Examination of Witnesses (Questions 320-333)
MR JOHN
HEALEY MP
17 SEPTEMBER 2003
Q320 Mr Jack: Are you telling us
that all of these submissions we have had are not worth the paper
they are printed on? A lot of people have spent a lot of time
arguing the case that they need some more help.
John Healey: No. Of course I am
not saying that. I am certainly not saying they are not worth
the paper they are written on. The detailed discussions we have
had with British Sugar and others have been instrumental in helping
us refine the sorts of calculations and assessments we are making.
They were instrumental in helping us be convinced that there was
an environmental case for support for bioethanol. What I am saying
to you is that the sort of case and calculations that are set
out have other variables in them. I have mentioned the capital
write-off period and I have mentioned also the assumption about
the cost of sugar remaining at the level that it is at the moment
heavily subsidised. I have also mentioned the fact that those
calculations do not take into account what is potentially already
available in terms of capital support. In view of that, clearly
you would not expect us to start to try and tailor our policy
as a government in order to meet the precise prescriptions of
the British Sugar business case.
Q321 Mr Drew: Apologies for missing
earlier parts of your submission but I have been on an SI. Can
I link two things together. First of all, what Michael has been
on about and you is you are making projections and industry is
making projections on what is going to trigger greater interest.
To me that is micro in nature. To go back to the issue of the
Renewables Obligation, you will be aware of the discussions from
the DTI on the current problems there are on the back of the TXU
demise where effectively Renewables Obligation Certificate trading
is in abeyance. How can you see the Treasury playing a part in
not only stimulating individual producers but providing a more
stable structure? We all thought Renewables Obligation Orders
were a terribly good idea because you are penalising the producers
of bad goods and you are giving the money to the producers of
good goods. That is fine as long as the market works but the market
is not working at the moment. Plus, there is another variable
which is if you were to step in then other European countries
could say, "State Aid? You are helping your own industry
and this is not a level playing field". How do we work our
way through this current morass? I know it is not principally
your problem but it becomes your problem when DTI come to you
and say, "We have got to put some form of rescue package
together because we have got to get this industry up and running".
How do you help them through some of the dilemmas that they are
facing?
John Healey: Am I right in assuming
that you are posing the question in relation to a hypothetical
transport fuel obligation?
Q322 Mr Drew: It is hypothetical
in the sense that we have got a current acute problem, which I
am sure we will find a way through, and we have got to prevent
those sorts of problems from happening again because with the
best will in the world people are in the biofuels industry and
the thing that they want is to make it economic but what they
also want is some stability out there to know that in five years'
time they are not going to have another TXU problem where people
are not going to be redeeming for a fair price the Renewables
Obligation Certificates.
John Healey: I think it is a really
important point, the desire to see stability and certainty in
this field. That may contribute also to the write-off periods
that we have just been discussing that companies are prepared
to consider for their investments and, therefore, rates at which
they may borrow to make those investments. Whilst there may be
a conceptual carryover or application of the Renewables Energy
Obligation to this sector, you are right to point to some of the
additional factors, things that we are looking at now. The State
Aids in this field essentially allow Member States to compensate
towards production costs, but not to overcompensate. A couple
of other factors which make this different from the Energy Renewables
Obligation is the supply chains are very much longer. With electricity
generation generally you have not got the international supply
chains which potentially you have with the production, distribution,
marketing and then use of biofuels. That makes the tracking, certification
and auditing that is required of an Obligation-style approach
infinitely more complicated and complex.
Q323 Mr Lazarowicz: Also on the Renewables
Obligation, we were told by Powergen in their evidence that because
of the fact there is little or no market for energy crops within
the UK at present there would not be sufficient energy crop available
to enable generators to meet the 75% energy crop requirement for
co-firing of biomass by 2006. Their conclusion, therefore, was
that if the Obligation's requirements about co-firing were not
relaxed then the effect would be that co-firing would end after
2006. First of all, do you agree with the statement that there
is "little or no market for energy crops" at present?
Presumably you would. If so, what is your explanation for the
absence of the development of that market?
John Healey: I cannot give you
an easy answer to the second part of your question but, on the
first part, I am certain that Powergen are making their representations
to you and doing the same to the DTI, which as I mentioned earlier
is conducting at present a consultation on the operation of this
aspect of the Renewables Obligation with the proposal, as you
suggest, to relax that 75% from 2006-16.
Q324 Mr Lazarowicz: On that related
area of stimulating the market, why has there been relatively
little take-up of capital grants for biomass powered generators?
John Healey: Chairman, I cannot
give you an easy answer to that. I am happy if it is a particular
point of concern to the Committee in relation to this inquiry
to write, if I may, and try and provide you with some indication
which might be helpful.
Q325 Mr Lazarowicz: On a slightly
different point, if I may, briefly, Chairman. You mentioned that
one of the other variables which you considered had not been taken
into account in some of the industry's submissions on the level
of quota reduction was the future levels of subsidy for sugar
beet, and that is obviously an important issue. If you were in
the House, you would have heard the statement earlier today from
the Secretary of State about the WTO negotiations. Given that
the trend at one level is to move away from agricultural subsidies,
although accepting that this is not an agricultural subsidy that
we are talking about here, when it comes to derogation, the effect
is obviously designed to stimulate production. How is the Government
ensuring there is coherence between the different policy objectives
here when it comes to, for example, international development?
In particular, what consideration has been given to the effect
of policies to energy crops on, for example, the international
sugar market?
John Healey: I think we want to
be clear about two things in relation to biofuels and the points
you put. The first is that the duty discount, the duty derogation,
in effect is likely to stimulate production of biofuels, not production
of feedstocks. In other words, it is principally there for the
manufacturers of biofuels. Now they may take the decision, particularly
if foreign sourced feedstocks are more competitive outside the
UK, that they might source the feedstocks for their production
in a way that brought little benefit to UK farmers. The second
thing is just to return unequivocally to the fact that the principal
purpose for the duty derogation is not to put in place another
form of production subsidy, in this case non-food crops for farmers
in Britain: it is there to try and capture the environmental gains
that we can get from biofuels and to do so in a way that takes
proper account of the value of those environmental gains but recognises
also that the production costs are greater than with conventional
fuels. That is the principal analysis and calculation we have
done in settling on the 20p. As I said earlier, I am happy to
provide the documentation to that to support the figures that
I have given the Committee this afternoon.
Chairman: We have two very brisk concluding
questions and then I want to ask one last one and then we are
done.
Q326 Mr Drew: The point I put to
Lord Whitty was what about security of supply. We had a big debate
on whether you should farm biofuels abroad, because they can be
grown more efficiently, and then import them here. There is an
overall quandary that one of the strongest arguments of having
a British biofuel industry is that it is one of the ways in which
you can defend the security of supply. Is that included within
this calculation?
John Healey: Forgive me, Mr Drew,
we did cover this actually before you came in.
Q327 Mr Drew: Assure me there is
a physical factor.
John Healey: Let me briefly explain
and this will be reflected in the supplementary note I offer to
the Committee. I said that the principal primary consideration
was environmental gain, that is the principal monetarisation or
quantification that we have been able to do as the basis for this.
We do recognise there are potential benefits both in terms of
increased security of supply, in terms of recycling waste products
and also the development of new technologies. Those are, as I
have underlined to you in my note, difficult to quantify. What
indications we have do not suggest that they throw out the broad
equation that leads us to the judgment that 20p is the right rate.
Q328 Mr Jack: Minister, in a letter
to me dated 7 April you said the following. "I believe that
the duty differential is already producing encouraging developments
from the industry—for example, I have been informed about
plans to build a £10 million biodiesel production plant in
Motherwell". Has it been built?
John Healey: No, but I understand
it is under construction at the moment. I understand that Argent
still aim for it to start producing during the course of next
year. The Committee may be aware also that Petroplus in Teesside
has also signalled its interest in setting up a biodiesel plant.
Q329 Mr Jack: We have heard, certainly,
of a Teesside plant. We are aware, certainly, of the existing
Ely plant but we have not had a squeak about Motherwell. Perhaps
just to put my mind at rest you might like to just check up for
me how things are going and put that as a postscript to your other
note. It would be very helpful.
John Healey: Mr Jack, certainly
I will do that because it will set my mind at rest as well.
Q330 Chairman: Minister, you have
defined what the purpose of a duty concession is, which is to
capture the environmental gain, but you said, also, we have to
decide what the purpose of the policy is or what the policy aim
is. It is quite natural that different people might have different
objectives. Defra might well have different objectives from you
and the DTI will have its own objectives. If somebody asked you
at the moment to order them, if the Prime Minister came and said
"I have got to give this bloody speech to all these wretched
greens and I have to convince them I am really interested in all
this, what can I say"—I am sure he would not use that
phraseology, of course—he would say "Look, I need something
in this speech, I am giving my six monthly speech on the environment",
what would you advise him to say in terms of what the policy aims
are so we can have some idea where the complementary or occasionally
competing aims may fit into the landscape we have to examine and
scrutinise?
John Healey: I would say very
simply that this is a measure which will allow us to make a contribution
through biofuels towards reducing the impact we have on the problems
of climate change. That is the central policy purpose of this
measure.
Q331 Chairman: The central purpose
is the broader environmental benefit and in the course of achieving
that there may be people who benefit by being able to contribute
or produce things but the strategic aim is that which caps the
enterprise?
John Healey: That is the strategic
aim and it is part of the contribution that the transport sector
generally makes to the overall effort to reduce the impact that
we have on climate change.
Q332 Chairman: Given that those requirements
to act in respect of climate change are ones we have accepted
in the form of international treaty then we have to find a way
of delivering?
John Healey: Correct.
Q333 Chairman: That means, at the
end of the day we will be looking at various instruments and you
have said part of the exercise is telling which ones work. In
fact you do not have the option of saying quite frankly at the
end of the day the game is not worth a candle, that is one option
that is not there?
John Healey: Correct. We are committed
to exploring and developing the role that biofuels can play in
helping as part of a whole range of policy measures in different
sectors towards reducing our impact on climate change.
Chairman: Minister, thank you very much
for coming to us. You have been very helpful indeed. You have
promised us some material. If you want just to corroborate what
we think you owe us and what you think you owe us then I am sure
the clerks have taken a note and can do that for you. We are most
grateful. Thank you very much indeed.
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