Examination of Witnesses (Questions 400-419)|
TUESDAY 20 NOVEMBER 2001
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
(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
(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
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
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
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
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
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.
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
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
(Dr Finer) Chairmansorry, if you are responding
(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
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
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
(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