Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 400-419)



  400. Can you just go through the causes again, why you think that is?
  (Dr Finer) The causes is how peak demand is treated. In the UK, in effect, all electricity that is sold at any given moment has been sold at the same price, so in the period, let us say, just after a television programme, when people go and make a cup of tea, there is a huge peak demand, the price shoots up because of all the extra capacity that has to be put on line to meet that demand, and industry pays the same price at the peak as does the domestic consumer. However, it is only the domestic consumer that has caused that peak, industry's demand has been totally flat. So really you have a choice as to how you do that, and other countries have chosen to attribute all that peak to the people who are causing it, which seems to us to be fair, namely, the domestic consumer; in the UK, everybody has been charged the same.
  (Mr Wey) Perhaps I can elaborate on the breakdown of those numbers. If one is looking at the domestic market, if you look at the energy prices then they are lower for the domestic consumer in the UK than elsewhere on the Continent, but also so are the tax levels as well; so you take those two combined then that makes a much lower factor. And, in terms of energy prices for large users, the UK is fairly high amongst the competitors on the continent. So if you make those comparisons then you get a very high ratio, that Dr Finer has mentioned.


  401. You are really saying, therefore, that we should tax domestic consumers across the board, and that, by doing that, the domestic consumers should be charged more and the industrial consumers would then pay a lower charge based on volume, effectively?
  (Dr Finer) I think what we are saying is that consumers should be charged according to the costs they incur, and the current system unfairly loads costs on industry which are solely due to the behaviour of domestic consumers. And that could be changed; and, actually, you could have a situation, with modern technology, which is win-win, in the sense that you could have technology which, for example, would turn off your fridge at home if you turned the electric kettle on, just during that period when there is peak demand, so you could actually cut costs for everybody in that way. But it is fair attribution of costs that we are seeking.

  402. What I am getting at is, we have in the UK a situation where a sizeable number of people, between four and six million, depending on how you count them, households anyway, depending on how you count them, are in houses which are hard to heat, or they do not have enough money. Two years ago, some of us with the Committee were in Scandinavia and in the Low Countries and talking to people there about things like fuel poverty, and you were talking about literally a problem which was almost alien to them, because their houses are better constructed and better insulated. And, therefore, the choice in the UK is not really open to us to have that degree of flexibility. I understand that you could have sophisticated metering, but, by the same token, for us to start straying into an area where you load charges on poor households, it might be politically unacceptable to certainly this Government, and even the last one was moving towards an acceptance of the consequences of fuel poverty.

  (Dr Finer) I totally understand that argument. The counter argument is that people who are in fuel poverty conditions, and I know it is awful from previous jobs I have done, need help, but it should not be up to energy-intensive industry to provide that help, it should be done through the general taxation system; why should chlorine manufacturers provide the help, rather than stockbrokers in the City, for example? The general taxation system is the fairest way to do it, and also I think the help that should be provided is to improve the energy efficiency of their dwellings, rather than just subsidise the cost of the fuel.

Mr Hoyle

  403. Just following on from where the Chairman started the debate and just moving on. I found it interesting, when I read the report, how you point out a good example of how there are two differences, that you go back to 1997 about the reduction of VAT on domestic fuel, and you make a point of that; so what you were saying was, really, what you wanted was not this Government to be elected but the Government at that time re-elected, because they were going to double VAT?
  (Dr Finer) I do not think we have said that, nor would we say that.

  404. But it is a worrying situation, because fuel poverty is important. How do you feel that we can deal with it, besides putting the prices up, because that is what you stated?
  (Dr Finer) I feel that fuel poverty should be dealt with by a comprehensive programme which produces project-managed improvements in people's homes, so that they have well-insulated homes, with efficient energy supply, well draft-proofed, modern appliances, and then everybody benefits, and the actual cost to them goes down, and they no longer have to live in these awful conditions, with mould on the walls and really unpleasant, cold homes.

  405. But in your report what you are saying is we ought to increase VAT so that they do keep more mould?
  (Dr Finer) I think we criticise the decision to reduce it, but, politically, I know, once you have done that, reversing it is difficult.

  406. Can I just say, you mention, well, if the kettle goes on, the fridge switches off; more often than not, the fridge is switched off because it is on a thermostat anyhow. You are playing at the game, you are not really addressing the poverty issue. What the quick answer seems to be is, "right, what we should not have done is reduce VAT, that normal domestic consumers should pay more, and we should pay less". Is that not what you are really trying to say?
  (Dr Finer) Overall, we think that it should not be up to energy-intensive industry to solve this problem of the energy poor, of the fuel poor, it should be done through the taxation system.

  407. So what you are saying is, you should be allowed to ruin the environment and the costs should then go to the domestic supplies?
  (Dr Finer) Not at all. I did not say that and I would not say that.

  408. But that is what would happen, if we reduced the price to you, you would use more, the domestic market would fall; but the problem of pollution is not coming from the domestic market, it is coming from industry, that is throughout the world, whichever way you look at it?
  (Dr Finer) That is actually factually incorrect. Any study shows that the domestic sector is far more energy-inefficient than the industrial sector; so, actually, the problem of pollution does not come from us.

  409. Can I take issue with that, and no doubt we will beg to disagree at the end of it; but if you go to a Third World country, where you have just put a chemical factory, and where people do not have domestic supply, how on earth can you compare the two?
  (Dr Finer) I do not fully understand the point you are making.

  410. If we take South America, for example, a growing country, a lot of people live there who have not got electricity, have no supply, in fact, and yet a chemical industry is set up there using the supply; how do you say that they are worse than industry?
  (Dr Finer) First of all, a chemical company cannot set up shop where there is no supply, and there has to be a supply from somewhere.

  411. I did not say that. I will rephrase it and I will make it easier for you, and I will say it slowly, if that is what we want to do. If there is power, but a lot of homes do not have supply but industry does, how can they be affecting the environment more than the industry that has got the supply?
  (Dr Finer) Clearly, in that situation, you are right.

Mr Lansley

  412. This morning, along with the Minister, the Department took the view that energy-intensive users in this country were suffering no competitive disadvantage from the costs of their energy, as compared, principally, to those on the continent. Your memorandum to us suggests that the contrary is the case, but, as I understand it, both in relation to electricity supply and gas supply, you are suffering a comparative disadvantage. Can you just tell us, are you right, or are the Department wrong, or are you working on different sets of figures?
  (Mr Wey) I think it is important to look at this in an historical context. First of all, if you look at the way in which the gas market has developed; some four or five years ago, before the Interconnector was established, linking us to the Continent, and the influence of oil prices in the market, we had pretty well gas-to-gas competition in the UK, and we had a considerable competitive advantage over our continental competitors, because the gas price in the UK was clearly lower. Since that time, progressively, the gap has narrowed, so that, now, the energy content of the gas price, often, in the UK, is actually higher than it is on the continent; so we have a perverse development as a result of the Interconnector. And our concern is that, from having come from a competitive gas market in the UK, we are now linked to an uncompetitive market on the continent, where it is largely local monopolies, and also the custom of having a linkage with a lag to the oil market. And, yes, one could say that we might well benefit from that, in the short term, as the oil price declines, but, nevertheless, it is a market structure that is not a competitive market structure.

  413. I think I am with you. Let me just take it on, and tell me if I misunderstood. The consequence of the Interconnector essentially has been that, instead of a supply/demand relationship in the United Kingdom which gave you a relatively favourable price, you have now moved to a supply/demand relationship taking our gas, North Sea gas, to go with continental gas, where the price to continental industrial consumers is advantageous compared with yours, because of our supply/demand relationship. Now, as we look forward to the time when there will be an import dependence on gas, are we not moving to a situation where, in fact, this is just swings and roundabouts of the supply/demand relationship; if we had not the Interconnector, with its temporary impact upon you, in the long run, you would have been having to find relatively more costly sources of supply? So that is just the way the supply/demand is shifting over time?
  (Dr Finer) I think the problem with that analysis is that it assumes that there is a well-functioning gas market on the continent which produces competitive prices, but at the moment there is not, the prices on the continent are established by long-term contracts set by monopoly buyers and monopoly suppliers, and the result is the prices there are higher than they were here, where we had a proper, functioning gas market, gas-to-gas competition.

  414. Sorry to interrupt. Does not that just mean you should get into the long-term contracts to draw your own supply in that same sort of way; you have some very established plant and you know the sort of long-term demand you need?
  (Dr Finer) No; it is to the domestic consumer that this applies, largely, is it not.
  (Mr Wey) Yes, I think we are welcoming the fact there is an investigation presently under way into the operation of the Interconnector, because we are concerned about that particular aspect of the market. But, also, there is a Directive on the continent to speed up the liberalisation of the market, so it is much more open and it will become more competitive, and the sooner that happens and we feel we have a competitive market on the continent then it will help bring a proper balance of supply and demand right the way across Europe. We are concerned that certainly there are constraints in the market, which certainly disrupt the proper operation of supply and demand.

  415. Just two points from that. One is, so as far as the discrepancies in prices to energy-intensive users in this country compared with your competitors on the Continent, so far as you are concerned, liberalisation is the key to reducing that disadvantage that you currently experience. But, secondly, why does the Department believe that you are not operating at such a disadvantage at the moment, I did not quite get the answer to why you think one thing and the Department thinks another?

  (Dr Finer) Overall, gas prices now in the UK, today, are roughly the same as they are, on average, on the continent; we used to have an advantage. We are stuck at the edge of Europe, we need all the advantages we can get, in terms of being internationally competitive.


  416. But the criterion that was laid down this morning by the DTI, as I recall, was that the price of gas and electricity should not be more than the average of EU plus G7 countries. Now can you tell us whether or not, in your estimation, such a situation prevails, that electricity prices, unit prices, are at least no more expensive in Britain than they are, on average, in the EU and G7, and the same for gas?
  (Dr Finer) I am sure they are more expensive than that average, if you weight it according to trade, because the States has cheaper prices, significantly, than in the EU, or than here.

  417. Could you perhaps write to us on this issue, because we will obviously have to present your figures to the Minister and ask him to comment on it; but we got a fairly confident statement that, at the moment, all things being equal, we were still placed advantageously against the average of our G7 and EU partners?
  (Dr Finer) Chairman—sorry, if you are responding to that.
  (Mr Green) I was just going to add that I have been involved, for probably longer than I care to imagine, in discussions with the Department and the Electricity Association, in the past, trying to agree what electricity and gas pricing figures are; it is a difficult exercise. Often what the Government do not see is the delivered cost, what we actually pay, we are talking now surely about the market price of electricity. If you look at the introduction of the New Electricity Trading Arrangements, for instance, on average, the price has fallen nicely; but what that does not show is that the load manager for large users, who need to load manage to be competitive, whereas they used to receive a repayment of the capacity element, that is not there any more. If they used to manipulate load against day and night, these benefits have gone, we are not able to extract them any more; and I can say, quite categorically, all NETA has done is added cost and complexity.

Mr Lansley

  418. We understood the point you were making, even if not everybody agreed with it, about your industry not having to accept competitiveness and cost consequences of trying to deal with social objectives, or, by extension, environmental objectives, although, through some of the mechanisms currently applying, you do do that; but what about the security of supply objectives? The implication of the evidence from the Minister this morning was that, if necessary, if security of supply pointed towards such a premium, then a premium may have to be paid for security of supply, although he appeared to be thinking that it would not be necessary to do so and that market measures might minimise that. Now do you see it in the same way, or do you actually contemplate that, if necessary, security of supply points to a premium and the industry would be prepared to pay a premium, because this is key to your competitiveness, because you rightly make the point about your need to secure continuous supply?
  (Dr Finer) There is a balance, and we are prepared, in certain circumstances, to pay more for security of supply; and, Ken, you have an example, I think you mentioned.
  (Mr Green) I think, in terms of security of supply, you have to look at it in two parts. There is short-term security of supply, if when the winter comes along, it is much worse than we thought, there is some plant, that has fallen over, and that is where industry can help, they can load manage. In the longer term, of course, it is what fuels are available and how those fuels can get to the market, whether there can be interruptions. I do not think we do believe that there is a need for any security payment. I think, as we said before, there should be an overview, we do not want to end up with California, or anything like that, but relying on the market, in the first instance, because, after all, suppliers want to provide their customers with solid, reliable supplies.

  419. But where security is concerned, so far as you are concerned, in offering support, through your note to us, for the development of renewables, and indeed for nuclear, so far as you see it, are you doing that on the basis of its environmental benefit or its security of supply benefit?

  (Mr Green) I think, in terms of its environmental benefit.
  (Dr Finer) I think it is probably both. We are keen on playing our full part in reducing the environmental impact of the industry, both directly and through the energy it consumes, but also we think that diversity of supply does provide security, because you never know what is going to happen down the line; somebody discovers a new problem, nobody thought of the greenhouse gas problem a couple of decades ago, so methane looked like "the" fuel with no downside at all, suddenly you find there is a problem there. So diversity of supply does provide that extra degree of security.

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