TUESDAY 20 NOVEMBER 2001

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Members present:

Mr Martin O'Neill, in the Chair
Richard Burden
Dr Ashok Kumar
Mr Andrew Lansley
Mrs Jackie Lawrence
Linda Perham
Sir Robert Smith

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Memorandum submitted by the DTI and DEFRA

Examination of Witnesses

MR BRIAN WILSON, a Member of the House, Minister for Industry and Energy; MR NEIL HIRST, Deputy Director General, Energy Group and Director of Energy Policy, DTI, and MR JEREMY EPPEL, Divisional Manager of Sustainable Energy Policy, DEFRA, examined.

Chairman

  1. Good morning, Minister. We seem to have what would have been, in your previous incarnation, known as a good gate for today. Perhaps that is an expression only known to Scottish football fans - in those days, not very many of us! Can we welcome you this morning. We shall kick off right away. One of the reasons for the inquiry, as we understand it, is the question of the balance between supply and demand and the understandable anxiety of Government that there may well be the possibility that they will get out of kilter. In particular, we are aware that there is an argument being advanced that Britain is going to become dependent on energy imports. What is your assessment of that? How serious do you think the shortfall will be and when do you think it is likely to kick in?
  2. (Mr Wilson) First of all, can I thank you for asking me here today, and can I briefly introduce my colleagues. On my left is Neil Hirst, the Deputy Director General of the Energy Group and Director of Energy Policy at the DTI. On my right is Jeremy Eppel who is Divisional Manager of Sustainable Energy Policy at DEFRA. I shall refer and defer to them as required. I think that the question you ask, and which is at the heart of the Committee's interest, is extremely timely, indeed, it is the underlying question beneath the energy review which the PIU is carrying out just now, and the conclusions of this report will make an important contribution to that debate. There are very big changes taking place in our energy mix. None of them is more significant than the decline of the North Sea which we can hopefully slow the pace of, but which is none the less inevitably going to happen. That will increasingly make us dependent on imports, and in the case of gas it will make us dependent on net imports by 2005 and thereafter we will become very steeply dependent on gas imports. The projection just now is that maybe 90 per cent of our gas by 2020 will be coming from imported sources. Therefore, in the face of that kind of transition, the question of maintaining security of supply and where our energy needs are going to be met from, becomes increasingly relevant.

  3. This is a comparatively new problem in some respects, because from about 1996 we became an exporter of gas, and indeed I think that by 2000 we were exporting something around 11 Bcm of natural gas a year, which was about 12 per cent of the gas produced. Would it not have been more sensible perhaps to have slowed down the rate of exports, rather than face a premature depletion situation?
  4. (Mr Wilson) I think that is a reasonable comment, and obviously neither I nor this Government were responsible for policy at that time, but we have certainly had the benefit of gas in the short term. I think that probably most people, looking at this just from an objective stance, would say that what is remarkable is that having made such a commitment to gas, in fact our status as net producers of gas and being net exporters of gas has been so relatively short lived.

  5. Do you think that the difficulty in extending the exploitation of gas supplies will have been made worse by the present stand-off as far as oil prices are concerned, in that in recent months - put it no more strongly than that - there has been an apparent link between the price of oil and the price of gas, and if the price of oil gets down to 14 or 15 dollars a barrel is that likely to deter some of the future exploitation or exploration and subsequent exploitation in the West of Shetland area? Do you think this is a problem?
  6. (Mr Wilson) It is not a problem at the moment, and we have no evidence of any significant activities in the North Sea or indeed West of Shetland being cancelled. I think the oil and gas industry is well accustomed to taking a longer-term view of this kind of development. Obviously particularly in West of Shetland there are very large investment costs involved, therefore we have to look at that on a ten-year or 20-year perspective. I think the assumption or expectation, both in Government and in the oil and gas industry, would be that prices will find their natural point of equilibrium, but at very low prices nobody makes money, therefore they are unsustainable, and at very high prices, for different reasons, they are unsustainable. So I think the industry, in making its investment decisions, takes a longer-term view, and there is no evidence at present that any of these decisions has been put on hold. On the contrary, we are encouraged by the number of new investments being announced. This is in significant measure a result of the work of PILOT which, of course, has devoted a lot of effort to try to extend the life of existing fields and also to bring marginal fields into production.

  7. Thank you. We are talking more on the supply side, but on the demand side you, I think, are one of the members of that distinguished Scottish regiment of former Transport Ministers.
  8. (Mr Wilson) No, I am not actually.

  9. You were in Opposition.
  10. (Mr Wilson) I was never recruited.

  11. I do not think the word "recruit" was the one that was normally applied to that regiment, but never mind. On the question of demand, transport accounts for a very sizeable proportion of the demand for energy in the UK. It is noticeable that in your memorandum, in paragraph 1.7, you list the different bodies with whom the Energy Policy Directorate liaises. One of the ones that you do not seem to deal with - or I am not sure whether or not you have any dealings with - is the DTLR in relation to the demands of transport. To what extent do you liaise with DTLR, given the amount of energy that this industry and the transport sector consumes? Is there a great deal of interdepartmental liaison on matters of overall demand in these issues?
  12. (Mr Wilson) Yes, I think there is. Certainly we recognise that transport has a huge contribution to play in terms of reducing energy needs, and a great deal of work is going on on the potential of hydrogen in particular, but also into other energy-saving sources. There is a lot of co-operation among departments of the DTLR, the DTI and indeed DEFRA, and I will ask Jeremy to say a little more on that in a moment. We certainly believe that in the long term hydrogen produced from renewable energy may be a key transport fuel which would significantly reduce our reliance on oil. More immediately, we see improvements in energy efficiency and technology such as hybrid cars. That has a potential to extend the availability of fossil fuels or to improve the security of supply by reducing demand. Perhaps I could ask Jeremy to add to that.

    (Mr Eppel) There is not a great deal I can add, Chairman. Obviously transport was part of DETR until the last election and it is now a separate department, but we do work very closely both with DTLR and with DTI on these demand-side issues and indeed, as the Minister said, on issues such as fuel cells there is an interest both in the transport applications of those in the long term and in the stationary applications.

  13. What you are telling me is that there are one or two projects that you both have an interest in, but there is not really a formal relationship in the sense of joined-up government between one of the largest single consumers of energy and you, the department which has overall responsibility with Ofgem to try to secure supply. Would that be a reasonable conclusion to draw from the unspecific character of the answers we have had already from the Minister and Mr Eppel?
  14. (Mr Wilson) I think there is a close relationship in areas where there is a strong overlap. That takes place mainly at official level. I am quite prepared to recognise the possibility that it could be strengthened. I think that is possibly one of the outcomes of the energy review. Obviously the PIU has a very comprehensive look across departments at energy issues. I do not think it is giving anything away to say there will be a strong emphasis on energy efficiency, including in the transport field. If either you or they believe that we can work more effectively together, then I will, of course, be very willing to recognise that.

  15. As far as I can see, this seems to be one of the missing links in the concept of joined-up government in areas relating to energy. Would that be an unfair or a fair way of summing it up?
  16. (Mr Wilson) I will spread that question around.

  17. Mr Hirst, you have been involved in this game for a long time and you have been here before.
  18. (Mr Hirst) There are very close links between the DTI and Transport in areas where there is real direct contact - for instance, in things like refinery balance and how that links, the technology of fuels, advanced fuels and hydrogen, and that kind of thing. As a practical matter, the DTI has not got closely involved in transport policy, and that is an area where we do not have the expertise. I think it would be wrong for me to imply that there was a close involvement in transport. There certainly is a dialogue. For instance, through our Energy Panel we certainly have presentations and they have discussions that cover various forms of energy and other topics, including transport.

    (Mr Eppel) Perhaps I may add one other comment to that. I hope I did not give the impression that it was just on a project-specific basis, and particularly in the context of the work that has been done at official level to think about the preparations for the PIU's energy review. There has been a fairly coherent process of analytical work, particularly by economists from the three departments and others, to look at transport energy demand, alongside other forms of energy demand and the potential for energy efficiency improvements. Indeed, my department, DEFRA, put together six papers which were submitted to the PIU, which covered a whole range of issues: industry, domestic sector, services and transport. So I think there has been a reasonably coherent attempt, at least in the relatively recent past since the department was split, to try to do some analysis on a joint basis.

  19. So there is a bit of a Damascene conversion about the process - that is what you are telling us - triggered off by the PIU? The bus from Damascus has been full of civil servants, is that the position?
  20. (Mr Wilson) A continuing process of improvement and refinement.

  21. As ever.
  22. (Mr Wilson) The DTI and the DTLR are also about to publish a joint report on new vehicle technologies and the contributions that they can make to energy efficiency, so that is a slight improvement.

    Chairman: I do not want to labour this point, it is just that this is an area of demand where we had the impression that there were not really sufficient closely-knit governmental approaches being taken in the past. We take the point you are making that that has a consequence. One of the desired effects, one would have thought, of the PIU was that the competing or the non-integrated interests within Government would be drawn together by a body like the PIU because it can hold the ring between interdepartmental rivalries.

    Sir Robert Smith

  23. Going back to the demand/supply point, in a sense obviously this joined-up government is going to be quite important, because if you are switching transport fuels to other fuels such as hydrogen and electricity you are going to impact quite dramatically on the issues you are looking at in terms of the supply of those fuels. I wondered about your assumptions about the demand and supply. In the last ten years the demand for energy has grown by 13.5 million tonnes of oil equivalent, which is only 0.56 per cent per annum. With your Government's own commitment to energy conservation and reducing demand for energy, together with the slowdown in the economy and the changing nature of the economy, do you actually see much growth in demand for energy over the next ten or 15 years?
  24. (Mr Wilson) Through energy conservation measures we want to slow the growth in demand and eventually to reverse the growth in demand, but I think all the factors are relevant that you mentioned, and therefore we would not expect to see a large-scale growth in demand in that period.

  25. Then on the supply side, from the DTI's own 'Brown Books' going back now to 1974, in 1973 the remaining reserves of gas were 1,115 Bcm, then it went in 1980 to 1,343 Bcm, then it went up in 1990 to 2,115 Bcm and now it has gone up in year 2000 to 2,096 Bcm. So the premise that we are heading for a decline in the North Sea may be a bit premature, given that every ten years or so there has been a more optimistic outlook from the figures in the North Sea.
  26. (Mr Wilson) There is already a more optimistic outlook than there was a year ago. These things do change. I do not think anyone doubts but that the North Sea has peaked, and therefore what we are talking about is the pace of decline rather than the absolute concept of decline. There is a huge amount which can be done to extend the output of the North Sea and to bring into operation fields which were previously either undeveloped or downright uneconomic . I offer the example of the Clair field. It is well over 20 years since the Clair field was discovered and only now do we have development plans coming forward. That is due not only to changing economics, but also to the immense improvement in technology. I hope there will be a lot more results like that on both a large scale and a smaller scale.

  27. So in many ways, before we get too pessimistic, on our own doorstep we still have a lot of potential to improve our own security of supply from our own resources?
  28. (Mr Wilson) I believe that is undoubtedly true in terms of the North Sea and indeed West of Shetland and possibly West of the Hebrides. We should be developing these opportunities in conjunction with the industry. I think that has been one of the great success stories of the past few years through PILOT - previously the Oil and Gas Task Force - where tremendous work has been done on issues like fallow fields and the technologies and licensing regimes which make these fields attractive.

    Richard Burden

  29. On a small point going back to this issue of co-ordination with the DTLR, how far do you see that that could be developed as much by changes inside DTI as by contacts between DTLR and DTI? Obviously you are here today with the team from Energy Policy, and that is absolutely right. A lot of the contacts, it seems to me, on transport policy relate to the parts of DTI that deal with different kinds of sponsorship, if I can put it that way, of particular industry. I wonder whether you feel there is more to be done to improve that co-ordination and the interface with DTLR, as much as department to department?
  30. (Mr Wilson) I think that as the initiatives which we have described, between DTI and DTLR, various reports and studies develop, then if you are going to implement them it makes sense to have a very close working relationship. The more you can break down barriers between any departments in the pursuit of a common cause, the better it is. Sometimes it is easier said than done, but as the Chairman has said, possibly someone looking from the outside at how effectively that co-ordination takes place just now can have beneficial results and tell us how to do things better in future. There is no doubt that if the PIU report and other studies place a higher emphasis on energy efficiency, then a great deal of that burden or that opportunity is going to fall on the transport sector, therefore it is essential that energy policy is linked very closely with the practical implementation which is going on in relation to vehicles.

    Mrs Lawrence

  31. Can I come back to the point that the Chairman first made about transport as the largest single user of energy in the UK? The European Commission White Paper on Transport was published in September. The figures in that project that there will be a 50 per cent increase in HGV transport by 2010. Bearing in mind that transport is the largest user, will there be more formal discussions, cross-cutting departmental discussions, on the implementation for energy supply and demand arising out of the European Commission White Paper? You have mentioned various areas of interest, but this is a policy matter. Therefore, are mechanisms in place where you discuss with the DTLR on a more formal level, or is it just on a subject-by-subject basis?
  32. (Mr Wilson) There are mechanisms whereby at official level these discussions take place all the time. As I said earlier, we are going to resolve shortly one particular joint report on vehicles and the application of new technologies to vehicles, both commercial and private cars. Again, I would probably have to recognise, I think, that these structures could be strengthened, and I think the PIU report could be the trigger for doing that.

    (Mr Hirst) I think that is absolutely right. These things are brought together, in a sense, in the Climate Change Programme which looks at how all these things fit together. Except for the areas that we have described, the Department of Trade and Industry's involvement in that is not tremendously detailed.

    Linda Perham

  33. Your evidence mentions the joint working group between DTI and Ofgem looking at security of supply at a strategic level for "at least 7 years ahead", it says. Is anyone looking further than seven years, or is there some sort of magic number about that?
  34. (Mr Wilson) No. We certainly are looking beyond seven years. Indeed, the whole PIU report and the establishment of the energy review is predicated on understanding that we have to look fundamentally at our energy mix and hence security of supply for the next 50 years. The energy review is up to 2050. I think that the uniqueness of the energy review as a PIU study is that it has short-term, medium-term and long-term implications for policy. Some of these issues are bearing down on us very quickly, but since the transition to becoming a net importer of gas, but also to looking ahead to 2025, then we get into the whole question of energy, the extent to which demand can be reduced and also how that is to be met, and particularly the role of renewables in meeting it. So there are very long-term questions and also shorter-term ones, but they all link into the issue of security of supply.

  35. I wondered why it said seven years at the strategic level. Obviously, from what you have said, we are looking further ahead. Is it just that much further in the future that it is not being looked at in as much detail as the next seven years?
  36. (Mr Wilson) I think the history of forecasting would suggest that it is sensible to have different approaches at different stages of future planning, but within seven years that really is short term in energy terms, and these are decisions taken now that will have a very significant effect on what happens over the next seven years, whereas the further you go into the future, inevitably there is more dubiety about the conclusions reached, but it is necessary to have that perspective in order to try to plan sensibly for the future, because obviously some of the decisions we take now about nuclear power, about renewables, will certainly have an impact for the next generation.

    Dr Kumar

  37. Minister, in your submission to this Committee, in 6.2, there is a very strong emphasis that the Government's current strategy depends heavily on the ability of markets to deliver security of supply. Would not firmer government direction be a safer way of delivering not only the security but social and environmental aims, rather than just leaving it all to the market as such?
  38. (Mr Wilson) I think the two concepts are compatible. In general, the market will deliver solutions in a pretty efficient way, but clearly the role of Government is (a) to ensure security of supply, and (b) to ensure that other considerations are part of the mix, and they include social and environmental ones. Of course, part of the unfinished business, if you like, of the Utilities Act is to give Ofgem social and environmental objectives in a more formal way than at present, and that is something that we are working on.

  39. How far do you think that progress has been made in liberalisation of markets in the rest of Europe? Do you think that this is all part of the long-term strategy and that sufficient progress has been made?
  40. (Mr Wilson) I do not think sufficient progress has been made, in the sense that we have not got there yet and that it is a long and difficult process. I think that progress is being made.

  41. Would you like to see more happen?
  42. (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.

    Chairman

  43. 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 ça change? We both went to Scottish schools!
  44. (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.

  45. You are far too polite!
  46. (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.

  47. 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?
  48. (Mr Wilson) Chairman, I think maybe there is a hazard in setting a target for this.

  49. I pluck figures out of the air, in the sense that it is simply doubling them more or less.
  50. (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

  51. 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?
  52. (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

  53. 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.
  54. (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.

  55. What is the technical process for them coming into being? Is it an Order or what?
  56. (Mr Hirst) I think I am right in saying that we simply issue them. We have already consulted on this. We have produced and published draft guidelines, we have consulted on them1, 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.

    Chairman

  57. 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.
  58. (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.

  59. 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?
  60. (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

  61. 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?
  62. (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 are a number of measures put in place at the time of the last 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 government support for innovative district heating schemes CHP based. 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.

  63. 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?
  64. (Mr Eppel) The Climate Change Levy is a recognition of the need to help begin to 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.

  65. 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.
  66. (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.

    Chairman

  67. 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.
  68. (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 this investment 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

  69. 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?
  70. (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.

  71. Particularly in relation to the renewables and timescale, can you expand a little bit on that?
  72. (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

  73. 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?
  74. (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.

  75. Do you see anything at the moment which can alleviate some of these problems?
  76. (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.

  77. If you are going down the hydrogen transport fuel, you can generate the hydrogen at the time.
  78. (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.

  79. Where does your recent announcement about the submarine cable on the West Coast fit into that?
  80. (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.

  81. Where is the technical side at? My understanding is on that side of the country the rock is extremely hard and that if you dangle a cable across a lot of rocks and the tide and waves move it about a bit it gets cut up by the rocks. Is there something which has happened which makes you more optimistic?
  82. (Mr Wilson) I hope if what you say is right it is something the study will reveal in advance.

  83. Is this very much speculative?
  84. (Mr Wilson) Is it very much speculative? Of course it is speculative in the sense that we have to test its technical feasibility and also its economic feasibility. We certainly would not have taken it to this stage if there had been any prima facie evidence that it was simply not a runner.

    Chairman

  85. Is it not the case that previous wave power experiments have been questioned on the fact that the normal cable, which in these instances would have been about five kilometres long, was vulnerable to the wave power rubbing against rock and that it has been suggested to us that the more predominant rock form in the West Coast of the UK is gneiss. That rock is of a kind which is particularly sharp and inhospitable and if you are going to have 400 miles of this as distinct from five kilometres it could present dangers. It may be that in the intervening period since wind technology was rejected, the old wave power experiments and the introduction of new means that there have been heavy duty cables of an order hitherto never considered before. Has this been fed in? This seems to be fairly substantial prima facie evidence, to use your expression, Minister.
  86. (Mr Wilson) There are subsea cables on the West Coast so obviously in these instances the problems you refer to have not been insuperable. The point of doing this is to answer these questions and we would not have got this far if it was thought the rock was incapable of being cabled, and that is very basic. I think the question is very well worth asking.

  87. We look forward to your answer.
  88. (Mr Wilson) Indeed.

  89. All I am saying is that British energy - small "b", small "e" - the history of it is littered with ideas from the bright ideas box that come out prematurely and raise expectations and cost money and very often never actually produce the goods at the end of the day. If this one is of a different character then we will hold our breath and wait and see.
  90. (Mr Wilson) If I can use another method. Better to light one candle than to forever curse the darkness. If you do not ask the questions you do not get the answers.

  91. This is a question which maybe should have been asked before the match was even taken out of the box to light the candle, with respect.
  92. (Mr Wilson) If it is common ground that much of the renewables potential in the UK is on the Western Seaboard, if it is common ground that the transmission problems at present are severe and if it is common ground that it will be environmentally very difficult to address that problem on a land based solution then I would have thought it could equally be common ground that it is not a bad idea to see if a subsea cable provides an alternative option.

    Sir Robert Smith

  93. Is there only one danger that if the land based solution really is the only solution it takes your eye off the ball and stops the preparation work eventually having to come to terms with that?
  94. (Mr Wilson) I do not think it does at all. We are going to have a preliminary view by the end of the year on whether this is worth taking forward to a further more detailed study. I would not expect that further study to be in a timescale that would delay anything else.

    Mrs Lawrence

  95. Can I just say, Minister, as an MP whose constituency has three sides fronting the Western Seaboard, and we are hoping to have a gas pipeline come ashore there soon, I really hold great store by hoping that plan does go ahead. Some of those giving evidence to us have suggested that both renewables and CHP will never reach their full potential and your targets because of difficulties with transmitting to the infrastructuring on two levels. One is the technical one, which to some degree you have gone into there, but also commercial. Technical in the sense that the infrastructure as it exists at the moment is geared up to large power stations to feed in to the grid and the second one is the commercial costs for small renewable generators to connect to the grid. How can we ensure that the infrastructure is made more flexible to counter both of those potential difficulties?
  96. (Mr Wilson) I thank you for your comments incidentally on the subsea cable concept. Can I say to reinforce your point, there is one commercial wave power station in the world just now which is on the island of Islay. It is one megawatt. It cannot send its full output to the grid because the infrastructure is too weak to carry it. If we are serious here about talking about renewables then that seems to me to be a problem which has to be addressed because we are not going to light up Islay, never mind the United Kingdom, from renewables unless we can overcome the infrastructural difficulties. I am slightly surprised by the negativity, Mrs Lawrence being an honourable exception, to investigating the possibility.

    Chairman

  97. Realism not negativity.
  98. (Mr Wilson) Time will tell.

    (Mr Hirst) This is something the Department has put a lot of effort into. As you probably know there was the report of the Embedded Generation Working Group and now we have set up a group jointly with Ofgem to take forward its recommendation. This is exactly the point we are addressing, that we have an electricity network which was designed on the basis of large power stations feeding through the strong British network and then through into the distribution network and increasingly in future we expect smaller scale generation, including particularly renewables, will be embedded in the sense that it feeds directly into the distribution network, in some cases directly maybe into people's homes, if you are talking about micro CHP. There are a whole range of issues, some of them are physical configuration but they are also the codes and requirements for when you first connect to the system which are designed for some larger scale stations. There is a question of how you distribute the costs of sometimes reinforcing the system locally and also the question of what credit people who are contributing electricity much closer to the demand should have for the fact that they are in some respects enhancing the flexibility of the system. All of those issues we are taking forward as fast as we can through this joint group. They are all very important, I agree.

  99. Can I just ask you something very specific. I know of an incident within my own constituency, for example, where a photovoltaic system was set up.
  100. (Mr Wilson) Yes.

  101. So the difficulties experienced by, it was the Western Energy Centre, to get that connected into the grid almost put them off despite their commitment to renewables. Are things as small and practical as that being fully addressed?
  102. (Mr Hirst) We are certainly hoping to move to a system where if you have a very small scale generation system, CHP or micro CHP, you would be able to connect up quickly provided it conforms, of course, to the safety requirements. Everyone realises you have to have that. Provided it conforms to the type codes and, therefore, the safety requirements you should be able to connect that up very quickly with absolutely minimum fuss, yes.

    Linda Perham

  103. The DTI and DEFRA have overseen over the last about 20 years a number of schemes and programmes to encourage efficiency gains and efficiency in both the industrial and domestic sectors. What success do you think that those have had?
  104. (Mr Wilson) I think frankly limited success, particularly in the domestic sector, because not enough people are already persuaded that when they have to make choices about domestic expenditure the measures which they would need to take as individuals to reduce their energy needs are sufficiently high priority. I think in the industrial sector that because there are more pressing requirements to reduce energy costs there has been substantial success. We would certainly start from the premise that there is maybe a 20 per cent potential for domestic consumers to reduce their energy needs. I believe that once again the PIU Report, if it gives priority to energy efficiency, hopefully can help stimulate a new priority being given to addressing that problem.

  105. If you say there has been limited success in the domestic side, if prices fall then people will be less keen to go around switching lights off as I have done for many years. That is obviously a small thing but there are other larger contributions to savings on energy on our domestic side. Would that not be difficult if prices are falling because there is less reason to conserve energy?
  106. (Mr Wilson) I think that a lot of the savings which can be made can come from the greater efficiency of household equipment. We should certainly be seeing greater efficiency in all the tools which we all use in our homes. I think there is a combination of it being consumer led and also being producer led which will hopefully lead increasingly to energy efficient surroundings. When I say there has been limited success, I do not want to under-estimate what has been achieved and of course local authorities and others have led very successful energy efficiency programmes, by no means negligible, but there is still a long way to go.

    Mr Lansley

  107. One of the questions we asked the Department related to industrial competitiveness and in your memorandum you made it clear that you recognised that some industries had a higher demand for energy, they were relative intensive users of energy. As things stand at the moment what estimate do you make of the relative impact of costs on those energy intensive industries in this country compared with their competitors and hence their competitiveness?
  108. (Mr Hirst) One of the Department's formal targets is to try to ensure that energy costs in the UK are maintained at below the average level of countries in the European Union and the G7 which is a rather rough proxy for saying that they should be competitive. Our energy using industries should be competitive. At the moment the picture is quite complicated but I would say that we are actually in conformity with that. Across the board generally our energy prices if you look both at electricity and gas, I have to say generally because of course you look at particular companies and particular deals, are below the average, yes, of the prices faced by competitors in other countries in the European Union.

  109. When you look forward now to the issue of enhanced security or security of energy supply in the future, would you treat that target of maintaining our competitiveness as entirely compatible with securing our energy supplies in the future? Let me put it in two parts. Number one, is it compatible in your view and, if not, would you make it an overriding consideration to try and continue to achieve such a target?
  110. (Mr Wilson) If I can just elaborate. Security of supply is the overriding objective and the overriding responsibility of Government but competitiveness is obviously an extremely high priority and, therefore, we try to reconcile the two. Ultimately security of supply has to be the highest priority.

    (Mr Hirst) It remains a key objective of the Department.

  111. In your memorandum you take the view that there may be no reason for these two objectives to be brought into conflict depending on the measures which are chosen. Why do you assume that if we are to take measures to promote security of supply and those implied additional costs of realising our energy sources inside the United Kingdom as compared with importing them, why do you take the view that measures would be able to offset that cost without it having an impact on competitiveness of industry?
  112. (Mr Wilson) We recognise that in promoting renewables, for instance, that there is a cost, that the cost by 2010, I think, is put at 4.4 per cent. As in anything in Government there are a range of objectives which have to be reconciled. We have environmental obligations to meet, therefore we promote renewables. We want to create a manufacturing industry based on renewables, therefore we promote renewables. We have a security of supply imperative, therefore we want to stimulate domestic production of electricity. If you put these alongside the competitiveness issue all I can say is - and to reinforce what Neil has said - competitiveness is an extremely high priority but obviously Government policy is always going to be a synthesis of a range of objectives and I have named three of them.

  113. I suppose the point I am making is that at the end of the day if we place a premium on security, and we may have to pay a cost for that premium, your memorandum seems finessed away so the measures one adopts if they are market place measures will promote energy efficiency but those costs will be finessed away. Have you actually done any modelling to see what those costs may be and how that can happen? It seems to me unlikely that the costs will be wholly finessed away but they do have to be met and we may have to acknowledge such a premium before embarking down a particular path of securing our own supply.
  114. (Mr Wilson) I just acknowledged one such cost and I do not think there is any attempt to finesse them away. I think what we constantly have to do is to call on other interests to balance the considerations in the same way that we are trying to do. Anybody who takes an absolutist position, for instance, on renewables, everything should come from renewables, has to recognise that the costs will be very much higher than we are talking about and that is in conflict with our competitiveness objectives. Certainly on my part I have no wish to deny that there are trade-offs or, indeed, any reluctance to quantify them as far as possible but, as we were discussing earlier, we have already seen the beneficial effects of NETA in reducing wholesale electricity prices by 25 per cent so that is good for competitiveness. I can only come back to the point that we have a range of obligations and imperatives which may ostensibly be in conflict with one another but which come together in what I hope is a balanced energy policy. Could I say, Chairman, further to what Mrs Perham was asking about when I said the domestic success had been less great, I think the statistics are worth putting on the record. In the industrial sector energy intensity fell 62 per cent in the last 30 years, in the service sector by 43 per cent but in the domestic sector only six per cent, so clearly there is a huge amount to be done.

    Chairman

  115. Does the industrial figure take account of the collapse in the manufacturing industry as well?
  116. (Mr Wilson) The industrial figure is based on the consumption per unit of industrial output.

  117. Can I just say NETA and the Climate Change Levy started on the same day. I presume you have been monitoring the impact on industry of both of these. Have you got any figures you can share with us, that is to say the cost to industry after discounting of up to 80 per cent as against the fallen prices or is it too early to say this?
  118. (Mr Hirst) I think it is quite early to say. We would have to follow up with what numbers we might have.

  119. Would it be correct to say that the CCL is a Treasury driven measure?
  120. (Mr Wilson) It is an environment driven measure.

  121. It was the Treasury that promoted it and you then had to pick up the pieces, is that correct?
  122. (Mr Wilson) Pejorative -

  123. It may well be but I think that there are a number of people who question the validity of it. Now that everything is up for grabs under a PIU inquiry surely industrial competitiveness and the CCL should be a consideration, the environment and the CCL should be a consideration and whether a carbon tax might be a more satisfactory way of meeting the environmental objectives should be a consideration.
  124. (Mr Wilson) All I can say is the PIU would not be precluded from commenting on that.

  125. Will you be contributing to such a discussion? Will you be telling us what your thoughts might be on the matter?
  126. (Mr Wilson) No. The advisory group to the PIU team, which I chair, is meeting on Thursday to consider a draft report. I think it would be premature to comment on anything which is going to be in the PIU Report.

  127. Are you satisfied you are going to have enough information to address that issue that I have just raised given that it has only been in place for six months?
  128. (Mr Wilson) I think anything to do with energy with fiscal policy is ultimately the responsibility of the Treasury but equally obviously on something as significant as the Climate Change Levy there is constant monitoring of its actual effect.

    (Mr Eppel) On the Climate Change Levy and agreements, the Climate Change agreements are the responsibility of DEFRA and in that context for the energy intensive sectors - and there are 39 sectors with a total of 43 agreements covering some 13,000 facilities, so there is quite a significant bulk of energy intensive industries connected to these now - what we have seen is the impetus provided by the Climate Change Levy has been a very real one for those industries to look at the potential for energy efficiency. I think that has been very encouraging. Whether the total energy efficiency potential is realised through that one could discuss but certainly that has been a real spur for those industries to look at potential for energy efficiency including combined heat and power.

  129. We wanted to ask you about fuel poverty but we are conscious that the strategy is being produced tomorrow so I think it might be more appropriate if we were to, maybe, send you some written questions on that once it is published if we think there are any areas we need to cover on that.
  130. (Mr Wilson) Yes.

  131. Can I just ask one last point. When we had some people here from the nuclear industry last week, they seemed to make the point that nuclear at the moment is a realistic option, it will require some kind of favourable treatment in the way that renewables gets support, whether it is by a fiscal instrument or by an obligation or whatever. Is that part of your consideration to look at obligations? The coal industry have also promoted that as an idea as well.
  132. (Mr Wilson) Again, Chairman, I do not want to be unhelpful but the future of nuclear power is obviously a big part of the PIU study. I am not going to say anything which pre-empts their recommendations. Having said that, the PIU Report is to Government rather than of Government and any measures which the PIU recommends will be assessed through the normal policy making processes. I think it is worth recalling that there has never been a nuclear moratorium in this country, it is simply that companies have not chosen in the past 20 years to bring forward plans for new nuclear power stations. The question of whether new nuclear power stations are built or whether the life of existing ones are extended will be conditioned by the context which Government creates and that will in turn, I think, be influenced by the PIU Report. Obviously the nuclear industry, like everyone else just now, is lobbying, which it is perfectly entitled to do, and it has made its position clear in submissions to the PIU Report but exactly how much of that case has been accepted by the PIU team will become apparent very soon.

    Dr Kumar

  133. Minister, just a short one. You said that the report is to the Government from the PIU. Can you say what is going to happen to the report once it is submitted to the Government? What will happen to that report then?
  134. (Mr Wilson) The exact sequence of events has not been determined yet. The PIU is obviously part of the Cabinet Office and the report is to the Prime Minister. The intention is still that the report will go to the Prime Minister by the end of the year. At some stage the report will be published and then the subject, I am sure, will stimulate very intensive debate. Then it will be up to Government across Departments and centrally to decide what to do on the basis of the PIU Report and what parts of it to accept and give priority to.

  135. The point the Chairman mentioned about the Climate Change Levy and all those, we do not know, everything is in the air, we may have to wait a further long time for action on that?

(Mr Wilson) You certainly will not have to wait a further long time for the PIU Report, the whole thing has been done within six months which has been a very intensive period of activity. I have no doubt that in some areas the PIU team will and should say that these are areas which need further work. You do not compile the definitive volume on British energy policy in six months so where further work is needed then let us have further work. I would also hope that there are pointers in it which will lead to early action.

Chairman: Thank you very much. If there is anything else we will write to you.

1 Note by witness; The correct procedure is that the Utilities Act requires a final draft to be laid before each House of Parliament which then has forty days to object. Assuming there is no objection, the guidance may then be issued.