Examination of Witnesses (Questions 260-279)|
TUESDAY 20 NOVEMBER 2001
260. Good morning, Minister. We seem to have
what would have been, in your previous incarnation, known as a
good gate for today. Perhaps that is an expression only known
to Scottish football fansin these days, not very many of
us! Can we welcome you this morning. We shall kick off right away.
One of the reasons for the inquiry, as we understand it, is the
question of the balance between supply and demand and the understandable
anxiety of Government that there may well be the possibility that
they will get out of kilter. In particular, we are aware that
there is an argument being advanced that Britain is going to become
dependent on energy imports. What is your assessment of that?
How serious do you think the shortfall will be and when do you
think it is likely to kick in?
(Mr Wilson) First of all, can I thank
you for asking me here today, and can I briefly introduce my colleagues.
On my left is Neil Hirst, the Deputy Director General of the Energy
Group and Director of Energy Policy at the DTI. On my right is
Jeremy Eppel who is Divisional Manager of Sustainable Energy Policy
at DEFRA. I shall refer and defer to them as required. I think
that the question you ask, and which is at the heart of the Committee's
interest, is extremely timely, indeed, it is the underlying question
beneath the energy review which the PIU is carrying out just now,
and the conclusions of this report will make an important contribution
to that debate. There are very big changes taking place in our
energy mix. None of them is more significant than the decline
of the North Sea which we can hopefully slow the pace of, but
which is none the less inevitably going to happen. That will increasingly
make us dependent on imports, and in the case of gas it will make
us dependent on net imports by 2005 and thereafter we will become
very steeply dependent on gas imports. The projection just now
is that maybe 90 per cent of our gas by 2020 will be coming from
imported sources. Therefore, in the face of that kind of transition,
the question of maintaining security of supply and where our energy
needs are going to be met from, becomes increasingly relevant.
261. This is a comparatively new problem in
some respects, because from about 1996 we became an exporter of
gas, and indeed I think that by 2000 we were exporting something
around 11 Bcm of natural gas a year, which was about 12 per cent
of the gas produced. Would it not have been more sensible perhaps
to have slowed down the rate of exports, rather than face a premature
(Mr Wilson) I think that is a reasonable comment,
and obviously neither I nor this Government were responsible for
policy at that time, but we have certainly had the benefit of
gas in the short term. I think that probably most people, looking
at this just from an objective stance, would say that what is
remarkable is that having made such a commitment to gas, in fact
our status as net producers of gas and being net exporters of
gas has been so relatively short lived.
262. Do you think that the difficulty in extending
the exploitation of gas supplies will have been made worse by
the present stand-off as far as oil prices are concerned, in that
in recent monthsput it no more strongly than thatthere
has been an apparent link between the price of oil and the price
of gas, and if the price of oil gets down to 14 or 15 dollars
a barrel is that likely to deter some of the future exploitation
or exploration and subsequent exploitation in the West of Shetland
area? Do you think this is a problem?
(Mr Wilson) It is not a problem at the moment, and
we have no evidence of any significant activities in the North
Sea or indeed West of Shetland being cancelled. I think the oil
and gas industry is well accustomed to taking a longer-term view
of this kind of development. Obviously particularly in West of
Shetland there are very large investment costs involved, therefore
we have to look at that on a ten-year or 20-year perspective.
I think the assumption or expectation, both in Government and
in the oil and gas industry, would be that prices will find their
natural point of equilibrium, but at very low prices nobody makes
money, therefore they are unsustainable, and at very high prices,
for different reasons, they are unsustainable. So I think the
industry, in making its investment decisions, takes a longer-term
view, and there is no evidence at present that any of these decisions
has been put on hold. On the contrary, we are encouraged by the
number of new investments being announced. This is in significant
measure a result of the work of PILOT which, of course, has devoted
a lot of effort to try to extend the life of existing fields and
also to bring marginal fields into production.
263. Thank you. We are talking more on the supply
side, but on the demand side you, I think, are one of the members
of that distinguished Scottish regiment of former Transport Ministers.
(Mr Wilson) No, I am not actually.
264. You were in Opposition.
(Mr Wilson) I was never recruited.
265. I do not think the word "recruit"
was the one that was normally applied to that regiment, but never
mind. On the question of demand, transport accounts for a very
sizeable proportion of the demand for energy in the UK. It is
noticeable that in your memorandum, in paragraph 1.7, you list
the different bodies with whom the Energy Policy Directorate liaises.
One of the ones that you do not seem to deal withor I am
not sure whether or not you have any dealings withis the
DTLR in relation to the demands of transport. To what extent do
you liaise with DTLR, given the amount of energy that this industry
and the transport sector consumes? Is there a great deal of interdepartmental
liaison on matters of overall demand in these issues?
(Mr Wilson) Yes, I think there is. Certainly we recognise
that transport has a huge contribution to play in terms of reducing
energy needs, and a great deal of work is going on on the potential
of hydrogen in particular, but also into other energy saving sources.
There is a lot of co-operation among departments of the DTLR,
the DTI and indeed DEFRA, and I will ask Jeremy to say a little
more on that in a moment. We certainly believe that in the long
term hydrogen produced from renewable energy may be a key transport
fuel which would significantly reduce our reliance on oil. More
immediately, we see improvements in energy efficiency and technology
such as hybrid cars. That has a potential to extend the availability
of fossil fuels or to improve the security of supply by reducing
demand. Perhaps I could ask Jeremy to add to that.
(Mr Eppel) There is not a great deal I can add, Chairman.
Obviously transport was part of DETR until the last election and
it is now a separate department, but we do work very closely both
with DTLR and with DTI on these demand-side issues and indeed,
as the Minister said, on issues such as fuel cells there is an
interest both in the transport applications of those in the long
term and in the stationary applications.
266. What you are telling me is that there are
one or two projects that you both have an interest in, but there
is not really a formal relationship in the sense of joined-up
government between one of the largest single consumers of energy
and you, the department which has overall responsibility with
Ofgem to try to secure supply. Would that be a reasonable conclusion
to draw from the unspecific character of the answers we have had
already from the Minister and Mr Eppel?
(Mr Wilson) I think there is a close relationship
in areas where there is a strong overlap. That takes place mainly
at official level. I am quite prepared to recognise the possibility
that it could be strengthened. I think that is possibly one of
the outcomes of the energy review. Obviously the PIU has a very
comprehensive look across departments at energy issues. I do not
think it is giving anything away to say there will be a strong
emphasis on energy efficiency, including in the transport field.
If either you or they believe that we can work more effectively
together, then I will, of course, be very willing to recognise
267. As far as I can see, this seems to be one
of the missing links in the concept of joined-up government in
areas relating to energy. Would that be an unfair or a fair way
of summing it up?
(Mr Wilson) I will spread that question around.
268. Mr Hirst, you have been involved in this
game for a long time and you have been here before.
(Mr Hirst) There are very close links between the
DTI and Transport in areas where there is real direct contactfor
instance, in things like refinery balance and how that links,
the technology of fuels, advanced fuels and hydrogen, and that
kind of thing. As a practical matter, the DTI has not got closely
involved in transport policy, and that is an area where we do
not have the expertise. I think it would be wrong for me to imply
that there was a close involvement in transport. There certainly
is a dialogue. For instance, through our Energy Panel we certainly
have presentations and they have discussions that cover various
forms of energy and other topics, including transport.
(Mr Eppel) Perhaps I may add one other comment to
that. I hope I did not give the impression that it was just on
a project-specific basis, and particularly in the context of the
work that has been done at official level to think about the preparations
for the PIU's energy review, there has been a fairly coherent
process of analytical work, particularly by economists from the
three departments and others, to look at transport energy demand,
alongside other forms of energy demand and the potential for energy
efficiency improvements. Indeed, my department, DEFRA, put together
six papers which were submitted to the PIU, which covered a whole
range of issues: industry, domestic sector, services and transport.
So I think there has been a reasonably coherent attempt, at least
in the relatively recent past since the department was split,
to try to do some analysis on a joint basis.
269. So there is a bit of a Damascene conversion
about the processthat is what you are telling ustriggered
off by the PIU? The bus from Damascus has been full of civil servants,
is that the position?
(Mr Wilson) A continuing process of improvement and
270. As ever.
(Mr Wilson) The DTI and the DTLR are also about to
publish a joint report on new vehicle technologies and the contributions
that they can make to energy efficiency, so that is a slight improvement.
Chairman: I do not want to labour this point,
it is just that this is an area of demand where we had the impression
that there were not really sufficient closely-knit governmental
approaches being taken in the past. We take the point you are
making that that has a consequence. One of the desired effects,
one would have thought, of the PIU was that the competing or the
non-integrated interests within Government would be drawn together
by a body like the PIU because it can hold the ring between interdepartmental
Sir Robert Smith
271. Going back to the demand/supply point,
in a sense obviously this joined-up government is going to be
quite important, because if you are switching transport fuels
to other fuels such as hydrogen and electricity you are going
to impact quite dramatically on the issues you are looking at
in terms of the supply of those fuels. I wondered about your assumptions
about the demand and supply. In the last ten years the demand
for energy has grown by 13.5 million tonnes of oil equivalent,
which is only 0.56 per cent per annum. With your Government's
own commitment to energy conservation and reducing demand for
energy, together with the slowdown in the economy and the changing
nature of the economy, do you actually see much growth in demand
for energy over the next ten or 15 years?
(Mr Wilson) Through energy conservation measures we
want to slow the growth in demand and eventually to reverse the
growth in demand, but I think all the factors are relevant that
you mentioned, and therefore we would not expect to see a large-scale
growth in demand in that period.
272. Then on the supply side, from the DTI's
own `Brown Books' going back now to 1974, in 1973 the remaining
reserves of gas were 1,115 Bcm, then it went in 1980 to 1,343
Bcm, then it went up in 1990 to 2,115 Bcm and now it has gone
up in year 2000 to 2,096 Bcm. So the premise that we are heading
for a decline in the North Sea may be a bit premature, given that
every ten years or so there has been a more optimistic outlook
from the figures in the North Sea?
(Mr Wilson) There is already a more optimistic outlook
than there was a year ago. These things do change. I do not think
anyone doubts but that the North Sea has peaked, and therefore
what we are talking about is the pace of decline rather than the
absolute concept of decline. There is a huge amount which can
be done to extend the output of the North Sea and to bring into
operation fields which were previously either undeveloped or downright
uneconomic . I offer the example of the Clare field. It is well
over 20 years since the Clare field was discovered and only now
do we have development plans coming forward. That is due not only
to changing economics, but also to the immense improvement in
technology. I hope there will be a lot more results like that
on both a large scale and a smaller scale.
273. So in many ways, before we get too pessimistic,
on our own doorstep we still have a lot of potential to improve
our own security of supply from our own resources?
(Mr Wilson) I believe that is undoubtedly true in
terms of the North Sea and indeed West of Shetland and possibly
West of the Hebrides. We should be developing these opportunities
in conjunction with the industry. I think that has been one of
the great success stories of the past few years through PILOTpreviously
the Oil and Gas Task Forcewhere tremendous work has been
done on issues like fallow fields and the technologies and licensing
regimes which make these fields attractive.
274. On a small point going back to this issue
of co-ordination with the DTLR, how far do you see that that could
be developed as much by changes inside DTI as by contacts between
DTLR and DTI? Obviously you are here today with the team from
Energy Policy, and that is absolutely right. A lot of the contacts,
it seems to me, on transport policy relate to the parts of DTI
that deal with different kinds of sponsorship, if I can put it
that way, of particular industry. I wonder whether you feel there
is more to be done to improve that co-ordination and the interface
with DTLR, as much as department to department?
(Mr Wilson) I think that as the initiatives which
we have described, between DTI and DTLR, various reports and studies
develop, then if you are going to implement them it makes sense
to have a very close working relationship. The more you can break
down barriers between any departments in the pursuit of a common
cause, the better it is. Sometimes it is easier said than done,
but as the Chairman has said, possibly someone looking from the
outside at how effectively that co-ordination takes place just
now can have beneficial results and tell us how to do things better
in future. There is no doubt that if the PIU report and other
studies place a higher emphasis on energy efficiency, then a great
deal of that burden or that opportunity is going to fall on the
transport sector, therefore it is essential that energy policy
is linked very closely with the practical implementation which
is going on in relation to vehicles.
275. Can I come back to the point that the Chairman
first made about transport as the largest single user of energy
in the UK? The European Commission White Paper on Transport was
published in September. The figures in that project that there
will be a 50 per cent increase in HGV transport by 2010. Bearing
in mind that transport is the largest user, will there be more
formal discussions, cross-cutting departmental discussions, on
the implications for energy supply and demand arising out of the
European Commission White Paper? You have mentioned various areas
of interest, but this is a policy matter. Therefore, are mechanisms
in place where you discuss issues with the DTLR on a more formal
level, or is it just dictated on a subject-by-subject basis as
(Mr Wilson) There are mechanisms whereby at official
level these discussions take place all the time. As I said earlier,
we are going to resolve shortly one particular joint report on
vehicles and the application of new technologies to vehicles,
both commercial and private cars. Again, I would probably have
to recognise, I think, that these structures could be strengthened,
and I think the PIU report could be the trigger for doing that.
(Mr Hirst) I think that is absolutely right. These
things are brought together, in a sense, in the Climate Change
Programme which looks at how all these things fit together. Except
for the areas that we have described, the Department of Trade
and Industry's involvement in that is not tremendously detailed.
276. Your evidence mentions the joint working
group between DTI and Ofgem looking at security of supply at a
strategic level for "at least 7 years ahead", it says.
Is anyone looking further than seven years, or is there some sort
of magic number about that?
(Mr Wilson) No. We certainly are looking beyond seven
years. Indeed, the whole PIU report and the establishment of the
energy review is predicated on understanding that we have to look
fundamentally at our energy mix and hence security of supply for
the next 50 years. The energy review is up to 2050. I think that
the uniqueness of the energy review as a PIU study is that it
has short-term, medium-term and long-term implications for policy.
Some of these issues are bearing down on us very quickly, but
since the transition to becoming a net importer of gas, but also
to looking ahead to 2025, then we get into the whole question
of energy, the extent to which demand can be reduced and also
how that is to be met, and particularly the role of renewables
in meeting it. So there are very long-term questions and also
shorter-term ones, but they all link into the issue of security
277. I wondered why it said seven years at the
strategic level. Obviously, from what you have said, we are looking
further ahead. Is it just that much further in the future that
it is not being looked at in as much detail as the next seven
(Mr Wilson) I think the history of forecasting would
suggest that it is sensible to have different approaches at different
stages of future planning, but within seven years that really
is short term in energy terms, and these are decisions taken now
that will have a very significant effect on what happens over
the next seven years, whereas the further you go into the future,
inevitably there is more dubiety about the conclusions reached,
but it is necessary to have that perspective in order to try to
plan sensibly for the future, because obviously some of the decisions
we take now about nuclear power, about renewables, will certainly
have an impact for the next generation.
278. Minister, in your submission to this Committee,
in section 6.2, there is a very strong emphasis that the Government's
current strategy depends heavily on the ability of markets to
deliver security of supply. Would not firmer government direction
be a safer way of delivering not only the security but social
and environmental aims, rather than just leaving it all to the
market as such?
(Mr Wilson) I think the two concepts are compatible.
In general, the market will deliver solutions in a pretty efficient
way, but clearly the role of Government is (a) to ensure security
of supply, and (b) to ensure that other considerations are part
of the mix, and they include social and environmental ones. Of
course, part of the unfinished business, if you like, of the Utilities
Act is to give Ofgem social and environmental objectives in a
more formal way than at present, and that is something that we
are working on.
279. How far do you think that progress has
been made in liberalisation of markets in the rest of Europe?
Do you think that this is all part of the long-term strategy and
that sufficient progress has been made?
(Mr Wilson) I do not think sufficient progress has
been made, in the sense that we have not got there yet and that
it is a long and difficult process. I think that progress is being