Publications on the internet
CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 386-i
HOUSE OF COMMONS
TAKEN BEFORE THE
PUBLIC ACCOUNTS COMMITTEE
ENERGY LANDSCAPE REVIEW
MONDAY 2 JULY 2012
MOIRA WALLACE, RAVI GURUMURTHY and SIMON VIRLEY
Evidence heard in Public
Questions 1 - 215
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 wil be printed in due course.
Taken before the Public Accounts Committee
on Monday 2 July 2012
Margaret Hodge (Chair)
Mr Richard Bacon
Mr Stewart Jackson
Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General, Ed Humpherson, Assistant Auditor General, Jill Goldsmith, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
The government’s long-term plans to deliver secure, low carbon and affordable electricity (HC 189)
Examination of Witness
Witness: Laszlo Varro, Head of Gas, Coal and Power Division, International Energy Agency, gave evidence.
Q1 Chair: Welcome, Dr Varro, and thank you very much indeed for agreeing to give evidence to us this afternoon. You will not know how we manage this; we are about to take evidence from the officials in our Department who are accountable for electricity supply policy on behalf of Government. We would find it really helpful before that to talk to experts on the ground who know much more about this than we do, so that you can give us some hint of the sorts of areas where you think the UK should be thinking about its electricity policy: where you think we are doing well, where you think the gaps are and what you think the challenges will be-anything that you feel would be helpful in the kind of short, sharp investigation that the Committee undertakes. We are looking specifically at the value-for-money aspects.
Fire away. Given all your knowledge of international countries, where do you think, briefly, we have it better and where do you think the major challenges rest, where we might learn something from other countries?
Laszlo Varro: Madam Chairman, thank you very much for the invitation. My name is Laszlo Varro. For the record, I do not have a doctorate. I did a graduate degree at the university of Cambridge, but not a doctorate. I am the head of gas, coal and power markets at the International Energy Agency. In my initial comments, I would like to focus on benchmarking the UK electricity situation compared to other major OECD countries. Due to the very different level of electrification, it probably does not make much sense to compare the United Kingdom with India, for example. The relevant comparison is with developed, industrialised democracies that also have a political commitment to a climate policy.
In this context, the UK shares a number of similarities with those countries. Electricity consumption per capita and electricity consumption per unit of GDP are roughly in line with the standards of industrialised countries. In the UK, the service sector makes a very large contribution to GDP. Consequently, electricity consumption per unit of GDP is slightly lower than the industrialised country average. There are of course potential benefits in improving electricity efficiency. That should be pursued, but the bottom line is that we do not believe that electricity efficiency policies of advanced democracies can compensate for the impact of healthy GDP growth. That is a major difference compared to energy efficiency in the building sector or energy efficiency in the transportation sector.
In the United Kingdom, as in many other industrialised countries, the building sector is essentially heated by natural gas, and transportation is based on oil. For heating energy needs and for transportation energy needs, we foresee an absolute decline, but in the case of electricity, improving energy efficiency will bring down the rate of growth, but not bring an absolute decline, once the economies come out of recession. We project that, in the next 25 years, even with the most aggressive application of energy efficiency, Europe will add roughly the current electricity consumption of Germany.
Q2 Chair: May I stop you there? One assumption made by the Department is that consumption by consumers will decline, based on energy efficiency and, I assumed, a bit on price as well; I do not know whether it is based just on energy efficiency. When you say that there will be a net increase, are you saying that that will be because of population growth and economic growth, although individual household consumption might decline, or are you saying something different?
Laszlo Varro: The most important driver is GDP. The share of electricity in the total energy system has been growing for decades, because electricity has fundamental advantages. Electricity is an extremely efficient way of transporting and distributing energy. Also, the importance of sectors that use electricity as an energy form is increasing compared to other forms of energy. Electricity can be used to heat water, but hot water cannot be used to charge a mobile phone. This means that electricity use in practically every country is growing more rapidly than total energy use. Another factor that drives electricity use is that electricity is a very important channel for cutting carbon dioxide emissions in other sectors, most importantly through electric cars and heat pump heating in buildings.
On the demand side, the UK is in line with international experience. On the supply side, again, the current structure of power generation in the United Kingdom is not unusual. The backbone is thermal power generation, coal and gas-fired power plants, some nuclear and some renewables. Currently, renewables have a lower share than the industrialised country average, but on a forward-looking basis, the UK ambitions would mean it catching up. Also, the United Kingdom is facing a problem with the ageing of the power plant feed, which is not unusual in principle, but in practice the problem is more pressing in the United Kingdom than in a number of countries. Most importantly, that is because the economic and political viability of coal in the United Kingdom has been under question since the 1980s. Essentially, there has been not much investment in coal-fired power generation capacities since the 1970s, so the United Kingdom will lose a bigger proportion of its power generation capacity more rapidly than the usual industrialised country average.
Q3 Chair: But if you compare it with California-in my little knowledge of this-their reliance on out-of-date power stations that then broke down or had to be closed for repairs or whatever meant that the lights were then switched off.
Laszlo Varro: California did experience a series of electricity crises in 2000 and 2001, which were, in my view, a regulatory failure rather than a market failure.
Chair: What does that mean?
Laszlo Varro: The regulatory licensing environment of California made it almost impossible to build a new power plant. Consequently it faced a situation where the population was increasing, GDP was increasing, demand was growing and supply was fixed. Prices went higher and higher, but if you legally cannot build a new power plant, it does not matter how high prices go. That was one big regulatory failure, another was that they had electricity market arrangements that made it easy to manipulate the electricity market, and large-scale market manipulation took place. The crisis was effectively tackled by reforming the electricity market arrangements.
Q4 Chris Heaton-Harris: I have a couple of questions in two almost completely different directions. First, the membership of your agency is very diverse-from Japan that is turning its nuclear power plants back on as we speak, to Germany that is turning them all off, to the States where energy prices are falling at the moment because of shale gas, to the UK where the prices are going up. Which of those countries has best got the mix right?
Laszlo Varro: It very much depends on the circumstances. Japan was enthusiastic about nuclear power up until the day of the Fukushima disaster. Whether the democratic legitimacy of nuclear power can be restored is an open question. There is no doubt that the Japanese electricity supply will be more expensive and less secure without nuclear power. On the other hand, it is also understandable that after Fukushima, there are some very, very serious concerns in Japanese society. The United States is a very special case because of the shale gas revolution, which led to incredibly cheap gas prices. We do not have any credible scenario for Europe that replicates the US gas price level. We have an optimistic assessment of the non-commercial gas potential of Europe, but that would mean that the European import dependency will grow less rapidly. We do not believe that non-commercial gas in Europe would compensate for the decline of the North sea and the decline of the Groningen fields in the Netherlands. Of course, the United States started this process a couple of years ago with an extremely large coal-fired power generation fleet, and despite the lack of enthusiasm for climate policy in the US Congress, US carbon dioxide emissions are actually falling more rapidly that President Obama’s Copenhagen pledge. That is primarily due to the market competition between cheap gas and coal-fired power generation. I should emphasise that that relies on really, really cheap gas and we do not see the prospect of that in Europe.
In Germany, nuclear has been a highly political issue for decades and, in fact, a nuclear phase-out policy was discussed back and forth in the Bundestag in different forms. Fukushima greatly accelerated the process. Again, we believe that achieving climate objectives without nuclear power is technically possible, but it is certainly more difficult and more expensive. A rich and sophisticated industrialised country such as Germany might decide to pay the costs of achieving climate objectives without nuclear power, but in a global context we believe that nuclear has an important role to play.
Q5 Chris Heaton-Harris: My second, completely different question, is on the European large combustion plant directive. You mentioned that California suffered from regulatory problems. Do you think that we have been over-ambitious in the United Kingdom, in saying that we are going to comply with this directive when we are not ready with the other technologies to kick in and provide for that base load?
Laszlo Varro: The large combustion plant directive concerns not carbon dioxide emissions but local air pollutants such as sulphur dioxide and nitrogen oxide. It has been debated since 1997, and it came into force in 2001, so I do not believe that in 2012 this should come as a sudden shock to the industry. This has been well-known for a decade. Also, whereas carbon capture and storage is not yet commercially viable and there are serious technological risks, for sulphur dioxide and nitrogen oxide there is no technological risk, and ready, off-the-shelf solutions are available.
They do, of course, have an investment cost. Whether the economics of that investment is justified for, say, a 40-year-old power plant that might have another 10 to 15 years to go, will be challenged in those 10 to 15 years by climate policy objectives as well. That can be a subject to debate, and so the large combustion plant directive is likely to lead to power plant decommissioning. But this is not a technological problem; it is really about whether the investment to maintain the plant is economical.
Q6 Fiona Mactaggart: I was wondering about our energy market. I have in my constituency a small combined heat and power plant, and the people who run it are always saying to me that the cartel that runs the energy market makes it impossible for them to produce energy into the market. Have we got the right policies to make the market work to encourage small environmentally friendly producers, who have not got the mass and scale of the big six?
Laszlo Varro: The United Kingdom has, as you mentioned, six large competitors in the electricity market. France has one company dominating its electricity market, Italy also has one, Germany, which is a much bigger electricity system than the UK, has four, and Spain has three or perhaps four. So there is not a single electricity market in the world that would fulfil the micro-economic textbook definition of competition, for very sound technological reasons, because up until very recently large power plants had an unbeatable technological cost advantage over small distributed generation.
This is changing. The cost gap is narrowing and consequently there is the potential for the electricity market to be much more competitive in the future. For combined heat and power the key obstacle is that the combined nature of the generation means that the electricity efficiency will be lower than for large electric power plants. That is compensated by the efficiency advantages of not throwing away the heat that is generated by the turbine, but we face some significant market failures. Most importantly, our carbon pricing regime is not robust enough and the carbon prices are not high enough. By the way, the entire building sector is exempt from carbon pricing, so there is no proper incentive there for improving energy efficiency. Also, there is a huge literature of energy efficiency failures in the building sector, including co-ordination between landlords and tenants, which includes financing barriers , which are too high generally-it is too difficult to get bank finance. There is a host of market failures that I believe justifies policies to encourage combined heat and power.
Q7 Austin Mitchell: The policy seems to me, as a somewhat nationalist observer, to be one of developing by shovelling large sums of money into foreign multinationals, particularly Electricité de France, to persuade them to do the investment here, and then forcing the consumer-the poor old consumer-to pay for it. What is the sense in that policy? Is anybody else doing it that way, or are they doing it by public spending in other countries?
Laszlo Varro: The general model for low-carbon power generation is actually quite similar to what the Department of Energy and Climate Change is proposing now. The typical model in industrialised countries it that low-carbon power generation is mainly wind and solar power that enjoy a fixed cash flow, and that is priced into the consumer bills via some structure that can be different from country to country. The general model is that consumers pay for low-carbon power generation.
Nuclear is a bit different. The overwhelming majority of nuclear investment in the world is done by state-owned companies, and that was the case in the United Kingdom as well when the nuclear power plants were built originally. Currently there are a handful of privately owned nuclear power plants under construction in Finland, South Korea and the United States, but practically all of them benefit from some form of risk management. To put it bluntly, I don’t believe we will see fully, totally private investment in nuclear for a competitive electricity market anywhere.
Q8 Austin Mitchell: Isn’t this going to lay us open to exploitation and to an enormous increase in costs on producers in this country that other competitors are not having to pay?
Laszlo Varro: The decarbonisation of the electricity sector has costs. The United Kingdom has a very strong commitment to climate policy. A number of countries have commitments to climate policy. There is a difference in that for most countries that commitment means a Prime Minister making a speech, whereas the United Kingdom has legislation in place. If I take the carbon dioxide emission reduction objectives set in the climate legislation of the United Kingdom, it is very difficult to imagine them being fulfilled without low-carbon electricity generation deployment, which in the United Kingdom, according to the Department’s strategy, will primarily mean nuclear power and offshore wind. Again, given the geographical characteristics of the United Kingdom, I think this is probably a good choice. Neither nuclear power nor offshore wind is really cheap energy. They are capital-intensive energy technologies, and both nuclear and offshore wind are subject to project management risk. The risk of project delays or of cost overruns is real. On the other hand, without this investment I do not think that the climate policy objectives set in the legislation would be fulfilled.
Q9 Austin Mitchell: Your International Energy Agency gives us good marks for recognising the low-carbon investment challenge and for attempting to find concrete solutions to it-in other words, for leading the world in this direction. What is the virtue in that for islands built on coal, which is increasing its costs by this kind of process? What is the virtue in setting an example to the world at such a heavy cost to consumers in this country?
Laszlo Varro: What we have observed in the past-
Austin Mitchell: I do not want to set an example to the world, I just want cheap electricity.
Laszlo Varro: Sure. If that is the objective then you would have to go back to the climate change legislation, and that may or may not be desirable from the point of view of the UK Government. If I take the UK climate change legislation, those targets are probably impossible to fulfil without low-carbon electricity deployment.
Now, what is the objective of the UK showing leadership in this to the world? Climate change is a collective action failure. In an ideal world, all of us would come together at one big UN summit and agree to everything, and all would be happy. But that is not how it happens in real life. In real life, we have had big climate summits and the only thing that actually works is that some countries are acting as responsible stakeholders and show leadership. I am very happy that the United Kingdom is one of the countries showing leadership.
I can tell you that this example is working. For example, we recently published a book on deploying renewables, which is the European renewable energy experience. We were immediately asked by the Chinese National Energy Administration for the copyright of the book to be translated into Chinese and disseminated into Chinese provincial administrations, because China is now the biggest investor in green energy by a very large margin. So, the notion that some western democracies show leadership and the emerging markets catch up is actually working in real life.
Q10 Meg Hillier: Do you have any comments on different approaches? We hear in Germany that, despite state aid rules in Europe, there has been investment in some of the base infrastructure; for example, for offshore wind. The UK approach, while there is some Government money, is predominantly, as Mr Mitchell said, looking at private sector investment. At the same time, we have seen quite a sudden withdrawal-for instance, on nuclear-and we have put ourselves in the hands of decisions of companies that these days do not actually have headquarters in the UK. Are other countries giving it better than us, or is it just a difference of approach?
Laszlo Varro: In the case of Germany, the overwhelming majority of the investment is coming from the private sector. Interestingly, the large of majority of the investment in Germany is coming from outside the conventional utilities. Germany has half a million investors in renewable energy-middle class households who put some of their pension savings in local green energy products. There is some direct state funding of low-carbon energy in Germany, mainly through the German state development bank, but that is focused on high-risk frontier projects, such as offshore wind.
For geographical reasons, offshore wind in Germany is much more difficult than offshore wind in the United Kingdom. The UK is an island that has a long and large sea coast area; Germany just has the Helgoland Bight. Given the technical difficulty of offshore wind in Germany, the KfW has a €5 billion direct funding, but that is not a very large amount of money in the context of the German energy system. What is a major difference is that Germany relies highly on fixed feed-in tariffs for wind power and solar power, whereas the current UK policy relied on a tradable renewable obligation. However, the new policy design, the contract for difference, will actually be quite comparable to the German policy design. One very big difference, of course, is that UK energy policy is positive on nuclear power, whereas Germany made a big push on solar power. Given that the UK is not an exceedingly sunny country, the decision to emphasise nuclear instead of solar power is the right decision.
Q11 Chris Heaton-Harris: Based on the wide policy areas that you take on board-you mentioned one of them earlier, the wind industry, which is my favourite bête noire-where do you think wind has a place, given its intermittent nature? What is the best way of dealing with the intermittent nature of wind energy?
Laszlo Varro: Up until medium-level penetration, the intermittency can be dealt with. The electricity industry has a 100-year-old tradition of dealing with intermittency. During my tenure in the Hungarian regulator the most serious energy security problem I had to deal with was a cold winter where lignite froze to the conveyor belts in the open-cast mines. That was a weather-related intermittency of coal-fired power generation. So up until medium-level penetration, the industry can deal with it.
At a very high level of penetration, there are some serious issues. The United Kingdom has roughly 1,000 hours a year when there is practically no wind, and out of those 1,000 hours, for roughly 500 hours during the same period, there is practically no wind in Germany either; so in the two most important wind energy countries in Europe you have 500 hours of simultaneous no wind. So the electricity industry will have to enhance its flexibility for dealing with this problem.
Now, in that case the UK has some peculiarities, because in continental Europe international interconnectors play a very important role in managing these fluctuations, so Germany would export large quantities of electricity in strong wind, and import in weak wind. The United Kingdom will remain an island, and offshore undersea cables will never be cheap, so international interconnectors will never play a very large role. The other big flexibility source potential is energy storage, which, in the future, could be or should be electric cars; but up until the penetration of electric cars the only really practical option is pumped storage hydro. The United Kingdom has some potential for that in the Scottish highlands, but that would need some very big electricity transmission developments, because electricity consumption is concentrated in England.
That leaves us having a much bigger reliance in the United Kingdom on conventional power generation-most importantly gas turbines and also demand-side measures. So the United Kingdom will continue to need a significant gas turbine fleet for flexibility purposes, even after the deployment of low-carbon energy sources, and also the United Kingdom will have to encourage demand-side response so that the consumers contribute to system operation as well.
Q12 Chair: If you suddenly were appointed to run the Department with responsibility for this area, what are the three things you would change, and what would your top three priorities be for action?
Laszlo Varro: My first priority for action would be to finalise the policy.
Chair: Before you came in we said, "I think we’re on our fifth Bill"-we had four White Papers.
Laszlo Varro: I have known people in Ofgem and DECC and its predecessors for a decade. They had the new electricity trading arrangement in 2001, the British electricity trading arrangement in 2005-06 and now the electricity market reforms; so the expected lifetime of an electricity market design in the United Kingdom is shorter than the lifetime of an electricity industry investment.
Q13 Chair: Make up your mind.
Laszlo Varro: So my first priority would be to finalise the market design and provide a stable and transparent institutional framework. There is a trade-off between how beautiful the micro-economics underlying the policy are, and how quickly it can be implemented. I think in the case of the UK I would focus on finalising it and implementing it.
My second priority would be to make a very thorough review of the licensing and planning environment, focusing on two things: electricity transmission and onshore wind. The UK is a very windy country in international comparisons, in onshore as well; I do not believe offshore wind will ever be as cheap as onshore wind. Putting steel structures in the sea will always be expensive. So if the planning environment allows a larger-scale deployment of onshore wind, that will be surely be a cheaper solution-
Chair: Chris would like that.
Chris Heaton-Harris: No, I’d be stopping that.
Laszlo Varro: Also, I have already mentioned the hydro potential of Scotland, so managing the electricity system with stronger transmission will surely be cheaper.
There is a third thing to discuss with the Treasury. Electricity in the United Kingdom is in the 5% VAT rate, so if I buy a new refrigerator, I pay the high VAT rate on my new refrigerator and I save the low VAT rate on the saved electricity of the new refrigerator in terms of overall consumption; consequently the difference between the two VAT rates is a fiscal punishment on energy efficiency. I was involved in changing that in Hungary, so I know that it can be a very difficult process.
Q14 Chair: So you would use tax incentives to incentivise lower energy consumption. What are the three things you would stop?
Laszlo Varro: The three things I would stop? I am not aware of obviously bad things in UK energy policy. I could have a long list of countries where I can immediately name a couple of things that I would stop. In the case of the United Kingdom, I think that the big building blocks of the policy were put in place correctly, and the concerns are much more at the second level-the actual policy design and the implementation. I cannot tell you about something that I would stop immediately.
Chair: Thank you very much for very full and very clear answers. We will now move into a session in which we interrogate those who are responsible.
Examination of Witnesses
Witnesses: Moira Wallace, Permanent Secretary, DECC, Simon Virley, Director General, Energy Markets and Infrastructure Group, DECC, and Ravi Gurumurthy, Director of Strategy, DECC, gave evidence.
Q15 Chair: Welcome to you all. It is certainly good to see you doing this job, Ravi, although I don’t know how you ended up there-we worked together in Education many years ago.
This is huge agenda, Moira. Let us put in some context: this is what we call our landscape review, so really we are asking you to set the baseline today, against which we will measure whether you have implemented what you promise us today. We shall try to pull some things out of you.
Can I start on what struck me, on reading the NAO Report, as a key question? For a lot of the electricity supply to occur, we are dependent on commercial companies taking particular decisions. If they decide not to do something, that prevents the implementation of Government policy. We have seen that recently in nuclear-that is the obvious one. What levers have you got to ensure the implementation of policy if commercial companies decide not to invest?
Moira Wallace: The way we are approaching it is to try and understand what is necessary for them to invest, and to try and get a framework that makes it worth their while, while also getting a good deal from the point of view of the consumer. We are also looking for a lot of diversity, so that we are not over-reliant on one company or one form of electricity. We are trying to have a very broad-based framework to give us some security.
In terms of actual levers, I am sure we will get on to the topic of EMR, but we are trying to develop a really long-term approach, where we and companies can get certainty on what each side is signing up for fairly early on in the process. So within the framework of a privatised industry, we are trying to develop a system that gives the right incentives to each side-
Q16 Chair: So bring subsidy into nuclear?
Moira Wallace: No, we’re not bringing subsidy into nuclear-
Q17 Chair: Well, what is an incentive if it’s not money?
Moira Wallace: We’re trying to set incentives to correct market failure around all low-carbon generation.
Q18 Chair: Don’t play with words. I’m happy for us to say that, but at the moment we’ve had two people pulling out according to the report-Horizon and somebody else I can’t remember pulled out in 2012. Everybody is panicking. If you had been at the pre-meeting, there was quite a lot of concern that we are not addressing the issue of energy supply with sufficient urgency. Of course, you try and create a market where you encourage suppliers and competition, but I am interested in what happens if they don’t deliver. Are you going to put in more Government subsidy? Call it what you like-incentives, market-but in the end it is actually Government money. What are you going to do to ensure that our lights do not go off?
Moira Wallace: The purpose of our framework is to deal with the uncertainties and try to put ourselves in a position where, next decade, lots of different technologies that fit our needs are competing on cost. We are developing a regime that offers to different technologies a level playing field, and the framework they need, so that they are ready to compete on cost in the 2020s. It is not about subsidies; it is about preparing for a future that is very uncertain and in which we may want to change the balance in light of how different technologies do.
Q19 Chair: Well, two of the potential big nuclear suppliers have just pulled out, and as far as I can tell by reading the report-perhaps the NAO will help me-if you haven’t got a decision by 2013, you are not going to have it in place in time to fill the gap that will be created by the redundant current power stations. Am I right about that?
Moira Wallace: There are several different nuclear consortia. The owners of one consortium have pulled out-
Q20 Chair: Two have pulled out.
Moira Wallace: But they are in one consortium-the Horizon consortium, which is RWE and E.ON. They have pulled out for reasons to do with what is going on in Germany. They are now trying to sell their sites and their consortium, and various people are interested. It does mean that that is over, but it is only one of three consortia.
Chair: So are you confident-
Q21 Jackie Doyle-Price: It’s not just because of what is happening in Germany. There are wider considerations about what is happening here that is making that investment more difficult. If you are investing in a nuclear plant, you are talking about taking a long-term view and, as you started to explain, the landscape keeps changing all the time. They have got to take on that burden of risk. Am I correct in thinking that it was to be built in Wales?
Moira Wallace: Wylfa was the first station they were interested in.
Q22 Jackie Doyle-Price: Yes. And weren’t there some concerns around the political climate and the deliberations of the Welsh Assembly that were adding to that uncertainty?
Moira Wallace: I might bring in Simon in a second, but I will start by saying that actually the two companies that ran that consortium were very supportive of the electricity market reforms that we are bringing in in the draft Bill, and they saw them as something that would help them invest. All the people who were interested in investing in nuclear see that as something that-
Q23 Mr Bacon: Sorry, I beg your pardon but are you saying that the companies that have just pulled out were very supportive of your reforms and saw them as something that would help companies invest? Did I misunderstand you?
Moira Wallace: No, you did not.
Q24 Mr Bacon: So it would help them invest, but not enough that they would actually do it.
Moira Wallace: These are two German companies. The German nuclear companies have been through enormous changes as a result of what has been going on in Germany, and when they announced that they were pulling out, they emphasised that that was the reason.
Q25 Chair: But they have pulled out, Moira, that’s the point that we’re making.
Moira Wallace: Yes they have pulled out, but they are now trying to sell to someone else-they are trying to sell to other people who, funnily enough, are not German. They are in a different situation, and other people are interested in that.
Simon Virley: We are very optimistic that hopefully there will be buyers coming forward for Horizon. As Moira has already indicated, we have two other consortia-
Chair: We are very optimistic-hopefully, maybe.
Simon Virley: It is not our process to sell; it is obviously a commercial decision for RWE and E.ON to sell the Horizon consortium, but there is some interest in buying that, and two other consortia are interested in nuclear power in the UK.
Q26 Chair: So can I ask again the question I asked at the beginning? If it all happens, great, but just looking at the history, we are a bit sceptical. If it doesn’t happen, then what is plan B?
Simon Virley: If I could pick up on your question, Chair, about what happens if we face a situation where we are worried about the lights going out, we have announced that we will introduce a capacity mechanism. Essentially, that is an intervention to ensure the right capacity does come forward at the right time. So there is a lever there for Government and National Grid, as the system operator, to pull if we are seriously worried about threats of power failures during the second half of this decade.
Q27 Chair: Explain that to me, because I am not the great expert. That means that there would be an incentive to make the market-in other words, some taxpayers’ money or through the levy.
Simon Virley: It would go on to energy bills-
Q28 Chair: It would go on to energy bills.
Simon Virley: But we have published an impact assessment which says that we think that the impact is negligible in terms of the impact on consumers.
Q29 Chair: As I understand it-again, correct me if I am wrong, because I am a bit of a novice on this subject-in the Bill that is currently wending its way through Parliament, the Treasury is capping your ability to put a levy on, which is presumably the way that you would fund things such as this system. The Treasury is capping it.
Moira Wallace: That already happens. This was decided in the last spending review, since quite a lot of money is going through levies, and it is a burden on bill payers. The Treasury and we agreed a framework-an indicative one-with a bit of headroom in it.
Q30 Chair: Of £15 billion by 2015.
Moira Wallace: Yes. That will have to be extended in each spending review to go further forward, and we have discussed that with the Treasury. It is not something that is going to be in legislation, but because it is a big cost on the economy, it goes on to people’s bills-
Q31 Chair: It’s a tax.
Moira Wallace: It’s a levy-
Chair: It’s a tax.
Moira Wallace: -and it goes on people’s bills; it is not raised from general taxation. It goes on people’s bills-
Chair: It’s a tax.
Moira Wallace: -and that is why they are trying to control it. That is not something in legislation, but it is part of Government budgeting.
Q32 Chair: If, in controlling it in the context of this Report saying you need a £110 billion investment, this is capped at £15 billion in 2015 in legislation, and your nuclear guys or whatever-
Moira Wallace: It is not in legislation. The levy control framework is a matter of Government budgeting, but it is not part of the Energy Bill. It is not in legislation in that way.
Q33 Chair: You mean you negotiate with the Treasury what the cap is. There will be a cap-
Moira Wallace: Yes, there will.
Q34 Chair: But the actual level will be negotiated with the Treasury.
Moira Wallace: Yes.
Q35 Chair: Right. So what is the point of having a cap then?
Moira Wallace: Well, it is like any other budget.
Q36 Chair: You negotiate with the Treasury, anyway, every year.
Moira Wallace: Yes, but we do not put departmental budgets in legislation, so that we have to take more primary legislation to change them; it is just a normal spending limit.
Q37 Chair: But it isn’t one, because it is a negotiable one.
Moira Wallace: Well, you negotiate it.
Q38 Chair: It says, "Thou shalt have a cap", but then you are telling me you will negotiate every spending review with the Treasury.
Moira Wallace: But you do that with any Government budget. You do that with every departmental budget.
Q39 Chair: What?
Moira Wallace: In every spending review, you say what the budget is of DECC-
Q40 Chair: No, no, this is different. You are putting into legislation-
Jill Goldsmith: It’s not in legislation
Moira Wallace: It’s not in legislation.
Q41 Chair: Well, the cap is in legislation.
Moira Wallace: No, it isn’t.
Q42 Chair: So what is in legislation?
Moira Wallace: The mechanisms by which these levies will work are in legislation.
Ed Humpherson: What you may be referring to is that the Climate Change Act commits the UK to certain reductions in carbon emissions.
Chair: No, I understand that.
Ed Humpherson: That is what is embedded in legislation.
Moira Wallace: What is in the Energy Bill is the broad principles of new instruments, which are the way that we propose to run the new electricity market. Some of them are completely new and some of them replace things like the renewables obligation, which is familiar.
Q43 Chair: Yes, I understand that. What you are really saying to us is that if the companies do not emerge to invest the £110 billion that we need in infrastructure investment and networks-if they do not do that-you would be able to use a mechanism which would, in effect, through a levy on bills, bring a public subsidy in to support companies and to make it a more commercially viable proposition for them.
Simon Virley: In effect, yes.
Q44 Chair: In your modelling, have you done anything to show the extent of that potential levy commitment? In other words, out of the £110 billion network and infrastructure investment, how much in that modelling-you have done a lot of modelling, and I accept that the modelling is really difficult-do you think comes out of levy?
Simon Virley: We have published figures for the levy budgets up to 2014-15. We do not yet have published figures beyond that, but we are in discussions with the Treasury about how the levy control framework will need to evolve post-2015.
Q45 Chair: Let me test that out. Until 2014-15, it is how much?
Simon Virley: The total levy budget in 2014-15 is £4.2 billion.
Q46 Chair: But I cannot believe you have not done modelling. You have modelled prices and everything, so I cannot believe you have not modelled how much you think the taxpayers for a levy would be expected to contribute to get your £110 billion. You must have modelled it.
Simon Virley: We have done modelling, and we have published in the impact assessment-
Q47 Chair: Give us a range.
Simon Virley: We have published in the impact assessment what that translates to in terms of energy bills. We have said that we think that overall, our market reforms will reduce bills by 4% on average, compared with just sticking with-
Q48 Chair: Let’s come to that later. That all depends on people changing their behaviour and consuming less energy. What I am interested in is getting the infrastructure, which appears to be absolutely crucial. I am back on my first question, really. If the commercial sector does not reduce, you have now told me, "Actually, we’ll step in through the levy to support commercial investment." All I am asking you for is a range-I cannot remember the end date-of the extent to which you think the levy might be needed. You said £4.2 billion until 2015; what beyond that?
Simon Virley: It’s all dependent on how some of the projects that we are currently engaged in discussing evolve. We have not published-
Q49 Chair: I accept that, which is why I have asked you for a range.
Moira Wallace: I don’t think we can give you that. We are working on-
Q50 Chair: I bet you’ve got it. Why can’t you give it to me?
Moira Wallace: We are working on ranges. They depend on a lot of modelling. We will start to do this work in the autumn with the Treasury, but-
Q51 Chair: Moira, I don’t accept that. Everything else is modelled and shown here, including prices. You are about to tell me you have done modelling showing that the consumers are going to spend less. We will question that in a minute. You have done modelling on what impact it will have on commercial pricing. Within that, you have done modelling that tells you that you need £110 billion in investment. I cannot believe you have not done modelling which gives us a range on the extent of how much will be required from the levy.
It is really important for Government. We had our first national whole of Government accounts, and one of the good things about it was that it allowed us to look at commitments going forward. All I am really asking you is what the range is. I accept that it is all very iffy. What is the range of what you have got in this area?
Ravi Gurumurthy: Well, the Climate Change Committee published a report last week saying that they think the levy control framework to 202 should be about £8 billion in today’s prices. We are currently doing some work, because it depends on the mixture of technologies-on and offshore wind, biomass-and what is happening to fossil fuel prices. That is something that we are working on over the next year in preparation for the next spending review.
Q52 Mr Bacon: Sorry, that is £8 billion over those five years?
Ravi Gurumurthy: No, that is in 2020.
Q53 Mr Bacon: In 2017, it will reach that?
Ravi Gurumurthy: By 2020, they think £8 billion will be the levy control framework, the amount put on bills.
Q54 Chair: So by 2017, you will be spending £8 billion?
Ravi Gurumurthy: Well, these-
Q55 Mr Bacon: Did you say the amount put on the bill will be £8 billion?
Ravi Gurumurthy: I cannot comment too much on this. These are CCC figures, so I am just-
Chair: We understand that these are very iffy figures.
Moira Wallace: Which year are they for, from your memory?
Ravi Gurumurthy: From memory, they are for 2020, but we can get back to-
Q56 Mr Bacon: You said it quite quickly. Can you just clarify? The £8 billion that you are referring to is an example of an amount that might be put on a bill in 2017 onwards?
Ravi Gurumurthy: That is correct.
Q57 Mr Bacon: Each year?
Ravi Gurumurthy: I will have to get back to you on the precise details.
Q58 Mr Bacon: Well, do you mean it will only happen once and then stop?
Ravi Gurumurthy: No, it is recurring.
Q59 Mr Bacon: So it is each year?
Ravi Gurumurthy: Yes.
Q60 Mr Bacon: Right. That is all I was asking. I am being very thick here, I know, but I am trying to clarify in my mind. You are saying that £8 billion-it might be wrong, and it might be right-is an example of a number that you say the Energy Committee came up with recently.
Ravi Gurumurthy: The Climate Change Committee.
Mr Bacon: Yes, the Select Committee on Energy and Climate Change.
Chair: The parliamentary Committee?
Ravi Gurumurthy: No, the independent Committee on Climate Change set up as a result of the Climate Change Act 2008.
Q61 Mr Bacon: We will come to what you think in a minute. This is an example of a number that they came up with that would be added to energy bills in five years’ time, in 2017-roughly; it may be more.
Moira Wallace: Compared with a similar amount this year, which is £2.8 billion.
Q62 Mr Bacon: Yes. My question was merely this. When it gets to the £8 billion, if that is the correct number, and continued to be in the following year, there would be another £8 billion the following year, in 2018, yes? And another one the year after.
Ravi Gurumurthy: As far as I can remember, this figure of £8 billion is for 2020 and it is correct that it is £8 billion recurring.
Q63 Mr Bacon: It is recurring. My point is that is recurring.
Ravi Gurumurthy: It is recurring. At the moment, we are spending about £2.5 billion through levies. By the end of this levy control framework, we will be spending £4.2 billion.
Q64 Mr Bacon: That is what the independent committee that you referred to thinks. What is your own Department’s estimate?
Ravi Gurumurthy: We are still doing that work at the moment.
Q65 Chair: Perhaps either the NAO or you could help me. If it is at £8 billion by 2017, in relation to the £110 billion envelope that you talk about in the Report, because that is over time, how much is going to be out of the levy? The £110 billion is between now and-go on, Ed, help us.
Ed Humpherson: The £110 billion includes investment in new generating plant. It also includes a substantial amount-about £35 billion-that is investment in network infrastructure; the wires. And that £35 billion is recovered by National Grid from the charges it places on energy supply companies for using the wires. So that is outside the levy control framework.
Q66 Chair: Okay. So £75 billion is going into building new capacity. I cannot remember what framework. That is between now and-?
Ed Humpherson: 2020.
Q67 Chair: If by 2017, we are putting £8 billion through a tax called a levy-I am trying to get a feel for what proportion of the-
Q68 Mr Bacon: Since it is plain that the £35 billion is excluded from the control framework, how much of the £75 billion-roughly-is going to come from additions to bills?
Q69 Amyas Morse: Excuse me for a second. Let us go back to the £35 billion and not lose that. That will be paid for by the consumer as well, but through a different route.
Q70 Mr Bacon: That consumers might get screwed twice is entirely believable.
Q71 Amyas Morse: The only point that I would make about £8 billion is this. Am I right in thinking that that is net of efficiency-assumed levels of efficiency? And if you say the home bills will go-
Ravi Gurumurthy: No, that is just pure levies, so it includes the warm home discount, the renewables obligation and EMR support costs. It does not include the efficiency savings, which will offset those price increases. That is something that we can come on to, but essentially our analysis shows that prices will go up but the volume of electricity will come down and will offset that.
Q72 Chair: We will question that, because that is also about behavioural assumptions, which we had a to and fro with Moira about when we did smart meters. It feels to me that at least 50%, or 60%, of the £110 billion investment is going to come, in one way or another, out of the taxpayers’ pocket. It feels to me like that; I do not know how it feels to everybody else.
Jill Goldsmith: The investment is paid for by the companies and they will spread the cost of that investment over time.
Q73 Chair: No, no, no, because there is a levy supporting them.
Jill Goldsmith: What goes into levy cap is the price support that, through the contracts for difference-they can probably explain a lot more clearly than I can. Do you want to take over? But the contracts for difference is paying the difference between the-
Chair: I understand that.
Jill Goldsmith: But it is that difference that goes into the levy control framework, not the whole cost.
Q74 Chair: I understand that. It does not matter how it goes in. At the end of the day, it is subsidising the private sector to deliver new capacity and I am just trying to get a feel for things. Rather than us saying it is all being done by the private sector, which it is not, how much is the poor old taxpayer is going to have to fork out for this? Right? That is all I am trying to get.
Q75 Mr Bacon: And you are unable to tell us at the moment?
Simon Virley: Well, the vast majority will be private investment by the companies.
Q76 Chair: What is the vast majority? We have already had £35 billion-
Q77 Mr Bacon: Vast majority? Do you mean over 90%?
Simon Virley: The £75 billion refers to what the investment required from the private sector would be in the energy sector to meet the targets that we have set out.
Q78 Mr Bacon: But we are talking about the consumers. I would not accuse anybody of being deliberately obtuse-perhaps I am just being thick-but Mr Gurumurthy, you said earlier, "We haven’t got an answer, we’re doing that work now." How is it that this independent committee has got a number and you do not? Where did they the material to produce a number? Presumably it was from you and from other agencies.
Ravi Gurumurthy: You can look at different views of the electricity mix up to 2020, and different views of fossil fuel prices, and therefore infer different amounts of levy expenditure. They have done that work. We are obviously going through the process of developing the renewables obligation banding review. We are looking at the cumulative impact of all the different proposals, but we do not have a published figure yet, and we do not have a prime figure.
Q79 Chair: I am asking whether you have a range.
Ravi Gurumurthy: We don’t have a range. I can’t give you the range right now.
Q80 Austin Mitchell: Aren’t you putting yourself over a barrel with these companies? Only a limited number of companies can build nuclear power stations. The demand, according to paragraph 2.11, will be substantial. We have just had a huge increase in costs of the one that is being built in Finland. You have had two of the big ones pull out, which leaves only Electricité de France, which is heavily subsidised in France and will have to be subsidised here to come here. You are dealing with an industry-nuclear-that always lies. It always tells us that it will be cheaper, and it is always more expensive at the end of the day. So you are over a barrel.
Moira Wallace: I would like to say a couple of things. I would like to talk about the position on nuclear, and the position on replacing power plants that are retiring. They are slightly different questions. On nuclear, there were three consortia. There are still two functioning consortia. There is another one that has land at Sellafield-the Moorside site-which is also interested, and the former German consortium is trying to sell its project. We may still have three; we certainly have two. The whole purpose of the framework that the Report sets out-I think, rather well-is to say that we are not trying to bet the farm on one technology, but we are recognising that we will need a range of things, and it is sensible to be open to several different kinds of electricity generation that will give us low carbon and security of supply. That is why we have the framework we have for renewables, the framework we have for gas, and the framework we have to try to encourage carbon capture and storage. It is precisely because we do not want to be in a position where if any one of those turns out to be a lot more expensive or just does not deliver, we are completely stuck.
I have only just mentioned the supply technologies, but we are also looking at what more you can do on the demand side-the cheapest form of electricity is the kind you don’t use-how we can encourage more energy efficiency, and whether there are any new things we can do to encourage that. We are trying very hard not to bet the farm on one technology or one company. That is the whole point of our policy.
Q81 Austin Mitchell: You are not betting the farm, but the consumer at the end of the day will pay the price of the bet.
Moira Wallace: Well, our Ministers have made it very clear that in setting the incentives that the Energy Bill devises, value for money will be right at the top of their minds, and they want to be able to balance them against each other, and they also want to be in a position-
Q82 Chair: Moira, can you answer Austin’s quite important question? We will come back to keeping your technology options open and not setting targets for individual technologies. What he actually said is that we know, because all our history and experience tells us, that we want some nuclear-all the options have some nuclear. All our history and experience tells us that they will massively overspend and deliver late.
Moira Wallace: We are trying to learn the lessons in the way we are devising our approach to nuclear, so that we learn first from our own past experience, and secondly from the experience of other countries.
Q83 Chair: So in the UK, if and when we get a decision, it will deliver on time and in budget. Is that what you are telling the Committee today?
Moira Wallace: I am saying we are doing everything to make sure that it does. So if you will allow me to develop the argument-you can roll your eyes at me, but let me try to develop the argument-when we built a lot of our nuclear we were determined to have our own design and then to have another own design. The approach that we are taking in this country is to try to use generic designs, and to get them assessed by the regulator, learning from what has gone wrong in more recent projects that have taken a long time, when they did not finalise the design before they started building. We have got to learn from what has gone well in other countries too.
Q84 Chair: Where has it been delivered on time and in budget?
Moira Wallace: I am not talking about the recent experience in France, but there was a huge build-up in France in the 1970s. If we had had that, we would be in a very different position now.
Simon Virley: Based on that experience, as the report shows, on the levelised cost-the comparison between the cost of different technologies-nuclear could turn out to be a relatively cost-effective low-carbon technology.
Q85 Mr Bacon: Sorry, did you say levelised cost?
Simon Virley: Yes, that is a technical way of comparing the different technologies.
Q86 Mr Bacon: How do you levelise so that you can compare? What do you have to do?
Simon Virley: You have to take account of both the capital and the operating cost and then discount back to give a pounds per megawatt hour figure.
Moira Wallace: Over the life of a station.
Simon Virley: Those figures are in the report.
Q87 James Wharton: Figure 11 on page 35 concerns me a bit. It is the projected additional cost to consumers-both private ones and, more significantly, medium-sized businesses. It looks as if, by 2020, the cost to medium-sized businesses of these policies will be a fifth of their electricity bill, and by 2030 it will be more than a quarter and getting on for a third of their electricity bill. I represent a region in the north-east where we have some very energy-intensive industries, and those sorts of figures will ring alarm bills for them, because if a large proportion of your operating cost is your energy use and that will go up by nearly a third by 2030, you will obviously be very worried about the impact of that. What modelling do you do on the potential impact on the economy and the competitiveness of British industry if you push ahead with these policies and they have that impact?
Moira Wallace: Perhaps I can cut straight to your question about energy-intensive industries. I think, if I am right, that the graph about businesses is talking about much less energy-intensive industries. The Government have recognised that the impact of some of these measures on very energy-intensive industries, which are very mobile internationally, would be unacceptable. We have been working together with the Treasury and BIS on a package that is worth £250 million, to mitigate the impact on energy-intensive users. I think that the details of that will be announced in the autumn. I want to emphasise that there is some special mitigation proposed for the kind of energy-intensive users that you are talking about. Did that make sense?
Q88 James Wharton: It is reassuring, but it strikes me that that is a very low figure, when we have just been talking about adding billions to national bills. You might be able to help a few energy-intensive plants with that, but the money that we are talking about here will be quite insignificant, won’t it?
Moira Wallace: Okay. We also want to do something to help the kind of medium-sized businesses that we are talking about here. Inevitably, it will not help them if we do not have energy security or we don’t tackle climate change, so it does not change our objectives. We have had to look at how these costs are distributed across the economy.
Actually, I think that the main thing that we can do for these companies is to help them work on their energy efficiency. I think that the report says-it is certainly true-that we probably have a better range of policies to help householders work on their energy efficiency than we have to help medium-sized businesses. It would help medium-sized businesses to see some of the benefits of using less, even if the price is going to be higher.
Q89 James Wharton: I must admit that I remain to be convinced of that. What modelling do you do of the economic impact-the GDP impact in raw terms-of these policies? Do you have a predictive percentage figure for what you are knocking off GDP by pursuing these policies, which put energy prices up by this much in 2020 and 2030, overlaid against these graphs?
Moira Wallace: Probably the thing that I would point you to is the impact assessments that we do of the overall carbon budgets, which Ravi could talk about.
Ravi Gurumurthy: So, HMRC general equilibrium modelling looks at the impact of our policies up to 2020 and the cumulative impact on GDP is 0.4%. Just to put that in perspective, that means that year on year, it is 0.05% negative. It is a very small negative impact on growth. That is a central estimate. We also look at-
Q90 Mr Bacon: You said 0.4% and then you said 0.05%.
Ravi Gurumurthy: Sorry. Out to 2020, the impact is 0.4%, so each year-
Q91 Mr Bacon: So it is negative.
Ravi Gurumurthy: Negative. Each year it is 0.05%. That is the Treasury-HMRC estimate of the impact of our policies on economic growth.
Q92 James Wharton: Have you projected that forward to 2030 as well? Does it remain at 0.05% a year?
Ravi Gurumurthy: We have figures for the fourth carbon budget period, which is 2023-27, and the impact then is 0.6% negative.
Mr Bacon: Goodness! That is more than half of 1%.
Ravi Gurumurthy: It is 0.4% for 2020-
Q93 Mr Bacon: You mean in each year up to 2020.
Ravi Gurumurthy: No1, and then 0.6%-
Moira Wallace: The size of the economy is just that much less-
Q94 Mr Bacon: In total.
Moira Wallace: And so that is a tiny little slice.
Ravi Gurumurthy: It is tiny.
Q95 Jackie Doyle-Price: And still we are trying to get positive growth.
Ravi Gurumurthy: It means 0.05% impact on growth in a year. The economy will be minus-
Q96 Chair: It is 0.05%?
Ravi Gurumurthy: Yes, so by 2020 the economy will be at 0.4%
Q97 James Wharton: Within that, can I ask-because I think that it is a significant figure, even if it is not a mind-bogglingly huge one-if it will affect different types of industry? You have already said, for example, that the Department and the Government are looking at energy intensive industries of a certain type to try to mitigate this. Is the impact of this going to be focused in a certain area? Will certain industries suffer? I imagine that it is a net figure, and, for example, you have taken off the positive growth that we should get from new green industries that will grow out of this. Where is the impact going to fall? Where is your assessment as to who will suffer as a result of that lower growth?
Ravi Gurumurthy: The modelling is, just as you say, at a whole-economy level. It does not split it out sector by sector. The only way that we can do that is through looking at the price impacts on specific industries.
Q98 James Wharton: If I might ask for clarity on that? If that is a whole-economy model, it is not minus 0.4%; it is minus something bigger than that, but with the growth that you expect to get from new green industries added back in. The total net impact is minus 0.4%, which means that the impact on some existing industry is greater than minus 0.4%, and potentially quite significantly so.
Ravi Gurumurthy: Yes, in terms of the transition, there will be winners and losers, and there will distributional effects.
Q99 James Wharton: Who are the losers? That is what I would like to know. Who are the losers?
Ravi Gurumurthy: What we have said already-
Q100 James Wharton: You must know. You must have some idea who the losers will be.
Ravi Gurumurthy: The key issue is that there are distributional issues with our policies and we need to try to mitigate the impact on the energy intensive industries.
James Wharton: I understand that.
Ravi Gurumurthy: We need to break that out even more clearly; it is the electricity intensive industries that we need to focus on, because for gas there is not an issue.
Q101 James Wharton: I understand that. You have acknowledged that there will be winners and losers, which means that there will be certain types of industry and bands of energy consumption that will be the losers. They may well, on top of that, be focused in certain areas of the country. In that case, we should look at what the impact will be. Who are the losers? Who are the biggest losers? You must have some assessment.
Moira Wallace: I don’t know if we have a piece of work that shows that. If we do, we will share it with you.
Q102 James Wharton: Do you think that perhaps you should get one, if you don’t have one? I represent a seat on Teesside, where we have a lot of a particular type of industry. It may be that you have accounted for that. It may be that almost a huge chunk of that economic loss is focused on a particular area of the country, such as mine, and you are telling me that you have not done the work to figure out where it will fall.
Simon Virley: We have published, with BIS, a call for evidence in terms of the most affected industry-the energy intensive industries-that looks at those sectors in a lot of detail. That is the basis on which the Chancellor has already announced £250 million of tax relief.
Q103 James Wharton: Absolutely. You are telling me that you are doing something about that and that remains to be seen, but you are still telling me that there will be winners and losers. You do not know who the losers are and you do not know if they are in a particular area, because you have not yet done that work.
Ravi Gurumurthy: Just to look at some facts: first, if you take manufacturing, energy and water purchases tend to make up 3% of their total costs, so at the moment, energy and climate change policies are putting 21% on their bill. That will go up to 25% in 2020, so there will be a 6% increase between now and 2020. Bearing in mind that only 3%-
Q104 James Wharton: That is an average though, isn’t it? For some companies that will be far higher.
Moira Wallace: Can I break into this? I don’t know that we have that information. I think that if we don’t, it would be a really interesting thing to look into and we should. I would rather just say that and see what we can do on it.
Q105 James Wharton: Thank you. That is positive, but it surprises me that you have not already done that.
Moira Wallace: There will be uncertainties. A lot of investments may or may not come through, but let’s see what we can do.
Q106 Jackie Doyle-Price: This goes to the heart of what I think is a real weakness in the way that you have approached this. You are looking at it, quite rightly given your responsibilities, as, "How do we achieve our overall energy mix and supply?"; but there are serious economic consequences for particular areas, as James has said. You say that it is only 3% of some firms’ costs, but that is the difference between profit and loss in the current economic climate. We are talking about people potentially losing their jobs, so we are talking about a significant impact on economic growth, which cannot just be set away in figures. You have form on this. For good environmental reasons, we have had a general shift away from petrol for cars to diesel, but we have never done the real work in terms of how we will meet the demand for that. We saw only last week how that has been impacted out into the energy infrastructure here in the UK. Do you not think that you, as a Department, need to do more to join up with the rest of Government to ensure that the economic consequences of the measures really are understood?
Moira Wallace: We may be doing more than I am giving us credit for. We do work very closely with BIS and we focus very heavily on the geographical impact of our policies. What I don’t think we’ve done is put side by side winners and losers to the extent that we can judge them and tell the story for particular regions. I think that would be very beneficial for a whole set of reasons.
Q107 Mr Bacon: May I ask one follow-up question on this? You mentioned a figure of £250 million, which you said would be announced later this year, in mitigation of the increased costs for certain industries. How did you arrive at the figure of £250 million?
Moira Wallace: I’m not sure I’m going to give you the best answer. That was a decision reached last autumn, in discussions between the Treasury, BIS and us. BIS is actually the lead Department on that, so I am not so close to the reasoning behind it, although-
Q108 Chair: Maybe the Treasury can help.
Marius Gallaher: I’m not familiar with how that figure was arrived at, but certainly if we can produce a note, we will do that.
Chair: I don’t think it was very scientific!
Q109 Mr Bacon: It’s hard to understand-why are you smiling, Ms Wallace? Is it because you agree with the Chair?
Moira Wallace: Why were you smiling?
Mr Bacon: I was smiling at you!
Moira Wallace: I was smiling back. It is a very human reaction-
Mr Bacon: Well, I was going to say-bonobos and chimpanzees do it, too.
Moira Wallace: You’ve really got me smiling now!
Q110 Mr Bacon: It seems to me odd to have come up with a policy that announces-I know you haven’t announced it yet, but you’ve said you are going to, so it can’t be a particularly strict secret. You have come up with the figure of £250 million to mitigate the effects of this policy that is going to make energy more expensive, particularly for certain kinds of industry. You can’t tell us which those industries are. You can’t tell us in which parts of the country they are, because you haven’t done the work yet; that is what you just told Mr Wharton. But you already know how much it is going to cost the Government in terms of mitigating the consequences of it. I just want to know how.
Moira Wallace: I think probably I am being slightly unfair to the work of other Departments. This is not our lead. It might be that if you had the permanent secretary of BIS here, he would be able to give you chapter and verse.
Chair: But it might be interesting-I mean, you might know. This is one of our frustrations.
Moira Wallace: I can imagine.
Q111 Chair: I hope you can bear with us on this one. You did not lead, but you will have been involved in those negotiations and you must have some understanding of the basis on which the figure was arrived at. Simon can-
Simon Virley: Perhaps I can just add that what we have been doing with BIS is looking at the most energy-intensive sectors, which will obviously be the most heavily affected, and those that have most exposure to international trade and therefore are most at risk of-
Q112 Mr Bacon: So you have been looking at different sectors.
Simon Virley: There is analysis, focused on the sectors-coming back to the previous question-that are most affected by these changes and-
Q113 Mr Bacon: Which are they? This was the burden of Mr Wharton’s question earlier.
Simon Virley: It is the energy-intensive sectors that are most affected-the aluminium sectors, the cement sectors, chlorine, chemicals and so on. It is those sorts of sector that are most affected, and we have published a call for evidence-
Q114 Mr Bacon: Where margins are very, very thin.
Simon Virley: Exactly.
Q115 Mr Bacon: As Jackie Doyle-Price said earlier, in these sorts of bulk commodity manufacturing industries, 3% is an absolute gulf-a grand canyon of a margin, if you can get it. These things operate on very, very fine margins. You have plucked £250 million out of the air, after negotiation with BIS. I do not understand how you have reached that number.
Moira Wallace: Okay. I’m afraid we have to stop making this up, which is what we’re going to be doing if we’re not careful.
Q116 Mr Bacon: You mean you’ve been making it up so far?
Moira Wallace: No, but you are ignoring our comments that actually we’re not the Department that is responsible for it and therefore-
Mr Bacon: You do know 76.2% of statistics are made up on the spot, don’t you?
Moira Wallace: And therefore like nice, helpful people, we are trying to speculate on what the answer is, but we don’t know, so we’re not going to make it up.
Q117 James Wharton: Could I ask just one follow-up question? How much do you expect green industry and the growth from renewables etc. to add to the economy by 2020? Do you have a figure for that?
Simon Virley: We have a figure for the position by 2030, which is 250,000 jobs.
Q118 James Wharton: I am thinking of the percentage of GDP. Do you have a percentage-of-GDP benefit for 2020?
Simon Virley: I don’t have that figure to hand, but we have published a figure in the impact assessment for the electricity market reforms-
Q119 James Wharton: If you have it, would you be kind enough to send it? I just want to understand this 0.4% contraction. I appreciate that it is net. I want to know what we are actually losing from existing industries. If you would send it, that would be much appreciated.
Moira Wallace: I think we are circling round the same points. We will do our best for you.
Chair: Okay. We have Meg, then Jackie and then Austin.
Q120 Meg Hillier: Ms Wallace, you talked earlier about not betting on one option for the future, although I know, from previous work, that there is a bit of a tendency to dash for gas if all else fails. Obviously, we had a wobble on nuclear. But if you look at figure 3 on page 13 of the Report--this is part two of the Report-the National Audit Office paints four "possible balanced and technology specific options", saying that the Department "has not identified a preferred approach". Would you be able to tell us which of those top four options are the nearest to where you have got to? It is page 13 of the Report and figure 3.
Moira Wallace: We have deliberately not identified a preferred approach, because there is too much uncertainty to rule out any. The reason why we did this work this way was to try to identify what the things were you would do as "no regrets" actions, come what may. If I can comment on these a bit more, undoubtedly, in any scenario, you would want to do as much energy efficiency as you could. As the Chair reminded us, we had debates about how sure we can be about the effectiveness of that, but we are certainly all trying to achieve lots of energy efficiency.
In terms of how you choose between the others, you choose depending on how things turn out. We are exploring all of these. They all make sense. You heard the colleague who spoke earlier talk about the role of each of these technologies in the future in different countries. We want to have the chance to use whichever of these, in whatever mix, is right for the country. That is why we are trying to innovate in carbon capture and storage. That is why we are trying to make it possible for new nuclear to happen here. That is why we are supporting renewables and so on. It would be illogical for us to say, "That’s the one-we’ll go for that and ignore the rest."
Q121 Meg Hillier: None of those actually say, "Go for one and ignore the rest," but I hear what you are saying.
I want to touch on the demand side, then on the capital side. On the demand side, was your Department aware, when the zero-carbon homes target was abandoned by DCLG, that that was going to happen, and did you support that move?
Moira Wallace: I do not understand the question.
Q122 Meg Hillier: There was a target to have zero-carbon homes by 2016 and it was abandoned.
Ravi Gurumurthy: Zero-carbon homes have not been abandoned.
Q123 Meg Hillier: The definition has changed.
Ravi Gurumurthy: What they have done in particular is maintain the thermal efficiency standards-that is, make it as insulated as possible, so that you don’t need much heat-but there is less stringent need to use microgeneration to generate electricity in the home. That is a sensible change, because we should not be forcing microgeneration when maybe more centralised generation is more cost-effective. The key thing is the thermal efficiency of the home-that that standard maintains.
Q124 Meg Hillier: Does that mean that, in effect, what you have described, Mr Gurumurthy, is that there was a decision not to push microgeneration and to focus on other options? Given what we have just heard about not choosing options, that, in effect, downgraded that option.
Ravi Gurumurthy: The decision was born of a need to balance different objectives across Government. One was the need to maintain affordability and enable new homes to be built at a low cost, but equally to maintain our environmental objectives. In doing so, the priority was around thermal efficiency, because at the end of the day what we can’t have is gas boilers in homes-that’s the thing we have to tackle. If you build homes now that require gas boilers, that will be problematic, whereas on the electricity side we should look at the most-
Q125 Chair: May I make an intervention? My understanding was that the building sector was exempt from carbon pricing.
Ravi Gurumurthy: Heat is not part of the EU emissions trading system, so gas is not priced for carbon-that is correct.
Q126 Chair: So that is a control that you do not have on the building sector.
Ravi Gurumurthy: Yes. In some ways, electricity is easier to control, because it is capped under the emissions trading system. On heat and gas demand, we have to use other levers.
Moira Wallace: It would be sensible to develop the point, which I think might answer it. We have moved quite a long way in the past year to try to be more strategic about how heat will be generated in houses up and down the country, and to recognise that different solutions are appropriate for different kinds of housing. In some places, district heating will be appropriate, and in some cases, heat pumps will be appropriate. Part of the decision that you described was that the standards slightly got ahead of us in terms of over-prescribing that. Is that fair?
Ravi Gurumurthy: Yes. What you don’t want is a standard that is so precise about microgeneration or not, when actually we should be much more flexible about whether we want district heating or microgeneration of electricity. We should be a bit more technology-neutral about this.
Q127 Meg Hillier: What about those in the construction trade who say that if you can set a standard, the technology will soon develop and become cheaper in order to meet it? If you put in boiler A or boiler B, and boiler A is not very efficient but boiler B is, the builders will end up putting it in, whatever is demanded. The danger is that, if there isn’t a lever to push the private sector-which is providing these things-to develop the model, it will never become cheap enough. The best green homes that I have seen have cost a fortune to green, because they are using very much untested technologies in many cases.
Ravi Gurumurthy: We have used different levers in heating. We have used direct regulation. In 2005, we introduced regulation to insist on condensing boilers, and since then 9 million condensing boilers have been installed, which is saving £800 million on the amount we spend on heat.
Q128 Meg Hillier: But the whole thing about zero-carbon homes was that they were new homes being built-setting standards for the new build. My concern is that you can argue at the margins about which is the right option, and allow for flexibility, but unless you have some strong standards you are not going to get the construction. Basically, a builder is going to put in what they get from the builders’ merchants, and if they have the right thing coming through, the supply chain will meet the demands set by the standards. That is what building regulations are all about.
Ravi Gurumurthy: Building regulations remain, and they remain very tough, particularly on the thermal efficiency side.
Q129 Meg Hillier: But not on the appliances. For example, I have a fantastic build in my constituency, on the Colville estate. It is the tallest timber-built block in Europe, with compressed timber shipped in to Wales, dealt with there and then brought to Hackney. I was looking around with the tenants at some of the new flats, and we thought it was great to see the shallow baths. We thought that they were easy to replace. If someone wanted a deep bath they could relatively easily rip out the shallow one and put one in. Those things were put in to try to make them green in every sense. If you do not have people putting in the right sort of heat generator-if you do not require that-whether a boiler or microgeneration or whatever, they will not be built in enough volume to be cheap enough for people to want to put in.
Ravi Gurumurthy: We completely agree with you, and that is exactly what the building regulation standards are doing, signalling far in advance very tough measures in relation to insulation and heating.
Q130 Meg Hillier: I am not going to start discussing particular widgets; I have made some of the points I wanted to make. I want to move on, though, to the issue of capital. Do you think, Ms Wallace, that your Department has the skills needed to project manage the various things you have just mentioned-CCS and nuclear? You are dealing with big private sector corporations and billions of pounds of money. Has your Department got the skills necessary to do that?
Moira Wallace: We are developing, and we are having to develop, very fast. We are not complacent.
Q131 Chair: Out of interest, how many people have you got working on supporting the capital programme?
Moira Wallace: There is a figure given in the Report-right at the end of it-of the number of people who are working on electricity. There are probably some of our capital programmes that we would not call electricity. The Department is 14,00-
Chair: Come on, you must know this, because you will have cut it back to get your third off.
Moira Wallace: About 761-in fact, precisely 761-were working on the electricity objectives, so that is part of the-
Chair: That’s 761 on the electricity-
Moira Wallace: But that is a range of-
Q132 Chair: If we asked the MOD, and I am going to ask the NAO to do a comparison, when we had the building whatever they are called people in-
Moira Wallace: The Major Projects Authority.
Chair: Major projects. You have the second biggest capital investment portfolio.
Moira Wallace: We are aware of that.
Q133 Chair: I want to know how many you have working on that, and then I want to compare it with how many the MOD have got.
Moira Wallace: If Amyas can tell us, it would be very useful.
Amyas Morse: Thank you. You feel I should join in, do you?
Chair: But you must know how many you’ve got, Moira.
Moira Wallace: Well, it depends how you define it. Looking at electricity, which is what we are discussing today, across the range we have 760 people. If you then zero it in on, for example, carbon capture and storage, in the office of carbon capture and storage we have-
Simon Virley: Thirty-five. But that excludes specialist external support. I think we have brought in about 100 specialists to the Department overall over the past year. Thinking about how we take these reforms forward, we will heavily be involving National Grid, as system operator to help deliver them, recognising that they have some of the specialist skills that we will need to rely on.
Q134 Meg Hillier: Ms Wallace, you said "we are not complacent", but you did not actually say whether you think you really have the skills to manage this, and what you are going to be doing-
Moira Wallace: I don’t think we have yet.
Q135 Meg Hillier: So what are you doing to make sure that you have got the skills? This is public money-billions.
Moira Wallace: We are doing a range of things that are set out as part of the capability review that has just been done of the Department. We commissioned an external one, for precisely the reasons that the Report sets out. We have moved very quickly from being the newest Department in Whitehall-a strategy and policy department that said, "Right, we have the strategy and policy now, that leads to a set of very large long-term programmes."
The things that we are doing are: first, we have tried to prioritise out everything that we can stop doing. I was very interested that the guy you interviewed for my job, before me, said that he could not think of anything to stop in our portfolio, which is a common experience. But we have tried to take out everything that we do not need to do. We have really tried to recruit in specialist skills. We have recruited a lot of project managers, commercial people, secondees from industry and engineers-we have recruited a large number of engineers; the specialists we are going to need. I would not say that we yet have enough of them. We are really working to find the resource and to recruit the people. We are doing it by the priority and the urgency of the programme.
Q136 Meg Hillier: We are in 2012 now. You were established in 2008 and you are just recruiting people now.
Moira Wallace: No. We have been recruiting and changing throughout. Most of the programmes that form this portfolio that is now so large have been started in the last three years, and many of them have been started in the last two years. It has been a very big addition.
Q137 Meg Hillier: If we were to have you back in a year’s time, where would you want to see the skill sets in your Department? What do you think you are missing, and what pledge will you make to the taxpayer that you will have the right people to ensure that the tax pound is followed and spent wisely?
Moira Wallace: We would want to be able to give you much better assurance that we had the right size of teams with the right skills on all of our major projects. We would like to have no worries about any of them, and to have really experienced project managers in and around those programmes. We have got more than we had, and some have got enough, but that is probably at project manager level.
Q138 Chair: I want you to be really open with us because you are cutting your staff. Like every other Department, you are losing a third of your head count.
Moira Wallace: Actually, so far, we have not cut staff in the Department, so we are rather unusual within Whitehall.
Q139 Chair: That has been agreed, has it?
Moira Wallace: Yes, because we are cutting our overall admin spend, but that includes the Department and some of its arm’s length bodies and partners. We made the decision that some of the work of those arm’s length bodies and partners-
Q140 Chair: The Environment Agency has had a big bash, has it?
Moira Wallace: It wasn’t actually the Environment Agency. We reduced some of our investment in, for example, the Energy Saving Trust and the Carbon Trust, which came out of this admin budget, and we decided that given the projects that we were doing, we were going to have to put our resources on project management in the Department. So far, and we regularly get lambasted for this by people who do not approve, the number of staff within the Department has grown in the spending review period.
Q141 Chair: Who are these people who do not approve of this-is it the Treasury?
Moira Wallace: No, lots of people outside, who say, "Why is DECC still recruiting people?" The answer, as you can read in our capability review, is because when you are doing some of the incredibly important and quite risky things that we are doing, you would like someone who had the right skills for it.
Mr Bacon: I find that rather encouraging.
Moira Wallace: Oh, good. I will add you to my supporters’ list when we get lambasted. I am smiling at you.
Meg Hillier: Just to add in-
Moira Wallace: There is obviously a sting in the tail.
Meg Hillier: Given that people are paying taxes and the levies, we want to know that the money is being spent wisely. It is a double taxation on people and we want to ensure that we follow the pound. You have now laid out your question set for a year’s time.
Q142 Jackie Doyle-Price: We need 30 GW in new capacity between now and 2020. We are not going to get there, are we?
Moira Wallace: Well, that is not what we say. We have quite a lot of different options and quite a lot in the pipeline. Obviously, this is stepping up the investment rate compared with the past, but we have spent most of the hearing discussing how we are trying to make it attractive for people to do that. We are quite confident about doing that. We have seen some fairly dramatic results in renewables where a framework like this has been in place for longer. I am not being complacent about it, but our whole policy framework is designed to deliver this.
Jackie Doyle-Price: According to paragraph 3.15 of the Report, it suggests that there will be a gap between demand and supply by 2018, so when the wind is not blowing, how will we keep the lights on?
Simon Virley: In response to your first question, we currently have 6 GW of plant either under construction or being commissioned at the moment and a further 16.3 GW that is being consented, so that is 23 GW in the pipeline as it were. Not all of those plants that have been consented will go through; some may fall away. We recognise that there is a decline in what we call the capacity margin-the safe margin of supply over demand-in the second half of this decade. I mentioned earlier that we are introducing a capacity mechanism to try to address that issue, because we do recognise that there are challenges in terms of investment for the second half of this decade.
Q143 Jackie Doyle-Price: The capacity mechanism, though, is sticking plaster, isn’t it? What we really need is some serious action to unlock investment, and you are talking about investments that have a long lead time to start paying off and a lot of political uncertainty to encourage people to make these investments. You’ve just outlined that you’ve got 6 GW under construction and 16.3 GW approved. According to this Report, it is estimated a third of that won’t be delivered, so we are still talking about a big gap that needs to be plugged very quickly if we are not going to have power cuts on a regular basis.
Simon Virley: We agree that there is a huge investment challenge. That’s why we are reforming the market to try and get the incentives right. You mentioned the high capital cost of some of the low-carbon plant, which I think your earlier witness was referring to in the case of nuclear and offshore wind, which is exactly why we are reforming the market to give more stable returns for those kinds of plant, through the so-called contracts for difference. In response to your question about if there are power shortages looking likely in the second half of this decade, again, the Bill that is coming to Parliament will have a mechanism to address that issue.
Q144 Jackie Doyle-Price: Well, the message I’m getting from you is that we are trying, but I just think we are missing the big picture about what this means. If we cannot actually rely on keeping the juice on, how are we going to build a climate where we are able to generate economic growth? This is actually coming very quickly down the track.
Q145 Moira Wallace: We have spent a lot of this hearing discussing the fact that we are changing the electricity market and that there are going to be some quite sizeable mechanisms there whose purpose is to leverage more investment. They are built on mechanisms we already have, which have worked, and the reason they are changed is to deliver a lower cost of capital to industry, and better value for money for the taxpayer. Take the renewables obligation, which has been driving renewables investment, like it or love it, over the last few years: in 2009 we had 8 GW of renewable electricity capacity. At the end of April we had 13.4 GW, so that is an extra 5.4 GW of what is still quite a new, not entirely popular, slightly cutting-edge technology. That has been driven by exactly the sort of instrument that we are now actually rolling forward, but in, we hope, a better-value-for-money form. It is not dreaming that these instruments will have an effect; they demonstrably do have an effect.
What the Bill that we have issued in draft is doing is saying, "So how do we make those better value for money, and how do we make sure that the framework we’ve got is actually addressing all our goals?"-not just renewables but the whole low-carbon piece, so that we’ve got a bit of diversity and can balance the intermittency, and also so that it is looking at security of supply, which is the capacity mechanism. It is not a dream; it is based on things that have worked. It is based on things, as you heard the first witness say, that actually work in other countries.
Q146Jackie Doyle-Price: No, it’s not a dream, and you’ve got a strategy that’s evolved, and it has a lot of integrity from a policy perspective, but it is missing the nightmare that is coming down the track with the decommissioning of existing nuclear and the decommissioning of coal-fired plant through the large combustion plant directive and the end of the opt-out. You suddenly have this big spike that you have to fill-30 GW-and the evolutionary approach we have had just is not going to deliver it.
Q147Moira Wallace: Well, the evolutionary approach is evolving. The whole background to electricity market reform and the legislation we want to put before Parliament is to say that we have got so far by basically having a market with add-ons, but actually it needed a comprehensive rethink. That is what is in the Bill before Parliament. We do accept that there is a challenge of a very different nature coming, and that is why we are proposing instruments of a very different nature, and they are getting a reaction from people who say, "Wait a minute; these are instruments of a very different nature. This is a very big thing." It is the biggest change to the electricity market since privatisation. We are not pootling along doing the same thing.
Q148 Jackie Doyle-Price: No. The jury is out. One more thing, though. What have you got against biomass?
Moira Wallace: I haven’t got anything against biomass.
Q149 Jackie Doyle-Price: Because if you look at figure 8, it shows the support rate that the Department has given for particular kinds of technologies, and it shows that biomass has not done quite so well as offshore wind and solar; but the reality is that biomass does have the ability to generate significant amounts of energy. It is also generation that you can control-you do not have to rely on natural factors and therefore be vulnerable when the climate does change-so why are we not doing more to encourage that?
Moira Wallace: My friends are competing to answer this question.
Simon Virley: We have nothing against biomass at all, but it has to be sustainable biomass of course, subject to tough sustainability standards. We published some figures last year, in our renewables road map, that biomass electricity will contribute more to our target than on onshore wind, for example, and that biomass heat in the non-domestic sector would contribute more than onshore wind. So biomass is playing a very big part in our plans, both on renewables and on low carbon more generally, but obviously it has to be consistent, and we have some of the toughest standards in Europe to make sure that it is sustainably sourced. Do you want to add to that, Ravi?
Ravi Gurumurthy: It depends on what biomass you are talking about, so co-firing and conversions displace coal, and that is very valuable; dedicated biomass, if it is using unsustainable feedstocks, is actually bad in carbon terms. It really does depend what the feedstock is.
Q150 Jackie Doyle-Price: I have a final question, because I know that Amyas is trying to get in. Do you not think that you could have done more to assist in the technological development for carbon capture, particularly given that we have an inexhaustible supply of coal?
Moira Wallace: We are trying hard on carbon capture and storage. We did not have a hearing on it, but the NAO has done a very full report on our first competition, which we were very sad that we had to bring to an end. We have tried to learn from that and get up and going again as soon as we could, so the current competition is under way, and we have tried to apply all the lessons that the NAO and we could think of in its design. I think that what the UK Government are offering compares very favourably with what anybody else is offering. So it is a combination of the competition, which has a lot of money behind it. Actually, all the instruments and the framework of incentives that we are talking about today are something that CCS could benefit from. We have £125 million of innovation support for CCS-I think I am right about that. It is quite a set of things that we are putting behind CCS. We think it has enormous potential-the IEA thinks so too-if we can get it to work and get it to work commercially.
Q151 Chair: What is the time frame on this new competition? The last one was four years.
Moira Wallace: This one was launched in April, and the bids are due tomorrow.
Simon Virley: On 3 July-yes, tomorrow.
Moira Wallace: And we would like to make decisions in the autumn, having assessed the value for money, etc.
Amyas Morse: I understand the thrust-keeping your options open and moving forward in that way-but are you satisfied that you know how to measure whether you are getting somewhere? It would help the Committee to hear your thoughts about that, because we have the job of seeing how this is going and whether we are making progress and delivering value for money over the next period of time, and this hearing is really the start of that. At the moment, there are so many pathways and options, it is quite difficult to know where we should be up to and when we should be reaching a certain point. It would obviously be helpful to us-hopefully because it would be helpful to you-to know how you are going to track progress in a linear fashion.
Moira Wallace: There are several answers to that. First, obviously, we track the carbon budgets, so they track more than just electricity generation. At the moment, we are projected to do better than the carbon budgets for a whole set of reasons. Secondly, the independent Committee on Climate Change, which we have mentioned, already does annual progress reports-it has just published one-and those provide a very full assessment of where it thinks we are up to. But on electricity specifically, part of the framework we are introducing is that the Government will publish a five-yearly delivery plan, which will have not just words but numbers on where we would expect to be up to, and that will be updated with performance every year. We are trying not to change the plan every five years-mindful of criticism-but to update on performance every year.
Q152 Chair: Can I challenge you? In the report, from the bottom of page 30, is a whole series of milestones: "the first new nuclear power station in 2013…the first long-term contracts for difference in 2014"-although I note that you still have a state aid issue-and "carbon capture and storage projects from 2016", although the previous one blew. Are you on track? On the last one, "supplying around 30 per cent of electricity from renewable sources by 2020", I think you are probably more on track, but are you on track for the other three?
Moira Wallace: Yes, we are on track, but you were quite right to point out that before we thought we were going to do a CCS competition last year. So some of these are amended, but we are on track for all of the-
Q153 Chair: What is amended on those?
Moira Wallace: We would have started earlier if we got the first competition to work. I am not changing what is in the Report; I am just saying it reflects the fact that the first competition did not work.
On the last one, which is "Are we on track for 30% of electricity from renewable sources?", we believe we are. We have done a big bottom-up analysis. There has been a lot of progress on this. We are in a better position than we were last time I entertained the Committee on this subject. I think we were getting a hard time then, but actually deployment has really ramped up quite impressively since then. The Committee on Climate Change also thinks that we can achieve it if we keep up the pressure on delivery.
Q154 Austin Mitchell: You are giving us such a bum’s rush by arguing that we have to have 30 GW of new capacity by 2020 because you want to close down eight of the nine nuclear plants and all the big coal-fired plants. Can’t the life of these be extended, instead of rushing into dependence on foreign multinationals to provide the alternative?
Simon Virley: The question of life extensions is really for the operator, which in this case is EDF in most cases, to put to the nuclear safety regulator. So it is not an issue that we get involved in, in terms of day-to-day.
Q155 Austin Mitchell: Like if you give them an incentive to keep it going.
Simon Virley: That is a commercial judgment for them, obviously.
Q156 Austin Mitchell: You are subsidising incomers. Why is it a commercial judgment for them on whether it is closed?
Simon Virley: What I am saying is that it is a safety judgment. A lot of these nuclear plants in the UK are very old now. Obviously, a number of them have had life extensions, but that is a matter for the operator to discuss with the nuclear safety regulator. It is not something-
Q157 Austin Mitchell: So they could be extended?
Simon Virley: Subject to what the nuclear regulator says. It is not a matter that Government get-
Q158 Chair: But the point Austin is making is that you could choose to put more of your subsidy into extending them, rather than them developing new. That would give the security that Jackie Doyle-Price says you haven’t got. I am assuming that they could do things to make them safer for a bit longer.
Simon Virley: In so far as the carbon price floor, which is essentially a carbon tax, incentivises existing plant, there is an incentive for low-carbon generation to stay on the system. In a sense, that is an intervention that assists existing plant. But the point I was making was just that the issue about life extensions is a safety matter.
Q159 Chair: Yes, but you can invest in enhanced safety.
Moira Wallace: I don’t think we can make a 40-year-old reactor not be 40 years old. I think that is the point we are making. If an operator-
Q160 Chair: You mean if it’s not safe, it’s not safe, and there is nothing you can do?
Moira Wallace: The way I’d put it is that, if you have a nuclear power station and it can still run safely and the regulator will let you, then you will run it. The conditions are very good. Capital investment was done a long time ago. You will keep it going. But it is now a matter of safety, and we, rightly, do not interfere in that. It is between the regulator and the operators. But there have been a number of life extensions, and that has pushed off the moment of crunch that has always been, in all the time I have been in this job, the same number of years away, which is quite interesting, as a result of extensions. We have less flexibility on coal and oil, where the LCPD is just a matter of legislation, and operators have to comply or stop, basically.
Q161 Austin Mitchell: The coal-fired?
Moira Wallace: Yes.
Q162 Austin Mitchell: Why have they got to close?
Moira Wallace: It is a matter of European legislation, which was agreed some time ago.
Q163 Austin Mitchell: Can’t that be suspended, or extended?
Moira Wallace: No, I don’t think so.
Q164 Austin Mitchell: So for some EU directive, we have got to close down the coal-fired capacity that has served us so well for so long?
Moira Wallace: Well, because of the level and nature of the emissions from it. That is the reason for the EU law.
Austin Mitchell: To reach pollution targets that no other bugger is going to reach, probably, we have to close down our capacity, at the behest of the EU, which has served us so well.
Q165 Jackie Doyle-Price: Can I illustrate this with an example? A coal-fired power station in my constituency is having to close down because of the LCPD and because of the sulphur emissions. The station manager of that power station tells me that they only breach the sulphur emission standards in that directive when there is traffic congestion on the A13. To me, that looks like a very draconian response to the issue of sulphur emissions. To put the question another way, what would happen if we didn’t close those power stations? What action would the EU take against us?
Simon Virley: We would be liable for infraction proceedings because we had not followed the directive under EU law.
Q166 Jackie Doyle-Price: But if it wasn’t breaching the emission standards in the directive-
Moira Wallace: It wouldn’t have to close.
Simon Virley: It wouldn’t have to close because it would be compliant with the directive.
Q167 Jackie Doyle-Price: But my station has to close just because of two days a year when the A13 is jam-packed and there are higher levels of sulphur in the atmosphere. That is clearly not all generated by the power station.
Simon Virley: Well, obviously I am not familiar with that case-
Jackie Doyle-Price: But it illustrates the impact of this legislation, and in reality I think that energy security is far more important than satisfying that directive.
Q168 Austin Mitchell: Hear, hear. If we had carbon capture and storage-we’re not actually developing that at the moment, but if we had it and developed it, could the life of these plants be extended?
Simon Virley: If plants have basically opted in, are going to comply with EU regulations and then we develop carbon capture and storage, over the longer term one could potentially envisage a situation where you would-
Chair: May I take you in a more general direction?
Austin Mitchell: May I just make another point?
Chair: Is it on the same point?
Austin Mitchell: It is an international point.
Q169 Chair: Let me just ask about this, and then I will bring you back in on the international point.
There are clearly trade-offs to be made between investment in coal and gas, and in renewables. What these questions are getting at, and what I would be interested to hear from you and the Department, concerns your position on those trade-offs? Do you always put the reduction of emissions on top, or do you think about the trade-offs between that and the certainty of supply and where that supply comes from? We haven’t talked about that, but you may want to bring it in with the international point. Where are we on trade-offs? What is the current departmental attitude?
Moira Wallace: Our policy is designed to meet our carbon goals and our energy security goals as affordably as we can, because they are both so important. We are trying to devise a strategy that will meet both.
Q170 Chair: But there will be trade-offs. There must be trade-offs between them.
Moira Wallace: Of course there are trade-offs.
Q171 Chair: So what is the attitude? If you ask the Committee today, I think you’ll probably get a more pro-fossil-fuel response. All I am trying to get out of you is where your priorities are?
Moira Wallace: Presumably, you would quite like us to comply with the Climate Change Act?
Chair: I don’t agree with it, but these guys do.
Moira Wallace: Presumably, as a Committee you would quite like us to comply with the Climate Change Act?
Mr Bacon: Actually no, but that’s another story.
Moira Wallace: Did you vote for it?
Mr Bacon: I did, yes.
Q172 Chair: I am clearly in the minority. This is a serious question because there is concern about certainty of supply against doing well on the carbon emissions targets. What is your thinking? Where is your priority? Don’t tell me it is both.
Moira Wallace: I’m sorry but it is, because it is simply not acceptable-
Q173 Chair: What would give?
Moira Wallace: We do not want either to give, and that is what our Ministers would, and do, say when they are asked.
Q174 Chair: That’s not real world. In the real world, when you take individual decisions you have to balance one against the other. This is not theoretical; this is a real thing that you are going to have to do.
Moira Wallace: Okay, well, the policy framework is designed to deliver the decarbonisation we are committed to by law, and to maintain energy security. That is the policy.
Chair: It might be policy, but-
Q175 Meg Hillier: Does that not mean a dash for gas as your back-up policy?
Moira Wallace: Well, we could have a long discussion about the role of gas. We are not trying to have a dash for gas, but all the analysis in the Report demonstrates that gas does have a role to play in many different scenarios. There is a lot of gas in the pipeline. We are very uncertain about its future, and we are trying to create some kind of certainty.
Ravi Gurumurthy: We do not believe that you need to make a choice between security of supply and decarbonisation. If you want to improve security, you diversify, and that is exactly what we are doing to reduce emissions. We are increasing investment in gas in place of coal-it is half as carbon intensive as coal-and in renewables and nuclear. I think that supports both objectives.
Q176 Austin Mitchell: My point is about international statesmanship. I was talking to the President of Iceland on Saturday, as one does in Grimsby-nation state to nation state-who said that the proposal that was first advanced about 15 years ago to establish a cable from Iceland to the UK to use their hydro and geothermal generation resources is now practicable. They wanted to develop that, and the proposal put to them by the Americans and Canadians was that it should go via Greenland, picking up more hydro there, and across the States. But they wanted it to come to Britain, and he said that there had been no interest on Britain’s part in the development of that cable.
Simon Virley: That is not true. Our energy Minister, Charles Hendry, visited Iceland recently to discuss that very issue, and a memorandum of understanding was signed to try to take forward the question of an interconnector.
Q177 Austin Mitchell: Would it be significant? Is it technically possible?
Simon Virley: It is technically possible. It is a commercial matter for the parties concerned, but from a policy point of view, we are obviously keen to see greater interconnection. Interconnection will add only so much in terms of resilience, because we are talking about adding a few gigawatts rather than the tens of gigawatts that we need by way of extra capacity, so it is useful and it is valuable, but it will not completely remove the investment gap that we face.
Austin Mitchell: I’ll send him your response. Thank you.
Q178 Meg Hillier: I want to touch on back-up capacity. I do not know whether other Committee members are aware of the number of power stations that run a couple of times a year to meet capacity now. This has got to be a concern of yours. How are you considering balancing the risks that you will be using taxpayers’ money and levies to fund over-capacity? You will need some over-capacity, but you have got to get the balance about right in value-for-money terms for taxpayers. Perhaps you would explain your thinking.
Moira Wallace: One of the possible and likely futures for gas generation is that it will be less certain how long it will be operating, and it will be operating more as back-up. One of the purposes of the capacity mechanism and the capacity market, which Simon referred to a couple of times, is, when we need it, to find a way to retain that gas generation when it will not be generating as much as it is now, so that it doesn’t just lose hope and say, "I’m not going to wait for the small amount of time I’m needed." That is rather a Ladybird summary of the policy.
Simon Virley: We will be publishing further analysis of the so-called system costs-that is, what is the system cost of moving in this direction-very shortly.
Meg Hillier: We love detailed time spots in this Committee.
Simon Virley: I think the appropriate phrase is "Within a matter of weeks."
Q179 Meg Hillier: That is very quick.
Moira Wallace: It is sooner than summer.
Simon Virley: We are going to be publishing more analysis on the system costs, and the system analysis. Of course, National Grid does that every day in working through big swings in peaks and troughs just from the morning to night peak, so they are pretty skilled at managing the system as it stands at the moment. Initial research is saying that although this is an issue over the longer term, obviously it becomes more of an issue as you have mass deployment of low-carbon technologies in the 2020s, as opposed to an issue that is really big right now.
Q180 Meg Hillier: We will wait to see what you come up with, but in terms of the private sector investing, and therefore balancing that with the public pounds invested, it is pretty important to have a clear policy on that, otherwise an investment decision may not be made, and the public and taxpayers may lose out, so we look forward to that. Hopefully, Chair, that can be included in our Report.
Moira Wallace: The other thing we have done, which is not to everyone’s taste, is that the emissions performance standard that is being set will be grandfathered and kept at that level for some years-for many years-for those that start now to give them clarity about the long-term regulatory framework.
Q181 Meg Hillier: You have to look at all these things in terms of us being the best value for money Committee. You have spare capacity, which we have just touched on, and very little in storage, which has not really been mentioned. Then there is the interconnector with Europe and the challenges there, and turning up the flow from Europe. How are you judging which is best value for money for the taxpayer? Jackie Doyle-Price raised the issue of security, which is a big issue. We are the value for money Committee. Where are you looking at the value for money aspect of this? How are you making sure you get that balance?
Moira Wallace: What we are trying to do is judge the value for money of the actual incentives that we would design, legislate for and allow people to put on bills. The issues that you have described, which I am afraid we are going to go into print about quite soon, intersect with incentives in various places.
For example, some of the things you have just described could-I think I am right in saying-be supported through a capacity mechanism, because they would be able to provide supplementary capacity when it was most needed. Therefore, they would potentially have a case to be remunerated. So in the design of that mechanism, we would be thinking, "All right, what is the best way to spend scarce money to give you the energy security you seek?" Equally, in terms of how to set support levels for things that are intermittent and might give you more of those problems, you also take into account the demand-the cost-that they will put on the rest of the system.
Q182 Meg Hillier: You mentioned demand. We have touched on domestic demand, but in all the big capital works you are doing, how much is going into looking at reducing demand in the business sector, for example through smart technology that, at peak, turns off all the fridges or back-room hot water in businesses? I know there is some emerging work on this. I think Morrison’s supermarket chain has been one champion of it. Is the Department looking seriously at that to reduce demand, as well as building in this huge and potentially very expensive-we have not really touched on numbers, but what you are describing is quite expensive-extra capacity? Reducing demand would presumably be cheaper. Have you balanced the value for money on those two?
Moira Wallace: Yes. That work has two elements. Building on our old friends smart meters and smart grids, there is the question of the ability to flex demand at a time of peak and say, "Can we now turn off all the fridges, because x or y has happened?" We are also looking, through something called the electricity demand reduction project, at ways to take out demand on a more long-term basis, so it is not just about peaks. It would provide more value on an ongoing basis.
Q183 Meg Hillier: Can you give some examples of what you mean by that?
Moira Wallace: I am not sure I can. Simon, you might be able to.
Simon Virley: In terms of motors used in businesses, for example, are there things we could do to incentivise more efficient motors? That could be through a regulatory standard. Product standards were mentioned earlier. It could be through a fiscal incentive-capital allowances-or it could be through one of the market mechanisms, like a feed-in tariff. Obviously, we want to find the best value for money way of unlocking that potentially quite significant saving.
Q184 Meg Hillier: My concern overall, Chair, is that we have talked about lots of things here, and it is a very complicated landscape, if I were running a small business, or indeed as a domestic user-there is a lot of talk of contract for difference and capacity mechanisms. Sometimes I worry that we have overcomplicated things. Businesses sometimes say, for example, that when you measure carbon emissions, it looks at a spot in time, not the whole life of a product. That is one way that the Department or the Government have chosen to do it, but there are sometimes equally valid ways of doing things. You plump for one, but adding all these complicated factors means that you have to have, almost, a degree in DECC to understand as a business which is the best option to take. For a small business, that is quite challenging. What are you doing to help on that score? Would you agree with me that it is very difficult?
Simon Virley: Certainly, we agree that this is a complicated area. What we are trying to do is help with the interface with most customers by simplifying the information they get, for example, on their bills. We have lots of work under way with Ofgem to make energy bills simpler so people can understand them. The energy businesses will obviously have to understand our reforms, but most businesses will not have to worry about the wiring, as it were, behind what they are seeing.
In terms of smaller companies getting into the energy market, we have actually-
Q185 Meg Hillier: I was thinking about those who use things. You talk about motors. You just mentioned a couple of things-capital allowances or other mechanisms-that would encourage businesses to take a particular route. That is another complication for a small or medium-sized business, isn’t it? That is what I wanted to focus on.
Moira Wallace: If I may, I think that one of the things we will see, if some of these ideas go ahead-you are already seeing it to an extent-is the development of intermediaries who will understand the markets or understand the help that is available and translate it for business. That is how I would expect it to happen, because I think that to connect someone who probably does not want to be bothered, but who does want to save money, with quite a complicated mechanism, you will need someone in the middle to help do that.
Meg Hillier: Would you count those into the 250,000 jobs that you want to see in the green sector? Is that part of that total figure-yes or no?
Q186 Mr Bacon: A recent study in Nature suggested that large parts of the savannah in Africa will be covered by forest, because of fertilisation from carbon dioxide. I am sure you are aware that once carbon dioxide levels reach a certain concentration, there is generally a switch from savannah to trees. This fertilisation is forcing an increase in tree cover, which one might have thought would be a good thing, and not just if you are an elephant. To what extent have you taken that into account in your modelling?
Moira Wallace: Do you mean whether this is going to have a beneficial impact on greenhouse gas emissions?
Q187 Mr Bacon: Net. It is well known that trees consume carbon dioxide and pump out oxygen, so yes.
Moira Wallace: We have a very strong science base and I would be fairly confident that that was taken into account, but I would be very happy to check for you.
Mr Bacon: The paper in Nature was published by authors from the Biodiversity and Climate Research Centre and the Goethe University, Frankfurt. If you were able to do that and send us a note, I would be very grateful.
Q188 Chris Heaton-Harris: I am sorry that I had to nip out, but I had to attend a meeting with one of your Ministers, the Minister for Energy.
Moira Wallace: That was all arranged.
Chris Heaton-Harris: I am not trying to say that it was in the slightest, but if any of my questions have already been asked, please just tell me and I will shut up.
First, I want to know what your Department’s got against poor people. Your policies, both now and in the future, heap costs on the poorest in society. In your own papers that you have published, you lay great weight on product policy driving down people’s bills. Product policy is people’s ability to change big things, like dishwashers and washing machines, which people in our happy situation, on a decent salary, can do fairly regularly, but those in more challenging circumstances cannot. Indeed, in one of your recently issued papers it looks like about 65% of people will be worse off under your own figures because of the policies we are currently undergoing. Why are we trying to hit poorest people hardest in our energy policy?
Moira Wallace: Obviously, we are not trying to hit the poorest people hardest. There are several issues. One is about how policies are funded: what is the balance between funding them from tax and how much is funded from bills? Obviously, that has a particular impact on poor people. This Government have taken several decisions to move to taxation away from bills for policies that would otherwise have fallen on bills-renewable heat and carbon capture and storage being examples.
The second is a question of making sure that your policies to help people use less energy are appropriately targeted at poorer groups and that they have support to take them up. There is an analysis that we could share with you-I don’t think it found its way into the Report-that shows that our measures will help poor people a lot more, so long as we can get them to take up measures like the green deal, ECO and others like that, so we have a big effort on take-up.
Q189 Chris Heaton-Harris: Why has the Department stopped measuring how many people fall into fuel poverty because of the policies we are taking? That is what I got in answer to a parliamentary question last week. Indeed, the only figures I can find about those entering fuel poverty now, because of policy, were kindly provided to me by the House of Commons Library, which forayed through the DECC website to find them. If you are not collecting that sort of information, surely you have no idea what the effect will be on poor people.
Moira Wallace: I am a little perplexed by that and will look into it. I am puzzled by that. I speculate slightly that it might be to do with the fact that we have looked again at the definition of fuel poverty. If you are interested in these issues I expect you have probably looked at the Hills report, which looked at the definition of fuel poverty and concluded that it was actually sometimes too flattering to the Government and sometimes too hard on the Government; it wasn’t an accurate definition, and it recommended that we have a better one, so that we can actually see the impact of policy. We have said that we are going to consult on a new definition, taking into account his analysis. I don’t know whether that has had an impact. I will look into that, because I am slightly puzzled by it.
Chair: Will you do us a note in time for our report?
Moira Wallace: Yes.
Q190 Chris Heaton-Harris: There was also a written answer last week, to me that you had stopped measuring.
Moira Wallace: I haven’t read enough of your dossier, obviously.
Q191 Chris Heaton-Harris: I am sorry about the number of questions I am asking you, because, obviously, you know I really dislike the onshore element of our provision.
Moira Wallace: We have noticed that.
Q192 Chris Heaton-Harris: Surprisingly enough, I thought I might ask you about how the Department plans for the intermittent nature of wind. I understand-I understand from the Minister just now-that we have nearly got to the point where we are not going to be seeking too much more onshore wind. However, we are going to be seeking a great deal more offshore wind. Whether it is intermittency on land or offshore, if we are gambling a lot on this wind resource, I’d like to know how that is balanced, because we do not have the hydro that they have in Scandinavia, and I am sure you are very aware of the issues they are now beginning to see in Germany about the pressures on their supply and demand in energy policy, because of their something-or-bust approach to renewables.
Moira Wallace: We were discussing it before you came in, but why don’t we just summarise some of it.
Simon Virley: I was saying that we absolutely recognise the issue that you raise in terms of the system costs of intermittent generation. There is work under way at the moment inside the Department, which will be published very shortly, and the assessment at the moment is that those costs will grow as the deployment obviously ramps up. Mass deployment in the 2020s will obviously increase the system costs. There are a number of ways you can address that, including through demand-side response, as Moira indicated in answer to a previous question. At the moment, National Grid obviously manages big swings day to day anyway, and is coping. It says it can cope for the next few years quite well, in terms of the kinds of deployment rates that we are seeing; but there will be further work published on this very shortly from the Department.
Q193 Chris Heaton-Harris: Why has it taken so long to do some work on this? We have been having wind in our energy mix for well over a decade, and, indeed, the problems of intermittency have been well documented. I have a paper going back to 2006, an academic piece, on this, so why is the Department just about to come to terms with what intermittency does?
Simon Virley: No; I wouldn’t describe it as just about. We have already published, in our impact assessment with the renewables obligation banding review, our assessment of what those costs might look like, so we have been on this for some time previously, but this is further work that the Department has been doing with the help of National Grid to look at the system balancing costs and how they might evolve over time.
Q194 Chris Heaton-Harris: I have two more questions if I may. One is connected, because you are the Department with climate change in your title, and there are lots of questions about the make-up of the IPCC, and how it got its facts together, yet, as of this moment, this Government and previous Governments, or the Department, have not raised any questions as to the validity of the findings of the IPCC in the past, even though they have been well documented. Do we have any concerns about how some of the information that might be leading to policy choices now has been skewed in the past? Do we check that sort of stuff? When it gets to the point where there are inquiries in the universities themselves, does the Department start to look around?
Moira Wallace: Of course we take a very close interest in the state of the evidence base, because it is crucial to what we do. It sounds as if you might not agree with this, but the vast bulk of scientific opinion still supports what we are doing, and that evidence is, as far as we are concerned, overwhelming. We have worked very closely with the IPCC over the last couple of years, as it has had to sort out one or two things that were not as they should be, and we have taken a very close interest in that and made sure, as one of their representative nations, that we were satisfied with what they are doing. If you have particular concerns, we will look into them.
Q195 Chris Heaton-Harris: I have been trying to wade through the Energy Bill and, at the same time, this landscape review. I am sure someone else has asked this sort of question on the capabilities of the Department when it comes to negotiating huge contracts with big multinationals who have got unbelievable sums of money and the best lawyers on the planet. I know that DECC has not had as much of a cut as many other Departments, but still at a time when money is tight within your Department you are launching on an unbelievably large spend and I just wonder if you are very confident about your abilities to get the best value for money for the taxpayer on this.
Moira Wallace: We did talk about this before you rejoined us, but I am happy to say again that we need to develop and we are developing very fast. We are in a slightly different position from other Departments, because we have a very fast-expanding agenda and many Departments do not. And we have really prioritised our resources, so that DECC has been growing; the Department has been growing and our arm’s length bodies have not been. We have been recruiting a lot of specialists: commercial specialists; project managers; engineers; and so on. Some of those are permanent staff, but we also buy in specialist advisers and we get advice on who we should buy in for particular projects.
I am not being complacent about it but we can see the issues and the risks the same as you can, and we get a lot of help and advice from those around Whitehall who have the expertise and share our concern about it. So we really are working very hard to get the right people in the right place.
Q196 Chair: How long have you been in post, Ravi?
Ravi Gurumurthy: Two and a half years.
Q197 Chair: And how long have you been in post, Simon?
Simon Virley: Three years.
Q198 Chair: And you, Moira, have now been in post for a year?
Moira Wallace: I have been here for four years.
Q199 Chair: Four years? Blimey.
Do you expect stability there?
Moira Wallace: We expect a lot of stability.
Q200 Fiona Mactaggart: Unlike Chris, I am not an expert in this subject; it is not one of those subjects that I have particularly studied as an MP. Looking at it from the point of view of the interested amateur, if you like, I do not think I understand why the Government take this all to themselves. This Government say, "Oh, we’ll decentralise things."
For example, it seems to me that in terms of getting micro-generation the planning system has a very significant part to play. It takes a bit of time. It took a long time to get the riverside walk on the Thames, but just by saying to every single development that came up that if it was on the Thames, they had to put a riverside walk in, we got a riverside walk on the Thames. You could create micro-generation in the same way, and I do not think I can understand why we think we have to use taxpayers’ money, Government action or regulation that people have to do the carbon things themselves. I am not sure that we are using all the tools that are available. That is my question-are we using all the tools that are available, and if we are not using them why are we not using them?
Moira Wallace: There are two answers to that. I think that we do have to recognise that there are very different audiences out there, with very different pressures on them. For a whole set of reasons, people may not do things in their life or on their land that suit the climate change and energy security needs of the country. They may not believe that it is a problem, or they may simply say it is unaffordable or too much hassle. We have got tonnes and tonnes of research that tells us that. Therefore, because you think it is the public good and you would like to encourage people to do it, you try to find ways of encouraging and incentivising them to do it, whether that is financial, making it easier for them or behavioural science. The evidence suggests that it is not something that people are naturally going to do themselves, not least because of market failures; that it is just too expensive for them to do at the moment with the carbon prices that we have, or it is just too much hassle and it is item No. 13 on their to-do list and they are not going to get to it.
However, to look at your question a different way, I think there is a lot of scope and we are trying to use that scope to form partnerships with bodies-local authorities and community groups-that are much closer to the people who need to take action and might want to take it. We will use the people who are trusted, to say, "How can we help you insulate your loft, because it will be good for you and many others in so many ways?" We are trying to build partnerships but it is just not as rosy a world as you suggest, in which most people want to do these things, can do them and can afford to do them.
Q201 Fiona Mactaggart: I am not suggesting it is rosy. I just think that if we had clearer regulation about, for example, insulation standards on new build, or the requirement on business premises to have micro-generation of so much of their energy use, yes, it would increase the capital cost of initial development, but over time it would mean that we could compete with other European countries that do much better than us, on both of these things. We would be creating a system that, over time, made a difference.
Moira Wallace: The Government think carefully about when they want to impose regulation and when they do not.
Fiona Mactaggart: Oh, I see-
Moira Wallace: No. You will see that in current policy there are a lot of steps under way steadily to ratchet up the standards. We were talking about building standards but, for example, there are also the requirements on the private rented sector to raise the energy efficiency of properties.
Q202 Chair: Is this all one in, one out?
Moira Wallace: Some of it is.
Q203 Chair: So to get your "in" you have to get something out, have you?
Moira Wallace: Yes.
Q204 Chair: Or are you allowed to add in?
Moira Wallace: Well, the policy affects us the same as everyone else.
Chair: What did you say Chris?
Q205 Chris Heaton-Harris: I said, "Overall." The question should be whether overall this is one in, one out, because you cannot have, "Some of it is and some of it isn’t".
Moira Wallace: Anything that qualifies as a regulation is subject to that policy. I was shorthanding, sloppily.
Q206 Chair: I am going to ask three questions that I think we have not covered, and then we are at the end. The first is: do you care who owns and controls some of our energy supply, whether it is Russian, Chinese, Iranian?
Moira Wallace: This is an old chestnut. We are very keen to see inward investment, but there are certain circumstances and certain legislative powers, and if you had certain concerns you could take action. That is a summary of a much longer chapter.
Chair: So you do care.
Simon Virley: We certainly care if there are threats to national security or energy security, and there are powers, as Moira says, under various pieces of legislation, to give us the powers to intervene.
Q207 Chair: So you would intervene in the market if the Iranians bought up a couple of these nuclear companies.
Moira Wallace: It will not surprise you that we are not going to go through a list of countries and what we would do at different stages, but there are powers under the Enterprise Act, and there are criteria and circumstances in which they can be used.
Chair: You would intervene.
Moira Wallace: There are circumstances in which you could.
Q208 Chair: The second thing is: a lot of your assumptions are built on the idea that consumer demand will go down. It takes us a little bit back to when we were doing smart meters with you. You are assuming that consumer demand is 30% to 50% lower, as I understand it.
Ravi Gurumurthy: By 2050, yes.
Q209 Chair: Yet there could be population growth and economic growth.
Ravi Gurumurthy: Yes.
Q210 Chair: There are two questions really. First, what is the difference between the 30% and the 50%? What is the range, and the impact there? Secondly, what happens if you are completely wrong and there is no drop in demand? There are other people who disagree with you-someone point me to the page.
Ravi Gurumurthy: Our 2050 modelling assumes two things: demographic growth of 0.5% a year, and economic growth of 2.5% a year out to 2050. The range of different scenarios that you cited is a third to a half per capita energy efficiency improvement, and what is really happening in those scenarios is a lot of technological change, particularly around renewable heat pumps and electric cars. It is not just about behaviour change.
If you take a renewable heat pump, it is 300% to 400% efficient. You put one unit of electricity in and you get four units out. If you take an electric car, it is potentially 90% efficient, compared with 25% efficiency for a combustion engine, so the real difference between the 30% and the 50% is the level of behaviour change. In the 30% scenario, we assume that people do not turn down their thermostats, do not have smart heating controls and do not use public transport. We just see this technological change in terms of the consumer products. The 50% is about two things particularly, a modal shift in transport, and smart heating controls enabling people to turn down their thermostats.
Q211 Chair: That is very helpful. The final thing I want to ask you is: one of your instruments in the Bill will be to do these contracts for difference, so can you give us a little explanation? When I read this, I thought, "Are Government really fit-are you fit-to negotiate them and fix them? Will it not just, again, be another route into higher prices for the consumer?
Moira Wallace: We think the reverse, but Simon can-
Chair: It is the bit that Chris pointed out: have we got the capability?
Simon Virley: In a sense, what we want is for the market to reveal the prices by tendering out-revealing the prices by, essentially, bids coming back to National Grid as the system operator. What we are trying to do is to take Ministers out of this altogether, in the sense of the market revealing prices. Obviously, ultimately, Ministers will have to decide on the basis of advice from system operators, but that is the long-run model.
Q212 Chair: That means you will not want any contracts for difference.
Simon Virley: No, it will, I am just talking about the process of revealing the prices. You were questioning about how we ensure that we get the best value for money, and we want to do that, essentially, through competition and tendering arrangements over the longer term, to make sure that we have the cheapest bids coming back, revealing the cheapest forms of low carbon.
Q213 Chair: Is there enough competition on this out there?
Simon Virley: This is why we are at the moment trying to develop different technologies, to maximise that degree of competition-building on what Moira said earlier about diversity of supply. If we have got competition between renewables, nuclear and CCS, we can maximise the competition and drive down prices. In the short term, we still have to administer those prices where there is not sufficient competition. We have set out already our plans for how quickly we can move to tendering arrangements-as early as 2017, we hope, for some of the renewables technologies, and we will do the same for the other technologies in the years that follow.
Q214 Chair: The scary thing for this Committee is that this looks to us entirely like a recipe for the taxpayer being ripped off.
Simon Virley: Inherent in the way a contract for difference is set is, in a sense, the provision of a stable return for investors, but if the electricity price rises above the strike price, essentially the generator will be paying us and the taxpayer back. So this is a much better value-for-money way, and our impact assessment says that it should be cheaper in the long run.
Chair: As with PFI, I am sceptical of our ability to strike these deals properly.
Q215 Chris Heaton-Harris: Energy policy has always been about trying to back a winner of some sort, but then a game changer comes along, as when we had the "dash for gas" in the ’80s and ’90s. We heard evidence from the head of the gas, coal and electricity division of the International Energy Agency about what shale gas has done to the American energy environment. I think we are on the 14th issue of shale gas bids, which are just about to come up, and people are beginning to look at where and what shale gas is available in the UK. Is enough flexibility built into this programme to allow for a game changer to come in, should one turn up?
Simon Virley: The Bill and the programme we are setting out will not set in stone that this is going to be the mix. In a sense, we are relying still on the market, and obviously we can flex and adapt as developments such as shale gas turn out.
Our current assessment is that we are cautious about the impact of shale gas in the UK; obviously, there has been a transformation in the US, but if you are going to export it from the US, you have to liquefy and transport the stuff, and there are no significant export facilities that currently exist on the east coast, although they have now licensed some early stage. Pushing against that supply boost has been the demand pressure from countries using more and more gas, so even the IEA, which has itself been saying that shale gas is a tremendous boost, is forecasting gas prices rising-not falling-and if you look at the forward markets at the moment, in terms of what gas prices are looking like, the forward prices are rising rather than falling. You have to be cautious in the assessment.
Obviously, as far as indigenous sources go, if we can develop UK shale gas in an environmentally safe way, we will do so.
Moira Wallace: That is also why the CCS programme is so important, so that we will have a way of dealing with the carbon.
Ravi Gurumurthy: One reason why we have not picked a single pathway is because we need to try and keep our options open. There is one particular pathway in which we have shale gas in mind-the CCS pathway. Just to look at the numbers, in that scenario 40 GW of CCS are being deployed, and the amount of carbon dioxide going into the North sea would be the equivalent of North sea oil at peak coming out. So we still need other technologies. Even with 40 GW of gas or coal CCS, you still have 20 GW of nuclear on the system and 36 GW of renewables. That is why the diverse mix makes a lot of sense. The precise shares will change as the costs of different technologies emerge.
Chris Heaton-Harris: The reason it is important is because this is about industrial competitiveness, not energy competitiveness. If you are manufacturing cars-if you are Vauxhall now-and you have a question not about where you have an existing plant but about where you might invest in a new one, your energy price is a very big part of that.
Chair: Thank you very much indeed, very interesting.
 This statement was corrected by witness, transcriber heard “ Yes and then 0.6%”