The Committee consisted of the following Members:
Kate Emms, Alison Groves, Committee Clerks
† attended the Committee
Alan Brandwood, Chair, Safety Directors Forum
Vincent de Rivaz, Chief Executive, EDF Energy
Dr Luke Warren, Deputy Chief Executive, Carbon Capture and Storage Association
Richard Hall, Head of Energy Regulation, Consumer Focus
Will Straw, Associate Director for Globalisation and Climate Change, Institute for Public Policy Research
Pete Moorey, Energy Campaign Manager, Which?
Jenny Saunders, CEO, National Energy Action
Peter Smith, Policy and Campaigns Manager, National Energy Action
Gary Smith, National Secretary, GMB
Graham Meeks, Director, Combined Heat and Power Association
Michael Rolls, Director, Business Development, Sustainability and Government Affairs, Siemens UK Energy Sector
Chris Littlecott, Senior Policy Adviser, E3G
Maria McCaffery, Chief Executive, RenewableUK
Maf Smith, Deputy Chief Executive, RenewableUK
Examination of Witnesses
Q 332332 The Chair: Good afternoon. We come to the first of our evidence sessions this afternoon with representatives of the Safety Directors Forum, EDF Energy and the Carbon Capture and Storage Association. For the record, could I ask each of you to introduce yourselves by name and organisation?
The Chair: Before calling the first Member to ask a question, I should remind colleagues that questions should be limited to matters within the scope of the Bill, and I should tell everybody, including the witnesses, that we have to stick absolutely strictly to the timings in the programme motion, which means that this evidence session cannot continue beyond 3 pm. I might even have to interrupt you in mid-sentence when 3 pm comes. Looking at the headings within the Bill, is there any colleague who would like to ask questions relating to its overall aims?
Q 333 The Minister of State, Department of Energy and Climate Change (Mr John Hayes): Perhaps I could ask this of Vincent in particular: how important, do you estimate, is the greater certainty that the Bill provides in terms of investment and, in particular, how important is FID enabling—final investment decisions—which allows organisations such as yours to plan their business around long-term investment?
Vincent de Rivaz: Thank you for the question. I will be as clear and specific as I can. We are shovel ready. We have done our part to be ready to take the decision about investing in the new generation of nuclear power stations. In answer to your question, John, the Energy Bill is absolutely critical in allowing that decision to be made.
The comments I would like to make this afternoon in answer to your questions apply to all low-carbon technologies: just as the Bill aims to drive investment in all low-carbon technologies, the points I want to make specifically today are not specific to nuclear, but apply to all low-carbon technologies.
We have said, and I am pleased to repeat in answer to your question, that we welcome the Bill’s provisions and strongly support its objectives. The amendments we seek would simply—but importantly—add precision, and so increase certainty that the Bill will deliver what is intended. The Bill’s clear proposal, as the Government have said, is to attract investors while keeping prices as low as possible. Greater certainty in the Bill will reduce risk and so limit future cost for consumers.
I have some points, which I am happy to develop, if you wish, that are specific to the contract for difference. The goal of electricity market reform is clearly to deliver the Government’s policy of attracting investors and delivering a good deal for consumers. That spirit of fairness and balance is one that we share. Therefore the contract for difference has to be a contract for investment in affordable, low-carbon, secure energy. The contract must work, allowing debts to be recovered, it must provide for any case where policy has changed to prevent delivery of power and it must preserve the original agreement for the long term. I would be very happy to talk about all three of those points in detail.
Q 334 Mr Hayes: In respect of carbon capture and storage, may I ask Dr Warren for his comments on the progress that has been made by the cost reduction task force in exploring at what point carbon capture and storage could be commercially viable, and on the difference that would make to carbon-based technologies as a part of the energy mix that the Government are seeking in order to deliver resilience and sustainability?
Dr Luke Warren: My first point is that we have been absolutely supportive of the Bill’s direction of travel. We think it is absolutely necessary to treat all low-carbon technologies on an equivalent basis. The work undertaken by the cost reduction task force showed, with a high degree of confidence, that CCS can be delivered in the early 2020s at a cost equivalent to other low-carbon technologies. The first projects are likely to be more expensive. They will be smaller and more expensive in terms of cost-per-unit performance. They will probably be equivalent to some of our renewable technologies today. However, we will see a credible cost reduction over the next 10 years or so, which will mean that we should be able to deploy CCS for coal and gas at a cost close to £100 per MWh in the early 2020s. This work is absolutely critical in terms of the Bill for the signal that will send to the industry. It will enable the industry to start making pre-investments and will stimulate the supply chain, which is important for delivering cost reductions.
The cost reductions will come in three distinct chunks. First, there are cost reductions from undertaking projects at a more commercial scale. Secondly, when there is clarity about the volumes of CCS likely to come forward under the delivery plan, the justification for developing common infrastructure will be much clearer, which will deliver additional cost reductions. Finally, it will stimulate the supply chain. When the supply chain is confident that this will be a vibrant sector, we expect there to be real competition, which will drive costs down. The Bill is absolutely critical in terms of sending a signal to the industry and getting us on that cost reduction pathway.
Dr Luke Warren: We have gone on the record on this issue. CCSA, the Nuclear Industry Association and RenewableUK wrote to the Secretary of State to say we support a clear decarbonisation policy, and it should be included in the Bill. That is our position. There needs to be a discussion about what it should look like, but, given the uncertainties about the world in 2030, it is logical that any numbers are contained in secondary legislation. We think that a decarbonisation target will be helpful for a number of reasons. First, it is clear that questions are now being asked about some of the commitments to a decarbonisation agenda. If we sent a clear signal about where we expect to be in 2030, it would be helpful and would provide confidence to potential investors.
Secondly, we have to understand our direction of travel. That is particularly important for the analysis that will be undertaken on the delivery plan. We need to understand where we need to be post-2020 so the delivery plan analysis can get us on that trajectory. That will feed in to the discussions around the levy control framework. This time around, the levy control framework has been set in advance of the delivery plan analysis. In the future it might be more logical to undertake the analysis first so we can ensure the levy control framework meets the requirements shown by the analysis.
Thirdly, there is the signal that is sent to investors. Companies will look closely to see what the potential share is and what the market looks like for various low-carbon technologies. The two elements of that are the 2030 decarbonisation policy and the delivery plan. They are both critical parts of the jigsaw.
Despite strong support for the decarbonisation policy, we also give strong support for the timely progress of the Bill. It is hard to underestimate how important the Bill is for carbon capture and storage. We are very reluctant to see anything hinder the progress of the Bill and delay Royal Assent.
Q 336 Tom Greatrex: Can I just pick up two points? You made a point about a delay to the Bill, but is there any reason why incorporating a target into the Bill would delay it? Secondly, the Government have suggested that there will be a power to set a decarbonisation target in 2016. Do you think that that prolongs the period of uncertainty? Is it better to have a target in the Bill, as opposed to a power to set a target in three years’ time?
Dr Luke Warren: On your first point, clearly it is the politics of this that might potentially result in a delay. We would be interested in following that closely to see whether that would actually materialise. On your second point, if we have clarity on the first delivery plan in terms of the volumes of technology coming forward over the period 2013 to 2018, and if—or when—we have more clarity on the levy control framework, those two elements will be really important in terms of near-term investment decisions. A decarbonisation policy would certainly be helpful. As for whether it is absolutely essential, the debate is still out on that one.
Q 338 Peter Aldous (Waveney) (Con): On the contracts for difference and the single counterparty, having read the representations from both EDF Energy and the Carbon Capture and Storage Association, I get the impression that you are supportive of the direction of travel, but you both appear to have concerns about the contractual arrangements. I would like to hear a little more about those.
Vincent de Rivaz: It is a key element of the electricity market reform, and we are very supportive of it. I want to develop three points. In my first answer is the simple idea that the contract for difference represents a mechanism to reconcile differences between the price of electricity and the fair strike price agreed. It is also a mechanism to reconcile differences between the intent of the Bill today and reality over the long term. So there are three precisions that we think have to be added.
First, the contract for difference must work to allow debts to be recovered. The Bill envisages most scenarios, but it needs to cover all scenarios. As a back-stop the counterparty needs the right and obligation to pursue suppliers. Investors need the right to pursue the counterparty if we are not paid, to recover the debt due. These should not expose the counterparty to short-term fluctuations in cash flow. The Government can and must give confidence in the solvency of the counterparty. One approach that has been used before is for the Government to ensure sufficient comfort for investors through binding commitments. That is the first precision that is important. Contracts for difference must work and allow debts to be recovered.
The second precision is that the contract for difference must provide for any case where policy has changed to prevent delivery of the power. If a power station is available to generate electricity, its operator should not suffer financially because a policy or system decision is made that its electricity is not needed. It is right not only for investors, but for consumers as well. For instance, base load power such as nuclear operating at maximum availability of 91% gives the cheapest prices for the consumers—it is obvious. So eliminating these risks and not having to factor such risks into the price allows us to lower the price for consumers. It is vital that the contract for difference encompasses the concept of deemed output and not metered output.
The third point is the fact that the contract for difference must preserve the original agreement for the long term. It is a contract, and each party must take responsibility for its own actions. The Government and we wish to enter, if we sign the contract, into a long-term partnership; all we are saying is that if they break partnership, there has to be a proper settlement. For instance, the contract for difference must preserve the original agreement for the long term: structure and arrangement reached now must remain in place over the life of the contract. Neither party to the contract should have the right to terminate the contract. There should be an appropriate mechanism or review structure to preserve the policy and the regulatory intent of the original deal. This is needed in the event of changes beyond the control of the generator that result in major changes to operating costs that will have to apply—for example, changes to charges of business rates.
It is all about having a contract that is credible, a contract can raise the confidence of investors because of the certainty of the contract, the consistency of the deal and the continuity of the policy. This precision is at the moment lacking in the draft document of the CFD and it is very important that these questions are answered if you want to reach an agreement, which is what we all want. As I said earlier, our project is shovel ready.
Q 339 The Chair: Will the witnesses try to make their answers to questions a little bit briefer? We have a lot of ground to cover, and at the moment we are just asking questions about the overarching aims of the Bill. We will certainly come back to the specifics and contracts for difference, if members of the Committee have further questions on that matter.
Q 340 Barry Gardiner (Brent North) (Lab): Dr Warren, are you satisfied that CCS will be afforded the appropriate priority in the allocations market? Mr de Rivaz, given that all bar one of the companies represented on the debt capacity mechanism expert group have significant gas interests, do you believe that that has made sure that there is sufficient representation for the renewables and other low carbon? Mr Brandwood, do you think it sensible that the Government, in the funded decommissioning programme, have said that they will not set the waste transfer price until the early 2040s?
Dr Luke Warren: The delivery plan is the vehicle by which that signal will be sent to the industry in terms of how much CCS is expected to come on over the course of this decade. At the moment, we have a commercialisation programme. We do not have any clarity as to the number of projects that that programme will deliver. The current coalition agreement says they will deliver four projects, but I think the expectation may be that we will not actually have four projects, certainly in the first round. The delivery plan is going to be absolutely critical in terms of selling that objective and, at the moment, quite frankly, the industry does not know what the Government’s objectives are for CCS over what you might term the medium period, going up to 2020.
The second point is that there has not yet been any work to describe the allocation process that a CCS project developer will have to go through to acquire a CFD. When the various documents were released back in May, they were completely quiet on the allocation process for CCS. This is something we have been raising repeatedly, because for a developer to be able to put a project together and get it to the point that it can bid in for a CFD, it will have to understand what the likely market is for CCS and what the allocation process is. We were quite gratified that the documents that have come out alongside the Energy Bill have recognised a
Dr Luke Warren: Under the NER300, which is a European Commission process, it ranked No. 1 in terms of the cost per unit performance, that is in terms of cost per tonne of CO
The Chair: I am very conscious that we are still considering the overall aims of the Bill and I have three further Members who want to ask questions. We are halfway through the question time and we have the whole of the rest of the Bill to discuss afterwards. Perhaps Mr de Rivaz could answer the question that was addressed to him.
Vincent de Rivaz: Very briefly, we believe that CCS is a vital technology to allow gas and coal to continue to contribute to the energy mix in the long term. The electricity market reform is intended to work also for CCS technology as well as for all low-carbon generation. I agree with what Dr Warren has said.
Q 345 Barry Gardiner: No, Mr de Rivaz, my question to you was different from the one to Dr Warren. It was about the capacity mechanism expert group that DECC set up and the interests that were represented on it, all the companies bar one being companies with substantial gas interests, and whether you felt that that had influenced the drafting of the Bill against low-carbon technology.
Vincent de Rivaz: The capacity mechanism, which is part of the Energy Bill’s main intent, is something that we welcome. I think that it will play an important role in maintaining the security of supply. What is contemplated in terms of timetable to make it a reality, introducing the first capacity auction in 2014 is something that we support.
Alan Brandwood: As chairman of the Safety Directors’ Forum I represent 25 companies and I am obviously not an expert in everything. The question is therefore out of my direct experience, but I can seek advice from my members and give the Committee a written response.
Q 346 Dr Alan Whitehead (Southampton, Test) (Lab): This is a question for Mr de Rivaz. There have been more than a few suggestions that the chapter in the Bill on investment instruments has been written specifically to assist EDF and their ambitions as far as CPC power stations are concerned. Do you consider that the advantage
Vincent de Rivaz: I do not fear at all that these risks will materialise. I believe that the Bill’s aims are for all low-carbon technologies. It happens that our project is shovel ready, and not by accident; we have been working on it for almost five years. What does matter is the evidence: it has to be transparent and it will be transparent. All the relevant details will be made available to Parliament and the public at large of this contract for difference—there will be nothing secret about it. What matters is that the first contract of this magnitude is a perfect example of fairness—fair for the customer, for the consumers, and fair for the investors and the policy makers. I believe that it is in within our reach to achieve that fairness in this first contract for difference. It will create a precedent, indeed, but a very positive one for others.
Q 347 Dr Whitehead: Do you think that there might be a better requirement on you to accept some pretty tight dates on investment instruments, so that an investment instrument that perhaps has a very wide application does not thereby drive out the possibility of an allocation of CFDs being swamped in a particular year by the uncertainty surrounding whether the investment instrument comes into play in that particular year?
Vincent de Rivaz: The Government will have the responsibility in this respect to create the right regime and the right framework, which I think is one of the intentions, but we need to start, and when a project is shovel ready, we should not miss the opportunity. I repeat that what is important is that we demonstrate—together, in this new partnership—that we have a fair deal, which is fair for the customers, fair for the policy makers and fair for the investors. At the end of the day, what the Government need to demonstrate through this Bill and through the amendments that we are seeking is that it attracts investors to invest in this country. I think this is entirely possible, visible and desirable and is coming soon.
Q 348 Mr Mike Weir (Angus) (SNP): Dr Warren, may I press you on one point about CCS? You talked about CCS being deployable from the 2020s, I think. Given that the emissions performance standard in the Bill will set a figure for unabated gas up to 2024, could that act as a brake on the deployment of CCS?
Dr Luke Warren: Just to be clear, our expectation is that we can have the first projects operating before the 2020s. The point about the 2020s is that that is when the first commercial-scale projects could be operating. There are two distinct points there.
In terms of the EPS, the point that should be made is that what is driving or will drive CCS is the contract for difference, the feed-in tariff; it is not the EPS as such or the carbon-price floor that will drive CCS.
Q 349 Mr Weir: Surely, if an investor is looking at new gas plant and has the option of a plant that will meet the emissions performance standard, or perhaps a much more expensive plant including CCS for some 20 or 25 years in the future, is there not a danger that they will go for the unabated gas plant as a cheaper option?
Dr Luke Warren: Absolutely, if the CFDs are not made available for both coal and gas plant. CCS in either coal or gas is more expensive than unabated coal or unabated gas, so the developer will only build that plant if they have access to that CFD. That comes back to the point about the need to provide clarification in the delivery plan and to provide space within the levy control framework for those CFDs to be made available.
There is a broader issue in terms of the signal that is sent to potential investors around the grandfathering limit. Everyone appreciates that there is a need for new unabated gas to be built in the coming years to address the supply crunch that is expected, but there is a contrast between the 30-plus years of grandfathering available under the EPS and the 10 to 15 years that have been offered in relation to CCS CFD contracts. Sorry—it is not that they have been offered, but that is the indication about what the Government might be willing to offer. There is definitely a tension there to be reconciled.
Q 350 Laura Sandys (South Thanet) (Con): We are looking to achieve a truly mixed low-carbon energy economy. Would you agree that the Bill, with the strengthened counterparty and CFD regime, provides a truly equal platform across all low-carbon energy technologies—renewables and nuclear?
Vincent de Rivaz: For me, the answer is absolutely yes. My point is that the precisions I am seeking for the contracts for difference, as I have said, apply to all low-carbon technology on a level playing field.
Vincent de Rivaz: We are creating something that is novel. In this country, we have always been convinced that the market is very important. It is not about a lesser market. It is about a better market, which means a market that works and delivers the policy maker’s policy, and that is what is at stake. Are we ready positively to embrace this reform, which is one of the most important in the past decade for energy policy in this country? Clearly, it is one of the most important made in European countries. For the reason that this policy of low-carbon, secure and affordable energy is our common future, I think we should take this opportunity. Now is the time.
I am shovel-ready with the nuclear project. We are also investing in combined cycle gas turbines, and we are opening in this first quarter of 2013 a brand new 1,800 MW CCGT in Nottinghamshire. We have 4,000 MW coal power plants that are operating well, and we are investing in up to 1,000 MW in renewables. However, we are clearly leading the nuclear revival in this country, and, in the energy mix as a whole, nuclear is simply the long-term, consistent guarantee that Britain will have the low-carbon energy that it needs.
Dr Luke Warren: No is the short answer. We are confident that the Government see the need for carbon capture and storage to be fitted to both coal and gas. If we are going to be decarbonising the power sector by 2030, that is appropriate. What is a bigger concern at the moment is that the design of the CFDs has perhaps not adequately considered the needs of CCS to date. CCS has some quite distinct cost structures relative to other low-carbon technologies, which perhaps have not been fully appreciated so far. We still need to work closely with DECC to ensure that we actually end up with a CFD system that is an investable proposition for both coal and gas CCS developers. At the moment, we still have several concerns, such as contract length, which still needs to be resolved, and the indexation of the strike price, because the cost base of CCS is absolutely critical, particularly for fossil fuel prices, which are global in nature. There are also other issues, such as the reference price, which has not yet been satisfactorily resolved. We are confident that the intention is for CCS to have CFDs, but we are not quite there yet in terms of CFDs working for CCS.
Q 353 Mr Hayes: There are those who claim that it is paradoxical to devise and deliver public policy that aims to promote investment in both renewables and gas. Why do you think that they are wrong? You might be guided by Proust’s claim that today’s paradoxes are tomorrow’s prejudices.
Vincent de Rivaz: These kind of critics are a sort of broken record. I am privileged to have been in this country for more than 10 years. The list of criticisms I have heard about any attempt to create the right framework is endless, but the proposals the Government are making are now fixing the debate. We have decided in this country—the debate has taken years—to have a diverse energy mix, with a bit of gas and a bit of coal, and—if you can find the solutions—CCS, renewables, energy efficiency, of course, and nuclear have a role to play. Why are we reopening this debate permanently?
We have not to oppose the technologies; we have to ensure that there is a reasonable and sensible mix, and create the attraction for the investors to deliver. That is the Bill’s intention. I have just one concern—and I will take this opportunity, so thank you for the invitation—about some precisions needed shortly in the contracts for difference. There are three elements—credit risk, availability risk and change of circumstance risk—that we need to address so that the intentions of the Bill are not distorted by the reality of the contracts for difference. At the moment there is a mismatch that can be fixed very easily.
Q 354 Tom Greatrex: I have a question for Dr Warren, which is perhaps more specific and less philosophical than the last one. You referred to the potential danger, under the levy control framework, of there not being scope for CCS, because of various factors, including time. Going back to the question Mr Gardiner asked, do you see a need in the Bill for more clarity around the allocations process to ensure that CCS does not get squeezed out by other technologies?
Dr Luke Warren: I am not sure that the Bill is necessarily the right place to provide that kind of clarity. My sense is that it would be better provided in secondary
Q 355 Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): Mr de Rivaz, you raised the point of fairness and the importance for the consumer. When and if the price is finally agreed, will you be happy for the consumer to have, through Parliament, access to the scrutiny of how that price has been arranged?
Vincent de Rivaz: Absolutely, yes. I am absolutely confident that contracts for difference, if they do exist, will pass the trust test and the transparency test, and we are working on that. Obviously, the details of the negotiations going on cannot be public now, but the results will be. It is simply because, to exist, this contract will have to be a win-win contract.
I am not going to propose that my shareholders sign an unbalanced contract—that would be silly. The short term is very favourable to us but, at the end of the day, there would be a backlash if this was seen by consumers as unfair, so we have no alternative but fairness. We have no alternative but to pass the trust test. We will pass that if the works we are doing at the moment with DECC, with the support of the Treasury, achieve their objective in the next few weeks.
Q 356 Barry Gardiner: Paragraph 3(3) of schedule 3 goes against what you have said, because of course that excludes, under the business of confidential information, the strike price and the reference price. There are other elements that the Secretary of State does not need to disclose, so precisely what you have said is not stated in the Bill, is it?
Vincent de Rivaz: I have read the Bill, but maybe not with the same level of scrutiny that you have done, because I am not an MP—I am just a practitioner. I can say, loud and clear, in front of Members of Parliament, that we are going to stand up proudly with our contract for difference. It will pass the trust test and the transparency test, and the strike price will be known by our investors, the customers and all parties—of course it will be. It will be presented, as it will be, as the fair price.
Vincent de Rivaz: We are not asking to transfer to the customers any of the construction risks or any of the problems that we might have that are our own responsibilities in the operation of the plant. The examples I have given may be for an implausible case, but it is important for the certainty that investors need that this case is addressed upfront because there are circumstances in which policy context and regulatory context may change the basis on which the contract has been agreed. For instance, if there are policies in the future which lead to a base-load nuclear power plant that is designed to operate at 91% of capacity unable to do that not because of the operator, but because of a change in policy, we need to be protected against that type of risk.
Q 359 Dr Lee: That is an example of an operating cost, so what is an example of a construction cost that is out of your control? In view of the fact that Flamanville is significantly over budget and not complete—I am struggling to think of a plant that is on time, on budget and complete—I am trying to think of a construction cost that is out of your control so that the risk should be borne by the taxpayer and/or the consumer.
Q 362 Dr Lee: But you are not asking for a change in the way in which the contract for difference is drawn up in order for you to be allowed to come back and say, “This event was out of our control, which is why the construction cost has gone up”?
Vincent de Rivaz: The points on which I have asked for precision in the contract for difference, given the intent of the Bill, are the three points I have made. They do not cover the point that you mention. I am not asking for anything other than those three points.
Q 363 Dr Lee: I am just trying to clarify from EDF’s submission whether there are any events outside the company’s control that apply to construction. You have given me an example for operating—I accept that—but this is important for construction, because the construction cost of this nuclear reactor could have a profound impact on the country’s intentions to build further
Vincent de Rivaz: The most important thing I want to share with you is that I am confident that the construction cost we have put in the business model, which is in front of DECC officials, is a construction cost that we are going to deliver. It is fit for purpose. It takes into account the experiences of other projects, which were of various different kinds and where the initial estimations were widely underestimated.
We are going to start this shovel-ready project with a basic design that was approved in December by the safety authority. We have a design acceptance certificate. It has taken three years of work and 350,000 hours of engineering to reach this point where we have a stable, approved design. We have applied for the design and it has been approved by the safety authority. It is a huge boost for the credibility of our cost estimation. It is a huge boost for the safety authority, by the way, and for the credibility of the overall policy in Britain. It is very important. We have in place a world-class project team, and we have absolute confidence that when we sign this contract, it will be based on cost we can deliver.
Q 364 Graham Jones (Hyndburn) (Lab): This is just a general question. Vincent, you have talked considerably about the Bill. Do you think it will be beneficial to EDF as it currently stands? Do you think it is a good Bill, and will EDF be able to profit from it?
Vincent de Rivaz: I will come to that specific point, but I want to make it clear that this Bill is there to deliver the policy makers’ policy, which is low-carbon, secure, affordable energy. We, as investors, aim to have through a contract a long-term partnership with the Government of Great Britain—this Government and the next ones, because I guess that for the duration of the contract it will not be only one Government—that is based on fair remuneration for the investors. We will seek a fair remuneration on the investment we make, of course, and we will seek a fair deal for the consumer as well. There is no reason to oppose that.
Vincent de Rivaz: I am answering it. The contracts for difference, because the Bill is general, are for all low-carbon technology. It is not an EDF Bill. In the contract for difference that is specific for one specific project, we will seek to have a balanced deal that will remunerate the investors—EDF and others—fairly for the investment being made. The return of the investment will be known and will be public, as will the strike price. It will be absolutely transparent, and you can demonstrate from that that it is a fair remuneration for the risk that we are taking as investors. It will also be fair for the consumer, so where is the problem? Do you expect any investors in the world to invest without fair remuneration?
Alan Brandwood: I have been in the industry for quite a number of years. I can remember back to 2000 to 2005 when the industry had a number of problems with NII, as was. To give you an example, from the industry’s point of view, the regulator does two things. It regulates to ensure high standards of performance and also provides a service to the operator, in that if an operator wants to make a change to operating plant or to its organisation, it has to prepare a safety case. That safety case then has to be assessed, and that assessment takes time.
Back in the mid-2000s, NII was under-resourced, and therefore safety cases were being held up and that was costing the industry money. To give you a specific example, Wylfa on Anglesey generates about £400,000 of income for the Nuclear Decommissioning Authority every day. If the regulator cannot assess a safety case and delays one day of operation, that is costing the NDA £400,000. It is also costing the UK enough electricity for a city the size of Liverpool. We did suffer those sorts of delays. In fact, one of the sites we had at Oldbury had quite a large safety case and that was held up for several months. You can see the amount that it cost. It was purely because the NII could not resource itself.
The establishment of a statutory corporation, which is completely independent and in control of its own destiny, with its own board setting its own strategy, its own resourcing policy and so on, we see as a very positive move forward for the part of the service that the ONR provides.
Barry Gardiner: What I would ask you, therefore, is in relation to the negotiations around the strike price. Nuclear is in a slightly different situation because most of the costs of nuclear are construction risks. They are up-front risks, therefore the estimated cost of construction is extremely important in the negotiation over the strike price. I am not saying this as an accusation; I am simply stating it as a fact: there is therefore a perverse incentive for companies to load their anticipated construction costs in order to be able to negotiate a higher strike price.
Do you think then, as a matter of principle, there should be a mechanism within the Bill whereby, if the construction costs do not come in at the projected level and are lower than that projected level, there should be some compensatory mechanism to ensure the strike price is subsequently lowered, because that then reflects a fair return to the company and also a fair return to the taxpayer?
Vincent de Rivaz: It is a question that has been put to Ed Davey. He said that he could not deliberate on the detail of the negotiation, but the intent that you are describing is consistent with the fairness view that I have. I cannot elaborate more, but I understand what you are saying. I fully agree that it is a sensible question. It is constructive, and I prefer these questions that are constructive.
Sometimes, when I am talking about what we are doing, I am asked if we are guilty to have been working for five years to have a shovel-ready project in this country—billions of investment, 25,000 people working at the site and we are being asked, “Are you going to ask for reasonable profit?” Yes, we are going to ask for reasonable profit, and I have no reason to apologise for that. We are a force for good. We have demonstrated it, and we hope to demonstrate it shortly in a fair deal with the Government. I hope that there will be a strong consensus in this country and that investors will not be deterred from investing or asking for reasonable profit. If that were the situation, you could draw a line through any energy policy in this country. It is time to respect investors for doing their job when they are doing it with a fairness agenda, as is our case.
The Chair: We have come to the end of our time. I thank all three witnesses, Alan Brandwood, Vincent de Rivaz and Dr Luke Warren. Thank you for coming to meet the Committee and answer its questions. I invite the next three witnesses to come forward and take their place at the table.
Examination of Witnesses
Q 372 The Chair: We will now hear oral evidence from Consumer Focus, the Institute for Public Policy Research and Which?. I invite the three witnesses to give their names and tell us which organisations they represent.
Q 373 Laura Sandys: If you do not mind, Mr Bayley, I want to talk about consumer redress. The Bill introduces clear procedures on consumer redress. That is a first for the electricity sector, and I wondered what your responses were to it being included on the face of primary legislation.
Richard Hall: It is extremely welcome. At the present moment in time, if companies are subject to enforcement action by the regulator Ofgem for wrongdoing, any fines as a result of that enforcement action are paid directly to the Treasury. While that clearly has a positive effect on the Exchequer and may have an effect in deterring future misbehaviour by those companies, it does nothing to remedy the ill effects of those actions on consumers. Creating a mechanism that allows for compensation directly to consumers is something that we strongly welcome.
I could also highlight two or three areas where consumer redress powers should be enhanced or clarified further. I am happy to talk through what those are. The first is around whether third parties could appeal decisions. Currently, the provisions envisage that if an energy supplier or company is subject to a fine as a result of wrongdoing, they can appeal that fine if they feel that it is unfair. That seems quite reasonable and is consistent with natural justice, but if that appeal right is constrained solely to the party that is subject to the fine, there is a risk that it simply ends up being an upside-only situation for the firm, whereby if they feel they have a weak fine, they do not appeal and if they feel like they have a strong fine, they appeal. We think that there may be some value in widening that appeal right so that consumer bodies such as ourselves and Which? also have an appeal right so that where a company thinks the fine is too harsh but consumer groups think it is too soft, we can go down that avenue.
I will try to be brief on the two other things. First, it is envisaged that if a redress order is made against a company, there should be a notification process so that those affected by the decision have the ability to put forward their views and their case. As a consumer group, we are regulatory junkies, so we look at the Ofgem website. I suspect that many end user consumers do not look at it, and therefore might not be aware that enforcement action is taking place. It may be worth considering the Bill having a requirement on suppliers to take reasonable steps to publicise the fact that Ofgem is consulting on redress actions, where those affect that specific consumer.
The final point I want to make on consumer redress is that we could not see a definition in the Bill of the consumers that the provisions will apply to. We are interpreting that therefore as meaning it applies to all consumers, both domestics and non-domestics. I suspect that suppliers may argue that some larger non-domestic firms are able to look after themselves. I do not necessarily agree with that, but in order to avoid definitional arguments further down the track it may be useful if the Bill clarifies that it applies to all consumers.
Pete Moorey: As things currently stand, I do not. It is clear that attempts have been made throughout this process to put affordability at the heart of the Bill, but the way that the Bill is currently drafted leaves things relatively vague, and we have to take it on faith, to a certain extent, that consumer interests are being protected. We would like to see much greater transparency and scrutiny of the contract for difference process written on the face of the Bill so that we do have that confidence.
There are a number of things that we would like to see. The first is on the independent panel of technical experts that is being established. We think it should be given legislative legitimacy, a clear role and responsibility and clear oversight; there should also be consumer representation on the panel, so consumers can feel assured. The other thing is the publication of strike prices. I was encouraged by what the chief executive of EDF said, but at present we do not think that there is enough scrutiny of those prices written into the heart of the Bill. We would like to see them published before they are signed.
Pete Moorey: Yes, absolutely. It is really necessary, because consumers’ level of trust in the industry is low and their concerns about cost are incredibly high. Unless we deal with that on the face of the Bill, and organisations such as my own and Consumer Focus can say that we feel assured by that, consumers will not be.
Richard Hall: I would agree with all those points. I would further highlight that we would take more comfort if there were a stronger commitment to the introduction of competition on the face of the Bill. At the moment we have an administered price-setting process for zero-carbon technologies that attempts to cater for differences in their relative level of maturity, essentially to try to pump-prime a range of different technologies to market.
To give an example of how that plays through, in the current RO banding system, 31 different technologies are subject to RO banding, spread across 27 different bands. That excludes CCS and nuclear. That prompts some fundamental public policy questions: is it reasonable to expect consumers to bear the full cost of bringing 33 or more different technologies to maturity? Do we think it is realistic to expect that all those technologies will reach maturity? Some undoubtedly will, some will not, but what is our statutory process or policy process for deducing which will and will not—filtering out the winners from the losers? Finally, do we need to try to bring every single technology to fruition in order to meet our carbon targets? If we can get there with a narrower range of lower-cost zero-carbon technologies, should we not consider that option?
One thing that we would find very useful would be if the commitment, which to us is very welcome, to introduce competition between zero-carbon technologies in the medium to long term was crystallised in the form of a deadline on the face of the Bill. We would strongly support—I think this view is probably common to
Will Straw: As a think-tank we have looked in some detail at both energy bills and fuel poverty. We published a report about this time last year on the true cost of energy, which looked at the lack of transparency in the energy market, particularly in the vertically integrated companies. Although we have not yet researched it, we are interested in the prospect of reintroducing the pool as a way of creating greater transparency in energy markets.
We have also looked in some detail at the issue of tariff reform, and we have been more sceptical than Consumer Focus and Which? about the benefit of switching as a means of bringing down energy bills, because of the complexity of the existing tariff system, and, indeed, the amount of inertia there is among consumers.
Will Straw: We do, and we said this time last year that Ofgem should consider introducing an absolute limit on the number of tariffs, so we are very pleased that the Government have moved in that direction, although there are questions about whether that would interfere with innovation.
There are two other areas that we think are relevant to this. One is the ambition on efficiency. Although the Bill is relatively silent on that, other initiatives are taking place at the moment, including the consultation on the feed-in tariff, which we are interested in. We published a report in December, which looked at the energy company obligation, which we think does not have nearly enough ambition on fuel poverty. We think that it would take until 2032 to eliminate fuel poverty, even on the narrower definition recommended by John Hills. We would therefore certainly not achieve the target by 2016, as stated in law. We also think that there is likely to be low take-up of the green deal, and that therefore more ambition is needed.
The final area is something that I am sure you have discussed with other witnesses: the 2030 target. We have not been able to complete our research on it yet, but we hope to do so before the conclusion of the Bill’s passage through Parliament. However, some early indications from the research we are doing are that consumers would get a better deal if there was a 2030 target.
Will Straw: Exactly. We use DECC’s projections of where the gas price will be. We are not aware that there is a better set of estimates, although there is of course a huge amount of uncertainty on both sides.
Will Straw: There is a lot of change going on, and we would not for a second say that there would be zero cost in going down a route where you hugely ramp up the level of renewables, and indeed nuclear. However, as I said, we do not want to say too much about that at the
The Chair: To try to structure the discussion a bit, of the many people on my list, were there other colleagues wishing to ask questions about tariffs and the price to consumers? I will take Mike, then the Minister.
Q 379 Mr Weir: On energy tariffs, we have not yet seen the Government’s exact proposals about cheapest tariffs, but it was suggested to us, I think by witnesses from the utility companies, that it would be the lowest tariff within the type of tariff the consumer already had. Do you have any views on how that will really impact on those who are paying the highest amount for electricity, such as those on pre-payment meters?
Pete Moorey: A key point for us on the tariff proposals is that they are just the first step in the right direction in terms of simplification. Although we support the likely amendment—as you say, we have not seen it—we think that a vital element of any reform to tariffs is to introduce simple, single-unit rate pricing so that you have real clarity around price. Without that, for pre-payment meter customers, or any customer on a more expensive tariff, all we will be left with is another, slightly more simple scenario for energy consumers, but one where it is very difficult for them to see what the cheapest deal around actually is. It is right that pre-payment meter customers will remain on a pre-payment meter tariff, but as a result of these proposals they will not necessarily see such clarity around price that they can see the benefit of moving, for example, out of the pre-payment meter space and into a credit meter.
Q 380 Mr Weir: But it is often very difficult to move off pre-payment meters, because of the reason you are on one. It does not matter what the tariff is if you are stuck on a pre-payment meter because of past debt, and cannot get on to a lower tariff. For those people stuck on a pre-payment meter it does not really matter what the tariff is, to a large extent.
Q 381 Mr Hayes: On that precise point about the marriage of simplicity and transparency of which you have spoken, is it not the case that that mix is likely to have the effect of restraining price increases, because it is harder to hide uncompetitive deals? In that context, has this debate not been most welcome, and, actually, rather overdue?
Pete Moorey: Absolutely. The Government’s intervention on this issue has been incredibly welcome. For far too long, we have been debating how challenging and confusing tariffs are and the huge proliferation of tariffs. When Which? did “The Big Switch” last year, we found that the people who came in to do the collective switching exercise were on 1,400 different tariffs, so that element of the proposal—along with Ofgem’s retail market review, which will get rid of dead tariffs—is incredibly welcome and will lead to some kind of simplification.
The real problem is that there is a lack of competitive pressure in the energy market, and the danger with a proposal of putting people on the lowest deal is that all that will happen is that people will be put on the best uncompetitive deal in a market that is still not becoming any more competitive. That is why you need clear visibility on price so that people can go out, shop around and find the cheapest deal, just as they can in the petrol market, where you can go to your local garage and see what the price is and then go down the road and see if it is cheaper.
So we think that that is a vital element of driving price competition in this market. You need simple single-unit pricing. The Government could add that on to their tariff amendment when it is brought forward in the next few weeks. That is the vital element to drive price competition and to keep pressure on the different companies to offer the best deal to their customers and keep prices down.
Will Straw: One thing that we found with our research was that, although the huge increase in the number of tariffs was often done in the name of competition, it was actually anti-competitive, and that loss-leading tariffs in particular were preventing smaller suppliers from entering the market, because they could not compete. The big six energy companies were using the inflated costs in tariffs for inert customers essentially to underwrite those loss-leading tariffs.
One thing that we felt that simplicity and proper enforcement of the ban on loss-leading tariffs would do was to increase competition in the market. If that is done in the right way, we could well see a more competitive market, even though there would be many fewer tariffs available.
Q 382 Tom Greatrex: Earlier on, in response to the first question on consumer redress, you welcomed those elements of the Bill. Do you have a view on clause 8, which suggests that surpluses held by counterparties should go back to the Treasury? Would you rather see any surplus directed towards consumers, rather than it being a backhanded way of the Treasury raising revenue from the process?
Richard Hall: Provided that it is possible to find a cost-effective mechanism to repay those moneys to consumers, and as long it is not such a nugatory amount of money that the admin cost exceeds it, it would seem prudent to have an approach that allows for those moneys to be given back to consumers rather than to the Treasury.
Pete Moorey: I do not know what the Government’s intent is in that section of the Bill. We would welcome that being probed during the next stage of the Committee to understand further what that intent is, because it would seem logical for that money to return to consumers rather than to the Treasury.
Will Straw: The key question might be in which way that happens. Would it be some kind of cash transfer to consumers or would it come in ramping up the ambition of policies such as energy efficiency, which might then help all consumers, particularly those in fuel poverty?
Richard Hall: The organisation I work for is technology neutral. We have no favoured technologies, so we would like to see the policy mechanism deliver low-carbon energy at the lowest possible cost, and effectively to use market forces to decide which technologies are best able to deliver the units of energy that we need at lowest cost. We would favour going down an auctioning or tendering approach for zero-carbon technologies in order to establish which ones can deliver most bang for the buck.
In terms of which technologies are likely to fall out of the process, I think that would change over time, but to some extent the purpose of the market processes is to enable efficient price discovery to work out which are best able to deliver the public’s needs at lowest cost.
Q 384 Luciana Berger (Liverpool, Wavertree) (Lab/Co-op): We have heard from Mr Moorey. Will the other two panellists expand on what they would like to see from Government in their plans to ensure that everyone is on the cheapest tariff? Will mentioned pooling. What do the other two members of the panel think about pooling?
Richard Hall: I have gut sympathies for the pooling idea, although it is not without issues. Pools tend to be a mixed bag of virtues and vices. In terms of the areas where they are strong, by their nature—by creating essentially a split between the production and supply sides of the sector, with a central buyer in between—they actually remove many of the natural advantages that vertically integrated companies have, and therefore they effectively give guaranteed access to a physical product for downstream suppliers, because there is always a central body—the pool—they can get energy from. Likewise, for independent generators, it essentially gives them a purchaser of last resort, albeit only for spot products.
In that regard, pools can be quite beneficial in opening up market access. They potentially have some advantages in terms of transparency over what we have currently. Effectively, you can see what a genuinely liquid traded price for energy within that pooling arrangement is. On areas where they can be slightly weaker, if you look back at the decision-making process around 2000 to 2001 when the old pool was scrapped, one of the flavours of the DTI document at the time seemed to be a concern that there was some risk of gaming, because the generation market was comparatively concentrated at that time. I think some of those risks have ameliorated somewhat; the generation market is less concentrated than it used to be.
The principal risk I would see with a pool—it is not insuperable, but it is a significant risk—is simply that at the moment we are seeing quite a significant change in the policy backdrop for all generation. EMR is a very substantive, complex Bill, even with its existing provisions. Ultimately, in so far as legislation creates risks or uncertainty for generators, they will always pass on those costs to customers either directly through seeking a higher return on capital or a higher return on investment through their contracts for difference in order to be willing to invest, or they will simply walk away and say, “Actually, it’s too risky at the moment.”
There are some risks around a pool, which are less to do with the notion itself and more to do with the fact that we have a very cluttered policy environment, and it is another moving part that could have an effect on investor confidence.
Will Straw: In answer to your question about tariffs, our research showed that there were households in the same street with similar energy patterns, and one was paying £330 a year more than the other because they were with different providers. That was a great shock to us. It suggests that although switching can be an important part of bringing down costs, it is certainly inadequate on its own, particularly since fewer than half of all customers have ever switched. Switching rates in a single year are below 10% and falling.
We would like to see these reforms ensuring that customers who have not switched and are unlikely to switch—often in vulnerable groups: elderly, poor or on pay-as-you-go tariffs—are not in a situation where the tariffs can be ramped up without their knowing what is taking place. That was the principle that guided our research.
Pete Moorey: The only point that I would make with regard to the Bill in relation to that is the importance around the reference price—a point that Rich made. Clearly, the reference prices are going to be really important in terms of their relationship with the strike price and the costs that we pay ultimately. Clearly, there are concerns at present with the energy wholesale market around how transparent those reference prices are. While I would not propose any changes to the legislation with regard to that amount, because I think this is something that needs a great deal more consideration and study, it will be very important beyond this Bill in terms of strike prices and their relationship with reference price.
Q 386 Barry Gardiner: Mr Hall, I want to focus on costs to consumers. You will recall that between 2004 and 2010 the average UK consumer bill rose from £605 to £1,060. Of that £455 rise, can you recall how much was due to a rise in the wholesale price of gas?
Richard Hall: I cannot give you a percentage off the top of my head, but the principal driver of increased consumer bills in the course of the last few years appears to be significant increases in the wholesale cost of energy driven by increases in fossil fuel costs.
Q 388 Barry Gardiner: Will has just given you the same figure. Well, Mr Straw, perhaps I should turn to you to pursue this line of questioning. Of that £455 rise, £290 of which was due to the rise in the wholesale price of gas, do you recall how much was linked to the measures to support low-carbon energy generation?
Q 390 Barry Gardiner: Yes, indeed. I asked you specifically about generation. Let me ask a further question, Mr Straw. Have you looked at the international energy outlook 2012, the latest international energy outlook projections on world gas?
Q 391 Barry Gardiner: Oh well, perhaps I can jog your memory too. Do you recognise the projected rise in China’s demand for gas from 130 billion cubic metres in 2011 to 545 billion cubic metres projected by 2035?
Q 392 Barry Gardiner: You do. Thank you. That is a more than fourfold increase in China’s demand. Tell me what you believe the demand in world gas prices is going to do. I take it you have read what it also says about the relatively static demand in Europe taking time to get back even to the 2010 figures. What do you think that demand in world gas will do to prices in the UK if we have a further dash for gas?
Will Straw: Economic logic would dictate that the price would rise unless there was a considerable increase in supply. I know some people are taken by the possibility that there could be large shale reserves that we could extract from underneath the European continental shelf, but in a way that is very different from the US. There are big problems with that. One is that it is spread over a much more densely populated area. Another is that in most European countries there are not the same mineral rights for the landholders that there are in the US. Indeed, as we have seen in particular in Germany and France in recent months, there are much more stringent regulations and therefore often restrictions on shale gas exploration.
Richard Hall: Most markets respond to supply and demand fundamentals, so it will depend on the balance between production and demand. In terms of the future trajectory of gas prices, it strikes me as quite plausible that they would increase, but I don’t think that is a definite given. There is certainly likely to be more volatility in fossil fuel prices than in the marginal costs of most renewables and other zero-carbon forms of energy.
Pete Moorey: Both the other witnesses are better informed than I am on this issue.
Q 395 Dr Whitehead: On the question of future prices, have you done any analysis of the packages of either direct or indirect demands that will arise on consumer bills, as a result of various measures in the Bill? I am thinking of CFDs; a possible expensive capacity market arrangement, which will derive payments to increased capacity resilience recovered from customers; the indirect effect of the exemption of energy-intensive industries from paying CFDs and, of course, the question of what gas prices will look like subject to carbon floor price, assuming they continue to be market makers, and the impact, therefore, on other people’s prices, who would take the price from the customer but would not necessarily pay that carbon floor price. If you have done such analysis, what does it look like?
Will Straw: The only one of those we have looked at in any great detail is the carbon floor price. We put out a report in 2011 entitled “Hot Air”, in which we were critical of the carbon floor price, because of the differential price of carbon it would place on our very close European neighbours.
We are sceptical about the evidence for carbon leakage from the UK to markets such as China and other markets in the far east, because the set-up costs for a business in those jurisdictions are much higher. A steel manufacturer, for example, thinking about whether to buy wind turbines from a European steelmaker—a Dutch steelmaker, for example—facing a higher price in the UK, has quite an easy decision to make. We have been sceptical whether the carbon price floor will do anything to cut overall emissions, while at the same time certainly increasing prices to consumers.
Richard Hall: We have not conducted our own separate analysis, although we are avid readers of others’ analysis. On the carbon floor price, I agree with Will’s points. The CFP introduces a unilateral UK price for carbon at the same time as we are within the EU emissions trading system—the cap and trade scheme. To explain its effect, I would liken it to pushing down on one end of a seesaw. If you push down on one end of the seesaw, you get the superficial impression that you have reduced its height, but you have actually done that by increasing the other end by an equal and opposite amount, leaving the central point the same. There is a real risk with the carbon floor price that the EU as a whole emits the same amount of carbon but the UK goes further and gives one of our competitor nations headroom to do less as a consequence.
The receipts from that are expected to increment over time. You are probably aware that we are one of a number of consumer organisations supporting an initiative called the energy bill revolution. That essentially calls for the proceeds of carbon taxation to be spent on an ambitious programme to retrofit our housing stock and commercial building stock in the UK, with a particular focus on vulnerable customers, because we think that would be a way of using the receipts from carbon taxes to make a meaningful reduction in carbon emissions and a meaningful improvement in the quality of consumers’ and voters’ lives. We believe we could bring a vast number of households out of fuel poverty through that kind of mechanism.
Pete Moorey: We share the same concerns as IPPR and Consumer Focus about the carbon price floor, although we have not done our own analysis. The only other point I would raise about the raft of costs you mentioned is the exemption for energy-intensive industries. Clearly, we are concerned about the cross-subsidy that might come from domestic consumers for that exemption, but at present, we do not know what its impact on consumers will be.
Q 397 Laura Sandys: You have seen the Government’s consultation on demand reduction. It is the first consultation in the UK on that important part of energy policy. A lot of people are looking at the Bill as a possible vehicle for some elements of demand reduction. I am sure you have all submitted a response to the consultation. Did you propose parts of the Bill you think could be a platform for amendments aimed at demand reduction as an important part of the energy mix, if the consultation resulted in conclusions like that?
Pete Moorey: I know. We agree that there is an important role for a demand-side response and demand reduction. Most of the debate thus far seems to have been about energy efficiency feed-in tariffs, but we have not yet heard a compelling argument for their introduction. We are concerned that there will need to be an analysis of the likely impact of the cost to consumers of adopting that approach. In some respects, this is similar to my point about energy-intensive users. Clearly, we are concerned that energy efficiency FITs might lead to business consumers benefiting at the expense of domestic consumers. Yes, we agree that there should be a role for demand reduction, although it is probably too soon for this Bill. If the Bill did pursue something about energy efficiency feed-in tariffs, we would want to see much more analysis of the impact on costs for consumers.
Will Straw: Energy efficiency should always be sought. We regard it as one of the best uses of public money, not just for its impact in reducing carbon emissions, but also for the boost to jobs and growth. Consumer Focus has done some work on that. There is a paradox with any kind of efficiency. As demand is reduced, price falls, which could have a dynamic effect and increase the total demand. Economists such as Dieter Helm have made that point. In previous instances of increasing efficiency, you sometimes see consumers making a decision to put the same amount of money in the meter so they can be a bit warmer.
Q 399 Laura Sandys: Can I come back to something you were saying? On the face of it, the Bill is about supporting generation, although that is not necessarily the intention in the future. Is there not also a role for supporting megawatt hours, as such? Do you see any mechanisms or platforms in the legislation that could help to reduce demand rather than just increasing generation with no ceiling? The lack of ceiling on generation will end up costing the consumer, will it not?
Will Straw: I certainly think there is a case for including more energy efficiency in the levy control framework, although of course that potentially eats into some of the available capital for renewing our generation. There are plenty of other things that Government can and should do, away from the Bill, to enhance energy efficiency. The report that we published at the end of the year, which I mentioned earlier, includes a number of measures that we think would improve the energy company obligation and make it more efficient. Those include greater working with local authorities and new approaches taken by local authorities where they try to deal with whole streets at a time rather than just targeting individual houses that they know suffer from fuel poverty. Those things could be done relatively easily, and we think they would have quite an important impact on the success of that policy.
Richard Hall: I wholly agree with the proposition that the Bill potentially provides a vehicle for incentivising megawatts and demand reduction. I will not pretend that I have a silver-bullet policy for how that might be enacted, but I think there are platforms within it that could be used. It is important that we try to use those platforms where we can. Although analysts will have different views of the relative contribution that different interventions can make, across assessment of carbon abatement cost, measures that have negative carbon abatement costs—ones that save both carbon and money—tend to be demand reduction measures such as energy-efficient lighting and improvements in industrial processes and domestic goods, which are improvements in the very fabric of the environment. Interventions that tend to have a positive carbon abatement cost, meaning that they save carbon but cost money, are far more likely to be production measures.
If we are trying to tackle decarbonisation in an orderly fashion, it would seem to imply that many of the most cost-effective means of doing it will be through demand reduction measures, so if we can take those opportunities, we should. In terms of where the Bill provides a potential vehicle for that, there are two or three areas. The first is within the capacity mechanism itself. The capacity mechanism is essentially intended to provide a means of insuring consumers against the risk that the lights may go out at times of system stress. Clearly, one of the ways you can meet that system stress is by having additional generation available at those times, but you could just as easily have megawatts or demand response capabilities that allow you to keep the lights on by reducing demand at those times rather than simply boosting production. The capacity mechanism provides one sensible vehicle for trying to promote demand reduction.
There are a couple of other issues. The issues around the levy control framework have been mentioned, and I would be strongly in favour of allowing demand reduction measures to have access to the LCF on the same terms as production measures. Ultimately, whichever provides decarbonisation at the lowest cost, good luck to them. I think there should be equal access for demand side measures within that.
The final area—I will be woolly if you try to push me on details—is around the contracts for difference themselves. There may be some scope for incentives for demand reduction in there. There are a lot of conceptual strengths and a lot of conceptual weaknesses, dare I say it, with
Q 400 Mel Stride (Central Devon) (Con): I was interested in Will Straw’s comment about promoting energy efficiency take-up through local authorities and getting to the street level rather than the individual property. One of the challenges that I think you identified is getting people, particularly the harder to reach, to take up these schemes. Can you flesh that out for us a bit?
Will Straw: Yes. In the report, one of the things that we looked at was something called the low-cost, low-efficiency area scheme. There is something similar that DECC is doing, but this is slightly different. Rather than trying to identify and target those houses that we know for a fact are absolutely in fuel poverty, you try to find areas where there is a high proportion of fuel poverty, but not everybody is in fuel poverty, and you try to do the whole street at once. That means that you have to put the scaffolding up only once and hire the builders and contractors on only one occasion to do the whole street. If you have some social housing mixed with some owner-occupied and private-rented housing, there are opportunities for those people to take up and have their own energy efficiency done at the same time.
Although, in some ways, it is less well-targeted than if you did it on a house-by-house basis, because you are doing it in areas where there is a high level of fuel poverty and giving those who are not in fuel poverty the opportunity to be treated, in terms of bang for your buck, you can do much more.
Q 401 Mel Stride: Within that approach, do you think there are levers that can increase the propensity of people in those areas to engage in that process or is it more to do with the targeting, as you suggested?
Will Straw: One of the big issues with the green deal is that any energy efficiency at the moment is low take-up because people are quite sceptical and distrustful of energy companies. They do not want the disruption in their houses, and so on. There is also a bit of a culture gap whereby people do not necessarily want to have to do this if no one else in their area has done it. We think that it could encourage greater take-up by those who would be considering the green deal anyway. However, there is no hard evidence on that, because it has not been piloted.
Pete Moorey: One of the benefits of this kind of approach is that trusted intermediaries, whether they are local authorities or community groups, can really get involved in them. They can drive them forward. Bearing in mind all the issues that I raised previously around trusting the energy sector, that presents real opportunities.
This is outside the Bill, but I think that there is a missed opportunity around smart meters and the roll-out of smart meters, and the opportunity to do that on an area-based approach and to link it with energy efficiency
The Minister of State, Department of Energy and Climate Change (Gregory Barker): You are preaching to the choir in terms of advocacy of a street-by-street roll-out. However, you have rather confused the issue—or muddled it. This is the EMR Bill. You have confused electricity efficiency with thermal efficiency. Obviously, the roll-out of the projects you suggest in exactly the way in which you suggest is very good for achieving savings on gas bills and heating primarily. There will be some benefits through installing efficient electrical devices, but so far as the average house or home is concerned, the overwhelming savings from that sort of project are to do with thermal efficiency rather than electricity, unless you are one of those few people who still heat their home through electricity.
I am afraid that it is not an alternative to the inclusion of projects in an electricity capacity market, which needs to identify electrical processes when there is scope for efficiency. It is actually one of the frustrating things. You could keep on stretching the Bill. In an ideal world, it would be energy market reform rather than electricity market reform, but this is quite enough to digest as it is.
In the light of that, perhaps you might reflect on—back to Laura’s question about understanding the potential of a capacity market to bid for projects for electricity demand reduction—residential and commercial against new build generating assets, the megawatts theory. How do you think you could apply those in the same way, but in a way that attacks electrical efficiency rather than thermal efficiency?
Will Straw: Let me assure you that I appreciate the distinction. That is why I said to Laura that there were things that were outside the scope of the Bill. It might be better to defer to you, Richard, on the megawatts because it is not something that we have looked at in any great detail.
Richard Hall: My understanding is that DECC is currently looking at possibly having a pilot project for demand-side response or demand reduction within the capacity mechanism. The issues are really around allowing that market to crystallise because it is novel in the UK.
Q 402 Gregory Barker: Absolutely. The challenge, which is where we really want input from experts and stakeholders such as yourselves, is aggregating those sorts of projects into a scale whereby they can compete with generating assets where the ticket price for minimum entry is significantly larger than any projects on energy efficiency that we have seen to date. The question is: how do you build that market quickly enough so that they can compete? Otherwise, you will have projects that have a value in the low millions competing with projects with values of hundreds of millions, which would be a mismatch. I wonder if you have any thoughts on how you could do that?
Richard Hall: I suspect that, in the short to medium term, it will probably be non-domestic customers—significant supermarket chains and the like—who are most likely to be in a position to participate in these kinds of things; first because they all have the scale to be able to put together a product that is sufficiently large to be attractive to their capacity mechanism purchaser and also because they are fundamentally engaged in energy decisions on a day-to-day basis.
For domestic consumers, because you would need to tally far more of them together to come up with a sizeable product, and because, for many consumers, it is a passive purchase—you do not think that you are making a purchase when you switch the lights on—if you want to engage them, you will probably need to look at where there is scope for automation through smart goods and also around trying to sell the benefits of that to customers. For example, through the tariffs, is there actually a financial benefit to you, as a customer, that is sufficiently attractive for you to engage? I suspect that it is likely to be non-domestics in the early years who will be most able to participate.
The Chair: Forgive me, I have got five more people wanting to ask questions and, since we are all great mathematicians on this Committee, that allows for less than a minute per question and a minute per answer if we are to get through them. I think that we should move on.
Q 403 Sir Robert Smith: Just a quick question, back on tariff performance. When you were looking at tariff problems, did you come across people on dynamic teleswitching where it was very difficult to switch to other suppliers because of the wiring and the way that their house operates? When it comes to tariff reform, is there anything specific that needs to be done for them? Or would you like to write to us on that?
Richard Hall: Certainly we are aware of issues for customers with dynamic teleswitching around their ability to switch and to plan: because their meters—and sometimes their heating equipment—are being switched from low rate to high rate remotely, it is not always the case that consumers are aware of when that is happening. Therefore, when you are not actually aware of what is on-peak and what is off-peak, your ability to load shift is quite limited. In terms of more detailed practical problems we found with customers in those circumstances, I am happy to take that away and write to you if that would be useful.
Q 404 Mr Weir: One of you mentioned that one of the main things needed from reform was greater competition in the market. Concerns have been raised by some that the contracts for difference will solidify the control of the big six and make it more difficult for new entrants into the market. I wonder if you have any views on that?
There is a distinction here between competition in the generation market and in the supply market. My understanding is that, to some extent, that has been resolved, although smaller generators, who I am sure that you are speaking to, are still concerned that some of the arrangements will make it hard for them to access the market. I am less clear about whether there are constraints on competition in the suppliers’ market from the contracts for difference.
Q 405 Dr Whitehead: Sorry, this is a “would you agree” question. Will, in particular, would you agree that the description that you have given of a community-based enveloping programme, in terms of energy efficiency, is an accurate description of the community energy saving programme, as it operated? If you go to Walsall, you will see a good example of how that worked, including improvements for homes that were not directly related to the original CESP coverage. Do you agree that that has just recently been abolished by Government and therefore we no longer have a CESP?
Finally, would you agree that substantial savings in heat, particularly as far as gas is concerned, have an effect across to electricity generation—in terms of the demand for gas for both electricity generation and domestic consumption?
Will Straw: Yes and yes, and on the first of those, the research that we did showed that we thought that the energy company obligation would get you only 40% of the coverage that the CESP and the CERT would have got.
Q 407 Mr Hayes: You spoke earlier about demand reduction. I am interested in your thoughts about demand reduction and its relationship with the capacity market. I presume that you take the view that capacity market design has to be sufficient to allow demand to be a salient in considerations of capacity.
Q 408 Peter Aldous: I will ask another “do you agree?” question. Would you agree that the plans in the Bill to commission an open book scrutiny of developers’ documents provides the necessary transparency?
Richard Hall: That is a thorny question. I am not sure that I do agree on that one. The Bill currently appears to provide that investment instruments would be laid before Parliament, subject to some redactions. I think it sets out that, effectively, the CFD strike price should not be among the redactions. But from our perspective—from a consumer perspective—we would want to be quite clear that whatever is laid before the House does not redact any clauses that could materially impact on consumer costs. If there are buy-out or opt-out clauses in there, those need to be publicly disclosed. If there are clauses about risk sharing, indexation, or anything that might cause the contract to be eligible for reopening, we think that those all need to be in the public domain, because ultimately these are unusual contracts. I am sure the developers will push back and say, “This is
Pete Moorey: The key issue for us, on that point—I think Consumer Focus agrees—is that strike prices must be made public before they are signed. Publishing strike prices after the event will not provide the opportunity for effective scrutiny.
The Chair: Okay. Well, because of brief questions and brief answers, we have just made it by the drop-dead time. Thank you to the three members of the panel, Richard Hall, Will Straw and Peter Moorey, for meeting the Committee and answering its questions.
Examination of Witnesses
Q 409 Mr Hayes: Welcome, ladies and gentlemen. I was going to ask how much you welcomed the debate about tariffs. We have initiated quite a wide-ranging discussion, part of which we enjoyed earlier this afternoon, as you might imagine, about the objective of greater transparency and simplicity, and the effect that that will have on people’s capacity to navigate the system—the energy prices available to them. How important do you think that that is for particularly vulnerable consumers? What advice would you give, because we are involved in a consultation on this, and I would respect and value your comments?
Jenny Saunders: NEA has for some time tried to highlight the difficulties that low-income customers in particular have had in engaging with the competitive market. That is partly because of the offerings to them—the lack of good deals available, particularly for people on pre-payment meters—but also because of their trust in the market and their legitimate fears that they might move to a worse deal. We found that when people were switching on the doorstep, for example, they quite often did not understand the offerings and were switching to something that left them worse off.
Having something on the face of the Bill to introduce transparency and simplicity would be very welcome. Going beyond that, we would advocate support for
Gary Smith: Minister, as someone who is going through the process of switching at the moment and sees how difficult it is, I have great sympathy for people who are trying to remove concerns about the tariffs.
As a trade union, we welcome the commitments around transparency and simplicity, but the rhetoric is easier than the actual delivery. There are a couple of important things. In terms of helping people with their bills and giving them confidence in what they are paying, the key thing for us is smart metering. People will pay for the energy that they have used, which is why we think that smart metering roll-out will be important. The other thing—we think this is a deficiency in the Bill—is about the system of regulation. People should have confidence that the regulator who is supposed to be on their side is on their side and is delivering on their behalf. The fact that there is no systematic overhaul of Ofgem and of the regulation, as we see in the Bill, is a huge deficiency.
It is also easy to talk about simplicity, Minister. Actually, when you look at the detail of the Bill, in terms of the energy market we see—as it has been argued—that there is a huge amount of failure, but it is also massively complex. Government after Government have presided over this complexity. So the Government can talk about simplicity of Bills, but what is driving costs for customers, or a lot of those costs, is hugely complicated and, with respect to Members of Parliament, I think you would have difficulty explaining to your constituents on the doorsteps what they are actually paying for.
The Chair: Before we move on to wider issues, do any hon. Members want to ask consumer-orientated questions on tariffs, consumer redress and such issues? If not, we will move on to the heart of the Bill and the need for electricity market reform.
Q 410 Tom Greatrex: Gary Smith, we have in our packs a copy of the statement that you made—I am not sure whether it was from when the draft or final Bill was published—about the changes. What are your views on the design of the counterparty? Do you think that it meets the objectives that you set out in your statement?
Gary Smith: The energy companies are very happy that the Government or a Government body is going to be the counterparty. I think that is what you are referring to. Throughout the Bill, we see certainty for energy companies in terms of income and price, and maybe that is required. What we do not see, however, and what
Q 411 Tom Greatrex: Perhaps I can try to ask the question a bit better. When the draft Bill came out, there was talk of multiparty counterparties. Following the response to the Select Committee’s report, we now have a model with a single counterparty, which has been broadly welcomed. Do you have any concerns about the way in which that counterparty is likely to act? Does there need to be more in the Bill to provide some clarity and detail on that, or are you satisfied that the intent given in the Bill is enough to be going on with?
Gary Smith: In terms of our comments, we need the guarantees to ensure that the investment is delivered. That is absolutely important. Having the single counterparty is probably the right thing. Whether we are the party that is best equipped to give a detailed answer on this point about counterparties, I am not sure. I do not believe that we are. We have tried to focus our comments on things that we are equipped to deal with and that we have experience in. We have tried to focus our comments on regulations, claims about economic growth, job creation, and the Bill providing for the huge decarbonisation of the energy sector.
Q 412 Tom Greatrex: Is it your view that the counterparty, as part of this set of issues in the Bill, gives enough to drive investment and to create the jobs in industries in which you have members and expect to get more members from? Does more need to be done to provide that?
Gary Smith: My understanding—we speak to all the big energy companies regularly—is that if the price is right, they will build infrastructure and invest as required. If the price is not right, we will have a problem. The fact that the Government or a Government agency will be the counterparty is helping confidence. It is bound to do that, and we argued in favour of that.
You talked about jobs, and we question the suggestion that the Bill will create thousands of jobs. The case around job creation and economic growth is unproven at best, because let us not forget that, while we are talking about investment, Ofgem is talking about huge cuts in investment in electricity and gas transmission and gas distribution. Thousands of jobs are going as we speak, and if we do not get the right investment in things such as carbon capture and storage, the indigenous coal industry will be finished and more jobs will be lost.
Jenny Saunders: The assumption that we have gained from the impact assessment is that the proposal will reduce investment costs by some 1.5%. If we are correct in our understanding, that would lead to a potential 5% to 9% drop in energy prices. We are dependent on the analysis in the impact assessment and do not have the
Gary Smith: Just to be clear from the GMB’s perspective, having a single counterparty reduces risks and therefore should reduce costs. I am not sure that the Bill does give consumer certainty over what is going to happen to bills. It does give energy companies certainty over what they are going to get in returns. That is not fair.
Q 414 Barry Gardiner: Mr Gary Smith, in your written submission, you acknowledge the importance of the Bill’s three objectives: the security of supply, the decarbonisation and the reduction of fuel poverty. In your remarks today, you have alluded to what in effect could be stated as a further objective, namely, economic growth, seeing how the energy system feeds into the wider economy.
You make specific charges about Ofgem in your submission. I am sorry, I was out of the room when you started speaking about Ofgem, so I just got the tail end of your remarks. Can you elaborate further why you think Ofgem has made the proposals it has, which you feel will undermine growth in the economy quite badly and undermine skills and jobs?
Gary Smith: Thank you, Mr Gardiner. I don’t think it is an assertion; I think it is a matter of fact. I see day in, day out, the consequences of the Ofgem Rio funding process in terms of jobs and safety. Safety is being compromised and skills are being lost—the much-needed skills to equip the economy for the future.
We believe that the Bill does not deal with the systematic failings in regulation. The current system of regulation is dysfunctional. We think that is demonstrated by the fact that the Rio process means there will be huge cuts in the electricity and gas sector, and jobs are being lost as we speak. There is no provision within Rio to ensure that there is a skills base for the future in this country. There is no social provision in terms of jobs. What customers and the British public can look forward to is higher bills but little by way of investment in jobs and skills, we fear.
Nobody could deny that the current system of regulation has failed in its primary responsibility to customers over their bills. You know that very well because your constituents are furious about the increases in bills over the past period and, importantly, they do not understand why the bills have been hiked in the way that they have. Part of the difficulty with Ofgem is that it relies on market mechanisms in order to deliver competition, which is supposed to deliver better prices. It has failed, and we have to be honest about that. What you are dealing with here in the Bill, as we see it as a trade union, is in large part about market failure.
We can talk about capacity mechanisms, contracts for difference, feed-in tariffs and all the rest of it, but what we are talking about here is subsidies. We are having to subsidise companies to produce energy and
Gary Smith: Let me just say this to you, Mr Gardiner. The changes are where we are going to lose skilled workers in areas such as the gas industry—first call operatives. Reductions in gas mains replacement will compromise safety. We have had a very wet summer, and we now have a cold snap. The King report, which dealt with and instigated the massive gas mains replacement programme, came about as a result of weather conditions similar to this and the explosions that resulted.
Can I just say this about jobs, because it is important? We think that the suggestion that this investment is somehow going to facilitate the creation of jobs is unproven. Apart from what I have said about potential job losses in coal and the energy sector because of Rio, there is a serious question mark about whether British manufacturing is well equipped to deal with, meet the challenges of, or seize the opportunities offered by this investment. Let’s not forget that a factory in the north-east, the only factory that produced an important component in the electricity sector, was closed by the German owners last year despite a full order book. That work was transferred back to Germany. So this suggestion that somehow British manufacturing is going to benefit—we do not see that. There is no industrial strategy backing this up, and that is necessary if we are seriously going to create jobs and get the full benefits for this investment. Sorry to go on, Chair.
Q 416 Laura Sandys: I want to delve a little deeper into the issue of jobs. The reason why this legislation is so important and there is so much demand for this Bill, is that we are facing the effects of a lack of investment in the energy sector over the past 13 to 15 years. A lack of investment must obviously have equated to fewer jobs in the sector. We are now looking at a piece of legislation that has been introduced to release up to £200 billion for renewing, refurbishing and bringing on new forms of generation in the energy sector. I cannot understand why this particular measure is going to deliver fewer jobs than the past 13 years of lack of investment.
Gary Smith: I think that, in principle, there is a lot of merit in the Bill, but the argument that it is somehow going to create jobs and economic growth is, at best, unproven. We have had a huge building boom over the
Gary Smith: The truth is that, to a large extent, the components in these power stations will be built in Korea and Germany, and they will be connected up with Chinese-made cables. In terms of British skills and jobs, we are the Meccano men and women; we bolt things together and the high-value stuff is produced elsewhere. That is what is happening on the ground, I’m afraid.
Q 419 Laura Sandys: Let me focus on this. When we talk about buying manufactured goods from abroad, I understand exactly the point you are making. However, investment in energy infrastructure has to be done in this country, and a whole raft of jobs will be required. Also, there has been quite a lot of investment in apprentices and the engineering and skills sectors in order to meet this demand, not least in my constituency. So I still find it very difficult to understand why this is not going to deliver more jobs.
Gary Smith: We have not said that it is not going to deliver more jobs. We are saying that there is a huge issue with underemployment at the moment, so presumably people can do more and pick up the slack. Look at the experience in engineering and construction over the past 10 or 15 years. It was presented as British jobs for British workers, but with some industrial disputes in the sectors—that was never true. It was about contractors trying to bring cheap labour in under the agreed and established rates. What happens is that companies bring in labour and that labour goes back to wherever it came from without leaving any residual skill base. There are some great examples out there of investment in jobs and skills—there is no doubt about it—but without an industrial strategy backing this up, we will not maximise the opportunities.
The Chair: Before you come back, Laura Sandys, I want to say gently that we have hours ahead of us when we will be able to debate the merits of the Bill. These sessions are largely for us to put questions to the witnesses, rather than for us to debate with them. I know that you have further questions.
Gary Smith: Chair, I just want to say that we are big supporters of the nuclear industry. It creates quality jobs. If you get the opportunity, you should look at some of the good stuff that we are doing with EDF. We are in social contracts, which are about investment in skills, jobs and communities. If we get the right funding for carbon capture and storage, that will create jobs as well.
Jenny Saunders: Can I just add that the insulation industry is concerned about the impact, not necessarily through the Bill, and the loss of jobs in the short term in the insulation and heating industries? If we bring forward some proposals through the Bill for demand reduction, we might create very useful jobs in the insulation industry as well. I want that to be considered by the Committee.
Q 421 Dr Whitehead: I will be asking about demand reduction. How do you envisage measures to develop permanent demand reduction being incorporated into the fabric of the Bill? What areas would benefit the most from legislative touch, shall we say, to enable the incorporation of demand reduction on a permanent basis into either capacity processes or contract for difference processes? How would you distinguish between measures to develop demand-side response and measures to develop demand-side reduction within the Bill?
Peter Smith: We are in the process of responding to the DECC consultation on the options proposed to potentially pull through electricity demand reductions. Broadly speaking, as you said, you have the capacity market that it could sit within, you have an energy efficiency feed-in tariff, you have proposals to potentially introduce a non-domestic ECO, and who could forget the energy efficiency feed-in tariff, which is popular among a growing number of NGOs?
There are two things to say, really. We are very supportive of the role of electricity demand reduction in reducing exposure to rising wholesale prices through reducing the consumption of what will be quite high-cost energy services in the future. It has positive merit. We are in the process of evaluating the options that the Government have consulted on. One concern from our perspective is that the Government’s analysis to date is broadly that the domestic sector is largely covered by the existing suite of policies. We would question that assumption. The worry is that you would see, in pulling through any of those four options, the imposition of a potential additional consumer-funded mechanism, which would be limited to the non-domestic sector, with clear implications, as was discussed in the previous session, for domestic consumers potentially picking up the tab for non-domestic customers.
I am sure that Members might want to come back on the positive macro impact of supporting demand reduction over and above centralised generation. We recognise that there is a positive story to be told there, but a lot depends on what you assume the cost of the energy mix is going forward, and where you pin the incentives.
In our response, we are looking to flag up the opportunities for other measures that could potentially be pulled through by making minimal tweaks to primary legislation or simply changing the institutional arrangements for the green investment bank, and by enhancing the role of electricity district network operators to realise the value of electricity demand reduction in the context of reducing reinforcement costs. I would be happy to send something to the Committee about that issue should you be able to stand reading through it.
Gary Smith: Very briefly, in terms of flexing demand for domestic customers, we think that smart metering is going to be very important, both the right financial
Peter Smith: One further thing is worth mentioning in this context, in terms of the implication of helping households to reduce their exposure to some of the imposition of additional costs that may be coming down the tracks as a result of some of these policies. Built into the assumptions about the cost of the EMR policies are the Government’s—I say Government because it is not simply DECC, but the Department for Environment, Food and Rural Affairs as well—assumptions about products policy, that is, the degree to which existing legislation or EU regulation affects the consumption of electricity, and the assumption that the situation will steadily improve in the future as products policy ramps up across Europe. We question the saving that has been attributed to all households of circa £150: that largely means that, on top of the costs proposed by the EMR, you may be assuming that a household is in a position to buy new flat-screen televisions, efficient lighting and so on, but in the case of low-income households, sadly, those electrical appliances will largely be out of reach.
Q 422 Dr Whitehead: On that principle of the extent to which consumers may be underwriting things that are not necessarily coming back to them, what is your view on the relative merits, in terms of the cost to consumers, of a market-wide capacity payment mechanism as opposed to a strategic reserve mechanism?
Peter Smith: To be honest with you, we have considered it in some detail but we do not have a formal position on that yet. I would not want to mislead the Committee into thinking that we were more informed than we are on that issue.
Jenny Saunders: The Fuel Poverty Advisory Group is hoping to undertake some analysis of the distributional impacts. We are about to start that work. Our particular concern is the impact on the fuel-poor who use electricity to heat their homes. That is where we think there will be the greatest impact and where we would like to see some mitigating policies—new policies—because that is where we think there is a particular problem. You have 570,000 fuel-poor households using electricity; their average income is just over £11,000; they need to spend about 18% of their income to heat their homes and they have a very low household energy efficiency standard. They are the people for whom we think there could be a problem in relation to the Bill as the costs pass through, so that is where we would like to see some action.
Peter Smith: Just one further thing, if I may. The value of a capacity mechanism is predicated on having a sound understanding about the capacity of the generation on the system. Through my previous career, I happen to know that our understanding of the extent of embedded generation at a distribution level is limited, as is our understanding of the extent of things such as diesel
Gary Smith: Domestic customers may have a role to play, particularly when smart metering comes on stream, but the fact is that the majority of people in the UK heat their home using gas, not electricity. Electricity is very expensive as a way to heat homes, and we made the point in our submission that gas is going to be the fuel of the future for many generations to come, whatever the intentions of the Bill, because it is ludicrous to suggest that people are going to move easily or quickly to heating their homes through electricity, given the huge cost to replace their gas central-heating systems with one that uses a far more expensive fuel. That is not going to happen quickly, easily or in the short term, so what consumers can contribute to flexing demand is probably very limited.
Q 423 Gregory Barker: In the context of the EMR, I very much agree with what Mr Smith said about the difficulty of passing savings through to consumers in terms of energy efficiencies. I am interested in the point that Ms Saunders made. Did you say that 570,000 homes now use electricity for heating?
Q 425 Gregory Barker: So they would be able to benefit, because, conventionally speaking, thermal efficiency insulation is going to help to save money on the gas bill or the heating oil bill, rather than the electricity bill, so there is not a direct correlation with EMR, but it is interesting that there is a significant number where thermal insulation would reduce electricity demand.
Jenny Saunders: That is where we would like to see the revenues that the Treasury will accrue from the carbon price floor and through the additional funds from the EU ETS. There is an urgent need for a new publicly funded programme, so that not everything is through levies, and that should be focused on those households that will be most affected by the Bill.
Q 426 Gregory Barker: Unfortunately, the Red Book has already bagged the forecast revenues from those schemes and factored them into existing forecasts for public spending; there is no unused money sloshing around. However, from what you say—perhaps you might reflect on this—there is interesting potential for thermal projects to bid into a capacity market. I wonder whether you feel they are at a sufficient scale and are economically attractive enough to bid into a capacity market against, say, a proposition to build a new gas-fired power station.
Peter Smith: We have certainly looked at the aggregation models that are out there. As part of our wrestling with the consultation on electricity demand reductions, we
Peter Smith: Yes, it is a virtual power plant, but the interesting thing from the perspective of the UK is that the Chinese have used the fact of the energy saving potential of the non-domestic sector to pay for extensive measures in the domestic sector, particularly the replacement of electric heating in big tower blocks, where you can get scale and aggregation in the way you are inquiring about.
We also think, as we mentioned earlier, that DNOs should be particularly interested in projects such as replacing electric heating in tower blocks, for instance, as a way of reducing their future reinforcement costs.
Jenny Saunders: Could I add that if the Treasury felt able, very recently, to find £250 million for exempting intensive energy users, I think it should be able to find a similar amount, at least, for low-income domestic users? If it has all been bagged for other things, it has been unbagged for a particular group of energy consumers, and we would like you to champion that for the fuel poor too.
Q 429 Gregory Barker: The point I am trying to make is the slightly easier one that the capacity market represents an opportunity to get that quantum of funding without having to wrestle the Treasury for it. I am just interested in the economics and the piece of evidence that you have offered today. Perhaps you could let the Committee have details of the projects. Have you contributed to the DECC consultation?
Gary Smith: Could I help? There are some good initiatives. Our members have been involved with Toryglen in Scotland. British Gas has put in heat and air pumps, and insulated high-rise blocks. Communities have benefited, and money has been saved, but scale is a problem. The Bill will not represent a paradigm shift in moving to heat homes or power our transport system from electricity. It will just not happen.
Let me help you with this. Four times as much energy is carried down gas pipes as electricity cables. At its crudest, you would have to quadruple the size of the cables up and down the country to move to heating homes with electricity. It is simply unaffordable, and even after £110 billion and all the implications for customers’ bills, it will not happen in the short term.
Gary Smith: And we are absolutely supportive of that. We are working very closely with the energy companies and local authorities to reduce energy demand and to create jobs in the community insulating homes. I am happy to send the Committee some evidence.
Q 432 Mel Stride: A question for Gary Smith. You have argued with great passion, although perhaps it was more a critique of industrial policy or lack of a skills policy and so on more generally in the economy, but you said that you welcome elements of the Bill. Can you share with us what those elements are?
You also said—I am paraphrasing—that where we give a level playing field to the energy companies, you want a similarly level playing field for consumers. In that context, do you welcome the simplification of tariffs that the Bill provides?
Gary Smith: I tried to deal with tariffs earlier. It is not as simple or straightforward as people suggest—indeed, the whole energy market which, with respect, has been created by politicians over generations, is enormously complicated. If you want to help people with their bills, smart metering and investment in smart metering is an important component.
What we welcome in the Bill is decarbonisation, particularly in electricity generation. We have always supported development of a balanced energy policy—gas, indigenous clean coal, renewables and, very importantly, nuclear. We think support for these industries is in the Bill, and we welcome the move to decarbonise electricity generation, but as I keep saying, that does not represent a paradigm shift in heating homes and in transport. That will not happen as a result of the provisions in the Bill.
I touched on nuclear, you raised the issue of jobs, and your colleague talked about a nuclear. We are passionate about nuclear. We can see where the jobs will come from and quickly, but what we would like to see is less focus on decommissioning and more on nuclear development. Our approach to nuclear and generating low-carbon electricity through nuclear is very piecemeal at the moment. That is the truth of the matter.
Jenny Saunders: Overall we foresee an increase in fuel poverty over the next three or four years as a result of the Bill. That is on the analysis that we have been given, the impact assessment and the work by the Climate Change Committee. Longer term, they assume that fuel poverty may be reduced. However, short term, we cannot see any real mitigating policies. The policies now in place to help drive down energy bills through energy efficiency will not adequately address the problem. We are going to see increases in fuel poverty as a result of the Bill. That is the bottom line for us. We would like the Committee to come forward with proposals on how to reduce the impacts.
Our proposals have been for stepping up an energy efficiency programme. There are some opportunities for getting closer to consumers with the introduction of smart meters, but they in themselves will not deliver lower bills. People will need advice and assistance and some more progressive tariff reduction—tariffs that are cheaper for them to access.
Peter Smith: The clear thing that we were trying to flag up in our briefing is transparency about the impact. We believe that the Department for Business, Innovation and Skills has admirably supported the intensive energy users to articulate clearly or work out what the impact is likely to be for them in terms of the competitiveness of industry. We would ask Members here to support giving as much rigour to the analysis about what the impact is likely to be on low-income and vulnerable households and their competitiveness in dealing with the things that everyday life throws at them. Having done that, we believe that a consensus would emerge that further additional policies are needed to mitigate the impact of the EMR.
Gary Smith: Two things: first, insulating homes is absolutely essential; and secondly, there must be honesty in the debate, because energy prices are going up and we have to help people prepare for that. Some of the political discourse has not been honest over the past few years. It is easy to play Punch and Judy with the energy companies, but it serves to confuse people who are paying the bills. The key thing in terms of dealing with fuel poverty is to create jobs—create well paid, skilled jobs like those in the energy sector and in the manufacturing supply chain. That is why I am so passionate about the fact that what is missing here is an industrial strategy. Unfortunately it has been missing for many, many years.
Jenny Saunders: It is currently £2.35 billion. It is going to treble. All we pointed to is the fact that those costs will be borne by the consumer. We think that there are negative impacts to that on the most vulnerable. A final point is about the issue of trust. The Government are passing through more and more social obligations on to the energy companies, which will see those costs come through to them. Consumers need to be able to have faith that the price they are paying is solid. The Government need to be able to stand behind the companies once these decisions are made and say, “These are fair.” That is why we need the transparency. We need the consumer advocacy groups to be able to sit at the table when the deals are done and to have access to some of the analysis that is being done so that they can reassure consumers that this is a fair price; otherwise they will not come forward and engage with smart meters. They will not come forward and ask for help under ECO and engage with green deal. The companies are driving green deal.
Peter Smith: There also has to be a recognition of what sits outside the levy control framework in terms of programmes. NEA admits that some of those programmes are social programmes but some of them are not. We have got to be transparent about that. When we see these rises, £7.6 billion per annum is not going to be the final word on the matter. Consumers are going to pay more than that—
The Chair: Order. I am afraid that has to be the final word on that, because our rules state inflexibly that I have to interrupt at this point. I thank the three witnesses for coming here and answering the Committee’s questions. We are most grateful to you, and we look forward to the piece of paper that you said you would send us.
Examination of Witnesses
Michael Rolls: On the general point of the Bill, the RO did appear to be working but we all knew that it was not going to work for ever, so we certainly welcome EMR in general. On the capacity mechanism, we welcome the fact that that is likely to regulate the flow of combined cycle gas turbine projects, in particular, to avoid the kind of boom and bust that we have had in the past 10 years, when 9 GW of plant was ordered in two to three years, and then nothing. To take the point that the gentleman from the GMB made, if we are going to build skills around project teams and around the construction business, we do not need boom and bust; we need a steady flow, and I think the capacity mechanism has the potential to deliver that. There are several things in the Bill now that make it more attractive for project investors, such as the single counterparty, and we certainly welcome those changes.
Graham Meeks: We are certainly clear that we need an ambitious decarbonisation programme and that technologies of offshore wind, nuclear and carbon capture and storage, around which the Bill is focused, are necessary in terms of delivering that. Clearly, the Government have determined that the CFD is the core mechanism by which they will deliver that, and there has been improvement on how that is going to operate. I would say that those are all necessary elements of this legislation. The question we have to address is whether they are sufficient to deliver the wider energy policy goals at the right time, particularly when one looks at the significant risks around those core technologies.
There are big questions about the affordability, deliverability and financability of those technologies. Recognising those issues, we have to ask whether the Bill is sufficiently broad to deliver the wider actions that we will need. In particular, we would like to see far more focus on decentralised generation and decentralised energy initiatives at that level and on the demand side. We were pleased to see the electricity demand reduction consultation published alongside First Reading. We think that is a step forward. At present it is alongside the Bill, not in it, but it is a move in the right direction towards more decentralised generation.
Graham Meeks: The problem with the legislation as it stands is the CFD mechanism is incredibly complicated. With respect to my members and others, it is too complicated a measure to incentivise people whose core business does not operate in the electricity market. That includes communities, industries, householders, commercial enterprises and the public sector. Alongside the CFD mechanism, we would like to see an extension of the small-scale feed-in tariff arrangements, which were introduced in the Energy Act 2008, to a threshold that provides a meaningful envelope to bring forward initiative on the demand side. We do not think the CFDs are capable of doing that.
Chris Littlecott: I can answer both questions at once. We very much welcome the Bill. We think that it positions the UK as a pathfinder for energy market innovation, which has repercussions and benefits beyond these shores. Certainly, some of the measures that were taken to strengthen the Bill in the version we now see are welcome. It gives a clearer framework and a mechanism for procuring low-carbon power. That is very important, although the details are still to come. The clarification of the emissions performance standard in respect to CCS is welcome, but, again, further improvements could be made.
I agree with Graham that demand reduction and the integration of a demand-side response are absolutely essential for managing cost-effectiveness and risk-managing policy delivery over the next two decades as the Bill is implemented. We are keen to see how those measures will be integrated into the Bill, in respect of both the financial incentives and the architecture of how the system operates.
Chris Littlecott: Particularly in respect to a demand-side response, a clear mandate needs to be given to the system operator that that is part of what they are being asked to deliver, and they should be properly incentivised. With the right kind of framework, you could build in incentives that incentivise them to actively procure and source further cost-reduction measures, which will benefit the consumer and will improve the cost-effectiveness of delivery as a whole. But the operator should see some benefit from that.
Chris Littlecott: That would need to be more clearly set out now. It would fit alongside whatever decisions are taken on the exact form of the financial mechanism. There is a piece of architecture missing from the Bill, which would need to give a very clear signal that the demand side needs to be prioritised before significant supply-side procurement is undertaken. It should essentially set out a range of targets for the five-yearly delivery plan. That would start to create a logic about how the demand side could really start to tackle cost-effectiveness and consumer bills.
Q 439 Graham Jones: This is to Mr Meeks, really. You talked about raising the threshold of the feed-in tariff to encompass medium-size energy projects for which contracts for difference are far too complex. Where do you suggest that threshold should be?
Graham Meeks: That is a difficult question. Any threshold is going to be arbitrary. The issue at stake here is the competency of the people we are dealing with. We can see projects that would range from tens of kilowatts up to hundreds of megawatts where you are still in a situation in which the project sponsor, if you like, is not a professional participant in the electricity market. They are a speciality chemicals manufacturer or a district heating operator. They are something different from that. We have to look carefully at this and define it perhaps in terms other than scale, or look and see where there is some other criterion that might be better used to determine what that threshold is likely to be.
We should be talking about tens if not hundreds of megawatts in some circumstances as being appropriate in order to realise the full opportunity that exists. We know that we are working in a world that is capital constrained, where the balance sheets of many of the utilities that have been traditional investors in this space and in these markets are probably going to be directed towards one particular part of the market. What we need to be doing is making it possible for the Tata Chemicals and the Dow Cornings and the cities as well—the Leicesters, Liverpools, Manchesters—to be able to bring forward projects in their own right.
Graham Meeks: As with the strike price framework, we would have to be looking at different technologies and the appropriate feed-in tariff rate to be applied in those particular circumstances. There is no question that we would want to be going down a horses for courses route looking at the actual need and requirement in terms of those feed-in tariff rates in order to get the response that we want. I do not think anyone is expecting in the current circumstances to be able to earn excessive rents out of this. People just want to be able to get on, own a business and act in a sustainable policy environment. What they are looking for is to have their risk managed. We are ultimately talking about having the risk that is inherent in these investments being properly managed through the right incentive mechanism that is appropriate to the capabilities and competence of the sponsor.
Graham Meeks: It would be possible. People will find a way. We are an incredibly ingenious nation and there are a lot of sophisticated people out there who would be able to find a way to make CFDs work for CHP—biomass CHP and gas-fired CHP. The question is, how far do you want to try and push it? The sense I have is that trying to do that would be trying to bang a square peg into a round hole, when in fact we have other mechanisms that could do the job better. In that regard, a premium feed-in tariff arrangement would be far simpler. It is easier to understand and much easier for people to transact in the market. The risk and the cost of operating in a market where the premium feed-in tariff would be the incentive are much lower. You carry on doing what you normally do and you receive a premium revenue payment that improves your viability and the likelihood of going forward as an investment.
Going under a CFD regime would entail a step change in the sophistication of your operations and how you manage your day to day trading operation. Also, the costs that you need to bear, in terms of posting collateral and of how often you have to intervene in the market, or how much of the value of that mechanism you are having to lay off to your supplier—who will bear that risk for you? That is money that is gone, value that we do not need to be paying; it is transaction cost that is being taken out of the system and not delivering new low-carbon investment. I do not see why we would go down that route when we have the legislative tools in the box that would enable us to go down a simpler route in those circumstances. My immediate reaction is to say, let us use the simple feed-in tariff—extend the small-scale feed-in tariff—to have that effect.
Graham Meeks: CHP, like any other form of generation—fossil, particularly gas-fired generation—should be able to access the capacity mechanism if it can bring value within the capacity mechanism. The capacity mechanism is not an incentive in any way. Ensuring that CHP can access the capacity mechanism is just ensuring that there is effectively a level playing field and that CHP is able to access the same markets, if you like—it is just another facet of the market, that CHP is able to access the same part of the market as traditional utility generation. I do not see how the capacity market in itself could offer an incentive that would overcome some of the inherent obstacles and market failures that are stopping CHP realising its potential.
Q 443 Tom Greatrex: I want to direct my question initially to Mr Littlecott, but others may wish to express a view as well. Between you, you have touched on CFDs in your earlier answers. I wanted to explore, Mr Littlecott, whether you are confident of the allocation process for
Chris Littlecott: That is not an area that I, personally, have a lot of detail on. What we seek, if there is a clear link to how the procurement process binds with the point that Mike was making earlier, is the longevity of view for the manufacturing side. As a public interest organisation, we would be much more interested in trying to see how the system can build new markets, rather than trying to look at the carve-outs for existing sectors. Perhaps colleagues would like to comment.
Michael Rolls: On the levy control framework and the allocation process, the concern is that there might be too much coming forward in one year and perhaps not enough in another. There ought to be some kind of banking between periods, so that you are not holding up projects unnecessarily because of an allocation process in one year. I am not sure that that affects the Bill or whether it affects the operation of the mechanisms behind the day-to-day activity of DECC. That would be the concern in terms of bringing forward projects and, hence, bringing forward economic activity to build them.
Q 444 Tom Greatrex: In relation to CCS specifically, do you have any concerns that the way in which CFDs are likely to be offered within the levy control framework would make CCS less likely? Is there a case for carve-out of CCS, or is that about technologies proving themselves and then fitting into the mechanism?
Chris Littlecott: The fact that CCS is now able to access CFDs is the key piece that must be got right in terms of how CCS can move from demonstration to deployment. If you remember, we have gone from having a levy that is to do with the whole process to having a limited amount of capital and then CFDs for operational support. That is quite a different packaging process that operators have to go through in order to get products away. On the competition, we will quite clearly do that bundling, and that will be part of one negotiation. At the moment, there is an absence of any clarity at all about whether CCS projects, beyond the first one or two that might come out of the competition, would be able to bid in. It then becomes very difficult to give that signal in terms of projects able to stay in the game without coming out of the competition, unless there is a carve-out or another means of passing a Government hurdle of being approved as valid. That has put CCS in a difficult position, in not being able to see a path to deployment at the moment.
Michael Rolls: It would only be an issue for the levy control framework, as it is defined at the moment, if there are truly commercial projects beyond the demonstration projects coming forward for operation before 2020-21. Whether that is likely or not, I leave to people’s minds, but I suspect it is not.
Q 445 Gregory Barker: I just go back to the point about potentially tapping into the capacity market for energy efficiency projects. The concept is fairly well understood and the devil is in the detail. One of the very practical details is that the difficulty is getting scale and aggregation. In fact, it is unlikely that you will have
Graham Meeks: As we see on the supply side, the demand side needs to see a bright future. There needs to be a significant opportunity. One of the concerns that we would have about the capacity mechanism is that the way in which the administration of it would work may not provide sufficient long-term certainty over the scale of that opportunity to then encourage people to look at what that long-term opportunity is and what the value that comes from that is likely to be, so I think it is helpful that the consultation on EDR posited other alternatives as well. The premium payments and the supplier obligation were put out there. Each of those things has its pros and cons, but those mechanisms have the opportunity to provide a high degree of certainty.
Q 446 Gregory Barker: Given that we now have a cast-iron levy control framework set for some years ahead, but also some flexibility within that framework, would you be happy, as part of our overall, economy-wide decarbonisation programme, to see energy efficiency projects such as that eat into that LCF and take priority over renewable energy projects, which might be displaced?
Graham Meeks: With what we are doing now with the Energy Bill and setting effectively a framework for the energy market that exists well beyond 2020, we are looking at a system whereby we are clearly aiming to reconcile the need for, first and foremost, a secure energy system, but then carbon and affordability become absolutely key within that. In that regard—
Graham Meeks: The answer is yes, I think it is appropriate that if we are using energy efficiency to deliver decarbonisation and energy security at the least cost, the benefit that accrues to society is going to be far greater. If we can get more measures—effectively more carbon saved—and keep the cost down for the consumer, those projects have every right to be drawing on the levy control framework.
Chris Littlecott: However, some clarity will be required as to whether capacity payments will be coming out of the levy control framework. Certainly, in respect of demand response, there is a very good argument for that to be handled in a similar form and format to capacity payments. As I understand it, some of the options for demand reduction and energy efficiency could dovetail quite nicely with demand response. There are some questions around double counting and how mechanisms will work together. In the early years of creating new markets for this, having a target for procurement from the system operator might be one way that could be delivered to provide the architecture for the financial incentive. In which case, it might be that such funding would not be within the levy control framework.
Q 448 Gregory Barker: Would you be confident that we would be able to scale up, in the foreseeable future, demand reduction projects at a size that could compete with new generating projects that might be bidding into the capacity market?
Chris Littlecott: The USA experience has been, over the course of not too many years or auctions, that demand reduction and response can do that. DECC’s proposals to trial the demand-side element are very welcome in starting to build that market. I think there is a question about how those aspects that we know we will need on the demand side are still at the moment triggered by decisions taken on the basis of supply side and questions about the reliability standard. I think there might also be some benefit in having the Bill more clearly delineate that the demand side must be prioritised and come through as part of the requirements for the system operator.
Q 452 Mr Weir: This is principally for Mr Rolls. In your initial answer to Ms Sandys you talked about the boom and bust investment plans in the past, and the need to replace the renewable obligation. It is fair to say that we have had some differing views on whether contracts for difference will be up and running quickly enough to replace the renewable obligations by the Government’s preferred date of closure of 2017. Do you have any views on that? Do you have enough confidence that the detail is there for CFDs to see them up and running in that short time scale?
Michael Rolls: We have to take a lead from our customers. You have had many of them at this table. We rely on them to draw their conclusions for their investments, leading to demand for our products and services. The key is the EMR, that the reforms go through as quickly as possible, so that there is little need to extend the RO, for instance. If there is delay, it could be that some people would like to have that extension in order to bring forward projects that might otherwise be under threat in terms of the time scale. You have had those answers here.
Michael Rolls: Yes, but I can only take my lead from what they say. It depends very much on where their individual projects sit in the timeframe of EMR, and whether they as developers have confidence that EMR is going to be delivered on time and that they are going to understand, not just the strike prices, but all the conditions that attach to them, in time to bring forward their projects.
Q 454 Mr Weir: You will know from your business as suppliers to them that there are fairly long lead-in times for some of these developments. One concern is that they are making decisions now or shortly for developments that will not come on line until post-2017. The uncertainty is perhaps a concern over that.
Michael Rolls: Yes, there is concern. I suppose that some of them must be talking about early investment contracts and some would prefer to stick with the RO, but I guess that the time has passed for sticking with the RO unless, for some reason, there is an unforeseen delay in delivering EMR.
Michael Rolls: If we are looking at that kind of investment, the biggest part of it is supporting the infrastructure development behind the factory. It is not just the factory itself, but the land on which it sits and the quayside that it uses, and that is a larger part of the cost and the cost commitment than the factory itself. So while we must have short-term orders to kick-off a decision—we cannot kick-off a decision without those orders—we also need long-term confidence that there is going to be a healthy market for those products well beyond 2020 because we are talking about something like a 15-year commitment on that site.
Without that visibility well beyond 2020, we have a really quite considerable risk to take into account in making that decision. That could be helped by volume certainty of offshore wind, but that is quite unlikely given that we are not into the process of picking winners in that degree. That is why we support the proposal to have a 2030 or 2027 decarbonisation target for the electricity sector, because it would help to define the pathway through the following decade and at least give some confidence that we are not going to change our minds halfway through.
Michael Rolls: Perhaps I could just add that, around this room, there has been a lot of talk about investment and investment decisions, but the investment decisions by project investors are on a relatively short time scale. I know, Mr Weir, that you talked about the long time that it takes—it is a long time—but the investment in manufacturing facilities and assembly facilities is a much longer investment commitment, and it has a different time horizon altogether.
Q 456 Peter Aldous: Actually, Mr Bayley, Mr Rolls has just answered it. In his representation, he said that he needed the short-term orders and the long-term market view. I was going to ask him whether he had that at the present time, but I think that he has answered that question.
Q 457 Gregory Barker: Mr Rolls, on providing certainty, obviously there is a range of factors that provide certainly, and no one Parliament can bind its successor, but how much comfort do you take from the fact that there is cross-party consensus on, and commitment to, the Climate
Michael Rolls: The Climate Change Act and the carbon budgets are set for the whole economy. Behind that, there is a storyline about electricity decarbonisation, but there is no certainty that that will remain the story.
Q 458 Gregory Barker: But it would be impossible to decarbonise the British economy by reducing our carbon emissions by 80% from 1990 levels—it would probably be impossible to decarbonise beyond 50%—unless you decarbonised the energy sector. It is a huge part of the picture.
Michael Rolls: The Climate Change Act has done nothing actually sector by sector. As electricity decarbonisation is such a fundamental part of the storyline for decarbonising the economy, it is incumbent on the Government to put that a little bit more firmly in place and encourage the investment that it would engender.
Q 460 Gregory Barker: The whole premise of the Climate Change Act—I served on its Bill Committee back in 2008 as well—was not to try to micro-manage the economy. It was to set the overall trajectory very clearly, but to set carbon budgets over a period of years and not to try to micro-manage between sectors. Clearly you cannot achieve the aims and trajectory without the decarbonisation. Equally, transport is a very important element of the decarbonisation plan. Domestic and commercial building stock is important. We are not proposing to set decarbonisation targets for those. There are big factors. While I appreciate that you need the certainty—and that is why we are taking powers; this is not a Government who are against this in principle or who have set their face against it—it just seems to me that by focusing so clearly on this target, we risk ignoring what we have already before us, which is an unparalleled commitment in developed economies to decarbonisation, of which the energy sector is an integral part.
Michael Rolls: In an ideal world I would agree with you. We certainly welcome the step forward of the proposal to amend the Bill to include a 2030 decarbonisation target. Our problem is that if we wait until 2016 to get the certainty that would help us to make a decision, particularly around the Hull investment—this is for other companies with other technologies as well—we would probably miss the boat.
Michael Rolls: You have been questioning witnesses about the situation in Germany and Denmark. We are coming from behind. Germany and Denmark built up their supply chain businesses in the 1980s and before
The Chair: May I just make a comment to the Committee? I know that you have been sitting for five hours almost non-stop today, and I notice that the Committee is wilting. The flexibility I have as Chair to suspend the sitting is pretty narrow, but if you were to stop questioning now, I could suspend the sitting for six minutes—until 5.30 pm—to allow those who want to stretch their legs and have a coffee outside to do so. Do any Members wish to ask further questions?
The Chair: I apologise to the witnesses. You have been short-changed, but you have given us some really good answers to straight questions, and I thank all of you—Michael Rolls, Graham Meeks and Chris Littlecott. I suspend the sitting until 5.30 pm.
Examination of Witnesses
The Chair: We get back to business with this afternoon’s fifth panel. We have representatives from RenewableUK. We start these occasions by asking you to introduce yourself—simply your name and job title.
The Chair: Because we are short of time, we do not have introductory statements, so I turn to Members for questions. It has been suggested that one of the issues that should be raised with you is whether the decarbonisation target should be in the Bill. Does any Member wish to raise that matter?
Maf Smith: In terms of the publication of the Bill, the Government were very helpful in setting out the levy control framework up to 2020. The levy control framework provides certainty for developers—the people who are going to build the projects and generate the megawatt-hours that we need to hit the targets—but, as you heard from Siemens, it does not necessarily help the manufacturers. The levy control framework will allow us to have the energy, but not necessarily to turn that into the additional economic benefit. We are moving from the RO to the CFD, which is akin to changing horses in mid-stream. The industry is prepared to do that, but the decarbonisation target tells all in the industry that that journey is worth making.
Q 464 Graham Jones: Would I be right in suggesting then, that in managing risk what you are more likely to see without a target is that if there are renewables in the UK they are more than likely to be imported? They will be manufactured elsewhere, where the risk can be managed—in Germany or wherever. In that way, any uncertainty in the UK is effectively managed, because you simply do not invest in the UK and do not take that risk. Would that be a fair summary of your assessment of not having a 2030 carbon target?
Maria McCaffery: Yes, it would. Attendant upon investment is, of course, employment, so we would lose out on that front as well, and we would see delays to the achievement of the targets and the quantities of capacity that were needed to achieve the targets.
Q 465 Graham Jones: What impact will this have for those power companies and for the supply chain? The two might be different. I would imagine that the supply chain would suffer more from not having a 2030 target than would the power companies, which would probably be able to manage risk better. Of course, for them it is about power generation.
Maf Smith: Yes, and the power companies in general manage a portfolio with different types of generation, so over time they can switch or adjust their investment decisions and are not committed just to developing a supply chain and a single technology. The supply chain, particularly for offshore wind, does need to develop. The manufacturers, as you say, could choose to import. There is capacity elsewhere in Europe, so there are risks to their choosing to build additional manufacturing capacity in the UK. Clearly, if they are not building that capacity in the UK in manufacturing, the clustering effect, which we see for example in the automotive industry, does not take place. We have good companies able to supply the electricity market in the UK, but it is harder from them to supply to plants in Germany, Denmark and so on than it would be if the plants were on the doorstep.
Maf Smith: No, but picking up on what was said in the previous session by Mr Rolls, the electricity industry’s need to decarbonise is broadly an area that has been identified by the Committee for Climate Change as
In some senses, waiting until 2016 to take a decision delays the wider sector in its understanding of what the lie of the land is. We have a spread of views from our membership, but some feel that it would have been better to say yes or no now, so that we know what is going to happen. Some industry representatives feel that waiting until 2016 makes the problem of knowing what will happen and what the need will be worse.
Q 468 Dan Byles: People keep saying that this is all about the direction of travel and confidence in that, and we have already heard that there is not a country on the planet that has a 2030 decarbonisation target for the electricity sector. We have the tightest emissions reduction target on the planet for 2050, and it seems staggering that within that you need this 2030 target as well.
Maf Smith: There is confidence, therefore, from the generation sector but not so much from the manufacturers who have to make fresh investment decisions. Right now, if we were a few years further back in time, they would probably be more confident because they could see more certainty up to 2020. We are in the midst of moving to the CFD, so by the time there is the clarity in EMR and the CFD for the developers to make their final investment decisions and therefore place orders, we are starting to be in 2015-16, and at that point a manufacturer will start to worry about where that is. The risk is that people wait before they make the decisions. If we want them to get on and make the investment decisions so as to have the plant ready for when the CFDs go live, it is best to say now what is happening in decarbonisation, specifically in the electricity generation sector.
Q 469 Dan Byles: How confident are you that the supply chain will come? There seems to have been this assumption from every witness that there is a supply chain just hanging with its bags packed on the other side of the channel, ready to rush across the moment this is agreed. I remember people saying that about solar, and solar feed-in tariffs, and the industry that developed there was men with screwdrivers screwing Chinese-made solar panels to roofs. How confident are you that we will get a domestic supply chain, if we do put this in?
Maria McCaffery: This is the chicken and egg problem, and it is why we feel that the outstanding elements of the Bill need urgent attention. We have often contended that it is more important to get something right than to do it quickly, but we need to do it quickly here, because there has been that sense of being on the cusp and sitting on the edge of making that final investment decision and making that commitment. We just heard from Siemens and it must be two years since they took an option on their north-east location. We have seen half a dozen manufacturers pledge between half a
In answer to your question about a gauge on confidence, the manufacturers, as Maf has pointed out, would not be so persuaded by the Climate Change Act and decarbonisation targets as they would by clarity and definition in the elements of the Bill, which would give them the confidence to make that commitment.
Q 470 Dr Whitehead: Following your previous answers, I want to ask about the transition between RO and CFDs. As far as wind is concerned, I am thinking of larger wind. Are you confident, particularly with round 3s—offshore—that the present gap that is available between the end of the RO and CFDs coming in will enable that to work efficiently? Do you have any views on what that transition might look like?
In relation to that, what are your thoughts on the use or role of investment instruments by larger wind companies in facilitating that sort of investment? Do you perhaps think that is not relevant to the sector?
Maf Smith: In terms of the transition period from 2014 to 2017 for larger projects—offshore wind—it is very tight. If there were to be any delays in introduction, either from the Bill receiving Royal Assent or from secondary legislation and implementation, the transition actually disappears. If you look at round 3, which includes the larger wind farms, some of them are seeking to develop, deploy and deliver prior to 31 March 2017, so that they will be under the renewables obligation. A larger number are yet to make a decision and will have very limited time essentially to say, “Let’s work with the CFD, knowing that we have the RO as a backstop if we find that we are not comfortable with the CFD.” Broadly, the transition is critical.
The key part there is that DECC has defined the transitional arrangements and how the RO will be grandfathered. It did that in the technical update. We have some detailed concerns, but the approach is broadly welcomed. Our problem is that it is not in the Bill. The proposal is to do that in secondary legislation, but we feel that that needs to be defined in the Bill, because that will allow some of these companies to make decisions now about the RO and to proceed. Otherwise, a range of developers will be waiting a further year before they make final investment decisions, which then creates a rush later in terms of the amount of projects.
Maf Smith: A number are doing that, and it is positive that the Government have offered that process. The point about having RO certainty in the Bill, in terms of how the grandfathering works, relates across the renewables sector and to projects at all scales that might be seeking to make a decision now. For projects at the medium to smaller end, FID enabling is not appropriate.
Maf Smith: It is not extending the RO transition period; it is Government setting down the terms of the closure of the RO and how the RO value is fixed from 2017 out to 2027. If that were put in the Bill, there would be clarity by the end of this year or early 2014. If that is not put in the Bill, the clarity will come when secondary legislation is passed. Projects that might want to build now and use the RO, but which know that they are going to have to rely on the closed RO after 2017, do not quite have certainty about what that income stream looks like. The Bill would enable them to do that and enable projects to continue.
Maf Smith: Yes, and the Government have set out provisions on phasing, which are welcome. In terms of the RO closure from 2017, the issue for us there is the delay. If the Government’s timetable stays on course, which broadly it has, there is sufficient time as an industry group. There are different views from different developers, but as RenewableUK we are not calling for the RO period to be extended. If there were delays, that would become a problem for the industry, however.
Q 474 Tom Greatrex: As an organisation representing a number of companies, broadly speaking you are content with the period itself as long as there are not any delays. If there were to be any delay, if the period of time between 2014 and 2017—three years, effectively—was maintained, that is more important than having a different cut-off date.
Q 475 Peter Aldous: The contracts for difference and the single counterparty model—reading your evidence, I got your impression that you welcome this as a step in the right direction but you still think that there is more work in progress that needs to be done. Does that work in progress need to be in the Bill, or can it be in secondary legislation?
Maf Smith: Elements of it do. One particular area we would like clarity on is the ability of the counterparty to take debt and hold credit. The Bill sets out that it may do that, and we feel that that needs to be strengthened. The key issue is about risk for different parties. The CFD and the counterparty will essentially allow transfer of money from suppliers to generators. If it cannot hold credit, a generator risks not being paid if a supplier has withheld payment. If it can hold credit, it can manage the ups and downs of that payment cycle. If a generator risks not being paid, or at least risks delays in payment, that means that investors in that project will price that cost in, so it makes projects more expensive. The other element that needs to be clearer is that the counterparty can sue and be sued. If there is a problem and a developer or a supplier has failed to deliver on its obligations, the
Q 476 Dr Phillip Lee: Most contracts lawyers can leech; that is what they do. I would suggest to you that at the moment, given current circumstances, getting any return on investments is a good story for most investors. What is a good return? Is it not the right of Government to write the Bill in a way that perhaps pushes more risk on to investors in the current economic climate? Comments please.
Q 477 Dr Lee: Sure, but there has to be a balance. We do not want to make it too easy for these investors, do we? You say about them charging you more for their money, but maybe you just turn around and say, “No, you will get less return for your money. Try investing in something else that will be better at the moment.” There is a balance—that is my point.
Q 478 Dr Lee: You could keep coming for more, so to speak, saying, “Take more risk, take more risk, Mr State,” but ultimately there comes a point where they have to justifiably earn their return on their investment.
Maf Smith: That is very true and that balance remains important. One of the things in deciding where that balance lies is knowing who is best placed to manage risk. An element of risk that generators, particularly independent generators, and therefore their investors are badly placed to manage is the default of a supplier. The counterparty body is better placed to manage risk. It is contracting between the supplier and, subsequently, the generator. Allowing credit allows it to manage that relationship better. Allowing enforcement of the contracts does not make the risk go away, but it allows them to do something if those risks materialise.
Q 479 Mr Weir: Some concern has been raised, particularly with the smaller renewable projects and perhaps with the community projects about the amount of investment needed before you get to the stage where you can actually get the contract for difference. Is that something that concerns your members? Will it have an impact on some of these smaller developments coming forward?
Maf Smith: That partly depends on what happens in future with the feed-in tariff. Many of those projects will come under the feed-in tariff. There are developers, community schemes and companies looking to aggregate a number of schemes and would look at contracts for them. It will be harder for them. That problem relates to the difficulties of securing a PPA for independence or for an aggregator to go on to secure that. The Bill includes a back-stop power, should that happen, which we welcome, but we have concerns about what DECC is doing alongside that.
The Government have said that they will create the back-stop power and then review whether they need to use that power after the first allocation period. Essentially, that is too late, however, because at that point those
Maf Smith: We certainly welcome that very strongly. We had some questions as to how the figures were reached, because we do not yet know, for example, what the strike price level is, and therefore what the different technologies will be supported under. However, looking broadly at comparability in terms of how the RO works, that gave us confidence in the 2020 targets.
The issue that gave us concern was using the levy control framework to also fund demand management actions. That relates to two issues. One is that we do not know how much money may be required out of the levy control framework to fund energy demand measures, so there is therefore a question of how the pie is cut up. That leads on to a wider issue, which is a concern among investors as to certainty about the money being there, or perhaps not being there, backed up by a wider risk that if something else where to come along later, which Government see as important that relates to the energy sphere, that that LCF may be seen as a useful piggy bank to raid. By defining it in the way that it has been defined—it was for low-carbon generation and now it is also for energy demand—people feel that there may be risks attached to it and its reliance out to 2020.
Q 481 Barry Gardiner: Mr Smith, the CFDs initially would be allocated on that first-come, first-served basis before we move to the allocations round. What is your understanding of how that next phase of the allocations round is going to work? Do you believe that further clarification of that is necessary in the Bill? If so, what would be helpful to the industry in order to ensure clarity there?
Maf Smith: In terms of allocation issues, on questions about the eligibility of how that works, Government have listened to some of what industry has talked about in terms of allocation. Allocation will be based when grid connection and consent have been gained for a project. We called for a two-stage allocation process, and Government have essentially responded not so much
Maf Smith: The risks relate to the milestones that are agreed. Once you have allocation of a CFD, you agree milestones on when you will deliver your project etc. and what delays acceptable. There needs to be some flexibility in that, and particularly flexibility around the longstop date—as in, if you have not built by this point, you have the CFD removed. There are risks around that for the developer, because if the CFD is in demand—if it is constrained—losing a CFD may put you back to the end of a very long queue, when you have already spent most of your development money. Those issues can be resolved outwith the Bill, in terms of clarity from DECC on the rules and particularly on the operational framework around the CFD.
Q 482 Barry Gardiner: The Tyndall report suggests that the introduction of shale gas and the dash for gas could take between £19 billion and £31 billion of potential investment away from renewables. Is that a concern you share? If so, what would provide you with additional clarity and certainty beyond 2020?
Q 483 Peter Aldous: Very quickly, because I have just noticed a discrepancy. In your original EN15 representation, you have seven areas of concern, but in the one that has just been put in front of us this afternoon, there are actually eight. You have added an eighth, which is, “Clarifying what is considered confidential information”. Would you be able to elaborate on your concerns?
Maf Smith: There was a concern about, essentially, the terms of the reference price and the strike price, in terms of those being open and transparent. However, closer reading of the Bill has shown us that that concern was misplaced.
The Chair: That brings us to the end of our allotted time with these witnesses, so I would like to thank you, from RenewableUK, for coming to meet us and answering our questions. I should award long service and good conduct medals to all members of the Committee.