Examination of Witnesses (Questions 280-299)|
TUESDAY 20 NOVEMBER 2001
280. Would you like to see more happen?
(Mr Wilson) Yes, I would, but it is not entirely within
our gift to make more happen. What we can do is to continue to
hold European dialogue both within the European Union and also
with some of the individual Member States, and that is exactly
what we are doing. The Commission's proposals are being negotiated
at working-group level in the Energy Council. While there is general
support for the proposals, some Member States, particularly France,
have difficulties with them. I am due to meet my French counterpart
very shortly, and I hope that will move things forward. I think
the reality is that the French are unable to commit to a timetable
before their presidential and National Assembly elections next
281. I have been sitting in this chair for a
number of years and have had the same story from every Energy
Minister from both Governments that somehow it is the nasty French
and to a lesser extent the less nasty Germans, but the pair of
them are always screwing it up for everyone else who wants a liberalised
market. There is always an election coming up that seems to prevent
a decision being taken. Is it, to use a French expression, a case
of plus c"a change? We both went to Scottish schools!
(Mr Wilson) On the record, I should make clear that
I am not one of the Energy Ministers who used any of the pejorative
terms which you mentioned.
282. You are far too polite!
(Mr Wilson) Far too polite! I think there is a strong
element of truth in what you say, it has taken a long time and
obviously there is resistance to it, but I do not think it would
be right to say there has been no progress. If you recall, agreement
was reached at Lisbon in March 2000 to accelerate electricity
and gas liberalisation, and the clear objective there was 100
per cent liberalisation. So nobody underestimates the obstacles
or the reluctance in some quarters, but progress is being made
and we just have to keep working away at it.
283. To be more specific and straightforward,
we have seen that as a consequence of the original Directives
you have got to 30 per cent for gas and 20 per cent for electricity,
as far as liberalisation is concerned, and everyone has now signed
up to them. The two nations which I have referred to in a pejorative
sense have signed up to that, but it is very much moving at the
speed of the slowest. What do you see as a realistic short-term
target for increasing liberalisation in both of these areas? Is
this all dependent upon the French election? For heaven's sake,
30 per cent and 20 per cent of markets is not really very significant.
Do you think that we can see us moving to 60 per cent and 50 per
cent or something like that before too long? Is that a prospect?
(Mr Wilson) Chairman, I think maybe there is a hazard
in setting a target for this.
284. I pluck figures out of the air, in the
sense that it is simply doubling them more or less.
(Mr Wilson) No, I would not say these are targets
set as a result of Lisbon. There were not deadlines. There were
date targets set. Indeed, it is not really certain that these
will be met. Therefore, I do not think it would be very helpful
to set more targets while we are still working on these ones.
All we can say is that there continue to be structural objections
on the part of Germany and timetable objections on the part of
France. The only way through these is to negotiate and discuss
rather than simply to proclaim targets. All I would say, therefore,
is that it is not quite true to say that nothing has happened.
I think that Lisbon was a significant landmark, but I do not think
it really helps the process either to be over-critical or to be
over-rigid in setting fresh targets.
(Mr Hirst) I think that the draft Directives and the
draft Regulation which the Commission have produced do constitute
a very big step forward in this area. A lot of good work is going
on in the working groups, preparing the ground eventually to approve
those, including trying to deal with some of the difficulties
that our French and German colleagues have, and there is a lot
of widespread support within the Community. So I think I would
say that whilst there is genuine momentum, this is not going to
go away or back down. As the Minister said, I do not think it
is realistic to come here and say, "Here is the target date."
285. You said that significant progress is being
made and that there is a lot of support for it. If there is such
a lot of support for it, then why is it moving at such a snail's
pace? We should have seen a lot more evidence of that in front
of us. Which other countries are in support of these changes?
(Mr Hirst) I think it is fair to say that all the
countries in the European Union, in principle, as they agreed
at Lisbon, are in favour of moving forward with energy liberalisation.
It is a very complex, demanding issue. As the Minister has said,
there are difficulties in reaching agreement on certain aspects
of it. In some ways opening up the domestic market may be actually
more difficult and could take a little longer than opening up
commercial markets. We certainly have strong support from the
Scandinavian countries, from Spain, from Italy and from Holland,
and they have all supported this process. The Spanish, who will
be chairing at the Barcelona Summit, want to see this go forward.
Sir Robert Smith
286. I wanted to come back to the conditions
for Ofgem. You talked about more formal social and environmental
objectives for Ofgem. I wondered what the timescale and process
for producing those was.
(Mr Wilson) I think it is a short-term requirement
really and obligation to put these in place, since they do flow
from the Utilities Act which is now clearly well in operation.
Also, some of the issues which have arisen from the functioning
of Ofgem, which in general terms have been extremely successful,
would make it desirable that these objectives are clear and transparent.
287. What is the technical process for them
coming into being? Is it an Order or what?
(Mr Hirst) I think I am right in saying that we simply
issue them.<fu1> We have already consulted on this. We have
produced and published draft guidelines, we have consulted on
them, we have had a lot of comments which we are working on. The
next step, for instance, will be for us to issue a comprehensive
list of these.
<fo1> Note by witness: the correct position
is that the Utilities Act requires a final draft to be laid before
each House of Parliament which then has 40 days to object. Assuming
there is no objection, the guidance may then be issued.
288. Before we leave this question of energy
markets, can I get something clear in my mind? We have been in
the position for a long time that we have not really had to concern
ourselves with the continent of Europe as far as security of supply
is concerned, and that in some respects the Bacton Zeebrugge pipeline
was more about exporting than about importing. Given the scenarios
that you have outlined, Minister, both in your documents and in
what we have discussed this morning, we are moving towards a situation
where we will become more import dependent and therefore we will
have to look to Europe to ensure that the gas comes through, and
as to whether we need an additional pipeline to the first one.
There are others coming down, but I mean the ones that are linked
to continental Europe, as distinct from Scandinavia, if I can
draw the distinction. We may have to have another one. Is it not
the case that until we get liberalisation within Europe sorted
out, a gun can be placed at Britain's head by those countries
through which gas would have to travel in pipelines which are
already perhaps almost overloaded? We are coming late to this
game in some respects, as far as continental Europe is concerned,
but there is a degree of urgency now, if the kind of security
of supply issues that you have outlined in a slightly different
way have to be resolved by the supply of gas coming from first
Europe, as it were, but having to travel through Europe.
(Mr Wilson) I do not have any reason to think that
a gun is going to be put at our head, but I think that full liberalisation
is highly desirable on a range of grounds, and security of supply
is among them.
289. The expression "gun at the head"
might not be a very happy one to use, but on the other hand it
is the case that the gun can be an economic one and it can be
one which can be used. The trigger mechanism is the price, and
we have seen already that prices have gone up in quite an arbitrary
way as far as gas is concerned for UK industrial users in the
last 12 months. It may change, but it does show a volatility in
that area. Surely in terms of our security of supply, the extent
to which you can afford to pay for something determines how secure
your supply is. We really need to address this issue and importantly
to seek to find a means of getting it opened up if we are to have
a security of supply, do we not?
(Mr Wilson) Can I say, with reference to your last
point, Chairman, that like you, I am sure, I have been very concerned
about the large increase in gas prices, particularly for industrial
users in the last year. Because of that concern I have initiated
a consultation to try to get to the bottom, in a definitive way,
of the reasons for these price increases, because I do not think
our industry can be subjected to that kind of volatility in a
way that simply could not have been planned for.
290. Could we perhaps move on to issues like
combined heat and power and renewables, those kinds of issues,
for a little while? Government made no secret of its wish to encourage
those kinds of sectors, and there are obviously a number of initiatives
to try to stimulate that. Do you think there is also an issue,
though, that there have been some fairly glaring omissions where
the effect has actually been rather perverse, so that, for instance,
on renewables and combined heat and power there has been the exemption
from the Climate Change Levy, which was very much welcomed by
the CHP and renewables sectors, but at the same time that exemption
has not been extended if there is combined heat and power supplied
off-site through licensed suppliers, and that has fairly seriously
hampered CHP development? Do you think that is a problem? My second
question is, if it is a problem, what are you going to do about
(Mr Wilson) I think that in general terms there is
a problem with combined heat and power. The problem to me is that
events on the ground are moving in a different direction from
our stated aspirations and targets. Irrespective of what the specific
reasons for that are, then I regard that as a problem, because
I have no interest in saying one thing while another is actually
happening. I think that the reasons for CHP difficulties are more
complex than is sometimes acknowledged, but there is no doubt
that NETA has an effect on CHP, and I would argue that gas prices
are an even greater difficulty. So I want to see consistency between
our ambitions for combined heat and power and the climate within
which it is operating. We have obviously made our representationsas
indeed have DEFRA who are in the lead in combined heat and powerto
the Treasury on some things that could be done, and we will see
what happens about that. We have had extensive discussions with
combined heat and power interests. I think the first thing is
to recognise that they do face real difficulties. If the effect
of that is to deter investment and indeed in some cases for people
who had committed themselves to investment actually to turn their
backs on it, then that is a problem we have to address. I do not
know whether Jeremy has anything to add from DEFRA.
(Mr Eppel) I do not think so. I think the issues for
CHP are of quite considerable concern to all parts of the Government
at the moment. There were a number of measures put in place at
the time of the last Budget and the beginning of this financial
year in connection with the Climate Change Levy: enhanced capital
allowances, considerable but not complete exemption from the Climate
Change Levy, as you referred to, and partial exemption from business
rates. There have been a number of other expenditure measures
which have been takenfor instance, the introduction from
next April of a scheme called Community Energy which is under
the Treasury's Capital Modernisation Fund, which over two years
will provide some £50 million of government support for innovative
CHP based district heating schemes. I think that my Department
and, as the Minister has said, Government as a whole recognise
the difficulties CHP is facing and that other issues need to be
291. We shall come on in a second to the impact
of NETA on that. You mentioned that the causes were fairly complex.
I hope I am not putting words into your mouth, but I think you
recognise that the Climate Change Levy issue is something that
is a problem. You also mentioned the rise in gas prices. What
would you say the other areas are that are hampering that sector?
(Mr Eppel) The Climate Change Levy is a recognition
of the need to help begin a move towards environmental, properly
priced energy. What I was referring to in the context of CHP is
that CHP, in recognition of its very real environmental benefits,
its carbon benefits, has considerable special treatment under
the Climate Change Levy; it has exemption from large parts of
the levy for CHP-generated electricity and enhanced capital allowances
for CHP equipment are available. In addition, sectors which have
signed Climate Change Agreements are very strongly encouraged,
and there is support, through the Energy Efficiency Best Practice
Programme, to help them do more energy efficiency through CHP.
292. I understand that. I was looking at it
the other way round. The lack of exemption from the Climate Change
Levy for off-site supply is regarded by the CHP sector and others
as something which is actually hampering them. They welcome the
exemption but they do not welcome the limits on that exemption.
I was just struck when you said earlier on the problems facing
the CHP and renewable sector, that the Climate Change Levy was
part of the picture, NETA was a very good part of the picture
but there were other things as well.
(Mr Wilson) It is a combination of these factors you
have mentioned and the pincer movement really of high gas prices
and low electricity prices and both of these militate against
CHP. Obviously Climate Change Levy is a Treasury issue. I have
gone as far as I can really in saying that we recognise the difficulties.
I think the summary of the balance sheet on CHP is that there
has been a lot done for it but there is no point going around
claiming the list of good works we have done for it if the reality
for the industry at present is negative. I have had a lot of discussions
on it and I am certainly seized of the need to square that circle.
293. Would you say, Minister, there is maybe
a wee bit of a problem here? There is quite an effective trade
association promoting CHP on the one hand and then there are the
people who benefit from it, the members, who are perhaps not quite
as devoted to CHP and quite cynically, one could say, for good
business reasons they will abandon the use of gas for environmentally
satisfactory purposes if they can sell the gas on at a higher
price given that they have got long term contracts and gas prices
have risen. As a consequence of NETA electricity prices have gone
down and, therefore, they are able to use electricity in preference
to gas. So it is a pincer movement which may not be environmentally
satisfactory but it is not to the disadvantage of the businesses
which have originally invested in CHP.
(Mr Wilson) That is part of the complexity I referred
to, the high price of gas has two impacts on this debate. That
is why the bottom line is still that what is happening in reality
is disinvestment in CHP and that is not compatible with our objectives
so we have to find a way of bringing the two into line.
294. Richard referred there to NETA and the
impact on CHP. The DTI submission acknowledges that it had concerns
about the impact of NETA. It says here ". . . was and continues
to be of concern . . ." on page five. Why were those concerns
not addressed before the introduction of the new trading arrangements?
(Mr Wilson) It was before my time but I think in fairness
they were addressed in the sense that an undertaking was given
to review the workings of NETA at a very early stage. Some of
the concerns about NETA were by definition hypothetical and they
had to be tested against reality. I think what is important is
that within a very short space of time we are consulting on exactly
what the impact has been on small generators, particularly on
renewables and on CHP. We have to assess the lessons of that consultation.
I think you always need balance when talking about NETA because
in its own terms NETA has been a great success. It has reduced
the wholesale price of electricity by almost 25 per cent within
that same short space of time and that will be of benefit to consumers
and to industry. It has also created many efficiencies again in
its own terms. The headline of NETA is it is a great success story
but clearly there are implications for some sectors of the generation
community and we are trying to evaluate and then address these.
295. Particularly in relation to the renewables
and timescale, can you expand a little bit on that?
(Mr Wilson) I do not think there needs to be any great
delay in getting the consultation completed and conclusions drawn
from it. Of course we are in constant discussion with Ofgem, and
other interested parties, about how some of these problems can
be addressed. Again, the Government has clear and ambitious targets
for renewables and it is completely against our interest to allow
any factor to deter investment and confidence in renewables.
Sir Robert Smith
296. Following on from that, the intermittency
of some renewables, such as wind energy, is seen by some as a
serious drawback in security terms. Is that something you would
(Mr Wilson) I think it is a drawback. It is in the
nature of things that you do not have constancy of wind and you
do not have constancy of sunshine so renewables are going to have
to counter that negative but, of course, there are many positives
in their favour. Also technology will continue to play its part
in reducing these problems.
297. Do you see anything at the moment which
can alleviate some of these problems?
(Mr Wilson) Consolidation can certainly help to alleviate
some of the problems and the balance a mix of the energy supply
because you are not over-dependent on sources which peak and trough,
and then their impact on the overall supply is limited. Do you
want to add anything?
(Mr Hirst) If I can divide that into the short term
and long term. In the short term, this has been discussed with
the NGC. The source of, for instance, the ten per cent target,
given the overall margins of electricity capacity that we have,
I do not think anyone thinks there is a significant drawback from
the security point of view from aiming for ten per cent in 2010.
In the longer term, if you are talking about a much bigger share
coming from wind, then you would have the issue now what is the
backup if there is a still day. Possibly we could be talking about
things like energy storage, but this is much longer term. In the
short term I do not think there is anything which should deter
298. If you are going down the hydrogen transport
fuel, you can generate the hydrogen at the time.
(Mr Hirst) Yes.
(Mr Wilson) I think the last point that Neil made
is very important. All of these considerations are secondary as
long as we are talking about a ten per cent target by 2010. It
is full steam ahead towards achieving that and that is a very
high priority commitment.
299. Where does your recent announcement about
the submarine cable on the West Coast fit into that?
(Mr Wilson) I think it is potentially a really important
and, dare I say it, visionary concept. There is limited point
in producing renewable energy if there is nowhere to send it.
Many of the places where the potential is greatest for renewables
have either weak or non existent links to the National Grid. So
we have to find a way of circumventing that if that potential
is to be realised. We are not only talking about what could be
done now but even in parts of the western seaboard where the connections
appear to be adequate just now, they could still in a few years
time become a constraint on the potential of renewables. I just
think there would be immense and possibly insuperable environmental
objections to strengthening the inter-connector on land and, therefore,
an attractive alternative is to do it through a subsea cable which
would run all the way down the western seaboard collecting as
it went along. Whether that is technically feasible, which I am
pretty sure it will be, and also economically feasible is something
we have to test. If the concept can be turned into reality then
it is the strongest possible signal we could give to the renewables
industry that we are very serious about this.