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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 4 House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE Environmental Audit Committee
Wednesday 19 May 2004 MR TOM DELAY, MR MICHAEL REA and DR PETER MALLABURN MR PHILIP SELLWOOD and DR NICK EYRE Evidence heard in Public Questions 285 - 397
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Wednesday 19 May 2004 Members present Mr Peter Ainsworth, in the Chair Mr Colin Challen Mr David Chaytor Paul Flynn Mr Mark Francois Mr Malcolm Savidge Mr Simon Thomas Joan Walley David Wright ________________ Witnesses: Mr Tom Delay, Chief Executive, Mr Michael Rea, Director of Strategy, and Dr Peter Mallaburn, Head of Government and International Affairs, the Carbon Trust, examined. Q285 Chairman: Welcome. Welcome to a very hot Committee Room, hot but probably environmentally friendly, we will find out later. Thank you very much for coming back to the Committee. It is a pleasure to see you again. When we saw you last, in February, you referred to a carbon gap, which you put at, I think, around six million tonnes, if I remember rightly, by 2010, between the aspiration and the likely achievement. That was the thing that worried you and obviously the gap which needed to be filled. At that time you stressed the importance of the forthcoming implementation programme in mapping out the measures needed to fill that gap. We have now had that Implementation Programme, and of course we have had the Budget as well, and there is a feeling that really neither contains the sorts of substantial measures which are needed to make the leap which you identified before. Do you share in that view? Mr Delay: I am going to suggest that Michael here answers more fully, but I think the answer may not be the one we all want to hear. It is not clear. I think the Implementation Plan, in itself, is not a bad plan and it does cover a great deal, but an awful lot of it is still aspirational and has not been anchored in precise terms. If all the measures in the Implementation Plan were to be put into action effectively then I think there would be a very realistic chance of addressing the gap and setting the course for 2020. I think the big question is are they going to be put in place with anything like the rigour that would be required reasonably to address certainly the uncertainty around meeting that 2010 target, and the whole issue of building a platform for 2020? It is not as clear maybe as we would all have liked to see. I think the elements are there in the Implementation Plan but probably not in sufficient detail to give any definitive view. Mr Rea: I think that is right. I think when we wrote back we talked about the overall gap in business and the public sector being in the order of 16 million tonnes, and we said that effective implementation of Plan measures could deliver a further ten to 12 million tonnes. The things which are correct in the Implementation Plan, if implemented to the full degree, would deliver that extra ten to 12 million tonnes, but there would still be a gap, I think, in our view. It is two things. To pick up on Tom's point, one, it is implementing everything in here to the nth degree. I think that things like that are the right things but we need to get on and do them. Even doing that there is still a gap, in our view, so we need to bring forward new measures to fill that to 2010 and beyond. Q286 Chairman: I wonder if you could help us a little more by giving some examples of where this lack of clarity lies? Mr Rea: One I would pick out would be that the Plan talks about public sector leadership in terms of building procurement, so it talks about procuring buildings that are top quartile in terms of energy efficiency performance, which we think is absolutely the right thing to do. What it does not talk about is how we are going to do that, how we are going to make that happen, what is the methodology which defines how we measure top quartile, how that links to the EU Buildings Directive and what would be a sensible timescale to roll that out across the government estate. As ever, the devil is in the detail, and I think that is one good example. Q287 Chairman: I heard what you were saying earlier - sorry to interrupt - about if it is all implemented fully probably you will be okay, but if it is as vague as that how on earth can it be implemented at all, let alone fully? Mr Delay: My sense is certainly that the timing of the Plan was difficult for Government, in that it was pretty much a year after the publication of the Energy White Paper, allowing for a period of reflection, so that one could reflect on one full year, but it was before the current spending round has been discussed and agreed. It is before the Climate Change Programme has been reassessed, which is in the Plan for this year. Therefore, it is quite difficult to be precise around the numbers when neither the funding nor the gap has been confirmed by Government's own analysis, which is due to be carried out this year. I think there will be a case to say this is a Plan which, for various reasons, was published maybe six months earlier than would have been ideal. Q288 Chairman: Presumably, it is also a problem that we have not yet seen the revised UK energy projections? Mr Delay: Indeed. Q289 Chairman: It might have been logical to have had those before debating any of this, might it not? Mr Delay: That is a reasonable view. Q290 Chairman: That is a cautious answer, but I take it that you agree? Mr Delay: Yes. Mr Rea: The numbers we quote are our numbers. That is what we try to model. We try to take our view on where we think emissions are going over the next ten years. Clearly, Government have much wider access to data than we have, and I think it would have been helpful to have that earlier in the debate. I think, from our perspective, the debate now shifts, in a way, to the Climate Change Programme review and I think we need to be realistic about what is the real level of gap and therefore what we need to do to close that gap. Q291 Chairman: When do you expect the energy projections to be published? Mr Delay: I think that would have to be a question for the government departments responsible. Q292 Chairman: You have not heard anything? Mr Delay: No, we have not. Q293 Chairman: Do you think that, in a sense, too much is being left to future reviews? It all seems to be being pushed off. It was going to be the Implementation Plan then it was going to be the Budget, and now we are looking at the Climate Change Programme later in the year, the Buildings Directive, the changes to Building Regulations. It is always something which is going to happen at some point in the future and you never quite get there? Dr Mallaburn: I think there is an issue which we have not mentioned, a very general point, which is partly encouraging and partly discouraging. There is a link between the Government taking strong policy decisions and cost-effective responses by programmes like ours and those of our colleagues behind, and this is a nettle that they are starting to grasp but really they do need to grasp that quite firmly if this Plan is going to work. I think they need to do the same in the Climate Change Programme review. I think, in a sense, they have started to think about that, and this leadership in public procurement is a very welcome step forward but that needs to be rolled out much more widely across the Programme than currently it is. Mr Rea: There is quite a good forcing mechanism, in that we have a 2010 target for a 20 per cent reduction in CO2. Target or aspiration, I think you can debate the language, but let us call it a target. I think, actually, sticking to that in terms of the Climate Change Programme review would be a very good forcing device, really to say, "This is the gap and this is what we'd need to do to close the gap," because, in effect, time is running out. Mr Delay: Certainly, all the work that we have done suggests that there is a real complementarity between strong policy measures and the kinds of support measures that we and others can put in place essentially to address knowledge gaps and small financing gaps, but which nevertheless are pretty sterile unless they are on the back of very strong policy measures. All the analysis we have done suggests that the stronger the policy measures in their entirety the easier it is, relatively, to find support measures, and find support measures to fill the gap. If we end up in the situation where, for various reasons, the policy measures are not as strong as they might be, then one's only alternative, if really one is to address the gap, is to start funding and subsidising measures which are in themselves cost-effective. This is Government subsidising NPV positive measures, which does not make a lot of sense. I think there is a very strong imperative to come up with the strongest possible set of measures, be it around standards, building regulation and labelling, Climate Change Agreements, Climate Change Levy measures, and so on, essentially to make it as cost-effective as possible to meet the target and address the gap which is there. The alternative is a very difficult situation where in two or three years' time we will find ourselves with an even bigger gap and facing really little other option than basically to subsidise the measures required. Q294 Chairman: It was interesting, in fact, that the Implementation Plan differed from the White Paper in terms of the targets set. Actually, overall, it increased the amount of carbon savings that the Government say they are expecting, and, given that the domestic target was cut, the whole of that increase now is expected to come from the commercial industrial sector. Have you identified where that is coming from, and I am talking here about the increase to 12.1 million tonnes of carbon coming from the commercial sector? Mr Rea: I am looking at one of the pages from the Plan itself. The main changes that we can see pre and post the White Paper are around extending CCAs to other sectors, extending CCA targets and extending the deliverable from the Carbon Trust in 2010 from half a million to a million tonnes. I think that the three big changes in terms of meaningful numbers are, one, extending CCAs to other sectors, two, increasing CCA targets and, three, extending the deliverable from the Carbon Trust from half a million tonnes to a million tonnes in 2010. I think the other measures are swings and roundabouts. The deliverable from UK ETS has gone down but that has been brought back up again by the EU ETS. Mr Delay: I think you may well ask is that a credible shift? Q295 Chairman: Yes. Were you asked about it before it was announced, because you are going to have to deliver quite a lot of this? Mr Delay: With appropriate funding, and nevertheless focusing very much on what is cost-effective, I do not think it is unreasonable for us to deliver our share of that new target by 2010. I think the element on which certainly we gave a view, and which I think Government has taken note of but is probably less well-known, is the Climate Change Agreement success. Climate Change Agreements, very broadly, have overdelivered by a factor of three on what they were supposed to deliver. I think that does reflect the real meaning which many businesses attribute to a legally-binding commitment, built nevertheless around a voluntary target, between a business and Government. I think that is something which most businesses involved took very seriously, and as a result they overdelivered. Therefore, I think there is significant scope for both increasing the targets of Climate Change Agreements and extending their sectoral coverage. That was a view which we shared with Government before the Implementation Plan was published. Chairman: Thank you. Q296 Mr Chaytor: Within the Carbon Trust's own contribution to the targets, what is your estimate of the contribution of the Action Energy programme, in terms of emission reductions? Mr Delay: I suppose it is a question of how much we feel sure about and are prepared to back. We would say that to 2010 our contribution to effective emissions reduction is almost entirely Action Energy. It is our programme to reduce carbon emissions now. Our other activities are there very much to support early-stage technologies which will have real meaning in 2020 and thereafter, but relatively few of them will be material by 2010. In essence, Action Energy is what we will be delivering at 2010, with developments that we will be putting in place to ensure that it has as full an impact as it can. We will be looking particularly at how we can extend the potential for SME loans for working with very large companies on a partnership basis, and so on. If we take what we believe we can achieve and we attribute a sensible probability to achieving that, I think we feel reasonably comfortable with the figure that is in the Plan. Q297 Mr Chaytor: What are the figures in the Plan? Mr Delay: They are basic Action Energy figures and we see potential to go beyond that if the funding was available. Q298 Mr Chaytor: Can you remind the Committee what the figures are? Mr Rea: It is a million tonnes of carbon to 2010. Q299 Mr Chaytor: How reliable are these figures? I want to move on to the methodology, because obviously the Government's figures have changed, a reduction on the domestic side, an increase on the business side, but are you absolutely certain that there is a reliable methodology used to calculate these emissions figures, or are there competing ideologies and can people pick and choose? Who does the calculation? Who do you rely on? Do you have your own experts, does Defra do it, do they contract it out to some university department? How is it done? Mr Rea: In effect, we have developed the methodology to assess the impact of our programmes. We have a fairly rigorous process for Action Energy where we go out and survey the customers that we work with in terms of what is the overall impact in terms of emissions, have they gone up and have they gone down. In cases where they have gone down we have a number of questions where we try to assess our impact in terms of helping them to deliver those reductions. Depending on the size of the customer we have different methodologies. For customers with energy bills of more than £1 million we survey each and every customer we work with. For customers with energy bills of less than £1 million, we do it on a sampling basis and we do it on a statistically robust basis that statisticians will recognise as being sensible. We use an independent market research company to gather the data and then we use a technical consultant to consolidate the data and scale it up and give us the answer, so to the extent that we can have one, it is an independent view. As I have said, we developed the overall methodology about how actually you would do it. 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 saying "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. Q320 Paul Flynn: Do you see any other measures which can be introduced by either yourselves or Government? Are the other measures you are suggesting going to get us anywhere near the target for 2010? Mr Delay: At its crudest, you could have a CHP Obligation. Q321 Paul Flynn: There is an amendment to the Energy Bill which exempts CHP from the Renewables Obligation, which would give them a small financial benefit but possibly a significant one. Do you think that would work, or that could be used in any way? Mr Delay: It may well, but I do not think it will be the only thing. I think also the treatment of CHP within the European Emissions Trading Scheme and how that pans out eventually in the detail of the Scheme is equally important. Q322 Paul Flynn: Any more financial incentives? Mr Delay: I think financial incentives need to be looked at very carefully because of their cost. Q323 Paul Flynn: After we have looked at them very carefully, what conclusion will we reach? Mr Delay: I think we would find that, in many cases, CHP is a very expensive way of achieving an environmental aim under today's market conditions. That does not mean that in future CHP does not have a great role to play. Every scenario we have of a low-carbon economy has CHP central to the delivery of that end. Q324 Paul Flynn: The report last week on biomass by the Royal Commission on Environmental Pollution has some very trenchant things to say about the Government's policy on biomass and describes it as being fractured and misdirected. They pointed out that it was an important energy source, they suggested also that the Government were not achieving anything like as much progress as our fellow European neighbours. "I am disappointed," they say, "the energy environment has not developed as quickly in the UK as elsewhere in Europe." Is this a matter of concern to you? Mr Rea: I would say, yes. I think, as well as CHP, their future scenarios of how you get to a low-carbon economy biomass play a key part, so you need biomass as well as wind, and so forth. I think generally it is recognised, at least among the people I talk to in Government, that the approach we have taken to biomass over the past few years in the UK has not really worked. I think people are trying to think about, "Well, why is that and what can we do differently?" I think our own view is that in the past we have tried to create a biomass industry on a big scale and that has left real disconnect between the growers of biomass crops and the developers of biomass projects. What we would advocate as a potential approach going forward is to start on a much smaller scale to develop biomass supply chains, feeding into, say, two megawatt plants as opposed to ten or 30 megawatt plants, and actually use that foundation to grow a supply chain in a consistent way over time. Q325 Paul Flynn: Just to echo what you say, and what the Royal Commission said also, they looked at 14 different grant schemes and found not a single one of them had any national co-ordination with it. Is this typical of your experience and, certainly it is not working, do you have any further ideas on how to fix it? Mr Rea: I think actually taking a more local approach to biomass developing and thinking really about a local area. Q326 Paul Flynn: How can the Carbon Trust be involved in this? How can you help to promote biomass? Mr Rea: Biomass is one of these issues like offshore wind for us, in that with our current funding in this area of, say, £25 million a year we could put that into wind/biomass schemes. The approach that we take in terms of biomass is to say, "Well, let's invest £100,000 to understand how a policy regime might be put in place which would move the whole debate forward." That is one of the things that we have in mind to do this year, building on the work of the Government. Q327 Paul Flynn: Did you try a scheme for intervention? Mr Rea: Actually, what we want to do is take a step back and think of some of the ideas we had about what regime we would need to stimulate biomass, as opposed to investing in specific biomass projects at scale. Q328 Paul Flynn: The step back will be followed by a couple of steps forward, I presume? Mr Rea: Hopefully, it will be followed by some insights into how we could overcome some of these barriers to biomass. Mr Delay: I would like just to qualify that. I think biomass is quite interesting, along with CHP, in that, in many cases, it is a relatively mature technology. It is unlike many renewables, where we are investing today to see the cost of the technology come down to the point at which it is fully competitive. There are new technologies in biomass but many of them are well-tried and proven and the difficulty is finding a way of making them economic. I think there is a view that the complexity of the supply chain, having to get the growers and the buyers and the processors and the energy consumers all in a row, is actually where the challenge lies. That is why taking too large a scheme is fraught with risk and tends to fail, and why there may well be much more success, and indeed it will be following many of the European models, in having smaller biomass schemes, where there is a much closer alignment literally between the grower of the crops and the consumer of the energy. Q329 Paul Flynn: Does any of this explain why we are so far behind our European partners? Why have they been far more successful than we have, according to the Royal Commission's report? Mr Delay: I am not sure, is the simple answer. Certainly my understanding is that there has been greater investment in community-scale renewables, including biomass, in Europe than traditionally there has been in the UK. To some degree, that ties in with what I said I thought was the issue. To be honest, we do not know, and probably that is why we would like to spend some time and a very small part of our resource this year trying to understand it, because it does seem to us that there are some very differing views and we would like to get a firm fact base before, as you put it, we can take one step back and two steps forward. Paul Flynn: Thank you very much. I am grateful to you. Q330 Chairman: Can I try to pin you down on just one specific issue. You are aware that the Energy Bill, as currently drafted, contains an amendment which exempts CHP from the Renewables Obligation. Do you think that should remain the case? Mr Rea: I think it is something that needs to be analysed pretty carefully, because, from the numbers I have seen, the carbon benefit of doing it is relatively low. You have to look also at the knock-on impact, in terms of the broader renewables market. Q331 Chairman: Does it have to be done in a way which impacts on other renewables? Mr Rea: There are ways you can get around it, you are absolutely right. One of the things we hear a lot from the investment community is that, historically, and particularly over the past two or three years, the rules in the energy market have changed quite a lot. Therefore, investors will tell you, they attach a high degree of political risk to investments in UK energy. One of the things they advocate quite strongly is, going forward, actually to minimise changes. That is why, when we look at changes like this, we say you have to look at it in the round. You have to look at the benefit to CHP stacked up against what might be the negative impact on the renewables market more broadly. Q332 Chairman: If it is done in a way which did not impact on the renewables market more broadly, it is a net gain, is it not? The only thing the market has to react to is a rather more enhanced environment for investing in CHP, which is something which is sorely needed? Mr Rea: I suppose the thing you would have to look at then would be the cost to consumers. Obviously, the cost of such a change would have to be borne by somebody, and in this case it would be the consumer. Again, I think you would have to come across to one of the things that we are pretty passionate about, which is, would the investment be cost-effective relative to other things you could do with that resource? That is the key question. If we were looking at this as Government I think really we would want to understand the cost and the carbon benefits and the trade-offs, and once you were confident of those facts I think then you could make the decision. Mr Delay: I would like to add to one point Michael was making there. The economics of most renewables, under the Renewables Obligation, depend very, very strongly on the value of a rock and on forward estimates as to the value of a rock. Anything that casts doubt in the investor's mind as to how long that rock will be of that value is a real barrier to investment, and, given investment returns recently in the energy sector in the UK, it is a very, very sensitive issue. I think, all the analysis that needs to be done, you are absolutely right, there are ways in which you can do it without directly affecting the rock market. I think one needs to be able to explain that to the investor sector in a way that they accept is not tinkering with the rules, which ultimately might upset the returns they have seen on previous investments. Dr Mallaburn: In a sense, it is the same point that was made earlier about confusing people by changes and discontinuities in service provision, so it is slightly back to that. The investor community needs the confidence to be able to invest long term. Chairman: I did say I was going to try to pin you down. I do accept, I am not always successful in anything I say I can achieve. Q333 Mr Challen: Just following on from that, really I am getting a bit confused. Some people put too much blind faith perhaps in the future of renewables. As to what weight you put on the market, what weight you put on financial incentives, to what extent you pay heed to the Government's declared policy of not picking winners, and I think sometimes we do not pick any winners at all, this is all a very complex process. Obviously, NETA did it for CHP, you have mentioned that, and biomass is terribly complex, and we know the problems with offshore wind and onshore wind. Really, how do you weight these different factors? Should you not be saying to the market, "This is where we're going and you should just follow and pay heed to what we're doing," as it were? Mr Rea: I think there are lots of levels to your question, but if I start by talking about the 2010 renewables target and its deliverability. We have done some work looking at deliverability of the 2010 renewables target and in our view it is deliverable, primarily through onshore and offshore wind. There are a number of barriers to overcome that we all know of, around planning, investment, it is great around public acceptance, and so forth. I think our view is that, largely, Government have put in place a pretty good framework, in terms of the target and the Renewables Obligation. Our view is shared, I think, by investors and by industry, that Government should be working to overcome these barriers, and if they can then business and investors will come in and support the target and deliver the target. If you start looking then to 2020 and beyond and at earlier-stage technologies, such as wave and tidal, it is a completely different picture, and I think that is the area where we will focus more of our activity. Q334 Mr Challen: Is that an area where the Government should focus more of its attention as well, and funding? Mr Rea: In short, I would say, yes. We have looked at a number of early-stage renewable technologies and wave and tidal is a good example, but we think the UK is very well positioned in terms of developing a technology with terrific economic potential. There are uncertainties about whether the technology would work or not but, based on what we know today, we think that it would be sensible for the UK to invest a lot more in this technology, to move it down the cost cover and test if it can become cost-effective. We have done some benchmarking work, looking at what the UK puts into energy R&D research, and typically we are putting in about a quarter of what other major developed economies put in, so we are starting from a pretty low base in terms of overall level of funding. Going back to your 'picking winners' point, we prioritise very much our investment, in terms of the low-carbon technologies, going back to our £25 million of funding. We do not try to be fair and equitable and give some to every technology. We take a view. So we say which technologies we think have the most carbon-saving potential and in which technologies we think the UK has a potential competitive advantage and then we prioritise our investment in those technologies. Q335 Mr Challen: The Renewables Innovation review which you did with DTI obviously has brought out many of these features about the lack of funding and the short-term nature of it. When the DTI saw those results, did they say, "Oh, we've got to do something about this. Let's turn this around quickly because we're lagging behind"? What was their reaction? Mr Rea: It was not so much a reaction because literally we did it together, it was a joint exercise, so we were learning as we went. At the end of the process, we and they were fully behind the conclusions of the review. So, the things I have just said about lower levels of R&D resource in the UK and focusing on those technology areas where we can make the most difference, I think there was complete alignment between ourselves and DTI. Q336 Mr Challen: What sort of extra funding would you be looking for in the Spending Review 2004? Mr Rea: That is where the process changed a little bit, in that we did the review jointly with the DTI in terms of setting the overall direction. We came up with some estimates of what we thought were sensible and then the DTI took those forward and put in a bid to the Spending Review, but that was not something in which we were involved. To give you a sense of scale, we were talking in the order of, for earlier-stage renewable technologies, between £100 million and £200 million over the period of the Spending Review. Q337 Mr Challen: Would you be seeking more PSAs (Public Service Agreements) as well during this period? Mr Rea: In what context? Q338 Mr Challen: For example, getting government departments to be doing more in this field, promoting more energy efficiency, and so on, getting businesses to improve? Mr Rea: The short answer is, yes. Going back to our work in terms of energy efficiency, we think there is a lot more we could do with further resources. Q339 Mr Challen: In your supplementary memorandum you stated, and I quote, that: "Our performance targets for 2004-5 for CO2 savings and other metrics are due to be presented to our Board for agreement in March as part of our annual business plan process. Target-setting is dependent on a budget which for 2003-4 has not yet been agreed with our funding partners." Have your performance targets for 2004-5 been agreed now by your Board? Mr Delay: We have a Board meeting actually next week at which we will sign off finally those elements of our business plan and the funding. The funding agreement has been reached now with our funding providers - Defra, Scotland, Northern Ireland and Wales - and, very broadly speaking, our targets will be adjusted to suit. I think it is fair to say that we will put a strong emphasis in our own deployment of resource internally on tangible, reasonably short-term delivery of carbon savings, but nevertheless maintaining our activity in some of the very early-stage technologies that we believe have a long lead time but very real potential for the future. We will balance it between those two, and our Board meeting is actually next Thursday. Q340 Mr Challen: Did you spend up your entire budget in the last financial year and are you seeking an increase in this one? Mr Delay: Yes, we did. Q341 Mr Challen: Are you seeking an increase? Did you run a deficit or are you balancing the budget? Mr Delay: Basically, we have to get as close as we can to spending all of the monies allocated to us, and clearly some of our activities are held within one country's jurisdiction, other activities are spread across. It is almost impossible to hit precisely the amount of money that is allocated by the Scottish Executive, the Welsh Assembly, Northern Ireland, and so on. To within a very small margin we have spent all of our available funds last year, and we have made it clear that we have the capacity to invest a significant, but not very significant, increase on that next year. We do not believe it would be appropriate to ramp up, as it were, on investment ahead of our ability to deliver valuable and cost-effective savings. Q342 Chairman: Can you give us a figure for the amount by which you hope your budget will increase? Mr Delay: Our overall budget has increased by about 15 per cent, between last year and this year. I have not got the exact figures here. Q343 Chairman: Can you remember what it was last year? Mr Delay: About £60 million. It is about 69. Mr Rea: Yes, it has gone from about 60 to 69. Q344 Chairman: How much of this comes from the Climate Change Levy? Mr Delay: Thirty-three. Again, we can confirm those figures to you in writing, but I am pretty sure it is 33. Chairman: Thank you. That will be helpful. Q345 Mr Thomas: I wondered if there was a correlation between whatever the figure is and the carbon reduction that you are seeking to achieve as well. If your budget is going up 15 per cent, is the target for CO2 reduction also 15 per cent, or more? Mr Delay: It depends whether you are talking about carbon reduction in the short term or carbon reduction in the long term. Certainly I think it is appropriate to say that the carbon reduction in the short term should reflect the increased budget in the activities that deliver carbon reduction in the short term, absolutely. I think the danger is that we end up chasing short-term benefit and we do not invest sufficiently in the long term. We do have real concerns about meeting 2020 targets, about the UK's ability to look for 2020 targets, and so it is important that we keep a balance. Essentially, that is the key decision that our Board makes, in looking at our funding, what the balance should be between the pursuit of relatively short-term objectives and the medium term. At the moment, our resource is balanced pretty much 50-50 between those two areas. You are absolutely right, our targets for this year will reflect the fact that we have an increase in funding over last year. Q346 Mr Savidge: Is the funding you get from the devolved parliaments and assemblies roughly proportionate to what you are getting from the UK level, or how does it operate exactly? Mr Delay: That is a very complex question, down to the legislation under which the funding is provided is different, country by country. Yes, very broadly, the funding is in proportion to originally the Barnett Formula and, going on from that, an allocation of funding. It is not precisely that year on year, because different administrations are able to provide funding up to a certain level one year and not going forward. That is the broad picture, and again we will be happy to provide you with any details. Chairman: Thank you. That will be helpful as well. Q347 Joan Walley: Just picking up something that Mr Challen said and, at the very outset, our Chairman said about what more could be done, and Mr Challen was asking possibly about Public Service Agreements. Can I ask you to comment about the issue that you raised at the very outset about public procurement and whether or not you are involved with the Round Table which has been set up by Jacqui Smith, Minister at the DTI, looking at public procurement, and whether or not you have got a direct input into that, saying how carbon savings can be linked directly to this whole debate which is taking place across Government on public procurement policy? Mr Rea: We are not linked into the review directly per se. Q348 Joan Walley: Do you think that you should be? Mr Rea: I think we should be, yes. Q349 Joan Walley: Have you made representations about that? Mr Rea: Today is the first that I have heard about it. Historically, we have done quite a lot of work on procurement both in terms of buildings themselves and the equipment within buildings. We have been involved in previous Government reviews, in terms of procurement, and I think we have some good material in terms of how we would like to see this evolve. I think we would want to be involved very much in this review, in terms of sharing with both sides. Q350 Joan Walley: Presumably, in terms of the work that you are doing to advance the technology and change the way of working, that could be geared very much into that Round Table debate that the DTI are having? Mr Rea: Absolutely. Government procurement, in our view, is a lever which is very much underutilised, both in terms of doing the right thing by Government's own stock, as it were, but also in terms of having an influence on the market more broadly. Also, I think, both in terms of existing energy efficiency technologies and future renewable and low-carbon technologies, if used in the right way they could be a very cost-effective way of making a real difference. Joan Walley: Chairman, maybe we could ask the Carbon Trust if they could update the Committee on the progress they make in contributing to that review? Chairman: Indeed; assuming that they can get themselves in the door. Q351 Joan Walley: I am sure that this must help. Mr Delay: I am sure it will. Thank you. Chairman: Yes. We look forward to hearing of progress. Q352 David Wright: I want to turn briefly to the Sustainable Development Strategy and how you will contribute to the review of the Strategy. Will you be submitting a memorandum to Defra, for example? What is your overview on that review? Dr Mallaburn: We have been approached by Defra and we are happy to work with them in a limited way through our programmes. In terms of engaging in any material way, I think the answer is, no. I think our view of the Strategy is that currently it is operating at such a high level as to be really an issue that is beyond our remit. It is an extremely high level. In our final analysis, the work we do probably is too detailed for it to be put before the Committee. Q353 David Wright: It causes me some concern, in the sense that surely we should be drilling down priorities from that kind of material into practical proposals that you can implement, a small number of practical proposals which can feed out of a strategy like that, which people like yourselves can be implementing? Mr Rea: I think you are absolutely right. That is our view. I think what Peter was referring to, in terms of the current framework, it is too high a level. Therefore, actually to have impact you need to take it down to a level that is actionable. I think, within the latest Government consultation document, the area of climate change has a reasonable amount of flesh around the bone about what is happening and what is being done, but I think, over time, we can flesh it out more through the Climate Change Programme review. I think, in some of the other areas, they still remain at a very high level of abstraction. Q354 David Wright: That means they will not get implemented, does it not? Mr Rea: Taking the business point of view, I think one of the things about sustainable development is that the Carbon Trust and the business world generally think it is absolutely the right thing to do. The issue is translating that into a language or a set of actions which, as businesses, you can take forward. I think that is the challenge for us all in terms of taking what is absolutely the right thing to do or translating that into something that is actionable. Q355 David Wright: Where will that happen then and what forum will be used for you to meet in the middle, if you like, with Government to formalise some targets and priorities? Dr Mallaburn: In a sense, the work that we do in our day job is linking the environmental pillar of sustainable development with the economic pillar. I think that works because we make it both tangible, which is Michael's point, and in people's interest. We can have a debate with Government about how it operates and the lessons that we learned, and we have that debate with them now, but I think, as Michael said, probably that will take place through the Climate Change Programme review, which is looking at those issues in great detail. I think the problem about making things relevant and in people's interest is what we are about. Q356 David Wright: You said you are going to submit to Defra. Are you confirming that you are going to submit to Defra on the review with some proposals? Mr Rea: We have not taken a view on that. As ever, we will talk to Defra informally and feed in our thoughts and we will take a view on whether submitting a formal consultation would add value beyond that in due course. David Wright: I am sure the Committee would be keen to see any submission that you would make, so that we can match perhaps what you are putting in with what kind of response comes out of the review, so that would be helpful. Chairman: Thank you very much. I think that concludes our questions. Thank you very much indeed, we are grateful to you. There are a number of points arising which we look forward to hearing from you about. Thank you. Witnesses: Mr Philip Sellwood, Chief Executive, and Dr Nick Eyre, Director of Policy and Development, the Energy Saving Trust, examined. Chairman: Good afternoon to you. You are no strangers to this Committee. Welcome back, it is good to see you. Q357 Mr Francois: When you saw us in February, you expressed considerable hope that the Budget would include a raft of measures to promote energy efficiency. How far short of your expectations, if at all, did the Budget fall? Mr Sellwood: I think, broadly speaking, we asked for three sorts of measures to be brought forward in the Budget. One set were around VAT reductions. The second set were around introducing inefficiency charges for inefficient products. Thirdly, a bit more far-sightedly, we were looking for something around linking a financial instrument with the Home Condition Report, as and when it becomes available. I think it is fair to say that we have a pretty mixed view of how we fared. We were surprised, and pleasantly surprised, to discover that actually a VAT reduction was brought forward on heat pumps, which was not expected. We were disappointed that we did not get a clear mandate, so to speak, on micro-CHP. We are concerned that the Treasury still take the view on the imposition of inefficiency charges as being retrogressive for the poorer members of society, which is a view we do not take. We believe that the savings over the lifetime of efficient products more than outweigh the upfront cost, which, in fact, now, has virtually disappeared. We are still a bit confused as to why we were not successful on that particular measure. We have detected a thawing, I think would be the way I would describe the Treasury's response to our suggestion of linking fiscal instruments to the Home Condition Report. Certainly that has been a theme, and one of the things that we are going to be spending some time on in policy terms this coming year will be trying to flesh out some of the detail that is necessary to persuade Treasury of the merits of that particular approach. We have pretty mixed feelings, frankly, about the Budget. Q358 Mr Francois: Thank you. That was a very detailed reply. We know you welcome the landlords' energy saving allowance. How much impact do you think that particular measure might have? Mr Sellwood: When I thought about it first, I thought actually it would be quite significant, but then I talked to some landlords. What do I mean by that? I mean that, a significant rebate, if you are implementing energy efficiency measures, clearly this is a good thing. What I am concerned about and what landlords are telling us is that it will not bring forward investment, because if you can get 60 per cent rebate on something that is fine, but if you can get 100 per cent rebate by doing nothing in the first place that is even better. That is actually the response of many of the landlords to this particular option. Having said that, broadly we welcome it because we think there are quite a lot of responsible landlords out there with whom we can work in order to use this as a decent financial lever. Q359 Mr Francois Can I bring you back to the comments you made about the proposals to reduce VAT on heat pumps and the related point about micro-CHP. Firstly, the point about VAT and the domestic installation of ground-source heat pumps. Can you tell us a little bit more about your perspective on that particular measure and the significance of that? Mr Sellwood: It is significant but then you have to look at the upfront capital cost of putting in heat pumps, which, typically, and these are pretty much averages but none the less for that, for a new-build would be anywhere upwards of £4,000, and for implementation in a refurb considerably more than that. A reduction is significant, but in our view the reduction on VAT, and hopefully the inclusion in the next Energy Efficiency Commitment of micro-CHP, is much, much more significant, and we say that for one reason. When somebody is looking already, and unfortunately there is not much choice on the market at the moment, to buy something that looks like a micro-CHP product, they are comparing it with a boiler. Therefore, the comparison is between spending perhaps £2,000 on a highly-efficient condensing boiler or £3,000 on a micro-CHP plant, and broadly that is where we are at the moment. A reduction in VAT on that thousand pounds is quite significant, because there is a direct comparison being made, but frankly we do not expect a rush to the barricades for heat pumps on the basis of a reduction in the VAT. Having said that, I would add one caveat. I was looking at some figures today. We manage the small-scale renewable programme in Scotland and in the last two years heat pumps, along with solar heating, have been the number one choice, as it were, both of small-scale householders and small businesses, which actually we found quite surprising. Q360 Mr Francois You highlight CHP there but, as I understand it, a decision is going to be dependent upon fuel trials, which could last for up to two years. You have intimated that you think potentially it is quite important, but there does seem to be quite an element of jam tomorrow in all of this. What are your thoughts on that? Mr Sellwood: I think it is somewhat unfortunate, in that, through various means we managed eventually to get this decision from Treasury on micro-CHP, unfortunately just at the point at which the arrival of micro-CHP on the market seems to have moved further away from us. I think really it is just unfortunate timing. Having said that, and obviously colleagues behind me who are managing the field trials, we are absolutely clear, because we are working closely with the Carbon Trust on this, that it is absolutely essential that we get that right before we start giving too many significant price signals to the market. Nonetheless, it is a welcome move. Mr Challen: I did see you shaking your head when I asked the question about whether the two organisations should be joined together. Presumably the answer is no, from your point of view. I will ask you if you want to say anything about that when we return. Chairman: We will break for the division. The Committee suspended from 5 pm to 5.10 pm for a division in the House. Chairman: We can now recommence. Q361 Mr Challen: If I were an architect working for a large housebuilder, to whom should I go for advice on designing houses, would it be you or would it be the Carbon Trust, or both? Mr Sellwood: Actually, if it were managed housing probably it would be us, but probably it is neither. It would be SIBSE, probably, or CABE would be the organisations which would best advise on thermal energy efficiency, or possibly even BRE. We are not experts in that field. Mr Challen: I will not pursue that point. Q362 Chairman: Does not that illustrate one of the points which Mr Challen is making, which is that there are too many organisations, it is confusing for the public and it is confusing for business? Mr Sellwood: I do not agree. I think that the level of functional specialism that is required, in terms of delivering on the message, so, for instance, your example, the level of technical excellence that is required in housing, means that really if you did take your thoughts to the common conclusion we would have one absolutely enormous organisation with functional specialisms sitting within it. I do not think necessarily that is really what people are looking for. All I can say is, reflect, in a sense, because, obviously, we have talked about it in a very general sense, that we do not have lots of customers saying to us, "Why aren't you merged with the Carbon Trust?" If we get the focus wrong, if we approach the wrong audience with the wrong message, or we do not get the message right, then they are very quick to pick us up and say, "This is not actually what we want." We are clear this is less an institutional issue and more an issue about having the appropriate knowledge delivered to the appropriate audiences. Q363 Chairman: You do not think there is scope for a one-stop shop? Mr Sellwood: I think the one-stop shop would dwarf Tesco's, it would be enormous, because there are so many different audiences that need those functional specialisms. I am not saying it is impossible but it would be a very, very unwieldy organisation. Q364 Chairman: Can I return to the question of heat pumps. I am intrigued by this. It came sort of from nowhere, this Budget proposal, and I just wonder whether you have done any work since the Budget on the size of the market for domestic ground-source heat pumps? Mr Sellwood: The answer is we were as surprised as you were, because we had not put forward a particularly strong case for heat pumps specifically. We have done two things since then. One is that we have started to undertake some serious work, as I said, in Scotland, where we have a presence already in managing programmes around heat pumps. We do not manage that programme in England, unfortunately, which is an interesting observation compared with the last question, where I would agree there are some issues. Nonetheless, we are finding that there is clearly a significant market in certain localities, and those certain localities have a certain commonality - rural, off gas - so we are seeing already some interest in Northern Ireland, as I say we have got quite a lot of interest in Scotland. If you were to ask me how big the market is, we have no idea how big it is at the moment. Q365 Chairman: I looked at a website, because I am a diligent sort of chap, this is a little out of date, it is 2002, and I discovered that the Director of IEA Heat Pump Centres, making a speech in the Far East, I think in Beijing, said that probably there were between 100 and 200 installations of ground-source heat pumps in the United Kingdom. That does not sound like an awful lot to me. This sounds so marginal, so peripheral, that for the Chancellor to announce it as one of the key planks of his Budget, in relation to the whole question of climate change, frankly is insulting? Dr Eyre: I would not be as negative as that. Q366 Chairman: It is not your job to be. Dr Eyre: Let me remind you that the Chancellor removed excise duty from hydrogen when there was no hydrogen at all being used in UK vehicles. In the sense of giving the right signal to a future technology, it is important, but, yes, one might be slightly cynical and say, well, it is also rather cheap for the Treasury. Q367 Chairman: It will achieve the square root of nothing, in terms of reducing carbon emissions? Dr Eyre: If it were sufficient to make the market take off then it would do. The data we have got from our Scottish scheme is that in average applications it is saving two tonnes per household per year, and it is saving consumers about £250 per year. For the additional cost that Philip talked about earlier, that is unlikely, in our judgment, to make it attractive in the short term. Clearly, if somebody could bring down the cost and produce a cheaper heat pump then the market opportunity would be there, and in that case the VAT reduction would be welcome. Mr Sellwood: It is also just worth considering, and again without overstressing the point, in those areas, for instance, and it is to an earlier question that was asked, where gas is not freely available and people are relying on oil then suddenly this becomes a much better commercial proposition. Certainly, when you have got the combination of oil, rural and off gas, I do not think anybody is saying that this is the answer to the low-carbon economy. Q368 Mr Challen: Putting aside for one moment the major expansion in the Energy Efficiency Commitment, what other significant measures in the Plan would you identify? Mr Sellwood: I may dwell for one minute on the Energy Efficiency Commitment. We welcome the Plan, broadly, I suppose, because it delivers on some of the practical means of delivering on the policies, and with the exception of the absence of some of the fiscal measures we are pretty happy that the policies are in place. Where we are less happy, and no doubt we will come on to this, is the change, as we see it, in the post-2008 EE Commitment, which currently is still due to run at double the existing level to 2011. It was our contention, and still is, that, in order to make the step change necessary in terms of meeting the original targets, that needed to be three times the existing level if it was to deliver on the Energy White Paper original targets, and we may well come back to that, in terms of how the targets have changed. The second area where we are concerned is, even though there is a commitment in the Implementation Plan, just to give it some context, the Plan depends, in terms of delivering for the Energy Efficiency Commitment, 70 per cent depends on delivery of cavity wall insulation, four and a half million cavity walls. I have to tell you that the last three years have seen a three per cent, a five per cent and, with all that we and others have done, a 13 per cent increase, in the last three years, so in the last three years that market has seen less than a 20 per cent increase. Actually it has to double every year between now and 2010 in order to meet the overall target, so we believe there is still a lot to do in terms of incentivising that market. Q369 Mr Challen: Then what should the Government do to incentivise the market to achieve those levels? Mr Sellwood: There are some who would say this is all about a fiscal incentive or a tax incentive. We think there is room for linking some of those fiscal incentives, but, if you look at it commercially, the truth of the situation is that there is no real market in cavity walls, it is a subsidised market. You can go out into the market-place today and buy cavity wall insulation at a 90 per cent discount. The reality is that the barriers to entry in the market are customers' ignorance, and I mean ignorance in the sense of knowing what it is for. There are a lot of myths around how much it costs and also the sort of damage it does to your house. I think the answer is, and one of the things that we are actively involved in, this has got to be about a hard-fought, public education campaign, using the supply chain, using installers and using the big manufacturers. Q370 Mr Challen: Have you made representations to Government about that, and what has been the response? Mr Sellwood: We have. You will remember that we had a similar concern about condensing boilers, which has yet not gone away in its entirety. I am pleased to say that, as a result of what we talked about last time, in terms of persuading a combination of DfES, the Treasury and others, we have been able to put together a fairly detailed training programme. We have some confidence, growing confidence but I would not say certainty at this stage, that we will be looking to train upwards of 50,000 heating installers and plumbers in the next 15 months, ahead of the change in the Building Regulations. Government and the private sector and ourselves are working together to deliver that. The biggest problem that we have with something like cavity wall insulation, which is such a key measure, is that actually there are 150,000 installers. The average installer is one man and a white van, and they do not have, in the same way that gas installers have, a trade association, like SEGA, to which they belong, so it is very difficult to access these individuals within the supply chain, but it is a pretty key job. Q371 Mr Challen: It sounds like a good opportunity for some Polish craftsmen to come across and do the job for us. The Government has revised down its domestic energy efficiency savings from 5MtC to 4.2MtC. Do you have any explanation for why that has happened? Were you consulted on it? What representations did you make about that, if any? Mr Sellwood: We were very involved in developing the Plan, as you can imagine, on the basis that we are one of the major delivery vehicles for delivering the Plan. We have to say that we did not have the final decision, in terms of the figure, and we have to say also that we do not agree with it, for three reasons. For those who are not fully conversant, it has moved from five to 4.2 and we take issue with three things. One is, you will remember that a significant part of the first Energy Efficiency Commitment is the delivery on appliances and white goods. There is something called the market transformation effect, i.e. if we subsidise or give grant aid through EEC to only 50 per cent of white goods, what it does not take into account is the other 50 per cent which are not subsidised by energy suppliers and retailers. This is a recurring annual saving, and for some reason that has not been taken into account. Certainly we would like to make, and have made already, additional representations to Defra to look at those figures, because we are not convinced they are correct. Dr Eyre: The assessment that we made, in advance of the Energy White Paper, was that the scope for carbon savings in the white goods sector was approaching one million tonnes in this decade. Although we have not got access to the way that Defra have come up with their calculations of 0.1 million tonnes, i.e. ten times smaller, I think, even without access to that information, we are fairly sure that it is a serious underestimate of what actually will be delivered by the policies which are set out in the Action Plan. We are not saying in this case that more policies are needed to deliver the carbon savings, we are saying the converse of what is often the problem, that actually the policies are there but the carbon savings have not been counted. Q372 Chairman: Mr Sellwood, you had some other reasons? Mr Sellwood: The second I have referred to already, which is the gap, in a sense, between 2008 and 2011, at double, as opposed to treble, which was what originally we said needed to happen in order to deliver an additional 700,000 tonnes of carbon. We do not have an answer as to why that has changed. It may be that, with the onset of emissions trading, there is a view which says that when that becomes available the Energy Efficiency Commitment will be less effective. We do not know that, but certainly it was our contention, in order to meet the original target, it would need to be at triple status. The third thing is, again, I have referred to it adjacently, that there are a number of measures which have not been factored into the Plan, even though certainly they are going to be within the lifetime of this Plan. The first one I mentioned was the advent of the Home Condition Report, which will require every home to have an energy rating. It is our view that if we could link that energy rating to a stamp duty rebate and/or surcharge then this would be a powerful financial motivator for the 1.2 million people who move every year actually to do something about energy efficiency, and that is not in the Plan. We think those three things together would more than reach the target that was set out originally. Q373 Joan Walley: I would like to come back on that first point, in view of the Energy Bill, and the implementation, if you like, of the Energy White Paper into the Energy Bill, and the bearing which what you have just said has on not just the Budget but on the work which is being done to legislate for those reduced savings. You said that you have been very much involved in developing the Plan and that you were going to be the delivery vehicle. I wonder what talks you have had with the DTI about the way in which there is going to be legislation now to implement that? Mr Sellwood: Obviously, we talk to the DTI, Defra and, with our other hat on, DfT constantly about the development of the Plan, or both Plans, the Transport Plan and the Energy Plan. At the moment it is quite a timely meeting. Literally, we have come fresh from this, in terms of the Implementation Plan being published last week, so as yet we have not had any further discussions, but obviously, through (SECN ?) and others and talking direct to DTI, we will be making our representations. Q374 Chairman: Presumably, to the extent that the target for domestic carbon saving has been reduced, your job has just got a lot easier? Mr Sellwood: It is not, actually, because we are in the process of putting into place quite sophisticated partnering arrangements within supply chains, and you could say, well, we could take our foot off the accelerator and coast a bit. But, because, as I said earlier, there is so much emphasis on two or three major things which need to be delivered, our concern is that if one or two of those major things are missed, like the cavity wall insulation target, we could run round and create huge amounts of activity in other areas but it would not make up the shortfall. I suppose, in the short term, the answer to your question is, yes, it would, but actually sitting here reflecting back on the target then I think it would not be easier. Dr Eyre: I think, Chairman, we will want to take a more helpful approach to Government. Reflecting on the points which were made by colleagues in the Carbon Trust about the likely gap in the Climate Change Programme, I think we will want to stand ready to help Government raise this target back up to five million tonnes, or higher, when it feels that is necessary, when it reviews the Climate Change Programme. Q375 Chairman: I am sorry, I do not understand this. The target has come down, you are worried about a whole lot of issues which are going to make it very difficult to fulfil the ambitions which you set yourselves. If the target had remained where it was you would have missed it, if you were going to miss it, by an even wider margin than you are likely to miss the reduced targets, surely? Mr Sellwood: No. That is assuming you think the figures are correct in the first place. Dr Eyre: No. We are very confident that the policy measures are in place to deliver the 4.2 million tonnes, the new aim in the Action Plan. Indeed, because of the issue about white goods, we are confident that the policy measures in place will deliver more than 4.2 million tonnes. If it were still at five there would be challenges and it would require the Energy Efficiency Commitment to be increased and some additional measures to be put in place. We think that is the sort of challenging but achievable target that Government should be setting within the Action Plan if it is to deliver on its broader goals that are set out in the Energy White Paper. Q376 Joan Walley: You still have not said, in reply to Mr Challen's question, why you think Government has reduced it from five to 4.2? Dr Eyre: That is because honestly we do not know. Q377 Joan Walley: Have you made any attempts to find out? Have you spoken to the civil servants about it? Dr Eyre: We are beginning to do that, yes. Q378 Joan Walley: You have not got any theories of your own as to why this has happened? Mr Sellwood: My view is that we want to operate only on the facts, and the facts are that until we were sure of our own facts I think it would have been a bit previous to be talking to Government about how wrong they had got the figures. Certainly, now that we are confident of the figures that we have, we will be going back to Government to help them readdress that target. Q379 Joan Walley: Am I not right in thinking that this is going to be considered in legislation tomorrow? Dr Eyre: No. We do not think that any more primary legislation is needed, other than the legislation which is being discussed on the Home Condition Report within the Housing Bill. The primary legislation for Building Regulations, the primary legislation for the Energy Efficiency Commitment is already in place. Q380 Mr Challen: Can I sort out just exactly what these figures are. Are they targets or are they forecasts? Mr Sellwood: As far as we are concerned they are a target, but as far as Government are concerned they are an aspiration. Q381 Mr Challen: You made them a target yourselves? Mr Sellwood: It is not for us to say that five million is the target, that is not our role and Government would not give us that role. Our role is to ensure that when we say something can be delivered the facts back it up. It is a bit like Tom was saying earlier, or Michael, we like to think that these are targets. If you talk to Government, they will say that they are still aspirations, but our view is that, in order to measure them, we want to see them firmly as targets. Q382 Mr Challen: Of course, in order to achieve them you have to be given the support, the finance and all the rest of it, to do so, and if their aspirations are set lower than what your aspirations are, if you like, then where do you find the money to finance the gap? Are you able to do that? Mr Sellwood: The answer is, we will not be able to. Q383 Mr Challen: The impact then is going to have a concrete effect, this gap? Dr Eyre: Can I add to that, and hopefully not confuse the semantics even further, but I think, technically, the English component of the 4.2 million tonnes is the energy efficiency aim which Government is required to set under the Sustainable Energy Act which was passed last year. The distinction between a target and an aim and an aspiration I do not want to go any further on, I think. Q384 Mr Challen: We are getting to the stage where we could fuel a power station with all these different reviews, aims, objectives and aspirations. There is another aspiration in the business and public sector then to achieve 7.9. Do you think this increase is based on a robust analysis, or is this an easy target? Mr Sellwood: I think I can only defer to my colleagues behind me. I do not think we are qualified to comment in the level of detail on business and the public sector in the way that we would on the household sector. I think that would be speculative. There is no reason to believe that it is not robust, let us put it that way. Q385 Mr Challen: The Plan includes, in its list of future commitments, the need, and I quote, "to review, once the revised UK energy projections are available, the scope for increased activity to promote business energy efficiency...by the end of 2004." How much of a problem has the delay been in producing the revised UK projections caused? Mr Sellwood: Again, I do not think it is squarely in our field. Dr Eyre: As I said before, we are confident that the policies in place deliver the savings that are set out, of 4.2MtC. The issue of the energy projections is against what baseline are those savings to be measured? Until you can answer that question then you cannot say what the national level of carbon dioxide emissions will be. That is why it will be an issue within the Climate Change Programme review, in the context of the Government's aim for a reduction of 20 per cent by 2010. These numbers are about the savings but we do not know quite from what they are savings. Q386 Joan Walley: I want to carry on the question that we had about the architect and to whom the architect would go for advice. I wonder about the area of the Sustainable Buildings Task Group and what that has done, and your work on that, whether or not that is setting out, if you like, the framework which would provide the architect with the answers about how to deal with this issue? Mr Sellwood: It has been absolutely central to that Group. I chaired the Energy Group and was very much aware, as were other colleagues from water and waste, that the issue which has been raised here today, in terms of the number of organisations, the number of codes, and so on, is even more of an issue within the construction industry. What we sought to do really was three things within the Task Group in the report. Firstly, to say to Government that it is entirely appropriate that one organisation only, and you will smile as I say this, should be responsible for the development of a single code for sustainable building, whereas at the moment we have got, I could not tell you how many, many different codes which address the building issue. What we have sought to clarify is who should be doing this and what that code should include, although we have not determined the code because clearly that is a matter for more expert advice. Thirdly, we have given Government a series of options, some of which we have touched on here today, in terms of fiscal incentives, labelling, information, more demand-led instruments, which will assist and bring consumers forward into demanding sustainable buildings going forward, not just in terms of the new-build that is going on in Thames Gateway and elsewhere but also in terms of the refurbishments which need to take place in a vast majority of the stock in the UK. Q387 Joan Walley: In the light of Spending Review 2004, where we are waiting on every indication from the Chancellor as to what money is going to be there, what do you think needs to be there in that announcement to satisfy your hopes that will come out of the Sustainable Buildings Task Group? Also, can you give some indication of the implications for skills and training, in terms of the new construction skills that we need, in the light of the money which is needed for the further education programme? Mr Sellwood: Just to answer the second one first, obviously the Egan Report has addressed the issue of skills and skills in construction, but it was quite interesting that early on in the work of the four groups, energy, water, waste and building materials, skills was a common theme that ran throughout. That might be about lack of skills of the existing workforce, or in some cases it might be the fact that apprenticeships, for instance, just do not exist in some parts, so it has been very much a common theme. One of the things that we have been talking about is the sort of scheme to which I was referring earlier with regard to plumbers and gas installers, where there is, I think I am right in saying, a unique combination of private sector, public sector and Government working together to deliver training modules which are City and Guilds accredited. That is the sort of model we think might be appropriate to deal with the issue of skills shortages in some of these areas. In terms of the first piece, the interesting thing is that we realised very soon, probably after the first plenary session of this Group, that what we did not need to do was invent anything to solve the issues that we were facing. There are no great technological silver bullets necessary in order to deliver sustainable energy in buildings. There are no large sums of money, necessarily, that need to be made available. There is no reason why many of the issues of thermal efficiency cannot be addressed within the existing building footprint. Frankly, our biggest problem is that the standard of housing which is being built currently is not very good, and that is why we have moved towards a single, enforceable code of practice. The answer to your question is that the report does not command or need hundreds of millions of pounds of resources, it needs the bringing together of existing legislation and codes under one body, effectively mandated, in terms of being enforced. Q388 Joan Walley: Are you confident that is being done, and who is leading on this? Mr Sellwood: I am not confident it is being done at the moment, clearly, because we know the work that we, BRE and others have undertaken is that if we were to want the code of practice to be enforced tomorrow, and I do not mean at the very best of standards, I mean at the just above Building Regulations standards, currently two-thirds of housing built today would fail the code, and 90 per cent would fail on thermal efficiency. To you and me, that means leaky windows and doors. Q389 Joan Walley: That is quite an alarming statistic. On that note, may I wish you a safe journey back. I realise that you have to leave shortly. Mr Sellwood: I have to go to talk to your Welsh colleagues in Cardiff, but I can stay for another few minutes. Q390 David Wright: You will not be surprised by my questions because you will have heard them from the gallery a few moments ago. They relate to the review of the Sustainable Development Strategy. What role will you be playing and what submissions will you be making there? Dr Eyre: I am tempted to say you will not be surprised by my answer. We share the analysis that you heard from colleagues in the Carbon Trust, which is essentially that sustainable development is a very helpful framework for people to think in and it is important that Government is committed to it. Certainly we are pleased that energy and climate is proposed as a major theme within the consultation, but as a strategy it is not a driver for what we do. It has got two pages on energy and climate and there are one hundred pages here on energy efficiency, on its own. It is at this level of detail of Government document that we find our practical drivers. We will be responding to the Strategy and taking part in an innovative online process that Defra have got, but we do not see it as being an earth-shattering event for the energy and climate sector. Q391 David Wright: Will you be going back with a small number of targeted ideas to try to influence the Strategy, to break it down to something which is deliverable? Mr Sellwood: I think what we will be seeking to do, and this is not ideal from a strategic point of view, but in fact what I think will happen, effectively, is that the Strategy will become bottom-up rather than top-down, what we want to do is make sure, and one of your colleagues made the point earlier, that the Strategy relates to reality. What we will do is feed in some very clear, focused priorities on which we wish to deliver, to make sure that Strategy reflects those priorities. Ask me if that is how it should be done, perhaps not, but that is the reality with which we are working. Q392 David Wright: It would seem to me that your replies earlier about new house-building, for example, are crucial issues, are they not, about how you need to comment into the Strategy at a high level, the fact that we are not meeting targets on such a large number of new-build? Mr Sellwood: Yes, I agree. Chairman: Given the number of new houses that the Government wants to build, it assumes an even greater significance. That is the subject of our next inquiry. Q393 Joan Walley: We were talking earlier on about the heat pumps and the huge amount of savings that there will be as a result of that. There is something in the Budget about rented accommodation. What do you think the impact will be of the measures of the energy saving allowances scheme in respect of rented accommodation, and do you think that there should have been a greater emphasis on the owner-occupied sector? Mr Sellwood: The sector is an important one, representing about ten per cent of the total sector, so it is not insignificant, and really it is quite important that instruments are used to incentivise landlords. I think I said earlier that what it will do is, for those enlightened landlords it will be a very good measure, but our general view is that we find this particular category quite difficult to motivate. I suspect that we would want to see more stick and less carrot, frankly, in this particular area, because all the evidence before us, from many years, is that it is a notoriously difficult area to get people to invest in when they are not seeing a direct relationship to their own earnings. We welcome it but we are not expecting it to change the sector. Q394 Joan Walley: I wonder whether Dr Eyre would like to comment on the potential in respect of the owner-occupied sector, because I realise that Mr Sellwood has to catch the train? Mr Sellwood: Thank you, Chairman. Dr Eyre: I think I agree with the thrust of your question, which is essentially that there are seven times as many owner-occupied properties as private rented sector properties, their energy efficiency is better, but not hugely better, and therefore we need policy instruments to address that sector as well. Q395 Joan Walley: What would you suggest? Dr Eyre: The one that we flagged earlier. We think that the information which will come out of the Home Condition Report should be linked to an incentive. I think it echoes what you heard from the Carbon Trust earlier, that often it takes more than one policy instrument to achieve a goal and that trying to have a combination of information programmes and financial incentives working together can be more effective than either of them could be individually. Q396 David Wright: Chairman, the problem here is that some of these policy measures will lead to house price inflation, will they not, because costs will just be passed on down the line in the sector? That is the problem. There is also an issue which John Healey, the Minister, raised with us when he gave evidence the other week, in that some areas have no stamp duty now and some of those areas will cover communities where some of the worst energy-efficient domestic properties will be. How do we tackle that? Dr Eyre: I was very encouraged by John Healey's response, which I have read, not obviously the original minutes, because I think if those are the two best arguments that can be found against this sort of measure we could well win the argument. The argument that, essentially, you cannot use the incentive in some properties because the tax does not apply there does not seem, to me, to be a very good argument, it means just that you need to think of another measure to address those. As those are in regeneration areas, I think there is a whole range of different tools which should be applicable. Q397 David Wright: Then what we need, Chairman, is a surcharge policy, do we not, to penalise low-quality domestic properties, in terms of energy efficiency? Dr Eyre: Whether the stamp duty incentive should be a surcharge for not doing something or a rebate for doing something is a decision I would be quite happy to leave to politicians. I think that is a political choice. You could do it either way. All we are saying is that you need to make it cheaper to do the right thing than the wrong thing. David Wright: That is very helpful. Chairman: Thank you very much indeed. We are very grateful to you. |