CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1065-i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

The UK's energy supply: security or independence

Tuesday 24 May 2011

Professor paul Stevens, John Mitchell and Professor jonathan Stern

Professor Nick Jenkins, Professor Goran Strbac and Dr neil Strachan

Evidence heard in Public Questions 1-85

USE OF THE TRANSCRIPT

1.

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

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

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course .

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 24 May 2011

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Dr Phillip Lee

Christopher Pincher

John Robertson

Sir Robert Smith

Alan Whitehead

________________

Examination of Witnesses

Witnesses: Professor Paul Stevens, Chatham House, John Mitchell, Chatham House, Professor Jonathan Stern, Oxford Institute of Energy Studies, gave evidence.

Chair: Welcome to the Committee. Thank you for your time in coming in to see us. This is our first public session on this particular inquiry, although we have done some work in private first. As we have another set of witnesses, we have about an hour, if we can just pace ourselves with that in mind. I believe one of you has to leave at 11.30 am anyway.

John Mitchell: Sort of.

Chair: It will provide a natural opportunity because we have some more witnesses later on.

Q1 Chair: Could I start off with a general question? Do you think that we can be energy secure if we are not energy independent?

John Mitchell: Both those slogans upset me somewhat. Firstly, energy security is not a standard product. It is a bit like health; it is a bundle of problems and a bundle of insecurities for which there is no single answer. "Energy independence", President Nixon’s phrase, did not work in the United States and I think it is extremely unlikely to work here. I think those are not really the right points to start, if I may put it that way, but there is a security problem for energy, yes, and I think we need to differentiate it and say what we are worried about and what the policies appropriate to that are. In that, I think there is a big distinction between security against disruptions and more strategic security about prices and economic things. Finally, I think we don’t know all the answers yet. The future is very uncertain. We need to take it step by step.

Professor Stevens: I reinforce that view. I think putting energy independence and energy security together is a mistake because it implies that energy independence, somehow defined as not being dependent on imports, will generate energy security. You only have to look at a little bit of history. If you look at the UK over the last 40 years, two of the major energy crises were created by problems with domestic energy supplies, namely the coalminers’ strike. The French President is kept awake at night by the thought that the nuclear engineers will go on strike, in which case the French lose 80% of their electricity. Putting the two together, I think, is a mistake.

Professor Stern: In what I specialise in, which is natural gas, virtually all the major natural gas security incidents where large numbers of people and firms have lost gas have been due to domestic incidents. I really hope that we can put behind us what I call this kind of 1970s view of energy security which is that you can measure it in terms of import dependence. Basically, you can’t.

Q2 Chair: To put it the other way round, though, if we were very, very import-dependent, would that not also make us even less secure?

John Mitchell: That depends on how we prepared for the risks. Japan is very, very import-dependent. Their main problem is not an import-related issue at the moment. They have mechanisms to deal with disruptions in the form of very high stocks of oil and they have strategic policies to minimise their use of energy in general, which protects their economy. I think it is possible to separate them.

Professor Stevens: Yes, again I would reinforce that. Having high import dependence, it depends on what strategies Governments have in place to take account of disruptions, whether the disruptions are physical disruptions or disruptions associated with price.

Professor Stern: I think that is a crucial distinction between physicality and price, because I think it can be argued that if you are self-sufficient in energy, you have less of a problem with price spikes, although you have to be careful there, because obviously if you lose a crucial facility, you lose a lot of production and the price can go up. There is at least some credence to be given to the argument that says if you are not importing all your energy, you may have some greater control over price-but, I would argue, not over physical security.

Q3 Dr Lee: Would you say that it would be better to describe it by saying that it would be better to be independent of unnecessary risk in terms of where you get your energy?

John Mitchell: I think it is possible to define policies that reduce the risks of dependence on any source, whether domestic or imported, yes.

Q4 Dr Lee: My point being-and we are going to get on to it later-if we were to get our fossil fuels from a country that had a history of stability and maybe close geographical proximity, that would make us more independent of unnecessary risk in terms of getting our fossil fuels from further afield.

Professor Stevens: Possibly, but you do have to bear in mind the fact that these are international markets, so events in one country will have knock-on effects. This is particularly true for oil. Gas is a more regional commodity, but if anything happens in the international oil market to a particular supplier, it will have knock-on effects throughout the whole market.

Q5 Dr Lee: Does that then point to having a long-term contract at a fixed price?

Professor Stevens: If you can get a long-term contract at a fixed price, that may be an option, but again it depends on what level you fix the price at and what happens in the future as to whether that is seen to be a good or a bad move. If we are talking about oil, oil is largely traded on spot or short-term contracts. Long-term contracts are a thing of the past. Whether that could or should change is another issue.

Professor Stern: For gas, this is a major issue, and the UK is quite unique in having no-what the gas industry call-long-term contracts, which of course is a product of the way it has organised its market for the last 25 years. Now there is, I think, quite an interesting argument about having longer-term contracts, but fixed prices do not exist in this world. You have to set a price, and the price will move with the market price.

Q6 Chair: Is it just luck that we haven’t had the lights going out in that case, or have our contingency arrangements been robust?

Professor Stern: I do hate this phrase "the lights going out" because it really conjures up for me completely the wrong impression. We have had a number of gas security incidents over the last 10 to 15 years, including a very interesting one earlier this year, but no one has mostly known about them. I have written extensively about this, explaining how basically we came very, very close to a major problem in 2006, but it is totally unknown because the media were not interested in it. Nobody picked it up. Again we came close-not as close-earlier this year through a constellation of unusual events, but I would say we have been lucky in the case of gas. I think probably because of our huge import capacity, the problem will be less serious in the future, but I have made a very strong case in my own work for a much greater level of gas storage, which so far has not happened.

Professor Stevens: I would just add that for oil, of course, it is not an issue of the lights going out because we do not use oil for power generation. But again, if you look over the last 30 or 40 years, apart from the fuel protests, there have been no physical problems with supply. If there has been a problem, it is to do with price.

John Mitchell: I think I would just add that in the case of oil, the diversity of the international markets combined with our facilities for importing oil mean that it is not a problem. I remember when the lights went out in 1973 because of the coal strike, and the fact is one can diversify. The problem is that there may be dislocations, and during that period of dislocation, if you are dependent on a particular supplier and that supplier is affected by the dislocation, there will be a couple of weeks or three or four weeks while the suppliers get reorganised, and there will be a price effect, of course.

Q7 Chair: From the point of view of oil, given the just-in-time delivery arrangements on which retailers now largely operate-perhaps we had sight of this during the tanker drivers’ strike in 2000, where suddenly people started to realise they might not be able to get what they wanted in the shops, which is a different issue from the lights going out, but one that could be almost equally disruptive to most people’s lives.

John Mitchell: I think you have hit the nail on the head, if I may say so, because in analysing the 2000 crisis, there was not an overall shortage for more than a day or so, but the stocks were mostly held at refineries, which were blockaded, and therefore the lesson was to try to disperse the stocks nearest the point of consumption. I think that is a generally recognised principle now. I think the problem, however, for oil, is that deliveries, not so much in the refineries where they have back-up facilities but in retail stations, depend on electricity to work the pumps and so on, so one goes back to the question of how secure the electricity supplies are.

Q8 Chair: So what would you say that the main threats to our security are?

Professor Stevens: For oil?

Chair: Start with oil.

Professor Stevens: For me, the main threat is in terms of price. As John said, you have plenty of supplies; you have plenty of logistical options, so if one big supplier goes down, you can move things around. The problem is the impact on price and the macro-economic implications of that and the impact on consumers. That is, for me, the largest oil threat in the near term.

Q9 Chair: For gas?

Professor Stern: Price as well. I think we have now had enough episodes in the last two or three years that we can see the UK can cope with very cold weather. What it cannot do is to moderate the price effect of storage being run down very quickly and then to have some sudden threat to any one source of supply, which will cause a price spike. Empirically the market does not react to threats on the demand side. It reacts to threats on the supply side and it tends to overreact, so we might get a period of very high prices for a protracted period of time, which we could moderate through storage.

John Mitchell: In my view, the most serious threat is in electricity because of the run-down of capacity as the oil-fired and coal-fired stations are closed, because of the directive on sulphur and any possibility of a delay in the commission of new nuclear plants, or any delay in the forthcoming renewable supplies. I think the forecasts of Ofgem and others already suggest quite a significant drop in the capacity margin in the latter part of this decade. That is when, if a crisis of any kind hit, we would be in serious trouble.

Q10 Sir Robert Smith: First, I should remind the Committee of my entry in the Register of Members’ Interests as a shareholder in Shell and other oil and gas-related interests.

On the oil stocks, the EU are looking at some changes to the way oil stocks are handled. Do you think they have a clear strategy on how we can draw down those oil stocks?

Professor Stevens: I think the short answer is no. There has been historically a sort of-not a conflict, but a situation where you have the IEA emergency stock-sharing scheme and the EU scheme. It is not at all clear how the two are co-ordinated-I suspect because they are not co-ordinated-so it is not at all clear what would happen in the event of a serious emergency. Certainly, in terms of the IEA emergency stock-sharing scheme, there are questions being asked about how relevant it is in today’s oil markets.

Q11 Sir Robert Smith: Because there is enough confidence in the market?

Professor Stevens: No, because it excludes a large number of the major oil consumers. I am thinking here of the Brazils and Indias and Chinas. Also, there is no connection with the producers. It seems to me it would make eminent sense if the IEA scheme talked to OPEC and offered them a carrot to carry spare capacity and say, "If there is an emergency, you can have first go at the shortages with your spare capacity." There are all sorts of things that are being discussed, but I am not sure how relevant the EU scheme is, given the existence of the IEA scheme.

Q12 Sir Robert Smith: Looking at the UK, which is traditionally an exporter and still a major producer, do we need to start thinking about physical stocks, or is there still time to rely a lot on the fact that we have spare production?

Professor Stevens: Are you implying a sort of unilateral approach to this as an oil producer?

Q13 Sir Robert Smith: The UK gets some benefits from being a producer but it does not have to physically hold the stocks, because it can surge production. Do we have to, as a matter of policy, start to think ahead?

Professor Stevens: Certainly. If the North Sea is likely to decline, and all the signs are that it will do, then yes, there will need to be consideration of this.

John Mitchell: Changes made by the EU in the compulsory stock-holding bring the levels into line with the IEA levels, and that helps and should help the UK slightly. The UK gets a derogation from that, which I imagine will shrivel away as time progresses, but slowly.

Q14 Sir Robert Smith: In terms of our own security and strategy, does it make sense to try to maximise the production from our own resources?

John Mitchell: It depends on the cost.

Professor Stevens: And it depends on your view of what the prices might be in the future. Are you talking about UK depletion policy? Should we produce it sooner or later?

Q15 Sir Robert Smith: I suppose what is at the back of my mind is that the Treasury’s recent sudden change in the fiscal regime has caused a lot of uncertainty in the investment market-whether that, strategically, is the best way to secure your energy supplies.

Professor Stevens: What, by slowing development and keeping the oil for the future, as it were even if it is done by accident rather than-

Q16 Sir Robert Smith: I was probably thinking the other way round: by risking the loss of the infrastructure, that means that there will be a lot of stranded oil that will never be produced.

Professor Stevens: That certainly is a possibility, given the fact that a lot of the existing infrastructure must be coming to the end of its natural life, and to renew it or upgrade it is going to cost a lot of money.

Q17 Sir Robert Smith: One other thing on stock-holding. Does it make any difference whether the stocks are held by the industry or by a public Government body?

John Mitchell: It makes a big difference to the industry, because if they hold the stocks, the cost is on their balance sheets, whereas it is not if it is held by a public body.

Professor Stevens: In practical terms, I suspect, apart from that, there is not a great deal of difference.

Q18 Sir Robert Smith: One other thing came up in the earlier evidence about oil being a spot market, a global market. Is there any change in that in the way China is trying to develop a supply relationship right through from production to its use in China with its relationship with resource-rich countries?

John Mitchell: I don’t think so, no. The short answer is no. Firstly, there is no evidence of this in the existing Chinese deals. The oil is sold at market prices. Remember that the host Governments have a great interest in what their price is because their tax intake is based on that, so they will be very reluctant to give away, by means of some kind of a long-term contract, an advantage to the Chinese. I don’t think there is any big divergence. Having said that, there are some advantages in just being in there and knowing what is happening, but that is a matter of cents rather than dollars. I think, in that sense, China will be doing the sensible thing.

Professor Stevens: In most cases, to the best of my knowledge of the Chinese companies operating abroad, the oil is simply sold into the international market. There is no sort of integrated chain. It does not go back to Chinese refineries necessarily.

Q19 Sir Robert Smith: Finally, do you three have any views on the debate about whether conventional oil is globally peaking in its production capacity?

John Mitchell: It depends what you mean by "conventional oil". If you take the reservoirs that were in production 10 years ago around the world, yes, they are peaking, but new fields are being discovered. New methods of recovery are being developed and so-called unconventional oils. The border line is getting very fuzzy, so in terms of total liquid supply, no.

Professor Stevens: I would agree with that.

Professor Stern: I will leave the oil to these guys. There is no sign of peak gas production.

Q20 Dan Byles: Going back to oil, half the world’s oil obviously is transported by sea, and there are a number of key chokepoints that have been identified. Would you be able to identify one or two of those chokepoints that particularly affect the UK, or is it more complicated than that?

John Mitchell: I am afraid I take the view that "chokepoints" is another of those treacherous phrases. Suez used to be a chokepoint. It was closed for some years. The immediate effect of closure was very disruptive but the industry got around it. The ships took a longer voyage, more ships were built and so on. I think that is true of all the other so-called chokepoints. I do not think the UK is particularly exposed. We do not import very much oil from the Middle East, for example. We import it mostly from Norway, which is a friendly country that does not carry the same risk as some of the other sources of supply. I would say, no, I don’t think there is a particular chokepoint.

Professor Stevens: Not an obvious one. There was Bab-el-Mandeb, which is the entrance to the Red Sea, and I think that is more to do with LNG transport than crude oil transport as a potential threat.

Q21 Dan Byles: Because we buy on the open market, it is not the case that oil that would be destined for the UK would then be blocked; it is more a question of the impact on global oil prices, for example.

Professor Stevens: Prices are another aspect, yes. Price is definitely another issue. If the Iranians said, "We are going to close the Strait of Hormuz tomorrow", even though they could not do it, just watch the oil price.

Q22 Dan Byles: That was going to be my next question; exactly that. If the Strait of Hormuz was to close tomorrow indefinitely, what would be the impact? Not just on oil, but the knock-on effect on food security and so on, because it would have a ripple effect.

Professor Stevens: If it was closed permanently, the impact would be huge because the oil price would head-think of a number and double it-and stay there for quite some considerable time because the alternatives to getting the oil out at this stage are fairly limited. There are pipeline options, but their capacity is nothing like the amount of crude that goes through the Strait of Hormuz. But the idea of the Strait being closed for any length of time is inconceivable unless somebody puts a dirty bomb in there.

Q23 Dan Byles: Which is not entirely beyond the realms of possibility.

John Mitchell: The other big effect, of course, is that if the Strait was closed for a length of time, the economy of Iran would collapse; the economy of Kuwait would rest on its overseas assets; Saudi Arabia has alternative outlets, but through the Red Sea and not very large. So, yes, it would be enormously disruptive, but one of the points that I made in my submission is that we are now in the state, and will be for the indefinite future, where Middle Eastern oil basically goes east, not west, and therefore the physical disruption would not be to us; it would be to the East. That would of course generate a huge price explosion, but we would still fill up the tanks here.

Q24 Dan Byles: I am curious, because energy security in this sense and food security I think are quite closely linked. If this inconceivable event was to happen and a terrorist was able to explode a dirty bomb and actually close the Strait of Hormuz, I am just curious to know who, anywhere, is doing the details-knock-on, "what if" work-on what that would mean for the UK in terms of energy security and food security. I know food security is not necessarily your issue, but it is an obvious knock-on consequence of a semi-permanent explosion in oil prices.

Professor Stevens: I don’t know-

Q25 Dan Byles: Sticking to the price of oil, has anybody done any modelling on what the impact would be other than saying, "Watch the oil price explode"? Has anyone done any modelling on what might happen if the Strait of Hormuz-

Professor Stevens: I am not sure anybody has, and part of the reason for that is if you take a model that has been designed to look at the impact of oil prices on the macro-economy, if you double the prices, then the model goes out the window, so it would produce pretty silly results, I suspect.

Q26 Dan Byles: One final thing. Leaving aside physical chokepoints such as the Strait of Hormuz, are there any other infrastructure chokepoints, for example in refinery capacity or anything else, that could have a noticeable impact?

Professor Stevens: The big one is the Abqaiq facility in Saudi Arabia, which processes over six million barrels a day. It is an identifiable target and in fact has been targeted on a couple of occasions in the last eight years. If they were able to get in and do serious damage-and of course if you know what you are doing, you could do serious damage-then you would suddenly overnight lose six million barrels a day of crude capacity. Again, that would be replaced. There would be spare capacity out there eventually, but in the meantime the price impact would be spectacular.

John Mitchell: I think it comes back to the point about temporary dislocation. It affects the UK because in our system we export as much oil as we import. There is a huge in-and-out flow because the shape of our demand is different from the shape of our production. We have seen a little bit of this in the case of Libya. Low-sulphur crude not available; UK refineries are slightly less affected than others, but there is a shortage of a particular type of crude. This might be the case in many different kinds of disruption. I think there is a UK question here. Would the UK be able to deal in its refining mix with refining significantly different mixes of crude that would be available, just like this slightly heavier crude is available but it is not necessarily what we are accustomed to? There would be a time lapse, but it would be fixed.

Q27 Dan Byles: Before we go on, LNG was mentioned. Rather than exclude you, Professor Stern, the LNG chokepoint: what sort of an issue or impact could that have on the UK? Is there a specific risk to our supplies of LNG?

Professor Stern: I would say not really, although there was a threat of a strike in the Suez Canal earlier this year and that would have disrupted tankers. What it would have meant was, as John mentioned earlier, they would have taken longer to arrive. That could have happened at a very inconvenient time. If there is a major chokepoint, it may be Qatar. It is a very small state. It has two very large export terminals. The tankers pretty much have to take the same route. If for any reason either of those terminals were disabled through some kind of hostilities, that would have a big price impact on the LNG market, but again, more likely in the Pacific than here.

Q28 Dr Lee: I am looking at table 3 of Mr Mitchell’s documents. These are possible events and I am quite struck by this. I remember attending a conference about six or seven years ago and asking a distinguished former politician about democracy in the Middle East and something like "Arab states do democracy" has generally been the response of the Foreign Office for decades. That has all been found out to be baloney in the last few months and there is a sense that foreign policy is being made; they are making it up on the hoof at the moment to try to work it out. Obama has made some attempts to carve out a policy for changes that we had no control over other than providing them with the internet. I just wonder: in view of the fact that we are absolutely useless at predicting the future, it seems, does that not point towards weaning ourselves off fossil fuels in general?

John Mitchell: That is rather similar to saying, "It is dangerous to cross the road, so let’s stay at home".

Dr Lee: Not really, because you can cross the road by another way.

John Mitchell: Exactly. This is my point. The question is to find out what tools are available to deal with these different contingencies, and as we learn more about which contingency is coming to the fore, to lean on that particular policy instrument. For example, the one technology that would help on the lines you suggest is to improve the efficiency for which energy is used, because reducing the demand for energy, especially electricity, has a knock-on effect on the demand for imports, and therefore not only insulates us to some extent against shocks but also reduces the cost to the economy of surges in price, because the cost to the economy depends essentially on how much we import. In that sense, there is a universal strategy, which is to make the use of fuel more efficient.

Professor Stevens: There is an argument based on that to wean ourselves away from dependence on fossil fuels. There is also the climate change argument for the same thing, but it comes down to what it would cost and the speed with which you would want to carry out this weaning process. It can be done-for sure, it can be done-but the costs would be absolutely horrendously high.

Q29 Dr Lee: And our costs of being in Iraq, Palestine and Libya are not?

Professor Stevens: I suspect they are a lot higher than that. Again, it depends on how quickly you wanted to do this and what the political will was. For example, Western Europe could slash its gasoline consumption tomorrow if the European Union, if Brussels, introduced a law that put a national speed limit of 50 mph across the whole of Western Europe. Politically, that would be a very interesting exercise if the Germans could not drive down the autobahns at 200 km an hour. It comes down to the costs and the political will.

Professor Stern: I think also the three of us may be veterans at having seen these arguments come round again and again but for different reasons and now for carbon reduction reasons. I came into energy studies around 1973, and since that time it is very disappointing how little progress we have made towards what everyone considers to be a desirable objective, although for different reasons.

Q30 Dr Lee: Do you think that is a lack of political will?

Professor Stern: Absolutely a lack of political will to do things, as Paul was talking about and John also, particularly on the efficiency side. These are things that have been talked about for a very, very long time. I have been hearing about smart meters my whole career. I have still never seen one, although I am hoping to do so soon.

John Mitchell: If I could just add on a slightly more optimistic note, firstly we have to remember, after the second oil shock, the price of oil increased by about threefold in real terms and it stayed at that level, again, in real terms, for about 20 years. Oil lost 10% of the world’s energy market as a result of that, and the demand for oil fell. There was a big impact. Now we have a situation where the price of oil has increased five times above that higher level. It is unimaginable that this does not have a big effect on demand. Now, how will it have that effect on demand? I am talking now about an effect on supply as well, but the effect on demand is very difficult to pin down because we consume oil and energy in so many different ways.

There is not some big thing where we could say, "Well, let us track incandescent lights," but that is a simple example of a technology forced in this case by Government action and by EU legislation but supported now by the economics of a technology that springs from outside the oil and gas sector, but it enables substantial reductions in demand. Insulation standards do the same, and I know that companies like United Technologies, General Electric and so on and Japanese companies incentivised by what is happening in Japan are already developing and offering a whole raft of things. It is unimaginable that the technology we put on our mobile phones cannot be used to control the energy at the point of use. It will happen.

Sir Robert Smith: You mention, Professor Mitchell, about the refineries having to be tuned to their supply, but also there has been a sort of dislocation in the consumption of refined products. It no longer fits the profile of the refineries we have. The owners of the refineries seem to feel they do not have much margin and the question mark seems to be over where the next investment for the upgrading of those refineries is going to come from. Are there any supply security implications for the profile of the UK’s refinery supply side, or are we just going to go to India and import refined products?

Professor Stevens: That certainly would be an option, and you are right to point out that the refining problem, not just in the UK but globally, is that refineries are a very bad business to be in. The returns and the margins have been poor since the early 1970s. The result of this is that companies have always been reluctant to invest in refineries, and if you look at the history, the only reason investments have taken place is largely because of environmental legislation imposed by Governments on the product quality and the processing. This does present a problem, but, as you say, it is a global market, so if you cannot produce it here, you can simply go and buy it somewhere else.

John Mitchell: Paul is talking about the West. New refineries are being built in the Middle East and in Asia and particularly in India, and they are very profitable. People are building them and making money because the demand for refined product is surging. It is not surging in Europe and the US and the refineries are having to cope with a whole raft of climate-induced restrictions, so investment is not taking place. I don’t know the details of the change-

Q31 Sir Robert Smith: Given the Chairman’s earlier observation about the consequences of refined products not reaching their destination and how quickly things start to go wrong, will that alter our stocking of refined oil? Obviously, at the moment, if you have the bulk of your refinery on your doorstep-the response time and so forth when something goes wrong-if there is a much longer supply chain, will we need to alter any capacity products or refined products?

John Mitchell: There is already a requirement to stock a proportion of the compulsory stocks as refined products, yes. One could review that. I don’t know the details.

Professor Stevens: Again, it comes down to a cost issue. What are you willing to pay for insurance?

Q32 Christopher Pincher: Just following on from Robert’s point, between 2005 and 2025, the demand for oil in China alone is going to triple, and as I understand it, although you have said that there were more refineries being built in India, there is not much extra refining capacity outside the Middle East and Saudi Arabia right now. Does that not present a chokepoint that Dan referred to?

Professor Stevens: I would be very careful of taking too seriously these projections on China. The IEA, the last world energy outlook, projected that of the increase in oil demand expected by 2035, something like 63% was going to come from the MICs. You have heard of the BRICs; the MICs are Middle East, India, China. Now, the reason they are significant is that all three, for a long time, have had highly subsidised prices for their consumers. In India that process stopped in 2002, and in China it stopped in 2009. The result is that the final price to the consumer in those countries has been rising dramatically-around a 350% increase in the retail price of gasoline. A lot of Middle East countries are talking about the same sort of thing. Prices work and markets do operate, so eventually those sorts of price increases will impact on demand. I think the IEA is likely to find itself being way out on those sorts of projections.

John Mitchell: I think it is probably true that the surplus in refining capacity in the Atlantic region is much less than it used to be. The question is: what are we trying to protect? If we are trying to protect petrol at the pumps, building refineries is a very expensive way of doing that. Having a bit more storage near the spot is a more achievable alternative.

Q33 Barry Gardiner: Can I move to specifically gas markets now and ask some questions around that? Mr Mitchell, you said that the high transport cost of gas relative to energy content limits consumption mainly to countries with their own production or access to regional supplies, and Professor Stevens, you said that gas is essentially a regional rather than a truly global market. Now, BP have been saying that, in fact, gas is now becoming a global commodity as the increased US production of unconventional gas will led to more LNG cargoes. Am I quoting you from a period before that became a reality? Have things changed? Do you agree with BP now or do you maintain your position? If so, why is BP wrong?

John Mitchell: I think one has to define the terms. In my study on More for Asia et cetera, which you are quoting from, essentially I never said there was not going to be a global gas price. There is going to be arbitrage charged between all these markets, undoubtedly, but the main bones will be regional, and therefore regional prices and things that drive them will be very important. If you look at China, Russia and so on, it is the domestic price that determines the profitability of those industries, but Jonathan is the person you probably should ask.

Professor Stern: I am hesitant to agree with the proposition that gas is a global commodity, but it is globalising in the sense that the markets are beginning to influence each other in terms of price and availability. If you look at the statistics, what you discover is that only about 30% of gas that is produced in the world crosses an international boundary. Of that, only about 28% is LNG, and of that 28%, only 2% is committed to any specific market, so it is a very small spot market. The problem with using terms like "a global commodity" is it makes it sound as if gas becoming like oil, and it is not, and it almost certainly will never become like oil. It has moved a long way from the rigid international trade business that it was 10 years ago, and it will move further, but it is a very different commodity to oil and it needs to be seen in that context.

Q34 Barry Gardiner: Remind me again of the percentage that you said was being traded by LNG.

Professor Stern: It is only 28% of total internationally traded gas.

Q35 Barry Gardiner: Do you think that that is a driver of the globalisation of the increasing LNG-

Professor Stern: Absolutely.

Q36 Barry Gardiner: What percentage might that become?

Professor Stern: It might become as much as 40%, but again following the way John sees the world, which I think is right, in the Pacific it might be much more than that. In the Atlantic basin it will be less, especially with the apparent disconnection of the North American market due to unconventional gas-and that is something that it appears is going to continue at least for a few years. Europe is basically a pipeline market with LNG round the edges. Obviously, a country like Spain is very much more important, whereas the Pacific is really an LNG market with very little pipeline gas. There is more now that China is starting large scale pipeline imports and possibly India, but essentially the Pacific is where the bulk of the LNG gets traded.

Professor Stevens: I think it is worth remembering why oil is an international market, and the reason is because of the very low transport costs. If you are in charge of a cargo of crude oil heading to New York across the Atlantic and the prices change in Singapore, you can phone the captain and say, "Turn round and go to Singapore", and it does not take a great deal of price differential to get that arbitrage kicking in. Because gas is much more expensive to transport, that is more limited, but it is beginning to happen. As you say, it is globalising; it is not global.

Professor Stern: Could I could say one more thing specifically about the UK? The coming of LNG in the UK has exposed the UK to the global gas market, and that is really terribly important and a very new phenomenon. The UK in the last two years has become this fascinating transit market where we import LNG in Wales and to some extent in the Isle of Grain, and then we export equivalent quantities of pipeline gas out to the Continent. As a result of that the UK has really engaged with both global and regional markets for gas, which is a phenomenon I think we are going to be seeing a lot of in the coming years.

Q37 Barry Gardiner: In a previous inquiry, we concluded that the impact of unconventional gas was likely to be beneficial but not significant. Is that something that you agree with?

Professor Stern: I think we need to be terribly careful here. I mean, in North America, the coming of unconventional gas, which is not as the literature makes it seem-something that happened in the last five years-but something that has been happening over the last four decades, took everybody by surprise. That can justly be called a game changer for North American gas, and that is going to continue, although in my view not at the prices that we have seen in the last two or three years. I am very cautious about the development of unconventional gas anywhere else outside North America. I think it will happen, but I think it will happen quite slowly, and I am uncertain whether it will have the same kind of impact on the general gas market that it has had in North America.

If there is a place where that will happen, it could well be in China. I doubt whether it will be in Europe, although for certain European countries, Poland and perhaps some others, it could be significant, but the work that we have done suggests that it is not going to be significant in general terms for the European gas market-certainly not in this decade, possibly not even in the 2020s.

Q38 Barry Gardiner: What about for the UK?

Professor Stevens: If you look at the reason why the shale gas revolution happened in the US and you look at the many reasons that built up to it, and then you apply those reasons to the Western European or the UK context, it is simply not there. There are property rights issues and lack of service capability; it is a long list that says that yes, shale gas is going to happen, but it is going to be a very slow process. It is not going to be the same sort of game-changer that we have seen in the United States.

Professor Stern: And, crucially, it is going to need a different business model to the model we have seen in the United States.

Q39 Barry Gardiner: Given the threats to international supplies, looking at UK policy, are you confident that the policy the Government has in place will lead to adequate provision of both stocks and storage of gas?

Professor Stern: I am not sure I would necessarily eaute stocks with storage. I do not specialise particularly on the UK, but the work I have done on the UK has all been looking at the lack of storage and saying, "This is a serious problem in terms of gas security". I think it is less serious now that we have substantial import capacity, but it remains a very difficult problem, and new work that we are going to publish this year shows that because of intermittent renewables and the role of gas in backing up those renewables, it is going to become even more important.

We have a very odd situation in the UK. We have built very little storage in the privatisation era, and that is not because we do not have a lot of projects. There are lots of projects out there, but the commercial environment has not been such as to see them come forward in a timely fashion, and we have had serious problems with the Rough facility several times. We are not in any sort of panic situation, but we still have only about 5 bcm of storage, and we probably need at least twice that and possibly even more than that. In the current commercial climate, I do not see that coming forward.

Q40 Barry Gardiner: What is constraining them?

Professor Stern: Essentially the commercial way you look at whether you are going to invest in a storage facility is the spread between summer and winter prices, and you look at what happens when prices go up and see whether storage gets used. When you look at the last two or three winters, you do not see a justification for building new storage. In other words, it does not get remunerated at the kind of hurdle rates that commercial companies need. A lot of these companies, as I say, have gone through the permissions process. Some of them are ready to go; some of them are not but have done a lot of preliminary work, but many storage projects have been under consideration for a very, very long time and they really do not seem to be moving forward.

Q41 Barry Gardiner: Given what you said about the need for balancing fuel and the grid, and increasingly that being the case as we move forward to greater reliance on renewables, do you believe the Government should be focusing more clearly on incentivising storage or encouraging new storage to be built?

Professor Stern: I think the Government has two options. I think for me it just is incontrovertible that we need more storage. What you could argue is, "Well, a lot of storage is being built on the Continent. We have connections with the Continent. Why don’t we simply get access to those storages?" That is a good commercial argument. But should we have a problem with any of those pipelines from the Continent, that will, of course, sterilise our access to the Continental storage. I think there is a balance to be struck here between access to storages in Continental Europe-and there is a lot of German storage, Dutch storage; it is perfectly possible to do that-but also fast response storage in the UK from projects, and that we know about with ifferent developers. It is high time that policy addressed that issue.

Q42 Barry Gardiner: How?

Professor Stern: There are really two ways of doing it. We have been through the arguments for strategic storage: that is Government-built and commissioned storage with Government controlling it. Nobody likes that. Everybody says, "Well, then you have to make up rules of when it is going to be released and it will adversely affect the development of commercial storage". I still think there is a case for itt, but nobody else does, so that is not going to happen.

I think what we have to look at are obligations on companies to provide some kind of surge supplies. That could be storage. It could also be some kind of contractual mechanism that says, "You have to have contracts in place that additional gas will be delivered", mostly from, abroad in certain circumstances. The problem with that is that if there is a problem with the LNG market or a problem at a terminal or with a pipeline, that may not be possible. SO The problem has to be looked at in terms of obligations to supply, and that probably means a mix of domestic storage and access to foreign storages.

Q43 Sir Robert Smith: I just ask on the access to foreign storages. You have the pipe and you have got the-but history tells us that if you are a German supplier and you fail in any way to meet the needs of your German customers, you are going to get into so much trouble that the last thing you will do is respond to a market signal and supply the UK.

Professor Stern: This could not be done in terms of the old model of market signals. I mean, back in those days, British suppliers were told when they went and asked for access to storage, "Yes, sign a long-term contract with us and we will give you access to storage. If you show up in November or in February and say you want stored gas, we are not going to sell it to you because we have our own obligations", but so much storage has been built on the Continent since then that it seems entirely possible that British companies could sign contracts for storage to be delivered when they need it-but they would have to make those obligations.

Q44 Barry Gardiner: Should the IEA or some other organisation provide coordination of how stocks would be drawn upon?

Professor Stern: We now have the EU Regulation on Gas Security, which does go into some detail there. The problem is that countries are in a very different situation, so, for example, the Belgians do not have any storage, but they are right next to the Dutch who have a huge amount of storage. The regulation includes "n minus 1" concept that a country must be able to cover a certain proportion of the loss of the biggest supplier for a period of days. The difficulty with this is that what happens in reality is almost certainly different to what you plan for, but in my view for the UK (which is either the biggest or the second biggest gas market in Europe depending on what the Germans are doing at any particular time, but probably with more CCGTs it will be the biggest). It is really not a feasible situation that a country that depends so heavily on gas has so little storage, because unexpected events do happen. The problem of course is: who is going to pay for that?

Q45 Dr Lee: Developing the discussion on European gas security, in particular the pipelines from the former Soviet Union, do you think that the Nabucco pipeline is going to be built?

Professor Stern: Let me try to reiterate in as brief a way as I possibly can. I have continued to say that I think that 30 billion m³ pipeline will be built from the Caspian Middle East region. Sometime in the 2020s. Whether it will be called Nabucco, I do not know. Before 2020, I do not see gas available and I do not see markets available for such a pipeline. And not just Nabucco; all the southern corridor pipelines are very odd constructs, because the way gas pipelines get built is very simple. You have someone who finds gas and then you have a market for gas, and the two talk to each other and they build a pipeline between them. All these pipelines have been dreamed up by pipeline builders without reference to a gas source or even a substantial market, so I doubt very much whether Nabucco, as currently conceived, is going to go ahead before 2020. It could go ahead around 2020, but it is going to be very difficult.

Professor Stevens: I mean, there is a fundamental problem here of the difference between social cost-benefit analysis and private project appraisal. If Nabucco were to be built and was operating only at 10% capacity, this would be great news for the Western European gas consumers; in terms of the contestable market hypothesis, if somebody is a monopolist but there is a threat of entry, it forces the monopoly to behave as though it were in a competitive market.

The existence of Nabucco would constrain other gas suppliers putting gas into Europe to be, let us say, reasonable over the prices. The problem is that no private investor is going to build a pipeline unless it is going to be operating close to capacity, so you have this fundamental contradiction. I have to say that, in my experience, Brussels just does not get this. In other words, Nabucco is only going to be built if the European Union or Governments put money into it. If it is left to the private sector, it will not happen in the current circumstances because you need to operate pipelines at full or close to full capacity if you are going to make any money on them as a private investor.

Q46 Dr Lee: Developing this, Russian foreign policy seems to have a component of wielding this energy weapon as in, "You can have it; you cannot have it", and there is some evidence of that in 2009 in the Ukraine. Are you saying that if Western European Governments want to try to put themselves in a less dependent position on Russian gas that they need to subsidise a Nabucco line?

Professor Stevens: I think there is a case for that, certainly.

Professor Stern: I personally think that the difference Nabucco will make, assuming it is built-even if it is built quite soon which, as I say, I do not expect-is not going to create such large security benefits that I would recommend putting between 12 and 20 billion euros into building it. I mean, for me, to those who are concerned about the overdependence on Russian gas, LNG is a much more immediate and, I think, more commercially viable answer.

Q47 Dr Lee: Supplementary to that, is there any work done on whether it would be better for the UK to say, "Right, okay, we are not going to put 5 billion into Nabucco. We will put it into nuclear power"? Is there any sort of discussion about what is in our best interests? I mean, do you really think the UK is best served by going down this joint European energy security path or do you think we would be better off just looking after ourselves?

Professor Stern: I do not think the way to look at it is "looking after ourselves" because as many of us have said before, we are in a European market, certainly for gas, and arguably a global market as well.

Q48 Dr Lee: Yes, but you just said we will have to get it built. It needs to be outside of the market, so it is not within the market, is it, if you are talking subsidy?

John Mitchell: There has to be a trading market but the costs might have to be subsidised.

Q49 Dr Lee: But I am just suggesting that maybe we might choose to subsidise something else.

John Mitchell: Sure. I mean, in the Nabucco project as I understand it, nobody has signed up money yet and I would be surprised if the UK signs up anything. It would not be a direct beneficiary. It will be foreign countries who-

Q50 Dr Lee: My point is that if you were going to choose to subsidise something at the moment, would you subsidise a gas pipeline or would you subsidise some other form of energy saving or generation?

Professor Stern: If I was going to subsidise anything, I would subsidise gas storage.

Q51 Christopher Pincher: I should make clear I am a member of the Conservative Friends of Azerbaijan. Phillip has made a point about pursuing an energy independence line-about subsidising nuclear instead of a gas pipeline, for example-but is there not a risk that while we have economic co-dependence on Europe, then as long as countries in Europe have only one easy source of access to gas, through the Nord Stream for example, economic partners risk having their lights turned off, that type of phrase that you hate, which will damage their economies and damage ours too? Is not the real solution to dealing with a perceived problem to diversify supply from Russia?

Professor Stern: The Nord Stream, which is a very expensive pipeline, is specifically designed to lessen the problems through the Ukraine corridor. That is why Nord Stream and possibly also South Stream are being built. The events of January 2006 and January 2009 and a whole lot of other lesser incidents essentially persuaded the Russians that they could no longer rely on the Ukraine, and to a lesser extent, Belarus as well. Of course there is a perfectly reasonable perception that we should not be relying on the Russians anyway, but my view on this is the Russians have proved generally to be highly reliable suppliers. In fact, if you compare them with the reliability of a whole lot of other suppliers, they look pretty good. January 2009, which understandably is an event everybody remembers-we have written a great deal about this-in fact caused very, very little disruption to supplies except in South Eastern Europe.

It is something that we all need to be concerned about. The Nord Stream pipeline, as far as I am concerned, is an additional security benefit. Of course, should the Russians decide to politically act against Europe using energy as a weapon, that will make no difference, but I think they have rather strong incentives not to do that.

John Mitchell: One has to remember that with very small exceptions, Russia is dependent on pipelines for all its exports, and most of that goes to Western Europe. The cost of destroying that market would be enormous, so it would be a very extreme political situation to lead to that.

Professor Stevens: As we are concerned about security of supply, they are concerned about security of demand.

Q52 Dr Alan Whitehead: China has been engaging in what one might call vertical integration of their energy resources in terms of bilateral deals with a large number of countries to source and transport energy supplies. Should we be concerned about that particular move, and is that likely to develop further in the future?

Professor Stevens: I do not see why there is any reason to be concerned about it. If you are concerned about the supply of oil in a global market, it doesn’t really matter who produces it from where so long as it is produced and goes into the market. Whether it is the Chinese companies that are doing it or the Western international oil companies doing it, it does not make a great deal of difference.

Professor Stern: The case of gas is different because unlike the oil situation, the Chinese have a pipeline from Turkmenistan and will shortly have one from Myanmar, which will deliver gas directly to China, and in all their LNG projects they insist that those physical molecules are delivered in the ships to China, so they have a direct vertical integration. But again, I do not think there is anything to be particularly concerned about here. What is interesting is that I think China is a major competitor and a much more successful one so far than anyone else, compared to Europe, for Caspian gas. The Chinese have shown, certainly as far as Central Asia is concerned, that they are prepared to buy very large supplies of Caspian gas and they are prepared to finance all the necessary infrastructure in contrast to the European situation we were just talking about.

John Mitchell: I do not know quite how-whether "concerned" is a red light or amber light. I think I would go on pale amber, because the Chinese companies who are going abroad, as the US and European companies went abroad in the past, are very much the same sort of thing. The advantage they have at the moment is that, thanks to the huge trade surpluses of China, funds are not a problem, and the Chinese Government has many agencies through which development aid, investment aid, soft loans and so on can be channelled in parallel to what the companies are doing and are often linked to it. That is something Western companies do not have, so it is a problem for the Western companies. There is no question about that.

I do not think it is a problem for world suppliers for the reason that has been given, except there are some kind of nuances about that. One question is that in times of crisis or in times of stress, would the Chinese have an advantage? If they were there in the country, they would obviously have some political advantage, and they would have a huge advantage because the host country would always want to get the best price. The question arises, I think, in two particular areas. One is the effect of the China Inc approach in certain particular suppliers, what I call the pivot countries: West Africa, Iraq, Central Asia, where logistically the suppliers can go either way. I am talking about oil now. The suppliers can go either way and a little bit of a push can help them. Their welcome to investment by the Chinese, not tied to human rights and other concerns, gives them a competitive advantage, and I think probably it will be fair to say that Western Governments need to think about the competitive position of their companies in those situations, and whether it is possible to adopt a more coherent view about EU or British aid to those particular countries to keep the flag flying. I think that is one issue.

I think the other issue is there are certain countries where the dependence on China, not just for investment in oil but also for markets, defence procurement and other things, is rather serious. An example of that is the Sudan, because the Sudan has been excluded from access to a lot of Western markets, but that is an exceptional case.

Professor Stevens: It is also worth pointing out that the Chinese oil companies have done a brilliant job in convincing their own Government that because they are concerned about energy security of supply, they should be allowed to go out and explore and develop oil outside of China, and if you are China, concerned about your oil security of supply, does having oil in Sudan really help you from that point of view? I wonder if at some point the Chinese Government is going to realise that it has been victim of a very, very effective campaign by their own companies. It is principal agency; it is a classic example of principal agent analysis. Why a lot of national oil companies go abroad is to disguise from their own Governments what they are really doing.

Q53 Dr Whitehead: Mr Mitchell, the suggestion that you have made appears to suggest that European oil interests in particular ought to have regard to the extent to which by, for example, shunning countries that have desperate human rights issues, they are losing out to energy capture by China. Would that be a fair summation of what you were saying?

John Mitchell: We had a conference in Chatham House about this subject a couple of years ago when it was just beginning, and the representatives of countries like-I won’t particularly name them, but the developing countries who are receiving Chinese investment said, "This is great. This is a degree of freedom that we do not get when we go to the World Bank or to international banks that are bound by the Equator Principles or any of those other people who tried to impose all sorts of conditions on how we run our country. The Chinese don’t do that." They are very happy to have that additional component in their investment pattern. I don’t suggest that Western Governments or companies should give up their attention to human rights and all those issues, but I think some attention could be paid to a more holistic approach to relations with those countries that are, as I say, in a pivotal position.

Q54 Dr Whitehead: Is this, in your collective view, an emerging issue of energy being used as a tool of foreign policy, or is it just business as usual? You have mentioned, Professor Stern, the question of the role that oil companies in China have played in terms of convincing the Government that they ought to go and capture supplies elsewhere in the world, but conversely, I think the Chinese Government in May has announced plans to restrict the sale of oil overseas in order to keep high supplies within the domestic market and prices low. So is there an emerging pattern of policy development as far as energy management in oil supplies are concerned, or are there other factors, do you think, as far as China is concerned?

Professor Stevens: It is very difficult. I would not claim to be a specialist on China. You would need to ask somebody who had much better insight into the way the Chinese Government behaves, but it seems any Government is going to be pursuing its own self-interest, however it perceives that self-interest to be. If the Chinese objective is to win friends and influence people, then certainly this is one way of doing it, although one has to say that the experience in Africa, particularly somewhere like Angola, has not been particularly good from that point of view, because they have made themselves extremely unpopular in countries like Angola.

Professor Stern: I wouldn’t claim great expertise in this, but in the cases I am very much familiar with, which are the gas cases, I think a big issue, along with foreign policy, is that the Chinese are willing to except commercial terms that nobody else, and that includes the Russians and anybody else, can compete with. What the Chinese are prepared to do in terms of just committing vast amounts of infrastructural money is beyond what any market-oriented company could possibly do.

Professor Stevens: It is the cost of capital.

Chair: All right. I think we are out of time, unfortunately. Thank you very much indeed for your helpful advice and views.

Examination of Witnesses

Witnesses: Professor Nick Jenkins, Cardiff University, Professor Goran Strbac, Imperial College, London, and Dr Neil Strachan, University College, London, gave evidence.

Q55 Chair: Good morning, and thank you very much indeed for coming in. You will have heard some of the previous session as well. Could I start with a general question? What would you say are the key risks we should consider in assessing energy security?

Professor Jenkins: It is probably useful to explain our limitations on that very broad question. I think generally the expertise we have-the limited expertise we have, of course-is on the energy networks. Anything I say, and others can speak for themselves, will be on that point.

Chair: Fine.

Professor Jenkins: The generally accepted issues in terms of electricity networks are: aging assets, common mode failures stimulated by those aging assets, and the fact that as we move towards a sort of decarbonised power sector, which is what we are charged to do, we are likely to end up with much greater electricity flows, so they then stimulate risks on the electricity network.

Professor Strbac: To reinforce that, the area of interest that we might contribute to this is about the infrastructure provision for security rather than the energy itself that goes into it, so I think I would-I don’t see anything else. It doesn’t cover the area of infrastructure, which we hope to maybe give you some useful information.

Dr Strachan: I am much broader than networks, so let me try to broaden out your question. You may have heard this typology before. I think it is important to make a distinction between risk, uncertainty and ignorance. Risk is things that we know about that we can attach a probability to, whether failure of infrastructure; uncertainty is things that we know will happen, but we can’t assign a probability to, so the risk of oil shock; and just sheer ignorance is about things that we don’t know won’t happen.

Clearly, we would like to do some blue sky thinking to move our ignorance into uncertainty, but I think it is important to think those three things. As a general process, the more specific something is, if it is a risk, the easier it is to identify a strategy and the cheaper it is, and as you go broader and broader, you get a broader response to security and it gets more expensive. To just close with an example: if your risk is to do with your electricity network, one response would be to increase your spare capacity in your network, and that is relatively cheap. I mean, these things have a lot of positive zeros, but it is relatively cheap. If you are trying to address a whole host of uncertainties-and indeed, ignorance-one robust strategy would be to reduce your demand. Economists like myself will argue as to how expensive that is, but that is much more expensive-perhaps an order or two orders of magnitude more expensive than doing something specific.

Q56 Chair: Just going back to infrastructure, do you think we should be focusing on trying to improve the resilience of our infrastructures rather than addressing specific risks?

Professor Strbac: The infrastructure security is a kind of balance between the cost you put into it to have a spare capacity, as it were, versus the benefits it brings in terms of avoiding shortages of supply driven by the problems in the infrastructure. Striking that balance requires-and we are very good at understanding what the cost of the infrastructure is, but not quite as good at understanding how we quantify in cost the pain if things go wrong. That is what I think we need to start to understand.

You can also divide infrastructure into two big areas: connected, like networks; and generation, particularly electricity, which is where I come from. The networks are natural monopolies, and they provide security of supply in terms of how good they are. This is based on standards that we developed quite a long time ago and haven’t been reviewed since the late 1940s. In my view, there is lots of evidence to try to review those, and if anything, what I was interested in is that we have perhaps more security than we need in terms of the network infrastructure in particular.

In fact, it gets worse than that in that the security considerations are costing us potentially quite a lot in terms of the ability of the system to absorb cheaper generation, particularly if you go to look in places like Scotland. We want to try to extract wind out of that, and we have 1948 security standards that tell us how we operate, so we are restricting the amount of power that can go across because we are worried about security and follow up. If you were to calculate how much consumers would place value on that security, you would come up with a 100 times bigger value than any number anybody uses anywhere else, so I think there is a strong case to review the level of how we run the system. Are we overly cautious? If you compare with other countries, it seems to me that certainly the network infrastructure in the UK is currently okay-more than that-and it seems to me there is a potential case to worry less about security of networks rather than worry more about security of networks. If I can start with that, we can explore it a bit later then as well.

Generation is obviously a competitive business, and there is no prescription at the moment as to how much capacity we should have. That kind of market would come up with that solution. I am sure you are all informed about EMR, Energy Market Reform, which is addressing some of these questions and saying, "Will the market deliver the sufficient capacity, given that there is a lot of interest in wind generation and so forth?" Again, that is the balance between cost of spare capacity versus the pain that we might have if we don’t have enough of it. Given there is so much interest and it looks as if this is going ahead in terms of smart meters and so forth, we will potentially have a chance to hear demand as to how we value capacity and how we value security. We would continue to rely on market forces in that area.

Q57 Chair: Getting back to the demand side measures, isn’t there a natural merit in tackling energy security through demand side measures, because also we are addressing the climate change agenda, and in the long term it may make economic sense as well?

Professor Jenkins: I think it is helpful when considering the demand side to again divide the question into two. We have the overall clearly desirable goal of reducing energy demand, and that makes almost everything that I think we are talking about easier to do. We then have the question of load shifting, peak lopping and moving power or energy for small periods of time to avoid system peaks. Clearly, both are very desirable. One reduces your overall requirement both for energy and assets, but the other only reduces your requirement for assets. But yes, clearly both are highly desirable.

Professor Strbac: We have conducted recent analysis, particularly if we move into electrifying transport and heat sectors. Moving into electricity here is not that easy to decarbonise. They come with a significant amount of flexibility. If you drive a vehicle, you have to have a battery, and when you do an analysis, it turns out that the cars are 90% or more of the time stationary. The energy behind what we need is not very big and the power is very large, so there are huge amounts of opportunity to do that in a controlled fashion so that we don’t need to invest in new infrastructure reinforcements, but we can achieve those; I am not saying we can with everything, but we can avoid a very significant proportion of investment in infrastructure by manipulating demand.

Dr Strachan: I would argue again that the role of demand side response is absolutely key, and our long term modelling says that if you are trying to meet security of supply and decarbonisation targets without such a major demand shift, it is either impossible or extremely expensive-and those two may be the same thing.

Q58 Sir Robert Smith: One of the conventional wisdoms is that if you have a mix of supplies and a mix of sources, you will be less under threat for any shocks or disruption. Is that something you share?

Dr Strachan: I mean, if I could just break it down, if you are talking about the diversity of supply, you can break that down into variety, balance and disparity, and you may have come across these terms. Variety means the number of different options you have, balance is the unequal shares, and disparity is how different they are. For me, the most interesting thing is how different they are, because you can have two technologies, for example, that rely on the same control system, or you can have two technologies that are affected by the same human failure or weather event or social change. Certainly I think diversity as a whole is a major aspect of supply security, but there are others.

Q59 Sir Robert Smith: Is the UK reasonably diverse?

Dr Strachan: I think it depends what sector you are. I mean, in transport, clearly we are not; in home heating, we are not. Right now in electricity, you could make a much stronger argument that we are. I think it depends on what you think are the weak points of your system as to whether we have sufficient variety.

Professor Jenkins: We did work looking at the interactions of gas and the electricity system, when, if you like, for a variety of reasons that we put in the models, the gas supplies to the combined cycle gas turbine power stations had to be constrained. What the models were telling us was either to revert to coal, when of course that will be increasingly difficult, or to revert to distillate fuel for the gas turbines. I think that does tend to indicate the benefit of diversity in energy supplies into your generating stations.

Q60 Sir Robert Smith: Do you think the market has delivered effectively on import capacities and diversity of imports?

Dr Strachan: It depends whether you are talking about a short run or a long run issue, and it also depends what you think as the market. We were talking the demand side; on our demand side, we don’t have market responses in that. I don’t see my tariff, for example, changing on a seasonal basis, never mind a daily basis, so I think I would leave it there.

Q61 Sir Robert Smith: The view of many is that the markets have delivered the new sources of gas infrastructure into the country at least. Can we just rely on the markets?

Dr Strachan: I think you probably cannot rely on the markets if the reasons for having security of supply link into other factors, particularly environmental factors. I don’t think people think that a broader diverse set of resources, such as electricity-focused renewables or biomass, is going to be delivered by the market. You are going to have to have public mechanisms to drive down the cost first.

Professor Strbac: Can I make a point regarding the imports and exports? There is some evidence that there is a significant commitment towards decarbonising energy sector UK and also mainland Europe, for example. Analysis conducted in trying to see what solutions might be appropriate for lower carbon European systems, including UK, clearly shows that what you want to do is try to put your renewable sources with the best resources, given that the wires are relatively inexpensive. In that sort of world, the UK turned out not to be an island, given the significant potential wind resource on and offshore that the UK has.

If you would like to run that world cost-effectively, you would then want to see significantly bigger integration between the UK and others; on windy days we export, and on non-windy days we import would be the cost effectiveness. In that case, one would see that if you want to treat it cost-effectively, solutions of larger integrations will be very attractive from the cost perspective. You have these issues about what sort of security that implies, but having that system strongly integrated, and does that require order of magnitude bigger into the connections from the UK and Europe-significant, we are already bigger. That would make the overall system significantly cheaper than if we tried to maintain the UK as an island and decarbonise it.

Q62 Dr Whitehead: Are there different ways in which one could look at energy independence? I appreciate that at first sight this looks a little counterintuitive, but doesn’t the possession of substantial wind resources, exported or not, together with other forms of effective control of energy production and supply, constitute independence, in effect? If one were to have that as a goal for energy security, what might that look like in a modified form?

Professor Jenkins: I think where you are taking us is the idea of significant amounts of renewables and demand control in GB, for example. I think, given the nature of the wind resource, and supporting what has just been said, it is likely to be much cheaper to integrate GB with mainland Europe rather than develop other mechanisms for providing electrical energy when you don’t have that wind resource available. Running your island system with either fossil fuel back up, with the consequent costs in carbon dioxide emissions, or energy storage, which remains a real challenge-the more practical solution is likely to be interconnection with mainland Europe.

Professor Strbac: Can I just stick with that? It is also potentially interesting to see that out of the concern for security, you could potentially say, "Well, this is maybe a business opportunity to become a big exporter of resources"-that the UK is the best place in Europe to build wind farms. The yield factors in Germany are half this; it is a different league. If you look at the focuses of the energy debates, they are pretty much kind of UK-specific, in the sense of how we are going to secure our supply. I think there is a potentially interesting avenue to explore as to how we are going to benefit out of all these resources that we have and resolve our issues about all this, because when you analyse all these futures in terms of electricity, the security of supply of the UK is no problem at all.

Q63 Dr Whitehead: If it is no problem at all, doesn’t that suggest something about energy independence development, whether based on the fact that one exports a good proportion of what one produces, but has the security of that production, especially when the significance of UK-produced fossil fuels is decreasing and there are potential "independence threats" in terms of the increased reliance on imports coming in that direction? How would those different factors balance up into something that, yes, was interconnected, but on the other hand gave, as you say, Professor Strbac-what might the overall picture be of a mediated independence particularly interconnected with Europe, but nevertheless balancing a independence of production with the reduction in production that we are now seeing in fossil fuels? What might that look like in terms of costs and outlook?

Professor Jenkins: I think the difficulty I have in the discussion is that in electricity terms, if we follow the Climate Change Committee’s strictures, we are not going to end up using very much fossil fuel for generating electrical energy, because you can’t just in terms of your carbon dioxide emissions. The numbers do not work for you. Therefore, that will be a decarbonised electricity system, and the question that then comes to us is: how much of our domestic transport and domestic heating is shifted from fossil fuels on to the electricity sector? That gives us all sorts of challenges.

To operate that system where we have essentially constant output plant, or plant that is broadly constant output-the thoughts are nuclear, fossil with CCS and renewables. You have to strongly engage the demand side to balance that system, but on top of that, to be able to balance over a larger balancing area by interconnecting with Europe through some sorts of links. I know there is another inquiry on the North Sea Grid, but that is likely to be one of the aspects of this lowest cost outcome for that future. How much that will cost I don’t know, but one of the things that will certainly drive the cost is the security of supply required by the customers. As Professor Strbac is indicating, there is probably movement there, given the very high security of supply we have at the moment, both on electricity and on gas supplies.

Dr Strachan: I would just like to quickly broaden that out, because when you look at long-term decarbonisation, that is a game-changer, so one thing you start worrying about is security of supply for biomass. If the UK does not import biomass, our long-term decarbonisation costs are high. Land in the UK is expensive and we don’t have very much of it, so then you are talking about energy-dependent links with hopefully friendly countries like Canada or South American countries. But it is even more critical the tighter and tighter your decarbonisation targets gets. Nick mentioned that fossil fuels would not be part of a decarbonised electricity supply. That is certainly true if you are going for a zero carbon electricity supply, because carbon capture and storage doesn’t get you down to zero carbon.

Q64 Barry Gardiner: How resilient is the UK’s electricity system, and what do you believe are the major threats to its reliability?

Professor Jenkins: I am sure you can get a clearer guidance from the National Grid and the distribution companies, but as I see the evidence, it is very resilient. That is what history tells us.

Q65 Barry Gardiner: They said a 1% reduction in reliability would result in around 230,000 households not being supplied for an entire year. That doesn’t sound greatly resilient to me.

Professor Jenkins: Yes, but that is going from their numbers, and 230,000 households not being supplied for a year? No. Generally, electricity interruptions last a rather short period of time. Occasionally there are events such as that storm affecting the forest or whatever that takes out overhead lines for a week, but those are unusual and only affect a fairly small number of people because of the way the network is arranged.

I would have argued that reliability of electricity supply is very good and the numbers will support that. In terms of long-term threats, as I was indicating, I think for 15 or 20 years we have been talking about aging infrastructure, and in truth, I think we are still talking about it and how that is resolved-common mode failures, clearly. The evidence that was being given earlier that restrictions on fuel supplies, for whatever causes, on to the power station-I mean, that gave trouble in the 1970s. I pick up on Dr Strachan’s point, this idea that we move towards a game-changer. If one of the potential routes is that we will load the electricity network harder, we will significantly require more capacity-and we cannot build capacity, as you know, because of the difficulties with public inquiries and so on, so we will end up loading those assets harder. That will potentially lead to challenges.

Professor Strbac: Maybe just to complement this, how we deal with security of supply in infrastructure is that there are these standards and, for example, at a National Grid level, the standards are-I will paraphrase them, simplify them-that we operate what is called an "N minus 2" security study. That means that any two lines simultaneously can go out of service, but the system must continue to operate. We have built security to redundancy of assets. That is what we have been doing so far. The technology has moved on significantly since the 1950s. There were a few revolutions in computer science and all that, and what we see is that there is a significant opportunity to substitute security from assets to being clever in terms of how we operate the system.

If you analyse big blackouts over the last 20 years-New York, London, Tokyo-none of them have been caused because of lack of investment in the infrastructure. It was always a credible outage and there was then an internal fault of the protection system or the controlled management wasn’t quite right. They are these sorts of data and communications-related issues rather than not having enough pylons and cables and transformers on the ground. I think there is a potentially significant opportunity to increase the resilience of the infrastructure by being cleverer in operating them, and there is technology and lots of work going on in this area. If that gets enough support from the-I think the regulation here is very important, because currently network companies make money more on building assets than being clever about operating them, so we need to shift that. There is a movement in the recent real consultation, which is a new way of how we are going to regulate this. There is a bit of movement towards that direction, but we need to look into how these assets perform rather than how many assets we have. All of that would lead to an increase in the resilience and security of supply delivered by the things that we already have.

Dr Strachan: I would argue that one of the opportunities and threats are people. I think we understand technology is better than people, and we have argued that demand response is the key to a cost-effective management of a more intermittent electricity network. From our evidence base on how people behave and how they respond to price and in our own individual lives, we know that we have behaviours that are set and are hard to change. This is an under-researched area, in my opinion.

Q66 Barry Gardiner: Given that what we want to do is to move to a low-carbon system but we want to maintain the resilience within it, how do you see us doing that? What are the changes that we are going to need to make to achieve that?

Professor Jenkins: I think we are beginning to see the changes, and as we move to the next 10 or 15 years, the main low carbon contribution is going to come from wind; it is going to come either from Scotland in the North or from offshore. We see that the initiatives the National Grid are taking at the moment to put submarine cables across the North-they are the Scottish-English interconnectors-are giving us difficulty. Because of the difficulty of building overhead line transmission circuits on the ground, you then have to go underground, and even that is a problem, so they are having to go offshore.

I would take a slightly different perspective on your question. If we are to decarbonise, we are going to require more transport capacity for electricity. If we are going to require more transport capacity, one way is to try somehow to install more assets, and if you put them underground or under the sea, that is very expensive. Alternatively, as Professor Strbac is saying, you can try to operate the system in a more intelligent fashion, but there is then a conflict, because I think you can argue the highest resilience route is just to have lots and lots of assets, and then you have no troubles.

Professor Strbac: But the costs.

Professor Jenkins: Oh, the costs are absurd, and the difficulty of putting them in is enormous.

Professor Strbac: Engineers can deliver any level of security you want if the budget is big enough.

Barry Gardiner: And if the planning system allows.

Professor Jenkins: I think we are going to be driven by the planning system.

Barry Gardiner: Please, continue.

Professor Jenkins: No, only of the difficulty. I think we started this by asking about decarbonising. Decarbonising will require additional transmission capacity for electricity. For that, the obvious solution is overhead lines. It is the cheapest, most effective and it has all sorts of technical advantages. If that is not possible, you have to go either underground or under the sea at very considerable cost.

Professor Strbac: Twenty times higher costs in your terms.

Professor Jenkins: There are technical challenges of moving from overhead lines to cables.

Q67 Barry Gardiner: Could you perhaps give us a note on the differentials in cost?

Professor Strbac: In writing?

Barry Gardiner: Yes.

Professor Strbac: Yes. Moving underground is much more expensive.

Barry Gardiner: Much more expensive, I appreciate that.

Dan Byles: Much more.

Professor Strbac: Yes, significantly.

Q68 Sir Robert Smith: Can I just ask one question on the subsea route? Is there not sort of a two-pronged thing that is also connecting up renewable resources that will be out there?

Professor Jenkins: That in the jargon is known as multi-terminal DC. In practice, it does not exist. There are three schemes in the world, and obviously the National Grid Company will have their views as to where they are going. I would believe that it is likely to be point to point initially, and then we will move towards this multi-terminal arrangement.

Q69 Barry Gardiner: Looking at the current policy framework, do you think that it is up to delivering the levels of investments that are going to be required for such new infrastructure?

Dr Strachan: Perhaps one flippant answer to that is that we haven’t had the market signals. We have a very low carbon price. The ETS carbon price is far too small to stimulate large capital investment, so until you have a sustained and more certain carbon price, you won’t-

Barry Gardiner: Of course, the Government just gave a signal in terms of the increase in the fuel price of carbon within the UK, but isn’t the risk there that certainly for things like gas, it might push it over to the Continent to avoid that and then put it back by interconnect, unless you operate-I mean, you rightly talked about operating on a European scale, but if we are trying to operate on a UK scale, some of those levers have perverse consequences rather than beneficial ones, don’t they?

Dr Strachan: I think that is certainly true about the details of carbon policies, and there are overlapping energy policies. You may have perverse incentives and you may have effects that go counter to that. I would perhaps raise on the gas issue that if you are talking about long-term decarbonisation, there is no guaranteeing that there will be a gas network. I mean, gas is a high carbon fuel, so in terms of energy security, yes, under short-term stresses the gas question is very important. Under long term stresses, maybe the gas question is not so important.

Q70 Barry Gardiner: What do you think the impact of the targets contained in the Fourth Carbon Budget are going to be on making sure that we get this low-carbon but resilient system?

Dr Strachan: It is no shock to anyone in this room that these carbon targets are challenging in the timeframe we have. A lot of our modelling finds that electricity is an infrastructure and generation mix that changes quickly and changes a lot. Part of that is the turnover of capital. We have aged generational capacity at the moment. The interface between resilience and decarbonisation is, I think, most interesting in the reduction of energy demand, because that is a common platform for meeting both those goals.

Q71 Dan Byles: We have touched on the need to balance the intermittency of wind power. It is obviously the sort of biggest challenge when increasing the percentage of our electrical production that comes from wind. Do you have a view on how much wind the UK system can take before balancing the intermittency problem starts to become a problem?

Professor Strbac: We have done quite a lot of work supporting the Energy White Papers on these questions. That is highly dependent on everything else that is happening in the system. The worst case scenario from the perspective of wind intermittency balancing is that we build a significant amount of inflexible nuclear generation in combination with variable and difficult-to-predict wind generation. We need to balance demand on a second-by-second basis. The power system is quite demanding from that perspective, and we don’t have any demand side with Europe any more than we are now. We could end up in a situation of potentially not being able to absorb maybe 20% of that energy. Whether we want to go nuclear or wind being curtailed, it doesn’t matter. That is obviously a disastrous situation, because both these models are very expensive, so not being able to absorb them and displace fossil fuel is very expensive.

If we analyse what else might happen, there are four mitigation measures against intermittency. One is demand side, and it can play an enormously big role in that, and it could remove that problem almost completely. Then flexible generation, and manufacturers are coming up with the flexible plant so that the gas plant becomes better in managing the variations in the demand supply. You have transmission. In about 2000, it was about 120 GW of wind, which is kind of 2050 where the whole entire Europe is decarbonised and all the things work. Also, storage is another technology that can be used to support that.

Now, which one of those would be more suitable would depend on what the system is. The cost of these will also play a major role, and if some sort of high level order is to be established in there, the transmission and demand side participation, particularly if we start electrifying transport and the heat sector, would provide potentially a very cost-effective solution for this. If you want to drive a vehicle, you have to have the battery, so the only question is how we charge the battery when the wind blows, type of thing. That, according to analysis and philosophy of other people, would provide very significant support and would enable the system to run cost-effectively with a very significant contribution of new build generation and inflexible nuclear generation.

Professor Jenkins: I think the only other thing I would say to that is that a few years ago there was a metastudy done by the UK Energy Research Centre, looking at all the studies on intermittency up to 20% of electrical energy. It was a very good study, reviewing perhaps 100 other studies, and that I think is quite solid. Beyond the 20%, up to the 30% and on, we don’t have that body of evidence brought together. To make decisions about very large sums of money, it seems to me that we now need to raise our game, if you like, and start looking at these higher penetrations and then conduct a metastudy on those studies. That would be the way through that.

Q72 Dan Byles: That is interesting-so above 20% at the moment?

Professor Jenkins: 20% by energy. At times, that was corresponding to-

Professor Strbac: In the UK.

Professor Jenkins: Yes, but the power implications-

Professor Strbac: 30 GW that is put on.

Professor Jenkins: Yes, 30 GW. I think the general view is that that is comfortable. People are comfortable with that future. Beyond that, I think it is fair to say that the evidence is not as well collated.

Dan Byles: So there is some homework for someone to do?

Professor Jenkins: I think there is homework for us to do, yes.

Q73 Dan Byles: There is obviously a lot of discussion at the moment that we might now be locking in a new generation of gas to provide that peaking plant. Interestingly, you said that perhaps you feel that demand management and interconnectivity with Europe is a more cost-effective approach. Do you fear though that because that is not there, because the demand management systems are not there, because the super grid is not there, we might end up locking in gas at a peaking plant and end up with the wrong solution? Is there a real danger that that might happen?

Professor Strbac: It is more of a carbon dioxide issue.

Professor Jenkins: Yes. The perspective I would put on that, and perhaps my thinking is not entirely consistent, is that if you look at the either decarbonised power sector or zero carbon generation, with the numbers we look at, you cannot use gas-fired generation without CCS on it. So for the longer term, almost any fossil generation-because you are trying to decarbonise the electricity sector, the power sector-is not open to you, so that will only be an interim step.

Dr Strachan: Although, if you have gas as back up and it doesn’t run very often, your cumulative emissions from those plants are relatively low. I think people have such focus on a decarbonised electricity system, because under the overall carbon budget there are some sectors that are much, much harder. If you don’t manage to crack aviation, then you will have to crack electricity-and it is not just aviation; there are some industrial sectors that are very hard to decarbonise also.

Q74 Dan Byles: The Government are talking about some sort of capacity mechanism to try to make sure that the capacity is there. Do we know at the moment how much extra capacity we are going to need? How can they design a capacity mechanism if the work isn’t there to know how much capacity we need?

Professor Strbac: There is obviously a very diverse spectrum of views on whether the capacity is required or not required. One of the key questions is how much is required and who is there to tell us how much we need, and given that we are definitely entering into smart metering, making energy infrastructure smarter is only a question of when. We would like to see evidence of the consumers responding, and to ask consumers how much they value security, rather than de-risking the investment of companies who are investing in our generation system without asking us how much we value security.

Professor Jenkins: I am not a markets design person, but I think your point is absolutely right. It is very unclear to me, if we say we are going to have a capacity payment, what magnitude of capacity would be purchased. I do not think that is clear at all.

Q75 Dan Byles: A final question, if I may, Mr Chairman, on the whole businesses of interconnectors interconnecting with Europe as a possible solution to this. Is that not so much a solution as just putting the problem across the Channel to somebody else to decide how to manage capacity?

Professor Jenkins: I think you need again to differentiate between long-term energy and fuel and shorter-term power, although in terms of hours, it is also energy. A key advantage of that interconnection is to extend your balancing area, and I think the evidence is showing that extending your balancing area, particularly on the supply side, gives you very significant benefits. It is that trading of shorter-term energy, if I can use that word, that gives you that, rather than just saying, "We want this fuel or energy in from abroad".

Q76 Sir Robert Smith: I will just ask on this zero carbon electricity and security of supply: if we cannot deliver effective CCS for gas, are we going to be able to achieve these targets?

Dr Strachan: Perhaps it is worth breaking down your zero generation capacity into three categories: one is CCS, one is nuclear and one is large-scale renewable sources. In a crude sense, if one of those does not work, you are still okay. If two of those do not work, it starts getting very difficult.

Q77 Sir Robert Smith: Are you saying we could just have nuclear and wind?

Professor Strbac: That system certainly can work. The only question is-which maybe I am not specialised to answer-how sensible that would be from the cost perspective. We can certainly decarbonise. From the technical feasibility perspective, there are no obstacles to delivering zero carbon. The question is how expensive these solutions might be. We certainly can power the UK with wind only. There is no problem there. We can run with wind only. If you built 600 GW of wind power, it is going to work. That solution would be incredibly expensive, but it can work.

Q78 Chair: Is the electrification of heat and transport going to improve energy security?

Dr Strachan: Yes and no, I think, is a fair answer, because it depends where you get your electricity from. Certainly you have a new set of challenges. If you are trading oil import issues versus biomass import issues, the answer could be yes or no.

Professor Jenkins: The perspective is rather a new one to me, because we tend to be driven, I think-or the thinking tends to be driven-by the fact of how you are going to meet your carbon targets. By not electrifying heat and domestic transport, you are driven for transport either using your fossil fuel for transport or down a hydrogen route.

Q79 Chair: Yes, but on the assumption we are going to try and meet our carbon targets, we have to end our dependence on oil for transport and we have to end our dependence on gas for heat.

Professor Jenkins: That is right.

Chair: The question was: in that process, is there a way of enhancing energy security? Clearly, it reduces our exposure to a number of price fluctuations and import dependence.

Professor Jenkins: In technical terms, it is making sure we capitalise on the flexibility of using electricity as our energy vector both for transport and low-grade heat.

Q80 Chair: What about on the demand side? I mean, if we all have electric cars and we go home and plug them in at 6.00 pm, will it be possible to smooth out the peaks in demand? If we are going to use more and more electricity and people want to heat their houses at the same time of day and they want to charge their vehicles the same time of day, is there a way of addressing what otherwise may be a terrible increase in the level of peak demand?

Professor Jenkins: Yes, and there are all sorts of ideas, if you want to talk on this.

Professor Strbac: Yes. I mean, the transport sector is particularly well placed to be managed, as it were, in terms of demand, and we have done detailed analyses of how people use vehicles in the UK. That shows that first of all, as I mentioned, vehicles are 90% stationary. Imagine: when you drive your car, if you can plug it in when you arrive at work, you want your car to be fully charged before you go back. If you do analysis, you could charge lots of people’s vehicles in that multi-storey car park without any need for any reinforcement. When you come back home, if you plug in your car and say, "I want it to be fully charged by 6.00 am" and if everybody in the street says something like this, then there will be massive opportunity to flatten out those charges and have everybody having the same level of service without any restrictions, but not needing to reinforce the infrastructure and have lots of wires and generators.

The heat sector is similar, particularly if we insulate buildings between now and, say, 2030 or 2050. There will be two elements there. There will be less energy required, and secondly, buildings themselves become kind of storage devices. There will be again opportunity to manipulate the load even under very cold conditions. That would be incredibly useful. What our notes suggest, for example, is that the benefits in the infrastructure costs avoided in that future are about £45 billion. If you talk to manufacturers in terms of what they need to be able to make this smart thing work, they talk about 10% of their cost, so it looks like a very good idea to ensure that we have infrastructure communication with business in place that will support that and enable that clever use of demand.

Q81 Chair: But this will have an impact on distribution networks, won’t it, because it will switch to this kind of point where everyone is using electricity very much more, particularly for transport.

Professor Jenkins: Yes, and there is an obvious potential conflict that must be managed between the effect of these loads on the distribution system and on the generation system. But the modelling so far indicates that that is manageable.

Professor Strbac: We could send you, if that is useful in terms of numbers, how much in the UK is going to be spent on distribution systems and generation systems against these futures. We can support you with that, if that is helpful.

Chair: Thank you.

Q82 Sir Robert Smith: On this consumer who will tell you that they want their car at 6.00 am, there is a strongly embedded sense of the freedom that cars have given. One of the freedoms is the flexibility that if your child gets taken ill that you can drive to the hospital. Obviously, if the car is plugged in and the computer thinks you don’t need it until 6.00 am-have you modelled that cultural-

Professor Strbac: There will be minimum levels of charge that you would need to have in order to be able to, you know, go to-

Sir Robert Smith: But still achieving the-

Professor Jenkins: I think your point reinforces an earlier point from Dr Strachan. We don’t have enough research and understanding of the human response, and I think that is absolutely the case. They are better placed in the US with their battery swapping. We would respond to that situation by saying, "Well, we will always have a battery swap station close enough, like a petrol station"-but how people respond to anxiety, I think that more work does need to be done on that.

Chair: Given the addiction to cars which the public already displays, almost regardless of price and other factors.

Dr Strachan: Yes.

Chair: It requires, I think, quite a leap of faith to think people are going to say, "Okay. I am home now, don’t need the car until tomorrow morning" you know, and suddenly want to march down the pub or something. I can see the theory but I can’t see the practice, given literally what it is.

Q83 Dr Whitehead: Talking about human response and energy efficiency, you have mentioned the importance of the fact that you need energy efficiency in relation to overall security issues. Has the so-called rebound effect on energy efficiency measures, to your knowledge, been taken into account in terms of the likelihood of absolute energy reductions being delivered over the next decade or so?

Dr Strachan: Yes, it has, and of course there are a couple of distinctions to make. One is between behavioural change, which is just patterns of consumption, and one is an efficiency change, where you are still using the same energy service demands but with a more efficient process. I think, though, that has been more work done on the direct rebound effect-i.e. "Energy is cheaper, therefore I use more", whereas this is the indirect effect-i.e. "Energy is cheaper, therefore I have more money to go out and spend on something else".

Dr Whitehead: Or on the effect of, "Well, my home is now more efficient in terms of its insulation, so I will use more energy".

Dr Strachan: That is the direct one, but if you saved money on your home energy bill and went off and bought a larger car, or went off on another flight, that would be an indirect effect.

Q84 Dr Whitehead: The projections that DECC is putting forward in its central growth scenario are energy demand falling by 6% and a decrease, I think of 21%, between 2008 and 2020 in the domestic sector. Those are the post-rebound effect analyses, are they?

Dr Strachan: I think it would depend which DECC forecast you’re actually talking about-whether it is the DECC energy model or the DECC Calculator. I am not quite clear.

Dr Whitehead: Yes, it’s the central growth scenario in terms of energy.

Dr Strachan: Yes, if it is the energy model that is producing that kind of energy model chart, then yes.

Q85 Dr Whitehead: What do you think in the longer term is the risk of overestimating the impact of energy savings, perhaps because of those features? How cautious does one need to be in terms of factoring in the real achievements that energy efficiency can make as far as achieving an energy balance is concerned?

Dr Strachan: I think there has been a fair amount of critical work on the rebound effect, and a number of 30% might be a useful rule of thumb, as long as you recognise that not all of your efficiency savings will be captured-but 70% out og 100% is still pretty good.

Dr Whitehead: Is that likely to be invariable over time, for example, in the development of new devices or assistance, even though they are more energy efficient-the actual number becomes the same, for example?

Dr Strachan: I don’t think you can say whether the rebound effect would be larger or smaller in the future. Certainly if you have capital turnover or if you buy a new car or a new house, you have more opportunities to rebound, but one would also expect things like consumer preferences to change. One might expect your children’s attitudes to energy to be slightly different than your attitude to energy due to the fact we are under this low carbon prognosis.

Chair: All right. I think we are out of time. Thank you very much indeed for coming. It was a very interesting session.

Prepared 23rd June 2011