Examination of Witnesses (Questions 300-319)
MR STEPHEN ALDRIDGE, MR NICK HARTLEY, MR GORDON MACKERRON AND DR CATHERINE MITCHELL
WEDNESDAY 24 APRIL 2002
300. Your targets for the domestic sector were 20 per cent by 2010 and another 20 per cent by 2020. Are current policies going to take us to those targets?
(Mr MacKerron) It is unlikely. We did not do a precise study of that, but we would otherwise not have recommended the relatively wide range of policies that we did in relation to energy efficiency. Most of them are enhancements or improvements to existing policy rather than radical new initiatives because much of the lines of present policy seem to be well enough conceived of but possibly not well enough resourced or pursued. It is the case that we would be unlikely to reach those targets without some substantial enhancement to the priority given to energy efficiency.
301. If we were to see emerging from your report a Government policy that, for example, emphasised renewables, perhaps emphasised the development of wind energy in particular parts of the country but then did not side-by-side to that emphasise the equally essential development of energy efficiency, you would see that as a flawed policy response to your report?
(Mr MacKerron) We would see it as deeply flawed. It is always a bit invidious to say what is more important than anything else. What we said was that energy efficiency should be at the heart and it was the thing we discussed first in making our proposals. It is not in any way to downgrade renewable energy but to say that we thought energy efficiency was the prime mover. There are two reasons for that. One is that the economics of most energy efficiency are in principle extremely favourable and in practice should become more so. Secondly, most kinds of energy efficiency investments and policy are entirely compatible with all the other sustainable development objectives whereas none of the other supply options are totally compatible under all circumstances with the other sustainable development objectives, and that gives a particular extra priority to energy efficiency quite apart from its economic benefits which are in principle very large.
302. Neither renewables nor nuclear would get us to Kyoto without energy efficiency?
(Mr MacKerron) Energy efficiency is an essential ingredient of all realistic strategies towards Kyoto beyond.
303. There has been very little progress in the last 25 years on energy efficiency. Do you really reflect in your report the difficulty of making progress in this area?
(Mr MacKerron) I accept that the progress in energy efficiency has not been as great as Government or others would have wished. There has been progress. We have tried to reflect some of the difficulties and we spent some time talking about a wide range of different policy areas all of which should be enhanced if energy efficiency is to become as powerful and central as we would like. We are realistic about it. It is also the case that many kinds of enhancements to energy efficiency policy cannot be implemented absolutely instantly. For example, to the extent that some energy efficiency improvements depend upon the turnover of capital stock they cannot all be implemented across the board immediately. There is a progression but the idea that the Government should give it much higher priority and set targets and do things in a much more
304. They could make some positive changes?
(Mr MacKerron) And make some real changes.
(Mr Hartley) Government has set in place a number of new institutions that are starting to make a differencethe Energy Efficiency Commitment, the Energy Saving Trust, the Carbon Trust. The institutional basis for policy is now there, there is a lot on which to build.
305. Staying with domestic energy efficiency, and this is typical of a lot of things we are looking at, in fact the time is now when we should be doing things. The idea about improving domestic energy efficiency has been with us for seven years. On the one hand, you are saying it is not going as fast as the Government or others would have wished but I suspect the Government could have and has had the tools at its disposal to take some real action in terms of setting strategic targets for how we are going to deliver all the things that need to be done if we are going to achieve those targets. You have said already that we are not on course to meet those targets. On the other hand, you are saying we are not going as fast as the Government might have wished but somewhere along the line we have to say the Government has the means to translate its wishes into deeds. Could you comment on that and also the consequences of Government delay if they do not take ownership of some of these problems?
(Mr MacKerron) I do not dissent much from the spirit of your question. Clearly Government has been doing quite a lot. As Nick said, there are new institutions, processes and some funding in place to help accelerate the rate. The reason we thought it important to establish a 20 per cent improvement target for energy efficiency in households was to highlight the importance and suggest that there might need to be further action and enhancement of the existing policy approaches. We are in favour of relatively rapid action in energy efficiency. Some of it will take time to bear fruit and some of it will bear fruit more quickly. Certainly we think it important that Government should set more explicit targets for itself where it is feasible to do so and to set about finding a means of delivering them as effectively as possible.
306. Delivery is the key, as well as accepting the measurement against delivery and knowing how we are getting along there. This again worries me. We set targets and further down we have got targets for various renewables but some of the targets the Government are givingit is this facilitation rolestop at 2005 and here we are well into 2002. It does seem that the Government is procrastinating (the kindest word to use) at the moment. We are already way down this decade we are looking at.
(Mr Hartley) Continued attention to this absolutely vital area of policy is needed. We ourselves say that the energy efficiency commitment, for instance, should be expanded beyond 2005. We think that commitment should be given now. We also think it is not just for central government, it is local government as well, which has quite a considerable role to play here. That can be helped by actions from central Government but it is the whole of the Government machine throughout the country which needs to address these issues.
Sue Doughty: I would agree with you but local government is very much reliant on directives from central Government because without that they have no authorisation to move forward on some areas.
307. Could you clarify for me in terms of energy efficiency where your stance is not just on households but on the workplace?
(Mr MacKerron) We have said that Government and DEFRA in particular should set targets, monitor more effectively and report progress on energy efficiency in all domains not just in the household domain. We chose households to major on because it seems to us there is the greatest potential there. If by the workplace you mean industrial and service sectors of the economy and so on, it is clear that there are some fairly strong commitments entered into by a large number of industrial sectors in relation to the climate change agreements which will deliver some quite large reductions in both energy use and emissions. I would imagine that those things are likely to be extended in time. We did not spend a great deal of time on specific long-term replication.
308. I was not thinking in terms of intensive energy users. I was thinking more of, for example, in any workplace like the situation we have here. You place the emphasis on households but equally in the office it is an area where a huge amount of savings can be made.
(Mr MacKerron) It is true we have explicitly said that Government should take a greater lead itself by paying somewhat more attention to the efficiency of energy use in its own stock of buildings which, as you know, is a substantial proportion of the national total.
309. I want to come back briefly to the Renewables Obligation, but I want to pick you up on this issue of cost that came up a little bit earlier. Do you agree with the Energy Technology Support Unit and its conclusion that 224 terrawatt hours could be generated from renewable energy at less than 4p/kilowatt hour by 2025?
(Dr Mitchell) ETSU have done a study which shows that there is a very large resource coming from renewables with generating costs that are low. I would not say that I agree to the terrawant hour but I agree that it shows that there is a very large resource at a low generation cost. That would be different, though, from the cost that either they could be paid or the cost of getting it to the market.
(Mr MacKerron) Could I just say it is very difficult to make point forecasts of this kind 25 years ahead.
310. With respect, is that not exactly the sort of thing your unit is there to do? That is why we have well-paid, very brainy people brought together to advise the Prime Minister to do exactly that big picture long-term planning.
(Mr MacKerron) Let me complete the answer if I may. Under the kind of world which we advocate within our report for the future of UK energy policy it would be much more likely that we could deliver 224 terrawatt hours at less than 4p/kilowatt hour. As a disembodied point forecast I am not sure it has got a great deal of meaning. One of the purposes of our review was to put in place the policies towards renewables that would make it happen. It is not one of those purely technological things that is written in the stars. It has to be as a consequence of particular policy initiatives. The policy initiatives that we suggest make it much more likely that that ETSU number could be delivered. There is a range of possibilities and scenarios. We, of course, are favouring the kind of scenario in which they might be delivered with much greater certainty than otherwise.
311. I think I follow you. You say in paragraph 7.64 of the Energy Review that it would be imprudent for the Government to commit itself to the policy instruments which might deliver your suggested 2020 target of 20 per cent until it is clear how well the main current instrumentthe Renewables Obligationis operating. Is this because you have concerns about the likely effectiveness of the Renewables Obligation?
(Dr Mitchell) No. We thought that it was important to have a longer-term target which shows that the Government is committed to promotion of renewable energy and we thought that since the Renewables Obligation has just started and since we do not know how well it will work or whether it will work very well or not, it would be wrong to say now what that mechanism should be and whether or not it should definitely continue on from the Renewables Obligation or whether or not because costs come down or for other reasons that there might be other preferable mechanisms at that time. It was not because we do not support the Renewables Obligation or do not think it is the right way forward. It is simply that we thought it would be wrong now to support something out in the future when the situation may have changed. We think that the 20 per cent target is the important thing, that people know that there is a Government commitment to go on from there, and that the Government will implement the best mechanism to fulfil that target, which may well be the Renewables Obligation.
312. Obviously there is concern that this 20 per cent target is timid and we have had a big discussion about that this morning. There is one point on which I am still not absolutely clear. Do you accept that this 20 per cent target means, effectively, that renewables will not be able to replace the expected decline in nuclear generation at the same time as contributing to carbon reductions, really the point my colleague Mr Owen Jones was making.
(Mr Hartley) There are various elements in the equation. It is not just a matter of change on the supply side, which is what you were identifying there, so that with a given demand for electricity you can meet it clearly by various supply options. Obviously if nuclear supply falls away then something else must take it place. Remember, we are also making very strong recommendations for changes on the demand side and so the precise balance of need between the various technologies depends not only on what other supply options are available but how much electricity is demanded. If the kind of increases in energy efficiencies we are envisaging can come true that makes a significant difference to the overall need for generation.
(Mr MacKerron) Could I put this in a slightly different way, although agreeing entirely with what Nick says. If one did a simple economic calculation and said how much will it cost per tonne of carbon reduced as we go forward to 2020, what we are really saying is that more energy efficiency will be more cost effective than more renewables if one goes beyond the 20 per cent renewables target as we envisage it at the moment. We see energy efficiency having that much more potential economically speaking than renewables. It is not that renewables do not have potential; they do and they will get cheaper. If one is saying what is the balance between the kind of policies one would wish to pursue in carbon emission reductions at that time, then energy efficiency would score higher because it is cheaper than renewables. We are not considering only the electricity generation system but the whole energy economy and carbon emission reductions as a whole.
313. Coming back to the point our Chairman was making earlier, I accept the argument that you are putting forward that we can achieve a great deal more by increased energy efficiency measures. I understand the point you are making, but all previous experience shows that you make very little or no progress in that area. People have been talking about greater energy efficiency for 20 or 30 years and yet we have seen no set change yet. There is going to be an increased population in this country and there are going to be many more households. Even if those are energy efficient houses the demand is still going to go up. I see the argument you are making but as a Committee we are quite sceptical about the ability to deliver it.
(Mr MacKerron) It is probably true to say that the direct result of Government policies on energy efficiency in the past has not been greatly to accelerate the underlying rate of improvement in energy efficiency, although the evaluation of that has been difficult. It is not true to say that there have not been improvements. In the household sector there has been a ten per cent per decade improvement in energy efficiency and in industry, partly because of the changing composition in industry, that rate of improvement has been substantially higher. We are saying there is every hope we can build on that policy to a greater extent than we have done in the past.
314. I accept that too but nevertheless the demand for energy keeps going up, not down. Your argument is that if we can get the total demand for generated energy to fall we do not need as many renewables. My point is you can do things but they are only very small things at the margins and the demand for energy is likely, realistically, to keep increasing. You have then got to generate it in a more environmentally friendly way if you cannot cut the demand.
(Mr MacKerron) Demand for energy is certainly increasing in an inexorable and difficult to control way in certain sectors. Transport is a very good example and we have not discussed that yet this morning. It is not plain in either industry or in households that there is inexorably an increase in demand for energy. There are various saturation effects in households. To the extent energy efficiency works, demand may not rise, it may well fall in households. Where we recognise (especially in the very long term) some very acute issues is in the transport sector where demand has been rising very substantially, where we are very dependent on oil, and where our own analysis suggests that in the long term towards 2050 cheap oil may no longer be available. There are particular areas of concern but we would not take an axiomatic view that energy demand always increases across the board and our scenario analysis has suggested that it may well not.
315. Without wishing to do this to death, I think it is worth recording that your assumptions arguably are quite optimistic. Even if you can make households more energy efficient there are still going to be far more of them, so those new households are going to require more new power and even if it is slightly less for each of them individually, the total is still going to be greater. You are saying we can afford to do less on renewables because we can achieve more from energy efficiency and a number of us feel that from all previous experiences (however worthy the aspiration) that is not going to deliver you anything like the savings that you think are possible. Looking at all previous experience for the past decades, it is not going to get there.
(Dr Mitchell) What Gordon is saying is right. I do not think we are saying that by following energy efficiency in this way, which is absolutely central for all the goals of energy policy, that we should not be moving ahead as fast as possible with renewables. We are absolutely not saying that.
(Mr MacKerron) Of course, if energy efficiency delivers as badly as you fear that would correspondingly give a further boost to support for renewables. We are not, as Nick has emphasised, trying to set in stone a very long-term set of rigid policies. We will have to see how they evolve and if your suspicions prove to be correct then one would expect a much greater emphasis to come back on renewables.
316. I am not trying to put words in your mouth. You have been arguing that one of the reasons we do not need to be quite so ambitious on the renewables is because energy efficiency gains will deliver some of what we need. I am reiterating the point that I am not necessarily sure that that is right. We need to do more on renewables because I do not think energy efficiency is going to deliver some of the things you think.
(Mr Hartley) Of course I appreciate what you are saying in terms of past outturn. As we have been saying, we think that there have been significant gains in energy efficiency in the past. We think governments have been making rather big strides in setting in place the kind of institutions that are needed. That said, our policy for energy efficiency is a very ambitious one. We must accept that. It is not an issue of exhortation to the public to turn off lights and save electricity by switching off TVs. We do not think that has been a successful way to achieve policy. It is necessary for governments to look at the levers which they have. That is not only the UK Government, it is also to be pursued at the European level. There is a considerable amount that can be done in terms of efficiency of new apparatus. That is of course already on the agenda. I think it can probably be pursued further and faster than at present and substantial gains in energy efficiency are achievable. We all know what the technologists tell us about the potential. It is now up to the Government to make sure that we achieve that faster than before.
317. To move on a little bit, in your paragraph 3.69 you make a recommendation about shadow pricing. I would be grateful if you could spell out for us what that really means. Is that not going to mean the move towards energy becoming more expensive?
(Mr Hartley) In terms of the Government's own decision-making, the use of shadow prices points up the wider environmental costs of carbon emissions. It may mean that some decisions are changed as a result of that. It may mean that governments adopt some options that are more costly than would otherwise be the case. If you say does carbon pricing carry implications for final costs, then yes it does! Again, that is one of the conclusions of our report, that the pursuit of low carbon policies is likely, certainly in the short run, to increase cost.
318. Where is it leading? Is it leading towards a carbon tax? Is it the first step towards this?
(Mr Hartley) We have said we believe in the long run policies should be pursued on the basis of having a clear, consistent value for carbon across the economy as a whole. In that way we get the most efficient set of policies that we can achieve in order to reduce carbon. It means that actors in all parts of the economy face up to the costs of emitting carbon. Whether that is a carbon tax or some sort of carbon trading, that is a matter for further consideration. A tax has some benefits. Carbon trading, as we know, also has some benefits and to some extent it is easier to put in place.
319. Given that you are providing the framework so that Government in a cross-cutting way (that is why it is being done by the PIU in the Cabinet Office) can then be in a position to make its decisions about instruments it wants to introduce, where are you steering the Government towards?
(Mr Hartley) Some form of carbon valuation.