Select Committee on Environmental Audit Minutes of Evidence


Examination of Witness (Questions 260-267)

28 JUNE 2004

MR DAVID GREEN OBE

  Q260 Mr Challen: I hope that they will take note of the amended form of Clause 84 of the Energy Bill, even if it does not survive the next three weeks.

  Mr Green: I am sure they will take note of Parliament's intent, Chairman.

  Q261 Mr Challen: You say in your memo that OFGEM are operating the Climate Change Levy exemption system for CHP, but a protracted failing in OFGEM's software means it remains a dysfunctional system. I wonder if you could tell us just a little bit more about that?

  Mr Green: It is not for the Business Council, Chairman, but, as many of you are aware, it is the work I have done historically on CHP, but just to explain, because most of you here were helpful in encouraging the Chancellor to give, I think it was in the Budget two years ago now, full exemption to CHP for the Climate Change Levy. For that to happen, OFGEM, under the Finance Act, were given a statutory duty, just as they are for the Renewable Obligation Certificates, of operating the virtual depository through which trading takes place in Levy-exempt certificates, the certificates for a supply which does not have the Climate Change Levy on it. First of all, according to OFGEM's annual review, the delivery of the software was some six months behind schedule and that caused the delay in getting the website for it up and running. Certainly, as of last week the transactions were still not taking place because there were still continual technical difficulties in the operation of OFGEM's trading system. What a number of companies in that sector have been pressing for is to get an ability to do manual transfers introduced because of the software defects which OFGEM have had. I learned recently that colleagues in the renewables community appear to be having similar problems with trading Renewable Obligation Certificates and it is to do partly with the volume of trade which goes on and the settlements which go on. It does not seem to be quite geared up to that, as yet. Certainly there has been quite a lot of pressure on OFGEM from Ministers to make sure they do tighten up their performance in this area, because Parliament legislated to give the exemption but if the administrative systems do not deliver then companies do not get the full benefit. OFGEM have made it clear that the full benefits will flow back to companies from the date Parliament passes the enabling legislation, so they are not going to lose out ultimately. It is just very frustrating, the cash flow implication of not being able to do it smoothly and efficiently.

  Q262 Mr Challen: Do you think the appropriate lessons are being learned in the right places?

  Mr Green: Yes, they have been. The software engineer who did it had been brought back from India, to where he had moved, actually to do the software upgrade, so we hope that it will lead to some improvement. For some reason I do not understand, Chairman, it all appeared to depend upon one person. I think it is a classic example of "just in time" delivery.

  Q263 Chairman: Just going back, if I may, to the question of the priority, or otherwise, that OFGEM accorded to sustainable development and whether or not it should be embedded in the remit, it was very encouraging to hear what you had to say about that from the industry's point of view. I wonder to what extent you would be involved in telling the Government those opinions which you have expressed to us?

  Mr Green: We have communicated them to Government in the meetings which we have had with Ministers and we have collaborated with a number of research bodies which have produced this information. I could never quite understand why ministers were so resistive of it. I can only put it down to historical legacy from the previous incumbent at OFGEM, who tended to be slightly resistive to this. Reading between the lines, I think there is a hope from Ministers that with changes of personality and the balance of people in OFGEM it will be easier for these things to happen and might lead to less resistance. I have to say, Chairman, and maybe I have done this job for too long, there is a slight history of Parliament being ahead of Government on these matters. I can think of a number of cases, in the 1989 Electricity Act and subsequently, where Parliament has had ruled out of order the machinery at the time and subsequently it has come back in, in later legislation and after pressure from various Select Committees. I can only think that if the amendment which various Members on the Energy Bill got in this time eventually does not come to pass, and it may indeed do so, who knows, we may well see it re-emerging in the future because that seems to happen with energy legislation.

  Q264 Chairman: You do not think that they are worried about the impact that including sustainable development might have on their Fuel Poverty Strategy, particularly in the context of rising prices?

  Mr Green: Separate concerns have been expressed to me about the relevance of some of the departmental PSRs, some of the departmental targets, in relation to the fuel poverty target, in an era of rising prices. Given that sustainable development is more than just about price issues, I suspect the worry is that if you have a general function such as sustainable development it will lead to a lot of organisations, environmental NGOs, business NGOs, etc, pressing OFGEM to do more in the environmental field. Historically, that was why OFGEM used to resist it. I do not know if you have noticed, Chairman, but John Mogg, the Chairman of OFGEM, in his recent announcement, welcomed the fact that very shortly the number of non-executive directors on OFGEM's Board will exceed the number of OFGEM employed staff on the authority, and it may well be that balance of power has an effect. I noted with interest, that the Chairman welcomed that trend.

  Q265 Joan Walley: I want just to press you a little bit further on this issue about whether or not the regulator should have as a primary function the sustainable development remit. Given what you have said in your reply both to Mr Challen and the Chairman, and given that there might be a change of heart which is emerging at OFGEM, what do you think the timing of that change of heart could be in respect of Government? Is it not the case that it can be done only when there is the legislative opportunity to do it, and so presumably we are locked into a system whereby there would be a five-year waiting period for the review if, somehow or other, the Government did not find a way of looking again at the legislation currently going through Parliament? Have you got any comments about that?

  Mr Green: It used to be the view that we had major energy legislation in the UK about only every ten years, but given we had a 2000 Utilities Bill and now we have got an Energy Bill four years on the gap between legislation seems to be getting a lot shorter. If the pressure which you and your colleagues exert on the Energy Bill does not come to pass, it will not surprise me, if there is enough will, that some other opportunity emerges, either through a Private Member's Bill or through some other bit of legislation that is going through, for some changes to occur. I hope that the Government would feel able to commit to accepting at least the sustainable development element of the amendment which was introduced in the Energy Bill, because I think that would send a powerful message about the long-term commitment of the Government. What everyone is worried about, particularly in the renewables community, is that we do have robust, long-term commitments, because on those robust, long-term commitments companies have to raise capital to fund their developments. The more we can do to ensure that we do not get unexpected surprises coming from parts of Government, including the regulator, the better, and one would hope that actually it may make it easier to have more consistent messages coming from the regulator if they have got more effective legal cover to enable them to move forward.

  Q266 Joan Walley: I think it would be helpful for the Committee to know as well whether or not this is something about which you have had discussions with the Sustainable Development Commission, and whether or not, in the view of the Sustainable Development Strategy at the moment, this is something which you are seeking to take forward?

  Mr Green: We have not had a formal opportunity to appear before the Sustainable Development Commission to argue our case. Certainly, personally, I have had discussions with the Chairman of the Sustainable Development Commission and one or two of their members, drawing their attention to this clause and hoping that the Sustainable Development Commission will want to take an interest in it. It strikes me as their classic territory but we have not been invited formally to give evidence and make representations to them. Certainly, personally, I have talked to the Chairman and a number of their members about it to make them aware of the work which has been done.

  Q267 Joan Walley: You would see that as being relevant to the current review of the Sustainable Development Strategy, per se?

  Mr Green: Absolutely. It would strike me as slightly odd if, on the one hand, the Government is consulting on a broader Sustainable Development Strategy for the UK and on the other hand is ruling it out of court for one of the major economic regulators which affects the economic behaviour of a large part of the UK economy.

  Chairman: Such contradictions are becoming familiar to this Committee. David Green OBE, thank you very much.





 
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