Electricity System Resilience (S&T Committee Report) — House of Lords, 2015-11-03
Topic: Energy
Matthew Ridley (Conservative, Centre-right): My Lords, I congratulate my noble friend Lord Selborne—I think I can call him my noble kinsman, since we share a great-grandparent —on this excellent report and on chairing this inquiry with his characteristic skill, courtesy and perceptiveness. I declare my interests as listed in the register, including, most importantly, an indirect interest in coal mining and a small shareholding in National Grid I would like to make four main points. The first is that I think our report was, if anything, a little too sanguine. The string of closures of power plants since then has left us even more exposed. The closure of Longannet, Eggborough, Ferrybridge and Ironbridge and the delay to the Trafford gas-fired station make the capacity margin even tighter this winter. As Professor Dieter Helm of Oxford University told our inquiry: "It is a quite extraordinary state of affairs for a major industrialised economy to find itself even debating whether there is a possibility that the margins may not be sufficient in electricity to guarantee supply" My second point is that "the lights going out" is a red herring. The national grid has many weapons at its disposal to keep the lights on somehow. That is a misleading test of policy health. The risk of system failure, which is always present, can be kept within bounds—but by pouring consumer funds into the sector My third point is that rising costs are the correct index of policy success or failure, and here I am afraid the news is bad. Even leaving aside the emergency costs of bringing on diesel generators when the wind does not blow, we are paying very heavily to have a resilient electricity system because of what I would consider deliberate policy mistakes. The Office for Budget Responsibility has recently published data showing that the cost projected for the capacity mechanism, which my noble friend mentioned, will be £1.3 billion in 2020—about 10% of the total levy control framework cost in that year. As my noble friend said, it is not for new capacity but for existing capacity. We should remember that most of that is going to fossil fuel plants, which should not need subsidising at all So why are we subsidising them? Because we have destroyed all incentives to build new, efficient, dispatchable generators, by using the law to force unproductive, expensive renewables on the consumer. That is why nobody is building new combined cycle gas turbine plants here unless they get subsidised. We should remember that those subsidies do not come from general taxation. They are added to electricity bills so they hit the poor hardest. As Rupert Darwall of the Centre for Policy Studies told our inquiry, "if you subsidise high-fixed-cost, zero-marginal-cost intermittent electricity generation, you will end up destroying the market and incentives to invest in the capacity to keep the lights on when the wind is not blowing and the sun is not shining. That outcome was wholly predictable but wholly unanticipated by policymakers" Can my noble friend the Minister assure us that the study currently being carried out by Frontier Economics into whole-system impacts of electricity generation technologies will take this into account—how much has wind prevented new gas being built and at what cost We have spent £14 billion so far subsidising renewable electricity. The cost is rising rapidly and will soon hit roughly £10 billion a year and stay that way for decades. What are we getting for that money? A less reliable electricity system, a big increase in cost and no discernible cuts in CO2 emissions, because of the need for back-up, the failure to allow gas to replace coal, and the leakage of energy-intensive industries to other countries with the loss of jobs here. I do not think that is a trilemma: it is a trisaster My fourth point is that interconnectors, while clearly a good thing, are in many ways irrelevant to the resilience debate, for two reasons. First, the current ones from France and the Netherlands are running one way—into the UK—at near-full capacity most of the time anyway, so they are no use for extra electricity in times of emergency. Secondly, they are not much use in in managing the variability of large renewable fleets because, as John Constable of the Renewable Energy Foundation pointed out to us, wind speeds are well correlated across Europe: a calm day here is usually a calm day in Germany. At 3 pm today, for instance, I looked up how much electricity was coming from wind in this country and in Germany: 1.4% in this country and less than 1% in Germany Where do the four points that I have raised leave us? It is now clear that instead of building windmills in the North Sea, whose electricity will cost three times the wholesale price, we should have been using cheap gas to phase out coal and putting more money into R&D designed to bring down the price of nuclear power. What Professor Helm called the "Miliband-Huhne-Davey policy" was based on the assumption that fossil fuel prices would go up. Instead, they went down In the spreadsheet released last year by Department of Energy and Climate Change, in the low fossil fuel price scenario, the cost of renewable subsidies for small and medium-sized businesses would add 77% to their electricity bills by 2020. Even in the high fossil fuel price scenario, the impact is still an increase of 45%. In other words, even if fossil fuel prices go sky high, the policies do not in fact offer any significant protection Every part of the world is increasing gas consumption at the moment except one: Europe. All the others—North America, South America, Africa, Asia, the Middle East, the former Soviet Union—are all increasing their use of gas, often to displace coal, as a response to the falling price of gas thanks to the shale gas revolution. Europe is doing the opposite. The Competition and Markets Authority has reported since our report that the renewables target is more of a constraint than the carbon budget; that is, there are cheaper ways of meeting our carbon targets I feel that we have the worst of all worlds: a system that has the high finance costs of the private sector but where all decision-making is nationalised; a system that has all the costs of renewable energy but trivial emissions reductions; a system that depends on regressive subsidy for even the cheapest and most reliable power; a system whose high cost is driving employers abroad; and a system with such low margins that costs will spike in the months ahead. I think there is a lot of work on my noble friend the Minister’s plate.