§ 1.14 p.m.
§ Lord Woolmer of Leeds rose to move, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).
§ The noble Lord said: My Lords, I should like first to thank my fellow members of Sub-Committee B for their support, hard work and contributions to this inquiry. I know that they will join me in expressing our deep appreciation and thanks to our specialist adviser, John Wybrew, and in conveying our warmest thanks to Patrick Wogan, who was our Clerk for this inquiry and who retired from the service of the House last week. He was a tower of strength and an inexhaustible source of wisdom and sage advice throughout his time with the House. We are indebted also to our secretary, Marilyn Byatt, and I thank her for her unstinting endeavours on our behalf.
§ I should also like to record our thanks to all those who submitted written evidence and to those who additionally appeared before us. Finally, but not least, I thank the Government for their positive and constructive response in September to our report.
§ The background to your Lordships' committee inquiry has two elements, both of which affect producers and users of gas. The first is the drive within the European Union towards a liberalised gas market. The second is concern about the availability of gas—the security of supply—as gas becomes an increasingly important source of energy and as net imports into the UK and the EU as a whole become substantial. We sought to consider both of these matters and, where appropriate, the interrelationship between them.
§ The reason for liberalising gas markets, after all is said, is to ensure that consumers of gas have a choice of competing suppliers who themselves are free to enter the market and who have transparent access to a transmission infrastructure. A single liberalised market within the EU should enable the most efficient and competitive gas businesses to emerge offering the best 578 deal for gas users. Your Lordships will be well versed in these matters. Our report itself deals with the details in Chapters 1 and 2 and in Appendix 4.
§ The European Commission first addressed these issues way back in 1991, but the first gas directive emerged only in 1998. Your Lordships' committee reported on that in its 7th Report of Session 1997–98. Little progress occurred, and the Lisbon Council of March 2000 urged rapid liberalisation of the gas and electricity sectors as part of a drive to complete the single market and improve EU competitiveness in the global economy. A second gas directive emerged and was agreed in 2003.
§ That directive requires a legal unbundling of the transmission companies from companies supplying gas to consumers, but vertically integrated companies are still allowed to own both types of business within the same group. To ensure that new-entrant supply companies are able to compete, they must have equal rights of access to the transmission network on fair and transparent terms. There must also be an energy-specific regulator in each member state. Member states are required to ensure that all non-household gas customers have free choice of supplier by July this year and all customers not later than July 2007.
§ Finally, since the directive was agreed, political agreement has been reached among member states on a draft regulation that sets out the detailed rules governing conditions of access to the transmission network. The United Kingdom, of course, liberalised its gas market some years ago. However, as the UK rapidly becomes a substantial net importer of gas, access to a liberalised and competitive gas market in the EU will be one aspect of ensuring the security of gas supplies to this country.
§ Your Lordships' committee welcomes the second directive and the proposed regulation governing third party access to the gas transmission network. There are, however, some issues that still concern us. Many, though not all, member states have managed markets with dominant vertically integrated companies, often seen as "national champions". Governments are often protective about national champions in what they see as a key strategic sector.
§ At a time of rising energy prices, uncertain energy markets and increasing global competition for energy, we expect member states to resist a speedy movement to a liberalised, internal single market and to fight their corner hard in the detailed discussions about the implementation of changes. The Government, Ofgem and the industry must ensure that we are fighting our corner with sufficient resources in the corridors of Brussels and in the committee rooms of comitology.
The Commissioners told us that they were,
absolutely sure we are going to have a competitive gas market".
We hope they are right. The history of gas market liberalisation to date has been one of foot-dragging and procrastination in many member states. Indeed, Mr Monti, the outgoing EU Competition Commissioner, is reported as saying on 21 September that the level of competition in the energy sector is "not encouraging". He spoke of highly concentrated
market structures and the prevalence of vertically integrated companies. He reiterated his preference for the mandatory ownership unbundling of transmission operators. I agree with him. Is my noble friend the Minister able to tell us the Government's view on this point? Do the Government know if the Commission is considering a further directive on this or other aspects of gas liberalisation'?
§ I turn now to security of supply. Chapters 3 and 4 of our report deal with these issues. In the simplest of terms, the EU as a whole imported 45 per cent of its gas demand in 2001, a figure forecast by the Commission to rise to 59 per cent in 2010 and to 77 per cent by 2020. The UK, after a long period of self-sufficiency, will become a net importer by 2006 and we are expected to import 50 per cent of our requirements by 2010.
§ The committee asked whether there was a danger that the UK, and more widely the EU, would face difficulties in ensuring that future demand for gas can be met by a combination of domestic and imported gas supplies. The evidence we received is set out in our report and in the written and oral evidence. Virtually all witnesses agreed that there are ample supplies of gas available throughout at least the next 20 to 30 years and probably well beyond. The Commission told us that 80 per cent of total world gas reserves are within economic reach of the European market.
§ Increasing the diversity of supply sources will contribute to security of supply. Rising imports of liquefied natural gas, LNG, will contribute to that diversity and to flexibility of supplies. For the UK, increased supplies will come from Norway and more interconnectors with Europe. Significant increases in LNG are likely to come from such diverse sources as the Middle East, North Africa, Nigeria, the Caribbean and possibly from the Pacific.
§ What are the risks? One might be an over-reliance on a small number of countries as sources of supply. Russia provided 20 per cent of gas consumed in the EU 15 member states in 2002. The Commission told us that Russia and Algeria have delivered natural gas to the EU since the 1960s and have acquired a strong reputation as fully reliable suppliers of gas. Producer countries certainly depend as much if not more on revenues from gas exports as Europe depends on gas imports. Even so, diversification of supplies is important and will add to security of supply. Security of sources of gas supply must be high on political and diplomatic agendas. As one witness observed, it is important not to be complacent.
§ The International Energy Agency has estimated that the investment requirement in gas infrastructure to cope with the large increases in gas imports in OECD Europe countries will be some 465 billion dollars between 2000 and 2030. Witnesses emphasised the critical importance of a flexible but stable and predictable regulatory framework within the EU if this investment is to be forthcoming. Given that, witnesses were confident that the necessary finance would be forthcoming. This emphasises the need for the European Union to make steady but speedy and consistent progress in liberalising its gas markets.580
§ Our report sums up our view on these issues in paragraph 88. The benefits of rapid implementation of the internal market in gas outweigh the dangers. The EU needs legal and regulatory certainty for investors. The risks inherent in greater dependence upon imported gas can be balanced by greater diversity of supply.
§ There is one issue that the Government might still usefully revisit. From now on the UK will be increasingly dependent on imported gas. We face a period of tight gas supplies globally and rising prices. Back in June our committee forecast real price increases of 25 per cent over the coming years; that now looks modest. Prices have risen by more than that in the last 12 months although many commentators expect prices to fall hack somewhat. In tight markets fully liberalised markets struggle to deliver sufficient insurance against shocks and fluctuations in the supply/demand balance.
§ The response in much of the EU to heavy dependence on gas imports with long supply lines has been to hold much bigger strategic stocks than in the United Kingdom—up to 20 per cent of annual demand compared with 4 per cent in this country. Until now we were self-sufficient and our own gas reserves were almost literally on our doorstep. The Government have consistently taken the line that this is a matter for the market and that even to talk about strategic stocks would interfere with that market response. However, massive import dependency will now become a new reality. The question of a strategic stockpile or other possible safeguards needs at least to he discussable. A blanket "no intervention in the markets" may not be the best way forward even if it served in a period of surplus gas and self-sufficiency. I do not ask for a response to this today from my noble friend the Minister but I urge the Government not to close their mind in the face of a changing world.
§ I turn finally to the matter of low probability/high impact shocks to the supply system. This is the subject of Chapter 4 of our report. Our committee was concerned about the security of gas supply over the next two or three winters. Demand for gas in the UK continues to grow as we phase out nuclear and coal-fired power generators, and production from our own gas fields is now falling. The increased physical gas infrastructure to facilitate the necessary large increases in imports of gas is now taking place. By 2007 our infrastructure capacity to import gas will be more than sufficient but the demand/supply balance for the next two or three winters will, in the view of the committee, be tight, especially if we have a prolonged severe winter. We hope that this does not arise but there is always that slight risk.
§ The forward market for gas prices for the coming winter shows very large rises on last year. Ofgem has recently investigated the causes of this and concluded that 30 per cent of the large rise in forward market prices has been caused by higher oil prices, 19 per cent by faster than expected decline in North Sea production and that much of the rest might be caused by the forward market's view of the risk of extremely cold winter weather.581
§ The Government's response to this aspect of our report is, in summary, that in a very severe winter the market would be able to deliver the required level of demand-side response through gas-fired power stations and large industrial users reducing their demand for gas in response to higher prices.
On this point, Platts UK gas report of 18 October reports that the National Grid Transco mid-October review of the forthcoming winter said if there was a one in 50 severe winter the cut back in gas consumption would be the equivalent to,
the cessation of gas consumption for approximately 25% of all non-domestic demand for a 40 day period".
On the face of it that would be a massive cost to impose on the business community. Is there no insurance policy worth considering to avoid those costs? Will the market alone make adequate provision for such low probability but high impact events?
With astute caution the government response concludes in masterly fashion that,
no matter how much is spent on a system of energy infrastructure there can be no absolute guarantee of security of gas supply…in all possible extreme circumstances".
We do not suggest that, but we do believe that changing net import circumstances and rising global demand in energy markets requires a willingness to review past policy that was based on past circumstances. We were not completely reassured by the government response.
§ These are important issues and I look forward with great interest to your Lordships' contributions today.
§ Moved, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).—(Lord Woolmer of Leeds.)
§ 1.30 p.m.
§ Lord Swinfen
My Lords, it is an honour to follow the noble Lord, Lord Woolmer, in this short debate. I very much enjoyed being a member of the sub-committee under his chairmanship. I believe that there were occasions when he found me a little disconcerting, as I stared at him like a stoat at a rabbit as I tried to follow what he was saying by looking at his lips rather than hearing the actual words.
As we say in our report, and as the noble Lord has already said, gas is becoming an increasingly important source of energy for the European Union and for the United Kingdom. The EU has been an importer for years but, according to the European Commission, the percentage of imports will rise from 45 per cent of current demand to 80 per cent of forecast demand by 2030. According to our Government, we will become increasingly a net importer of gas on an annual basis from around 2006, and we are expected to import 50 per cent of our gas by 2010. At present we import only during the winter.
We report that in the case of the United Kingdom there is already concern about meeting peak winter demand over the next two or three years. There is also the risk posed by the very exceptional winter day that 582 might occur once in 20 years. I find it odd that the industry is talking in terms of the very exceptional winter day that might occur once in 20 years. Many noble Lords will remember the exceptionally hard winter, 42 years ago, of 1962–63, when the weather remained very cold for weeks, if not months. I was unable to get my car to my house for three months that winter, due to the weather conditions and the snow on the ground.
At present, apart from gas landed from the United Kingdom Continental Shelf and North Sea fields, we can obtain gas only through the interconnector, which links the United Kingdom with Europe at Zeebrugge. The interconnector has currently a greater export capacity from our offshore fields than capacity to import gas from the Continent. However, there are a number of new import schemes in the offing, which means that we should have a sufficient gas supply within a few years to withstand the "very exceptional winter day" that occurs once in 20 years. Today our country is vulnerable to that very exceptional winter day, which I have already said may well last much longer than a single day—possibly weeks.
We live in dangerous times, and what I have already said takes no account of possible terrorist attacks on our gas supply routes. I do not want the Minister to tell the House what precautions the Government are taking to defend our gas supplies. However, I would like an assurance that they take this matter seriously and are looking with considerable imagination and forethought at how terrorists might attack parts of our supply routes where it would be difficult to make repairs and where those repairs might well take longer than is acceptable to the public at large. No one would have imagined that terrorists would deliberately fly hijacked aircraft into skyscrapers.
In their response to our report, the Government appeared satisfied that the power industry would be able to cope with the exceptionally high demand for gas in very unusual inclement weather. But for how long would the industry be able to cope? The Government gave no indication in their response. How many weeks' supply of alternative fuels for power generation is held in stock? Do we have the skilled manpower available to fire up mothballed power stations should that become necessary?
In the longer term, if we are getting most of our gas through Europe, what happens if there is a prolonged period of very cold weather, both here and on the Continent? Can we be sure of a satisfactory supply of gas? In his evidence to the committee, Herr Pfaff of Ruhrgas AG sought to assure us that no country on the supply route between the gas field and the United Kingdom would divert gas destined for the United Kingdom to its own use. My impression was that most members of the Committee, like me, found that hard to believe. I am sure that most political leaders, seeking re-election at some time in the future, would wish to please their electorate by ensuring that they would receive an adequate supply of gas in preference to the population of another country.
583 On another aspect, we were told that in future much of the gas that we would use would come from fields in the old Russian empire, from Central Asia. These gas fields are already in demand to provide power for China and soon to India, both nations with an increasingly voracious demand for power as their industries grow and their standards of living improve. Eventually that will cause problems for both Europe and the United Kingdom, particularly as the demand for power in the western hemisphere is also growing.
We need, for strategic economic and political reasons, to be independent of others as regards our power supplies, particularly if the European Union breaks up, which I believe that it will in due course. At present, I understand that we have some 10 or a dozen nuclear power stations, but they are coming to the end of their lives. Some nuclear power stations have already been shut down, and I am told that in 25 years' time only Sizewell B will be operating. I have already said that for some years our coal and oil-fired power stations have been converting to gas. Is it not time, before it is too late, for the Government to grasp the nettle and put in hand a programme to build a number of new nuclear power stations?
§ 1.37 p.m.
§ Lord Haskel
My Lords, it has been a pleasure and a privilege to work on this inquiry, and I join other noble Lords in my gratitude to our Clerk, Patrick Wogan, our special adviser, John Wybrew, and other members of staff. Their diligence and knowledge were sources of great strength to this inquiry. My thanks also go to the witnesses who took the trouble to talk and write to us. It was a pleasure to work with my fellow members on this Committee under the chairmanship of my noble friend Lord Woolmer.
Other noble Lords have explained why we are concerned about security of supply. Those concerns are justified: just over a third of our electricity is generated by gas, we use it to heat many of our homes and workplaces and we need it for industrial purposes. A shortage would hit us hard. Also, because gas is a cleaner fuel, we shall need more not less of it as we tackle global warming.
Our witnesses convinced us that there was enough gas in the world to satisfy our demand for the next 20 years. The problem is how to ensure that there is gas here in Britain, in the right place, at the right time and in the right quantity. As my noble friend Lord Woolmer said, the answer is to work within the European Union and to liberalise the market, so it is open to all and to work for a competitive market in gas with multiple suppliers, multiple sources and, eventually, multiple transmission systems, so that a free market operates with minimal regulation. Indeed, the European Union's energy council in June this year reached a political agreement on that, and directives are in place to ensure that it all happens. But will it?
Is that approach practical, sustainable and acceptable to all EU countries? After all, there are different ways of achieving security of supply. 584 American cities and states do it differently; they prefer to secure their supply of gas by contracting with a single supplier, which undertakes the necessary investment in transmission and buys the gas on world markets. That seems to work, with big players able to buy gas cheaply. Prices are regulated in each state. They say that it is easier that way.
So where do the problems lie with our policy? Take the directives. They have to be implemented by member states. The speed and effectiveness with which that is done is greatly influenced by political expediency. Some governments—France arid Germany come to mind—argue that sometimes competition should be watered down, because too much holds some firms back from becoming European champions. They see their gas pipeline networks as a national asset, and access to it as a kind of hidden state aid—a political tool that some governments are very reluctant to give up.
Yes, European legislation calls for a liberalised market, but because each government have their own view of liberalisation, the implementation will be slow and patchy. That is why I agree with the noble Lord, Lord Swinfen, that it is important for our Government to facilitate several sources of supply and not be entirely dependent on the European network. For that reason, I welcome the new links with Norway and Belgium, and the terminals for liquid gas.
That independence requires a lot of private sector investment, however. My noble friend Lord Woolmer gave us the numbers. We were assured that a free and open market would encourage that investment. Will it? Markets are pretty unforgiving and prone to all kinds of glitches. Now that much of our gas supply will eventually come from countries that are not particularly politically stable, and will have to travel long distances by pipeline or special carrier, the market risks increase. Add to that that we have storage capacity of only something like 10 to 14 days. As my noble friend said, that is a small buffer to protect us from market risks. Then there is the fact that a break in the gas supply is especially serious because, after the break, all the equipment has to be reset. Add all that up and one has a risky business.
As risk increases so do prices, and as prices increase so does speculation. The other week, the Times ran an article saying that the disappearance of the big energy traders such as Enron and Dynegy only added to the uncertainty of the gas market. Perhaps, but my admittedly casual inquiries reveal that the gas traders have been replaced by the gas betters. Our inventive financial services sector has ensured that, to speculate in gas, one does not actually need to deal in it. One can simply place bets on the price. No one really knows the amount of ordinary or spread betting that takes place on the gas market, but if it is anything like the market in equities, it will soon come to dominate the market. Of course, it is virtually unregulated.
Does that matter? I think that it does, even though, here in Britain, we put the consumer first to create a true market. However, in spite of consumer groups 585 condemning each rise, the price of gas is rocketing. Is the Minister happy to put his faith in that kind of market to secure the supply of such an important commodity as gas and, most importantly, to encourage the necessary investment? Perhaps, like me, he is a little nervous.
Regulation might make the difference. Let me make the point that Opposition Peers would make. Regulation often stifles enterprise and, without enterprise, one does not have a market. That is why regulation nowadays tends more towards setting standards than telling people what to do. Those standards are best enforced by the market players themselves but, as we have heard, in some European countries they are vertically integrated national champions or monopoly providers. Their standards and rules are different. In some countries, such as Germany, the regulator is not yet even in place. How enthusiastically will they implement market rules?
We have set up a consumer-driven market in Britain, but our rules are different and we are the exception. Each year, millions of customers here change their supplier and, as a result, price and service is seen as the key to customer loyalty. That requires only light regulation. Even so, in Britain some complain that the Government are regulating to achieve social objectives, such as the elimination of fuel poverty. Elsewhere in Europe, regulation is seen as a tool of social change, with the political gain being worth less competition. Once again, there is a difference in interpretation.
Liberalisation, markets and regulation are, I agree, probably the best way to secure our supplies in future. However, I have tried to show that each element is fraught with difficulty. Liberalisation is interpreted differently in virtually every European state. Markets are prone to failure through manipulation and speculation, and we have no cushion to support market failure. If regulation means setting standards and less social change, member governments will need the political will to implement them. We will have to work hard to overcome those difficulties.
We have important allies in that work, however. Yesterday, in a review of the Lisbon process and the economic reform of the European Union, Chancellor Schroeder argued that the emphasis should now be on accelerating domestic reform in the member states. At the same meeting, Mr Wim Kok, who conducted the review, suggested that there should be a league table of nation states to name and shame countries, in order to accelerate reform. From what I have learnt in this inquiry, I judge that they are both on the right lines. If there are to be league tables, I think that we in Britain would be in the lead.
I am optimistic that we can overcome the difficulties, but I have my concerns—the concerns of someone committed to Europe and the single market, but aware of the reality and, like Chancellor Schroeder and Mr Wim Kok, aware of the practical difficulties to be overcome. I hope that the Minister will be able to address those concerns.
§ 1.48 p.m.
§ Lord St John of Bletso
My Lords, I join others in thanking our sub-committee's chairman, the noble Lord, Lord Woolmer of Leeds, for his able stewardship of this fascinating and topical inquiry. I also thank our very able Clerk, Patrick Wogan, who, sadly, has retired, and our specialist adviser, John Wybrew, for their invaluable assistance in guiding us through the maze of structural complexities and definitions, which has culminated in a very user-friendly and readable report. I wish that more reports of your Lordships' sub-committees were more widely distributed to and read by the mass media.
At the outset, I should declare an interest as a non-executive director of Regal Petroleum, a listed oil and gas exploration and production company with operations in the Ukraine, Romania, Greece and Egypt.
Although the report focuses on the challenges and scope for achieving a truly liberalised gas market and the importance of security of supply, it is particularly important now for Her Majesty's Government to focus on the recommendations. As the noble Lord, Lord Woolmer, mentioned, the UK is rapidly moving from being a net exporter of gas to being a net importer. I entirely agree with the statement in paragraph 47, that gas,has the potential to become the most important fuel for the next generation".While there has been a recent hike in oil prices—and I agree with the noble Lord, Lord Haskel, that spread bets have hyped oil prices—and there have been concerns for the potential shortage in supply of crude oil, the comforting factor for the gas market is that global gas reserves are 50 per cent higher than oil, and gas resources are far less exploited than oil.
Demand for oil in the UK has fallen from 1.8 million barrels per day only two years ago to less than 1.7 million today. Our oil supply from the North Sea has fallen from 2.1 million barrels per day two years ago to less than 1.8 million today. That is fairly irrelevant, given that we tend to export all our expensive sweet crude and import cheaper crude oil.
However, our demand for gas has grown between 3 and 4 per cent every year, boosted by new gas-fired electricity generating power stations. Demand for gas is likely to peak next year. The estimate by National Grid Transco that by 2010 we will import almost 50 per cent of our gas requirements highlights our vulnerability on security of supply and price fluctuations.
While the three major pipeline additions to the existing European import pipeline network will ensure increased continuity of supply and provide redundancy backup, there is likely to be far more demand for liquefied natural gas—LNG. Although there have been tremendous technical advances in handling LNG—and a number of sites for terminals are already operational or identified throughout the EU—there is a major problem. There is currently a chronic shortage of ships suitably equipped to transport LNG. While that alternative supply of gas provides greater flexibility of supply, our report mentioned the likely increased global competition for LNG, particularly from the United States, where 587 indigenous gas supplies are fast depleting, as well as demand from other huge nations such as China and India. What is clear is that economic forces are moving the direction of global markets for gas; and the EU's Lisbon agenda will continue to seek competitive energy markets to help the global competitiveness of the EU economy
I was encouraged to read the Government's response to our recommendation that existing regulations be reviewed to examine the possibility of introducing fast-track reconnection practices for emergencies—a point raised by the noble Lord, Lord Swinfen. Lessons certainly have been learnt from the gas outage in Victoria, Australia in 1998. Can the Minister elaborate on how the GEIEC, with its incident response plan, has been working with other similar bodies in the EU with knowledge transfer to ensure a fully redundant backup service to consumers in the event of an emergency?
With the seasonality of demand for gas—and, sadly, the ever-present threat of a terrorist attack on one of our gas supply terminals in the UK—apart from the obvious need for alternative sources of energy supply, there will be an ongoing need for specialist skilled labour to be available in the event of an emergency where self-restoration is not possible.
Paragraph 68 of the report addresses a key issue; namely, that the problem over the next 15 to 20 years will not be so much the availability of gas as the ability to move it from the places where it is produced to markets around Europe and the world. That will require an extensive pipeline system, often in areas of geographical difficulty, and substantial capital funding. That point was strongly made by the noble Lord, Lord Haskel. The IEA forecast the investment requirement in gas infrastructure for OECD between 2000 and 2030 at 465 billion dollars. In the past, investment risk was shared between the supply companies and the producing companies, and ameliorated by being based on long-term, take-or-pay contracts. But as EU gas markets liberalise and the second gas directive moves to dismantle the so-called "managed markets" in some member states, I question where the capital funding will come from to complete the build-out of the pipeline infrastructure
The noble Lord, Lord Woolmer, mentioned that our witnesses were of the opinion that necessary finance would be forthcoming. However, there will need to be more incentives for investors. Many witnesses recognised the importance of a regulatory framework to attract investment.
Concern was expressed by a few of our witnesses that there may be a partial or a piecemeal approach to European liberalisation in both gas and electricity markets and that the imposition of excessive rules and regulations may prevent markets from functioning effectively. That is a major debate—and I have been speaking for longer than I should—so I shall not dwell on that today.
In conclusion, it is clear that if there is to be a truly liberalised gas and energy market in Europe, there is a strong need for all the EU energy regulators to work together with a shared commitment to achieving a level 588 playing field for all the gas providers and implementing the access regulations through consistent EU-wide arrangements, standards and network codes.
Is that achievable? Yes, I believe it is. I tend to agree with Tim Eggar, the former Minister for Energy, when he said that there was now a genuine desire for a change in Europe in the direction of greater liberalisation. In what time-frame will that be achieved? I tend to feel that it will take much longer than we all would have hoped, but the jury is out.
§ 1.58 p.m.
§ Baroness Cohen of Pimlico
My Lords, this was a truly interesting inquiry and I join colleagues in thanking our chairman, the noble Lord, Lord Woolmer, for guiding our choice and taking us through this. We were indeed brilliantly served by our special adviser, John Wybrew, and our Clerk, Patrick Wogan.
The inquiry was also full of surprises. We undertook it because we all knew that the UK was substantially dependent on gas and that the UK's own personal supply of gas, the reserves in our back yard, the North Sea, was running out, to the point that the UK was moving swiftly from being a net exporter of gas to a net importer. By 2010 we will be importing 50 per cent of our gas needs, and 70 per cent by 2020.
We expected to find that everyone, from suppliers to Ministers, would be concerned about that situation, and would be engaged in fierce contingency planning. Well, up to a point. All witnesses concurred with the view that there was plenty of gas and that, because Europe was a rich market, we could depend on suppliers to bring the gas to us. Market forces would work to build the infrastructure that we do not have. We have plenty of infrastructure to obtain gas from the North Sea, even if some of it is rather old, but much of the new infrastructure necessary to bring gas to us from new reserves does not yet exist. It is true that we have new storage facilities for gas—or rather for LNG—but this is only a very small percentage of the supplies we need.
The new areas for gas are in the main separated from us by many other countries, some not at all politically stable. In the case of the politically stable countries of the EU, we are depending on their willingness to liberalise their energy industries as the new directives require; to unbundled their distribution networks so as to allow other suppliers to pass gas down their distribution systems on an equal access basis. All that seemed to us a very far cry from the present comfortable situation where we have our own gas supplies and our own well-established infrastructure.
It was argued to us that this is how all modern industries work; that we are all dependent on suppliers wanting to supply and finding market mechanisms to do so; and on governments being prepared to ensure that any market is so organised as not to prevent this activity—that governments do not encourage protectionism or obstruction by dominant players. In this context, all witnesses pointed to the recent directives and assumed that EU countries would comply.
589 The trouble is that we are not dealing with baked beans or machine parts where disruptions to supply may have far-reaching financial consequences but do not totally disrupt the functioning of the country. Power cuts affecting electricity distribution threaten the vulnerable more or less instantly. They disrupt transport; they render accidents more likely; the elderly are more likely to die or fall ill; and they are, in short, a disaster. Interruptions to gas supplies to individual houses have even more serious consequences. At best it takes time to restore those supplies, leaving people in great difficulty while this is being done, and at worse serious accidents happen.
While this is perhaps less important in the grand scheme things, failure of supply threatens governments. It turns out that we are all remarkably poor sports about being unable to see to read, watch the TV, heat our houses or, more seriously, safeguard our elderly or our invalids. We seem to persist in thinking that in a modern world, where we are all dependent on safe consistent energy, the Government's basic duty is to ensure that safe supply. And we vote accordingly, as in this country in 1974 and in California in 2000. To paraphrase "Yes, Minister", courageous decisions in the area of gas supply may be the ones that lose you the election.
Against that background, it was surprising to find all witnesses, including Ministers, reasonably relaxed about the fact that we shall swing from the comfortable position of having enough of our own gas to export to a position of 70 per cent dependency on imports by 2020. In terms of risk analysis, those are the kind of risks which cause great companies to go bust or governments to fall. In those circumstances, company directors would be looking actively for ways to mitigate risk and I am not at all sure that Ministers were thinking along those lines.
Interestingly, the risk that all acknowledged was that of substantial price rises, as newly industrialised countries like China and India increased their demand on world reserves. That risk seems to have materialised very much more quickly than anyone thought and the consequences will soon be felt. The current Ofgem response to the various cries of anguish has been to advise us all to change our suppliers. But surely that is a somewhat limited reaction and what happens when we have all done that?
The risk of price rises is one thing, but failure of supply is quite another. Given the magnitude of that risk, some fairly drastic mitigation is required. Obvious routes to take are to increase direct gas access. At the moment, there are only two direct import routes, but two new pipelines are planned; the Langeled pipeline which will connect us to the Ormen Lange gas field, and another from the Netherlands to Bacton, but they do not yet exist. And of course we expect everyone in the EU to do their duty and allow the gas destined for us to have access to their transmission systems. It would, I suggest, be wrong to assume that EU governments are less sensitive than we to the undesirability of alienating their citizens. When it came to a competition for limited transmission 590 capacity, I agree with the noble Lord, Lord Swinfen, I would not assume that market forces and agreements to liberalise would prevail over a national desire to keep the lights on. We could store gas, which we have not historically needed to do, and stores for LNG are being built but the amounts we can store are small.
Surely, the obvious course must be to use something other than gas; something we have under our own control. We have indigenous ways of generating electricity. We have coal-fired power stations and some, now mothballed, could be brought back into use but not, of course, in a hurry when they might be needed. We have renewables upon which the Government are setting a great deal of store for environmental reasons as well as for diversification. Far be it from me to criticise renewables, but currently, including all the hydroelectric power capacity that has taken 50 years to build up, 7 per cent of our energy needs are met from renewable sources. The Government have given the construction works necessary for renewables a very substantial helping hand, both financially and in their directions to planning authorities, but not one of our witnesses thought that generation from this source would reach anywhere near 20 per cent in the foreseeable future.
Of course at the moment we have nuclear power generation, which provides just over 20 per cent of our needs. But by 2020, on present plans most of those plants will be closed. Put like that, when a much smaller number of new nuclear plants built in the next 10 years could maintain our indigenous generating capacity, controlled by us, at 20 per cent of our needs or better, it seems an obvious route to build to eliminate the major risk of supply failure. It ought also to make a contribution to keeping overall prices down; at the current price levels, nuclear generation is roughly comparable with gas and modern plants would generate more cheaply.
Keeping nuclear generating capacity does not only mitigate the risk of lights going out or prices rising intolerably. We are committed to emission reductions under the Kyoto agreements. I will not labour the arguments here, except to note that on present assumptions none of our witnesses thought that we could conceivably meet our Kyoto obligations.
In conclusion, I would therefore suggest to my Government that they may not be thinking sufficiently about the risks involved in depending on gas—the risks both to prices and to security of supply. Despite the understandable wish to increase generation from renewable sources, we should accept that if we get to 20 per cent, we will be doing very well and it will be extremely difficult. We should not lightly abandon the other great renewable source; nuclear power generation.
§ 2.7 p.m.
§ Lord Walpole
My Lords, I also thank our chairman for putting forward the report so clearly and for inspiring us to produce it. I certainly endorse what he said about our Clerk, our secretary and our adviser and, indeed, the rest of the committee, who I thought were very enthusiastic about producing the report.
591 I want to make one remark about procedure. I do not think that it is a very good idea to put forward such an important report on a Friday with relatively few people in the Chamber. I hope that the Procedure Committee will look into that in the near future so that, when reports are brought to the House, attendance is slightly higher. After all, the only speakers are members of the committee and two Members of the Opposition, and that is a pity.
I am surprised that no one has pointed out the misprint in the report. When I read it on the train the other day, I discovered that it was ordered to be printed on 8 June 2003. I know that the Government have not been doing very well recently, but I am aware that the date should be 2004.
Basically, I am a practical person and I hope that noble Lords will forgive me if I am a little anecdotal for a moment, but I do seem to have been involved in gas for most of my life. My grandfather was chairman of the North Thames Gas Board and he was also chairman of the Hertfordshire and Essex Water Co Ltd. So I spent my youth wandering around and looking at gas retorts, water pumps and so on, and that has held me in very good stead for most of my life.
My uncle—my grandfather's son—was chairman of the Gas Council when the first load of liquid gas was shipped into Canvey Island and the surveys for North Sea gas began. In fact, it was hoped that the gas would be found on land, and the seismographic survey crossed my farm at the time. Just south of where I live, a coal seam was found, and not only a little one. On 5 November 1970, the local newspaper reported that a coal seam more than 10 feet thick had been discovered in Norfolk. The Coal Board said, "Don't worry about that. It's ours". So I declare absolutely no interest in the gas or coal underneath my farm which I know is probably there.
We now have three 36-inch gas mains within a mile of where I live. They come in from Bacton and go west. By way of history, I am still a director of Fakenham Gas Works, which is an ancient monument and the only surviving complete town gas works in the country. There is also one in Scotland, but that is a devolved country.
What is this gas that we are discussing? Very importantly, in paragraph 26 of the report one discovers that it should be pure methane. Gas coming in at Bacton is dealt with, and so what comes down the pipes past us is methane. I believe that the Government wish to use the distillate from Bacton fairly soon in order to run other power stations in an emergency. The distillate is taken out by road—a road which the Gas Council kindly built for us, and I was chairman of highways in Norfolk county at the time. The distillate then goes by train. That branch line was not closed by Dr Beeching because it was necessary to take out the distillate, and so I can come to the House by train.
The important point is that the memorandum by Shell on page 112 of our report states that the least polluting form of fossil fuel is gas, provided that it is pure. It is absolutely essential to work towards the gas 592 in the mains of Europe being pure and not a nasty mixture. It should be what I believe is called "high-value gas" and not "low-value gas".
We must look at the local reserves that are still left in the country. We have coal beneath Norfolk and do not need to go down a mine shaft to extract it. Surely we can put microbes down there to extract the gas. In fact, parts of Norfolk are to be surveyed again because there may still be sufficient gas under the land to drill for, especially if the price is going up, as it is.
I turn to the subject of the "If…" programme, to which we refer in paragraph 89. I enjoyed the programme enormously but I am sure that, like all other members of the committee, we saw its flaws. But there is a certain amount of truth in it. One thing that we must remember if things go wrong is the enormous cost of reconnecting private houses.
When I wrote my speech, I wrote that the price of gas will probably go up, but since then I have read in the Times that it has gone up on, I think—I cannot remember—three occasions now.
The conclusion that I have come to is that gas must be of a standard quality in all the main networks, so that we all burn clean gas. Environmentally, that is very important. We should look for other latent sources of gas like the possibility of gas under north Norfolk and indeed in other parts of the country. Where there is coal, we should look very seriously for gasification of the coal.
The noble Lord, Lord Swinfen, mentioned ensuring that our mothballed generators are ready to work. I understand that the one at Great Yarmouth is nowhere near ready to work. I say, in parenthesis, that the other day I visited Yarmouth, and having been told that the marvellous new wind farm on Scroby Sands was working, I found that of the 30 turbines, only nine were working on the day I visited. It was very sad to see. I would like to have seen them all working. I would also like to see the power station at Yarmouth, which has been mothballed, ready to be brought back into service in case of emergency. As has been suggested, we should look at other sources of electricity so that in the long run we lower the percentage of our electricity that is dependent on gas.
§ 2.15 p.m.
§ Baroness Harris of Richmond
My Lords, I too congratulate the noble Lord, Lord Woolmer, on securing this debate. I chair your Lordships' EU Sub-Committee F, which, as your Lordships know, deals with home affairs—so I hope that I will be forgiven for being an interloper in this debate from that rather particular angle. I have nevertheless read the excellent report of Sub-Committee B, as I am sure everyone who is fortunate enough to chair one of your Lordships' EU Sub-Committees has, and I felt moved to take a very small part in this debate. My noble friend Lord Shutt, himself a member of Sub-Committee B, is unable to be here today. I hope that your Lordships will accept my somewhat less informed views—but, none the less, fresh eyes—on a report in which I have not actually participated.
593 The noble Lord, Lord Walpole, pointed out the error of the date in the report, so I shall not add to the collective embarrassment for missing that—an embarrassment that I too must share. However, it took three months to gather evidence and report, and then effectively four parliamentary months before a debate slot was made available. I am afraid that that occurs all too often in relation to EU Select Committee report debates. The noble Lord, Lord Walpole, anticipated the remarks that I shall make next, and I absolutely share his concerns. If your Lordships will indulge me for a moment, I shall make just a brief and valedictory remark for the record.
Many Members of this House participate in the EU Sub-Committees, spending many fruitful hours on important scrutiny and close and deep examination of legislation coming from Europe. No one else in our Parliaments does that to the same extent. If we are serious about saying that that work is important for the greater understanding and knowledge of how EU legislation will affect us as a nation, we really must take the trouble to effect debates in a more timely and responsible way.
Having got that off my chest, I return to the report. What of its substance? As we have heard, the report is made in the context of the liberalisation of EU gas markets in a future of diminishing supplies of EU gas to liberalise. Of course, liberalisation is to be welcomed, but the scarcity of supply in the future, which the report identifies as being problematic, must be a real cause for concern. At page 23, paragraph 52, the report states:On the assumption that there will be no more discoveries for development in the UKCS"—the United Kingdom continental shelf—National Grid Transco predict a supply deficit of 21bcm"—that is billion cubic metres—in 2004–05 increasing to 43bcm in 2008–09 and to 67bcm in 2011–12".That cause for concern was expressed by the noble Baroness, Lady Cohen, when she referred to the possible alienation of citizens unable to have immediate access to supply in the event of a failure of that supply. We shall have to be significant importers of gas, having been self-sufficient for a very long time, as we have heard from all noble Lords.
The report identifies that there is plenty of gas available in other parts of the world. Well, that is a relief. The noble Lord, Lord Haskel, referred to unstable areas of the world from where the gas will come. In particular, I note that one of the major contributors to the supply of all forms of gas will be Qatar, a country which is taking the lead in moving towards a sustainable Arab democracy. I am sure that all sides of the House would encourage Qatar in its brave endeavours in that respect.
However, it is the immediate needs of this country in the next few years, until those supplies can be produced, that worry me. It all seems very "iffy". When will the proposed increase in capacity be realised, and is it all coming forward on time? Is the 594 Minister able to reassure us that the work going on at the Isle of Grain site will be completed in 2005 as promised? What about Milford Haven, the upgrading of the interconnector with Belgium and the Orman Lange pipeline? Are they all predicted to meet their estimated completion dates?
Security of supply is of fundamental importance, especially in view of current price rises. In the longer term we need to ensure that there is maximum diversity of supply. I was pleased to see that the Government's response—their constructive response, as described by the noble Lord, Lord Woolmer—to some of those concerns was acknowledged. I hope that they will keep the sharpest of eyes on the producers to ensure that we all get sufficient supplies throughout the next few winters.
I should like to say a few words about pricing. We have heard that npower—our third largest energy firm—will increase its gas and electricity prices shortly. Oil prices have risen alarmingly, which will almost inevitably feed into gas prices. We will need to spend huge amounts on new pipelines to our country from geographically difficult areas in order to supply our needs effectively. For Europe as a whole, that will cost a total of 465 billion dollars between 2000 and 2030, which was referred to on page 28, paragraph 69 of the report and also by other noble Lords.
As the report states on page 30, paragraph 79, the European Commission recognised how important it was to,ensure that the necessary investments were made to allow the import capacity of the European Union to expand".Energy companies have made equally direct comments, as the report recognises at paragraph 80:Energy companies predict that there will need to he a doubling of the pipeline infrastructure and LNG terminals in the European Union over the next 20 years"—a point to which many noble Lords have referred. The fact is that it will take tremendous commitment and vision if all of this is to be realised and the European Union is satisfied that it has sufficient gas supplies to deal with both business and domestic consumers
I turn to the issue that concerns me most: the physical security of the supplies that we import. The noble Lord, Lord Swinfen, referred to terrorism, as did the noble Lord, Lord St John of Bletso, and I agree with them. If future supplies are going to have to travel vast distances around the globe to reach the EU markets, how confident are the Government that they can ensure the safety of the vessels in which the fuel will be transported? Because of the high risk of terrorist action, it is imperative that everything possible is done to ensure that the huge tankers which will transport the gas are carefully monitored throughout their journeys
The noble Lord, Lord Swinfen, referred to building more power stations. Perhaps I may make a bid to get our ship building industry up and running again to build some of those tankers. The noble Lord, Lord St John of Bletso, also recognised that need.
595 Perhaps more importantly, security must be built in to the new terminals where gas will be landed and stored in future. Are the Government satisfied that that is happening? On page 39, paragraph 110, the report states:if there were, for example, a terrorist attack on either of the two existing terminals at St Fergus in Scotland and Bacton in Norfolk, then this could produce a national emergency for which the Government would have to assume immediate responsibility".In the words of the country's senior police officer, it is not a question of "if" but "when" such an event occurs. I therefore ask the Minister how closely producers are working with the police and intelligence services. How frequently do they run "what if" incidents? In short, are the Government satisfied that everything is being done in terms of civil contingency around these terminals to ensure the safety of our communities? Noble Lords may feel that I am straying far from the subject of the production, transportation and storage of gas, for which I apologise, but that is a concern for the future and I wish to be reassured that it has been recognised as such.
The report is to he welcomed. It has identified the problems and challenges for gas supplies in the future, here and in the EU as a whole. It has pointed to the growing use of liquefied natural gas (LNG) and the probability that there will be fierce competition for that resource from around the globe. But it also highlights the concern about what will happen to our own supplies if we have harsh winters in the next few years. I share that concern, as do the people of this country.
§ 2.25 p.m.
§ Earl Attlee
My Lords, I am grateful to the noble Lord, Lord Woolmer, and his committee for both their work and their contribution today. I share noble Lords' concerns about the timing of this Select Committee debate and others. I must admit that I found the issue very complicated. That is precisely why noble Lords set up a Select Committee to look at the issue on behalf of the House. I am grateful to the noble Lord, Lord Walpole, for pointing out the printing error. I had thought that I first read the report a few months ago, not 12 months ago, so I am relieved that my memory has not failed me.
After reading the report for the second time, I was still thankful for the distilled wisdom of the committee, to be found in the abstract before chapter one. The report observes that the EU is already a major net importer of gas and that the UK is moving that way fast. There were questions about security of supply in the short term. The UK and Germany are well ahead of our other partners in liberalising our gas market. Whereas we have done it, others could be described as dragging their feet.
The committee has concluded that there are adequate supplies for at least 20 years. However, prices are rising rapidly, and the committee is uneasy about gas supplies for the next two years. The committee did not look at physical interruptions of gas supplies; I can 596 understand why. Noble Lords will be pleased to hear that I do not propose to cover the UK energy mix. Our debate is about gas markets and market security.
Like the noble Lord, Lord Woolmer, I broadly welcome the Government's response to the Select Committee report. We have moved from very stable prices built upon North Sea gas fields and infrastructure to gas prices that now move with the markets and events far away. Unfortunately, gas prices have not become de-linked from oil prices, even for the UK, where most of our gas still comes from UK production. Reasons for the increase in oil prices are outside the scope of our debate.
For affluent consumers, the price increases in domestic gas supplies might not be too much of a problem, but for others it could be very tough. The government White Paper on energy paid attention to the need to avoid, or at least to reduce, fuel poverty—that must be right. Those on low incomes will find it hard to accommodate rapidly changing domestic fuel bills for gas and electricity. Being cold in winter is miserable for most but could be fatal for the old and frail. Despite government efforts, this vulnerable sector of society will be severely affected.
Some noble Lords may have received a briefing from Ineos Chlor, which uses large amounts of gas to generate electricity in order to produce chlorine and chlorine-related chemicals. The UK wholesale gas price has been rising rapidly. That should not be too much of a problem for Ineos and other major gas users. They will buy in a forward market, and they sell their chlorine products in a forward market but based on the relevant gas price. The problem is that, although UK wholesale gas prices used to be a little lower than EU prices, they have risen quickly and outstripped EU prices by a considerable margin. It is not clear why that should be so. Can the Minister shed some light on that?
Energywatch and others suggest that full disclosure to all market participants of the availability of gas to the UK market might be beneficial. What information is available now? Would full disclosure improve matters?
The Select Committee expressed its strongest note of caution about winter gas supplies. The difficulty for the Minister is that, if he admits that there may be a problem after reading the latest JESS report and other indicators, he might further inflate gas prices. That would not be helpful.
Many noble Lords, especially the noble Lord, Lord Tombs, who unfortunately cannot be present today, are not convinced that we have sufficient electrical generating capacity. Of course, NGT can shed demand from industrial users on an interruptible contract, but I am anxious about the effect of having to reduce gas supplies to the generators. The good news is that we will have that vulnerability only for the next two or three years. Can the Minister confirm that I am correct in my optimism?
Is the Minister confident that, if the EU as a whole experienced gas market supply problems, our EU partners would co-operate, in accordance with the second directive? I hope that he is. The noble Baroness, 597 Lady Cohen of Pimlico, did not seem convinced. A debate immediately after a multi-day gas or electricity interruption would be rather better attended.
Noble Lords have touched on the vulnerability of our energy infrastructure. It is not helpful to go into it in any detail, but I am aware of government efforts to assess the risks. Some precautions have been taken that might not be immediately obvious. In addition, the greatest vulnerability of the nation is not necessarily the most obvious. I do not envy Ministers the job of assessing or protecting against the effects of a low probability/high impact attack.
Under the gas directive, we are obliged, as we import more gas, to create storage capacity. I can understand the Minister's reluctance to become directly involved. The Government will have to ensure that the UK meets its obligation, but it would be highly undesirable for domestic gas and electricity retailers to inflict wildly fluctuating prices on their customers. Is the Minister confident that market mechanisms will encourage the development of storage facilities in order to meet the customer's need for stable prices?
The noble Lord, Lord Haskel, talked about the need for alternative sources, including LNG. LNG destined for the UK is, to some extent, in storage as well as in transit.
My noble friend Lord Swinfen talked about the danger of the one in 20 bad winter. He reminded us about the winter of 1963; I can only just remember that event. My noble friend asked about mothballed power stations, a point also raised by the noble Baroness, Lady Cohen of Pimlico. The stations that are easiest to recommission have already been recommissioned. Further ones will be more difficult to bring on-stream.
My noble friend Lord Swinfen also mentioned China, among other countries. It is interesting to note that China is already burning 300 million tonnes of coal, which will not do much for carbon emission levels.
The noble Lord, Lord Haskel, alerted us to the danger of betting on gas price without owning any gas. Alarmingly, there is no regulation, but I have an aversion to regulation. What is the effect on the real gas market of betting on gas prices? Is the Minister content for the situation to continue?
The noble Lord, Lord St John of Bletso, talked about oil and gas reserves. An advantage of gas is that it is not concentrated in a few Middle Eastern states. It is more widely distributed. That is no doubt why all the witnesses were relatively relaxed about gas supplies. The noble Lord also talked about LNG shipping: your Lordships will be aware that at present there is a shipping and ship-building capacity problem.
Noble Lords were also concerned about the capital for pipelines. Since I am not an international banker, I cannot offer my view. But Mr Tim Eggar appeared to be confident that capital would be available, presumably provided that the market is operating properly.
598 The noble Baroness, Lady Cohen, touched on the energy mix. I agree with many of her sentiments. But, with difficulty, I will resist the temptation to pick up on her points about nuclear power.
The noble Lord, Lord Walpole, talked about microbes and biotechnology in order to extract gas from coal deposits. That technology is not available now, but I hope that the Minister does not describe it as an "interesting suggestion". If it works, it could facilitate extraction of energy from very poor hydrocarbon deposits, both liquid and solid, which I hope would produce good quality gas.
The noble Lord also spoke about gasification of coal. I am less enthusiastic about that. I suspect that it would create relatively high carbon emissions per therm of gas produced and burnt. In conclusion, I congratulate the noble Lord and his committee. I look forward to the Minister's response.
§ 2.36 p.m.
§ Lord Davies of Oldham
My Lords, I am delighted to have this opportunity to put the Government's response after such a full debate. I commend the chairman and members of the committee on their report, which is a very useful addition to this debate on one of the most important of all issues that confront the Government; namely, the security of an essential part of our energy supplies.
Of course, we welcome the thorough analysis of this important topic in the report: it goes without saying that I want to reaffirm the obvious point that the Government are giving the most urgent attention to the issues highlighted, many of which reflect our concerns for the future and the impetus behind current policy. It is a very useful addition to the debate on the challenges that face our country. The future of energy supplies is certainly very significant.
I assure the House that, bolstered by strong UK support, the liberalisation of EU gas markets is well under way. That does not mean that we are complacent; we recognise the difficulties. We as a country have made very substantial progress in this area, to the extent that our position acts as a model for what we hope will be adopted across the European Community.
We are aware that there are inherent difficulties to be overcome. I recognise the point about virtual integration which, at the present time, in certain European countries requires very direct action. I assure noble Lords that the EU gas market liberalisation programme is meant to be completed by July 2007. Her Majesty's Government will put their fullest possible efforts behind the move to ensure that it is delivered by that time.
We strongly support the Commission's proposal for a regulation to ensure third-party access to gas transmission networks, which should be adopted early next year, and the directive to safeguard security of gas supply, which was adopted in May of this year. As a package, those measures, once fully implemented, will take us much closer to the fully liberalised market, 599 which both the report and all contributors to the debate today have emphasised is a very important step towards guaranteeing our future with regard to the provision of gas. It is the Government's opinion that a competitive, well-regulated and liberalised energy market with no technical constraints on cross-border trade is an essential component to security of supply for the EU, and of course we are pushing hard to achieve this.
Let us not create bogeymen. It is a shift for the country to move from our own gas resources and the degree of self-sufficiency that we have enjoyed over the past two decades to a position where we are dependent on imports. But let us recognise the fact that there is a range of import options. Sometimes, in our debates on energy, one would think that we depend on one pipeline which, if it were subject to terrorist activity or if one country decided to redirect the resources of the line to meet its own needs, would make it extremely difficult for Britain. I have even heard it said that our problems lie at the end of the supply line which others could choke off. Let us be absolutely clear about this. We are talking about gas supplies available from a range of suppliers and using a range of delivery methods to this country. It is not only a question of gas pipelines. We are developing liquid natural gas installations so that we can receive imports of gas supplies from parts of the world different from those of the gas line suppliers. We are in the process of constructing those installations. They will broaden the base on which we can receive gas into this country.
I also make the obvious point: one of the critical objectives of the European legislation is to guarantee that essential supplies brought by pipeline into Europe are in fact supplied on a European basis. There can be no pre-emptive capacity for any one state, through its significant market position, its political stance or because it happens to be further up the pipeline than the United Kingdom, to enable it to direct supplies to itself during periods of shortage at the expense of all other states. That is the exact objective we seek to obtain: a guarantee that there is a proper and fair distribution. The concept of the liberal market means that the supply must be liberal not only in times of plenty but also, crucially, in times of shortage. I want to give the House my assurance on that point.
My noble friend Lord Haskel indicated that he was anxious about the slow progress on these issues. However, we are on target for the deadline that has been established. We contend that it is very much in this country's interest, as well as that of others, to meet the deadline. My noble friend need have no reservations; the Government will not hesitate to pursue these issues, and they will do so with the fullest possible vigour.
I accept what was said by the noble Lord, Lord Swinfen. It is a question of the necessity to unbundle these vertically integrated companies. I do not pretend that that will be easy, in particular with regard to the more dated perspectives of other countries concerning liberalisation of the market, but 600 of course the Commission has to report on whether this market is working or whether further legislation is necessary. We will have regular information and analysis of the position. Of course, we have made significant progress along these lines and I am grateful that both the report and the debate identify the significance of that in terms of our work.
§ Lord Swinfen
My Lords, I thank the Minister for giving way. I did not refer to unbundling at all. I was concerned about the political necessity for leaders of other countries to make certain that they have adequate gas supplies for their own populations, and in so doing denying us an adequate supply.
§ Lord Davies of Oldham
My Lords, I am riot underestimating the political difficulties inherent in the situation. We all recognise that energy is a crucial resource for all advanced economies. In countries which have limited resources and have to import it, there is always the question of the political imperative. I am merely emphasising that we are working intensively to create the conditions under which the European Community will be committed to the liberalisation of the process along a trail that, to a large extent, we have blazed. It is essential that we sustain the pressure to achieve these objectives.
The noble Lord will recognise that the building blocks are in place. I am not suggesting for one moment that it is a facile or easy process—it is not—but equally, given the right regulatory framework, a market-based approach will attract the necessary gas infrastructure and supplies. It is the cornerstone of our energy strategy as set out in the White Paper and we have made considerable progress in this respect. We intend to ensure that, through its directives, the European Community follows with similar dispatch.
We recognise that this is not only a European Community matter but a world-wide issue. The necessity of guaranteeing our energy supplies means that we have a real interest in suppliers of liquid and natural gas in societies outside the European Union. It is very important that we should strike bargains with them.
Let me balance a little of the pessimism that may creep in with regard to the security of supplies. Europe has been importing gas from Russia—and, before Russia, from the Soviet Union—for more than 30 years without there being at any stage a difficulty of supply. It would be foolish of me not to recognise that we live in a dangerous, changing and challenging world. The past 30 years have not passed without disruption—they have certainly not passed without disruption in terms of the body politic now known as the Russian Federation as part of the former Soviet Union—and yet energy supply guarantees have held.
That is why, when we look at the crucial issues of big investment, big resources arid international agreements, we should recognise that states approach these issues with the greatest amount of seriousness and commitment. Therefore we should not suggest, in a flip 601 way, that resources could be taken out at the throwing of a switch. That is not so. That is why we need to balance the question of security.
The same applies to the question of the short-term difficulties rightly referred to in the report and by noble Lords in considerable detail. My noble friend Lord Woolmer, the noble Lord, Lord Swinfen, and the noble Earl, Lord Attlee, mentioned that we are in a difficult transition period as we move from self-sufficiency to supplies from more distant producers. As we become a net importer of gas, margins will become tighter over the next couple of winters than they will be once the new supplies come on stream. My noble friend Lord Woolmer indicated in his introduction of the report that the committee had been satisfied by the longer-term indications in regard to energy, including the availability of gas supplies and the way in which we will be able to secure access to them. But there is an intervening period of some difficulty.
I should like to reassure the House that reports that the lights may go out in 2004–05 and 2005–06 are overly pessimistic. The National Grid's assessment in its Winter Outlook Report is that there is sufficient gas to meet demand, even in a very severe winter—even in the one in 20 type of winter to which the noble Lord, Lord Swinfen, referred. I seem to remember that the 1962 winter was probably a little more than one in 20—it seemed to be one in a lifetime. However, I have no doubt that someone—maybe even the noble Earl, Lord Attlee—will refer to the difficulties of 1947, which was also a fairly severe winter.
§ Lord Davies of Oldham
My Lords, the noble Earl does not need a video of this debate. Hansard will do him proud in this respect, with its promptitude and its accuracy. But no doubt he will get added enjoyment from the visibility of the debate on video.
There is flexibility in the gas market, and we expect large industrial users or power stations to reduce their demand if supplies become exceptionally tight due to significant problems. Of course we recognise that in the most extreme circumstances difficulties occur. It is essential that we guarantee supplies to households. We all know the potential danger—the actual physical Risk—of a failure of gas supplies to households. That would be the highest priority. It is recognised that other consumers can moderate their demands in order to ensure that we supply households in those extreme difficulties. However, we are talking about positions of real extremis. I am confident that the provision we have in hand for the next few winters, even if they are more severe than the ones we have recently experienced, will meet all the demands upon it.
I turn now to what I suppose is a euphemism, the term low probability/high impact events, and what happens if terrorist activities affect some aspects of supply. There are other elements in this category, but the predominant one is of terrorist activities. Let me assure the House that 602 the Government are doing all they can to ensure that our response, should such an event occur, will be co-ordinated, fast and appropriate. We have been working with the industry to review existing plans for emergencies affecting both the gas and electricity sectors and have created an incident response plan to deal with such crises.
The Emergency Committee has also developed procedures to enable swift reconnections should any customers' gas supply be cut off. It will be recognised that I cannot go into great detail about the security provisions that we make with regard to essential installations, but let me give the obvious assurance that we cannot safeguard the nation against a terrorist threat without having due regard to the security of supply of essential energy.
It was suggested that we ought to diversify our energy supply. That is exactly what the Energy White Paper did. It recognised the significant role which gas would provide, but nevertheless, the emphasis on renewables would help to meet our Kyoto targets and mean increased investment in new sources of energy.
Today, the emphasis has been rather more upon whether the nuclear option should make a rapid reappearance on the scene. Let me make the obvious point first: as the Energy White Paper spelled out all too clearly, new nuclear build is currently economically unattractive. If it were not unattractive, we would have proposals before us and proposers coming to government with their indication that they would want to build such a plant and seeking some positive government response to it. There are none such proposals.
Therefore, the market is clearly identifying that at the present time the actual costs of electricity generated from nuclear energy are still deplorably high.
As the noble Earl, Lord Attlee, will remind me, there are outstanding issues with regard to the disposal of nuclear waste still to be resolved. So the Government are taking the obvious and proper line; namely, that we intend to keep the nuclear option open. It would not be in the nation's interest to suggest that nuclear energy might not play an enhanced part in the supply of energy at some potential stage in the future.
However, it is not viable at the present time and the Government are keeping the option open. They are ensuring that the research and skills support is there to ensure that the industry can pursue its present objectives. Of course the rundown on nuclear power is over a long period of time; in total it still has more than two decades to go. So we have time in which to consider these issues, although I hear those noble Lords who advocate nuclear power—and I think that the noble Lord, Lord Swinfen, was eager to emphasise that point again today.
This has been a most interesting debate. I hope that I have given most of the arguments in the debate reasonable consideration. I am all too well aware that with so many expert contributors I cannot meet every single point, but I want to emphasise again that the 603 contribution of this report to the ongoing assessment of securing the UK's future energy and gas supplies is very much welcomed by the Government.
I hope that the House will agree that the priority given to this issue by the Government more than adequately reflects its importance and that some of the concerns raised by the committee have been assuaged. I would be optimistic in the extreme if I thought that I had allayed all anxieties; that is not in the nature of those who address themselves to such fundamental issues as all members of the committee have done and as the report accurately reflects. But I am very grateful for all their valuable work. The report reflects the most careful study. I congratulate its chairman, my noble friend Lord Woolmer, on the work of the committee 604 and its report. I hope that on that basis it will be recognised that the Government takes these issues very seriously indeed.
§ Lord Woolmer of Leeds
My Lords, this has typically been a wide-ranging debate. The noble Lord, Lord Walpole, even managed to bring in Norfolk—not to my surprise. I thank all noble Lords that have contributed so fully and for the contributions from the Front Benches and my noble friend the Minister. It has been a very useful debate and I am grateful that the report of the Select Committee was so well received.
§ On Question, Motion agreed to.
§ House adjourned at one minute before three o'clock.