Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 260-279)




  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 fans—in 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 depletion situation?
  (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 months—put it no more strongly than that—there 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 with—or I am not sure whether or not you have any dealings with—is 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 that.

  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 contact—for 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 process—that is what you are telling us—triggered 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 refinement.

  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 rivalries.

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 PILOT—previously the Oil and Gas Task Force—where tremendous work has been done on issues like fallow fields and the technologies and licensing regimes which make these fields attractive.

Richard Burden

  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.

Mrs Lawrence

  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 they arise?
  (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.

Linda Perham

  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 of supply.

  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 years?
  (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.

Dr Kumar

  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 made.

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