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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 536-i
House of commons
TAKEN BEFORE THE
Energy and Climate Change Committee
DECC: Departmental Priorities
Tuesday 17 July 2012
Right Hon Edward Davey MP, Moira Wallace, Phil Wynn Owen and Simon Virley
Evidence heard in Public Questions 1 - 114
USE OF THE TRANSCRIPT
This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
The transcript is an approved formal record of these proceedings. It will be printed in due course.
Taken before the Energy and Climate Change Committee
on Tuesday 17 July 2012
Mr Tim Yeo (Chair)
Sir Robert Smith
Dr Alan Whitehead
Examination of Witnesses
Witnesses: Right Hon Edward Davey MP, Secretary of State for Energy and Climate Change, Moira Wallace, Permanent Secretary, Department of Energy and Climate Change, Phil Wynn Owen, Director General, International Climate Change and Energy Efficiency, and Simon Virley, Director General, Energy Markets and Infrastructure, gave evidence.
Q1 Chair: A very warm welcome to you, Secretary of State, on your first appearance for a general tour d’horizon of the Department’s responsibilities. We had a productive discussion with you a couple of weeks ago about the draft Energy Bill. Could I start with a general question? Your Department’s business plan sets out four priorities. How do you think you are getting on in each of those areas?
Edward Davey: We are making progress in all of those areas. If we look at the Green Deal as one of our key areas, we have got the legislation through the Commons. Obviously we have to complete proceedings in the Lords but we are very confident that a legislative framework will be finalised, which is quite a big step forward. If you look at the supply chain, people are going to do the assessing and the providing. They are gearing up. For example, we have spent money on training people so they have all the information and knowledge they need when we have the staged introduction of the Green Deal from October. It is fair to say we are still doing some work on the financial aspects to ensure that there are financing arrangements in place, but we expect quite a lot of Green Deal activity from October by local authorities and as a result of the ECO. Both will enable us to get the Green Deal underway. I think that we are on track on the Green Deal.
Our second priority is delivering secure energy on the way to a low-carbon energy future. The last time I came before the Select Committee we talked about that in great detail. I am looking forward to your report scrutinising the draft Bill, and I hope your report will be able to confirm that we are making progress. I know there are one or two things we have to complete as we talked about, such as the final decisions on the payment model and looking at the capacity market, but that is well underway and on schedule.
The driving ambition is action on climate change at home and abroad. I have just come back from Berlin, where I attended the St Petersburg dialogue with a range of countries, and we talked about how we take the success of the Durban talks forward to Doha at the end of the year and beyond to 2015 to get an internationally binding treaty. I am not going to suggest that it is all plain sailing, but I think there was a real sense in the room yesterday of a willingness to build on Durban and to take it forward. Our work within the EU to try to increase the ambition of the EU to show leadership of the international climate change talks, and particularly our coalition agreement and the Department’s objective to move the carbon emissions targets of the EU for 2020 from 20% to 30%, show we are doing a huge amount of work, so I think there is some evidence of progress there.
Finally, in terms of our objective of managing our energy legacy responsibly and cost-effectively, the work we are doing on nuclear and coal, and with our other liabilities, is making real progress. The NDA have got to grips with some of the challenges they face, particularly at Sellafield. In due course I hope we will be able to announce real progress that will ultimately reduce the cost to the taxpayer, which is what it is all about-handling those liabilities as efficiently as possible.
Those are our four priorities. I hope we will go into them in a lot more detail this afternoon, but I think there is progress on all four.
Q2 Chair: We will certainly want to return in more detail to several of those. Just looking overall, though, some people have a sense that the Department is struggling to keep up with its agenda. Do you think there are any areas where you are actually behind schedule at the moment?
Edward Davey: In coming to the Department fresh, what is clear to me is there has been a huge amount of policy development, and in many ways the Department is moving towards a delivery phase; delivering on the electricity market reform, delivering on the Green Deal, delivering on the smart meters roll-out, and so on. Inevitably, when you are in delivery phase, there are going to be things that necessarily are not on programme but all the examples I have given you are on target, on time. I am sure you want to bring this up but I am very happy to put it on the table now; I had hoped we would be able to announce today our response to the Renewables Obligation banding, for example. We are a little bit behind on that, but we will be announcing that as soon as possible. We did not actually have a deadline for that but a sort of self-imposed deadline, but we will reach it as soon as possible.
Q3 Chair: We certainly were going to discuss it, but as you have raised it now, could you tell us why you have not been able to announce it?
Edward Davey: Government sometimes has difficulty, particularly towards the end of a period where you are going into the summer recess and there is a logjam, and we have had difficulty finalising it and getting it away. But we think there has been real progress during the consultation, during the crunching of that and sharing that with the Department, and I hope we can announce it as soon as possible.
Q4 Chair: The issues have been discussed in great detail by a lot of people. The only conceivable explanation for the delay is that the Treasury want a bigger cut than the Department of Energy.
Edward Davey: I can happily say on the record that there is no one arguing for the sorts of cuts you have seen in the newspapers, like 25%. No one in Government is arguing for that actually. I think it is more the fact that we have had a very busy schedule in Government, and the Treasury has been working very well with the Department to analyse our findings. As I have said on the record on a few occasions now, the critical thing is that when we announce it, our conclusions are evidence-based, and showing that evidence and explaining that evidence sometimes takes a bit longer than you might expect.
Q5 Chair: Is it not the case that if there was to be a cut of more than 10%, and if Britain is to achieve its target for the proportion of energy from renewable sources, that must inevitably mean there is likely to be less onshore wind in the make-up of our renewables and, therefore, as a result, we will have to have a bigger proportion of alternative renewables that require a bigger subsidy?
Edward Davey: You are asking me to speculate a little bit. According to your hypothesis, if you have less onshore wind to meet your renewables target, you will have to have more renewables elsewhere and that must be true. It is also true that in terms of large-scale delivery of renewables, onshore wind is the most cost-competitive renewable energy source available.
Q6 Chair: Just hypothesising further, let us suppose in the unlikely event that it is indeed the Treasury who have prevented you from making an announcement while Parliament was sitting, have you been able to point out to the Treasury that the direct consequence of their actions will be to raise electricity prices for consumers?
Edward Davey: I am clear that Treasury is aware that onshore wind is the most cost competitive, large-scale renewable source-that is what our evidence shows from the consultation-and I am sure that, when it announces its conclusions, the Government will base it on the evidence.
Q7 Chair: We have the prospect that Treasury intervention has delayed the announcement and thereby raised electricity prices for consumers. Is it not also the case, and apparent to even the most superficial observer of these matters-and let us hope the Treasury are not among the most superficial-that a further delay is going to damage confidence among the investment community, it is going to delay the bringing forward of projects and of investment in all kinds of renewables? Each time the Government dithers around, fails to meet its timetables, appears to be split as to what is going to happen, that has the direct consequence of raising the cost of capital because investors need a bigger return in view of all this uncertainty.
Edward Davey: While not agreeing with all of what you said, Chairman, and all the assumptions underlying your statement, the basic premise is that when people want to make investments, which will promote growth and obviously employ people, of course they want this announcement, not delay. I am disappointed that we have not been able to announce it, but I make it clear to you today that we are going to make it as soon as possible and investment will then be able to proceed.
Q8 Dr Whitehead: There are two possibilities here, aren’t there? Since the consultation was announced last October either DECC has failed miserably to make its mind up by the time it said that a decision would be made, or someone is intervening in a malevolent way in order to prevent that which DECC otherwise would have sorted out a long time ago. Which one is it?
Edward Davey: I think there is a third option. The third option is that we are engaged-as you are with all decisions in Whitehall-discussing the details. Let us remember that this is a complicated area. We are talking about a whole range of renewable technologies. I can certainly say that DECC has done the work. There was a lot of work to do because there were nearly 4,000 responses to the consultation and, as I said, it is a complicated area. But we have produced some proposals that we have put to the rest of Government and we are discussing those with the rest of Government, as you would expect us to.
Q9 Dr Whitehead: But shouldn’t that discussion have taken place before, if the reasonable assessment was that the decision would have been out by now? Why is it being discussed now rather than earlier on?
Edward Davey: I explained it is a very complicated area, and the Government has a very busy agenda across many Departments. I know everyone is impatient. I am impatient to get this out. We will get it out and we will get it out as soon as possible.
Q10 Dr Whitehead: Let’s be frank, we are on your side as far as this is concerned.
Edward Davey: I am on your side.
Q11 Dr Whitehead: That is brilliant. We want this to happen, we want this to happen early and we want this to happen in the interests of the investment potential and the certainty in the industry that, I am sure you would agree, is hurting more and more as this decision is delayed. We have a headline here from a magazine, "Treasury accused of actively undermining renewables industry with subsidy delay". It appears to be a common view that that is what is happening. Could you guarantee today that if there is going to be any further delay you can give a timetable now on when this decision will come out? Obviously just between ourselves-
Edward Davey: No one else is watching.
Q12 Dr Whitehead: Are there further discussions that will have to be had with other people unknown before a timetable for getting this decision out can be given, or are you able to say today, "Well, as soon as possible means the end of August", or, "As soon as possible means the end of the month"?
Edward Davey: Those discussions are ongoing and I am sure they will come to a conclusion as soon as possible. I can share with the Committee-and this is no secret, it is in the legislation-we need to publish the order for next year’s Renewable Obligation bands by 30 September, and Simon may give you the exact details here. Simon, do you want to-
Simon Virley: We have to set the order for next year, the obligation level by 30 September; that is in legislation.
Q13 Chair: Is it the plan to wait until the House comes back to make this announcement?
Edward Davey: I think it is important we make the announcement as soon as possible. This is clearly of huge interest to lots of people, particularly in Parliament but also in industry. It is important that we make the announcement as soon as possible, but I do want to make sure that we have a lively debate in Parliament. I think it is really important that our proposals are properly scrutinised.
Q14 Chair: We can promise you a lively debate in Parliament, and we would love to have the participation of the Treasury Minister when that happy occasion takes place. Therefore, do we expect that perhaps this announcement may appear on the day when Britain has won two gold medals at the Olympics, and maybe there is not much room in the papers?
Edward Davey: That would obviously be happening so frequently that there would be so many days to choose from, so I cannot be tied down to something that would be so vague.
Q15 Laura Sandys: Just continuing my colleagues’ questioning, I am very interested in how we look at the conclusions that you, as a Department, come to put to other Departments within Government, on the basis of evidence. Is the Treasury dealing in the same evidence as you are, and when you do announce this will you publish all the evidence on which your conclusions have been based?
Edward Davey: Yes and yes is the short answer.
Q16 Laura Sandys: You are dealing in exactly the same evidence as the Treasury. Why is it then speculated that you are coming to different conclusions?
Edward Davey: I wouldn’t say that at all. What I am saying is that we are engaged in showing that evidence and explaining that evidence. That is a process and, as I explained, there are, I believe, 29 different forms of renewable energy sources involved in the review, so there is a huge amount of evidence; nearly 4,000 responses. We have crunched that. We have set it out on the table, and we are explaining it.
Q17 Laura Sandys: So there is no difference between your analysis of the evidence and the other Departments’ assessment of that evidence? What concerns industry is the politicisation of this.
Edward Davey: As I explained, particularly in an interview I gave to the Financial Times, it is really important that the British Government is seen to act on evidence and is not seen to act under political pressure. That is very important when you look at investment in utilities and investment in infrastructure more broadly. Britain has a very proud record of making sure that it takes these decisions based on the evidence. If you do not, there is a danger that the cost of capital for investors increases, and that adds a risk premium to investing in not just renewables, not just energy infrastructure, but the country in general when there is an ability for politicians to be involved in the final decision making, so it is really, really important that we base things on the evidence.
When we publish our response, I believe we will be publishing the evidence at the same time, so people will look at our decisions, look at the evidence and say, "The decisions follow the evidence".
Q18 Ian Lavery: Rio Tinto Alcan in my constituency has closed. They say it is because of the Government’s introduction of green taxes, and 500 private-sector jobs were lost. The only saving grace is the potential sale of the power station, which will be converted to biomass. One of the crucial issues, and we were waiting for the announcement weeks ago, then they were waiting for the announcement today, is the new ROC band. Because it has been delayed it could put another 110 people in my constituency on the dole. I am just going to ask you, Minister, when will you make the announcement, because it is crucial and people are waiting for it for employment?
Edward Davey: Mr Lavery, you make a very strong case for making the announcement as soon as possible, which is what I have said. I am extremely seized of the view, which you have exemplified from a case in your constituency, that there are investors waiting for this decision. I really understand the importance of getting that out there. Part of our growth strategy is to make sure we have investment in the infrastructure. That is a critical part of it because that enables us to create economic growth and jobs in the short and medium term, but it also supports the sustainable growth of the economy in the long term, particularly when we are talking about renewable energy and biomass plant. I agree with you, but I keep coming back to my timescale, which is: as soon as possible.
Q19 Ian Lavery: When is "as soon as possible"? It has been said by your predecessor, and you have said it two or three times today. What does that mean?
Edward Davey: My predecessor was probably talking about the consultation paper because we are now talking about the response, which of course has been under my watch. We are working very hard on this. We know there are a lot of people watching and waiting, and we feel a responsibility to-
Q20 Ian Lavery: Is it a week? Is it a month? Is it two months? Is it a year?
Edward Davey: I guess, Mr Lavery, like other members of the Committee, you are going to want to tie me down in the way that the Chairman wanted to know whether it was going to be on the same day that we win two gold medals. I am not going to do that. All I can undertake to the Committee is that we will continue the discussions across Whitehall and this announcement will be made as soon as possible.
Q21 Chair: When the Committee on Climate Change published its fourth annual report to Parliament less than a month ago, it pointed out that, although emissions had fallen by 7% last year, only 0.8% of that fall could be linked directly to the implementation of emissions saving measures. Do you think, given the proud boast that this will be the greenest Government ever, that that was a good performance?
Edward Davey: We welcomed the report by the Climate Change Committee. It was a very helpful contribution and its robust analysis is really important, so it helps you and others to hold the Government to account. I do not want to move off the fact that emissions had fallen by 7%. Okay, the Committee said that only 0.8% was directly, in their view, related to our measures; the others were related to a milder winter and-I think it was-less economic activity. The Committee is right to put the challenge to us of when are we going to make the step change, which is what they are calling for. But, as we already rehearsed during this session, a lot of our policies are extremely far-reaching, extremely radical, which I think certainly give substance to the claim to be the greenest Government ever, and they are being pursued very actively.
So we do have the Energy Bill, which is fundamental to reforming our power generation sector radically, to move it from the intense fossil fuel sector we have at the moment to a low-carbon sector. We have the Green Deal, which-although no doubt we will rehearse it in more detail shortly-will take a little while to develop and blossom, but I believe it holds open the prospect of being the most radical policy put forward by the Government of a developed country to tackle energy efficiency.
These are radical policies. They have taken some time to develop. As Secretary of State, it is my job now to deliver on them and make sure they are fully implemented. I think those, combined with other things we are doing-the largest investment in the railways since the Victorians, the Green Investment Bank and so on and so forth-do amount to the step change that the Climate Change Committee is calling for.
Q22 Chair: They certainly did repeat their call for an urgent step change in that same court and I quote, "It is crucial now to move from the policy and development phase to delivery". I think this Committee would find it hard to reconcile that with the delay we have been talking about in making a decision about the Renewables Obligation Banding Review. It does not look to me as though we are moving very rapidly towards delivery, in terms of a crucial area of low-carbon energy investment.
Edward Davey: Let us remember that renewable electricity generation was 11.1% in the first quarter of this year, up 3.4% on the year. That is showing that, even ahead of our announcement, people have been investing in renewable energy creating growth and jobs. So I think we do have quite a story to tell already on the renewable electricity side, and we want to go further. As you know, I am proposing a cut in subsidies for some of these renewable electricity sources, so maybe people want us to keep the high levels, as we have at the moment, but we think we have to step them down a little bit. What I believe is, because it is based on evidence, we will continue to see an excellent performance on renewable electricity generation as we have seen in the last two years.
Chair: This Committee would understand that there are some technologies where it is appropriate to reduce the level of support as costs come down. Incidentally, I should draw attention to my entry in the Register of Members’ Interests in a number of renewable energy businesses.
Q23 Sir Robert Smith: I should remind the Committee of my interests in the Register of Members’ Interests through the oil and gas industry, and in particular a shareholding in Shell. In terms of gas and the energy mix, obviously with the likely progression of electricity market reform, and the evidence we have received on the need for more plant to be available at short notice to deal with intermittency and variability, there is going to be a greater requirement for gas storage to allow the system to respond quickly. Will the upcoming gas generation strategy be looking at gas storage as well?
Edward Davey: It is focusing primarily on generation. But I know this Committee has had an interest in gas storage for some time, and I think there is quite a good story to tell about the actions that we have taken and what is actually happening out there. As the Committee probably knows, there are four fast-cycle gas storage facilities under construction at the moment. When their construction is completed that will add 20% to our storage capacity. There are 10 planning consents for more storage facilities. If they are all built that will more than double our capacity, which I think is in line with what the Committee called for. It is worth stressing that we do not just rely in this country on storage capacity. We have the natural storage capacity that is represented by UKCS of course, although with the production declining that is less significant. But we still have a diverse source of supply with LNG and with pipelines. When you have that diverse source of supply and you see what is happening in terms of construction of storage facilities, I think one can be pretty confident that we are getting the right measures in place.
Q24 Sir Robert Smith: Will you at least be monitoring the market signals? The planning barriers and the regulatory barriers may be coming down, but obviously the commercial signals need to be quite far in advance of the need to actually get the capacity. While the UKCS is still an important source, a lot more of that gas now comes associated with oil and is less flexible in production, therefore the need for storage to be part of the mix is important.
Edward Davey: You will know that in the Energy Act 2011 we gave powers to Ofgem to be more active in this area, and we have asked them to look at it. They have some proposals out there that would penalise people who did not have gas available when they said they were going to have that available, so we are looking at the incentives.
I do not know if Simon wants to say a little bit more about that, but I think that is progressing quite well.
Simon Virley: Yes. Ofgem are currently consulting on what is called the Significant Code Review, which is sharpening the penalties for non-supply. We are obviously working with Ofgem as well, about what further incentives might be necessary, and monitoring the market closely. But, as the Secretary of State said, the gas market has worked very effectively in responding through a number of sources of gas to provide Britain’s energy needs.
Q25 Sir Robert Smith: The Committee on Climate Change is concerned that the Emissions Performance Standard regime, which you are contemplating, carries the risk of locking in more gas generation than necessary and, therefore, undermining the decarbonisation of the future generating market.
Edward Davey: I have seen some comment that when we announced the Emissions Performance Standard, which was always part of our policy, could be grandfathered to 2045, people felt that this would involve locking in gas. I point out that we always expected some gas generation in that period, much less than we have now and doing a different role. One would expect some gas to be around there. Also-and this is a point that seems to be lost on people-we retain the ability to reduce the level of emissions, to tighten the Emissions Performance Standard in the future, not on ones that grandfather of course. Our measures to bring forward some of the extra gas capacity that we need will help us to meet our climate change targets. For the reasons that we cited earlier, it is important to have more flexible systems because of the different mix that we will see in the future grid. I think that we still have those incentives but once more capacity comes on, we can then change them if we feel that is the right approach.
We do want to see more gas on. Grandfathering the EPS to 2045 for the next few years was the right thing, it sends the right signals, but that does not leave us without the tools to tighten that later on.
Q26 Sir Robert Smith: You have already mentioned that we have a domestic production that we obviously want to maximise, but also now there is the potential of onshore gas in unconventional sources. How are you progressing with how the induced seismic activity is going to be monitored in future shale gas exploration?
Edward Davey: You are right, there is a resource potential out there, which I think all Governments, of whatever hue, should take very seriously if that is a potential source of energy and would improve our energy security. We would not have to import so much. By the very nature of unconventional gas, we need to be cautious, we should not rush into it. We want to make sure the regulatory regime is fit for purpose and tough. Following the concerns about seismic activity from the drilling that Cuadrilla was undertaking, we saw their report and we asked some independent scientists to do a report on what Cuadrilla had found. We have now published that report for consultation, and we will respond to that consultation, taking into account also the recent report by the Royal Society.
In the autumn we will make some statements about where we see unconventional gas going in the UK. It is absolutely right that we do not rule it out, but it is absolutely right that we are careful and cautious because I do not think the public would take kindly to it-and I certainly would not take kindly to it-if we could not be sure that if we proceed with further drilling that it is done in a way that in no way damages the environment.
Q27 Sir Robert Smith: When it comes to the offshore regime, there has obviously been a sea change in the Treasury’s perception of the need to encourage investment in the UK Continental Shelf from the previous Budget to this Budget, and the constructive engagement with the industry seems to be paying dividends in increased drilling activity and potential production. One of the concerns has been the European Union’s desire to regulate directly the safety regime in the North Sea, and I wonder if you could update us on how negotiations were going on trying to persuade them that a directive route would be far less damaging and not undermine the regime that we have already established?
Edward Davey: You are right to point to this. My colleague, Charles Hendry, has been in quite a lot of discussions with Commissioner Oettinger, who has been the one suggesting that we should opt for regulation rather than a directive. Just so everyone is clear, we believe the directive approach would be far more effective, far less costly, because we have a very good regime that stands up to scrutiny. We will never ever be complacent, but I think if we went down the regulation route that would be costly and-some would argue-counterproductive. But we are making good progress in this area. I think the Commission have been listening to what the UK Government has been saying. I am not sure what the very latest is from those discussions, but if one of my colleagues wants to update the Committee.
Simon Virley: Just to support the fact that we are having some traction with the Commission, in terms of ourselves, and other member states who have an interest in this, pointing out that the best regime is going to be supported by moving to a directive rather than a regulation, so we hope that that will be the direction that the Cypriot Presidency now take us in.
Q28 Dr Whitehead: What do you think the interest rate on Green Deal is going to be when it starts?
Edward Davey: Of course this is a matter for the market to decide, it is not the Government setting the interest rate. We will not be coming to this House with an Order setting the Green Deal interest rate. It is something that people can compete on, and some of the discussions on the different ways that the Green Deal finance could be aggregated and offered to the wider market are commercial in confidence, and so I am afraid I am unable to share those today.
No doubt you will be aware that UKGI, which is the forerunner of the Green Investment Bank, is keen to be active in this market and we know that it is in discussions. We are aware of some of those but I cannot say what they are or what the implications are for interest rates. What I can say to the Committee is that, when we consulted on this, we looked at a number of interest rates in our impact assessment, and the central scenario is we expect an interest rate around about 7% to 7.5%, that sort of area.
Q29 Dr Whitehead: In terms of some market research that was carried out last autumn, I think that was about 1.5% above the rate at which pretty much most people-that is 90%-odd of potential Green Deal adopters-would consider the Green Deal and the research found that they would not proceed with it because it was not good value.
Edward Davey: In a second, I will bring Phil Wynn Owen in to talk about the details of that research, but I think it is fair to remember that if the interest rate were to come out at 7% to 7.5% that would be extremely competitive for unsecured lending. I don’t know if you have tried to get unsecured lending at that rate but it is pretty tricky. People who are on lower incomes would find it particularly difficult. In my former job, as the Minister for Consumer Affairs, I was involved in looking at high cost credit and looking at the millions of people in our society who have real problems getting unsecured lending at 7.5%. They would be lucky to get it at 30%. So I should say some of the things that have been written about this are slightly off the mark. But let me bring in Phil.
Phil Wynn Owen: As the Secretary of State explained, we modelled rates in the Green Deal Impact Assessment of 6.5%, 7.5% and 9.5%, and our central estimate is 7.5%. Our understanding was gleaned from commercial organisations, including the Green Deal Finance Company. The latter stated that they expected the cost to finance to be around 6% to 8% and, as the Secretary of State said, for unsecured lending that should be a highly competitive rate. I would only add that it is worth remembering that what will matter to the consumer is also the value they pay for the actual transaction. The interest rate is but one element and we may well see commercial packaging of deals as often happens. For instance, if you go and buy a new bathroom or new kitchen at the moment you may see a 0% interest rate and the deal will be packaged differently, and we want to encourage commercial deals. So I would not get too focused on the interest rate. What will also be important is the consumer shopping around to get the best possible deal they can off the back of their assessment.
Edward Davey: The final thing to add to that is, remember, the interest rate is part of the calculation for the golden rule. The savings that are made from the investment and the insulation and energy efficiency in lighting and so on-not lighting, that does not come under it does it-all the other elements there that can be invested in through the Green Deal and the credit they, together combined, have to meet the golden rule so that the savings are larger than that cost.
Q30 Dr Whitehead: I think you would accept though that the higher the interest rate, the fewer things that can be done under the Green Deal while keeping within the golden rule, and-
Edward Davey: You could say the higher the cost of a product or the higher the wage of the person doing the fitting. If any of the costs that go into this calculation of the golden rule are higher that is going to reduce the ability. So do we want interest rates lower, do we want costs lower? Yes, of course we do. We also have to make sure the system works. What is radical about the Green Deal, and the way I really do believe it is going to create a very successful market in energy efficiency, is that it is open to everybody. It is a universal offer. So often in this country we have seen energy efficiency schemes that have been very good in their own right-I am not having a go at them-but they have had strict eligibility criteria. The Green Deal is open to all. The other thing that is so exciting about the Green Deal is that we will see a lot more suppliers coming in. They will be far more competitive. That is the way we have tried to design it. I believe that will drive down the price as well. By having it on a bigger scale, by having more competition, I think over time those will put downward pressures on prices, and I think that will more than respond to the points you are making.
Q31 Dr Whitehead: Would you not accept that this begins to sound a little like, as the phrase goes, "It’s open to all as is the Ritz for breakfast"? You may be in danger of creating a market of those who will take up other forms of loan because they can get low interest, they can get secured loans on property. Some people will come at the other end under the Affordable Warmth element and get some assistance. Only those people in the middle, who might have difficulty in accessing other forms of finance, will then be subject to the highest interest rate and be most deterred. Is that a policy outcome you would welcome?
Edward Davey: This is not a Ritz policy. I don’t want to call it a "greasy-spoon café" policy because I think actually it is of much higher quality than that, but I think it is certainly a policy that is open to all, and genuinely open to all, and the golden rule is at the centre of it. I come back to the point, there are many people in our society on low incomes who would not be able to get unsecured lending at the rate that the Green Deal with deliver, so I know there are lots of naysayers but that is a very significant advantage of the scheme. In addition, and as you were rightly saying, the link to ECO is important, because you have a market approach but with some supplier obligations underpinning that, which means that we will see this being a tool to help tackle fuel poverty as well.
Q32 Dr Whitehead: Have you decided what to do with the £200 million you obtained from the Treasury, shall we say, for the beginning of the scheme?
Edward Davey: We did quite a lot of work on that, as you can imagine. We did market research and testing and so on, and I will be making that announcement in due course, but I do not think I can make it today. I certainly was not intending to make it today.
Q33 Dr Whitehead: Except that the scheme is beginning in the autumn, isn’t it? Aren’t we rather close to the actual beginning of the scheme and giving out contracts? I appreciate you have set that back a wee bit until the beginning of the year.
Edward Davey: The profile of the £200 million, most of it is for the next financial year-the vast bulk.
Q34 Dr Whitehead: Yes, but I am sure you would accept that it would be rather good if people knew how that was being disbursed in order to, among other things, be able to make their dispositions in terms of the contract. For example, if you are providing most of the £200 million in the cash-back I would imagine that would influence some people who are thinking of taking a scheme up at a higher rate of interest, because they might take that into account. However, if you are doing something else with that £200 million then that would not apply. I wonder how close to the beginning of the scheme you intend to delay the announcement of what is going to happen?
Edward Davey: There is absolutely no delay in this announcement. I will ask Phil to comment on this again, as he has been leading the work. But we want to make a big splash when we make the announcement and we want to have a big impact with it, as you would expect. Doing it now would not be the right time to have that impact. The staged introduction starts in October. We want to plan things, and plan any expenditure we have on marketing and any benefits we get from announcements, in a strategic way. This is not delay. Phil, would you like to add anything?
Phil Wynn Owen: That is correct. On the split of the finance, £30 million of it is available for this financial year and £170 million for the next financial year, which begins on 1 April next year, so I do not think it would be rational to pre-commit specific offers now. Ministers have previously made clear that cash-back is likely to be a significant element of it, but obviously we will also want to see how the market develops. There is a phased introduction, we will learn as we go along. It is not impossible-but Ministers will decide, and they have not decided anything about spending this money yet-that we may do it in phased instalments, so that we can adjust the offer as we go along, as you would find Tesco or Sainsbury’s doing for your weekly shop, almost daily in terms of what comes through your front door. We are trying to harness here the power of market forces and learn more about our customers and get closer to customers, so big announcements early, before we have begun to learn, may not be the best way.
Q35 Dr Whitehead: So you could see this as a market intervention fund, really?
Phil Wynn Owen: I call it £200 million of public expenditure designed to help with the introduction of the Green Deal.
Dr Whitehead: Yes, and I appreciate that but-
Edward Davey: Phil used to work in the Treasury.
Q36 Dr Whitehead: Would you be able to indicate whether you are considering other things to include within the £200 million market intervention fund, or whatever one calls it, which do not insist on cash-back, other forms of assisting the development of the Green Deal?
Edward Davey: Yes. We certainly have been looking at other forms. I do not want to prejudge the announcement. I am sorry, for the reasons that I think are good policy reasons, we are not going to announce. We are not ready to announce, but we have certainly been thinking of other ways.
Q37 Sir Robert Smith: One of the things you said, which is quite important about the Green Deal, was who the providers will be, because I think one of the big challenges with previous schemes has been the energy companies. Quite honestly, the public have never quite understood why someone who makes their money selling them energy is offering them free insulation to stop their bills going up. In many ways, the success of the Green Deal will be through encouraging those other providers who are trusted by the consumer to be more likely to be selling something if they want to achieve the goal of reducing their energy?
Edward Davey: While I think the Big Six have played a very important role in promoting energy efficiency with their supplier obligations, and will want to continue to do so, I think you are right that it is important that we have other suppliers coming in, and that is a big change in this new policy.
Speaking again as a former Minister for competition, when I was at the Department for Business, I think competition is absolutely critical to so many aspects of energy policy and none more so than this. We may have new large players and new small players, and possibly a lively local SME involvement, as we are seeing in some areas. The classic one is Birmingham City Council, which are playing a leading role. Phil may correct me if I am wrong, but I think they borrowed £72 million ahead of what they want to do from this October, and they have been inviting local businesses to come in, to talk to them and talk to some of the other bigger providers and some of the other landlords about how they can get involved in the Green Deal.
One of the things that I think is so encouraging about the Green Deal, and the work that is going on ahead of its launch, is the number of pioneer providers who are signing up, big and small. There is huge interest in this from all those types of companies that have something to do with building and construction products, whether they are in double-glazing, whether they are in DIY, whether they are in boilers or whether they are in doors. People are really engaged in this because they see a business opportunity. That is what we want. We want lots of ways of encouraging people to invest in energy efficiency.
Part of the problem in the past is that people have not really seen it as critical to their plans for their house. With the design of the Green Deal, where the debt stays in the meter, and with the fact that there are more people coming into the market wanting to promote energy efficiency and the Green Deal, there is a vitality that we have not seen before. Some people have looked at the impact assessment and said, "This Green Deal is not going to deliver dramatic change". One of the problems is it is difficult to measure because we have never seen a policy like this before. I probably should not say this, I will probably get told off for this, but I think the impact assessment is conservative in the way it is estimating the potential. I will be careful. I do not want to go on with hyperbole about the Green Deal. No doubt there will be lessons we will have to learn as we go along, but the great thing about it is that this is a dramatic long term sustainable change. It is a real shift in the way we think about energy efficiency in this country, not just for households and private residences but also for companies when we have the commercial Green Deal later next year. It is exciting, and I hope the Committee and others outside will get behind it and promote it, because I think it deserves it.
Q38 Chair: Mr Wynn Owen, you referred to 6% to 8% being a good rate. Is that really the case over 25 years for a decent borrowing?
Phil Wynn Owen: I think what I said was that it compared well with similar rates that people could get for such lending. But I also said that it would be unwise to get too fixated on the interest rate because, for instance, if you go into some retailers now, such as B&Q, you may well find that you are offered a kitchen or bathroom refurbishment at what appears to be 0%. Now all the offers will have to comply with Consumer Credit Acts, and so on, but we do expect retailers to repackage the offers.
What will be just as important will be consumers using the assessment to shop around, so as to drive down the cost of some of the works that will need to be done.
Q39 Ian Lavery: Looking at the carbon capture and storage issues, there have been massive problems experienced since the Longannet project was cancelled in October and then there was the introduction of the CCS Roadmap on 3 April this year. Can you say how many bids were received for the CCS commercialisation programme, and were any of the bids for gas power plants?
Edward Davey: Mr Lavery, I am afraid I don’t think I am allowed to say how many bids have been received. What I can say is there has been a healthy response, and it is fair to say we have been pleased with the response and obviously we are now analysing those bids. But I am afraid I am going to disappoint you. Because of the nature of the competition, I cannot say too much more than what is probably already in the public domain but I will try to be as helpful as possible.
Q40 Ian Lavery: Surely, it is not commercially confidential, laddie, to tell us how many people have put a bid in.
Simon Virley: The reason for it is that we are currently assessing the eligibility of the bids that have come in, so if it proves that some of the bids are ineligible on the basis of the rules-
Q41 Ian Lavery: I am just asking how many bids.
Simon Virley: We will be confirming how many eligible bids we have received shortly, but we are not able to do that at the moment. What we can say is the European Commission have already issued some preliminary view on their own competition, and I think the UK scored extremely well, with four of the top seven projects being UK projects in the provisional ranking from the European Commission.
Q42 Ian Lavery: On that issue, last week the EU published details about which projects could possibly get funding under the NER300 project scheme. It looks like the UK is only likely to get funding for one CCS scheme. If the information is correct that one CCS scheme would be the Don Valley project.
Edward Davey: I think you are running ahead a little bit here, Mr Lavery. As I understand it-and Simon will correct me if I am wrong-the top scheme was a British scheme and the next British scheme was fourth in the Commission’s listings. Prejudging what that means, in terms of how many they will support, is very difficult to say. There are quite a number of factors in that, and I do not think we fully know how many they will back.
Simon Virley: At this stage the Commission have not yet monetised the EUAs, the allowances that will give rise to the pot of money, so there is still further work to do. What they have done is given a provisional ranking and, as I say, four of the top seven are UK projects. We are obviously looking closely at those. All of those projects are in the UK-based competition, and obviously we will be making decisions on that in the autumn.
Q43 Ian Lavery: Given the problems with the CCS competition to date, and there so much riding on its availability in the future, are you confident that CCS will be able to be deployed commercially by the 2030s?
Edward Davey: In the UK we can be as confident as any other Government, in fact more confident than any other Government, because we have one of the best offers and we have some of the best potential. CCS has a huge role. I am a huge fan of CCS. The competition we have for the capital investment, the support that would come forward for revenue support afterwards, the investment we are making in innovation, research and development is a very attractive package and then you add on the EU work to that. I am keen to work out how we can collaborate as well in the longer term with other countries. You will be aware that there is what I believe is called the Four Kingdoms project, where you have the Saudis, and, I think, the Norwegians and the Dutch, and the UK working together. I have been talking to the Deputy Prime Minister of Qatar ahead of the Doha COP because it would be good if, outside the negotiations, we could have some other announcements. It is very, very early days, so I would not want to set hares running. Trying to see if there can be greater exchange of best practice, exchange of ideas and maybe even more among countries who want to invest in CCS at this stage makes perfect sense to me.
Q44 Ian Lavery: How much of the £1 billion that was originally set aside for the carbon capture storage in the current Spending Review period will be available in the next Spending Review period?
Edward Davey: I am not actually sure. Simon?
Simon Virley: It all depends on what we get in terms of the bids. So we are evaluating at the moment what the bids cost, both their capital, our requirements and of course any operating support that they are asking for. As Ministers have made clear, the £1 billion is there, it is available for projects to bid into and obviously we are assessing the bids at the moment.
Q45 Ian Lavery: It doesn’t really matter whether it is in this Spending Review or the next one; that £1 billion is guaranteed for CCS projects?
Simon Virley: Yes, Ministers have confirmed that.
Q46 Ian Lavery: The £125 million for research and development, can you say what that is for or will that be specifically focused on a winning CCS project?
Simon Virley: No, that is available for other projects, smaller scale projects, new technologies, so it is supporting research at universities and other research organisations on development of CCS components and on pilot scale projects as well. That covers a broader range of projects than those that are put into the main competition.
Q47 Ian Lavery: I know you said I was running ahead of myself before with regard to Don Valley, but the EU did say last week that of the seven CCS projects, the Don Valley Power Project was number one and they could possibly fund it. However, it could be the case that DECC may have to give that single project £620 million of the £1 billion that is already on the table. Would that be right?
Edward Davey: As I think I did say before, you are running away with yourself a little bit here. We have to do the analysis. This is a proper competition and we have to abide by the rules of that competition.
Q48 Ian Lavery: It is just what the EU announced last week.
Edward Davey: I know and I confirmed, and Simon has confirmed, what the EU said last week but we have a separate process. We are trying to run it as much as we can along similar timescales. That is logical. We argued very hard for the EU scheme and we are supportive and, as you have heard, we have done very well in it. But it would be the wrong process to adopt for us to give running commentaries about our competition as we go through analysis, and I am afraid you are not going to tempt me.
Q49 Ian Lavery: I understand. There are two separate processes, there is the UK competition and then you have the NER300 process in Europe. They have said the Don Valley Project is their preferred project. They have said that. It has been announced. Where does that leave the UK, if they believe that they only have £1 billion on the table for CCS? If the Don Valley Power Project goes ahead they will take £620 million out of that £1 billion that is already on the table. Where does that leave the other projects?
Edward Davey: Mr Lavery, I am afraid you keep wanting to tempt me to comment on our competition process and I cannot do that. I cannot say a particular project is going to be funded and one project isn’t, because we just simply have not done the analysis. As Simon was saying, we have not yet been able to register every bid to check that it is eligible and meets our criteria. You are asking me to run ahead of myself, and that would be improper.
Q50 Chair: We will soon be reporting on low-carbon co-operation between the UK and the UN and China; is there anything you want to say about CCS in relation to co-operation between Britain and China?
Edward Davey: It is an interesting possibility. Perhaps one or two of my colleagues could comment on it, but we are certainly engaging with China in a number of ways. They include a number of FCO-funded Prosperity projects, which look specifically at barriers to CCS, are jointly funded by the EPSRC and involve both UK and Chinese scientists, and various multilateral fora, including the Carbon Sequestration Leadership Forum and Clean Energy Ministerial. We have put in £60 million from the International Climate Fund to support carbon capture and storage capacity building in various projects abroad, so I think there is room to work with countries such as China. One of the reasons why CCS ought to be attractive to this country is not just what it does in terms of enabling us to move to a low-carbon power generation sector, but in terms of what we can sell, be it technology or our expertise abroad to assist other countries, because we cannot tackle climate change alone.
Q51 Laura Sandys: Moving on to the green economy and how we are doing globally, there is a lot of rhetoric, and I think we are sometimes seen as a touch self-congratulatory, what with statements about being the greenest Government ever and how brilliantly we are doing on renewables and so on. When you look at the facts, however, we have problems, obviously, with Vestas in Sheerness and there seems to be a bit of holding back on Siemens’ investment in Hull; whereas, when you look at France you have Alstom, and Areva, who seem to be moving very fast. When we have this clear determination, as you said, that Britain has gone from being the new kid in the class to the star pupil, is that reality or are we falling back and is our rhetoric really being met by the confidence that those investors need to have in the UK?
Edward Davey: We have really upped our game, and to give you some figures, in the last financial year 2011-2012, we had £6.9 billion of announced investment in renewables. In terms of employment, that was nearly 21,000 jobs just announced last financial year. They are pretty good figures, but let me agree with you that there is no room for complacency. I was interested to hear the speech of the Director General of the CBI, John Cridland, very recently, who wanted to make it clear, from a business perspective, that they believe that green and growth go together, so a very strong backing for our approach. Indeed, in his speech he listed a whole range of statistics backing up what progress has been happening and wanting us to go further.
Q52 Laura Sandys: There is a problem here that that £6.9 billion, and the 21,000 jobs, are in many ways a pipeline that started maybe three or four years ago. What some people in the industry are concerned about is that, due to the political environment, there is a lack of certainty about the pipeline going forward. That will impact on us in maybe two or three years’ time. With Sheerness, potentially there are lots of other issues involved. But if we are taking credit for current jobs, one of them is London Array, which is in my constituency, and that was actually agreed four or five years ago. Are we ensuring that we are looking at a future pipeline that is on the rise, not plateauing and certainly not falling off?
Edward Davey: Absolutely we are. Let us remember we have not only very ambitious targets in the Government, both in terms of output and overall desire to be the greenest Government ever but also in terms of our carbon budgets that we have published. We also have an international obligation, and that means we want 30% of our electricity generated by clean sources by 2020 to meet our 15% renewable energy obligation. That is a very clear target. Our policies are all designed to meet that. You will have seen the renewables road map, which I think gives extremely clear signals to investors about how we expect different pathways. We expect that we can get there. I know people are impatient for the response to the Renewables Obligation banding, which we discussed at length early in these proceedings, and I know people are impatient for us to get on with electricity market reform but we are on timetable on that. We have the draft Bill waiting for the Committee’s report. Thank you for the hard work you have been doing in that regard, and we expect to publish the final Energy Bill in the autumn. These are the things that people, when you talk to them, are impatient about, they want a certainty. They want a certainty about renewables. They want a certainty about the Energy Bill, and we are pushing at pace on both of those.
Q53 Laura Sandys: Some would say that the Government could play quite an active role in actually accelerating the market and-you having been at BIS- working very much more collectively as a consumer, certainly of renewables. Should Government have a renewable obligation in its procurement?
Edward Davey: Certainly it is not an issue that I have been reflecting on hitherto.
Q54 Laura Sandys: It was something that the CBI proposed-that Government needed to start engaging with this particular market itself.
Edward Davey: To be honest, I think what the industry wants us to do is to announce our response to the Renewables Obligation banding and get on with the Energy Bill and get it into law. That is what they really want, and they want some of the details of that, as we discussed the last time. They want to know the details of the payments model. They want to know exactly how the strike price will evolve, and we will be consulting on that next year. They want to know about the capacity market. When we talk to industry and talk to investors these are the things that they want to know, and we are determined to give them those answers as soon as possible.
Q55 Laura Sandys: You do not feel that the Government has a role in procurement or in kick-starting? The Environment Audit Committee have said this; the CBI have recommended that Government should use its spending power to support the sector.
Edward Davey: If he were here, the Chancellor would quite rightly say, given the levels of subsidies that are going in-of course, some direct from the consumer on consumer bills and some from the taxpayer-that there is a huge support for this sector. What we have to do is make sure that we get this clean energy but that we do it in the most cost-effective way, which is the best value for money.
The problem of using procurement-and I have talked to my colleague Francis Maude, who, as you know, leads the Government on procurement-is that every Government Department would like to make part of their policy objectives a condition for procurement, and suddenly you have a procurement Christmas tree and every single policy is going to be driven through a procurement process. That is questionable in terms of some of our procurement rules, and it is also questionable whether actually it is the most efficient way of doing it. I am interested in doing it in the most efficient way.
Q56 Barry Gardiner: Secretary of State, the Government has committed £2.9 billion to climate finance. Of course, between yourselves that is £1 billion, DFID £1.8 billion and DEFRA coming in at just £100 million. What I would like to hear from you is how the Departments actually work to ensure the most effective international leverage for that finance? Are projects presented across the board to see if there are wins for each Department? How is this negotiated; or do Departments simply decide on their own projects and then go ahead? What is the corporate thinking to exact maximum value?
Edward Davey: We work with colleagues across Whitehall. Clearly we work with DFID who have a huge amount of experience of delivering projects on the ground. Obviously the Treasury always want to be kept up to date with the spending public money, and DEFRA are also a Department that we talk to. We are keen to deliver on that. To date, most of the money has been allocated through multilateral bodies because that gets leverage, to use your phrase. It is not without its challenges, because although you get leverage going through multilateral bodies and you reduce your admin costs, it sometimes means that the spend takes a longer time to get through. The disbursements can be delayed. I guess what I am saying is that there are arguments on different ways of doing things.
Q57 Barry Gardiner: Look, I understand the use of the multilateral and bringing it into funds and so on, but what I am trying to drill down is way, way before that. Is it DECC that decides on what DECC is doing with that £1 billion that is in your budget at a project level, or at an early stage is there interdepartmental discussion about various projects, so that you can see if additional value could come from it to one of the other Departments?
Edward Davey: In a second, I am going to bring the Permanent Secretary in, as she will be aware of some of the detail of cross-Whitehall working. There is a joint board to oversee this money; Phil Wynn Owen sits on it for DECC, and DECC obviously leads on climate change priorities.
Moira Wallace: We try to get a degree of co-operation as well as having clear accountability for the money, so the money was allocated to different Departments and each of us is an accounting officer for our bit naturally. In that sense, it is clear who owns the money because somebody has to appraise it and take responsibility for it. But all the Departments have set joint priorities and have input into how they want to do that. We try to get win/win so that we do not just say, "This is my billion, and I am only interested in spending it on debt priorities and the rest of you can be ignored". So we do try to get synergies. That operates at Phil’s level, where there is a joint board that operates collectively.
Phil Wynn Owen: At the risk of being boring about bureaucracy, as it happens I was at DFID this morning for the joint board. I am the DG who represents DECC. The DG who chairs it is Richard Calvert, who is head of finance at DFID. There was a DG from DEFRA there. There were officials from the Foreign Office and from the Treasury. A joint evaluation had just been done of a new raft of potential investments, and that had been done almost as a competitive process, with officials from all Departments working collaboratively together.
There are naturally tensions within the process. That is why we set up a joint board to resolve those. Let me give you an example. At the margin, a DFID official will always be concerned about development and helping the poorest people in the world. Sometimes that will be in countries that are, therefore, emitting very little carbon because there is a correlation between carbon and wealth, and obviously my officials are most concerned to act in developing countries where there is the prospect of curbing carbon. But these are perfectly manageable. I would say it is one of the most collaborative cross-Whitehall ventures that I have been involved with. Obviously we set some rules of thumb initially. We were aiming for roughly 50% of the money to go to adaption, possibly 30% to carbon mitigation and 20% to forestry, and we are tracking that over time and seeing how the mix of decent projects that we can approve, because we are looking for value for money all the time, matches up against that. It is not easy. This is cutting-edge investment.
As you know, we are also trying to leverage up private finance. I met a delegate from South Africa yesterday afternoon who had just been to see you, so we are talking to many of the same people. I was talking about a potential investment in South Africa, and challenging him in some ways because we did not think the capacity was there on the ground in the Ministry, in the regions in South Africa, to support that particular investment. This is a challenging process. We are working as we are going along, but I am satisfied we have set up the bureaucracy appropriately.
Q58 Barry Gardiner: Thank you for that. The sort of meeting that you had this morning would be where it is determined whether projects get financed or not, is that right?
Phil Wynn Owen: Obviously, subject to Ministers’ final decisions.
Barry Gardiner: Absolutely.
Phil Wynn Owen: That board has some delegated powers but also where appropriate makes recommendations to Ministers.
Q59 Barry Gardiner: Below that level, are there generic teams that are working up proposals?
Phil Wynn Owen: Yes. There are both sub-committees of more junior officials, so I am on the DG board. A lot of the work is actually done by civil servants working in very flexible teams. I often see the DFID officials sitting in DECC-it is part of the new Civil Service Reform Plan anyway that they are more interchangeable. I heard one official from DFID mis-introduce herself as a DECC official this morning, and the Chairman said, "It really does not matter. We are all one team". So this is better than I have seen it for some time. It does not mean we will always get it right. Some of this is risky investment, but we are trying.
Q60 Barry Gardiner: Can you tell us what you have achieved with the Capital Markets Climate Initiative since it was set up in September 2010?
Edward Davey: I am going to pass that to Phil. I should say, however, that the International Climate Fund and initiatives from the private sector enable you to show some leadership at international conferences, and work with others who are also putting money on the table, such as the Norwegians and the Germans. That is critical because countries like ourselves and within the EU, more broadly, need to maintain the progressive alliance of countries that made the progress we saw at Durban. I am sorry to put this into the bigger context, but the progress we are making in those sorts of schemes is helping in the bigger international climate change negotiations. Phil will talk about particular initiatives.
Phil Wynn Owen: Yes, Capital Markets Climate Initiative, CMCI as it is known, is all about working with other stakeholders and other Governments to mobilise innovative sources of long-term finance, particularly private finance, to help meet UNFCCC goal of $100 billion per annum from 2020. There are two key elements. One is about getting a better public-private dialogue going. Sometimes the barriers to investment in the developing world are too many rules and regulations, which inhibit private financiers from feeling that they can invest safely; and secondly, about targeted use of private finance to leverage up, which we were just discussing.
The first phase of work has just ended in April. That ran from September 2010 to April 2012. It produced a valuable document on principles for investment in growth, policy and projects, and that fed into some OECD work that we are actually using in our project appraisal now; and secondly some targeted actual investments. For instance, you may have heard of the India solar project that we will be investing in, the Uganda GET FiT project, CP3, which is an innovative commercial private equity funds partnership. There are a number of cutting-edge projects that are benefiting from the inputs from CMCI members. It is quite an open membership basis. We have around 88 private and public organisations, including some very big names, feeding their expertise in. We had quite a challenging dialogue about how to do this properly and how to develop projects.
Q61 Barry Gardiner: Are you satisfied with the progress that you are making in the CMCI?
Phil Wynn Owen: Yes. It is early days yet, as I said it was on the International Climate Fund. We are deliberately looking for areas of the world and of project finance, where the markets are not already providing the finance, otherwise we would just be squeezing out existing investment. In the second phase of work, we have just created an innovation platform, a forum, where public and private players can debate what is working and what is not, and the focus is now very much on action on the ground. For instance, our Minister of State, Greg Barker, will be leading a low-carbon trade mission in September, including many relevant financiers and business people, to East Africa where we have a number of potentially very exciting projects. It is about getting things done now.
Edward Davey: The work that Greg has done has been really fantastic. He has put in a huge amount of time and effort, both in Whitehall but also out there in the investor community and internationally, so I pay tribute to him for the work and leadership he has shown on it.
Q62 Barry Gardiner: During the recent negotiations on the EU Energy Efficiency Directive, can we just clearly establish did the UK support the change to the target from 20% to 17%?
Edward Davey: I was worried at one stage we would not get the 17%.
Barry Gardiner: But did we support it?
Edward Davey: No, let us be clear. We were worried that, because of some of the member states-not all-who wanted a much lower level of ambition, we would not get as high as we eventually did. I would have liked to have gone higher. We were on the ambitious side working for some months before with the Danish presidency, to try to do what we could to raise ambition levels. But I have to say-and you will know this-that around the Council you get different views and you have to take them into account. We had the Parliament being very helpful, wanting to raise levels of ambition, and I was keen to get it as ambitious as possible. Indeed, on the night when the final deal was done, I was actually on the phone to our people in the negotiations making sure the deal could be done and it was as ambitious as possible.
Q63 Barry Gardiner: I take that to be your plea of mitigation, but the answer to my question then is, yes, the UK did support a 17% outcome?
Edward Davey: Yes. But the reason why I answered in a different way-
Barry Gardiner: No, I understand.
Edward Davey: -was because you were working on the assumption that 20% was on the table; 20% was not on the table.
Q64 Barry Gardiner: What you are saying is 17% was the best you could possibly have negotiated, and you went in to negotiate a lot higher but could not?
Edward Davey: I think that is probably a fair analysis of the negotiations. I think we have always been on the ambitious side.
Q65 Barry Gardiner: Let us cast these out in percentage terms. The "ambitious side" meant what? Did it mean 20% or did it mean a little bit more than 17%?
Edward Davey: It meant what we believed was possible in the European Council-
Barry Gardiner: Well, you must have had a figure going in, surely?
Edward Davey: -and the truth is, Mr Gardiner, at different stages of the negotiations, whether it was within the Council or whether it was in Parliament, there were different figures flying around.
Q66 Barry Gardiner: I am asking you for yours, not for the ones that were flying around. I want to know what did the UK go in there to achieve? What did you go in to try to achieve, and then we can measure your outcome against it.
Edward Davey: I am afraid we would not have put it like that. We would have put it, because this is the reality of European negotiations, "Let us get the most ambitious deal possible". That is how you do it.
Q67 Barry Gardiner: Did you start at 30%? What was your opening gambit, Secretary of State?
Edward Davey: It does not work like that, with respect, Mr Gardiner, because you are working with the Danish presidency who is going round talking to everyone else. That is what the presidency does, and comes back to other Ministers and says, "This is what we think we can do. Is there any way you can try to get another member state to be more ambitious and-"
Q68 Barry Gardiner: Yes, but they come back and say this is what they can do, because they have spoken with X country and X country has said, "No, our bottom line is 18%". What was your bottom line when the Danish presidency spoke to you? That is what I am asking. I am saying, what was it that we said, "We cannot go lower than-"
Edward Davey: Mr Gardiner, our lines were always higher than what was being put forward by others. That is the point I am making. The Danish presidency was very keen that we should remain as high as possible, so he could say, "If we don’t go higher, the Brits will leave". So we were working with the Danish presidency, being extremely co-operative. I met Martin Lidegaard, and spoke to him on a number of occasions, and had hoped at one stage we would have a meeting in Copenhagen to try to see what else we could do. But we were in regular contact and he was in regular contact with our officials, of course, always trying to be one of the member states that was encouraging a more ambitious approach.
Q69 Barry Gardiner: Did you have to get a deal? Did you have to change it? Could you have just said, "No, we are not prepared to do that"? Could you have vetoed it?
Edward Davey: It was an option, I guess, although we did not seriously consider it. It was an option where we could have said, "Sorry, this deal is just not good enough and, therefore, we will kibosh the whole Energy Efficiency Directive". I think that would have been a very bad signal to send and we would not have had the progress that we did get. Let us remember that a year ago people were not even thinking we were going to get the Energy Efficiency Directive, so rather than it being-
Q70 Barry Gardiner: But the target was 20%, and it went down to 17%?
Edward Davey: Rather than it being some sort of negative thing-as you are suggesting, Mr Gardiner-I think that actually getting the Energy Efficiency Directive was a real success of the Danish presidency, and I pay tribute to them. I do not think it was in the UK interests, and I do not think it was in the EU’s or in the interests of climate change, to undermine the Danish presidency’s effort to get a deal. But let me bring in Phil, as Phil would have been close to that, closer than I was in terms of the daily negotiations, but at every stage I was always saying we should be as ambitious as possible.
Phil Wynn Owen: I should say I think we got the best possible deal, both for the UK and Europe on this, and that the UK’s intervention was critical. I have been thanked by senior Danish and Commission officials for the Secretary of State’s intervention and the work of UK officials. The real alternative to not having a deal was that the Commission went into this directive estimating that the EU would only achieve 10% to 12% over the period to 2020. Yes, it would have been okay for the high-minded to block the directive, but you would have then had a worse outcome than the estimated 17% that it is estimated that the directive will now take the outcome up to.
By the way, in the context of the 2020 EU target of 20%, of course it is the Coalition Government’s policy to negotiate hard and to persuade European colleagues to move to 30%. We are quite happy to talk about how we are pursuing that in a bottom-up and top-down way, if you would find that helpful.
Q71 Barry Gardiner: It may be helpful, but what I am keen to establish is that at no stage did the UK either go along with or argue for the watering down of the directive from 20% to 17%. At any stage, did any of our negotiators actually suggest that it would be better, one way or another, to water that objective down from 20% to 17%, or is that just a calumny that the press have put out?
Edward Davey: There was certainly some inaccurate reporting but I am certainly not aware of that. I do not know whether-
Phil Wynn Owen: We were pivotal to a deal, and when you are discussing a directive with a huge range of clauses you have different views on different clauses. But we were at the high side of ambition, as the Secretary of State said, and we were instrumental to getting a deal. For instance, if I think of my colleagues in the German Environment Ministry, who were very much in favour of the Energy Efficiency Directive, they were unfortunately hampered because the position within the German Government was an impasse between themselves and their colleagues in the Economics Ministry who did not want a directive. They apologised to me that they pretty much sat on their hands throughout the negotiations, whereas we were very active in getting the best possible deal for the UK.
Q72 Barry Gardiner: Mr Wynn Owen, you have said that we were pivotal in getting a deal. That means that our moving from what the Secretary of State has categorised as the "highest ambition" to this lower target of 17%, was a shift that was made at some point during the negotiations. What did you get in exchange for that?
Phil Wynn Owen: We got a directive that makes sense, and I reject your suggestion that at any point we moved from 20% to 17%. The debate was not expressed in that way, and when I say "we got a result", we got an outcome that makes sense, I would point out to you that that is very important in Europe. For instance, in the context of article 6, the crucial annual energy reduction target, the Commission’s original economic analysis did not wholly make sense, so I sent a team of analysts and economics in there to take them through their own calculations so they understood the ramifications of what they were proposing, and they adjusted their proposals accordingly. What we have in this directive is one that raises the level of actual likely outcome from, as I said, about 10% or 12% to 17%. That is real progress and it also contains targets that we think make sense arithmetically, economically and are achievable in a UK context.
Edward Davey: Just to back that up. You are right, there has been misreporting.
Barry Gardiner: I did not say that. I asked you whether there had been.
Edward Davey: In my view there certainly was, and let me try to give you examples of why people misunderstood what we were doing. First of all, to follow on from Phil’s point, we were clear we needed to have clarity in the methodology about how these amounts would be assessed and measured. It was too woolly at one stage, and we were determined to make sure that it was not woolly. If it had been woolly, what would have happened is we would not have made any progress across the European Union. In all these issues, you need to have proper ways of measuring, so you can hold people to account not just in the UK but across the European Union. Therefore, it looked to some observers that we were being pedantic, but knowing how these things were measured is absolutely critical; critical to getting a directive that is worth having.
The second thing, we were worried about some of the more proscriptive approaches in some of the articles that wanted to say, "You have to do it this way, that way and the other way". We thought, "Hold on a minute, as long as it has a target it has to reach, every member state should have a lot more flexibility in how it wants to meet those targets". That seems to me a very reasonable thing to do as well, because that means you can allow countries to experiment and do different things that respond to where their industries are, to where their buildings are and so on. I am not going to apologise for not wanting to be over-proscriptive and wanting to make sure the methodology was right. That is because we were engaged in a serious piece of work and we got a serious outcome.
Q73 Barry Gardiner: So the response, in a sense the trade-off, was to get a standardised methodology for MRV and flexibility in the way in which you achieve the quantified reductions?
Edward Davey: Flexibility and proper measurement is quite important, yes.
Q74 Barry Gardiner: You offered to talk about moving from 20% to 30%, below 1990 levels. Poland is obviously one of the countries that have been much mentioned as resisting that move. What discussions and what negotiations are you undertaking with them, on a bilateral basis or through the programmes of the EU, in order to try to achieve that ambitious 30% level?
Edward Davey: This is difficult, but, again, we are leading and I am going to lead personally because it is a Coalition commitment. It is something I personally and the Government are strongly behind. We want to get the EU’s target on carbon emissions raised for 2020 from 20% to 30%. But when you start looking at which countries are keen on that, people who have not made their minds up, people who are quite hostile to it, it is quite a kaleidoscope. Yesterday, when I was in Berlin, I met the new Environment Minister, Peter Altmaier. I had a lot of discussions with him because the Germans tend to share our view. They still have some discussions within their own Government in other areas, which Phil was talking about, but certainly Herr Altmaier seems to be keen on this type of thing. So we are very keen to work with them.
I was speaking to Connie Hedegaard, the Commissioner, on how she felt this might go. She was stressing we should also look at bottom up approaches so we can take measures, whether it is on energy efficiency or on set side of allowances on the ETS, to try to move up from 20% to get nearer to 30%. But she understood why countries like the UK want a top-down approach as well in a complementary fashion.
To speak directly to your point about Poland, I also met Marcin Korolec, the Polish Minister. I actually worked with him when he was the Trade Minister as well, so I have got to know him quite well over the last two years. He is a tough cookie. As you would expect, he has got his interests to defend, but we will engage with him. We were talking about meeting up again. Herr Altmaier was talking about meeting with Mr Korolec, and we will continue to work with Poland and with others to see if we can raise the level of ambition. That is our clear objective, and we are putting a lot of energy behind it.
Q75 Barry Gardiner: Would it be easier to cut emissions in member states if we could use EU cohesion funds for energy efficiency projects, and increase support for the 30% target that way?
Edward Davey: There are many ways one could look at trying to take this issue forward. I do not think it would be wise of me, both in terms of supporting my cordial relations with the Treasury, or in terms of UK interest in negotiations-
Barry Gardiner: Treasury have told us you speak for them.
Edward Davey: - on the MFF, the budget negotiations for the EU, to start saying, "That is the way to do it", or, "That is the way to do it". That would not be wise playing of the UK’s hand, but I would simply say that I think there are many ways that we could try to take this forward.
I have said on the record that I am very keen to work with Poland. I felt very uncomfortable at a recent Council meeting-I think it was in May or it may have been April-where it was 26 versus one, and I do not like any country being isolated in Europe. Of course the problem is Mr Korolec went back to a hero’s welcome in Warsaw, even though he had been isolated, and that is not good European politics. You need to understand where Poland is coming from. You need to put yourself in the shoes of the Polish Minister, dealing with their coal industry, with their lignite and their other quite dirty coal, their industries, and try to see if we can help them in any other way, be really constructive. I think taking as constructive an approach as possible in partnership with others, is the real way that we will help Poland move and unlock a high-level ambition for the EU, which by the way is critical to international climate change negotiations.
Q76 Barry Gardiner: Indeed. Using cohesion funds for energy efficiency projects might of course just do that. Some commentators have suggested that EU ETS revenues could be used for international climate finance. Is that something that you would support?
Edward Davey: There are many ways to raise the finance. We do have quite a lot of finance already in our climate change funds. I am sure you will know, Mr Gardiner, that the Treasury does not like hypothecation. Hypothecation is always a tricky issue, so I would not necessarily say it is our first choice. But I would come back and say no one can accuse the UK Government of not putting forward significant money on the table in this area.
Q77 Christopher Pincher: It is reassuring to know that you have cordial relations with the Treasury. Would that everyone had cordial relations with the Treasury. I want to ask you about the smart meter roll-out programme.
Before I do, could we just go back briefly to the vexed question of gas storage because I take the point, Secretary of State, that if the 10 applications on the table are realised-and it is an "if"-we will then double our storage capacity. We will still be something like at a third of Germany’s storage capacity, even though their demand is something like 10% less than ours. Given that gas demand is going to grow, we have seen that in the DECC figures over the next 18 years, aren’t we increasing the risk to our energy security given that we are going to be importing more gas then in a "just in time" manner?
Edward Davey: I do not agree with that, in the sense that we are not just relying on extra storage capacity. We are relying on diverse supplies, both through LNG or through pipelines. We are relying on a very active market, as we have a liberalised gas market, and we have a lot of players in that gas market. That is also helpful to our security. Plus, as I was saying-I think in answer to Sir Robert Smith-we have given powers to Ofgem, and Ofgem are taking measures and imposing measures that would assist as well by making sure the incentive structures are right, so we have quite a sophisticated developed model here that does not simply rely on storage. The storage is part of the answer.
Q78 Christopher Pincher: I said I would be brief, so I will not push it any further. I just wanted to make that point. Back to the smart meter roll-out. The figures that we have suggest that the roll-out programme has a projected cost of something like £11 billion, but the benefits are somewhere in the region of £18 billion, so a nice healthy £7 billion worth of net value. But the Public Accounts Committee and others have raised the question: what if those costs spiral out of control because the suppliers will simply pass them onto consumers? What confidence can we have that the £11 billion worth of costs are accurate?
Edward Davey: A huge amount of work has gone into this because it is such a massive programme. One thing I have been impressed by in my first few months in the Department is how much detailed work, over a period of time, has gone into planning the smart meter roll-out, and in the particular respect of making sure we harness competitive pressures to keep costs down. Because it is such a big programme, there is always going to be doubts about the exact magnitudes, of course there is, and I am not going to sit here and say it will be exactly on the button on the numbers that you have quoted. But the design has been to deliver value for money. Phil or Moira may want to add to that.
Moira Wallace: I appeared at the Public Accounts Committee sitting that you referred to, and I suppose I can draw two points out of that. First of all, we had a great debate about how much optimism bias we should have included in those costings, and we did go through the arguments for the optimism bias that we have included, and I thought we had fairly good evidence to show that the bias was appropriate, given the state of maturity of this technology, which does not exist in many other countries. It is also relevant, as the Secretary of State said already, that we chose to use the suppliers to roll it out rather than the distributors, because they are the ones that you engage with, they are the ones that you choose to be with or choose to switch from, and we thought that would produce the strongest commercial incentives for people to do it at least cost. This has very, very good optimism bias, and it is very positive for consumers. We see every reason to be confident about that.
Q79 Christopher Pincher: You are confident that there is a sufficient level of competition and the other changes will allow people to switch sufficiently easily, in order for them to say, "If this is costing me more and more and more, because the cost is being passed onto me, I can switch to these other guys", and that competition is going to drive down costs?
Moira Wallace: Yes. It has to be seen as part of a broader context, and we are doing a lot to promote competition in the energy market anyway, and we are also doing a lot to promote switching, and indeed smart meters themselves promote switching and make it easier to switch, and another reason why we want to get on with the roll-out is to make sure it is easy to switch and that smart meters enable switching rather than getting in the way; they should enable that.
Q80 Christopher Pincher: But another important element for this to be successful and thereby the costs being kept as low as possible, and the benefits being as wide as possible, is to ensure consumer engagement. What is the roll-out strategy to ensure that consumers are engaged? About half of consumers have not even heard of smart meters, and those that have have all sorts of concerns about them, about the privacy of data, about how accurate they are, about the cost of them. How are you going to ensure that the customer community are fully engaged?
Moira Wallace: Phil will probably say a bit more about this because he leads the programme, but we have been trying to time our consumer engagement right, so we are not trying to tell everyone about smart meters when actually we have not done the technical specifications and you could not actually get one. This spring we therefore published a consumer engagement strategy, so that it is ready to line up with the technical specifications, but I think Phil would be able to say more about that.
Phil Wynn Owen: That is correct. The consumer engagement consultation closed on 1 June, and a central proposal therein is the idea of a supplier-funded central delivery body, which will do everything it can to educate and prepare the public for the installation of smart gas and electricity meters. You also mentioned privacy. At the same time, we take very seriously the issues of data access and privacy, and consultations on those also closed on 1 June. I think I might have the details of that if you wish, but we regard these to be central strands of the programme. As you nicely summarised for us, half the benefit comes from consumer behavioural change, and I explained earlier in this hearing that we’ve made what we think are prudent assumptions about behavioural change. We think some of the research to date both the UK and worldwide could see higher consumer benefits emerge. I should also say on the supply side that smart meters are an essential precursor to smart grids, and most of the benefits of smart grids that will flow from and follow smart meters are as yet uncosted and therefore not in the business case and indeed in the figures that you gave at the start of this discussion.
Q81 Christopher Pincher: You say you have made prudent assumptions, but Which? disagrees with some of those prudent assumptions. It suggests that, as far as roll-out is concerned, a street by street roll-out approach may improve engagement. So why not listen to Which?
Edward Davey: Of course we do listen to Which? Which? have a lot of knowledge and a lot to add to this debate, but it does not mean they are always right of course. We think competition is going to drive the costs down more than anything else and, as the Permanent Secretary described, that is built in. You have seen Which? and others criticise it from the consumer angle. If you look at a number of the criticisms that have been made, they are not really borne out by the evidence. For example, on privacy-and it is interesting that perhaps not everyone thinks this is the best test-the European Data Protection supervisor has said this is one of the projects in the European Union that has taken account of privacy and confidentiality the best. We are having independent people, who have experience of how this has been done in other countries, looking at ours and saying, "You are doing a good job".
Q82 Christopher Pincher: But you still have to get over the hump of half the people who were polled do not know anything about smart metering. Where do you expect to be, let us say, in 12 months’ time with the level of engagement? Is it going to be 70%, 80%, still at 50%?
Edward Davey: I am not sure if that is really the measure that is critical to be honest. If you think about an analogous programme, the digital switchover programme for example, I am a Member of Parliament, I am sure I have said lots of things about when the switchover is going to happen in my constituency. I cannot say I was absolutely clear-probably because I do not watch much telly-when it was going to happen. I do not think that matters. When I had to re-programme, I was able to re-programme, so I do not think people absolutely need to know if the smart meter roll-out is going to be in their neck of the woods in 2018. I do not think they need to be aware of it now in 2012. I think one can overplay the awareness issue. What is really important is if they are soon going to get a visit, and they are going to have their meter changed, that they are aware of that and they are aware of how to take the best advantage of it for them.
Moira Wallace: If I may just add, mass roll-out of smart meters starts in the fourth quarter of 2014. Quite deliberately, we are not going to spend what money we have and what money we raise now, as if we were about to start mass roll-out now. A lot of what we are doing is the preparation, the work with industry to make sure all the systems work. It is a matter of finding the right moment to do that, and not getting ahead of ourselves when mass roll-out is not going to start until then.
Q83 Christopher Pincher: You mentioned the digital switchover of TV, and that was done by region. Would you propose a similar region by region roll-out of smart metering because the digital switchover worked, did it not? That is what you are saying.
Edward Davey: The two are not analogous, in the sense that different people in the same street have different suppliers, for example, and if we were trying to drive this by competition, which we think is the best way, then the supply model would mean that you cannot do it in exactly the same way. Clearly, we learned lessons from that. We learn lessons from other major projects.
Moira Wallace: We are not planning to do it regionally. We are planning to work alongside consumers’ preferences and the natural asset life of the meters. Meters get replaced all the time, and when they come to be replaced, they will be replaced by smart meters. So we are trying to work with the grain of actually what would happen anyway and accelerate that, rather than have a big regional approach that does not fit with actually how electricity and gas work.
Q84 Christopher Pincher: But you are still confident then that that, if I may say, piecemeal approach, a slower approach, is going to drive the benefits that you suggest and the £80 billion worth of value that you suggest?
Moira Wallace: Yes, we are because we are working with the natural tempo of how meters will be replaced, plus those who want to have one, rather than saying, "Gosplan has decided that West Hertfordshire is going to do it this week". I imagine if we were defending that approach you might be saying, "That is not a very good way to get customer engagement".
Christopher Pincher: I never wish to be a member of Gosplan.
Moira Wallace: I didn’t think you would.
Q85 John Robertson: I was just thinking God’s help might be useful here. I just want to say, before I ask some questions, I have never heard so much gobbledegook in all my life coming from four people. The way you have not answered questions is an absolute disgrace. We are trying to get to the root of things. We want to know what is happening and you have used unbelievable clichés and phrases for not answering any questions. That is my opinion. It doesn’t matter what you say, if you don’t like it, I could not care less; the way you have conducted yourselves not answering questions has not done you any favours.
I want to talk about cost a bit more. I want to talk about the person who cannot afford to have a smart meter, and really does not want one because it is going to mean absolutely nothing to them. What can you do for that person?
Edward Davey: I have to tell you, Mr Robertson, that we are worried about the costs of energy bills the whole time. One of the reasons we are doing this, though, is because we think smart meters can lower people’s bills because they can help them understand how they are using their energy. Giving people information, helping them understand what it costs to do X, Y or Z is surely incredibly important, and no more important than for people who are on low incomes.
Q86 John Robertson: Yes. We have talked about the strongest commercial initiatives. We have talked about promoting competition in energy markets. We have talked about consumer engagement strategy, and we have talked about the supplier fundamental distribution body. I have yet to understand how this is going to help Mrs Bloggs in Drumchapel in my constituency, who has no clue about any of these things and does not understand what a smart meter is or how she is going to work it. How does this help her to help you?
Edward Davey: Let me help for a second and then bring in the Permanent Secretary. Your constituent need not have a smart meter. Smart meters are not mandatory. However, I would suggest that, as her local MP, you would want her to have a smart meter because it is one of the ways that she can find out how she is using energy to enable her to make more informed decisions, because she will know that particular appliances use a lot of energy and others use less. She might find out, through information that she is able to get, through being more aware, that she has a particular appliance that is extremely inefficient. She will not have to have it, but I would hope you, as her MP, would encourage her to have it because it will help her.
Q87 John Robertson: I have over 13,500 pensioner households. How am I going to get round all these people to show them what to do?
Moira Wallace: You will not have to because installers will visit them and explain how it works. Just to enlarge on what the Secretary of State has said, if I want to read my electricity meter, I have to stand on a chair. If I want to read my gas meter, I have to go down to the cellar. It will tell me the answer in kilowatt hours. Lots of people do not understand kilowatt hours. It does not tell them how much they are spending in pounds and pence today, last week. If they are trying to adjust something it does not tell them how much they have saved. If they go out and they leave things on it does not tell them how much that has cost them. People are going to get something-so your lady in Drumchapel, and all our mums-which they can put in the kitchen, they can put in the living room, wherever they want, that is designed to be visible and user friendly and to tell them in very, very visible terms how much they are paying per hour, how much they have paid in the last week, so they can track it if they want to. How many people really understand their bills? How many people understand their meters? It is designed to get precisely over that problem. We are doing an awful lot of work on the design to make sure that it is easy for people, who do not see so well, to be able to use and to put it exactly where they would like it in their house.
Q88 John Robertson: There are not too many cellars in my constituency, so you won’t need to worry about finding anything down there when you come to my constituency. The 7% to 7.5% interest rate you talked about, it is not very low is it? In fact, you seem to have put your eggs in a basket-let me see if I can find the exact words-and you are looking for packaging of deals and consumers shopping around. I go back to my wee lady in Drumchapel. She can’t do that. She does not have the wherewithal to do it. She does not have the equipment to allow her to go around and find out the cheapest package and deal. Who is going to help her?
Edward Davey: It is very important for your constituent in Drumchapel that we have strong consumer protections available, which support the competition that we have. The golden rule, for example, will make sure that the savings that she will make will pay or more than pay for the investment and the borrowings that she would be making. There are other aspects of consumer protection that should reassure you. She will be given the choice, after an assessment has been made, of going to seek quotes, not from the company who is doing the assessing but from others as well. I would hope and expect your lady in Drumchapel would not just benefit simply from the consumer protection that we put in, which is at the heart of our measure, but also from competition as well. Phil, you may want to add to that.
Phil Wynn Owen: It might just be worth mentioning that the new energy company obligation, dubbed the ECO, which replaces CERT and CESP, has been designed so as to direct substantial funds towards helping to combat fuel poverty, as well as insulating people’s homes and saving them money. For instance, £350 million of the assumed £1.3 billion per annual value of the ECO will go to the Affordable Warmth ECO, which you might want to think of as a bit like the old Warm Front scheme that has helped, as you know, many ladies like the one you are talking about.
Q89 John Robertson: I have a lot of homes, and I dare say many other constituency MPs have the same kind, that were built in the 1960s that are concrete blocks. You spend all of the winter heating up the walls and you spend the summer trying to cool them down. Was that the kind of person you are talking about to be able to help?
Phil Wynn Owen: Yes, potentially. Another £190 million of the ECO is going to the Carbon Saving Communities Obligation, which is particularly targeting some of the poorest wards and constituencies in the country.
The other thing I might add-because I am not entirely familiar with the sort of property you mention-is that we think we will also see a shift in product mix towards more solid wall insulation.
Q90 John Robertson: I saw that, and those things are great for some houses, but most of these properties are multi-storey-type flats that were just basically concrete blocks put together to build a house. They were great for putting roofs over your head but they were absolutely terrible to try to keep them warm in the winter and cool in the summer. It takes ages to heat up the concrete and it takes ages for it to cool.
Phil Wynn Owen: Solid wall insulation, which we will see more of and we do expect to see early uptake in the social housing sector, might make a big difference. I have certainly seen blocks of flats, both in Birmingham, for instance, and Germany, where that has made a big difference to people’s lives.
Moira Wallace: Can I just come back on how the Green Deal is going to help, how it is designed to help the kind of people you are talking about. The whole point of the Green Deal is that it will enable people who have no money in the bank to actually-
John Robertson: I have plenty of them, yes.
Moira Wallace: I know you have plenty of them. It is designed to help them. They cannot just go out and pay for this stuff, so it will enable them to have lower energy bills. They are people who will not be able to borrow at the rates they will get offered, so they will not see it as taking out a loan, they will see it as a reduction of their bill. It means they do not have to take out a personal loan, so if they move on, the costs stay with the property that benefited from the improvement. It is designed very precisely to help the people you are talking about.
Q91 John Robertson: Is that like the housing development housing as well? How do they cash in on this?
Phil Wynn Owen: Yes. As I said, we are seeing both a number of social housing providers and major cities taking a big interest in either being Green Deal providers themselves or facilitating the entry of Green Deal providers to their areas. You may be aware of the big progress that was made on insulation in Kirklees, Huddersfield area. A lot of people are modelling their plans on that.
Edward Davey: Just to add to that, there is the ability under the Home Energy Conservation Act to issue guidelines to local authorities to help them and to support them so they get to know where in their community they can take action to help people. We intend to issue some guidelines under the powers we have under HECA. We are just talking to local Government to make sure that this is not seen as another burden on them, but that they all want to work with that system. Just as you have been saying, Mr Robertson, some of these tower blocks, some council homes, for too long have had very poor insulation. I was visiting an estate in Newcastle, about a month or so ago, that had been built just after the war, prefab. You could see through the walls. They are now getting solid wall insulation in and it was fantastic. It was completely reducing their bills. Their homes were warm for the first time they could remember, and the appearance of the estate was changing. People were coming to me and saying, "Do you know, I sometimes walk down the road and think I’ve not gone to my home because the estate’s appearance has changed so dramatically". This has some real significant benefits in the areas that you are talking about.
Q92 John Robertson: I think everybody wants that. Coming back to the loan part of it, I have a lot of people who do not have bank accounts. How does the loan then fit with them?
Moira Wallace: What they will see is a lower energy bill, and the worry behind it, which they won’t see, is that from their future savings they are going to fund the work that is done to make their house warmer and easier to heat. Is that fair?
Q93 John Robertson: The question here that I was going to ask and you have maybe answered it then. It basically says-
Moira Wallace: Don’t be shocked.
John Robertson: Believe me, getting a question answered has not been easy today. Will consumer engagement strategies be integrated in order to save money and reduce the risk of energy efficiency fatigue among consumers? It is maybe slightly different, but we are talking about strategies.
Moira Wallace: What that can be regarded as is that there are quite a lot of things that we would like the public to take up and some of them are a bit jargony, so we are working at trying to explain them in clear English. We are also trying to make sure, so far as possible, people can do that in a connected way. For example, our advice line will explain about all the things that you could do to your house to save money, to be greener. I think that is a pretty fair explanation.
Edward Davey: I have never had a constituent write to me and say, "Mr Davey, I want solid wall insulation". So many things are hard sells on one level and we need to use every option in the book to encourage people to take this up because we believe, yes, this will reduce bills in some circumstances but, most important of all, it will make sure people will have warmer homes.
Q94 John Robertson: Other than the last few questions, you have spent a lot of time talking about companies and not consumers, which, of course, is something I don’t like. Having said that, are you confident that the competition you talked about earlier will drive prices down and not up? There is one thing that we have seen, particularly in the last two years, is that prices have not been driven down at all. People have already had a 20%, almost across the board, rise in the power costs over the last 12 months and about eight or nine months before that they had an 8% across the board increase in prices. My concern is that with all your other increases added on to what they have already had, and what they are probably going to get come this summer, they are going to be in such a position that they are not going to be able to afford what you want them to afford.
Edward Davey: I am really pleased you asked that question. I am, hopefully, going to give you the answer that you want.
John Robertson: That would be nice.
Edward Davey: Just to cheer you up. First of all, the biggest increase in prices for energy bills has come from increases in global gas prices, if you look at the analysis. Given that situation, we have to help people as much as we can. The key thing is driving a wedge between the prices of energy and what people pay on their bills. There are several ways you can do that. First of all, energy efficiency that we have been talking about, so they use less energy, so the bills go down. That is the first and probably the most sensible way of doing things. That is why we put so much emphasis on the Green Deal. That is the first thing: to drive a wedge between the price of bills through insulation.
The second thing is to help people who are in fuel poverty, both in terms of insulation, with the Affordable Warmth programme but also with things like the Warm Home Discount, where there has been a very imaginative matching of people who are on low incomes. There are 2 million people in all-including, I think, around about 1 million pensioners-who this year will get £130 directly off their bill. Unlike winter fuel allowance that goes to everybody, this Warm Home Discount is targeted at those people who need it most. So some direct financial will help to help people with their bills, the second direct financial help is for your insulation. The third means of helping is better information. This is not about smart meters this time. Through a deal that we negotiated with the Big Six, and the Deputy Prime Minister announced this in April, we have commitments from the Big Six to tell people about what is the best tariff that they offer.
Q95 John Robertson: No offence, we have had Big Six commitments before. What bothers me is the fact that everybody has to tighten their belt, except the Big Six. They don’t seem to be tightening their belts. I know they have money to invest and they need to improve things, but the fact of the matter is they do not need these increases that they have had, and they should have been tightening their belts to try to help the people out there who are their customers, and they didn’t do it.
Edward Davey: We are determined to drive competition because that will put pressure on the Big Six. We are doing that in a number of ways. I could go into detail about how we are trying to do it. Ofgem is working on that through the wholesale markets and liquidity, which I will not bore you with, but actually that is a critical part of it.
Let me tell you something that I think is driving competition, which is directly consumer facing, and that is commitment. The work that I have been doing as Secretary of State, and I took over some of the work I was doing when I was Consumer Affairs Minister as part of BIS, is called Collective Purchase, Collective Switching. It is very early days. It is not a Government programme. It is other people out there delivering it. In this case Which? have taken the cudgels up. You are seeing the Eden Project doing an experiment in Cornwall, and you have a social housing association called People Power who are looking at this. There are other players that I know about, who have not announced, who are trying to get into this market to help people switch.
What you have seen in switching is it has tended to be the internet-savvy, the well-heeled who do it. It is not the people you have been talking about, Mr Robertson, either because they are not aware they can do it, it is too much hassle or they do not have that information. One of the advantages of collective switching is if we can help people work together, come together. I have been talking to the Church of Scotland about this. I was up in Edinburgh, and the Church of Scotland are very interested in collective switching. We also have the Muslim community there and the Hindu community there, I should say. Unfortunately the rabbi couldn’t come, but he gave his apologies. But my point is this: we were talking to the faith communities who are really keen on tackling fuel poverty, and they love the idea of playing a part, partnering with others, to promote collective switching. The one scheme that has done this at scale is the Which? scheme. Which? got 38,000 people to switch, saving £230 a year; 230 quid a year. Imagine if we can get collective switching working more. We can help other people in our communities, ideally working through civil societies, NGOs, local authorities, social housing providers, to help people who really need that help. It is early days for this, but I think collective switching, and the innovation that is going on there, can make a big difference. It drives competition.
One of the most interesting things from the Which? experiment was not just that people made savings of £230, which I think was pretty impressive, but also the organisation that won the bid, that won the auction that was organised, was Co-operative Energy. They doubled their consumer base overnight. For some of these new players who want to take on and compete with the Big Six, one of the problems they have had is getting new customers because they are small. The Big Six-with the inertia that customers have-almost have, not a totally captured market, but people do not tend to leave them. But through this process we can see smaller companies being able to play in the auction and be able to win customers, which at the moment is effectively a barrier to entering into the market.
Q96 John Robertson: Well, I accept that, but you miss my point. We should not have to do this. We just should not have to do it.
Edward Davey: I think it is important-
Q97 John Robertson: If these companies can save £200-odd for every customer, then all these other companies can do the same. We should not have to do it. Each company should be responsible enough to look after their own customers. I am not having a go at you here. I am having a go at them because we should not have to do that.
Edward Davey: Personally, I think competition is the way to get more affordable prices and we do have-and it is worth putting on the record-the lowest gas prices in Europe for consumers, and I think we have the lowest or third-lowest electricity prices?
Simon Virley: Below the average.
Edward Davey: Below-the-average electricity prices, because we have one of the most competitive markets in Europe. It could be more competitive. As I said before, in BIS one of my hats was Minister for Competition. I believe we can drive competition, and I have talked about some of the ways we can do it. Then, hopefully, I think you will be happier.
John Robertson: Don’t bet on it.
Q98 Sir Robert Smith: Just a quick question that cropped up during the smart meter exchange. With the mass roll-out in 2014, what about the semi smart meters that are currently being offered by some suppliers? Are they being used to learn lessons; and second, is the roll-out of those going to disrupt the roll-out of full smart meters?
Edward Davey: I am going to hand that to Phil.
Phil Wynn Owen: We are in the foundation stage where there are smart meters probably being installed as we speak. By the end of last year the energy companies estimated that just over 500,000 smart meters with some smart functionality had been installed. By the end of this year you might add 200,000 to that, so call it possibly 750,000 by the end of this year. We are learning from that all the time, but remember in the mass roll-out we are planning to get up to 50 million meters, gas and electric combined, in over 30 million properties. It is relatively small.
There has also been some good news recently, because in early July the smart meters equipment technical specifications about what is actually in a smart meter’s box were approved by the European Union after a period of consultation. Hopefully, that will mean that many of those smart meters being put in at the moment will be compatible with those rules approved by the European Union because obviously the energy companies have been installing these at their risk at present. But I think that so-called SMETS 1 clearance by Europe-sorry to use acronyms-paves the way to the foundation stage building sensibly towards full roll-out and not being in conflict with it.
Q99 Barry Gardiner: Secretary of State, I want to focus on future bill costs. Your Department statement says, "In 2020 the average household energy bill is estimated to be 7% lower and in 2030 3% lower, compared to what the bill would have been in these years without DECC policies". What I am trying to find out here is: what is the truth of this? What does "without DECC policies" actually mean? Does that mean if we just did nothing and let all those energy generators go off-stream and we did not have enough supply, then the price would go up and it is against that?
Edward Davey: It takes into account all DECC policies, whether it is on-
Barry Gardiner: Yes, that is what I was worried about.
Edward Davey: -renewable energy and some of those subsidies, whether it is on the cost of ECO, which goes into bills. There are things where DECC policies are adding to bills but there are lots of DECC policies that are helping reduce bills. The figures that you have are of a net effect. A lot of DECC policies are aimed on energy efficiency, something we are focusing huge amounts on.
Barry Gardiner: Not enough, we would say.
Edward Davey: Maybe, but whether it is energy efficiency-
Q100 Barry Gardiner: Where was that in the draft Bill?
Edward Davey: I am happy to deal with that in a second, but let me answer your question. We are reducing bills through Green Deal and ECO. We have heard about smart meters having effect. We have Warm Home Discount that reduces certain people’s bills. We have policies on products that will help reduce people’s bills. There are a number of policies that are DECC-related that will reduce people’s bills.
Q101 Barry Gardiner: I understand all of that, and I accept all of that. You have pocketed me on that, okay? That is pocketed. What I want to just tease out from you though is: are you also including if you did nothing to encourage the replacement of the generation capacity that we know is going off-stream? Are you including that and saying, "Well, if we did nothing then all that would go off-stream and, therefore, costs would rise"?
Edward Davey: Can we give this chart to the Committee? This is the chart that lies behind it, and in terms of electricity market reform there is a cost to electricity market reform, a support cost, in this case to the average energy bill of £41. You can see here you have a whole load of policies that are pushing up the bills. They are very necessary because we need to have security of supply, we need to modernise our transmission mechanisms, and so on.
Barry Gardiner: I understand that.
Edward Davey: They have a cost, so we have measures that are putting up bills, but we have measures that are putting down bills, and that is-
Barry Gardiner: That is not my question.
Edward Davey: What is your question?
Q102 Barry Gardiner: I understand that through the bill there will be elements that raise costs, so all the subsidies for nuclear that the Government is not going to be giving, and the other feed-in tariffs, and so on. There is a cost to that, of course there is. That is not my question. My question is this: if we did nothing, without that element of DECC policies, are you including the fact that you are then incentivising the coming on of new generation capacity? Are you factoring as one of the things that would have otherwise increased the price the loss of that generation capacity, which would have increased prices because it would have reduced the supply? That is what I want to find out.
Moira Wallace: Very high prices because there was a shortage of electricity?
Barry Gardiner: Exactly.
Moira Wallace: I do not think that is in there.
Barry Gardiner: I hope it is not, but I wanted clarity.
Moira Wallace: In fact, I can see it in front of me in a different form but it is the incentives as you describe, but we are not saying, "Oh, if we did nothing electricity prices would quintuple and, therefore, that is the basis of this". We are not saying that.
Barry Gardiner: Thanks very much and, of course, it is also-
Edward Davey: A very good idea.
Moira Wallace: Yes, we will incorporate that next time.
Barry Gardiner: Please don’t. That would be scurrilous and illegitimate. I am very glad you have clarified that you have not done it this time.
Moira Wallace: I am devastated that you think we are that scurrilous.
Q103 Barry Gardiner: But not surprised. How confident are you that in practice consumers will make the changes that are required to achieve the efficiency reductions and, therefore, end up in that position of being charged those percentage points lower than they might otherwise be without your other policies?
Edward Davey: No one can be absolutely sure that ECO and Green Deal, to take two of the examples that are putting downward pressure on bills in our calculations, will work exactly as we say. But, as I said in discussing the Green Deal earlier, I think we have made rather concerted assumptions about how many people will take up the Green Deal over the rest of this decade. I am assuming there will not be massive take-up in the first few months, the first year or so, but I think when the market really matures there will be a bigger take-up than we are probably suggesting in our rather conservative assessment.
Q104 Barry Gardiner: I would like to be optimistic with you. I hope that is the case. What I would ask you to identify is that element of the cost that you think will be depleted by public action? What is that? If the market does not shift? If people’s behaviour does not move in the way that we all hope it does, how much will their energy bills actually have increased by? What is the proportion of your calculation that is accounted for by consumer shift?
Edward Davey: I will bring in my colleagues in a moment, but if I read down the figures because they are cumulative of a number of policies: the Warm Home Discount will benefit around 2 million people per year. These are averages. All these policies are put together but clearly that is going to have an impact. Because we are reforming the wholesale market, we have a £20 benefit from the wholesale price impact of EMR renewal obligation, and so on, because over time we believe that will promote more competition and, therefore, there will be an improvement in the wholesale price. On the other hand, by the way, we have some price increases from some of the investments we are making. We are trying to be fair and measure them out in as fair a way as possible. We have a £37 saving for smart meters and better billing. Some people say that is extremely conservative again, but it is in there so I am giving it to you. We have-
Q105 Barry Gardiner: Sorry, rather than try to do this verbally, could you perhaps do a note to the Committee so we have in writing exactly what consumer behavioural shift is producing?
Edward Davey: Of course.
Moira Wallace: Could I just add that some of these measures do not require a shift in consumer behaviour, i.e. if your house is insulated or you have a more efficient boiler, your thermostat remains unchanged and you do not start opening the windows, you will save energy and you will save carbon and you will save money. Others require a shift, like smart meters. Some of them also raise the possibility of rebound effects, so people will say, "Oh, my bill is smaller", and then they do something different. But all of that is accounted for in the figures that underpin this, so we can share that with you.
Q106 Barry Gardiner: Thank you. Electrically heated households: now, the difference between the Climate Change Committee’s and your projections were largely accounted for by the fact that the CCC had looked very carefully at the different sectors of the public, and their bills, and for electrically heated households who cannot make the savings on gas boilers and so on, they believe that they are the ones who are going to suffer differentially, are they not? How are you developing policies specifically targeted at the electrically heated households? Their bills are likely to be higher and not come down as quickly?
Edward Davey: So, off-grid customers, off the gas grid as well-you are right to focus on those customers. Often they tend to be in rural areas, which is why they are not on the gas network. Some of our measures directly relate to them. For example, with ECO, Philip was talking about the carbon saving communities. There is a rural obligation within there that will speak to them, and some of our policies that we are still designing will take account of off-grid customers. Colleagues may want to come in. You have written something down, Moria; that is very, very helpful.
Moira Wallace: Yes, fortunately I am right-handed.
Edward Davey: RHPP, the Renewable Heat Premium Payment, has an off-grid element to try to make sure that renewable heat, which is obviously electricity, can go to off-grid customers first. There are those moves.
Q107 Barry Gardiner: When you write to us with the other information, could you also separate out and analyse the impact on the bills of those specific subsets of people, like those using electricity who are off-grid, and give us the impact on their future bill projections as well? It is important that we try to disaggregate this to get a better handle on what is going on. Is that okay?
Edward Davey: We will certainly try. I do not know how much work that is going to require. We have some ready figures that are average bills and, of course, we have never claimed anything other than average. If you start taking subsets of the population, it may require a huge amount of work to rejig these figures. I don’t know. But if we have to do it in two stages, give you what we have at the moment and then come back, then we will try our best. But I only give you that caveat.
Q108 Barry Gardiner: If we can just look at off-grid as a sort of key subset, in the way that the Climate Change Committee has already done. They have done it, so part of the work is there, I think.
Moira Wallace: I think we may need to model it separately because some of the policies are different also. For example, you get more money in Warm Front if you are off-grid, so I think it will probably require a special piece of analysis.
Q109 Barry Gardiner: Grand. Thank you. Just finally and very quickly, talking about consumer engagement, and how crucial that is to many of the energy efficiency initiatives, consumers are going to be bombarded from a number of points. Will those strategies be integrated, in order to save money and reduce the risk of energy efficiency fatigue among consumers so that they are not finding that it is coming to them from all angles, whether it is smart meter roll-out or Green Deal? There are so many different messages that people are going to have coming in at them that it is important that they do not just say, "This is just too complicated, I am not interested".
Edward Davey: There is only so much the national Government can do, particularly when you want the market to be competitive. There may be a number of people wanting to encourage people to buy with them and to go with them. Obviously, because of budget constraints we want to make sure we are not spending money willy-nilly and the energy advice saving hotline-is that the right one?
Moira Wallace: Yes, close.
Edward Davey: It was launched in April, and it is a central point for people who want advice, whether it is about ECO and the Green Deal as it is launched, or FITS or smart meters. All aspects of our policies are on this one telephone line. In a free society, where you are looking at competition, you cannot control all the messages that people are going to get.
Q110 Barry Gardiner: No, indeed, but I know you have done some work on behavioural analysis, and, looking at how you can best influence behavioural shift and behavioural change. I just think it is important to look at information overload and the effect that that has as well.
Moira Wallace: We are concerned about it. The other thing our research tells us is about using intermediaries, local authorities, the Church of Scotland, you name it, because sometimes it is not just about amalgamating messages but about who they come from, and we and the energy companies may not turn out to be the right people.
Phil Wynn Owen: Where appropriate we are making connections between policies, mindful of the fact that of course Parliament has published different laws and regulations about be it smart meters, RHI, Green Deal or whatever. For instance, we have built energy efficiency conditionality, going forward, into the FITS scheme, and we have been looking at it for the RHI scheme. We are trying to make sure that people do things in the logical order. But you are right, we have a big communications challenge here along with the suppliers and with the market.
Q111 Sir Robert Smith: You mentioned the off-gas people, and they are very important in my constituency. The other thing, obviously, in those rural areas is great sources of timber supply, so obviously they would like to know why the Renewable Heat Incentive for domestic consumers has been delayed until 2013?
Edward Davey: We want to get it right. We have the Renewable Heat Premium Payment, which is still something that domestic customers can access now. We are going to be consulting-I think, this September, so later this year-on the domestic RHI and then, hopefully, coming back to Parliament with conclusions and measures in 2013.
Q112 Sir Robert Smith: If it is got right, then that will be most welcome, because it has been a long time in fruition, not just under this Government.
Edward Davey: It has been a long time. That is absolutely fair comment. But some of this is leading edge. We are leading the world in this area, so we cannot go and find out where it has been done before because it has not been done anywhere else. That means we want to make sure-particularly when there is large money at stake, both coming from the taxpayer and the consumer-that we get it right. We are really keen to press ahead. We have to press ahead because of our renewal energy targets, but we want to press ahead in a way where we can ensure there is value for money.
Moira Wallace: The other thing we are using this premium payment scheme to do is actually to make sure the installers are ready and able to install things right because we have some evidence that, for example, with heat pumps, there was a huge variation in the way people installed them. Some of them were just not working properly at all, and they would not have made the savings. We are using the current scheme to check that they are being installed right. We have onsite metering. We are getting those results, so we can check the supply chain is ready to go because it would be dreadful to start installing these things all over the place and discover people were not doing it right.
Q113 Sir Robert Smith: On the non-domestic front, the reports are that 20 out of 376 applications from non-domestic consumers have been approved by Ofgem. Why are so many not being approved, from those reports?
Edward Davey: Again, Ofgem is doing leading-edge stuff. I cannot say I recognise those figures. I am sure it is working hard.
Q114 Sir Robert Smith: Maybe you could clarify them, because it is-
Edward Davey: I am very happy to send a note. We can talk to Ofgem. Phil, do you have the answer to hand?
Phil Wynn Owen: We are happy to follow up with a note consulting with Ofgem. The gist of this is it is a cutting-edge scheme. More of the project applications that have come forward have proved to be so-called complex cases, where Ofgem have actually had to enter into a discussion to elicit the necessary information so they can go ahead to approval. We are all learning from this, but it bears out the remarks that the Secretary of State and the Permanent Secretary made about it being very cutting edge and the need to learn as we go along. I believe that both suppliers, the regulator and ourselves are learning, but there have been more complex cases than we expected.
Chair: You have been extremely generous with your time. We have covered a lot of ground. We much appreciate it, and I am sure we shall be in close communication with you. As ever, we are here to try to assist your endeavours in the right direction.
Edward Davey: We appreciate that. Thank you.