My Lords, I have put my name to this amendment. Our energy markets are dominated on both the generation and supply sides by the big six integrated utilities. Meanwhile, we have a very complicated situation whereby the Government are trying to maintain semi-market conditions in a marketplace that is obviously rigged, and rightly so, in order to decarbonise it and ensure security of supply. As a result, the contortions and complications in this marketplace are mind-boggling, as my noble friend Lord Roper said. It is hard to see how the EMR game will evolve in this respect over the next decade.
One basic principle if we are to have an efficient marketplace is that we need to balance as far as possible the amount of power generated with the demand for that power—with a capacity margin, of course. There is no doubt that the integration of a power supply chain makes achieving that balance much easier but having all the power generated by only a few is not in anyone’s interest. We need as many independent generators as possible and that means they need to be able to secure investment for their projects. The Government recognise both these facts in their amendments in this group.
To touch on the principles involved here, I understand the argument made by some that no business should have the right to make a guaranteed return for its investors, but in the electricity market we are dealing with a special situation. We have to make the big jump
from fossil fuels to renewable power. In a competitive, international financial marketplace, with many variable investment opportunities in many less risky and possibly less complicated fields, investors and banks are reluctant to commit to the renewable generation industry without a reduction in the long-term risk. For the sake of our energy security and energy decarbonisation, not to mention our overall economy, we need that reduction in risk and thus that commitment. The Government’s recognition of this in their amendments is very pleasing.
To continue to defend the principles behind the Government’s amendments, it is important to remember that an increased risk inevitably leads to an increased cost of capital, which in turn leads to higher costs for consumers. We do not want that increased risk. Bear in mind that renewable technologies are pretty much all about the cost of capital because after the initial capital cost the actual source of the power—wind, sun, tide or waterfall—is usually free, provided that the management is satisfactory.
So far I could have been speaking in favour equally well of the new government amendments as our own. My only real worry about the government amendments is that, with all the “may”s rather than “must”s, and all the possible provisions that might or might not appear at some undecided time in the future, these amendments descend on one like an amorphous cloud of uncertainty. One recognises that somewhere within them are the right intentions but no one is quite sure how it will all work out. I suspect that we will return to these amendments on Report to get greater clarity.
Returning to our amendments and Amendment 55AC in particular—the noble Lord, Lord Roper, spoke about this—it might be worth touching on the choice between a backstop power purchase agreement, or PPA, and a green power auction market, or GPAM. My own view is that of the two options GPAM is the better one. I would very much prefer it if the Government could keep Amendment 55AC up their sleeve in case their backstop PPA does not do the trick for the investors. I cannot see what harm it would do to have it in reserve. That would make it much easier in future to revert to the existing, proven system. I stress those last three words: the NFPA exists and works. It would be crazy not to put this option in the Bill now just in case investors lose confidence in the backstop powers. It does not matter how confident the Government are that their way will work. It is the confidence of the investors that matters. There is no way of second-guessing the marketplace.
As I said, the existing NFPA is already a proven option and works extremely well selling six-month contracts six months ahead—because it is only for six months. The balancing risk is low for the supplier. They will not get caught out buying too much power at the wrong price that will look silly in five or six years’ time. That is very helpful to the small supplier and therefore encourages greater diversity and competition at that end of the marketplace. That may be why the big six do not like it. Meanwhile, we already know that GPAM creates enough flexibility and reliability in the marketplace to boost the confidence of the investor, who is needed to support the independent generator. All that is already proven.
The other element that persuades me that GPAM is best is that I do not like the idea that the backstop PPA leaves DECC or Ofgem in overall command of the marketplace, setting both the strike price and the electricity floor price. I prefer some semblance of a working market, even though a true market may be some way off. I guess that this is my main preference for GPAM. We all hope that in 25 or 30 years’ time, our reliance on CFDs and strike prices will be considerably less. I hope that we will not need a floor price set by a backstop PPA.
The renewable power industry in all its diversity will be strong enough to stand largely on its own feet, and it is at that point that we will need a real marketplace with as many players as possible to help create competition, both for generators and suppliers, and thus help provide cheap energy. There is more chance of the currently proposed GPAM transmogrifying into a body fit for purpose at that time than a state-controlled backstop PPA. I am surprised that a Conservative Government do not also see that.
I am not saying that we should attempt to create a power marketplace in 2013 that is fit for the 2030s but let us focus now on the needs of today. We should stick as closely as possible to a real market, even if it is at this stage only an embryonic market. Thus, I believe that as a backstop to the backstop, Amendment 55AC is an option that is very worth while considering while we are in legislative mode.
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