Britain's energy supplies must be secured through efficiency and diversity

Speech by Sir Robert Smith MP delivered to House of Commons on Wed 8th Mar 2006

I think that the crucial first step in achieving security of supply is to ensure the efficient use of existing supply. The better we use what we have, the less we need to worry about imports and finding new sources of generation.

Much remains to be done. On Tuesday 17th January, European Standing Committee C is to debate Europe-wide energy efficiency measures. It is estimated that efficiency could be improved by at least 20 per cent. across the European Union.

Provided that they are applied effectively, it makes sense to work through building regulations for new build and for extensions, but we have to deal with existing buildings as well because our housing stock will not be replaced quickly. Many people who face fuel poverty will not necessarily move into new housing stock, so it is crucial that we tackle the energy efficiency of the existing housing stock. We have relied on low fuel prices and improved incomes to tackle fuel poverty. However, someone's income can vary according to their circumstances, and if we can tackle the energy efficiency of our housing stock we will reduce people's dependency on energy so that they are less likely to find themselves in fuel poverty. We still face a major hurdle in improving consumer confidence so that people accept the new technologies, install them and understand what can be done to maximise the energy efficiency of their home. There is a problem, too, with marketing and presentation, as people do not see that the increased investment in their house can be offset against its improved value and long-term savings in energy bills. We need to find innovative ways of enabling people to measure energy conservation in their home and in their energy bills. A complete household energy package will demonstrate the benefits of conservation over time in reduced bills, thus enabling people to see more clearly the equation between conservation and investment.

Given the current high prices, it is a good time for the Government to press the case for energy conservation, and to use public information to convey both its importance and the opportunities available for conservation. Energy conservation and increased security of supply are important and do not just affect heating and electricity. Transport is a major contributor to carbon emissions, as well as a major consumer of energy. Replacing crude fuel taxes with road user charges would be a more effective way of ensuring more efficient use of fuel while ensuring that people who live in communities where road transport is the only available form of transport are not penalised. Replacing the climate change levy with a carbon tax will focus the economic signals on the importance of saving and conserving energy.

Our debate has touched on the important benefits that can be derived from improvements in the distribution of energy and the way in which we can bring energy generation closer to consumers' homes. Every year, 1 million or so gas boilers are replaced, and it would be beneficial if people had the confidence to replace them with a mini combined heat and power plant to generate electricity in their home and provide heat at the same time. Again, that would reduce demand and the need for large distribution systems, thus leading to a more efficient market.

In many ways, this debate has been triggered by the high prices this winter. The Secretary of State said that there is a problem partly because world energy prices are high. As has been said, the international oil market sets the price of oil around the world. Gas remains a much more regional market, although it is becoming more connected as more liquefied natural gas is processed and gas is shifted from one market to another. We have seen an extreme example of what can happen in an isolated part of the regional market. The UK is in transition from its status as a supplier that meets its own energy needs to one as an importer, and has experienced problems in coming to terms with new gas imports. The transition to the new market arrangement coincided with forecasts of cold weather, which did not improve confidence in a thinly traded market. What guidance is given to the Met Office on the way in which it makes its predictions? Is more caution creeping into its predictions and, to avoid accusations of omitting predictions of bad weather, has it over-predicted bad weather? Do the Government monitor the Met Office's predictions, which have a major impact on the market.

Clearly, for many years, domestic users and energy users with normal contract supplies have benefited from the market. However, as has been said, the transition investment will be made later and, as can be expected simply by relying on the market to send the signal, there are spikes in the market. Both as a nation and as individual energy users, we must decide whether the benefits of the good years, when we do not need investment, are worth the price of uncertainty and upheaval in the transition years. Other markets have probably paid over the odds in past years, but they have not experienced upheaval in times of transition and new investment. There may not be power cuts and loss of energy, as the Secretary of State and the Minister have often assured us, but self-disconnection because of fuel poverty is a serious problem for people on prepayment meters. Self-disconnection by large industry is a major problem for the economy. A large business may be geared up to disconnecting from supply and not operating during high peak times, but the supply chain is affected and that hidden way of balancing energy supply has a knock-on effect on the economy.

The Secretary of State said that the pipes are coming and the LNG shipment terminals are being built, connecting us to new supplies. However, as he has also said, the pipes have not always been full and the ships have not always turned up. With winter projection models of the stability and balancing of the UK energy market, more awareness is needed of the interaction with markets beyond our borders. The pipe is not an adequate solution unless there is fuel flowing though it. As the Secretary of State said, we must consider the liberalisation of the market and ensure that both ends of the pipe are operating in the same market. That will bring more stability to supplies and more confidence and predictability to prices.

We need an open market with similar storage regimes at both ends of the interconnector so that forward supply and planning can be built into the risks and the models for trading on that market. That will not work if there are two different markets. The market is further distorted by the fact that the quality of gas in mainland Europe is different from that of UK gas. It would be interesting to hear from the Minister how his Department intends to take account of gas quality standards, and how we will adapt our trading arrangements to deal with gas of a different quality that flows from the European market.

Norwegian supplies will improve the situation in the next two years. Alarm bells have been set off by what happened in Ukraine. The upside of that was that the Russians saw that if they want to reach their markets, they need to continue to make supplies. No matter how rogue the nation, the nation at the other end of the pipeline will not get the money unless it provides the goods. Sellers need money as much as consumers need supplies. I welcome the legal changes that are coming to encourage more storage. That will greatly improve the situation on this side of the market.

The North sea must be recognised for its major contribution to the UK economy, in capital investment, jobs, tax and supply of fuel. The Department of Trade and Industry has done much to encourage the maximisation of its continuing potential. The North sea still has much to offer. The fallow fields initiative and the access to infrastructure have been extremely welcome, but as has already been remarked in the debate, it seems perverse for the Chancellor to increase the tax regime during his pre-Budget report at such a crucial time when we are trying to encourage more investment in gas and more supply, exploration and production.

What is even more perverse about the way the Chancellor has treated the industry this time round with his tax shock is the fact that he introduced it two thirds of the way through the financial year, making the planning environment even more unstable for investors. Also, as I said in my intervention, he will not reduce the tax if oil prices fall. The tax is clearly not designed to send signals to investors that he is interested in encouraging their investment. On top of the previous tax shock, it has sent disturbing signals to the market about investment.

The Chancellor should consider abating petroleum tax on older fields, because they are the hubs that allow us to explore the smaller fields around them. He should also consider how the tax impacts on tariffs, because the Department of Trade and Industry is trying to encourage the maximum use of pipelines and infrastructure, so it is perverse for the Chancellor to increase the cost of using the pipelines through extra tax. A lot of gas remains to be extracted, so it is important that we get the matter right.

The North sea has an important role to play in carbon capture and storage to reduce the environmental impact of carbon fuels. The Miller project off Peterhead is a good example of the North sea's potential as a place to dispose of carbon rather than putting it out into the atmosphere, which causes environmental disruption. Preserving activity in the North sea while we develop the technology is vital, and if we get ahead in that technology there are markets in China and India, which must produce carbon in meeting their energy needs. We must therefore find a solution on carbon capture, which, as we heard in yesterday's Westminster Hall debate, also offers a potential future for coal.

Our nuclear industry has left us with a massive clean-up bill for historic waste of £56 billion and rising. Nuclear energy was originally described as too cheap to meter, but it is leaving us a major legacy. It makes sense to use the existing plant for its maximum life, because the cost has already been incurred, but we need a permanent solution on waste. The incentives to build new capacity for nuclear power would be better directed towards dealing with the problem, which the hon. Member for Rutland and Melton (Mr. Duncan) mentioned earlier, of the signals to the different renewables sectors, in which we need to encourage diversification.

Britain is an island with a huge coastline, and wave and tidal power have major contributions to make in the long term. The Scottish Executive have already seen the problem of the imbalance of incentives sent to the renewables sector by encouraging the marine sector with their tripling of the renewables obligation, which will restore the investment balance and encourage marine renewables.

The skills developed in the hostile environment of the North sea have a lot to offer the marine renewables sector. Biomass is a major renewable that also has a lot to offer: our rural economy is currently going through major change, and given what has happened to farming and forestry, the new markets that biomass could produce would benefit our rural economy, our security of supply and our environment.

Gas is in the headlines but high oil prices also hit sectors of our economy that do not have access to gas. Farming, contracting, fishing and transport as well as domestic and industrial heating away from the gas main suffer from high oil prices. Perhaps the Minister could expand in his winding-up speech on how the European Union dialogue with the Organisation of Petroleum Exporting Countries is progressing on tackling long-term stability through exploring and producing enough oil from OPEC to stabilise world oil prices.

People say that we should not depend on the rest of the world but we cannot escape the fact that we live in an interdependent world. The Secretary of State mentioned the G8 and what we are trying to achieve at the World Trade Organisation. It is crucial that we do not allow protectionism and do not accept the argument that the national interest would be best served by cutting ourselves off from the rest of the world. The only way to protect ourselves from global forces and world markets is to ensure that they operate efficiently and effectively. We cannot run away from them; they will have an impact on us, no matter how much we try to be self sufficient.

The Government need to redouble their efforts on energy liberalisation and ensure that their proposals for storage capacity stabilise the market. In the long-term, we need to use our scarce energy resources with greater efficiency, make full use of our potential to capture carbon and unlock the renewable resources that nature has given us.