Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 280-299)



  280. Would you like to see more happen?
  (Mr Wilson) Yes, I would, but it is not entirely within our gift to make more happen. What we can do is to continue to hold European dialogue both within the European Union and also with some of the individual Member States, and that is exactly what we are doing. The Commission's proposals are being negotiated at working-group level in the Energy Council. While there is general support for the proposals, some Member States, particularly France, have difficulties with them. I am due to meet my French counterpart very shortly, and I hope that will move things forward. I think the reality is that the French are unable to commit to a timetable before their presidential and National Assembly elections next summer.


  281. I have been sitting in this chair for a number of years and have had the same story from every Energy Minister from both Governments that somehow it is the nasty French and to a lesser extent the less nasty Germans, but the pair of them are always screwing it up for everyone else who wants a liberalised market. There is always an election coming up that seems to prevent a decision being taken. Is it, to use a French expression, a case of plus c"a change? We both went to Scottish schools!
  (Mr Wilson) On the record, I should make clear that I am not one of the Energy Ministers who used any of the pejorative terms which you mentioned.

  282. You are far too polite!
  (Mr Wilson) Far too polite! I think there is a strong element of truth in what you say, it has taken a long time and obviously there is resistance to it, but I do not think it would be right to say there has been no progress. If you recall, agreement was reached at Lisbon in March 2000 to accelerate electricity and gas liberalisation, and the clear objective there was 100 per cent liberalisation. So nobody underestimates the obstacles or the reluctance in some quarters, but progress is being made and we just have to keep working away at it.

  283. To be more specific and straightforward, we have seen that as a consequence of the original Directives you have got to 30 per cent for gas and 20 per cent for electricity, as far as liberalisation is concerned, and everyone has now signed up to them. The two nations which I have referred to in a pejorative sense have signed up to that, but it is very much moving at the speed of the slowest. What do you see as a realistic short-term target for increasing liberalisation in both of these areas? Is this all dependent upon the French election? For heaven's sake, 30 per cent and 20 per cent of markets is not really very significant. Do you think that we can see us moving to 60 per cent and 50 per cent or something like that before too long? Is that a prospect?
  (Mr Wilson) Chairman, I think maybe there is a hazard in setting a target for this.

  284. I pluck figures out of the air, in the sense that it is simply doubling them more or less.
  (Mr Wilson) No, I would not say these are targets set as a result of Lisbon. There were not deadlines. There were date targets set. Indeed, it is not really certain that these will be met. Therefore, I do not think it would be very helpful to set more targets while we are still working on these ones. All we can say is that there continue to be structural objections on the part of Germany and timetable objections on the part of France. The only way through these is to negotiate and discuss rather than simply to proclaim targets. All I would say, therefore, is that it is not quite true to say that nothing has happened. I think that Lisbon was a significant landmark, but I do not think it really helps the process either to be over-critical or to be over-rigid in setting fresh targets.
  (Mr Hirst) I think that the draft Directives and the draft Regulation which the Commission have produced do constitute a very big step forward in this area. A lot of good work is going on in the working groups, preparing the ground eventually to approve those, including trying to deal with some of the difficulties that our French and German colleagues have, and there is a lot of widespread support within the Community. So I think I would say that whilst there is genuine momentum, this is not going to go away or back down. As the Minister said, I do not think it is realistic to come here and say, "Here is the target date."

Dr Kumar

  285. You said that significant progress is being made and that there is a lot of support for it. If there is such a lot of support for it, then why is it moving at such a snail's pace? We should have seen a lot more evidence of that in front of us. Which other countries are in support of these changes?
  (Mr Hirst) I think it is fair to say that all the countries in the European Union, in principle, as they agreed at Lisbon, are in favour of moving forward with energy liberalisation. It is a very complex, demanding issue. As the Minister has said, there are difficulties in reaching agreement on certain aspects of it. In some ways opening up the domestic market may be actually more difficult and could take a little longer than opening up commercial markets. We certainly have strong support from the Scandinavian countries, from Spain, from Italy and from Holland, and they have all supported this process. The Spanish, who will be chairing at the Barcelona Summit, want to see this go forward.

Sir Robert Smith

  286. I wanted to come back to the conditions for Ofgem. You talked about more formal social and environmental objectives for Ofgem. I wondered what the timescale and process for producing those was.
  (Mr Wilson) I think it is a short-term requirement really and obligation to put these in place, since they do flow from the Utilities Act which is now clearly well in operation. Also, some of the issues which have arisen from the functioning of Ofgem, which in general terms have been extremely successful, would make it desirable that these objectives are clear and transparent.

  287. What is the technical process for them coming into being? Is it an Order or what?
  (Mr Hirst) I think I am right in saying that we simply issue them.<fu1> We have already consulted on this. We have produced and published draft guidelines, we have consulted on them, we have had a lot of comments which we are working on. The next step, for instance, will be for us to issue a comprehensive list of these.

<fo1> Note by witness: the correct position is that the Utilities Act requires a final draft to be laid before each House of Parliament which then has 40 days to object. Assuming there is no objection, the guidance may then be issued.


  288. Before we leave this question of energy markets, can I get something clear in my mind? We have been in the position for a long time that we have not really had to concern ourselves with the continent of Europe as far as security of supply is concerned, and that in some respects the Bacton Zeebrugge pipeline was more about exporting than about importing. Given the scenarios that you have outlined, Minister, both in your documents and in what we have discussed this morning, we are moving towards a situation where we will become more import dependent and therefore we will have to look to Europe to ensure that the gas comes through, and as to whether we need an additional pipeline to the first one. There are others coming down, but I mean the ones that are linked to continental Europe, as distinct from Scandinavia, if I can draw the distinction. We may have to have another one. Is it not the case that until we get liberalisation within Europe sorted out, a gun can be placed at Britain's head by those countries through which gas would have to travel in pipelines which are already perhaps almost overloaded? We are coming late to this game in some respects, as far as continental Europe is concerned, but there is a degree of urgency now, if the kind of security of supply issues that you have outlined in a slightly different way have to be resolved by the supply of gas coming from first Europe, as it were, but having to travel through Europe.
  (Mr Wilson) I do not have any reason to think that a gun is going to be put at our head, but I think that full liberalisation is highly desirable on a range of grounds, and security of supply is among them.

  289. The expression "gun at the head" might not be a very happy one to use, but on the other hand it is the case that the gun can be an economic one and it can be one which can be used. The trigger mechanism is the price, and we have seen already that prices have gone up in quite an arbitrary way as far as gas is concerned for UK industrial users in the last 12 months. It may change, but it does show a volatility in that area. Surely in terms of our security of supply, the extent to which you can afford to pay for something determines how secure your supply is. We really need to address this issue and importantly to seek to find a means of getting it opened up if we are to have a security of supply, do we not?
  (Mr Wilson) Can I say, with reference to your last point, Chairman, that like you, I am sure, I have been very concerned about the large increase in gas prices, particularly for industrial users in the last year. Because of that concern I have initiated a consultation to try to get to the bottom, in a definitive way, of the reasons for these price increases, because I do not think our industry can be subjected to that kind of volatility in a way that simply could not have been planned for.

Richard Burden

  290. Could we perhaps move on to issues like combined heat and power and renewables, those kinds of issues, for a little while? Government made no secret of its wish to encourage those kinds of sectors, and there are obviously a number of initiatives to try to stimulate that. Do you think there is also an issue, though, that there have been some fairly glaring omissions where the effect has actually been rather perverse, so that, for instance, on renewables and combined heat and power there has been the exemption from the Climate Change Levy, which was very much welcomed by the CHP and renewables sectors, but at the same time that exemption has not been extended if there is combined heat and power supplied off-site through licensed suppliers, and that has fairly seriously hampered CHP development? Do you think that is a problem? My second question is, if it is a problem, what are you going to do about it?
  (Mr Wilson) I think that in general terms there is a problem with combined heat and power. The problem to me is that events on the ground are moving in a different direction from our stated aspirations and targets. Irrespective of what the specific reasons for that are, then I regard that as a problem, because I have no interest in saying one thing while another is actually happening. I think that the reasons for CHP difficulties are more complex than is sometimes acknowledged, but there is no doubt that NETA has an effect on CHP, and I would argue that gas prices are an even greater difficulty. So I want to see consistency between our ambitions for combined heat and power and the climate within which it is operating. We have obviously made our representations—as indeed have DEFRA who are in the lead in combined heat and power—to the Treasury on some things that could be done, and we will see what happens about that. We have had extensive discussions with combined heat and power interests. I think the first thing is to recognise that they do face real difficulties. If the effect of that is to deter investment and indeed in some cases for people who had committed themselves to investment actually to turn their backs on it, then that is a problem we have to address. I do not know whether Jeremy has anything to add from DEFRA.
  (Mr Eppel) I do not think so. I think the issues for CHP are of quite considerable concern to all parts of the Government at the moment. There were a number of measures put in place at the time of the last Budget and the beginning of this financial year in connection with the Climate Change Levy: enhanced capital allowances, considerable but not complete exemption from the Climate Change Levy, as you referred to, and partial exemption from business rates. There have been a number of other expenditure measures which have been taken—for instance, the introduction from next April of a scheme called Community Energy which is under the Treasury's Capital Modernisation Fund, which over two years will provide some £50 million of government support for innovative CHP based district heating schemes. I think that my Department and, as the Minister has said, Government as a whole recognise the difficulties CHP is facing and that other issues need to be addressed.

  291. We shall come on in a second to the impact of NETA on that. You mentioned that the causes were fairly complex. I hope I am not putting words into your mouth, but I think you recognise that the Climate Change Levy issue is something that is a problem. You also mentioned the rise in gas prices. What would you say the other areas are that are hampering that sector?
  (Mr Eppel) The Climate Change Levy is a recognition of the need to help begin a move towards environmental, properly priced energy. What I was referring to in the context of CHP is that CHP, in recognition of its very real environmental benefits, its carbon benefits, has considerable special treatment under the Climate Change Levy; it has exemption from large parts of the levy for CHP-generated electricity and enhanced capital allowances for CHP equipment are available. In addition, sectors which have signed Climate Change Agreements are very strongly encouraged, and there is support, through the Energy Efficiency Best Practice Programme, to help them do more energy efficiency through CHP.

  292. I understand that. I was looking at it the other way round. The lack of exemption from the Climate Change Levy for off-site supply is regarded by the CHP sector and others as something which is actually hampering them. They welcome the exemption but they do not welcome the limits on that exemption. I was just struck when you said earlier on the problems facing the CHP and renewable sector, that the Climate Change Levy was part of the picture, NETA was a very good part of the picture but there were other things as well.
  (Mr Wilson) It is a combination of these factors you have mentioned and the pincer movement really of high gas prices and low electricity prices and both of these militate against CHP. Obviously Climate Change Levy is a Treasury issue. I have gone as far as I can really in saying that we recognise the difficulties. I think the summary of the balance sheet on CHP is that there has been a lot done for it but there is no point going around claiming the list of good works we have done for it if the reality for the industry at present is negative. I have had a lot of discussions on it and I am certainly seized of the need to square that circle.


  293. Would you say, Minister, there is maybe a wee bit of a problem here? There is quite an effective trade association promoting CHP on the one hand and then there are the people who benefit from it, the members, who are perhaps not quite as devoted to CHP and quite cynically, one could say, for good business reasons they will abandon the use of gas for environmentally satisfactory purposes if they can sell the gas on at a higher price given that they have got long term contracts and gas prices have risen. As a consequence of NETA electricity prices have gone down and, therefore, they are able to use electricity in preference to gas. So it is a pincer movement which may not be environmentally satisfactory but it is not to the disadvantage of the businesses which have originally invested in CHP.
  (Mr Wilson) That is part of the complexity I referred to, the high price of gas has two impacts on this debate. That is why the bottom line is still that what is happening in reality is disinvestment in CHP and that is not compatible with our objectives so we have to find a way of bringing the two into line.

Mrs Lawrence

  294. Richard referred there to NETA and the impact on CHP. The DTI submission acknowledges that it had concerns about the impact of NETA. It says here ". . . was and continues to be of concern . . ." on page five. Why were those concerns not addressed before the introduction of the new trading arrangements?
  (Mr Wilson) It was before my time but I think in fairness they were addressed in the sense that an undertaking was given to review the workings of NETA at a very early stage. Some of the concerns about NETA were by definition hypothetical and they had to be tested against reality. I think what is important is that within a very short space of time we are consulting on exactly what the impact has been on small generators, particularly on renewables and on CHP. We have to assess the lessons of that consultation. I think you always need balance when talking about NETA because in its own terms NETA has been a great success. It has reduced the wholesale price of electricity by almost 25 per cent within that same short space of time and that will be of benefit to consumers and to industry. It has also created many efficiencies again in its own terms. The headline of NETA is it is a great success story but clearly there are implications for some sectors of the generation community and we are trying to evaluate and then address these.

  295. Particularly in relation to the renewables and timescale, can you expand a little bit on that?
  (Mr Wilson) I do not think there needs to be any great delay in getting the consultation completed and conclusions drawn from it. Of course we are in constant discussion with Ofgem, and other interested parties, about how some of these problems can be addressed. Again, the Government has clear and ambitious targets for renewables and it is completely against our interest to allow any factor to deter investment and confidence in renewables.

Sir Robert Smith

  296. Following on from that, the intermittency of some renewables, such as wind energy, is seen by some as a serious drawback in security terms. Is that something you would agree with?
  (Mr Wilson) I think it is a drawback. It is in the nature of things that you do not have constancy of wind and you do not have constancy of sunshine so renewables are going to have to counter that negative but, of course, there are many positives in their favour. Also technology will continue to play its part in reducing these problems.

  297. Do you see anything at the moment which can alleviate some of these problems?
  (Mr Wilson) Consolidation can certainly help to alleviate some of the problems and the balance a mix of the energy supply because you are not over-dependent on sources which peak and trough, and then their impact on the overall supply is limited. Do you want to add anything?
  (Mr Hirst) If I can divide that into the short term and long term. In the short term, this has been discussed with the NGC. The source of, for instance, the ten per cent target, given the overall margins of electricity capacity that we have, I do not think anyone thinks there is a significant drawback from the security point of view from aiming for ten per cent in 2010. In the longer term, if you are talking about a much bigger share coming from wind, then you would have the issue now what is the backup if there is a still day. Possibly we could be talking about things like energy storage, but this is much longer term. In the short term I do not think there is anything which should deter us.

  298. If you are going down the hydrogen transport fuel, you can generate the hydrogen at the time.
  (Mr Hirst) Yes.
  (Mr Wilson) I think the last point that Neil made is very important. All of these considerations are secondary as long as we are talking about a ten per cent target by 2010. It is full steam ahead towards achieving that and that is a very high priority commitment.

  299. Where does your recent announcement about the submarine cable on the West Coast fit into that?
  (Mr Wilson) I think it is potentially a really important and, dare I say it, visionary concept. There is limited point in producing renewable energy if there is nowhere to send it. Many of the places where the potential is greatest for renewables have either weak or non existent links to the National Grid. So we have to find a way of circumventing that if that potential is to be realised. We are not only talking about what could be done now but even in parts of the western seaboard where the connections appear to be adequate just now, they could still in a few years time become a constraint on the potential of renewables. I just think there would be immense and possibly insuperable environmental objections to strengthening the inter-connector on land and, therefore, an attractive alternative is to do it through a subsea cable which would run all the way down the western seaboard collecting as it went along. Whether that is technically feasible, which I am pretty sure it will be, and also economically feasible is something we have to test. If the concept can be turned into reality then it is the strongest possible signal we could give to the renewables industry that we are very serious about this.

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