Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 380-399)



  380. Mind you, there is a problem with that, and my colleague will come in, in a moment, of having a sponsoring department which also has a kind of regulating function as well; we have seen in recent years that the British system of public administration does not seem to be able to handle these two balls in the air simultaneously, when we look at agriculture and parts of the Health Service, and things like that?
  (Dr Finer) That is absolutely right; so we would not see this authority as having a sponsorship role, it would be setting strategy.

Dr Kumar

  381. Dr Finer, in your submission to this Committee you said you fear the high cost of bringing in renewables to the market, yet you seem to support the uneconomic case for nuclear power. Could you say, why do you fear the cost will be high for renewables, and by how much it will be, compared from traditional sources, and yet give strong support to nuclear power?

  (Mr Wey) I think our concern about the Renewables Obligation is that, yes, it certainly will add costs to the present consumers of electricity; but we also feel that that is giving perhaps the renewables an advantage, certainly an incentive to develop new technology, and we are concerned that the benefits of that new technology should eventually force down the price of renewables. At the same time, there is a lack of incentive perhaps to improving the technology with regard to nuclear, and we feel that this is a very important aspect; nuclear is going to be phased out, it is a very important part of our supply, and we are a little bit concerned that the development of renewables may not be sufficient to bridge the gap, certainly as we see the likely supply of indigenous gas declining. So we are concerned, I think, that we see new technology perhaps trying to cope with some of the problems that nuclear generation has, certainly disposal of waste we recognise as a problem, we recognise that there are also high costs to this, but I think we are a little bit concerned that the field is a little bit weighted towards the development of renewables just at the moment.

  382. But nuclear power in the past has enjoyed a great deal of support, a lot of financial support, so why do you object to renewables getting the same sort of support, at least to get them off the ground?
  (Mr Wey) I am not so sure that we object to it; in a sense, we are concerned that it is going to be loading on the costs to the UK consumer, particularly the industrial consumer. I think that is a concern that—

  383. How much do you think would be the cost; have you made any calculations, have you made any estimates?
  (Mr Wey) Of the order of £15 million to £40 million a year, of that kind of order; it will rise, as the proportion of renewables rises from 3 per cent to about 10 per cent then that will progressively look for higher-cost sources of renewables and the cost of that burden is likely to rise.

  384. And what will that mean, in real terms, for electricity prices?

  (Mr Wey) It could be of the order of a 1 or 2 per cent rise, we are a little bit uncertain. I think the concern is that that is something that we are going to have to bear, in the UK, and that our competitors on the continent are not going to be bearing perhaps the same burdens.
  (Mr Green) I think our concern, Chairman, is that the bottom line is competitiveness, we have got to be competitive. On energy bills and electricity bills, at the moment, we have the Fossil Fuel Levy, the Climate Change Levy, there is going to be a Renewables Obligation; it cannot go on, otherwise we would not be in business.

  385. But you cannot say what would be the actual cost on electricity prices, you have no figures for that extra cost?
  (Mr Green) We can calculate the figures, and we can send you a note on that. I think they fall out of the document on renewables; it is probably going to rise to about £1/MWH by 2010.


  386. But is it not the case that if the argument for a Renewables Obligation is that we will be able to benefit from, in the shorthand, green electricity, which initially is expensive, because the technologies are fairly original and as yet unproven, in some instances, but where they are proven there is not yet the level of demand which will afford the economies of scale which, in fact, rather than increase price, Mr Wey, may well reduce price, there will be a hump, but after that it will come down?
  (Mr Wey) I think that was a concern, that we should see the benefits of renewables technology actually filter down to the consumers; but the details of the Renewables Obligation have a cash-out price of £30/MWH, and there is a mechanism within that application for that to be ratcheted up and not to be ratcheted down. So I think we are a little bit concerned that that should be open to review.

Richard Burden

  387. If we can just turn to Combined Heat and Power, there is quite a strong emphasis in your paper on your support for CHP, and I think you say that your industry accounts for 20 per cent of CHP capacity. You say that it is projected to account for 20 per cent of energy-efficiency improvements up to 2010; what is that based on?
  (Mr Sturgeon) It is based on our Climate Change Agreement with DEFRA; the Climate Change Agreement targets an 18 per cent efficiency improvement, 1998-2010; now that 20 per cent contribution from CHP is in relation to the 18 per cent.

  388. Right; and you think that is fairly robust, you are on target to achieve that, you think?
  (Mr Sturgeon) We think we are, yes; we hope our members' plans on that are very firm. I think, to a certain extent, the projects moving further away from the current period involve a certain degree of faith, given the current economics for CHP; so I think, if the current economics were to stay as unfavourable as they are, there could be a danger of some of those projects later on being postponed or cancelled. So I think that 20 per cent is part of a challenging target, which is our Climate Change Agreement target, and some of the later projects, for which the capital has not been sanctioned yet, could be an expression of faith, if the current conditions continue to apply later on.

  389. I recognise I am asking you to crystal ball gaze a bit here, because we are talking about the future, but it is something obviously you have signed up to an agreement to, so you will have to crystal ball gaze a bit yourselves as well. Given the current state of CHP and the apparent barriers to the development of CHP, if they stay in place, would you say it is more likely that you will not reach that target than that you will reach it, as things stand at the moment?
  (Mr Sturgeon) There is a danger we might not, if the conditions continue as they are.

  390. What do you think it would take to make it more reliable that you would reach that target?

  (Mr Sturgeon) I think there are incentives in place for CHP, there is potential for those to be extended slightly further. At the moment, exports of CHP to the Grid are not CCL-free; now that would help to incentivise CHP further, if they could be made CCL-free. In addition, Enhanced Capital Allowances do apply to CHP, but not where the CHP is leased. So I think those are two areas where further incentives could be given to CHP. At the end of the day, the other problem is a basic one of economics, that gas prices have risen and electricity prices have fallen; that is where clearly we need help.
  (Dr Finer) At the end of the day, our own members have signed up to these Climate Change Agreements with the Government and they have got to meet them one way or another or lose the rebate from the Levy; so they will have every incentive either to do the project or find some other way of meeting their targets.

Mrs Lawrence

  391. Can I go back to the Climate Change Levy and environmental issues. You seem to say, in your evidence, you accept that the Government has to adapt its energy policy to take environmental considerations on board, but you do seem basically to dislike the measures, such as the Climate Change Levy and the Renewables Obligation, those measures which have been put in place. What would you see as an alternative means to achieve those ends?
  (Dr Finer) We are quite keen on emissions trading, we think an emissions trading regime is inherently a good idea, and to the extent that one had to be designed to fit on the top of the Climate Change Levy regime, which we already have, we support what the Government has been doing on that. We were not actually opposed to the principle behind the Climate Change Levy itself, it was more the way it was implemented that really worried us. We had an alternative proposal, which, in a nutshell, was that anybody who wanted to should be eligible for a rebate on the Levy, a full rebate, in exchange for entering into an agreement; that would have been pretty straightforward. A lot of the problems are caused by the artificial barriers between those who are eligible for the rebate and those who are not, those who are eligible being the ones who are governed by the Integrated Pollution Prevention and Control regime; and we found, within member company sites, for example, that some parts of the site are eligible and some parts are not, and this gives rise to huge burdens of bureaucracy. It is the level of detail that we are concerned about, more than anything.

  392. In part, you have probably answered this, because I notice, on page 2 of your evidence, you highlight the Association's acceptance of the Climate Change Agreement with the Government, but then you also highlight the vehement opposition of the industry to the introduction of the Climate Change Levy. Is that what you have just touched on now? Effectively, it seems a strange dichotomy?
  (Dr Finer) I think a lot of our initial concerns were met. Initially, when it was first mooted, the rates of the Levy were different from the way they turned out in the end, and the percentage of rebate was different from the way it turned out in the end; also, there were various concessions that the Government granted, in terms of exclusion from the Levy, like the production of chlorine, by chloralkali electrolysis. So, as it turned out in the end, we were really not too unhappy with it, except at this level of bureaucratic detail; it was the original proposals that we opposed.
  (Mr Green) Could I just add, Mrs Lawrence, that I think there is no way we wish to abrogate any responsibilities. Prior to the Climate Change Levy, the Chemical Industries Association did have a voluntary agreement, in which we had set targets and were well on the way to achieving those. I think our main concern is that energy can be too easy a target. If you are looking, as a country, to meet Kyoto targets, you have got a number of sectors, there is transport, energy, other sectors; you do not need to discriminate, really, you need to be sure that you are going to just meet it all.
  (Mr Wey) May I comment on that, to say that, at the end of the day, we are a global industry and we are competing in global markets, and our fundamental concerns, I think, relate to the rate at which we are increasing our burdens on industry through additional energy taxes and our competitors are not; and all the time that is happening we are losing our place in the world market.

Sir Robert Smith

  393. Can I quickly check; given that Kyoto was the declared aim, do you think if it had been based on carbon use rather than energy use it would have been slightly more palatable?
  (Mr Wey) Yes.

Mr Hoyle

  394. I just wonder how many members of your Association, as they feel so strongly and you are putting the case so strongly, have moved abroad and are now operating in standards which are much different from here and are adding to the problems for the world, rather than reducing the problems for the world, from them being posted overseas?
  (Dr Finer) You do not see step changes, or very rarely do you see step changes, you do not very often see a company shut down a site in the UK and open another one somewhere else. What happens is that when there are marginal decisions about investment then people make the decisions and they invest elsewhere compared with here. And there are examples, for example, bits of the pharmaceutical industry have moved from the UK to Ireland, because of different—

  395. That is tax breaks, is it not; that is not down to this?
  (Dr Finer) This is for all industry.

  396. And you are putting the case, very strongly, you are under the cosh, the pressure is on, you cannot cope; how many are running fuel factories where, in your view, they will close down the operation here and ensure that the operation goes ahead abroad, because of the savings that will be made, but, at the end of the day, that will do nothing for the environment because the standards are not the same?
  (Dr Finer) I do not think I could say that this single factor on its own will lead to any change of that sort, it would always be a combination of lots of factors. So I cannot honestly say there is a single case which is solely due to this, that I am aware of.

  397. So it is not quite as bad as you are saying then?
  (Dr Finer) I do not think I ever said that, Mr Hoyle.

Dr Kumar

  398. Dr Finer, what would you like the Government to change regarding the Climate Change Levy, if there was one thing you would like them to change at this moment in time?
  (Dr Finer) To change the eligibility requirement for the rebate, so that anybody who is prepared to sign an energy efficiency agreement is eligible for the rebate.

Mr Djanogly

  399. In terms of energy conservation, what evidence do you have to support your assertion that UK electricity prices are skewed more towards final consumers here than elsewhere in Europe?
  (Dr Finer) We do actually have some data. From our own data, if we look at gas prices, if you take the ratio of large industrial consumers to domestic, sorry, the other way around, and base it as 1 for the UK, then the average for the continent is 1.5, and for electricity the average for the continent is 1.45; and within that range obviously there are some countries that are higher than that and some lower.

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