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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 923
HOUSE OF COMMONS
TAKEN BEFORE THE
Energy and Climate Change Committee
DECC Annual Report and Accounts
Wednesday 23 January 2013
Rt. Hon. Ed Davey MP, Phil Wynn Owen, Vanessa Nicholls and simon virley
Evidence heard in Public Questions 1 - 100
USE OF THE TRANSCRIPT
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Taken before the Energy and Climate Change Committee
on Wednesday 23 January 2013
Mr Tim Yeo (Chair)
Dr Phillip Lee
Mr Peter Lilley
Sir Robert Smith
Dr Alan Whitehead
Examination of Witnesses
Witnesses: Rt. Hon. Ed Davey MP, Secretary of State for Energy and Climate Change, DECC, Phil Wynn Owen, Interim Permanent Secretary, DECC, Vanessa Nicholls, Acting Chief Operating Officer, DECC and Simon Virley, Director General, Energy Markets and Infrastructure, DECC, gave evidence.
Q1 Chair: Good morning and welcome. This is obviously the big news event of the day-I don’t think there is much interest anywhere else on the political horizon, but we are very glad to see you all here. I think you have indicated we have a couple of hours, which should be plenty of time to cover the points we want to raise. Can I start off with carbon capture and storage, which seems to be so central in terms of the technology development that not just we need but the world needs? Have you drawn any lessons from the failure of the previous competition and the collapse of the Longannet project?
Mr Davey: Yes. There was an exercise internally in DECC talking to the industry, talking to all the people involved about what went wrong, what we could learn from that process. A lot of the information was made publicly available, including some of the results. I would not describe it as a complete failure, because many lessons were learned, and that is helping develop the CCS industry not just in the UK but outside because we shared it so widely.
But the lessons have been learned. I think that is why we have gone about the process this time round in the way we have, with clear evaluation criteria and a competition that has attracted a huge amount of interest.
Q2 Chair: Initially the forecast was that the first plant would be operational in 2014-15 and now we are looking at the date of 2020. Are you confident we are going to keep to the new timetable?
Mr Davey: We are on track in terms of the competition. Because we had so many applications-we had eight applications-they all had to be assessed rigorously and robustly against the criteria that we had published. As you will know, there are a number of key criteria but our objective is to make sure we can have cost-effective deployment of CCS in the 2020s. That has to be the objective for all our carbon plan objectives. So, we have evaluated the eight. We announced that we were taking four of those eight into what we call the bid improvement phase. We got revised bids after a lot of engagement, which has not happened quite as intensively before, with the four bids that got through that round. They submitted their new bids on 14 January and the team is now evaluating that against the published criteria. We hope to make announcements, we do not have a date, but in good time.
Simon Virley: If I could just add on the timescales, we are still evaluating the bids but some of the projects are saying they could be up and running by 2016, not 2020, so there are still some that are able to come in well before 2020.
Q3 Chair: The initial plan was to have four projects. How many projects do you now envisage taking forward?
Mr Davey: You are tempting me to prejudge the current phase of the competition, so I cannot do that. We have a financial envelope. We have the £1 billion. That will be supported by low-carbon CFDs that have been announced in the Levy Control Framework going forward as revenue support. There has to be a restriction on the number of projects. We cannot do any number, but we are determined to get good value for money.
Q4 Mr Lilley: What is the maximum number?
Mr Davey: That is determined by the size of the bids that come in. We now have four in the bid improvement phase. I need to allow the team to assess those, on all the criteria that have been published, to ensure that we have value for money. It is highly unlikely that all four will go through to the next stage, but let that analysis go ahead. I do not think I should prejudge it.
Q5 Chair: You may not have seen the evidence the Prime Minister gave to the Liaison Committee. When I was asking just before Christmas about related issues, he said, "If carbon capture and storage didn’t come forward and you had a very tough carbon target, you would have no unabated gas at all", which I think arithmetically is probably true. The implication of what he was saying is if you do not have carbon capture and storage, really there is no hope of having a tough target for reducing carbon intensity. Does the Department have any kind of plan B? There do not seem to me to be any grounds for absolute certainty that we are going to get economically viable CCS.
Mr Davey: Chairman, you are in danger of putting words in the Prime Minister’s mouth, of course, in that question. However, let me answer the substance of the question. The substance of the question, it seems to me, is you are right to say there are lots of uncertainties around CCS, but I would argue there are lots of uncertainties about almost every aspect of energy policy, whether it is the gas price, where the cost of different renewables is going to fall over what time scale, or whether we will be able to get cost-effective nuclear. I am an optimist. I think we will achieve all of them. Part of the strategy, whether it is on the supply side or indeed the demand side, which I should add into this equation, is to ensure we are doing as much as we possibly we can. The significance of decarbonising and the urgent need for decarbonisation in the most efficient way possible leads you to a view that means you ride as many horses as possible. Even if you do not sign up to that analysis, it makes sense, given all the challenges and uncertainties we know about the energy market, to have diversity in your approach. So, the plan A, B and C is to have a diverse approach and to try to develop as many technologies as possible, working with colleagues.
On CCS, what is really interesting is some of the signs we are getting from Obama II. There are really very positive things they have been saying on climate change. Part of that agenda that the Americans seem to be thinking about-early stages, I know-is CCS, and I welcome that. We have had discussions with a number of other countries, for example the Norwegians, to see how we can push this, because we think it is really, really important, but you do have to do everything because the challenge and the uncertainties are there.
Q6 Chair: Turning to the EU New Entrants Reserve scheme, do you think any British projects are going to get funding from this?
Mr Davey: I think they will. We are waiting to hear when the second round will be and how that will be shaped. There is a meeting in Brussels today of the European Climate Change Committee. DECC officials are at that, and we may learn today about the details of that second round. We think we are well placed. We had to take a decision about whether we would run our competition in line with the first round of NER300, and there was a lot of pressure to do that. We wanted to make sure that we could get European funding.
I was clear that the key test was value for money for the British taxpayer. We have a £1 billion competition. We have the consumer business support on the energy bills for the CFDs going forward. That is a huge amount of money, far greater than is available from the European Union through NER300. I was determined we would not allow the tail to wag the dog. So we had to make our decision on our competition, in the way we needed to do, to make sure it was robust and value for money. I believe we will be able-subject to what is announced in Brussels-to have a UK CCS project in the second round of NER300.
Q7 Chair: Given our expertise and the priority we have attached to trying to achieve CCS, it would be a pity if we did not have a British participation in an EU programme like this.
Mr Davey: We want to get any money that is available, of course we do. In many ways the UK has been a driver behind NER300. I pay tribute to my colleague, Chris Davies MEP, who has been quite forceful in the European Parliament and with the Commission, along with others, in trying to create NER300 in the first place. So, yes, of course we want to be part of it if we can, but we will have to see our competition, see who we eventually put forward from that and see how the Commission judge it. Our competition has different criteria from the European Union’s competition, I think for good reasons.
Q8 Sir Robert Smith: I had better remind the Committee of my Register of Members’ Financial Interests entry regarding the oil and gas industry, in particular Shell, who I think are one of the bidders for a project that is very important to the north-east of Scotland.
Is the evaluation of the four that is going on now to see value for money, or is that to see if they can deliver? What sort of criteria are they being judged on?
Mr Davey: I will bring in Simon in a second, who can give you some of the details of this. In many ways, the top criterion is cost-effective deployment of CCS in the 2020s. We want to deploy the technology, so inevitably that is why you have a complicated set of criteria. Ability to deploy, to learn from that and to go further is critical, otherwise we would be wasting money. One of the things we wanted in our approach this time was to maintain the competitive tension in the system that went away in the last go. That is for value for money, to sharpen people’s engineering inputs and so on. Again, I do not apologise for that. I think that is important. It is important we get value for money. We are trying to keep tempo and momentum behind this. That is quite important. We are asking private sector companies, often in consortia, to keep going on this and to invest and to push their bids forward. We try to make sure there is some momentum there so they stick with the competition. As part of that, we were determined to have greater interaction with them, more communication with bidders, so they heard from us, and that was a more productive and constructive dialogue than I think we have seen in the past. So we had those approaches, but there is a manual that all bidders have had. It is very detailed and sets out all these issues in great detail. Simon, do you want to add to the points that I have made?
Simon Virley: As the Secretary of State said, the central thing is how can they contribute to the outcome, which is getting towards cost-effective CCS in the 2020s, so is there a demonstrable cost reduction pathway there, through reducing the cost, say, of storage or transmission of the CO2,? We then have to assess: is it deliverable? Is it value for money when you think about what else we could use the Levy Control Framework on, and is it affordable within those? Those are some of the tests we are applying in the evaluation phase we are doing at the moment.
Chair: I should also draw attention to my entry in the Register of Members’ Financial Interests, with which I am sure you are now quite familiar.
Q9 Mr Lilley: Could I be absolutely clear? I had thought the idea of this competition was for Britain to develop technology that we could then market worldwide. Now you are saying, no, it’s not that. It is so we can burn gas and coal in the UK, so we have a technology available for us to be able to burn gas and coal in the UK and extract the CO2. The difference being, lots of countries are doing research into this-if we sit back and do nothing we can use their technology. The only purpose of us doing it is either if we think that we are better, and we will suddenly come up with something no one else has thought of, or that we will develop a capacity that will be exportable. You did not mention that at all in the criteria.
Mr Davey: Mr Lilley, we could have done.
Q10 Mr Lilley: You should have done if it is part of it.
Mr Davey: Hold on there, I think you are making a mistake. You are bringing together what might be Government ambitions with the criteria of the competition. I did not mention it when I was detailing the criteria of the competition because it is a policy objective, but we do not have to put that within the competition criteria. They are separate. To address the substance of the issue, I think we should be aiming for both. It would be good if we could burn gas and coal in the UK, where all the carbon was captured and sequestered and stored properly, and that would help our overall programme. That is why we are doing CCS. The quicker we can move to abated gas and coal, I think everyone would welcome that. So, yes, it is partly for UK interest but it is also for export potential as well. We may not end up being the best country with the best companies and the best skills, but I hope we will be.
One of the reasons why we ought to try, and not just leave it to others in the way that you were implying, is that we have some really good skills in this country. We have some fantastic engineering companies. We do not talk enough about UK-based engineering companies and the skills they have. We have fantastic knowledge from the North sea. The North sea oil and gas industry has given us huge skills and knowledge from fantastic companies, large, medium and small. The fact that we have the North sea, and we are still operating in a very successful basin, means that we understand some of the potential places to store the carbon. So, I think we are well placed to try to make this successful.
I still think, even if we do not end up having the best companies that can have huge amounts of export, by playing a part with others, be it the Americans, the Canadians, the Australians, the Qataris, the Poles or whoever we end up working with-the Norwegians I mentioned before-we are playing a part in an international challenge. If we can get carbon capture and storage working in the UK and worldwide, it is a game-changer in the way the globe will be tackling climate change. So I make no apology for the UK playing its part, whether that ends up with us having the best companies and the best supply chain or whether we are playing a part in a wider global achievement of making carbon capture and storage commercially viable.
Q11 Chair: While we are still on this subject for a moment, the previous programme, Longannet, ran into problems because of cost overruns. Does the present funding that you have in place make you confident that we are going to be able to proceed? The private sector has been deterred by what they see as rather low returns in this area. Will we find we have funding problems again in the future?
Mr Davey: We think we have one of the most attractive packages for CCS in the world, because it is a combination of the capital in the competition and the CFDs that support the revenue going forward. I think that is why we had eight bidders. The proof of the pudding often is in the eating. We had eight people wanting to bid for that, and we still have four actively engaged. But it is the competition, the criteria and the robustness of the way we are going about that that gives me confidence that we will be able to deliver successful projects. The way we have gone about it-learning from the past, of course-has been pretty rigorous. I am getting a feel from the reports I see, and some of the feedback from the companies, that not only have we been scrupulously fair but it has been a more constructive approach. Simon, do you want to add anything to that?
Simon Virley: Of course, the main difference is we now have an agreed Levy Control Framework to spend CFDs under. We did not have that when we were doing the first competition. One of the main lessons from the first competition was question marks about what was going to support these projects during their operational phase, so I think that is a major improvement.
Q12 Barry Gardiner: I am not quite sure whether this should be to you, Secretary of State, or to Mr Virley. I have before me the Treasury figures for 2011 and 2012 on this. Is it a surprise to you to find that the £1 billion was not there in the 2011 figures? It was £660 million that was there, and nothing for the 2011-12 year?
Mr Davey: I can deal with that. When the contracts for the projects are signed, then the money will flow. There is no doubt about that. Inevitably, because the competition has not come to a conclusion and we have not signed deals, there is no deal for the money to flow.
Barry Gardiner: With respect-
Mr Davey: No, with respect, you would not spend money until you have a project.
Q13 Barry Gardiner: No. I am looking at what they budgeted and there was zero in 2012-13. For clean coal there was £63 million in 2012-13, £164 million in 2013-14 and thereafter in 2014-15, zero.
Mr Davey: When you are doing budgets-and I will bring Simon in because I am sure he knows the detail better than I do-you have to have some indicative figures. When you are running competitions, you are not quite sure when the outcome is going to be and when the money will be drawn down.
Q14 Barry Gardiner: The figure we were given was £1 billion.
Mr Davey: But there is no dispute. That money is available for the carbon capture and storage projects that win the competition. When that competition is completed and when that competition is signed, that money will be forthcoming.
Q15 Barry Gardiner: It will not be there for clean coal because that is not in the budget post-2012.
Mr Davey: The £1 billion we are talking about is for carbon capture and storage. Simon, are there things you want to add to that?
Simon Virley: The money will be spent over this spending review period and the next, but there is no doubt that the £1 billion is there. That has been reconfirmed as recently as the mid-term review that the Government issued just a week or so ago.
Q16 Barry Gardiner: In the Treasury figures that I have in front of me for 2012, clean coal is not a line in the energy budget, and items-
Mr Davey: I am telling you, Mr Gardiner, when the Treasury does its budget it has to have-
Barry Gardiner: You want to listen to the question before you answer it, Secretary of State. It might be helpful.
Mr Davey: I know where it is going.
Barry Gardiner: The line in the Treasury figures for 2012 gives a total of £575.81 million. That is the total capex cost, all funding. It is broken down to £115 million, £172 million, £201 million and £86 million, and, beyond that, nothing; absolutely nothing. So you are saying to the Committee that the Treasury has committed to £1 billion for CCS. I am saying it is not there in the figures. Other figures do extend beyond that period. They do not for CCS. Why is there not the £1 billion that you say there is there in the budget?
Mr Davey: I will bring in Simon again, but I am trying to make the point, and my answer is not going to change, that there is absolute clarity from the Treasury that that £1 billion is available and can be drawn down when it is needed.
Q17 Barry Gardiner: Which £1 billion? If it is not in their budget, where is it?
Simon Virley: Those figures I think you are quoting relate to the current spending review period. I do not have those figures you are quoting in front of me, but those figures relate to the current spending review period. They will be spent on these projects beyond the current spending review period and the profile-
Q18 Barry Gardiner: As they will on biomass, as they will on CCGT, as they will on nuclear EPR and so on. But those figures are in the budget beyond 2015, and indeed beyond 2020, but there are none there for CCS. I am asking why.
Simon Virley: Because we are still evaluating all these bids, and the profile of the spend will depend on which projects we take forward and when the money is spent. That money will be spent not only over this spending review but also over the period of the next spending review. As I say, it has been recommitted to as recently as a couple of weeks ago in the Government’s midterm review.
Q19 Barry Gardiner: It is not committed if it is not in the budget, though, is it, Mr Virley?
Mr Davey: Mr Gardiner, let me help you. I am happy for us to write a note explaining the process of the budget figures you have. If you give us those budget figures, we will take you through them. Let me try to allay your fears. There is absolute clarity that that £1 billion is available. When the competition is concluded and the draw-down of that money happens, I am sure that will appear in every spreadsheet you need to see it in.
Q20 Barry Gardiner: Thank you very much. I look forward to receiving it from you. While we are on the subject of budgets, you underspent yours by 20% in this year that we are considering. There are two ways of asking this question. Mr Lilley would like me to ask you this question in the way that says, "Why the hell was your budget so high when you did not need that much money?"
Mr Lilley: Yes, stop there.
Mr Davey: I can’t believe that.
Barry Gardiner: Other members of the Committee might like us to ask that question in a way that said, "What are the dreadful omissions that you have not managed to achieve, in terms of what you set out to achieve at the beginning of the year, because you failed to spend your budget to the full?" You can answer it in any way you like but it amounts to the same thing, does it not?
Mr Davey: I will answer the question. I do not know whether this will please you or Mr Lilley or any other particular member of the Committee. Obviously my aim is to please you. What I can say about the underspend in 2011-12, as you will see in the annual reports and accounts, is that we underspent on our DEL by £266 million. What was that made up of? Around about three quarters was made up of extra income that we had not anticipated from the NDA, extra income from activities at Thorp from reprocessing and from Sellafield MOX. Sometimes with the NDA’s income it is quite difficult to anticipate what it is going to be, and it can be volatile in both directions. But in 2011-12 it was volatile in the upwards direction. We had more income than we expected, and that is shown in the accounts as an underspend, but I hope you will feel that if there is extra income coming in from Government-owned assets, that is not a bad thing. There was an underspend on one or two-
Q21 Barry Gardiner: That goes directly to the Treasury, does it not?
Mr Davey: Yes, it does. Let us remember the relationship with the NDA’s budget. It is ring-fenced, so it is quite different from a lot of other items. If the income goes down in any particular financial year from what is predicted, then we are able to go to the Treasury about that as well. I am just checking with Vanessa. So it is symmetrical and, therefore, hopefully that gives you some reassurance.
I have only accounted for about three-quarters of the underspend and I am sure you want to know where the others went. The largest number was on Warm Front, and we underspent that budget by about £55 million. Clearly that is a worry because that money is going to people who are fuel-poor, helping them get greater energy efficiency in their homes. Clearly we looked at that very closely because we want to spend that money.
There were issues that we had more money than we expected at the beginning of the year. For example, there was £10 million of support from the Department of Health, which we found problems getting out of the door. We had tightened up the eligibility criteria to try to focus Warm Front on those who needed it the most. There is no science in when you tidy up eligibility criteria, as I am sure you will appreciate. As a result of that, it seemed we were not getting inquiries from as many people, so this year we have loosened the eligibility criteria. We learnt from that. There were also some issues in the supply chain. Carillion, the major supplier, had some supply issues, so we did not get the money out of the door. That is a shame, because we are trying to spend as much as we can on fuel poverty within our budgets. But we have learnt the lessons on that. There were a number of other areas that I could take you through where there was some slippage on programmes, some lower claims on the Coal Authority and so on.
Q22 Barry Gardiner: Secretary of State, there are two different questions that arise from that. One is a straight question about the whole decommissioning programme as the NDA revenue declines in coming years.
Mr Davey: That is a very important question.
Barry Gardiner: That is predicted. It is known this is going to happen. Given that that money does go to the Treasury, and it is straight into their coffers, you would have to go to the Treasury and ask for greater support for your own budget at a time when the Treasury is getting less in from the NDA. How difficult do you think that is going to be, and what assurances have you received that your budget will not be unduly prejudiced in future years as a result of that?
Mr Davey: You are right to focus on this issue. I am glad you have, because the NDA spend is such a large portion of DECC’s budget. Although it is ring-fenced as I was describing, the fact that it is so large we have to give a great deal of attention to it. In the last financial year it was around about 64% of our total budget. In this financial year that has gone up to 69%. So it is huge and we have to give it great attention. It is made up of DECC departmental funding and then the income we have talked about. It is sort of two thirds DECC, one third income, but that is pretty rough and ready. This year it is about £3.2 billion: £1.9 billion from us and £1.3 billion from NDA income. As I was saying, that income is volatile and, you are absolutely right, it is expected that over time that income will decrease. It is expected that the taxpayer-DECC, the Treasury-will have to increase its contribution. The fact that that is expected and planned for and known is very helpful. We have had discussions with the Treasury about how that will be managed.
I should pay tribute to the Treasury and the whole Government, and, indeed, in part the last Government, because the whole NDA process, the decommissioning process, is something that previous Governments of all colours and persuasions have not faced up to. Despite these difficult financial times we are continuing. The Treasury has ring-fenced the budget, to make sure that this generation faces up to its decommissioning responsibilities and does not hand on these high hazards to future generations. I am paying tribute to the Treasury. I am sorry this answer is long but it is really important, not least with the spending review coming up, but I pay tribute to the Treasury-
Q23 Barry Gardiner: I am sure it is important, but I just wanted you to answer my question. My question was about the assurances that you have of continuing support. You have given the Committee those, so I want to move on because I know we will be pressed for time otherwise.
We are talking about a situation where the spend on fuel poverty has gone from £319 million in 2010-11 to £97 million in 2011-12. That is an approximately 70% decline. It is not just in Warm Front. What that means is that at a time when the Department had more money in the door than it had anticipated, it spent less on one of its key priorities. You rightly expressed regret that it took longer and that it was more difficult to get money out of the door on the Warm Front scheme. Regret is one thing, but what the Committee really needs to hear from you is, as a Department, what active measures you are taking to ensure that fuel poverty is top or near top of your priorities, in terms of getting all that money to people who are in desperate need of it. This is about all of our constituents experiencing the winter cold, right now, needing to know that that support is coming and having seen a 70% cut in it during that period.
Mr Davey: Let me answer that in two ways-first of all, the general point about policy on fuel poverty and where money is coming from, and then the Warm Front budget this year, because I can give you an update and it was discussed in the Opposition debate last week.
In terms of overall fuel poverty, let us remember that there has been a switch, begun by the last Government, from taxpayer-funded schemes to levies on consumer and business bills to fund fuel poverty schemes. It was anticipated in the spending review that we would move away from taxpayer-funded schemes almost entirely, so that it became consumer bill- funded. Therefore there is lots of money being spent. It is coming from a slightly different source, but there is still a lot of money being spent on fuel poverty, so within the energy-
Q24 Barry Gardiner: Sorry, I do not mean to interrupt you, and I do want you to continue what you are saying, but on that point can I ask you: do you think that is fair, that shift away? I am not trying to make a party political point here, but given that you said the burden is being shifted from taxpayers to consumers, is it right that it should be the other consumers who are subsidising those consumers through their bills? Or in looking after those who are fuel-poor in our society, as a matter of principle, should it be from general taxation, which of course is contributed to in other ways? I grant that, by and large, it may be the same people who are paying it, because we are all taxpayers, but in your view what is the best way to do that?
Mr Davey: Professor John Hills did a review into how we measure fuel poverty. He looked at these two different options. He says that it amounts to very much the same thing, but that consumer bill approach, if it is done right, if the schemes are structured right, can still be redistributive. If I may comment on that, given that you have come back on that question, and I will come to the Warm Front budget in a second.
Within the energy company obligation, there are components. So the £1.3 billion per annum, which it is estimated that energy companies are going to have to spend on the energy company obligation, £390 million is on affordable warmth and you have to be poor to be eligible for affordable warmth. We then have another slug, about another £190 million-
Q25 Barry Gardiner: Companies are contributing to that, are they, business energy users?
Mr Davey: Let me check. Does that go on business bills or is it just consumer bills?
Phil Wynn Owen: I believe it is a levy on all bills, but we will check that for you and write to you if I have that wrong.
Q26 Barry Gardiner: If not, then it would be substantially different from other taxation.
Mr Davey: We will check on that, but businesses pay taxes and it goes to individuals, so let us be clear on that, even on business taxation.
So we have the £390 million affordable warmth component of the energy company obligation. We then have 190 carbon-saving communities, where it is an obligation and the money is going to households who live in low-income communities. Of course, everyone is entitled to the rest of the energy company obligation, the carbon saving obligation, so people on low incomes will be able to access that as well. When you add it up, we estimate that about £650 million-half of the energy company obligation-will be being spent on people who are from low-income households. So it is difficult to suggest that we are not making fuel poverty a priority in our approach. We are doing everything practically possible that we can reasonably be expected to do to tackle fuel poverty. If you add on not just taxpayers but consumer-funded levies into fuel poverty, we will have spent more on fuel poverty by the end of this spending review.
We are trying to think of other imaginative ways. We will be publishing a fuel poverty strategy later this year-I hope before the summer recess-which will set out some of our latest thinking, building on the work that John Hills’ review set out. So it is a priority and I feel that very strongly.
Q27 Barry Gardiner: You are confident you will not be short-changing the fuel-poor in the current and coming financial years?
Mr Davey: Let me deal with your Warm Front budget question, because I did say we have learnt lessons from the underspend.
Barry Gardiner: Before you do, just say "Yes" to that.
Mr Davey: Sorry?
Barry Gardiner: Before you deal with the Warm Front, just say yes to that-that you are confident that you will not be short-changing the fuel-poor in this or the coming financial year.
Mr Davey: Yes, I am confident, and I am going to explain why, and then you can hold me to account for what I have said.
Barry Gardiner: Absolutely.
Mr Davey: There was £100 million in this year’s budget, 2012-13, and during the year it was clear that it was not going to be spent if we did not take action. So we have taken action in-year. What have we done? First of all, we have loosened the eligibility criteria and, when we did that, we saw an uptake on demand. We have worked with the supplier to try to make sure that people can access Warm Front. We kept it open into 2013, in order for people to be able to access Warm Front. Because we felt there would not be sufficient spend on fuel poverty in 2012-13, compared with our budgets, I decided a few months ago that we would put in a special fund for fuel poverty of just over £30 million. We ran a competition with local authorities that could bid for that fund, so they could tackle fuel poverty in their local communities using the money that we provided. That was an additional in-year fund, an in-year competition we decided on, in order to make sure we were using our capital budget on fuel poverty.
Q28 Barry Gardiner: Thank you. Two other brief questions. For the International Climate Fund the spend was down from £275 million to £140 million. This is at a time when work in this area is so critical, moving from the Durban Platform through to 2015. Can you give an assurance that you really will be spending up to the full in this area of budget? That work on international co-operation is so critical.
Mr Davey: Yes.
Q29 Barry Gardiner: Thank you. Finally, can you explain why one of the NDA’s companies, Rutherford Indemnity Ltd, is based in an offshore tax haven?
Mr Davey: It is the first time I have heard of that company, I will confess. I am not sure if Vanessa has heard of that.
Vanessa Nicholls: No, but I think we should find out.
Mr Davey: Vanessa knows almost everything there is to know about the NDA. So what we will do is we will write to you.
Barry Gardiner: Guernsey, by the way.
Mr Davey: Okay.
Q30 Dr Lee: Following on from the concept of being fuel-poor, a report was issued yesterday by a chap called Tim Morgan. It is an economic report. I wonder if you agree with the following statement. "The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel". Do you agree with that statement?
Mr Davey: I am not sure if I do. I would like to read the full report and see that quote in context. If you let me have a copy of the report, I will take it away.
Q31 Dr Lee: The reason I say that is that essentially the economy is about energy, it is not about money. That is the central thrust of the report. If that is the case, and if you accept it-and of course you need to read the report-I wonder whether there should be an additional circular on what the Department spends and what it is costing the economy to go down the path of increasing the cost of energy, if that is true. My colleague next to me has shown me the cost of landed gas across the world. At the moment it is $2.95 in the gulf of Mexico, $13.15 in Japan and $9.63 in the UK. The point I am trying to make is that this Department’s policies have significant cost implications for the broader economy, particularly in the next 10 years. I wonder whether that should feature in your accounts.
At the moment you look at this and you think, "Okay, we see quite clearly that nuclear costs a lot of money on this chart that is produced by the Department", which is a bit unfair really, because if there is a strike price of £150 for offshore wind, how much is that costing the British economy? How much is it going to cost us to set any other strike price? I am still intrigued to know how we are going to set a strike price, when you have prices as broad as that on the world scene of gas. I think that is needed because, at the moment, I get no idea about how much our energy policy is costing the British economy, and I think that is an important figure to have on your accounts in view of the fact that I think the economy is all about energy.
Mr Davey: Clearly, energy is a very important part of any modern developed economy. Who would deny that? To say it is the only thing that matters, I think, would be going a little far. Energy-efficiency in both the domestic sector and the industrial sector is critical, and the countries that are more energy-efficient in the future are going to be some of the most competitive economies. So just looking at the input costs is not quite the whole picture, and you have to look at the overall way that energy is used. You could have very cheap energy but if you used it very, very inefficiently you could be less competitive than the country that has higher-priced energy but uses it more efficiently. So I hope you will accept that the analysis has to look at both sides of the equation.
Q32 Dr Lee: But as somebody who is a supporter of nuclear-and I make no secret of it-it just strikes me when I look at this, it is like, "Oh God, isn’t nuclear expensive? Look how much it is costing as a proportion of the budget". That is a misrepresentation, because how much is it costing us to set prices for wind-offshore wind, onshore wind, potentially putting in a Severn barrage, marine power, and so on? Why doesn’t that appear on here? There are up-front costs with those technologies that, if these prices are anything to go by, are going to be quite significant, because I am not confident that civil servants can set a strike price in the light of not knowing what the gas price is going to be next year. At the moment the difference is between $3 and $13, and that is make or break for an economy. That is significant.
Mr Davey: Let me try to deconstruct some of the things you are saying. There are different elements to what you are saying. First of all, look at the gas prices that you have shown us. Obviously we have talked to a lot of people about that-gas market analysts, many in the industry-to understand why there are different gas prices, and primarily it is because the gas markets around the world are not integrated. When you ask them when the likelihood is that they will be integrated they say, "Not any time soon". There are some very good physical reasons why the world gas markets are not integrated, why there are different gas prices in different places and why people, not just civil servants but frankly market analysts and the industry, are uncertain about what the gas price is going to be in five, 10, 15 years’ time. That seems not unreasonable.
The reason I am bringing time into the equation is that a lot of your comments and analysis seems rather too static and too here-and-now. If you are looking at energy policy and climate change policy, you have to look at it over years, decades. Particularly as energy is so important, as you say, you have to consider what are the things that we need to take into account to make sure our people, our businesses, our economy and our world are using energy in the most cost-effective ways, getting the most cost-effective energy. If you look at it that way over time, rather than just at one chart, one snapshot, you might very quickly come to the conclusion that taking a diverse approach to energy policy-as I described to the Chairman earlier on in this session-and looking at different technologies is the right way to go. To use common parlance, putting all your eggs in one basket is not very sensible.
That does mean that some technologies, and one particular snapshot, are going to be more expensive than another. But I think that economic history and economic progress, before and after the industrial revolution, show that sometimes cost of production for particular technologies come down. The question is, do you want to be non-strategic and not thinking long-term, and only back those technologies and those energy sources that, at this particular moment, are the cheapest?
Q33 Dr Lee: Never did I say that I was putting all my eggs in one basket. I was suggesting that you are putting just one egg on this chart and you are not stating the true costs of all the other energy forms, so I think that is important.
Secondly, by definition, the contracts for difference model is a static model, a static price. In a world that you are telling me is not static, it is a static construct. Trying to suggest that you should not have a static approach-
Mr Davey: It is not static.
Dr Lee: It is. You are fixing a price for a period of time.
Mr Davey: It is not. I will give you a full answer. I will bring Simon in here.
Dr Lee: You are fixing a price in a world that you have just described as not static. That is my central thrust.
Mr Davey: Let me help you.
Q34 Dr Lee: Secretary of State, I am not suggesting that we should not have a mixed bag of energy generation. I am suggesting that the cost implications of it should appear in your accounts, so that we can then look honestly and clearly over a period of time at what nuclear is costing, what wind is costing, what marine is costing, what gas costs, what CCS costs. I think just having the nuclear decommissioning there is not fair on the nuclear industry, because there are costs for the other forms, as I have already said there are.
Mr Davey: Dr Lee, we try to be fair. We will take that point away. We will see if we can present you with the information, because we publish so much information-the levelised costs of different energy generation, the impact on bills and prices-that I think it would be rather unfair to say we do not publish a huge amount of information. If you are pointing at one page, I would suggest that might be unfair given the information we have made available. There are huge amounts available on all these different costs.
Let me deal with your other point, because it is really important. I think I can help you. You are suggesting that CFDs are one price that is static. Let me explain how the CFDs are going to evolve, because they are evolving in a market way, in a dynamic way, in exactly the way we want them to. We are forming a market where low-carbon is supported in a whole variety of ways. We are trying to create a low-carbon market where there are not static prices, either for strike prices or for other things. How are we doing that? We have to deal with where we are at the moment. We have renewables obligation certificates, which are a static price, set by Ministers with four-yearly reviews. As we move forward to 2017, when they will go, we have CFDs that will have static prices, administratively set, not by Ministers but by National Grid, the system operator. It is consulting on the prices at the moment. The whole objective is to run these CFDs in the first phase with static prices administratively set, alongside renewable obligations, but in order to get, post-2017, to auctions, where the strike prices are decided in the market, where there is price discovery not set by Ministers, not set by National Grid, but set by the market in a more dynamic way.
I have to say, I think the whole thrust of energy policy ought to be something that you should welcome, because we are going to get more price transparency, and the market is going to be deciding the prices for low-carbon in the future in a way that it has not in the past. Simon, I do not know if you want to add anything to that.
Simon Virley: Just to say that obviously we do publish annually an assessment of the impact of all Government policies on energy bills. What it shows is that the policies that are taking something off bills outweigh the policies that are adding to bills. So, the effects of the Levy Control Framework you referred to are incorporated in those bill estimates that we publish, and we will be publishing an updated version very shortly.
Q35 John Robertson: On this point, it sounds like "static" is obviously the new in-word with your Department, because it has been used many times today, which we have never heard before, but there we are.
Mr Davey: I am glad we have introduced a new word.
Q36 John Robertson: I want to know if I am right in my summation of what you are saying here. What you are saying to us is that we need to look at the future and not the here and now, which is static.
Mr Davey: I would do both. I think both are a good idea, and actually the past as well.
Q37 John Robertson: Yes, that was the point I was going to make. You have said that the experts cannot predict the future, so what is the point? Is this just a gamble ? Is this just a game of roulette? Your experts cannot tell you what is going to happen in the future-and those were your words-and yet we do know what is happening in the here and now, which is static, and we do know what has happened in the past. I have always thought that you learn from history to make sure that you do not make the same mistakes again, or you try to make the things that went right, right again. So what is it? Is it just one big gamble or do we have experts who do know what is happening?
Mr Davey: Whether you are predicting the future of the economy, the future of a particular policy, or the future price that is going to be set for a particular commodity-and obviously, the longer you go the more uncertain things are going to be-it is always a best guess. The idea that anyone here could claim that they can know the future is getting towards the absurd. What economists do, what forecasters do, what officials do, what markets do is try to use all the information they have at their hands, from all different sources, crunch that information, and come up with the best guess. But most of them, if they are humble enough, will recognise that they cannot absolutely know the future. What it is about is managing risks, managing uncertainty and making sure that your policies are as flexible as possible for different scenarios that might develop. That has been a key component in our thinking on electricity market reform and all our policies. No official in DECC claims-and I do not as a Minister-that we know the future. In fact, it has been one of my refrains since becoming Secretary of State that the huge uncertainties that we are trying to grapple with in creating create sensible policies that are fair for consumers and fair for businesses also make sure the lights stay on and that we decarbonise the system. You are doing that with all that uncertainty. I do not apologise that we do not know the future. If I said otherwise, you would rightly criticise me.
Q38 John Robertson: If you don’t mind me saying so, Secretary of State, I think that is the first honest answer you have given us, the first that has been absolutely true. You have admitted that you do not know what is going to happen. We do not know what is going to happen either, but we do try to have a best guess with the expertise that we have and that we get from other people. We like to think that if you perhaps listened occasionally and took on some of our best guesses, then perhaps we would not be in the static position that we are in today that you have just told us about.
Mr Davey: Let me explain, Mr Robertson, about the dynamic relationship I have with you and the Committee, because it is very constructive. This Committee wrote a report on the draft Energy Bill and you made a number of suggestions. In a very dynamic way, we took almost all of them on board and the Energy Bill before the House is a much better Bill because of that dynamic relationship.
Chair: I am happy to confirm that I think it is the Committee’s view that, although you have not moved as far as we would like in some directions, we recognise that there was quite serious account taken of our suggestions in relation to the Energy Bill.
Mr Davey: Thank you.
Q39 Sir Robert Smith: We have already touched on how much the NDA dominates the budget, despite the fact that the Department has so many responsibilities. Even if it is ring-fenced in terms of coming through the Treasury, you are there to protect the taxpayer. Given the spiralling costs and the delays at Sellafield, do you have any plans for holding the NDA to account for its management?
Mr Davey: We do hold the NDA to account. Most recently we had Stephen Henwood, the chairman, and John Clarke, chief executive, in front of the DECC board. We are doing that now on a regular basis so they can explain to us the challenges that they face. There was a recent NAO report and a PAC inquiry. My colleague, Mr Wynn Owen, was there and I think Vanessa was there as well, and they can tell you a little bit about that accountability process and how that worked.
It is true to say that the NDA has seen some cost overruns on a number of budgets, but it is also true to say they have made significant savings on other budgets. There are some huge challenges, particularly at Sellafield, and I am very happy to answer the questions you have on the details there.
Going back to Mr Robertson’s point, let us remember the uncertainty that the NDA faces in dealing with some of the challenges at Sellafield, whether it is the ponds, where some equipment and debris is stored, or the silos. Decommissioning those is highly hazardous, and there is not a detailed inventory of everything that is in there. So the degree of uncertainty they are dealing with, in a very hazardous environment, is significant. Given that uncertainty, it is not surprising that we cannot be absolutely clear on every budget line, every project line, what the outcome is and what the path will be. The NDA’s set-up, both in terms of accountability and the way it works with the parent body organisations and the site licence companies, is to ensure that the incentives to be efficient and the monitoring and performance requirements are met.
Let us be clear, we will never be happy and we will always be trying to get better value for money. At the moment there is a new group called the Sellafield Performance Group, looking at how the projects are being managed, to see what extra cost efficiencies can be brought out. So we are not complacent, the NDA is not complacent, but I think the overall structure is a much, much stronger one than we have had in the recent past.
Q40 Sir Robert Smith: Would you be able to publish the cost and schedule information for their major projects across the estate so that we can monitor it?
Mr Davey: I know some is published in the NDA’s own annual accounts but perhaps I can bring Vanessa in on that.
Vanessa Nicholls: There is information available, particularly about the 14 major projects at Sellafield. We will be happy to give you some of that if you want us to. Just to underline the Secretary of State’s point about savings, over the last three years £425 million of savings have been realised at Sellafield, £1 billion has been taken out of the Dounreay programme and £1.3 billion out of the Magnox programme. So, although the overall costs of this are huge, we and the NDA are clear that they need to be reduced as far as they possibly can be.
Q41 Sir Robert Smith: Looking in from the outside, the public will notice that top managers receive bonuses of over £50,000. How are these bonuses calculated, and what are they rewarding?
Mr Davey: I am not aware of the detailed salary and employment contracts of the particular people involved. Vanessa, do you want to comment on that?
Vanessa Nicholls: The bonuses and salaries are set by the NDA board and chairman, as you would expect. It is not a decision for Government, and we are operating in a competitive market where, if you want good people, you need to reward them.
Q42 Sir Robert Smith: We have touched on the state of buildings at Sellafield, but what is being done to ensure that, even in that chaotic situation, it is still safely managed?
Mr Davey: Safety is the number one priority of the Government in respect of the industry, and for the NDA and the players involved. All that is reasonably practicable on safety is done. We have a regulator-the Office for Nuclear Regulation-which I think is seen to be one of the leading ones in the world, but we are always striving for improvement. When I have met them and questioned them on what they are doing on safety and how that is applied to the work of the NDA on Sellafield-on these difficult buildings that you have described-it is clear that the culture that they are trying to inculcate, and that they operate on, is to ensure that improvements are continually being made. One is never satisfied that you have got to the right level of safety, and you are always trying to do more. Of course, because safety is the number one priority in these projects, that can be a contributor to delays and cost, but they are trying to manage the projects, taking safety as the number one priority but trying to do that as efficiently as possible. Again, Vanessa, do you want to add anything to that?
Vanessa Nicholls: The ONR have a team of genuine world experts at that site to ensure that the buildings are managed safely. The Environment Agency is also involved and they work very well together with the ONR. As the Secretary of State said, it is more important that this is done safely than that it is done quickly.
Q43 Sir Robert Smith: Is there a timeline for a strategy for sorting out what is going to happen to all the plutonium?
Mr Davey: On the plutonium, the key thing again is the safety and security. I have visited both Sellafield and Dounreay and seen where it is stored. I was very impressed by the processes there for both safety and security, so obviously the ONR looks at that. So I feel confident that we are taking the right measures.
Q44 Sir Robert Smith: Would you consider something like PRISM reactors to burn up the plutonium to save us having to find a disposal site?
Mr Davey: To be honest, we have done some work on that. We have consulted on what we might do in the long term to the plutonium. There are a number of options. Clearly there are discussions about whether one of the options should be procuring a new MOX. Some people argue that MOX is a very credible, mature technology and would be the way to go. But you mention alternatives, and, of course we should and will consider the alternatives. I do not know whether Simon wants to add any more to that.
Simon Virley: That is right. All those options are still under consideration in terms of the long-term stated intention, which is reuse of the plutonium. Obviously market conditions have changed a little bit, subject to what is happening with both the new nuclear build programme here and the appetite round the world post-Fukushima. So we are having to take account of those developments.
Q45 Sir Robert Smith: In your answers you have outlined cost savings at Magnox and Dounreay, but work has increased by £3 billion in real terms overall. Is there an explanation for that?
Mr Davey: By "work", you mean the overall budgets?
Sir Robert Smith: Yes.
Mr Davey: Again, Vanessa may want to come in. We are trying to grapple with this issue of decommissioning in a way that has not happened before. We are spending significant amounts of money on it, despite all the financial challenges for the Government, and there is a huge amount of activity going on at Sellafield and Dounreay and across the Magnox estate. If you look at all the different types of projects at Sellafield, there are 600 projects, 100 big projects that have beginning and start dates, and 14 major projects, so it is not surprising that quite a significant amount of money is being spent to tackle this legacy that we inherited, which previously has not been grasped.
Q46 Sir Robert Smith: Do you agree with Mr Robertson’s point about learning from history-that our previous generation embarked on a journey without working out the consequences for this generation, and that if future journeys are going to be made, it is much more important to build in the whole life cycle of what you are planning, so you are not leaving a legacy for the next generation after that?
Mr Davey: I could not agree more.
Q47 Barry Gardiner: Ms Nicholls, in response to my colleague, Mr Smith, you said, "If you want to get good people, you have to reward them". I have no doubt that that is true, but one of the main conclusions of the NAO report was that the portfolio of 14 major projects at Sellafield has so far not provided good value for money, that there have been significant lifetime cost increases, and that there have been delays of between two and 19 months during this period. I am not against rewarding good people for good performance, but I think you need to do a little bit more to justify why they were getting bonuses of up to £50,000 each for absolutely appalling performance.
Vanessa Nicholls: The NDA and Sellafield Ltd accept that progress on the full range of those projects has not been satisfactory.
Q48 Barry Gardiner: Of course they do. It is an agreed report with the NAO. They have to accept it because they have signed off on it.
Vanessa Nicholls: Particularly the Evaporator D project, which is the one that overspent particularly. Again, Sellafield and the NDA both accepted that at the PAC hearing. However, you do need to take a balanced view across the full range of what the NDA is attempting to achieve, and there has been significant progress in other parts of the portfolio against what is a very challenging set of objectives. For instance, spent fuel has been retrieved from one of the ponds at Sellafield for the first time in 50 years. That is a significant achievement. There are also plans in place to retrieve fuel for the first time from some of those other facilities, over the next four to five years. I think that is performance that deserves some credit, albeit that nobody is satisfied with the things that are currently off schedule.
Q49 Barry Gardiner: When their remuneration package is worked out, what element of bonus is for good performance and what element of negative bonus-if I can put it that way-is for poor performance? Or do we just shovel the poor performance under the carpet and say, "Oh well, you have done well in these areas, in accordance with your bonus targets, so we will give you £50,000 extra"? It does seem to me that you cannot just pay people extra for good performance. You also have to dock them for bad performance. What I would like to see-and I do not expect you to provide this now, but I do expect it in writing to the Committee, confidentially if necessary-a very clear outline of exactly what elements of their remuneration package they did not receive, which they might otherwise have done, because of bad performance in those areas.
Mr Davey: If I can help-and Vanessa may want to come in on this-we made it clear that the NDA sets the remuneration packages for its staff. It is not a matter for Government. While we want to help the Committee-
Barry Gardiner: But it is a matter of concern for Government, Secretary of State.
Mr Davey: Indeed, and I have made that very clear. The fact that we had the chairman and chief executive before the DECC board just last week or the week before-
Q50 Barry Gardiner: I am sure your confidence in the chairman of the NDA would not last very long if you felt that they were not in control of this, and therefore I think you do have a role here.
Mr Davey: Indeed, they are accountable to DECC, and in accounting terms to the accounting officer, Mr Wynn Owen, and we will hold them to account. In terms of disclosing the information you want, we will have to talk to the NDA. Ultimately it is their decision, and I am sure that you will want to ask them to do that.
In terms of the overall point you are making, I think our Department has probably put more time and effort into looking at what the NDA and others have been doing than has previously been the case. It is because it is such a big part of our budget now, because the amounts of money are going up, that we need to do that for the Treasury, the taxpayer, Parliament and this Committee. We will do that, but let us be clear about what is happening at Sellafield and across the wider decommissioning piece. They have to build and design some of the most complex, hazardous chemical engineering projects that have probably ever been built or designed in the world. There is no blueprint for them to go from, they have to think through as they retrieve this hazardous material, package it up and store it. It has not been done before. This is cutting-edge stuff. While we need to make sure that it is done in the most efficient way possible, that we do not spend an extra pound if we can help it, there are risks there. It would be wrong for me to hide those risks and those uncertainties from the Committee, so I am not going to.
Q51 Barry Gardiner: Yes. But they have found £3 billion worth of extra work that they say needs to be done, have they not?
Mr Davey: That is not surprising, because no one has bothered to tackle this in the past.
Q52 Barry Gardiner: It also suggests that their estimates of how much this work was going to cost were badly out of sync.
Mr Davey: I have to say, estimates of the decommissioning costs have regularly been revised. This would not be the first time. I think it has been revised many, many times. The point, and the real scandal, Mr Gardiner, is that these problems have not been grappled with before. No one has been transparent. This Government, the NDA, the process is more transparent and more detailed than has happened before. It is something that we should be proud of, even though it is really, really challenging.
If you ask me to guess the future in this regard, I would not be surprised if these cost estimates are changed again. I really hope they are changed downwards. There is some evidence that, as we get more information-because we are learning as we do-we may well be able to get more efficient. One of the issues we talk about is whether there could be more research and development in some of the technologies that need to be deployed, so that we can do it more efficiently. The contract at Dounreay managed to find £1.4 billion of savings, and managed to bring forward the decommissioning time scale by 16 years, because it was applying new techniques. The more we can find those techniques, the more we find new technology, hopefully the more we will be able to bring the cost down, but we do not know.
Q53 Barry Gardiner: It would be rather nice if your bonus were based on the amount that you managed to reduce your costs, which is a very great incentive then to find £3 billion of new work that needs to be done, isn’t it? It would be interesting to see how these bonuses are structured, Secretary of State.
Mr Davey: Let me bring in Mr Wynn Owen.
Phil Wynn Owen: Perhaps I could just add a few words, because I was one of the witnesses to the recent Public Accounts Committee hearing near the Sellafield plant on the excellent and much welcomed-both by ourselves and the NDA-Managing Risk Reduction at Sellafield report, on which the PAC itself will report shortly. As the Secretary of State said, first of all, it is important to understand the critical work that is going on at the Sellafield site at the moment. The PAC visited the site to understand that in the morning before the hearing. We are no longer just managing the risk and safety issues, although those are paramount, and that is the first priority, as colleagues have explained. As their names suggest, they are now also tackling the hazard. That means retrieving, encapsulating and moving high-hazard substances to more appropriate storage facilities. That can increase the risk as you move this stuff, so that needs very careful vigilance and procedural management throughout. Because some of what has been done it is a world first, by definition it is not easy to cost-estimate in advance. The NAO report, which is balanced, recognised that.
Secondly, the Treasury recognised this in the last spending review. The Sellafield ponds and silos were recognised by the Treasury as an area that should be prioritised within the NDA’s ring-fenced budget. In other words, money should not be the inhibiting factor in making progress in tackling the hazard as well as the risk. Of course, that does not mean that we are not vigilant on value for money and contract management.
On your question about bonuses, we are happy to take this away and ask the NDA if they have anything more to share with you and about how they manage their own staff and contractors’ remuneration. But to give you two examples that begin to answer your question: the Sellafield site is controlled by a contractor called NMP. We estimate just on one project, Evaporator D, which hasn’t gone well-and they have put their hands up and acknowledged that-that in terms of fee penalties, that will probably have cost NMP at least £40 million of penalties from the NDA during the course of the contract. Then, as you point out, the NDA’s own staff are of course accountable. The NDA’s remuneration committee overrode their own bonus calculation in 2011 and put a further 12.5% penalty on the bonus for that same Evaporator D underperformance. That is just one project. I think that cost John Clarke, who is an excellent chief executive of the NDA-and he wouldn’t mind my saying this, as we explained it to the PAC-about £10,000 off his own bonus calculation, just for that one project among many that had gone wrong. So, people are being held to account. The NAO’s report was very welcome and your Committee’s report is very welcome because, by any yardstick, £3 billion is a lot of public money and we have to make sure it is spent wisely.
Barry Gardiner: The 14 major projects at Sellafield have not provided good value for money so far. That is the conclusion of the report in your hands.
Q54 Dr Lee: I want to build on some of Sir Robert’s questions, referencing the plutonium stockpile. It is not just PRISM, but I think Candu Energy is also interested in putting forward a project. The impression I have, and I have looked at it in speaking to those two companies’ representatives, is that there is still a strong preference within DECC for a MOX plant, and I wonder if that is true. If it is true, why is that, in view of the fact that the MOX plant in South Carolina, which is being built by Areva at the moment, is so significantly over-budget, and that the market for MOX fuel is not there? PRISM’s business plan is to make what we are talking about an asset. I know it is not technically on the Treasury accounts as a liability, but it could be moved to being an asset, so that we could produce electricity with it. I just want to be sure that the Department does not still strongly prefer MOX when the evidence seems to point against that.
Mr Davey: To be clear, no decision has been taken. It is still very much under consideration, and I expect it is some way off before we take any decision on this.
Q55 Dr Lee: Any idea at all on the date?
Mr Davey: The fact that I cannot give you a date suggests that there is still a lot of work to be done in this area, and it will be some time before we make a final decision.
Q56 Dr Lee: Is it going to be a clear and transparent process as well? Are we going to get to see all the figures? Shall we say there are three options on what to do here, so are we going to get a fair and transparent process?
Mr Davey: We have already done some consultation. We believe, in the way we go about all these things, that we are more transparent than Governments in the past, shall we say. Simon will be more familiar with the current process. I do not know if you have anything to add.
Simon Virley: Yes. We will of course publish the evidence behind any decision that is taken on which direction to go in . As the Secretary of State said, we have a policy direction, which is to move to reuse. Obviously, the short-term priority is the safety and security of the plutonium that is currently stored, and it will be a long-term programme. The business case is being looked at, in terms of different routes to achieve the policy objective of reuse, and nothing is ruled out at this stage.
Q57 John Robertson: Could I just go back to the bonuses for just a second? Vanessa Nicholls, you said that you felt that they had done a good job, particularly in recovering spent fuel for reprocessing. I could be wrong, but NDA are in charge of the decommissioning of Chapelcross and they have had a licence since 2005. They have been in charge since 2004, yet only three out of the four reactors have had fuel removed in that time. That was up to the end of December. That doesn’t strike me as if they are doing a particularly great job in removal of fuel, and there have been many complaints about the stop/go attitude in the decommissioning in Chapelcross. Why are we giving them £50,000 not to do a good job?
Vanessa Nicholls: I am very happy to come back to you with more information about what is happening at Chapelcross, in particular. I think the point that we are-
John Robertson: Do you see the point I am trying to make here?
Vanessa Nicholls: Yes.
John Robertson: Everybody concentrates on Sellafield. You can sugar-coat it, you can cover it in nice paper and everything else but, at the end of the day, there is a lot of decommissioning that is going to have to take place. Here is one that has been on the go since 2004, and yet we are three-quarters of the way down the road. That is ridiculous.
Vanessa Nicholls: The point that we are trying to make is that the NDA has 19 sites, of which Chapelcross is obviously one that it is responsible for. Sellafield is the priority. It is more than half of the budget, and we all need to take that sort of balanced picture into account when assessing their performance. Not everything is going well. As we have already said, Evaporator D is one of those examples. I am very happy to ask them to provide you with more information about Chapelcross.
Q58 Mr Lilley: One item in the NDA provision is £1 billion simply for the unwinding of the discount rate used for future costs. What is the discount rate used?
Mr Davey: Does anyone know what the discount rate is? We will have to get back to you on that, Mr Lilley.
Mr Lilley: Would you like to compare it to the discount rate Lord Stern uses for future benefits?
Mr Davey: As has been pointed out-and I know you have made some comments on this-there are a number of discount rates. I think Professor Stern has reviewed it and made some amendments, which I think have addressed some of the criticisms that have been made about it.
Q59 Dr Whitehead: Changing the subject somewhat, what discussions has your Department had with Treasury concerning the setting of the Levy Control Framework? Particularly over the more recent period, when the control framework totals to 2020 have been published.
Mr Davey: We have an awful lot of discussions with the Treasury. That is the immediate answer to your question. The Levy Control Framework is a very significant part of DECC policy, and thinking through the right level-the implications for investment in low-carbon, the implications for bills and so on-has been a really critical matter for us to resolve, and we have done that with our Treasury colleagues.
Q60 Dr Whitehead: We already know the annual amounts for the control framework in terms of what has been published up to 2015. Would you know the levels from 2015 to 2020?
Mr Davey: One of the reasons we cannot be precise about those levels in any way is that we will be talking increasingly about a market and people coming forward to seek contracts for difference. If you were to create a framework that stuck with annual amounts that you had to meet, you would be undermining what we are trying to achieve. As we see the roll-out after the Energy Bill gets Royal Assent with the first EMR delivery plan that is going to come from the system operator, and as they allocate CFDs, a lot is going to depend on which investments and which projects come forward. It is for the private sector to bring those forward. They are likely to bring more forward now, as a result of the exceedingly good settlement on the Levy Control Framework. The fact that it will be £7.6 billion by 2020 is something that has been widely welcomed by the industry. Many people in the industry thought it would end up being a lot lower than that. So that has underpinned many of our other policies, whether in the Energy Bill or elsewhere, to send a very strong signal to investors and the wider industry that the UK is an extremely good place to come and invest in low-carbon technology.
Q61 Dr Whitehead: I think my point is that we know-indeed, you have emphasised-what the figure will be in 2020, but we do not know what the figure will be in 2016, 2017, 2018 or 2019, do we? We do not, but you may do.
Mr Davey: I will bring Simon in. I will explain why we will not know. It is because we have to see what the applications and products are that come forward for the CFDs, but giving an envelope with an amount at the end I think has been welcomed. Simon, do you want to discuss potential pathways-I know there is more than one-from now until then?
Simon Virley: Yes. We have further work under way to agree the actual profile for individual years of the indicative budgets up to 2020. As the Secretary of State said, we have the 2020 figure now. Given the information we are getting back about the interest in CFDs, we are looking at what the profile would look like, and also how the headroom mechanism would work, given that CFDs are slightly different in design to how the RO has worked. So that is work that is under way and not yet completed.
Q62 Dr Whitehead: If that work is still under way, how do we have the end figure for 2020?
Simon Virley: Do you want me to take that?
Mr Davey: I will add on to what you say.
Simon Virley: Obviously, by looking at the aggregate amount that is needed to meet the Government’s renewable, low-carbon and security of supply ambitions for 2020, and beyond. Obviously we are confident that the figure of £7.6 billion in real terms enables us to achieve the renewables target. We have done modelling of scenarios that suggests that we can get the renewable electricity up from 11% today to over 30% with that sort of amount, but we also have to ensure that we have space in that Levy Control Framework for CCS and nuclear. We have done various modelling scenarios that have enabled us to give that figure. Obviously there is a profiling question now about what happens between 2015 and 2020, and that work is under way.
Q63 Dr Whitehead: I have to say, I am not entirely sure how you get to a fixed sum while you are still doing profiling for how you get to that fixed sum, but perhaps we will let that pass.
Mr Davey: As Simon explained, when we negotiated with the Treasury, we knew there were things that we had to achieve, whether it was the renewable energy directive targets for 2020, or bringing on CCS or nuclear and so on, so all those were factored in. It is not an absolute science, not least because part of the process of the Energy Bill, the contracts for difference and the auctioning process we are going to see post-2017 is to reduce the costs. Inevitably, this goes back to the static/dynamic argument we were having earlier on. This sort of analysis, particularly over the time period we are talking about and with the technologies we are talking about, has a degree of uncertainty. As Simon quite rightly pointed out, that is why there is headroom in these figures, and I think it is why it is going to be difficult to be absolutely sure about what it should be in any one year. In many ways, we will get a set of indicative figures that are likely to change, because some projects can be quite lumpy. It would be silly for the delivery plan for the system operator and the Government to say, "We shouldn’t build X this year, because the indicative budget doesn’t allow for that" because the overall envelope is the critical thing.
Q64 Dr Whitehead: The rules for the budget up to 2015 indicate that if you overspend, for example, in any one particular year, then that has to be compensated in other areas of your forward trajectory up to 2015. For example, the Department looks like it will have overspent on solar PV against annual-
Simon Virley: Indeed, it has done.
Dr Whitehead: It has done, yes, sorry. You will be required to make compensation elsewhere in the overall budget up to 2015, as a result of that, won’t you?
Mr Davey: In other areas that come under the Levy Control Framework we underspent, so there was a degree of substitution, but we have also used the headroom, the flexibility. The overall point I am making is that it is quite difficult to be precise on these things. I would not believe precise figures that were locked in stone, and I would not want them, because we are trying to get market competitive forces and drive down technology costs. I do not think people should be surprised when these figures move around, when we have to use headroom and so on. Simon, do you want to add anything to that?
Simon Virley: We obviously did have to respond to the overspend on solar PV, and we have introduced automatic digression, energy efficiency requirements and various other mechanisms to bring that spend back down. As the Secretary of State said, we have partially offset some overspend there with some underspend on the RO last year, so the net effect is not as big as the overspend on FITs would be. Obviously we are now looking with the Treasury about how you work the headroom mechanism in a world of CFDs. Of course, the great quality of CFDs is they provide stability for investors, but there is obviously greater volatility in the payment flows coming into the Levy Control Framework. So you have to work through how the headroom mechanism is going to work under a system where you have CFDs. That is work that is still under way.
Q65 Dr Whitehead: So if you get to 2015 and you have underspent in a number of areas overall, does the Treasury take back the theoretical amount of money that you might otherwise have spent on putative tax and spend within that envelope, or do you have that theoretical amount of money, which you have not spent, available to you and able to be carried forward after 2015?
Mr Davey: That is a very good question. The Levy Control Framework is quite a new way of managing budgets, and that is why you are quite rightly interested in it. These are budgets that are outside Government. The experience of FITs is we cannot quite control them in the way that you can if it is directly taxpayer-funded public expenditure. So, inevitably, some of the mechanisms are under development in the way that Simon has described. Were there to be an underspend by 2015, there would be a very, very strong case for us to roll that forward, but no doubt we would have discussions with the Chancellor.
Q66 Dr Whitehead: Is it the case then, since you do not know yet what the intervening figures are up to 2020 and you are still doing some profiling on it, that if it turns out that your profiling looks like overall you are going to overspend, or indeed underspend, that the Treasury will alter the figure to 2020 as a result?
Mr Davey: We have an agreement with the Treasury and I think we will all stick to that. Let us be clear, if we are underspending and we are getting lots of roll-out but we are doing it a lot cheaper, this is a good thing. If the converse is the case, we have to look at it to try to drive that costs down. The good thing about the Levy Control Framework-and I am a huge supporter of it-is that it creates discipline and makes people think hard. It also creates competitive tension. It makes it clear to investors they are going to have to compete for that support and that there is no blank cheque, and that is exactly how it should be. We need to have discipline in the way we think about it in Government, and the way the investors think about their projects.
Q67 Dr Whitehead: But bear in mind that no money comes into your Department and no money goes out of your Department, and the entire money that flows is outside the Department. There is a cap on one element of theoretical money. but there is no cap on the real money that lands up on consumer bills, is there? Are you planning either to report on or to regulate the cost on consumer bills of the Levy Control Framework?
Mr Davey: I am glad you have raised that point, because there has been quite a lot of misunderstanding, not least in the reporting, of the Levy Control Framework. In our previous analysis on bills and prices, which Simon referred to earlier, we had already assumed this type of support level going forward in order to meet our renewable energy directive targets. The £7.6 billion is not a new addition that has come out of the blue. It has already been part of our analysis because we knew we would have to spend-or consumers would have to contribute, business would have to contribute-this level of money. It is important to recognise that this is not some sort of new cost that is being added. Given Simon’s point from before, when you add all our policies together, on the demand and supply side, we believe that people’s bills will be lower in 2020 because of the many elements of what we are doing to help people save energy.
Q68 Dr Whitehead: You are committed to publishing a policy impact document, are you not, alongside the Annual Energy Statement on the cumulative costs of your-
Mr Davey: On bills and reports?
Dr Whitehead: Yes.
Mr Davey: Partly because of the negotiations on the Levy Control Framework, that was not ready to be done at the time we did the Annual Energy Statement. That is now being computed, and the Levy Control Framework and other decisions that were made are part of that new work, which will be published shortly.
Q69 Dr Whitehead: Regarding the carbon price floor that is coming in on 1 April, has the Department made a calculation of the windfall profits that will arise for existing nuclear power plants, over the period from when carbon floor price is projected to come in to 2020? Have you made a calculation of the likely windfall profits that will arise for existing nuclear power plants, bearing in mind that they will trade on gas as a market-maker but will not pay carbon floor price, whereas gas will pay carbon floor price?
Mr Davey: Simon may be able to tell you if we have made those and what they are, but let me just deal with the general point. It is important, when we are trying to decarbonise our economy in the least costly way, that we send out the right signals, and that we use market mechanisms to encourage people to invest in low-carbon in all its different forms. That is why the European Union emissions trading system is so important and why we need to get it reformed so that sends the right signal. Clearly, because of design flaws and the unexpectedly deep recession, the EU ETS is not sending out the signals that were expected and hoped for, for it. The reason I bring that up as a parallel is that that is why the carbon price floor is there.
I will ask Simon to answer your specific question on whether there has been any analysis of how it impacts different forms of low-carbon generation, but let us be clear why it is there and the role it is playing in our overall strategy.
Simon Virley: Obviously, there was analysis done at the time of the decision on the carbon price floor about all the impacts that it was going to have. The rents will not just accrue to nuclear generators. There will be renewable generators who will get some rent out of that for the period when they are operating. Of course, we are only ramping up the carbon price floor over time, and many of the old nuclear plants are coming off, so in a sense-
Q70 Dr Whitehead: They are not, are they? They have all just got extensions.
Simon Virley: Partial extensions, but-
Dr Whitehead: Two extensions in December of seven years, two extensions last December of five years, so four plants will be running right through the period past 2020 now, won’t they?
Simon Virley: The point is that this is an incentive that works right across the market, to basically shift and tilt the balance towards low-carbon and away from fossil fuel. That is basically what it is there to do, so there will be an element of rent in there.
Q71 Dr Whitehead: Yes. But, as I mentioned, just this December two plants were given seven-year extensions but would have otherwise closed in 2015-16, I think. Over the entire period with a projected carbon floor price of up to £30, there will be at least two and then four plants with last December’s extensions operating through that entire period, not having invested a single penny or doing anything else other than continuing to operate and getting that free money. Have you calculated how much that free money is coming to?
Simon Virley: I do not have that figure to hand, but we could certainly write to you if there is a figure available.
Q72 Dr Whitehead: Would you be surprised if it came to £44 billion for those four plants?
Simon Virley: I do not know of that figure. If that has been made, then I would be interested to know the source of that figure. The point I was making is that this is obviously shifting the incentives towards low-carbon. We have just reached a record amount of low-carbon electricity in the United Kingdom. We hit 34% in the third quarter of last year. Of course we are trying to decarbonise the power sector in order to decarbonise the economy, so there is a policy objective behind the carbon price floor.
Q73 Dr Whitehead: Secretary of State, if you were not to be particularly surprised at the possible figure-just for those life-extended plants-of £44 billion over the period as a result of the carbon floor price, would you consider that that was an acceptable profit, bearing in mind that those particular plants are not doing anything at all to incentivise investment in low-carbon energy?
Mr Davey: I would want to see the figures and see the context. Let us be clear, to get life extensions you have to get the ONR to agree and you may well have to make investments to maintain and meet the safety standards, so that is as it should be. They need to ensure that they can generate low-carbon electricity in a safe way, meeting a tough regulatory regime, and also taking into account some of the additional investments that are required within our system post-Fukushima. So there are two sides to the ledger. That is the only point I guess I am trying to make.
Q74 Dr Whitehead: Are you perhaps going to have a look at it?
Mr Davey: Do send me your figures, and we will see whether there is any other analysis and I will look at them.
Q75 Chair: You have probably explained this somewhere, not necessarily today. When we get to the point at which we have CFDs, there are clearly going to be different strike prices for different forms of generation. If the Levy Control Framework increases the scrutiny of value for money, would you expect that to lead to increased pressure to maximise the amount generated from the technologies with lower strike prices than higher?
Mr Davey: One of the reasons we have said there will be technology-specific auctions, and when the system operator completes its call for evidence and publishes its draft strike price later this year, I think people will see that different technologies will be treated differently in the way that has been the case, and that is as appropriate. When the system operator does its delivery plan, and works out which technologies it wants to run auctions for and allocates CFDs to, it will have a number of issues that it wants to think about. Obviously there are legal obligations for renewable energy targets. That will be a key player, particularly in the run-up to 2020. I will also be issuing guidance to National Grid, ahead of its first delivery plan, and we will be explaining that they need to think about the allocation of CFDs to ensure that we on the least-cost pathway to our 2050 targets for decarbonisation. They will have to take all of those things into account. Therefore, I do not think they will simply-if they are doing that-look at what is the cheapest here and now and put all the CFDs in that technology. I do not think they could look at the renewable energy target for 2020, or look at the least cost pathway, and do that. That was my point to Dr Lee earlier. You have to think about the technology strategy that underlies some of this, and you have to think about the future. The way we are guiding National Grid, and indeed the way that I think the whole of our policy is developing, is to try to make sure that we think about the long term as well in energy policy, climate change issues, as well as energy security issues and so on, and not simply the here and now. Do you want to add to that, Simon?
Simon Virley: Just to emphasise that essentially electricity market reform will go over two phases: the phase to 2020 with this technology development phase, in terms of helping bring down the costs of some of the new technologies, like CCS; and then, in the 2020s, moving to these technology neutral auctions, where essentially we will be doing exactly as you say, which is letting the technologies compete against each other and the cheapest technologies will win the biggest market share. But obviously the guidance we give to National Grid, in the short term, will emphasise the importance of diversity and bringing forward those technologies so they can compete in the 2020s.
Q76 Mr Lilley: Just on the levies, I am glad the cost of all these levies is now spelled out. My brief says that in the current year, the total of the renewables obligation fee and tariffs in the warm homes discount is £2.6 billion, which I work out at roughly £105 a home. The coming financial year, it will be £127 per household, and the year after that £155 per household. £7.6 billion, the cap in 2020, will be just over £300 a household. That is a lot of money that we are imposing on people. Of course it is coming back, all money comes back-Government takes money and spends money-but it is a big cost. However, I cannot quite reconcile it with the figure you gave the last time you appeared, when you said that you were intending to bring forward £110 billion-worth of investment between now and 2020. In response to a question of mine you said that £75 billion of that would be due to decarbonisation, and £75 billion spread over eight years is equivalent to £375 a year. So how are we subsidising and bringing forward £375 per household per annum worth of investment, whereas the levies are never going to be more than £300 per household?
Mr Davey: I have to say, I do not quite recognise your figures, Mr Lilley. I do not know whether Simon wants to comment.
Simon Virley: Can I just comment on the figures you quoted? I think you said that the Levy Control Framework budget for this year was £2.6 billion. I would agree with that, but I note that that includes that Warm Home discount, which is not in the £7.6 billion because it is about the low-carbon electricity part, so the figures are not directly comparable there. The figure for renewables obligation and feed-in tariffs would be more like £2.35 billion this year.
Mr Lilley: Yes, it is 10%.
Simon Virley: I did not recognise the figures you attributed to what that translates to into average household bill impacts.
Mr Lilley: That is just 25 million households, for the sake of a round number.
Simon Virley: Okay. I do not think that corresponds with our analysis, because obviously those costs are spread over businesses as well as households.
Mr Lilley: No, all business costs are ultimately borne by households, as the Secretary of State himself admitted a little while ago.
Mr Davey: Let us be clear what I said, the incidence always goes to individuals but those individuals could be a relatively small number. If it is a small group of shareholders, it may impact on pensions, so it could be many years hence and it could be international people. So you are absolutely right, but I think the incidence on individuals may be a slightly different set of individuals from the one that may be in your calculation.
Mr Lilley: No, it is all individuals. I have taken the average.
Mr Davey: You have not taken the world population, though.
Mr Lilley: No, I have not taken the world population. I have taken the UK population.
Mr Davey: I am just making the point that there are global investors in these companies that we are talking about, who are paying, and they are not getting dividends and so on. If you are being purist about this, Mr Lilley-and I know you are a stickler for that-I am sure you will accept that dividends, who pays the levies and so on will potentially be spread over people who are not in this country and not residents of this country.
Mr Lilley: If we are lucky.
Q77 John Robertson: We understand that DECC is working with Treasury to agree a levy reporting mechanism, which will provide Parliament with the opportunity to scrutinise levy cost estimates for the considerable monies covered by the Levy Control Framework. Is that right?
Mr Davey: We certainly are working with the Treasury. We want to make sure that there is good oversight of the Levy Control Framework, both to make sure it is affordable and, going back to the previous conversation, from a value for money perspective, and we want to make sure that everyone is involved in that. It is really important. Other than saying that, and other than saying that there is agreement on the overall amount for 2020, there are no specific plans to change the Levy Control Framework’s reporting mechanism.
Q78 John Robertson: You will not be seeking parliamentary approval for the future levy choice caps then, or will you?
Mr Davey: Currently there are no plans to do that. I am interested that you raise this, because people need to think about this. I am quite passionate, Chair, about the way the estimate process works. I took the trouble of writing a pamphlet in 2000 called, Making MPs Work for our Money: Reforming Parliament’s Role in Budget Scrutiny, because as a new Member-and I do not know whether you feel this, Mr Robertson, your time in the House-I felt that the way the House of Commons scrutinises the Executive on spending decisions is very poor. Parliament does not get the information it needs. It does not have the resources it needs to analyse the information, and it does not have the processes to use that information on the estimates. That is a problem that I hope people will turn their minds to because I would argue that that should be reformed. The last time a spending request of the Government of the day was rejected by Parliament was in 1919, and it was a request for a second bathroom for the then Lord Chancellor. So, while I am very keen for parliamentary scrutiny and accountability for budgets, we do need to improve the overall system. We will be very transparent on the LCF, but I think if we are saying that it is going to be part of the estimates, and that solves everything, the story I have just told you suggests that that is not the solution.
Q79 John Robertson: Going back to the second part of the question, what arrangements will you have, then, for reporting the actual costs? Have you thought about it?
Mr Davey: The fact that you know the figure, and the fact that we have had a discussion about that, shows that we need to-and will-give those figures out. In the exchange earlier with Mr Whitehead, who wanted to know the exact figures, Mr Virley made it very clear that there was a lot of work under way on that, but I also made it clear that a lot of these figures will be indicative by the very nature of the spend. This is about engaging with private sector firms who put in for projects. It is a very different type of expenditure, and therefore a different type of a process for assessing and predicting it, from one where you are saying, "We are going to spend X amount on schools or Y amount on hospitals".
Q80 John Robertson: In relation to the Levy Control Framework, I could be wrong but, from what you are saying, it strikes me that there will be some difficulty there in working out what is ultimately accountable in money terms and what it covers. Would that be a fair assessment?
Mr Davey: I don’t think so. If you look at what we have already put in the public domain, both about the current Levy Control Framework and about the spending review in particular, we have really tried to give people the information they need. For example, the analysis we do for bills and prices, which has been referred to earlier and which we are going to renew, gives a lot of information about the impact of these matters that Parliament can debate and that you have already touched on and used in this session.
Q81 John Robertson: Would that come under the terms of the Levy Control Framework? I am thinking about an outside scheme, such as electricity and gas network investment, which, it is said, will add £12 to domestic energy bills every year. As far as I am aware, that would not be considered, but it probably should be.
Mr Davey: When we do the assessment of the impacts of energy policy and climate change policy on people’s bills and on prices, all those things are taken account of.
Q82 John Robertson: In terms of timely management information, it says here that it is vital to ensure that rates are adjusted in line with the current technology costs, yet the Renewables Obligation reporting cycle is currently one year. So how will the Government ensure that rates payable are set at the appropriate level if timely management information is not available?
Mr Davey: The ROC system has to have a degree of stability there. It should not be changed on too regular a basis, because you are asking companies to take major investment decisions for projects that may be several years ahead. If that ROC support system is changing on us on a monthly basis, there is no way they would be able to make their decisions, and you would not get investment. A lot of these are very big projects. That is not to say that we should not be looking at how costs are changing.
I do have the power that if evidence comes before me that the costs of a particular technology has changed significantly, compared with the evidence we previously had when we set the renewable bands, then I am able to mount a call for evidence and look into that. So we do have provisions to act should there be a dramatic change in the underlying cost structure.
Let us be clear, the sorts of energy installations that fall under ROCs tend to be quite big, large and known about, and our Departments are aware of them. Therefore, some of the problems that you suggest do not occur in that system. They did occur and do occur in some of the smaller-scale installations. That was the whole story of solar PV and feed-in tariffs. So we have changed it, and the system for feed-in tariffs is different from that for ROCs, particularly now that have automatic digressions if the deployment is going much faster than expected. So we have reviewed how the cost control mechanisms on renewable technologies work, as there could be a sudden explosion of investment in a way that would bust our budgets, and we have made some serious improvements that should reassure you.
Q83 John Robertson: That sounds quite technical, and I have always had difficulty getting my head around these kinds of things. Could you write and explain to us exactly what you are going to do in relation to FIT rates as deployment targets are met, and what data you are going to pull in for that? Could you do that?
Mr Davey: We will write to you about that.
Q84 John Robertson: One question I meant to ask you was: who will audit the energy companies to ensure they are collecting and spending levies in the way that they are supposed to do?
Mr Davey: Ofgem is responsible for administering things like the ECO. It also administers feed-in tariffs. Are they responsible for ROCs as well?
Simon Virley: Yes, they are, and they would oversee the regime as far as EMR goes, to make sure that companies were complying with their licence obligations.
Q85 John Robertson: There has been a lot of criticism of Ofgem, particularly from my party. While I do not always support everything we say, a lot of the criticism is well founded. How are you going to make sure that it does this job properly and has the clout to be able to bring the companies into line if they are not giving proper information?
Mr Davey: Let me make a general point about Ofgem. Certainly Ofgem has received some criticism. I think some of it has been unfair and ill placed. The last Government made attempts to strengthen Ofgem. I think it was the leader of your party, when he was doing my job, who said the legislation he was putting forward would strengthen Ofgem and make it fit for purpose. We have inherited that legislation. I have a slightly different take on how well Ofgem is doing from that put forward by your Front Bench, despite the fact that Ofgem is operating under legislation that was introduced by the last Government.
In the Energy Bill before the House, we are trying to strengthen Ofgem’s hand as well, particularly with respect to consumer redress. I do not think anyone can be complacent in this area. There is a requirement in the third EU energy package that the regulator has the powers to do the job in all its many areas. We need to engage with it to make sure that it has the resources and the capacity to do that. But the idea that is sometimes put around that it should somehow be abolished and a new Ofgem created is not the cleverest idea I have heard.
Q86 John Robertson: I accept what you are saying, but the fact of the matter is that Ofgem needs to be looked at, and in many ways needs to be feared by the energy companies as somebody who can call them to book. Personally, I do not think that it instils that fear into the energy companies. As a matter of fact, I think the energy companies just ride roughshod all over it. That is where the problem comes between the Government and the Opposition at the moment, but if we could agree that there needs to be some kind of beefing up of Ofgem that makes the energy companies if not fear it then certainly be wary of it.
Mr Davey: I want an energy company to fear its competitors.
John Robertson: If they had competitors I would agree with you, Secretary of State, but they don’t, so you have a long way to go before that happens.
Mr Davey: I am very tempted to talk about competition policy in the energy industry, what we are doing about it in the Energy Bill, the retail and wholesale sides, liquidity in future markets, PPAs, trying to get independent generators in, the impact of collective switching and the impact of tariff simplification. All those things will assist competition, because you are right to say there is room for improvement. There is room for improvement in Ofgem and, dare I say it, there is room for improvement in my own Department.
John Robertson: I would not disagree with you.
Mr Davey: We strive to improve in all these areas.
Q87 Chair: We will give you a chance to say all those things on a future occasion. In the last 10 minutes or so, I want to quickly sweep up one or two other issues if I may. Can you confirm that the reason why your preferred candidate for the permanent secretary job, who had gone successfully through the whole Civil Service scrutiny process, was rejected was that Downing Street did not like his views about the carbon intensity target?
Mr Davey: I cannot confirm that. There was quite a process. It took longer than I had hoped or expected, but I think we have ended up with an excellent permanent secretary in Stephen Lovegrove, whose first day in the office will be 6 February. I had the privilege of working with him, when I was Minister responsible for the Shareholder Executive in the Department for Business. We did a whole range of projects together. For example, I put the legislation through the House to privatise the Royal Mail, separate off the Post Office and eventually move that into a mutual organisation in due course. Stephen led the Shareholder Executive on that work with a number of his excellent staff, and Stephen and I worked on a whole range of other projects as well. So I know that he brings huge experience to the Department, both in Whitehall and of the outside world having been an investment banker in his past. He has commercial skills that are widely recognised and praised across Whitehall. Having worked with him as his Minister for 18 months in BIS, I know he is going to bring huge competence and skills to our Department and improve an already well performing Department.
Q88 Chair: I cast absolutely no aspersions at all on this appointment, and I accept everything that you say about the excellence of the person who is taking up the job. Nevertheless, I am sure you will recognise that it is universally believed that he was not the first choice, and that the first choice was David Kennedy, whose commitment to achieving the implementation of carbon budgets is widely known. Therefore, his rejection is bound to raise questions in the minds of outsiders about the commitment of the Government, in particular, to maintain the fourth carbon budget, which comes up for review next year.
Mr Davey: I think David Kennedy is an excellent public servant. The work he has done in a number of guises, whether it was in his former life in DECC, his work for the World Bank or the EIB or his work now in the Committee on Climate Change, he has shown real leadership and huge skills, and we are lucky to have him as the chief executive of the CCC. He makes a major contribution. I hope and believe he will continue to make a contribution to this debate, but you must not go away-not least because a lot of it is in the press, and I do not always believe everything that is in the press-with any view that this Government, this Department and this Secretary of State are not determined to do everything we possibly can to tackle the threat of catastrophic climate change.
The recent evidence should really alarm people. The threat of climate change is getting greater, not less. People may not have seen it but the US National Oceanic and Atmospheric Administration pointed out-I think it was last week-that the 12 years of the 21st century have been among the warmest 14 years since records began 133 years ago. When you couple that with all the other evidence, whether it is from the Arctic ice cap melting much faster than people had expected or from other areas, we have to take this seriously. There is no room in my Department for a climate change denier and for climate change denial. We are determined that we will act on this and take it as seriously as ever. I am proud to lead a Department that contributes not just to the UK activity in this area but to the European and global activity. As we discussed at my last appearance after the Doha COP, this country punches well above its weight in driving forward international agreement to tackle climate change.
Mr Lilley: I will ignore all that highly contentious stuff. Moving back to the-
Barry Gardiner: No you won’t.
Mr Lilley: I will this time.
Barry Gardiner: I look forward to the next time.
Q89 Mr Lilley: On leadership, one of the criteria the Cabinet Office lays down for leadership is that it should ignite passion, pace and drive. From what you have just said, we know that you are passionately committed to all this stuff you have just said. But when it comes to getting the fracking industry going, can we have an assurance that the new permanent secretary will put passion and drive behind it, after the disgraceful moratorium on development of a potentially new industry, at a time the economy is in the doldrums and needs new industries, over the last two years largely because priority was given to carbon budgets over developing a new possible large source of natural gas?
Mr Davey: I do not recognise your description of the situation, Mr Lilley. I made an announcement recently that we had lifted the moratorium and were pushing forward to support the development of a fracking industry, and I am surprised you did not welcome that.
Mr Lilley: I did.
Mr Davey: You did not quite welcome it and say that I had taken that decision as Secretary of State.
Let me just push back a little bit, because you clearly are a supporter of fracking, and I know this Committee is, and indeed I am. It is a technology. Why would one be against a technology? It is worth thinking very carefully and calmly about this. If my predecessor, Chris Huhne, had not said "Let us have a moratorium" after the seismic shocks that were experienced, I think there would have been a danger of setting back fracking opportunities in the UK, because what you have to do is you have to take the public with you. We are not in the United States where a lot of the fracking takes place in distant areas away from settlements, away from villages, towns and cities. We are a much more densely populated place. I think it is right, in a mature democracy like the UK, that we do take people with us with these new technologies, which, let us be clear, have raised some concerns, whether it is over the seismic shocks and what was seen in Lancashire, issues of traffic going to the sites, issues of what it might look like and so on. If we are going to ensure that the public accept the significant things that would develop if the fracking industry proves to be commercially viable in the UK, we have to show that we have looked into all the issues and concerns that people have. So I make no apology that we took the seismic events in Lancashire seriously.
If you talk to the local Conservative MP there, he appreciates the time we took to get the experts in to show that there are ways of dealing with those seismic shocks to make sure that, should we ever get to the level that was experienced, the fracking activity can stop and measures can be taken to prevent anything untoward from happening. That gives huge reassurances to people, and because of that work we have done, as the shale gas industry develops in the UK other communities can know that that work has been done and can be reassured by it. So I would say that taking that seriously has meant the fracking industry is more likely to develop in the UK than might otherwise have been the case.
Q90 Mr Lilley: Of course one should always take concerns that people have seriously, but this is a technology that has been applied in hundreds of thousands of wells in the United States. Why did it take more than a month to go over and establish whether or not any lives had been lost, any buildings destroyed, any water polluted as a result of these seismic effects or the other concerns people had? By letting it take 18 months since this Committee recommended it go ahead-I was not on the Committee at the time that it made that wise decision-you have created the idea in people’s minds that it was very finely balanced, that it took one hell of a long time to discover whether this was safe or not. You have validated concerns that were not valid.
Mr Davey: No, I disagree with that. If you were to read the reports by the experts who did the original report, look at the responses to the consultation when we published that report and look at the reports done by the royal societies, I think you will find that people who support fracking thought that taking time to get this right was the sensible decision. Rather than creating doubts as you are alleging, we can look people in the eye and say, "We have looked at this extremely carefully".
I would caution you about using some of the parallels with the United States, because some of the experiences in the United States are not ones that are going to encourage people to support fracking. Some of the ways that it was undertaken are not ways that you or I would support. We do look at lessons from the United States. The director on the matter, Stephen Speed, who is a very able and senior official in my Department, is currently in the USA. We have had officials in America before looking at the history and learning the lessons, so that we can reassure communities in this country that when fracking takes place near to them, we have considered all the different issues. That is the best way to have a long-term sustainable future for fracking.
Let us be clear, it is going to take some time to develop this industry. We need the supply chain to do all the initial exploration and so on. Given that it is such a huge opportunity for the United Kingdom and particularly for our energy security, we have to get this right. With something like this, which is a long-term industry, if you were to rush it in a way that did not take the public with you, you would be making a mistake, which is not in the national interest.
Q91 Mr Lilley: Do you think that that slow, gradual process constitutes igniting passion, pace and drive?
Mr Davey: It will help ensure that some passions are not ignited, because some of the passions that could get ignited here could put pressure on local authorities, pressure on regulators, pressure on Government not to go ahead with shale gas, so sometimes not igniting passions, Mr Lilley, is probably the right thing to do. By being more detached and objective I think we will give more confidence, so that the passions of objectors are not ignited.
Q92 Sir Robert Smith: The Cinderella industry that your Department has some responsibility for is the refining sector that is going through a lot of challenges. What is your Department doing to engage with refining to ensure that the country’s security of supply is protected?
Mr Davey: We are doing quite a lot of work, actually. We have commissioned some research. John Hayes, the Minister of State, is looking at this, and he is engaging with the industry as well as with some of the research work to look at where the refining industry is going and what role there is, if any, for Government.
Q93 Chair: What is your current assessment of the capacity margin?
Mr Davey: As we speak, it is relatively healthy, but as I think everyone is aware, it is going to decline over the next few years, particularly as coal power stations and some nuclear come offline. We have seen the reports from Ofgem, which suggest that it is going to decline to 4% in 2015-16. My Department has analysis that suggests it is not going to be quite such a severe decline by 2015-16, but one of the reasons why we published an energy security strategy in November this year, trying to give as much evidence and as much information out to people as possible, was that I think there is an important debate to be had in this regard. It is one of the reasons we are legislating for a capacity market in the Energy Bill.
Q94 Barry Gardiner: I turn back to the National Audit Office, I am afraid, and the recent Public Accounts Committee report on offshore electricity transmission. You will be aware that it says, "It is doubtful that this elaborate new licensing regime will deliver any savings for consumers", and it goes on to say, "The new system could well lead to higher prices for consumers". There is concern there is no evidence that DECC and the authority have rigorously assessed the relative value for money to consumers of alternative licensing regimes. This, too, seems a bit of a debacle, doesn’t it?
Mr Davey: We have to respond to the Public Accounts Committee report, based on the underlying National Audit Office findings. Obviously we will read the NAO report, and the Public Account Committee report on the back of that, with care and we will respond in detail. But I will be frank with you, Mr Gardiner, our initial response is that we do not recognise some of the figures in the reports.
Q95 Barry Gardiner: Sorry, Secretary of State, that cannot be the case, because this is an agreed report. You in the Department have to sign off that you agree the Public Accounts Committee report before it can ever go to the Committee.
Mr Davey: Not the Public Accounts Committee report. We do not get sign-off on that. I will bring in Simon in a second, but when I noticed the reporting that went on, and this is-
Barry Gardiner: The report that the NAO makes to the Public Accounts Committee, the one that they are basing this on. That is what I am talking about.
Mr Davey: I am talking about some of the reports that were made following the Public Accounts Committee’s comments on this. I will bring in Simon in a second, but, for example-so you are absolutely clear why I said I did not recognise some of the figures-one suggestion was that the way the offshore electricity transmission regime was working meant that it would add £35 to consumer bills. Our estimates were that in 2011 it was adding £1 and by 2020 it would add £6. That is why I am very clearly saying we did not recognise some of the figures that were being bandied around when the Public Accounts Committee spoke. Simon, do you want to add anything to that?
Simon Virley: As the Secretary of State says, we will be responding in due course to what the PAC have said. Their tone was slightly different to the NAO report that preceded it-the NAO report did recognise that the regime had delivered benefits. Ofgem has produced estimates and evidence to suggest there is £300 million-worth of savings on the first £1.1 billion of assets, and we had £4 billion worth of bids on those assets. So that suggests that there is a healthy appetite and indeed good competition for these assets.
Q96 Barry Gardiner: That was the criticism, was it not, though, Mr Virley? The criticism was that in fact you had structured the licensing regime in such a way as to maximise investor appetite, to ensure that you had people bidding in, but without due consideration for the costs to the consumer. Was that not the argument that was put forward in the NAO report?
Mr Davey: There is an interesting argument about a policy issue here. The previous regime was dominated by a monopoly, and you might want to run the argument that a monopoly handing out licences in some way could produce a better outcome, a cheaper outcome than competition. It is not an argument that I would immediately run to. It is not to say that a regime cannot be improved. Indeed, Ofgem is already looking at tweaking the regime. It is consulting on some of the changes. Some of the changes that are recommended in the NAO report Ofgem already thinks should happen. No one is going to suggest that we have reached nirvana and that we have the best of all possible worlds, least of all me. I am sure there is room for improvement, but when we respond to the PAC report I think you will see that not only will we clarify some of the facts that are out there, but we will want to explain that the regime has some very good, value-for-money aspects that have not had the attention they deserve.
Q97 Barry Gardiner: Secretary of State, in a sense you have put up a strong point that the alternative is a monopoly regime, but in reality six licences were awarded but they were awarded only to two companies, so you have not actually increased competition in this sector very much, have you? What are you going to do to increase competition in the sector in the way that you say you want to do?
Mr Davey: The awarding process and the competition for the licences are really where the competition is. As Simon said, there has been a healthy competition for them. Indeed, in the five companies that were shortlisted for the initial competition there were four new entrants to the market, which ought to be welcomed. Again, I am afraid I do not recognise some of the complaints you are making. I am not saying there is not room for improvement. I am really not saying that. We have to be particularly mindful of when costs can go onto people’s bills, but just like with onshore energy, for which we are looking at the transmission systems and having to modernise and often completely replace things that were built in the 1950s, we have to make sure that we get value for money there, we also have to do that offshore.
Q98 Barry Gardiner: When the report says that giving licensees a guaranteed 20-year income, rising each year in line with the retail prices index, was, "generous and left the consumer bearing the risk in this regime", would you agree with that?
Mr Davey: Look at what Ofgem is doing already. What Ofgem is doing already is-and this colours my view-is consulting on three options on indexation going forward, to take account of trying to make sure it drives value for money. Two of the options would see partial indexation. Those sorts of lessons have to be learned. The point that Simon made to begin with was that we have estimates out there, which need to be repeated. We believe on the first £1.1 billion of bids, a saving was made of £290 million. That is evidence that the new regime is delivering some savings.
Barry Gardiner: Thank you very much.
Q99 Mr Lilley: You will have seen the article in The Spectator, which said that there is a bit of a racket going on with wind farm turbines that are capable of producing more than 500 kW, being artificially downrated to produce a bit less so that they get the higher feed-in tariff. What action are you taking to stop this?
Mr Davey: Although I am not a regular reader of The Spectator, I occasionally glance through it.
Mr Lilley: It shows.
Mr Davey: No, I prefer the Financial Times, The Economist and Prospect, but perhaps I should not be advertising those publications.
We are aware of turbine derating, of course and we take it very seriously. Why would we not take this very, very seriously? We are looking at it. There is some evidence that a very small number of manufacturers have derated to try to benefit from higher tariffs. When we had done our initial analysis we could only find 32 turbines out of all the ones across the UK that are in this relevant band, where we might be suspicious of derating, so let us put it in some sort of context. If you look at those 32 turbines that might be trying to manipulate the system in the way we are worried about, they amount to 0.009% of FITs installations. So let us be clear, let us put it in proportion. I did see a copy of that article, it was brought to my attention before and it did not make that point. I did not see it in proportion. I think it was trying to make a wider point that the evidence does not back up. That is not to say that derating is not something we should look at and worry about. We will take it seriously, we are monitoring it.
Q100 Mr Lilley: The author got in touch with me, and he is pro-wind farms. That is his business. He just wants it all done at the lowest cost to the taxpayer.
Mr Davey: I agree.
Mr Lilley: He has analysed all the figures in the last quarter for new turbines in the range of, I think, 500 kW to 1500, and there were something like 45, and a third of them have apparently dropped their thing down to 499 kW. So it is small, but it is a growing proportion in that area.
Mr Davey: We will take it seriously.
Mr Lilley: With passion, drive and pace, I take it?
Mr Davey: Passion, drive and pace, of course.
Chair: Thank you very much, indeed. A very useful session. We are most grateful to you and your colleagues for your time. We look forward to seeing you again soon.
Mr Davey: Likewise. Thank you.