Examination of Witnesses (Questions 300-319)
19 MAY 2004
MR TOM
DELAY, MR
MICHAEL REA
AND DR
PETER MALLABURN
Q300 Mr Chaytor: You are confident in
terms of your own Action Energy programme, but in terms of the
UK Emissions Trading Scheme or the EU Emissions Trading Scheme
how confident are you in terms of the projections put forward
for the savings there?
Mr Rea: Based on our assessment,
again it is an independent assessment to Government, I think the
figures are sensible and achievable.
Q301 Mr Chaytor: In terms of the Enhanced
Capital Allowances which have been operating for some time, am
I right in thinking that you were due to have some survey of the
impact of this and evaluation of this within the last few weeks?
Have you done that work?
Mr Delay: We have done a draft
of it, which has not been completed.
Q302 Mr Chaytor: Can you give us just
a flavour of what the value of it has been?
Mr Delay: Certainly, I can give
you a flavour, but I think we should note that this is very much
draft work. As yet it has not been fully shared either within
our own organisation or with our partners in Government. I think
what it shows is that, very broadly, there is a market for equipment
broadly in the categories as defined by the Energy Technology
list for about £4 billion per annum. A little less than a
quarter of that is equipment which qualifies for an ECA by being
energy-efficient. Probably about a tenth of that is actually an
uptake of the ECA scheme, which means that the ECA uptake is something
of the order of £100 million per annum. That is the value
of equipment against which ECAs are claimed. We still have to
work on those figures and be absolutely sure of them. At the moment,
we do not attribute to them the same certainty that we would put
around some of these other figures, but, very broadly, those are
the figures that we are getting out.
Q303 Mr Chaytor: In terms of the costing
of the ECA, but in terms of the net benefit of emissions reductions
as a result of this equipment, what is the projection there, what
are we getting for the £100 million?
Mr Delay: I think the first thing
to point out is that if £100 million is the number that is
not actually what the policy cost of the measure is, because to
make Enhanced Capital Allowances available on £100 million
worth of equipment costs probably five, six or seven million pounds,
so any cost-effectiveness has to be based on that figure and not
on the £100 million. I do not know the precise figures.
Mr Rea: We are still working through
that for carbon savings now. We will happily write to you on that.
Q304 Mr Chaytor: Are you broadly confident
that this is a cost-effective way of cutting carbon emissions?
Mr Rea: Yes.
Mr Delay: Yes, and let me say,
quite simply, why. The most cost-effective way of achieving an
energy efficiency objective is to do it entirely through knowledge
and just making information available and making change happen
with no financial expenditure. In a sense, the least cost-effective
way is to pay for the measure in its entirety through a grant.
Whether it is loans, whether it is reduced rates of VAT on equipment,
whether it is Enhanced Capital Allowance, that is only a small
proportion of the capital value of the item that you are trying
to incentivise. Loans, ECAs and VAT reductions that are round
this programme all will be significantly more cost-effective,
and therefore, in our view, will be reasonably cost-effective
in comparison with other programmes that are available. I think
your questions are absolutely right, and when we have completed
the work we will be very happy to write to you with the conclusions.
Q305 Chairman: That will be very helpful.
You did tell us originally, I think, that it would be ready in
April. Do you have a feel now for when it will be completed and
available?
Mr Delay: At the moment we are
discussing the draft, and it is only because we are putting a
number of burdens of proof into the process. I would have thought,
within three to four weeks.
Q306 Chairman: So within the lifetime
of this inquiry, which would be very helpful?
Mr Delay: I am not sure when the
inquiry finishes, but, yes.
Q307 Mr Chaytor: If I could move on to
another related issue, one of the questions which are preoccupying
many of the companies with which you are doing work at the moment
is the rising price of oil. Are you going to make representations
to Government as to the best way of dealing with this dilemma?
I appreciate, for example, that fuel costs for fleet vehicles
is not necessarily my responsibility, but there is an emerging
debate about what should happen to the fuel duty rise planned
for the autumn of this year. Will you be saying something to Government
about that, as to whether they should stick with that rise, or
hold off, to assist business to cope with the rising cost of fuel?
Mr Delay: I think, when it comes
to fleet costs and particularly fleet fuel costs, we do not do
as much work in that sector as our colleagues in the Energy Saving
Trust, and I think it might be appropriate for them to respond
more fully. What I would say is that most of the customers that
we deal with, be they commercial or large industrial, have moved
away from oil as the primary source of energy, so fuel oil is
a relatively small market these days in the UK relative to gas
and electricity. Therefore the direct impact of oil price as an
industrial cost factor is relatively muted, and indeed its impact
on transport fuels is very much also within the fiscal regime
as opposed to a direct impact of oil price. No, we have not had
a huge amount of response from the customers and companies that
we are dealing with.
Q308 Mr Chaytor: If the Treasury consulted
you about whether they should hold off on this planned rise in
fuel duty, what would you say to the Treasury, given the brief
you have got for reducing carbon emissions?
Mr Delay: I think the key issue
is one of competitiveness. If there is a serious threat to competitiveness
because there is a differential between the fuel duty and the
impact on UK businesses versus European counterparts, then I think
there would be something to say on the issue of competitiveness.
I think, if it went beyond the issue of competitiveness, probably
we would not say anything at all.
Q309 Chairman: Just before we move on,
can I come back to the question of the research that you are doing
on the efficacy of the Enhanced Capital Allowances. Is not one
of the problems you have got, in identifying the cost/benefit
outcome of that, that there are all these other things going on
at the same time which presumably are having a bearing on what
is happening to carbon use and carbon emissions? It is not just
Enhanced Capital Allowances, is it? There is the Climate Change
Levy, the Climate Change Agreements, the Emissions Trading Scheme,
there is a whole plethora of things. How do you disentangle the
impact of one of those from the impact of the totality, assuming
that there is an impact?
Mr Rea: As best we can. You are
right, it is extremely difficult to do and I think that the figures
we came up with are robust estimates. It is very hard to strip
out the pure effect of, let us say, the Climate Change Levy over
a period of time. What we can measure is the impact of a particular
measure in any one year and be relatively confident about the
number. You see also an accumulation effect, and ECA is a good
example of that, in that, on one side, ECAs stimulate companies
to invest in energy-efficient equipment, but, on the other side,
they stimulate manufacturers of equipment to get on our Technology
list. What is the cause and what is the effect here and isolating
those effects is difficult to do. As we move forward, as an organisation,
we are becoming more expert. In effect, this is the second year
that we are doing a very detailed impact assessment on our programmes.
Last year we learned a huge amount, and I think this year, as
I said earlier, I am very confident about the robustness of the
results, but I think as time goes on we will get better at this.
It is something that, in terms of the Climate Change Programme
overall, we need to take what we are learning and take what the
EST are learning and Government is learning more generally and
feed it into a hopper and think about what causes the overarching
methodology, so that we do this in a consistent way across Government.
Mr Delay: As you say, it is a
very complex set of factors which drive behaviours and at the
moment we are talking about behaviours and that is where it gets
difficult. It is conceivable to look at the Climate Change Levy
and attribute all the benefits to the Climate Change Levy and
say simply the Climate Change Agreement is just a discount on
that and actually it is a bad thing. All the anecdotal evidence
that we have suggests that it is the Climate Change Agreements,
because of their forcing mechanism, in terms of behaviours, that
are the effective bit and that the Climate Change Levy, as a pure
price signal, is a relatively weak price signal. It does depend
very much on how you look at the methodology, how you look at
the assessment, and different approaches will give you very different
answers. I think it is quite important also to look at the overall
impact in the round, and this comes back down to the credibility
of the overall package as opposed to any one individual measure.
To my mind, at least, Enhanced Capital Allowances are a little
different from the debate around Climate Change Levy and Climate
Change Agreements. I think this is a case of providing a list
of energy-efficient equipment and incentivising people to buy
off that list. I would not see any real double counting between
that and the Climate Change Levy.
Q310 Mr Challen: We have heard about
the plethora of different instruments dealing with climate change.
I wonder if you might agree with me that there is a plethora of
organisations dealing with climate change and that perhaps we
ought to have something called a Carbon Saving Trust, combining
the two organisations and making it simpler for the public and
for industry and everybody else to understand to whom they need
to go?
Mr Delay: In your question, I
think you might have said something about my response. You talk
about public and industry and I think the two Trusts work in a
very focused way. We are very outward-focused, we work with the
markets in which we are active, in our case that is business,
the commercial sector and the public sector, as a large energy
consumer. For the Energy Saving Trust, it is the public, both
in terms of domestic energy consumption and also transport.
Q311 Mr Challen: Who would best influence
house-builders?
Mr Delay: Are we talking about
new technologies?
Q312 Mr Challen: We do not know really.
Mr Delay: I would say, the Energy
Saving Trust.
Q313 Mr Challen: It might not be. It
could be you, by your industry. That is the point I am making,
that there are areas where there could be enormous confusion?
Mr Delay: I do not believe there
is any confusion in the markets that we serve. I think the most
important thing is that we focus resolutely on those markets in
meeting their needs. I am not sure if Philip would share this
view, but after two or three years in this position I am surprised
by how few times anybody has said, "Hang on a minute, I'm
not quite sure who I should be going to." I think both organisations
are well represented in the markets which they serve and are recognised
as doing work in those areas.
Mr Rea: I think it is interesting
that we have not had any customers saying this is an issue.
Q314 Mr Challen: They are not yet customers
at that point?
Mr Rea: We have had NGOs saying
this is an issue, and you can understand intellectually why they
might say that, but, practically, on the ground, it is. We are
focused on our own end-use markets and that is very effective.
Mr Delay: I can add two things
to that, very briefly. The first is, I think there is a trade-off
between what might look simple institutionally and what is effective
organisationally, and I think it is very important that we have
staff and resource focused very, very much on the needs of our
customers. If that is the case then I think actually the institutional
structure becomes much less relevant, and it is much more relevant
that actually we are doing what we should be doing in the market-place.
The other is that there are a number of areas of interface, and
we recognise that and we work on them together and in a very coherent
way. The examples I would give would be our approach to SMEs,
where at the very small end SMEs are remarkably like a large domestic
consumer. Some aspects of CHP development, including community
energy or district heating, where clearly there is both a domestic
and an industrial/commercial aspect. The work that we are doing
on advanced technologies around, for instance, micro-CHP, which
is an advanced technology, as a business proposition but eventually
will find its home into domestic applications. In all three of
those cases, essentially, we run programmes together and we sit
down and agree what we are going to do and we run them as joint
programmes. I would reiterate what Michael has said. I am surprised
how few people have ever asked us, or appear to be confused.
Q315 Joan Walley: You are very confident
about that, about how people would not be confused. I wonder if
you would be so confident in terms of if you were to come to my
constituency and be confident that SMEs would know of your existence,
know what you could offer them and know how to access what it
is you have got to offer them. I find that most SMEs have not
heard of you?
Mr Delay: That is not surprising.
There are 3.7 million SMEs in the UK.
Q316 Chairman: There is only one of you?
Mr Delay: There is only one of
us, but 3.2 million SMEs in the UK have five employees or fewer.
I think it is fair to say that, in the way in which we target
our services and market our services, we do not target specifically
those 3.2 million SMEs, so, on simple representation, I am not
surprised.
Q317 Joan Walley: Coming back to Mr Challen's
point, in terms of the need to get across and have a great public
awareness about carbon saving and the whole role of energy saving,
if you look at how best to get a message across and how to access
and how to get people engaged with this, would it not be better
to have one overall? Even if you are working closely together
now, would it not be better to have one agency where people would
know that there was a body which did that, then the details of
it could be looked at?
Mr Delay: I think the point you
mentioned about awareness-raising is very relevant, and let me
give just a couple of examples from our own organisation, but
is also something which I know we share with EST as a general
view of how this could be managed. Even within our own markets,
we use very different approaches to awareness-raising, so for
SMEs, typically small SMEs, who regard energy efficiency as a
cost saving, we ran the Lifeblood TV and press campaign, and that
was targeted very clearly at relatively small businesses who see
this as a cost saving. We ran a very different campaign, the Smart
Companies campaign, targeting essentially very large organisations
which see CSR benefit and who see peer group benefit in being
responsible, and very much want to think in terms of energy efficiency
as carbon emission reduction and risk management. Very different
markets, very different messages and a very different approach
to marketing our services to those companies. Lastly, we ran a
campaign called Carbon Rationing earlier this year which was a
much less positive campaign. It was a fairly clear call to alert
to the investor community, raising the issue of the Emissions
Trading Scheme and environmental legislation coming in across
Europe to the investor community as something that they should
take notice of in their dealings with large corporates. So three
complementary but very different messages which we think targeted
appropriately three very different audiences with which we work.
In all of those cases we referred to the business consequences
of climate change. I think there is a case for saying that public
awareness of climate change as an issue, and the fact that energy
consumption is linked to climate change, is something that will
benefit all of us, be it the Carbon Trust, the Energy Saving Trust,
be it Government at large, be it business at large, in trying
to make change happen. I do know that the Government at the moment
is looking at options around raising awareness at this higher
level, which does indeed go across the work of both Trusts and,
I would argue, most government departments involved in this, trying
to raise awareness of climate change as a major issue with the
public, be it the working public or the consumer. I think that
is a very fair point. I think there is a point at which it all
comes together but, interestingly, the work that we do is targeted
very much at the markets that we service and, as such, I think
is appropriate to those markets. I think you are right on that.
Chairman: We are all looking forward
to going and seeing "The Day After Tomorrow;" or perhaps
not.
Q318 Paul Flynn: Do you accept that the
investment in Combined Heat and Power has collapsed, and if we
are going to get on track to achieve the target of 10GW by 2010
we need some radical change in direction?
Mr Delay: I think it is fair to
say that the market for Combined Heat and Power generally has
slowed down pretty dramatically, and that it collapsed is a view
many people would take. I think the prime cause of that is the
spark gap, which at the moment means that the combination of electricity
and gas prices is just not favourable to the economics of Combined
Heat and Power. I think it is very hard to see how that spark
gap is going to develop over time. We are seeing electricity prices
rise and gas prices rise. It is how that gap actually starts to
develop that I think will drive the fundamental economics of CHP.
I think really we have two choices. Either we leave it to the
market and say, "Let's wait and see what the spark gap does
and see what CHP can do on the back of that," or we say,
"We need to have a far more interventionist programme to
support CHP in its development and its capacity development,"
which probably would take a very different approach.
Q319 Paul Flynn: What is your role? Do
you have a role to be interventionist on this?
Mr Delay: Principally, because
we are looking at value for money, and I think that is absolutely
key, we have not provided direct market support to Combined Heat
and Power to try to address issues of economics in the spark gap.
Where we are focused very much is on developing future technologies
and advanced technologies for Combined Heat and Power, so I would
include micro-turbines, biomass-fired CHP, micro-CHP, all of which
we have invested in, which are technologies for the future, in
anticipation of a more favourable economic regime. We have not
ever launched a deliberate campaign to try to address an economic
return issue, which we feel would be very expensive indeed.
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