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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 233-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
Wednesday 4 February 2004 MR A WARREN and MR R BAILEY MR T DELAY, MR M REA and MR P MALLABURN Evidence heard in Public Questions 86-170
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Wednesday 4 February 2004 Members present Mr Peter Ainsworth, in the Chair Mr David Chaytor Mrs Helen Clark Sue Doughty Paul Flynn David Wright ________________ Memoranda submitted by Association for Conservation of Energy and Sustainable Energy Partnership
Examination of Witnesses
Witnesses: Mr Andrew Warren, Director, Association for the Conservation of Energy and Chairman, Sustainable Energy Partnership and Mr Ron Bailey, Partnership Organiser, Sustainable Energy Partnership, examined. Q86 Chairman: Good afternoon, thank you very much for joining us and thank you for your memoranda which expressed a fair degree of dismay over the Pre-Budget Report and we are here to ask you some questions and we look forward to hearing what you have to say. Mr Bailey, your memorandum in particular referred to a deafening silence on the part of the Treasury over domestic energy efficiency. Why do you think they have done so little? Mr Bailey: Historically speaking I have been involved in trying to influence the Treasury for some eight years now, since the 1996 attempt to reduce VAT and at all times. I do not think it is political will: it is bringing officials on board. It is as though they were dragged screaming through the hedge backwards on every occasion. There is a whole history of each time you knock down one objection to some kind of tax or fiscal incentive, they come up with another objection. There is a history of that which I could go into, if you wished me to. Q87 Chairman: You said you do not think it is political will. Surely if the political will were there, the officials might jump into the hedge with enthusiasm. Mr Bailey: To that extent I have to qualify what I said. Certainly there are warm feelings in government, but not warm action. I would put it that way. The Economic Secretary to the Treasury, Mr Healey, is on record as saying that he supports in principle the extension of the five percent VAT rate. So in that sense perhaps there is sympathy, but not enough action. That is probably a better way of putting it. Q88 Chairman: So you do think that it is a failure of political will. Mr Bailey: Yes. Q89 Chairman: How about you, Mr Warren? Mr Warren: First of all, as far as we are concerned, what my members, who are the manufacturers and installers of energy saving equipment, are anxious to do is to get some firm signals to the marketplace, commitments which we can build upon. As far as we can tell, we have had very warm words, not just in recent months, but in recent years, always seeking to encourage investment. In practice, had our members believed those warm words, they would have suffered seriously financially. I have to say: is there sufficient political will to put into action those warm words? The conclusion has to be no, because we have not seen the expansion in the marketplace which we were told to anticipate. This goes back, not just over the last 12 months, but indeed possibly over the last 12 years or so. I can recall the last government producing a command paper on climate change policy and within that there were projections. I think it was called Homes 2000, which was an exercise which could certainly have been interpreted as anticipating the domestic market and an enormous growth in that marketplace. I have to say that when we discussed this in the council of our members, which is made up of the managing directors of these member companies, the view was taken that we were uncertain that there was the political will at that point to go ahead with this and indeed that is what occurred. Subsequently there have been various other examples which I can bring to mind on this. Q90 Chairman: Spare us examples of continuous failure. Is it fair to say that in your opinion the Treasury just is not serious about energy efficiency? Mr Warren: We have seen inklings in which they certainly suggest that they recognise that there are barriers in the marketplace. Indeed in the second of the consultation exercises they set out a series of thoroughly rational and sensible reasons why it was necessary for them to intervene. If you like, they had done the intellectual exercise and cleared that point. What actually has not followed is the commitment, whether it is financial in terms of providing incentives or even the disincentives, if you like, placing any taxes on less desirable actions; that simply has not followed. Effectively all we have been asked to build upon is a whole lot of promises going in the right direction, but no firm steer, no firm commitment to the marketplace that we can invest on the back of. Q91 Chairman: Was anything gained from this second consultation? Mr Warren: I actually think it was. What we learned from this was that on the various options which were being put forward, the landlord's tax issues, the ECAs and indeed relating to VAT, when people were asked to go back to the Treasury, and there was a significant number of responses, including from Members of this House, to that particular exercise, they did learn that yes, it was perfectly possible to implement those measures. The Treasury got the answers to the questions they were seeking and they got them unequivocally. The real question is whether they will respond to those in the marketplace who say this is what we need. Q92 Chairman: So the second consultation was worthwhile. Mr Warren: Inasmuch as it drew out unequivocally the response from all those operating in the marketplace that we needed a whole lot of new fiscal instruments. Mr Bailey: My partnership covers four wings: the industrial wing, which includes residential landlords, the National Federation of Residential Landlords; the local government wing; environment and fuel poverty wings. The second consultation involved all those people who were active on the ground and asked them what would work. Something like 47 of 51 energy advice centres said that the five measures we propose will work; not "might" work. That was their expert opinion. All the HECA forums and fuel poverty forums all over the country said these measures would work. All the residential landlords, the local federations all over the country and the national federation said these were the kinds of measures which would encourage their members to invest in private property to upgrade energy efficiency. That exercise was very, very good indeed, it got them involved and engaged. You can then imagine their dismay when nothing happened in the Pre-Budget Report. Q93 Chairman: You, Mr Bailey in particular, have been involved in lobbying activities. In the course of those activities, for example in relation to Brian White's Sustainable Energy Bill, did you find a difference of approach between the Treasury and Defra? Mr Bailey: On the issue of the Brian White Bill and maybe indeed on these fiscal measures but certainly on the Brian White Bill, it seemed to us that there was a row going on in government about commitment to energy efficiency. I use the word "commitment" as distinct from "warm words". Everybody supports warm words in government, but the impression we gained from the Brian White negotiations was that there is a massive row going on in government between those who want to commit to doing something and to targets, commitments, objectives - I am not worried about the particular word you use - and those who just want to make warm words. We thought we had agreement to real commitments after many negotiations on the Brian White Bill, only for it to be scotched at a later stage. Indeed one of the members of your Committee, Mr Chaytor, put down an amendment to the Brian White Bill which mirrored a commitment we had, a clause in that Bill which would commit the government to specific targets. That was an agreement we had with officials, only for that to be suddenly unravelled a week later. Q94 Chairman: Mr Warren, do you have a sense of a difference of approach between the two departments concerned? Mr Warren: The two departments you were instancing in this particular case were Treasury and Defra. In fact I would take it wider. One of the things which obviously does concern us is the fact that there is a myriad of departments which are pertinent to our industry. The Office of the Deputy Prime Minister is another, Department for Trade and Industry. There are obviously different views and differing amounts of enthusiasm about stimulating this marketplace, but bearing in mind the fact that the Treasury is the one which effectively decides how much money is put in to stimulate that, I have to say we have seen limited amounts of enthusiasm. We have seen good analysis; I do stress that point. They have done much of the necessary intellectual work. What there is not, is the same commitment. If I might say so, I had the opportunity to read the uncorrected transcript of the Economic Secretary's evidence to you just recently, indeed one of my colleagues attended the session, and it did strike me from that, that you were talking on that particular occasion about the use of stamp duty, and our members certainly believe that differential amounts of stamp duty would make an enormous amount of difference in the marketplace, particularly affecting those who were moving into new homes. The argument which was given by the Economic Secretary to you was a very different one from the one which they brought forward before, which was essentially that it was administratively difficult. It seems to have been accepted that it is not that administratively difficult to do. The suggestion was that deadweight costs would be the problem. It was that when people move house, yes, they do do improvements and the presumption therefore - and I am quoting directly from him - is that they make improvements including some of the sorts of measures which would improve the energy efficiency of those homes so the risk to government quite clearly is that if you offer some sort of stamp duty incentive at that point, that is the point of people moving into homes, you run the risk of significant deadweight costs. I would argue that actually this is trying to work with the marketplace. It is the obvious time, when people move house, to encourage them to invest in energy efficiency when they are improving their home. To be told that because some people might theoretically do something, then automatically we are going to get deadweight costs and it is not worth pursuing this, is excessively dispiriting to our industry, which is being asked after all by the government to respond enormously to the Energy White Paper, to double if not triple in size over the next five or ten years. How can we do that when there are not the necessary stimuli in the marketplace? Q95 David Wright: I think I was the one who asked the Minister that batch of questions. Would you support the idea of putting within the proposed seller's pack, which is within the Housing Bill, an efficiency rating on each property, almost as you brand a fridge or a cooker in terms of its energy efficiency, would you see that as a route forward which would incentivise sellers to ensure that their house was in one of the best bands in terms of information in the seller's pack? Mr Warren: The answer to that is unequivocally yes and indeed we do have to do that under the Energy Performance of Buildings Directive and that needs to be implemented within the next 24 months in this country. Having said that, that provision of information alone, although it is important, is unlikely to stimulate the marketplace satisfactorily. Certainly those European countries which have had that facility going for some while, have found it necessary to produce other fiscal incentives on the back of it. Indeed, we have had that for some while with new homes. All new homes for some while have had to have an energy label put on them. Sadly it appears that most house builders fail to put that label on. The research which has been undertaken on that suggests that there is a 95 per cent failure rate, but those house builders are strictly breaking the law, because they do need, under the law, to inform people about what the energy rating is. In practice, if you want to do better than that, one needs to have some sorts of sticks or carrots and the stamp duty package would be both a stick and a carrot in order to encourage investment. Q96 Chairman: May I bring you back to the structure of government issue which I had not quite finished exploring? There has been a lot of talk about the dysfunctionality of having too many different departments involved. I take it though, from what you said, that you would think there was not much point in having an energy department if the Treasury remains so aloof from the issue. Mr Warren: I suspect that is going to be true, but one could argue that relating to any point of public policy in practice. If the Treasury retains such a strong interventionist streak as our present Treasury appear to have into all parts of government policy, one could make the same argument, I fear, across a whole lot of other areas of policy. One recognises that the Treasury obviously has a specific role to play on this. What one hopes will happen is that having asked for advice twice over from those who understand how the marketplace works and having been told unequivocally, and the Economic Secretary did say to you that there were unequivocal responses on this, what needed to be done, they have not yet sent any signals to the marketplace saying that they intend to respond positively. Q97 Chairman: Mr Bailey, do you see any merit in the idea that this whole area should be shifted to the DTI, for example, that Defra really is not the right place and that part of the problem is the kind of failure to join up between the various government departments involved? Mr Bailey: Absolutely yes, there is strong merit for joining up efficiency and generation as an overall policy area. There is also an on-the-ground view of Defra that Defra is still MAFF basically. I have no view, it is just a perception. It is effectively the Ministry of Agriculture, Fisheries and Food with a bit of Environment stuck on the end. That is a very wide perception and yes, most people I have spoken to, from all these sectors, see that if there is a joining up of energy generation and energy efficiency it would be advantageous. Q98 Mrs Clark: I do remember our inquiry back in 1999 quite clearly. We highlighted the need we felt to have an effective market in real terms in energy services. We do not have one five years on. Why do you think this is? Mr Warren: Indeed I do remember that particular inquiry and you came up with a whole series of very important and well-researched recommendations, if I may say so. You could argue that one of the reasons why we have not got the market in energy services is because government did not take up the recommendations which you made to bring this forward and a number of them would have been very pertinent Q99 Mrs Clark: Probably for some of the reasons you discussed previously with the Chairman. Mr Warren: Indeed. There is no doubt at all that even in the subsequent period whilst there have been an enormous number of warm words culminating in the publication of the Energy White Paper, which did require an enormous expansion in the marketplace of energy efficiency in order to deliver the carbon savings targets which were set in that, all of that is a background against which my members are working and they are aware of the fact that there are people within government and external to government who wish to see the marketplace expand and who recognise that there are barriers there. Those who are in a position to move those barriers do not necessarily respond adequately. Mr Bailey: The effect of that on people in local government is very, very demoralising. There are HECA officers out there day in, day out, at the coal face, who feel abandoned and left to take the stick, but who are given no encouragement whatsoever. This is what I get. The National HECA Forum is on my partnership and repeatedly they are asking what they have to do to get some kind of help and steer from government when they are doing their best day after day and I believe they are. Q100 Mrs Clark: What about the role of energy advice centres? What support are they getting, if any? We have one in my constituency of Peterborough, which is very effective When I say "effective", they have all the right ideas, they have an eco-house, they are brilliant, but I just wonder whether you are getting any feedback from them nationwide that they are not getting the steer they need. Mr Bailey: Less so with them, because they are being given money to give advice and the advice is very effective. Certainly for that very reason they were very demoralised over the lack of steer in the Pre-Budget Report, because they did respond to these consultations. I think 47 of our 51 responded, so the demoralisation has started to set in with them much more recently. Mr Warren: Probably your later witnesses, particularly the Energy Saving Trust, who do provide a substantial amount of funds for that, will be able to respond more directly to you on that. Certainly we believe that the advice centres do carry out a very important role indeed and I know they would like to be able to expand that role, but obviously they are limited in their resources, as I am sure you are aware. Q101 Mrs Clark: What do you think about the 28-day rule, the 28 days' notice to switch suppliers? How important is it that we make progress here in achieving wider objectives we may all agree with? Mr Warren: It is a very important move in the right direction. It is an experiment ostensibly with one million homes likely to be involved, so it is quite an experiment. Yes, it is valuable. Whether by itself it will turn the corner for energy services remains to be seen. Q102 Mrs Clark: Indeed it is a pilot project and we talked about the hiatus between DTI and Defra. Is it not just absolutely significant that the allocation of responsibilities on this pilot fall to DTI rather than Defra? Mr Warren: There is a continuing difficulty with this demarcation line and my colleague has already alluded to the fact that there is a genuine problem there. With the best will in the world, while one continues to have to deal with a whole set of government departments, that demarcation line causes unnecessary problems. Q103 Mrs Clark: Likely impact on your members of the five key measures you are advocating. Mr Warren: The answer is that seeing these in place will begin to give them confidence to be able to invest, to be able to provide first of all the manufactured products and then do the training which is going to be necessary to ensure that they are installed. This is all about confidence in the fact that we are not just dealing with words, we are dealing with firm commitments. I alluded to the position even 10 or 12 years ago in terms of fine words and we have been receiving those find words for the ensuing period. Those of my member companies who have believed those fine words have on the whole suffered financially. Q104 Mrs Clark: Is not the point anyway, regardless of our ideals, that the UK housing stock is, one could say, almost a disgrace; it is very, very poor quality? Surely this is going to impede the objectives and surely it is significant that there is not the political will behind housing. Okay, we do have the Housing Bill going through, but it was many, many years before we had a Housing Minister in the Cabinet. Mr Bailey: May I come in as regards the likely impact on some of the worst housing stock, which is private accommodation? All the government's fuel policy documents say it is the hardest sector to deal with. I referred earlier to the National Federation of Residential Landlords and I pay tribute to Richard Price the General Secretary who went round all his county associations enthusing them about these fiscal measures and they all passed resolutions and they were then enthusing their members. At long last we had private landlords enthused about energy efficiency, only to be deflated about the fact that there was no response in the Pre-Budget Report. That is one effect on one of my members, the National Federation of Residential Landlords. The National Housing Federation, which represents social landlords, were very disappointed at the lack of initiative on enhanced capital allowances to install proper heating systems in one million or so social housing units. They are wondering how to get decent home standards, how to get people out of fuel poverty, without proper steer from the Treasury on this. That could have been done. There are two impacts on other industries, on the housing industry and on the landlords' industry. Q105 Mrs Clark: So it is almost definitely up to us, as parliamentarians, to enthuse the passion for housing and push it up the agenda. Finally, on your own ideas and objectives, solid but perhaps not especially radical or ambitious. Am I being unfair? Do you think they will be enough on their own to achieve the step change in energy efficiency which is needed? Mr Warren: They will certainly send very important signals to the marketplace and the marketplace believes that these are amongst the most important options available which can give them confidence to invest both in manufacture and training and training is going to be as important. It is to have the people on the ground who can deliver the measures, but in order to set that in motion, we have to have the confidence that there is going to be the demand there. Mr Bailey: I am not usually accused of not being radical enough, so it is very unusual. To be honest, I do not think they are enough on their own and we actually suggested another measure at a seminar held by the Treasury and the Energy Efficiency Partnership for Homes in September last year where we thought that the VAT reduction could be extended to some of the DIY markets. If I could raise this now, we accept that DIY cannot get a five per cent VAT rate under the Directive because there has to be a service element. If it is supply and fit, then it is legal under the Directive because of the service element. We suggested they could interpret that as supply and deliver, which also has a service element, and we were given an assurance at the seminar in September that this would be considered and there was no response to this in the Pre-Budget Report. Q106 Sue Doughty: You mentioned you had been following what the Economic Secretary had been saying on these issues. We talked about where we can and cannot have the reduced rate of VAT. What is your interpretation, just to clarify this whole thing around VAT and energy saving materials and possibly energy efficient central heating and hot water systems which you refer to in the Clean Dozen? What is your understanding now of what is possible and what is not? Mr Bailey: Supply and fit is certainly deemed to be possible and that has justified the existing reductions. Straight DIY is not possible, but we would say there would be a service element if you extended supply and fit to supply and deliver. We can see no reason, and this has been accepted in correspondence with the Treasury, why the supply and fit which currently applies to insulation material should not also be extended to boilers and hot water systems etcetera. At the moment that is only five per cent on grant schemes relating to hot water systems and heating systems, but it can certainly be extended to supply and fit hot water systems, which it is not and it should be. The other thing is a slightly wider subject than you touched on and concerns generating new ideas, things like domestic heat pumps and micro CHP units could certainly be applied to that. Q107 Sue Doughty: Within those, what do you think it is realistic that the government could get on and announce in the Budget and the Energy Efficiency Implementation Plan? Mr Warren: The answer is all of those. We have really been having this debate about VAT for rather a long while. It is plainly ludicrous that we are taxing energy consumption at five per cent and energy conservation at 17.5 per cent. It is the most blatant distortion of the marketplace in the wrong way that one can conceive. It is not an argument that anyone can have to suggest that is satisfactory, keep it like this. Treasury Ministers time and again have said that they wanted to address this. They have said that they needed to continue discussions in Europe at the same time relating to DIY and that is certainly perfectly fair. We have acknowledged the fact that DIY alone cannot get this reduced rate until there is agreement right across Europe, but so far as the rest of it is concerned, it is just obfuscation. It is perfectly possible under existing VAT rules to reduce VAT in all these other areas to which Mr Bailey has referred. Q108 Sue Doughty: We look forward, hopefully, with happiness to Budget day and to crawling through the documents to identify that. Mr Warren: If I might say so, I should be absolutely appalled, and our industry would be greatly disheartened, were it to turn out at Budget day that we saw no changes whatsoever, much as we saw with the pre-budget arrangements. I cannot believe, having gone through this exercise twice, and having got such unequivocal responses, that our industry and by that I am incorporating all the other industries, not just the energy efficiency industry, but all those who have responded at some length to the Treasury on this and said unequivocally that we needed to do something, will be told "We have listened, but we are still not going to budge". Then, effectively, what that would be signalling to would be is that the Energy White Paper is not serious and that the carbon commitments which are anticipated, particularly for the residential area, just simply will not be reached. Mr Bailey: In 1996 I was, with the Honourable Member for Nottingham South, responsible for an attempt to amend the Finance Act, the Bill, as it then was, going through Parliament, to reduce VAT to five per cent on all energy saving materials. The person who was then the Shadow Minister and who is now the Minister, Ms Primarolo, got up in the House of Commons and said "In the name of justice, democracy, jobs and energy efficiency, we support a reduction of VAT to five per cent". We lost that by one vote, but we would say in the name of justice, democracy, jobs, energy efficiency and social justice that they should do what they said they would do in 1996. Chairman: Thank you very much. No doubt the Treasury will have noted your views which have been forcefully expressed. We are very grateful to you for your time this afternoon. Memorandum submitted by Energy Saving Trust Examination of Witnesses
Witnesses: Mr Philip Sellwood, Chief Executive and Mr Nick Eyre, Director of Policy and Development, Energy Saving Trust, examined. Chairman: Thank you for joining us. We are rushing headlong through a complex agenda, but I am going to ask David Wright to come in at this point. Q109 David Wright: Welcome to the Committee this afternoon. I should like to cover a number of the issues you have probably heard the previous witnesses speak about. Perhaps it is useful to begin with if we look at the scale of the challenge confronting us. I understand that carbon emissions are currently around 152 million tonnes a year. If we are to achieve the 20 per cent carbon reduction target by 2010, that will need to come down by some 20 million tonnes a year. How much of that reduction is expected to come from energy efficiency and how much from domestic energy efficiency? Mr Sellwood: Of the 20 million you refer to annually, 50 per cent has to come from energy efficiency measures and of that 50 per cent, 50 per cent of the 50 per cent has to come from households, so roughly five million tonnes per year. Q110 David Wright: So significant amounts. Mr Sellwood: By far and away the biggest amount to deliver on the Energy White Paper, yes. Q111 David Wright: What is your view in terms of how realistic it is to achieve the target? Mr Sellwood: We think it is realistic. You have heard from the previous witnesses some of the challenges, so I do not think we would in any way underestimate the nature of the challenge. Certainly, if the energy efficiency element of the implementation plan for the White Paper were to be achieved, we need to see some, if not all, of the measures which have been referred to earlier implemented. Q112 David Wright: What targets do you set yourselves then? How do you manage what you do as an organisation? What kind of structures and targets do you have in place to secure savings? How do you calculate what you have achieved? Mr Sellwood: Are you talking from the Trust or in terms of the Energy White Paper? Q113 David Wright: I am talking from the Trust's perspective. I am talking about how you implement the projects you run, for example, Warm Front and the broader commitment. Mr Sellwood: We do not technically run Warm Front, but essentially how we are organised is that we are organised into three separate divisions effectively: one is devoted to delivering energy efficiency in the home; one is delivering energy efficiency in our transport area; and one, which is a relatively recent development, is how we are delivering energy efficiency in terms of renewable technology. Essentially we organise ourselves on a programme by programme basis and those are individually managed so that we can set individual targets for programmes and thus measure our progress against individual targets. What we are not trying to do is measure an aggregated target. We are actually looking at individual programmes in terms of cavity wall insulation, loft insulation and the like. Q114 David Wright: How do you know that your contribution is going to help us achieve the 2010 target? How far away are we in your perception from securing that advancement? Mr Sellwood: One of the things we do, both for ourselves and in other areas on behalf of government too, is to have a fairly extensive evaluation procedure which literally evaluates those programmes against targets, which on either an annual or a rolling basis pretty well informs us whether or not we are on target. Q115 David Wright: Are you? Mr Sellwood: Interestingly enough, one of the roles which we are playing is in terms of helping deliver, for instance along with energy suppliers, the energy efficiency commitments and we are reasonably confident that in those areas we are going to deliver on the first energy efficiency commitment, or, should I say, the suppliers are going to deliver and we are going to assist in that process. Mr Eyre: The scale of the target is significant, five million tonnes of carbon by 2010. You have been focusing with earlier witnesses on fiscal measures, we would see that as important, but the broader picture needs to be understood. If that target is to be delivered, we are going to need a larger energy efficiency commitment in future years, we are going to need the building regulations to be significantly upgraded, we are going to need to spend more money on information and advice so that people demand energy efficiency measures. There is no single measure which will deliver this target, it needs to be an intelligent package of measures which fit together, both to produce the demand for energy efficiency and the supply from the market. Q116 David Wright: You said a minute ago that you did not administer Warm Front. How does that work then? Who does? Mr Eyre: Warm Front is the responsibility of Defra and is run by two managing agents, Eager Partnerships and PowerGen. Q117 David Wright: Turning to domestic energy efficiency in a little more detail, we have heard this afternoon about the Treasury consultation processes of July 2002 and then a further consultation in 2003. Do you think the Treasury is really serious about these issues? What would you like to see come forward in the Budget proposals later on in March? Mr Sellwood: It has been a matter of public record that we said we were disappointed in terms of the second consultation, for two reasons really. One is that it did not seem to have moved the debate on, as earlier witnesses have said, in terms of delivering some real deliverables at that stage. The other is that it really did not start to deliver significant price signals to the market because we feel that there are certain things, some of which have already been alluded to, which really did not require significant secondary consultation. There are three things which we would alight on as being particularly disappointing, which we submitted: one was with regard to the stamp duty proposal, which was alluded to earlier; secondly a very realistic and I think achievable requirement in terms of domestic micro CHP, which is a new technology which we believe can add significantly going forward. Thirdly, we were somewhat puzzled by the response of the Treasury to our suggestion of effectively balancing the reduction in VAT on some products with an increase in price on the least efficient products. The reason we say we were disappointed and baffled is that the response from the Treasury was that they did not see that they would represent a significant price signal to the market. Our view was contrary to that and we felt that these were items which could be taken within the remit of the UK Government, which did not in a sense get mixed up with all of the issues around the EU Directive. Yes, we were disappointed and we feel that more could be done. Q118 David Wright: Do you think more is being done in other EU states on this? What is the experience across the rest of Europe? Do they apply the rules in the same way that we do? Do they look at the same criteria in terms of energy efficiency goods in the home in terms of delivery or supply or some of the issues we have just touched on? Mr Sellwood: That is the sort of question which makes me wish I was somewhere else when you asked it. The answer is that 11 of the states currently within Europe actually have some form of tax or fiscal incentives. It is fair to say that no-one has exactly the same as we do. What it is true to say is that there does seem to be a greater sense of "joined-upness" elsewhere between that which takes place in energy efficiency and housing for instance. In the same way that I think that certain European countries would feel there were some things they could learn from the UK, certainly we could learn a significant amount also from the way in which they interpret fiscal measures in terms of energy efficiency. Mr Eyre: There is no coherent picture across Europe, every Member State is different. In the proposals we drew up, we tried to mirror best practice, so that we know that some of the ideas we have put forward, like we know that a 50 pence charge on grossly inefficient light bulbs would work because it has been done in Denmark and it has been successful. Q119 David Wright: Slightly at a tangent, local authorities have to produce the HECA reports on an annual basis. Do you think that has enough teeth? My perception is that local authorities perhaps do not spend enough time working on the HECA report, it is not produced in enough detail and it is not used to lead their strategic investment in housing terms. Mr Sellwood: In a sense the answer is in your own question in that we believe the way local authorities do not have energy efficiency at the heart of their overall strategy means that those officers who are responsible for HECA and also for energy efficiency, do not really get the level of support. Certainly one of the things which we, along with the Carbon Trust and others, are looking to do is to engage local authorities up and down the land. Q120 David Wright: One of the problems of course is that there is a third department involved there, is there not, which is ODPM, which is running housing investment strategies. We do not just have Treasury involved here and Defra, we also have ODPM with their fingers in the pie as well. Mr Sellwood: What we have found is that the best response to that complexity is to deal direct with local authorities. Certainly one of the things we aim to do in this financial year is to engage directly with LGA and others so that we can get energy efficiency, whether it be through transport, housing or domestic, very much further up the agenda, because - an earlier witness's point - it is really unreasonable for the average HECA officer, who tends to be a rather junior person in local authorities, to fight their way up through the organisation when in fact there is little strategic commitment within local authorities on this particular agenda. Mr Eyre: The policy context is not entirely helpful, given that the HECA duty is a duty to produce a report rather than to do anything. It is a weakness which probably needs to be picked up in the Energy Efficiency Implementation Plan and what the role of local authorities should be in domestic energy efficiency should be defined. Q121 David Wright: Absolutely; point well made. You heard us talk a little bit earlier about effective markets in energy services. Why, in your view, has an effective market not developed and could you touch perhaps briefly on your view on the 28-day rule and the pilot project? Mr Sellwood: I shall briefly touch on the top level. Nick has been sitting on the working group, so he can talk to the detail. The straight answer is that in talking with energy suppliers and the energy industry it is clear that there have been certain barriers which have prevented the development of energy services as we understand it. I am pretty clear that the action which has been taken or is about to be taken in terms of the launch of the pilot, which is a pretty significant pilot, one million homes, will give the opportunity for the first time for energy suppliers to sell the sorts of products in the sorts of ways which can open up energy services for areas like micro-CHP and others. The answer is that the climate was not there, the structure was not there, there were far too many barriers in the way. What has been proposed gives energy suppliers an opportunity, but they have to take it. Mr Eyre: May I add two points to that? One is that the nature of the domestic energy market has not been very helpful over the last few years. Suppliers have been focusing on customer acquisition and cost minimisation and energy service packages by their nature will cost them more money to deliver even if they deliver bigger benefits to consumers. As the market matures, there is an opportunity and we are seeing suppliers begin to try to differentiate themselves in different ways. So there is an opportunity for energy services to come in. The 28-day rule change will be helpful because the major suppliers perceive it as a barrier. At least two of the government actors, Defra and DTI, have worked well together on this issue and worked well with the industry on it also. I am not too concerned about it being called a pilot. If we can get one million energy services contracts within two years, I shall not only be delighted I shall be very surprised as well, because that would be a huge growth in the market. The emphasis is on the suppliers to deliver now; the change is being made which will help them do that. Q122 Sue Doughty: The Energy Saving Trust has actually been demonstrating some enthusiasm about measures on fuel taxation and transport which were announced in the Pre-Budget Report and particularly the alternative fuels framework where it is nice to see the government is finally doing something which looks as though it is a step in the right direction. You did mention that there are other issues which the Trust would like to see addressed, such as further reform of the company car tax and vehicle excise duty, which were not addressed. What do you want to see? Mr Sellwood: What we should first like to say is that that which has already happened seems to be working, that is the broadening of the bands. The greater clarity with which company car tax now delivers to its customers the very clear view that a large car, consuming large amounts of fuel or emitting large amounts of CO2 is actually something they will be penalised for is starting to have its impact. It is having its impact in our view in two ways. One is the growth of diesel vehicles in the marketplace, which is now just under 40 per cent of all vehicles this year. The other area is in the choices which consumers, that is company car users, are starting to make. What we are saying is that we would like to see much more of the same. Mr Eyre: We have not done any detailed analysis on vehicle duty but our perception is that the current banding is a step in the right direction, but not broad enough to have a large impact on its own. The company car tax measure is certainly much more significant and it is an area where the Treasury has done good work. Q123 Sue Doughty: You have welcomed the introduction of the alternative fuels framework but it is a matter of where we are going with this. Is it really a strategy? Has it got the aims and targets which would make it into a strategy or are we in a previous phase which we were discussing earlier this afternoon of words without the actual intent and deliverables at the end of it? Mr Sellwood: Does it amount to a strategy? Probably not. We have made it clear in our submission and our discussions with Treasury that we feel, if it is to be something which is really deliverable, three years is not an adequate timeframe and we certainly believe that the development of an alternative fuels framework needs to work within a ten-year framework. We say that because, having spent a considerable amount of time talking both to industry players and also some of the alternative fuel players, it is very clear that in terms of the necessary infrastructure investment which needs to be put into place, the sorts of paybacks which are required for some of these are far beyond three years. You heard earlier in the context of domestic energy efficiency how reluctant people are to make that investment, if they cannot see something that amounts to a strategy. At the moment this still feel quite tactical. Q124 Sue Doughty: Yes, I can understand why you say that. You also have concerns about dual-fuel and LPG vehicles. Again there is a general feeling that the Treasury's announcement sounded the death knell for this. What is your feeling about dual fuel? Mr Sellwood: It is a broader issue than just being about LPG. Our concern is that having spent a number of years encouraging alternative fuel producers, retailers and ultimately consumers to invest in a new technology and/or new fuel, just at the point at which the market is starting to look interesting - and bear in mind that for all the talk this is still only one per cent of the entire alternative fuels market - the idea that you can suddenly withdraw support at this stage is concerning not just for the fuels or the technologies which are available at the moment, but we are concerned at the sort of message that gives out over time and particularly in the absence of a longer term strategy. What that looks like to the consumer in our opinion is something which is highly tactical and we are concerned that, for instance with the development of hybrid technologies going forward, both industry and consumers will be reluctant to invest in something which looks like here today, gone tomorrow. Q125 Chairman: It is not just hybrid, is it? Mr Sellwood: No. Q126 Chairman: It is LPG itself which is now at risk. Mr Sellwood: Yes. Q127 Chairman: I know that the uptake has been small, but it has grown slowly and suddenly it is all going to be taken away. Mr Sellwood: There is no question that the growth in the last 15 months particularly has been significant, as the combination of grant and aid support, plus major OEMs coming into the market with a good product is starting to transform that market, which is why we say that for what is likely to happen, in terms of LPG, our wider concern is that may have a knock-on effect for future fuels and future technologies. People will be very reluctant to be caught again. Q128 Chairman: Yes, it is a case study of how not to send messages to the market. Mr Sellwood: If I were looking to develop a product, the last thing I would be doing, just at the point at which the rocket was leaving the launch pad, would be to suggest that we stop putting fuel in it. Q129 Sue Doughty: Yes, this is the very interesting thing about whether the government has completely wasted everybody's time over the whole issue of LPG. It takes so much time to bring it to market and everything you are saying is really saying "Forget it". I would agree with the Chairman. Let us go on to biofuels then. Should the government be giving greater incentives on biofuels? People like Cargill have been arguing for this. Do you think it is realistic for things to happen? Are there examples in other countries such as Brazil which give a good model we should be following? Mr Sellwood: I would caveat what I say with what I just said, which is that it would be a difficult message for any investor, either corporate or individual, to take on board to invest in biofuels post Budget if there has not been both further resolution on current fuels like LPG and also something which amounts to more than a three-year strategy. It would certainly be the view of the Trust that whilst any additional support to biofuels would be welcomed, in the context of a strategy vacuum, it could be very dangerous indeed. The combination of withdrawing support or lowering support for one fuel, at the same time as announcing enhancements to the fuel duty support for another fuel or another set of fuels, could be very confusing in the marketplace. Whilst in principle we would agree with the thrust of your argument, whether or not that would work in the context of where we are today, is a bit debatable. Q130 Chairman: Presumably the same would apply to compressed natural gas which appears to be favoured as an alternative to LPG, but you would probably say it would be a brave person who invested in that. Mr Sellwood: : The reason we talked about a ten-year timeframe was that we felt that over a ten-year period all of those fuels could be seen by consumers or indeed primarily by investors and then by consumers as a menu of options from which they can choose. What we have at the moment is that everything is either roast beef on the menu or everything is pasta on the menu. You turn up and one meal has disappeared from the menu. What we would like to see is a choice of all of those items on the menu, whether they be LPG, CNG, biofuels. You can only do that in the context of an understandable strategy. Mr Eyre: The reason we want a long-term strategy for each fuel which is clear is that there are two reasons for giving a tax break to a particular fuel. One is that it has environmental benefits and that justifies a tax break over a long period, but the other is to support an innovative industry, which is environmentally beneficial. That requires a higher initial level of subsidy, but there has to be some level of certainty in the industry about what the initial level will be and how that will come down. We do not have any problem with the view that the level of support should be reduced as the market grows and costs improves. We just say that people need to be clearer about what that will be, if we are to expect them to invest. Q131 Paul Flynn: This Committee has expressed a view in the past about the number and the complexity of instruments of energy policy. Would you agree that the present range it too complex? Have you any ideas for rationalising it? Mr Sellwood: I am not necessarily sure I would agree with the premise in that it depends how far and how comprehensive you want to be in your definition of an instrument. I would say that most of the instruments which are available at the moment are dealing with different audiences. Whether we are talking about emissions trading which is fundamentally dealing with large businesses and generators, whether we are talking about the climate change levy which is talking to a slightly different audience, and Nick has already referred to the energy efficiency commitment which fundamentally delivers on the audience of small and domestic householders, as long as we can make clear who those audiences are and how they operate, then I do not see that complexity is necessarily an issue. The other issue I have just raised is that it is very important that we have instruments which deal with both the supply side and the demand side. As long as we can be clear about what those are, I am not sure I agree with that premise. Q132 Paul Flynn: We have also been critical of what we generously call the Treasury's strategy in this field but there are no associated targets. Do you think there is any evidence of an overall strategy in the Treasury, or is their policy, particularly on domestic energy efficiency and fuel taxation, just based on tinkering? Mr Sellwood: I think they would say that in terms of their overall view of their environmental policy it amounted to a strategy. I have to say that from our perspective, what we are seeing is a highly tactical set of responses to individual audiences. Some work very effectively and some do not. What we would like to see is a very much clearer statement of what that strategy amounts to. Q133 Paul Flynn: Would you like to see that with targets and monitoring which would be transparent? Mr Sellwood: Frankly the idea of having a strategy without some form of measurement is just long-term tactics. Chairman: Thank you very much indeed. We are done. We are very grateful to you for your time and a very helpful session. Memorandum submitted by Carbon Trust Examination of Witnesses
Witnesses: Mr Tom Delay, Chief Executive, Mr Nichael Rea, Director of Strategy and Mr Peter Mallaburn, Head of Government and International Affairs, Carbon Trust, examined. Chairman: Good afternoon to all of you and welcome to the Environmental Audit Committee. You are very welcome on this your debut visit as witnesses and thank you very much for your time. Q134 Mr Chaytor: I want to ask about the delivery of structures for energy efficiency policy. We have four government departments with interest in the field, we have two major government agencies, we have local authorities dabbling around a bit, we have untold numbers of utilities, deliverers, providers. Is the whole thing not chaotic and are you not, as one of the agencies involved, part of the problem? Mr Delay: I hope not, is my first response. The Carbon Trust's activities are split into two. One half of what we do is all concerned with reducing carbon emissions from businesses and the public sector as consumers in their own right in the short term. The other half of what we do is all about accelerating innovation in low carbon technologies and I think we should put that to one side for the time being. When we talk about delivering energy efficiency we focus exclusively on certain target markets and, exactly as Philip was describing for the EST's activities in the domestic and transport sector, we have tailored what we offer to meet the needs, as we believe them, of the market we are engaging, which consists of businesses small and large and public sector organisations as large consumers. We run a large programme which delivers knowledge management services in the broadest context, which is called Action Energy. It was the energy efficiency best practice programme for many years. Essentially it is the evolution of that programme, turning it from what was largely a reactive programme into one which is very proactive. An example of that would be that in the first nine months of this year we actually made 3,200 site visits into organisations to help them assess, understand and move on their energy efficiency potential and make change happen. It is a very proactive programme. In support of that we have a number of financial incentives which we either manage on behalf of government or administer ourselves. We have a small SME loans programme offering interest-free loans to small SMEs. We also administer the enhanced capital allowance scheme on behalf of government. That provides, to very different audiences again, a degree of financial incentive for the energy efficient investments which are sometimes necessary. I do not think there is a huge amount of duplication. My own sense is that, particularly for delivery organisations such as the EST and ourselves, what is very important is that we are focused resolutely on meeting the needs of the markets with which we are engaged. That is our main concern. Q135 Mr Chaytor: Your point would be that there is a clear distinction between EST and yourselves in so far as you are targeting the business sector and SMEs and they are primarily concerned with the residential and domestic sector. Mr Delay: Yes; and we work together. Q136 Mr Chaytor: The EST manages a power shift programme which provides grants for alternative fuel vehicles. Mr Delay: Yes; quite specifically. Q137 Mr Chaytor: Owned by SMEs. Mr Delay: In some cases; more often than not owned by individuals. Q138 Mr Chaytor: So you think the majority of the power shift programme is used to --- Mr Delay: You would have to ask EST that question. Q139 Mr Chaytor: Except that there is an element of overlap there. Mr Delay: Yes. Q140 Mr Chaytor: There is no clear-cut distinction between the domestic and the business sector. Mr Delay: Yes. It is fair to say that probably 15 per cent or so of our respective audiences have a clear overlap and we manage those jointly. Examples would be very small SMEs which we have jointly managed as an integrated problem over the last couple of years and quite successfully. We provide a backbone of knowledge management infrastructure. The EST has provided a degree of face-to-face support for very small SMEs through its network and that has been very successful. Both of us are looking very much at local authorities from different points of view. EST will focus much more on the social housing aspect. We will focus much more on local authorities with regard to their own energy consumption in their own estate. Lastly, there is the community energy programme, which goes right across from domestic users of community heating, particularly supported by CHP, into business and public sector applications and is a programme jointly managed by the two trusts. Where there are overlaps and there definitely are overlaps, we manage those actively. Q141 Mr Chaytor: From the lay person's point of view, would you not accept that this proliferation of programmes and the changing terminology given to programmes ... You mentioned earlier the action energy programme of which I am very well aware now because I have received a lot of leaflets through the post, so I am now conscious of this. However, I was not aware that this was previously the energy efficiency best practice programme. I gather the Carbon Trust innovation programme used to be the low carbon innovation programme. Why do the names constantly change? Is this not actually undermining the very objectives you are trying to achieve? Mr Delay: I hope not. One of the things which both trusts have tried very hard to do over the last couple of years is to bring a degree of professionalism to the marketing programmes that we both offer to specific market segments. That is translated in a number of ways. Firstly, the segmentation of the markets themselves, which is now far more advanced than it was two or three years ago. I do not think the lay person per se exists in our nomenclature. You are a large business user, a small business user, a public sector consumer, you are a domestic consumer and so on. We are much clearer about what that segmentation means. In terms of the names, when we took over the energy efficiency best practice programme, it was a mouthful. It was seventeen syllables, it did not research particularly well from a marketing point of view. We already ran one part of that programme as Action Energy, which was the proactive element of site visits, and the market research said very clearly, that if we wanted to get across what we were trying to do, we should rename the entire programme in line with the proactive element of it, that is Action Energy, and that is what we have done. Q142 Mr Chaytor: May I ask about accountability? To which of the four government departments which have an interest in energy efficiency are you accountable? Mr Delay: Our funding comes from Defra and the three devolved administrations. The DTI has a seat on our board and a very active role they play too in terms not only of the board activities of the Carbon Trust more generally, but also the investment committee which supports all the innovation work we do. They are very actively involved in the innovation aspect of that. I suppose you would say, that in terms of the funding providers it is Defra. Q143 Mr Chaytor: Is that a coherent arrangement or do you think there is a case for reviewing the way energy efficiency policy is distributed? Mr Delay: There are two quite interesting things here. We certainly have good relations right across the board with different government departments, including Treasury, on this front. The question is: what is the objective one is trying to pursue. If you look at renewables, there is clearly an environmental objective underpinning much of the renewables investment which is happening at the moment, but it is also an economic development opportunity which is being pursued very aggressively. It is natural that it would therefore sit within the DTI because economic development falls very clearly within the DTI's remit. Energy efficiency is largely an environmental objective which has some economic development benefit as well. One can always debate where the balance of benefit is between the purely environmental concern and the wish to develop economic and industry value on the back of that. That is how I would look at it. Q144 Mr Chaytor: You do not think there is a case for re-establishing the Ministry of Energy which was abolished post-privatisation almost 20 years ago? Mr Delay: There always could be a case, but as you said yourself, it is difficult because there are at least four government departments involved and it is not quite clear how one would put it all together to provide a coherent framework in terms of transport, long-term innovation into renewables and other low-carbon technologies and energy efficiency across all sectors. It is hard to see how you would do that. Mr Rea: That is one of the reasons we think the energy efficiency implementation plan is so important. It should give real clarity about which policy measures will really make a difference in this area. It is a good test of whether these government departments can work together effectively to bring forward the right types of policy measures to move the markets in which we work. Q145 Chairman: It will be important if and when it appears. Mr Rea: Yes. Q146 Chairman: We must not talk about it as a living entity at this stage. Mr Delay: The other point I would make is on the single energy policy network, which has been put in place to pursue and to develop the energy efficiency implementation plan as part of a broader Energy White Paper implementation plan. We are part of that network, as is the Energy Saving Trust, as are Ofgem and as is the Environment Agency. That is a great opportunity and if it works, it will provide a degree of synergy across government departments and a degree of accountability in terms of delivering results which has maybe been lacking in the past. The jury is still out and we wait with bated breath to see what happens next. Mr Rea: Coming from a business background, a kind of mechanism which has been set up of having senior reporting officers accountable and truly accountable for energy efficiency and renewables is something which is important, having accountability over a period of time so that they are not only accountable for delivery of the recommendations in the Energy White Paper but also for the result over time in terms of emission reduction. Q147 Chairman: I hope you will forgive us if we track back over some of the issues which we discussed with previous witnesses, but we are interested in your particular take on them. I gather you have done some modelling work on the scale of the problem and the base line from which we need to move forward. Can you tell us a bit more about that? Mr Rea: Based on publicly available information we have looked at 2010 and what the gap might be in terms of the climate change programme. Our estimate is that the gap is about six million tonnes of CO2 across the board. In thinking about the energy efficiency implementation plan and our programme going forward that leads us to think about two issues. One is how to close the gap to 2010, both in terms of policy measures and support measures. Secondly, and in some ways more importantly, how do we put the right infrastructure in place so we can continue to make savings to 2020 and beyond? To take an example, in the markets we deal in, CCAs and the climate change levy have been very effective in terms of getting business to get the right infrastructure in place to manage our emissions, to manage our energy in a way we have not seen in the past. If you look at commercial buildings, we do not have the same mechanism to do that. An example of an important policy issue in our view is the EU Buildings Directive and how that is implemented. Within that Directive there is some ambiguity about whether buildings have to have a label and that label has to be explicit. In our view that would be something which would really make a difference in terms of driving owners and occupiers of buildings to take a different view and put in place a basic infrastructure and management systems which would allow us to reduce emissions to 2010 and beyond. Mr Delay: I would just pick up on one thing. We have concluded that there does appear to be a gap in terms of delivery of the climate change programme and meeting the 27 targets. The question is how to meet that gap in the most cost-effective way possible. Q148 Chairman: May I just clarify something before you go on? Is the six million tonnes by which you have established we are adrift, tonnes of CO2 or is that tonnes of carbon? Mr Rea: Tonnes of CO2. Mr Delay: And, to be clear, that is only for the business and public sectors. The question is how to fulfil not just the aim of meeting the 2010 target but also building a platform for delivery of much further energy efficiency to 2020 in the most cost-effective way possible. We have looked at it in a number of different ways. If you simply take existing policy measures and stretch them or extend them, you are rapidly going to get to the point where they are no longer cost effective. There is a very strong case for making pretty firm policy decisions now and on the back of that building in the necessary support through organisations wide and varied, including ourselves, to deliver that. It is the hard policy framework which is going to make it possible. It is not support measures. They are very expensive. Q149 Chairman: To what extent do you set targets for yourselves? Mr Delay: We are in the process of setting targets based on a base line which we have just established. We have been around a couple of years. We assess the action energy programme for the year 2002-03. We know that the customers of that programme saved about 4.5 million tonnes of carbon in that year and something between - and it is a very broad range - 0.6 and 2.9 million tonnes of that 4.5 can be attributed to the action energy programme. Q150 Chairman: Is that what you expected when you set off with this programme? Mr Delay: It is probably more than we expected. Q151 Chairman: You have done better than you hoped. Mr Delay: Interesting point. We have done better against, we would argue, a very constructive policy backdrop. The climate change levy came in and set a first price signal, a relatively weak price signal in absolute terms, particularly in a time of falling prices, to most industrial consumers of energy over the last decade or so. The climate change agreements came in and offered essentially a way of mitigating some of that cost to very large energy users. What it did very effectively was raise the whole issue of energy efficiency up the board agenda in a very, very broad number of organisations and large companies. To some degree, Action Energy relies for its effectiveness on the policy framework which underpins it. It is not wholly surprising, if you say yes, climate change agreements certainly did have an impact in terms of changing behaviours, that support programmes and measures can therefore report more impressive findings. On the basis of that, which we assessed for 2002-03, we will obviously be setting targets going forward, always seeking to get more and more cost-effective carbon savings going forward, but that gives us a base line from which we are now going to be working. Q152 Chairman: It sounds as though you are quite optimistic. Mr Delay: I think we are optimistic but cautious. There are several opportunities which the implementation plan for the Energy White Paper as a whole presents us with. If we do not grasp those opportunities and really leverage what the European emissions trading scheme can offer us, what the European Buildings Directive can offer us as a platform for progress, then we will be far less optimistic. It really is crucial that the key policy measures are now put in place to allow the delivery of energy efficiency over the next 10 to 15 years. Q153 Chairman: How much of all this do you think comes down to money? Do you think the government is spending enough to support the sort of initiatives you are involved in? Mr Delay: It probably is not in absolute terms, but I do think before we start worrying about money we have to worry about what we are trying to influence and it is really decisions and behaviours. If you look at energy efficiency in the business and public sectors, the barriers to energy efficiency are multiple. There has to be a drive to make something happen, to make change happen and more often than not it is very expensive simply to throw money at that problem. You have to find some other way of driving people who want to do something differently. The climate change agreement is a very nice example where essentially a relatively low cost measure has brought about a significant change in terms of behaviours. There is the question of finding the solutions and proving that the solutions are effective and practical in the real world. The programmes the government has put in place over the last decade or so have largely highlighted the potential for energy efficiency, so there is not too much of an issue there. Then comes the question of finance and this is really a very difficult one. Most energy efficiency measures are MPV positive. In pure economic terms, they are cost effective today, but they are not being taken up. In the vast majority of cases it is because they rely on a payback of maybe two or three years for organisations with a budgetary outlook of one to two years. They simply fail on the simple measure of payback, when in fact they are MPV positive measures if you take a five-year outlook. Q154 Chairman: Is that where you think the taxpayer needs to step in? Mr Delay: It is where a number of things can happen and one of the questions is: what is the most efficient economic instrument to change the behaviour at that point. An example would be loans. We do believe that there is a case for very small organisations, who simply do not have the finance, to take on board an interest-free loan, repay the loan out of the carbon savings and the cost savings which they will generate over time and for them it is simply a solution to a problem. For a small organisation which cannot afford the energy efficient boiler, it is the way round that. For a much large organisation, a more sophisticated organisation, then an enhanced capital allowance which provides a lower level of financial support straight through to the corporate balance sheet is an effective way of dealing with the same problem. It is a case of picking the right financial instrument for the right class of consumer to make the difference. Q155 Chairman: It can be quite expensive, can it not? The emissions trading schemes cost the taxpayer something like £200 million. Mr Delay: That essentially was a kick start to a new programme. Q156 Chairman: A hell of a kick. Mr Delay: A hell of a kick. Q157 Mr Chaytor: In your written submission you refer to the analysis you have done of the impact of the Energy Action energy scheme and say that this implies a cost in terms of CO2 saving of between £8 per tonne and £39 per tonne, a ratio of 1:5, a huge differential. Which are the most cost effective elements of this scheme? What measures deliver CO2 savings at £8 a tonne and which deliver it at £39 a tonne? Mr Rea: You can break Energy Action down into three customer segments: we have the bespoke segment, where we typically work with larger organisations; we have a standard offering which really works with medium-sized companies and then we have a general service which is the mass market in SMEs in particular. The cost-effectiveness varies, depending really on the size of the company and the energy bill. It is most cost-effective when we work with large organisations, as you would expect, and least when we are working with small ones. Mr Delay: The range you refer to is also a range which reflects the different approaches to attribution. It is very difficult to say exactly how much of a saving is down to any one organisation or indeed policy measure's influence. Q158 Mr Chaytor: Methodological problems in calculating this. Mr Delay: It is just a reality. What we try to do is reflect a realistic range. Q159 Mr Chaytor: What do you think it ought to be? When you did the analysis did those figures surprise you? What do you think from government's point of view is a cost-effective price to pay? Mr Delay: There are two things. The way in which we did the calculation is the simplest way in which we could have done it, that is we simply took the year one savings against the year one costs, recognising that in most cases the savings will then have consistency over a number of years which will bring down the effective cost of the first implementation. Those figures are actually fairly low; if you take into account how many years of consistency you will gain, those figures would all come down. It is not surprising that the larger the organisation you are dealing with the more cost-effective it is to make change happen, particularly if what you are fulfilling is overcoming a knowledge gap to influence a change in behavioural decision-making, as opposed to some direct financial incentive to some direct investment. The case is really that knowledge management or knowledge-based support for very large organisations will be very cost-effective. Q160 Mr Chaytor: At £39 a tonne is it not cheaper to build a new nuclear power station? Mr Delay: No. Mr Rea: No. Q161 Mr Chaytor: It will still be cheaper to go for energy efficiency measures. Mr Delay: Absolutely. Mr Rea: It is the policy cost; that is the investment we make with the programme. If you look at the net cost to UK PLC, it would be negative. Q162 Mr Chaytor: I asked earlier about the proliferation of programmes. Are you content that you have the right mix of programmes for the different segments of the market you are working in, or is there further streamlining and are you going to change the name to something else in the next year or so? Mr Delay: I think the Action Energy programme is fine as it stands. It already covers everything from very large consumers right through to public sector organisations and SMEs with appropriately targeted services and support. The innovation programme is something quite separate. Marketing of the innovation programme is really to a very small number of very specific organisations, be they research councils, universities, private equity investors, corporate investors, the City more generally. You can pretty much put down the target list for the Carbon Trust innovation programmes' audience as 400 or 500 contacts and as such it is much less a requirement to be sophisticated in the marketing of it in that we actually have day-to-day contact with pretty much all of those organisations. Q163 Mr Chaytor: In terms of the government's whole range of approaches to carbon reduction, do you think the proliferation of programmes and instruments there is a problem and would you argue for further streamlining there? Mr Delay: I think you should always try to meet consumer needs and customer needs. All I would say is that the customers who come into Action Energy as a programme recognise what Action Energy has to offer - it has a very high recognition rate - and do not appear to be confused. They seem to know that Action Energy is where they want to go for the support they want to get. Equally well, I speak to a lot of people who say they know about Action Energy, but they are dealing with this programme because that is appropriate to their needs. I do not believe the confusion is as widespread as might be perceived. Q164 Mr Chaytor: May I ask finally about the climate change levy and the effectiveness of that as a policy? The Chairman mentioned the costs. The other figure which has been suggested to us is the extent of the rebates here which are now totalling about £1 billion. If you have a policy which gives £1 billion of rebates to companies which are probably the most energy intensive users, is it not self-defeating? What is your estimate of the effectiveness of the climate change levy? Mr Delay: The first question is whether the original aim of the climate change levy was to provide a price signal or to provide a source of revenue to the Treasury. If it was to provide a price signal, it is a fairly small price signal. If you look at energy input prices over the last decade through a period of deregulation and privatisation, alignment with European prices, you will see that wholesale prices of pretty much any energy have fallen quite significantly. They are starting to go back up now, but over the period of the 1990s, they came down very significantly. The climate change levy is a very small increase relative to that decrease. If you were a large industrial consumer, you would simply not have noticed the climate change levy in most cases. The interesting point is the way in which climate change agreements, being a discount on the levy itself and a very significant discount at that, 80 per cent, have, through the simple act of obliging organisations to sign a legally binding document with government, changed the whole nature of energy efficiency and the debate about energy efficiency within many businesses. The decision-making framework has followed from that. No finance director wants to explain to the boss why the company has lost its climate change levy exemption or rebate, because they have not done what would have been very straightforward to do. Nobody wants to be in breach of a legally binding document that they have signed with government. So even though in many cases, you could argue that the financial incentive was not that great and maybe it would have been rational for the organisation to simply say "Forget it", we think they have gone ahead in many cases and done a lot more than they needed to. Q165 Sue Doughty: The Treasury anticipated that the cost of enhanced capital allowances in 2001-02 and 2002-03 would be £100 million and £140 million respectively. What has been the uptake? Mr Delay: The simple answer is that we do not know and we are pretty confident that nobody else knows. The way in which the enhanced capital allowances' scheme was introduced has made no provision for strict reconciliation of uptake on an annual basis. There is simply no way of measuring the uptake of the ECA scheme which we administer. What we are having to do is carry out an assessment on behalf of the government departments who are concerned and very interested in finding out what the uptake might have been, to estimate what that assessment and uptake really is. There is no measure that we can actually carry out on the programme itself. Q166 Chairman: I am just staggered by the complete lack of information on this. Do you not think it is the job of the Inland Revenue to find out? Mr Rea: We have had this very conversation with them on a number of occasions and the issue from their perspective is about bureaucracy and red tape in business. Their view is that putting a few more boxes which businesses need to fill out on their tax return is an issue and something they do not want to do unless it is really justified. They struggle with this as well, particularly around ECAs, and they have come to the view that in this particular instance it is not, although from our perspective it would be extremely helpful, if we could do that. Chairman: We will take note of that. Q167 Sue Doughty: I think we had one area of shared grief amongst our earlier witnesses with short-termism in government strategy. You were talking about a lot of the organisations having taken it up very well with you. Looking at public buildings, say hospital or university expansions, they are the sorts of organisations which cannot necessarily benefit from capital allowances, they will look at their bottom line all the time in very straitened financial circumstances and they are the sorts of people when there is short-termism, who are less like to look at sustainable approaches to energy when they have that choice. Are you seeing examples of this? What are your comments about this grief about the short-termism in government strategy, meaning that we go up the hill and then we go backwards down it again? Mr Delay: On the issue of public sector organisations and how they can handle this, it is very true that the public sector does not benefit from many of the financial incentives that we have just been talking about for the private sector. Enhanced capital allowances do not apply to the public sector and indeed many other forms of support and incentives do not apply in the public sector. Yet, despite Treasury guidance, it is pretty clear to us that most public sector organisations we deal with have very real budgetary pressures which mean that they focus on this year's budget as much as any other organisation in the country. There are really two things which we are trying to do to push this forward and one which is really critical is a large-scale one which is closer to our hearts. The first is to try to ring-fence in some way energy efficiency funding within the local authority for its own estate. We are working at the moment on a local authority energy efficiency fund which would match fund sums provided by local authorities for energy efficiency over a period of years and create essentially a loan fund, where we would provide half the funding and the local authority would match it. It is a way of ring-fencing some local authority funding for a period to support energy efficiency projects within the local authority estate, but it is a relatively small-scale activity, though an interesting one and it appears to be going very well. I wrote to the chief executives of 411 local authorities and over 70 of them have come back and said yes, they would like to be part of the first wave of that, which is very promising and indeed well beyond our current budgetary capabilities. On a much larger scale, the real issue is PFI, the degree to which the very large public sector procurement of services does not tend to reflect energy efficiency in any shape or form whatsoever. Very, very few PFI contracts for new schools or hospitals have any element of energy efficiency win-win built into them, even though it is well understood and accepted that it would be possible. Q168 David Wright: I find that quite shocking in the sense that the point you were making earlier was that people would not invest on the basis of a three-year timeframe. We are talking about a 25-year timeframe for PFI. It is just a nonsense, is it not? Mr Delay: Yes; it is. Chairman: This may be something the Committee will wish to return to at a later date. Q169 Mr Chaytor: You mentioned writing to 11 major companies recently. Have you had any dealings with the Sergeant-at-Arms about carbon reduction on the parliamentary estate? Has this been brought to your attention or have you thought that there is a high profile initiative for The Carbon Trust? Mr Delay: As yet not, but it is true to say that we have quite recently signed agreements with Defra and with the Inland Revenue as pilot customers for a major programme. Q170 Mr Chaytor: So you are making progress. Mr Delay: We are. Chairman: Thank you very much indeed. It has been illuminating and very worthwhile from our point of view. Thank you. |