UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 130-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE

 

 

CLIMATE CHANGE: LOOKING FORWARD

 

 

Wednesday 12 January 2005

MR M CLASPER CBE, MR S HARDWICK and MR M GORMAN

MR D PORTER, DR J McELROY and MR A LIMBRICK, MR D GREEN

and MS K HAMILTON

 

MS G HARTNELL, MR P COZENS, MR J STRAWSON and MR M CANDLISH

Evidence heard in Public Questions 89 - 207

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 12 January 2005

Members present

Mr Michael Jack, in the Chair

Ms Candy Atherton

Mr David Drew

Patrick Hall

Mr Mark Lazarowicz

Mr David Lepper

Mr Austin Mitchell

Diana Organ

Joan Ruddock

David Taylor

Paddy Tipping

Mr Bill Wiggin

________________

Memorandum submitted by BAA plc

 

Examination of Witnesses

 

Witnesses: Mr Mike Clasper CBE, Chief Executive, Mr Stephen Hardwick, Director of Public Affairs and Mr Matthew Gorman, Group Sustainability Manager, BAA plc, examined.

Q89 Chairman: Could I call the meeting to order and welcome our first group of witnesses from the British Airports Authority: Mr Mike Clasper, their chief executive, Mr Stephen Hardwick their director of public affairs and Mr Matthew Gorman, the group sustainability manager. Gentlemen, you are welcome and thank you for your written evidence. I looked with interest at your evidence and I am grateful for its succinctness, but one thing which struck me about it, particularly in the context of BAA being a major user of energy, never mind about the aviation aspects which we will come onto in a moment, was that you were long on supportive statements about the need to reduce energy, in fact you point out that you have doubled your own internal target in terms of energy reduction and that in itself is very impressive, but you are very short on telling us how this is going to be achieved. Perhaps you could deal with my intrigue as to what programmes you are actually going to adopt, because you do not actually mention any of those in the evidence.

Mr Clasper: Obviously we felt that the Committee's major interest was in the whole area of climate change from the airline activity rather than the airport activity, but we are basically doing three or four things which we think will allow us to achieve our targets of reduction. The first area is that we have a lot of old estate, some of you probably travel through it, called Heathrow and Gatwick. We are going through a capital replacement programme of a lot of that equipment, probably adding up to about £15 million in which we are taking out old equipment and putting in much more energy efficient equipment, particularly in things like air-conditioning and heating. The second thing is that we are planning to use an existing CHP plant at Heathrow to fuel Terminal 5 which will add to our efficiency. We are in partnership with the Carbon Trust who are helping us to design more energy efficient buildings from the outset. Probably the final area where we have had quite a lot of success over the last three years is that we have had quite considerable growth in passengers and new facilities and yet over the last three years we have had zero growth in our energy usage. There has been some very basic stuff like sub-metering. Traditionally we had a meter for the whole site almost and therefore you did not actually know where you were using energy and therefore where to target reduction. We have probably put hundreds of meters in our Heathrow estate for example, so that we can understand where the energy is being used on a zone basis and then just encourage the basic sort of, I do not want to make it as simple as this, but the turn-out-the-light type of activity which produces conservation through behaviour and therefore partly through our successes and partly through a belief that we should try and do better, we have dramatically upped our own internal CO₂.

Q90 Chairman: You are quite right in saying that one of the principal areas of concern to the Committee is the fact that transport is a weak link sector in terms of meeting greenhouse gas emission targets and also the fact that aviation is as yet an uncontrolled area in this. One of the problems though is clearly, you cannot just look at it on a national basis: it is international. The United States is not a signatory of the Kyoto Protocol, other serious players are. From your contacts with the world of aviation, other international airport operators, what sense do you get that there is an international mood that aviation should be brought into this whole process? The only show in town from the evidence supplied seems to be some kind of emissions trading arrangement specially tailored for the needs of the aviation industry, but if that is not done of a global basis then it seems to me to be a rather limp stick.

Mr Clasper: A little bit of history; I want to be reasonably brief. Probably four or five years ago, the aviation industry, partly because international aviation emissions were excluded from the Kyoto Protocol, as you are probably well aware, was not really talking of it as an issue. Two or three years ago, we and British Airways in particular started to see the fact that, despite not being part of the Kyoto Protocol, we needed to start addressing the issue. Our view is that the best way of attacking the issue is not actually to have specialised activity specific to aviation, but almost to mainstream aviation into, as you rightly say, the start of the EU Emissions Trading Scheme (EU ETS) in 2008. British Airways and ourselves were relatively lone voices two to three years ago. Today, we have just seen both Rod Eddington write saying that he was supportive of joining the EU Emissions Trading Scheme and Virgin, similarly supportive. Our expectation is that we have literally just gone through a policy committee of the collection of European airports where the recommendation will be that they will support aviation moving into the EU Emissions Trading Scheme. I think that is a step of leadership for the world. I think that it is much more likely that the US will come along eventually if it is a market mechanism driven solution like emissions trading. We already know that the international ICAO body has accepted that emissions trading is the right sort of way of addressing the issue. We have gone from almost nowhere to a position of leading within the UK and now leading within Europe and I think that is probably the only way that will eventually get America involved, but you are more aware than I am of the fact that getting America involved in this issue is very difficult on a broader scale than just airlines.

Q91 Chairman: Just before I hand over the questioning to other colleagues, I had a look at the websites for Boeing and Airbus this morning to see what they were saying about reductions in terms of fuel usage. Boeing sort of say "Give us any problem in the world and we'll fix it", they seem to be very optimistic about it, Airbus talk about different types of construction of aircraft with the aim of reducing all-up weight as a way of reducing fuel usage. How do we deal with the paradox that if you go into emissions trading, it is effectively adding a price in some way to the cost of air travel in the hope that you will damp down the usage. However, there does seem to be a tremendous demand pressure: more people want to fly, cheap airlines are encouraging a tremendous growth in the use of the aeroplane as a transport medium, both within the United Kingdom and in the rest of the world, particularly in terms of Europe. There seems to be a danger that whatever technological improvements the airline manufacturers and engine makers may be able to make over quite a long time period, will be cancelled out by an almost insatiable demand to travel. What should we do about the insatiable demand and do you think that it does block out the technology contribution?

Mr Clasper: I do not like to answer in three parts, because I know you like brevity, but there are three elements to what you have just asked. The first one is that there is a tremendous inherent driver for fuel efficiency that is in the basic cost of the fuel that would encourage innovation and you are right, aircraft manufacturers are working on composite technologies instead of aluminium to reduce wear etcetera, flying patterns and so on, which will be further encouraged by the cost of carbon on top of the basic cost of fuel. That is the first point. The second point is that it is not just the burning of carbon, but it is also some of the upper atmosphere effects. Those upper atmosphere effects, unlike carbon, are not a law of physics given. You need a lot of energy to get a plane in the air, but once you are in the air it is possible actually to influence dramatically the upper atmosphere effects, but it requires long-term scientific understanding and technology investment to be able to achieve that. If we go down this route, there is a real possibility that we can get, not just continuous improvement, but actually step change in the climate change effect of any given flight. The third point I would make is that there is tremendous demand for air travel for all of the social and economic benefits that it creates in a global world and we do want to make sure that any measures in this sort of area, mainstream aviation, do not cause a distortion of economic activity. To price away the demand to solve the problem would require a level of pricing that would dramatically distort the market. Therefore, you are right, as a pure demand measure, there is almost nothing that is going to solve the problem and that is why a smart set of policy instruments is a much better way than some crude taxation process.

Q92 Joan Ruddock: You are suggesting the distortion of a market, but is the cheap airline industry in itself not a distortion of a market?

Mr Clasper: You would only say the market was distorted if there were some form of mass subsidy and you could argue, I will use as an example, that the American market at the moment is distorted by the fact that a lot of US airlines are in Chapter 11 and some of those processes are a distortion of the normal economic effect. If you look at the low cost airlines, the reason that they are able to offer these low prices is not a distortion caused by subsidy; it is the efficiency of their operational practices which has allowed them to offer these lower prices. Now, what I do agree with is that if there is an external cost, like the one we are talking about now, that should also play in the equation, but it should play in the equation in a way which is mainstreamed with the rest of the economy. I would argue, and do argue, and some of my airline business partners might not agree with me, that that external cost should come into aviation and it should come into it in a market efficient form like emissions trading. I will not affect the fundamental shift that has occurred in the aviation industry through outstanding efficiency and operational practices. The flights would still be cheap but not very cheap.

Q93 David Taylor: The existing environment market, through which aviation flies is seriously distorted at the moment is it not? You are a polluter that is not paying at all.

Mr Clasper: Not paying at all for what?

Q94 David Taylor: For the climate change and other effects that you are creating and the social and environmental issues that they have.

Mr Clasper: I do not know how you would describe that we are not paying in any different way that any other ---

Q95 David Taylor: It is a largely tax free zone over alternative forms of transport.

Mr Clasper: Well no, versus other alternative forms of transport, aviation is the only one within the UK, and we could get you actual numerical data on this, I do not have it with me, aviation is the only form of transport in the UK that is actually a net contributor to the exchequer. All other forms of public transport in the UK are net subsidised by the exchequer.

Q96 David Taylor: I am dubious about that, but we are not here to argue the toss on that. Flights up to say 1,000 kilometres, which could easily in many circumstances be provided by high speed rail links within the UK and within Europe are surely an example of an alternative that would have a much less damaging environmental effect than the alternative flights which your airports ---

Mr Clasper: I do not know how long we want to go down this track, but if you were to look at the way that rail travel is subsidised within the UK relative to air travel, you would find that already there is a very strong subsidy to encourage those 1,000 kilometres rail travel. For example, we are a total private sector company. There is not a single aspect of the infrastructure that aviation uses that is not paid for by the passenger, not a single aspect. The whole of Terminal Five which is being built for £4.2 billion will be paid for by the passenger.

Q97 David Taylor: Your environmental costs are paid for by the taxpayer, and the taxpayer and the passenger are not necessarily coincidental groups.

Mr Clasper: I would agree with the fact that the whole of the economy has to take a look at its external costs and wherever possible internalise them. What I am advocating very strongly, and I am proud that BAA has led, is that that approach should be mainstreamed in the EU Emissions Trading Scheme. As far as I understand it, the climate does not understand the difference between CO₂ from a power station versus CO₂ from an airline. Therefore by mainstreaming it, we are then paying our external costs and that then needs to be brought into the pricing equation. I think it is very important that we all understand though, that versus other forms of public transport, aviation is not subsidised in the UK, it is a positive contributor to the exchequer and therefore provided these external costs of CO₂ are internalised for everybody, including the rail industry, then any distortion of the choice will be eliminated.

Q98 David Taylor: I think aviation tends to overstate its contribution to the economy, and understate its costs to the environment. We will have to move on from that. Thirteen months ago, Alistair Darling launched the White Paper on the future of air transport in the chamber just a few yards away and that anticipated almost a tripling of passenger numbers between 2000 and 2030. Set against that sort of backdrop, you are still suggesting that you can achieve a 15 per cent reduction in CO₂ emissions. How on earth are you going to do that?

Mr Clasper: We made a commitment that by 2010, we will have reduced our emissions by 15 per cent over 1990, which is where the whole thing has been benchmarked. That does assume that over that time period our business in the UK, the number of passengers that we serve, will grow by four to five per cent a year. We are fairly confident of that target. I do not like setting targets in an important area like this that you know you can make for sure, but we do have the programmes and investment plans that we think will deliver that sort of efficiency.

Mr Hardwick: And there is one element that Mike missed out in his earlier summary and that is that we are sourcing 20 per cent of our energy from renewable sources. That is part of our commitment to reducing our emissions.

Q99 David Taylor: These are the airports themselves, we are not talking about aviation generally?

Mr Hardwick: The airports.

Mr Clasper: We are talking about the point the Chairman raised, that was the airports themselves, not the airlines.

Q100 David Taylor: The White Paper to which I just referred, paragraph 8 annex B, came up with the figure which you will all recognise that the impact of aviation emissions is 2.7 times the impact of CO₂ alone. You seem to accept that. Do you want to comment on that?

Mr Clasper: What I definitely accept, I think the whole aviation industry accepts, is that there is an additional effect beyond the CO₂ itself. It is of the order of what you have just described, but I think one of the things that one must do is, having accepted that, recognise that the impacts are very different sorts of impact. For example, a large part of that additional impact is water vapour.

Q101 David Taylor: Are we talking about contrails?

Mr Clasper: Yes, contrails, cloud formations that can actually be avoided by the way the plane flies depending on climate condition and topography. So there are potential solutions which could actually eliminate or dramatically reduce it, but it would require a much more sophisticated air traffic control system. Another one of the impacts is NO_x. There are certain engine technologies which are available today and will be available in the future which would have a dramatically lower NO_x effect at high altitude compared with certain existing technologies whereas, as I said earlier, a tonne of CO₂ is a tonne of CO₂ and therefore what you need is targeted policy instruments to tackle those different effects. Using a crude multiplier will produce distortion, some of which may actually be counter-productive.

Q102 David Taylor: I fully accept that. I am not at all sure that contrails can be effectively tackled in that way by altered altitude of flight. Yes, technically, but the organisational consequences of that are quite difficult, because at East Midlands airport in the northern part of North West Leicestershire, which, as you well know is the largest night freight airport in the country in terms of dedicated aircraft, has had all sort of problems trying to renegotiate and consult on altered flight paths to cater for the enormous increases, particularly in freight flights, but also in passenger flights, which are anticipated by the White Paper. So talking about reducing contrails in that way is perhaps a little bit academic. That is just an observation.

Mr Clasper: May I come back on that because I do have something reasonably valuable to add to that?

Q103 Chairman: Very briefly, because there are a couple of tax questions we want to ask you.

Mr Clasper: The core of this is the altitude that the plane flies at and the core of this is not in climb, but in cruise. There is a project which I think we all should be supporting which is a big review and new technology for 2020, the European programme on a single sky; it is called the Sesame Programme and one of our directors involved in that. I would encourage everybody who can to encourage that work to build in the concept of the environmental performance in flight which would then allow, not the path, but the height of the path to be handled that way. Maybe I am a born optimist, but I think that is capable of technological solution and would be a significant part of aviation's climate change.

Chairman: It may be helpful if you could drop the Committee a little line just to expand on that point. Mr Mitchell is going to ask you a question about tax and Candy will follow that up. Just before you launch, may I park a question with you? Aircraft are effectively long-life assets. Do we need to change the tax regime to encourage a quicker turnover, so that new technology can be introduced more quickly? If you could park that one, Mr Mitchell will add another fiscal point.

Q104 Mr Mitchell: Your point about being the least subsidised form of transport is pure sophistry surely. It is worthwhile subsidising railways and public transport because use of them has a less damaging effect on the environment than using cars.

Mr Clasper: Yes, so does a public aviation flight.

Q105 Mr Mitchell: So does a bicycle, but when it comes to aviation, you are uniquely privileged in the sense that the privilege is the fuel tax regime.

Mr Clasper: I should like to come back with the data, but if you accept, which maybe you do not, that aviation, as I understand it, is public transport, then if you look at the net contribution to the exchequer versus subsidy from the exchequer in the UK, there is not even a doubt that aviation is not subsidised whilst, for reasons other than environment, buses and rail are subsidised. I do not think you can argue that; the land take of rail is higher, the noise of rail is similar. I think there are public policy reasons why you might want to subsidise rail and I am not saying it should not be subsidised, but at least I think we should be on a clear understanding of what we mean by the word "subsidy" relative to other forms of public transport.

Q106 Mr Mitchell: Let us take it just on subsidy, because we are talking about carbon emissions and their effect on the environment and the problem therefore is whether the market has to be changed, you do not want interference in the market, because of the effects of aviation on carbon emissions and on the environment generally. We have just been dealing with the contrails, or as I used to call it, the tail scraping the sky, but you have a more substantial and damaging effect on carbon emissions than most other industries and certainly other forms of transport. Aviation represents 11 per cent of the UK's total climate impact and it is calculated that it will represent 33 per cent by 2050. Therefore, you are going to have to be penalised in some way if we are going to deal with this trend of carbon emissions and their effect on the environment.

Mr Clasper: All I am saying is that I do agree that that external cost should be internalised and I think it should be done in the same way as with the rest of the economy and I am a personal advocate of doing it through the EU emissions scheme because I think market forces and self-interest are more likely to drive innovation than pure taxation that is not hypothecated. You may not agree with that, but I stand here as a representative of a company which, along with British Airways, has been campaigning for the aviation industry to accept this for three years and that campaign is now working. We are volunteering to be part of Kyoto having been legally excluded from it.

Q107 Ms Atherton: You ended very appropriately on the scheme. Can you expand a bit more about how as a company you are participating?

Mr Clasper: Because we have three sites where we are a generator, by this definition of sites of 20 megawatts, we have three sites where we will register them like any other generator. It is helpful to us in a way in that we are participating in this in three sorts of ways: one in a general energy efficiency way with the commitment; secondly as a live generator, although I know behind me are some people who generate a lot more than 20 megawatts; thirdly, in this context of aviation where we do not fly the planes, but we do believe our industry needs to produce a responsible policy response.

Q108 Ms Atherton: Now I am not a scientist, so if I get this wrong, you will have to help me. In your evidence, you suggest that some of the policies to reduce carbons will actually create more problems with nitrogen. Can you explain that to me as a non-scientist?

Mr Clasper: I can only assert as a non-scientist to a non-scientist that in the main the new technologies can both deliver CO₂ and NO_x reductions. However, there is a triangle of three objectives against any individual technology: carbon, NO_x and noise, to go back to a point made earlier. In that triangle, you are always optimising two to the detriment of a third. You can then use technology to move the bar, so that it is not as bad, but you are always playing a game of optimising between them. It is to do with the efficiency of burn, the speed with which the plane gets up in the air, because the faster it gets up in the air the sooner they reduce noise in the flight path and therefore that is why you get into this situation of having to choose two at the expense of the third. I am not sure that helped a lot.

Ms Atherton: No, it helped a lot actually.

Q109 Chairman: And my point about tax and depreciation of assets?

Mr Clasper: The more that the carbon emissions market is real and liquid, the more it is an extra encouragement to move to the new technology. It is very interesting, going back to the point on the low cost airlines. One of the reasons that they are such a success operationally is they are starting with a new fleet which is much more fuel efficient than the old fleet. Were you able to do more to encourage, the sun-setting of the older planes, there is no doubt it would have a benefit, because the fleet life is a problem in addressing these issues. It takes 20 years for a new technology really to have a big impact across the whole fleet. It is an interesting thought, but I must admit I do not have any obvious answers to it.

Q110 Joan Ruddock: You have talked a lot about new technology with regard to the actual hardware and how you are going to try to reduce and everything, but what about the actual effects of aviation on climate change itself. I understand that you propose that the aviation industry should be funding this internationally. Is there encouraged co-operation between people internationally? How do you raise that money, how is it done and if you do it, how do you share the fruits of that research?

Mr Clasper: In the areas that are clear like carbon, then I do not think it applies, I think you just mainstream it. Clearly, an area like the water vapour area that I have just talked about is only aviation and we would recommend, although some of my business partners would disagree with this; some form of fiscal measure that stopped the free-rider principle and got the whole power of the aviation industry alongside government working on establishing this science that we talked about because there is still uncertainty in it and then working towards potential solutions. The solutions on the water vapour for example are almost certainly going to be air traffic control driven and all airlines would benefit from it, rather than actually driven by the airlines themselves.

Q111 Joan Ruddock: Are you saying you know enough about the science, you know enough about what aviation is doing in respect of climate change? I thought there were areas where further research was required.

Mr Clasper: We do not know enough about the details of it. We know enough to say that there are effects beyond carbon. It is by getting a greater understanding of the science of that, that some of these solutions ... At the moment we are not certain about the extent to which talking a particular track through the sky would reduce it. What we do know is that certain tracks create it and certain do not. The people who really know what they are talking about also know that it is a combination of daily climate and topography. Therefore there is a way of solving this, but it is only at that sort of conceptual level. Turning that into a real solution that can be built into a European air traffic control system in 2020 is going to take money and research effort and any policy instruments that would encourage that, we, wanting to have a responsible industry, would say that is the right thing to do and we want to avoid the free rider. For example, British Airways, who are in the vanguard of this in terms of airlines, are measuring, or trying to measure, their individual flight emissions. They are a lone company at the moment, and that in a sense hardly seems fair given the scope and scale of the global aviation industry.

Q112 Joan Ruddock: Are you really saying there is not enough cooperation to make this happen?

Mr Clasper: There is not enough co-operation in a joined-up policy between government and airlines and so on around, we are talking one particular issue, a very important issue, this water vapour issue. More policy instruments from government could force joined-upness.

Q113 Joan Ruddock: Would it not have to be an EU initiative to make sense of that?

Mr Clasper: We have talked about getting America to look at Kyoto seriously being well beyond any individual industry as far as I can see, so I think the start point for this should be at EU level. We have a great opportunity in the EU, in that the EU is already funding a big study of a better air traffic control system in 2020. Pushing for the environmental aspects of that project to be given a higher priority than if we did not push would be a smart thing against this whole issue that we are talking here today.

Q114 Mr Lazarowicz: Can I just be clear about your position on the use of fiscal instruments? As I understand it, you are against measures which result in increases in taxes and charges because you say they will distort the market; I think that was one of the reasons you were indicating you were against that. But surely, if aviation is brought into the emissions trading scheme, that is going to have an effect on prices and demand as well.

Mr Clasper: Yes, it will.

Q115 Mr Lazarowicz: If it is going to make a difference, surely, there is going to be a substantial impact if such a scheme is going to work for aviation.

Mr Hardwick: We are perfectly prepared to pay the cost of the environmental impact of the industry. Our view is that taxation is the wrong place to start, because you are monetising the cost and then giving the money to the exchequer and the impact remains the same. A charge is slightly better if the revenue from the charge is hypothecated into mitigating the impact and a market mechanism which targets the impact directly through trading or some other measure delivers both the internalisation of the cost and the output of the reduced environmental impact. We accept the demand consequences of the additional costs involved in meeting our environmental obligations. What we do not accept is using taxation to price behaviour as a proxy for dealing with the impact itself which is why, across a range of different measures, we would rather target the specific impacts with a measure which is most appropriate instead of counting the cost of all those impacts, writing a cheque and giving it to the exchequer.

Mr Gorman: An impact on demand may be a consequence but it should not be a tool essentially.

Mr Clasper: There is another important driver in here which is that the price sensitivity of the total aviation market is relatively low because of its tremendous value to its users, but the price sensitivity between individual airlines is very high. I know that I am going to fly to New York, I have to, I get a whole load of benefits from that, I will pay, I am not saying what it takes, but almost what it takes. However, when I choose which airlines to travel with, I will make a choice which might be because of a £10 difference. If you do it the way that we are talking about, that is not a blunt taxation, but is a policy instrument against the effect, then what it means is that if you adopt a lower cost carbon technology you get a structural price advantage in the marketplace, which drives people to your business and causes the other guy to buy new technology. If you take the example of the low-cost airlines, they have bought fuel efficient new aircraft, they have a structural advantage, they are gaining market share, they cause the other guy to look around and make a change. So you have a thing here whereby if you do it this way, you will get behaviour change in the industry and you will start helping to reduce, mitigate and even solve the problem. If it is just writing a cheque, as Steve says, everybody gets on with their business and writes the cheque. Nobody bothers to put the energy in, like we are here today, talking about innovation and technological solution.

Q116 Mr Lazarowicz: I accept that the Emissions Trading Scheme is probably theoretically the most comprehensive way of addressing these issues, but surely it is not beyond the wit of man or the wit of the Treasury to devise schemes of charging which are designed to have the most beneficial environmental consequences. You can do things with tax which will have at least some tendency to push ministers in an environmentally more sustainable direction.

Mr Clasper: Let me give you example from history. APT was introduced, Airport Passenger Tax, which probably roughly is about one billion pounds to the Treasury and we can give you the exact numbers. At the time - the Treasury sometimes changes over time the purpose of the taxes - it was originally introduced as an environmental measure to affect demand. It had demand effect for, we guess, six to 12 months, and then it had disappeared, yet it probably reflects roughly today the early payments that the UK aviation industry would need to do, if the cost of carbon was in the range of seven to ten. So what you have here is that the level of taxation to make the problem go away would not be anywhere near the scale of the external cost. It would have to be dramatically above the external cost to make the demand go away. Then you are distorting the economy, because the taxation levels would have to be enormous.

Q117 Chairman: May I just ask you a question which follows on from what you were saying and I apologise for interrupting? I am trying to understand how you structure an emissions tax for the airlines, because you have just said that in the biggest growth sector many of the low cost airlines are already at the best technological solution because they bought the most modern aircraft. Then you look at other airlines which will have a range of aircraft from the most efficient to less efficient. I am not certain how you structure the emissions trading arrangements, when you might have quite a slug at the industry which cannot actually get any better. How do you structure it to encourage things, when for the major growth area, you cannot actually get them to emit any less other than by simply making fewer journeys?

Mr Clasper: With the technology that exists today you cannot get the most efficient aircraft to emit less unless you have fewer journeys. You are absolutely right. I think what we are talking about here is that you have aviation as part of the whole of the economy that is trying to tackle this problem and whether the allowances go from a low cost airline to encourage one of the other airlines to sunset some of their equipment, the very point you were making earlier, or whether they go to encourage, at the margin, a lower emission energy generation project is up to the market. The economy solves the problem in a way that does not distort the development of the economy.

Q118 Chairman: But you do have distortions, because, in the nicest sense, airlines would probably have shorter journeys if they could fly in straight lines. But they cannot, because the air traffic control arrangements get them flying from here to there to wherever.

Mr Clasper: You make another very good point. If the cost of carbon is high, then it is an encouragement to find operational ways of solving that. I am not going to say it is going to make a huge difference, but one of the things about the whole air traffic control system currently is when people are in a stack and that is pretty energy inefficient. Is there enough momentum to solve that? There is some. Would there be more if the cost of carbon were in the equation? Yes there would. There is another way which, by using a market mechanism like this, would work. However, if you are going to pay £10, which is the current situation, to get on the plane and it does not matter how far it flies, how it flies, what technology it uses, are you going to get any serious activity to reduce, mitigate and solve impacts? No. I guess that is fundamentally the point that I am making.

Q119 Mr Lazarowicz: Without being too heretical, presumably, you could easily conceive a system where the taxation was varied to take into account the aircraft type, the type or length of the journey or the number of passengers. That is probably something we cannot pursue here. In practice, what you are effectively saying is that because it is some time off perhaps before we can get an ETS scheme working for the aviation, in the meantime you are not prepared to accept alternative measures such as ones which come from our taxes or charges. Effectively what your position is doing is arguing for things to be left as they are for some time in the future and you will be escaping the consequences of the activity for some years.

Mr Hardwick: We are talking about three years away: 2008, which is the government's objective for bringing EU aviation into the EU Emissions Trading Scheme is three years. That is not a very long timescale in a 50-year Kyoto-type scenario where we are looking at where we are going to be in 2050. We already have a taxation arrangement through air passenger duty which is covering maybe 60 per cent of the UK aviation industry's environmental costs. The problem with interim arrangements is that they tend to become permanent and we are trying to bring a coalition of aviation industry, airlines, airports, within the UK and across Europe for this bigger win than short-term gain through a domestic fiscal measure. One of the big problems that we have encountered and that British Airways has encountered in other countries is the fear of this alternative fiscal measure. For instance, in Germany the German Government has traditionally been in favour of taxation, so the German airlines and airports have been nervous about volunteering for emissions trading because they think they will get hit twice. I think three years is not too long to wait to bring in a better economic instrument that will capture the costs and start to deal with the impacts. There is one other thing I wanted to add on to what Mike said earlier about charges. We are not against charging, if it is smart charging. We ourselves vary our airport charges for noise: noisier aircraft pay a premium, quieter aircraft get a discount and for NO_x, the dirtier aircraft have to pay more than the cleaner aircraft. So if you use charging in a clever way, and we do it in a way which is revenue neutral so it spreads the load among the airlines, then that is a perfectly valid way of using a fiscal instrument.

Chairman: Gentlemen, you have given us some very interesting food for thought. You are very kindly going to supply us with one or two additional pieces of information and thank you very much for coming to give evidence to us this afternoon.

Memoranda submitted by Association of Electricity Producers

and Business Council for Sustainable Energy

 

Examination of Witnesses

 

Witnesses: Mr David Porter, Chief Executive, Dr John McElroy, RWE npower; Chairman of the AEP Environment Committee and Mr Andy Limbrick, Head of Environment, Association of Electricity Producers (AEP) and Mr David Green, Chief Executive and Ms Kirsty Hamilton, International Policy Advisor, Business Council for Sustainable Energy (BCSE), examined.

 

Chairman: Right, ladies and gentlemen, we move to our next group of witnesses who effectively are on the production side of energy. May I just say that I do appreciate that several of you are here and the one thing that we are always short of on the Committee is time, so I am going to make an appeal to everybody, including me, to try and keep our questions crisp and our replies of equivalence. It may well be that there are points that are put to one witness that others would wish to comment on, if you just raise a finger, a pen or in some way indicate to me that you might want to come in in addition to whoever has been asked to respond to the question, I will do my best to bring you in. So with those points, may I formally welcome on behalf of the Association of Electricity Producers, Mr David Porter their chief executive, Dr John McElroy, who is with RWE npower and chairman of the AEP Environment Committee. You have a very important title there; it is quite the longest one I have seen for some time. You are accompanied at the end of the table by Mr Andy Limbrick, who is your head of environment. From the Business Council for Sustainable Energy we welcome David Green, chief executive and Kirsty Hamilton who is their international policy advisor and Mr Paddy Tipping will commence our questions.

Q120 Paddy Tipping: Can we just take stock of where we are at the moment? I think my old friend John Prescott would say that the reduction in carbon emissions since 1990 has been largely on the back of the generating industry and the table that you kindly produced shows that quite significantly. What I wanted then to go on to say was that you then project those emissions forward from 158.2 million tonnes of carbon to 139 million tonnes of carbon by 2010. Is that achievable?

Mr Porter: I will ask Dr McElroy to comment in a moment Mr Chairman, but you made the point almost for us that we have, as an industry, borne the burden of reductions so far and I was most encouraged to hear the previous witnesses talking about their willingness to get involved in this as well. We have often, as an association, pointed to transport as a sector that probably could do more. John would you like to add to that?

Dr McElroy: I would have to start by saying that the projections which are referred to in the Association's submission are those of the DTI and are not those of the electricity industry. At the moment, the gap between DTI's forecast of CO₂ emissions in 2010 versus the government's target of 20 per cent to six per cent means a significant gap exists and, the point you made yourself, the UK electricity industry has already contributed significantly to those CO₂ emission reductions and at the moment is the only sector in the EU Emissions Trading Scheme in the UK that has been asked to make further reductions in the next three years. Therefore, I would have to say that things are getting tight for the electricity sector already and within the EU Emissions Trading Scheme, it is going to be important that other sectors start to play their part as well. In the wider context, then you are talking about the issues of the transport sector and we have already heard some of the comments from the aviation sector and the domestic sector in how they can play in to contributing to achieving the overall government ambition.

Q121 Paddy Tipping: Okay, let us just stick with that for a minute. You have just told me that of those projections the 139 million tonnes is a DTI projection. Are we going to meet them?

Dr McElroy: I would have to say that those DTI projections are based on some fairly heroic assumptions.

Q122 Paddy Tipping: Explain that.

Dr McElroy: The assumptions are effectively that we will go from a position at the moment where our electricity demand is rising year on year at a level of about 1.5 per cent per annum and effectively that would have to be turned around to achieve something around -0.2 per cent reduction to achieve the DTI's 139 million tonnes. The other thing which the DTI number says is that there is no need for any new investment in capacity within the electricity sector between now and 2010 that it can be met effectively with the existing capability. I would have to say that that seems to us to be somewhat ambitious.

Q123 Paddy Tipping: If you were to meet the target, what would you need to do?

Dr McElroy: The important point here is that we are engaged not in a UK Emissions Trading Scheme, we are engaged in a European Emissions Trading Scheme. Therefore all of this is about encouraging investment to reduce carbon emissions in the most efficient way across Europe. Therefore the options open to us in the UK are either to invest in new plant, if that is the most cost effective way of addressing the issue, or if others can do it more effectively, to buy alliances in the market. The whole point is that what we want to see is a market for liquidity encouraged and efficient investment is the best way of creating that liquidity, but the answer is not entirely obvious at the moment, because it is very early days in the scheme.

Mr Porter: What is obvious, it is fair to say, is that investment will not play a part in the first phase of the scheme.

Dr McElroy: Absolutely right.

Q124 Paddy Tipping: Because there is uncertainty about future marketplace and the regulation and the rest of it, people are not prepared to invest. You need to have a long-term investment climate.

Dr McElroy: That is one part. The simple fact is that the lead time on investment in the UK electricity sector is typically three to four years, so major investment can come into play in the first phase of the scheme. I think a lot of the perception was that early reductions could come from coal to gas switch and the current fact is that in the market, gas prices have risen very steeply. If we are looking at winter prices next year versus coal prices for winter next year, the economics of gas switching do not tally with the current price that we are seeing at the end of the emissions trading market. Therefore under those circumstances, if the alliances are available at that price, that is what the market would do.

Q125 Paddy Tipping: I will not get into price rises because that would detract us, but can you just tell me this in simple terms. The expectation is a 20 per cent reduction by 2010, a 60 per cent reduction by 2050. These are wildly optimistic figures are they not?

Dr McElroy: The government itself has done a lot of analysis on this area. A lot of work was done underpinning the Energy White Paper which showed that even if the electricity sector become carbon neutral, it would be impossible for the UK to achieve its 60 per cent target. This comes back to the point we were making earlier, that we must find ways of engaging other sectors and what we want to do is to do that in the most cost effective way and most efficient way.

Q126 Paddy Tipping: I am broadly sympathetic to the industry as you know, but there are people who are more hawkish than I who would say "Hang on you lads. This is like a game of poker. You're telling us, this isn't possible to do, you're telling us it is hard, because there won't be such demands made of you later on in the cycle". What is the answer to that?

Mr Porter: Some of those hawkish people have given us a lot of grief in the last few months.

Q127 Paddy Tipping: Could we have some names on the table?

Mr Porter: I think you will be seeing some of them next week. An error that the government made last year in calculating the "business as usual" situation for emissions played into the hands of the people who want to hit at the power industry. Roughly a year ago the government had quite seriously underestimated the "business as usual" level. As an industry we had already accepted that we would take a cut against "business as usual" and when they published their figures, unfortunately, they were wrong and they were much higher than they should have been and that led to a lot of difficulty. We had to argue with the government, quite sensibly, that they had got their calculations wrong and while that was going on, the hawkish people portrayed us as really trying to avoid our responsibilities. We are not: we actually want to help the government achieve its environmental objectives and in fact I can say with a certain amount of pride that the Association put the idea of a cap-and-trade approach to this on the agenda as long as ten years ago. I have to say as well that we were probably a little bit ahead of our time there.

Mr Green: You introduced us all at the outset saying we broadly represent energy suppliers. It is important that one actually looks beyond the industry as energy suppliers, because the Prime Minister has made clear, and it is something that the Business Council strongly supported, that the government is firmly committed to the drive to a 60 per cent and that the government is firmly committed to its 20 per cent target. What is clear from the work that has been done as far on the climate change review is that on current policies alone, we will not get to the 20 per cent target, we will only get to 14 per cent. That therefore begs the question as to what additional policies are going to be put in place. The other thing it would be worthwhile sharing with the Committee is that the forecasting exercises that are done by the DTI, for example on renewables, are essentially political exercises and the DTI's energy model would not, of its very nature, deliver an outcome of a 10 per cent renewables target. That is an external factor imposed on the model to achieve a given goal and in relation to the field that I have worked in for some years, combined heat and power (CHP), the DTI's model assumes the government will not meet its target. Now, if you were to put in place measures which would meet that target, it would then help industry to achieve the 50 per cent of its carbon savings which it is estimated could come from CHP. That is not just the industry; that is the manufacturing industry. So there is a range of measures which could be put in place to get us to that 20 per cent target, but they are probably measures, as John has said, which are outwith the electricity sector, apart from the fact that it is the electricity and gas sectors which have been heavy investors and are heavy investors in both renewables and energy efficient technologies. A whole swathe of measures could be put in place to ramp up general delivery of energy efficiency in commercial buildings, industrial, etcetera. It is probably in those sectors and in the transport sector, and a sub-set of that is the aeronautics sector, where significant savings could be achieved with a much more determined effort.

Paddy Tipping: We will come to CHP in a bit and there may be a chance to talk about other policy models. You had just better tell us where we are on the EU Emissions Trading Scheme, because I do not quite understand where the government is in relation to this. They made a bid, they submitted it to the Commission who are now threatening legal action. Could you just explain this in simple terms?

Q128 Chairman: May I add a point to that as well? In your evidence you say that you do not think the process is transparent. I am not quite certain why, after all this sort of proselytising you have been doing about it, you still cannot see the wood for the trees.

Mr Porter: I will ask Dr McElroy to comment in a moment, Chairman, but with your permission, may I just correct something that I said earlier. I think, as I played it back in my mind, I said that the government's initial allocation to us was higher than it should have been, in fact I meant it was lower than it should have been.

Dr McElroy: In terms of the transparency regarding the Emissions Trading Scheme, we saw the draft national allocation plan last January and we have had subsequent discussions. The important thing is that the draft national allocation plan set everything out down to the lowest level, so every installation in the UK knew what was proposed at that stage. We have not seen any update of that since January last year. We have seen a lot of discussion about what the total cut might be, we have some idea of what the cuts for the other sectors within the trading scheme might be, but the government has now taken the view that they will allocate to them and whatever is left in the pot after that will go to the electricity sector. So, until we really understand what everyone else is getting, we cannot actually understand what is going to be left for us. The original intention was that allocation would be finalised in autumn last year, we were then given a date of 15 January this year. Just shortly before Christmas, we were given a date of 7 February, with the ongoing debate with the Commission on which we have no direct information.

Q129 Paddy Tipping: Tell us what you know, because I only know what I have read in the newspapers. It does not make any sense. Just explain this.

Dr McElroy: All we know is what the government actually told us back in October, which was that they had identified this gap because of their revisions to the projections, they have decided as a result of that, that they need to increase the total allocation to the UK by something of the order of 18 million tonnes a year; I do not have the specific figure. They are going to give the electricity sector about a third of that which compares with the original shortfall, which was identified once the errors were spotted, which was around 20 million tonnes. They have obviously gone to the Commission to negotiate on that basis, but we await the outcome. We understand that relationships are difficult.

Q130 Paddy Tipping: I was just going to say that. The Commission are saying "You have to prove your case" and the British Government are saying "We'll see you in court".

Dr McElroy: I could not possibly comment on that because we are not party to those discussions. We can only read the press, just as you do.

Mr Porter: We might add, that we thought that being given our allocations in the autumn of last year was quite late enough for a scheme that began on the 1 January. We have now been in the scheme for 11 days without the necessary knowledge of the allocations.

Q131 Chairman: Let me pursue some of the technological arguments. You indicated in your opening comments that the move towards gas generation of electricity had certainly assisted us in terms of reducing CO₂ outputs from the energy sector, but we have something of a paradox in that over the foreseeable future - and my colleague Mr Drew is going to question you more closely on nuclear energy in a few moments - we have the nuclear sector declining as a proportion of our energy mix. We have, again as you indicated to us earlier, a rising demand for electricity. The third factor we have is some perversities in the pricing where the obvious move would be to go and build some more gas power to replace the nuclear that is disappearing and hope that somewhere along the line renewables might be able to fill in behind there to keep the whole show on the road. You then just said to us earlier on that the price of gas, particularly in the short term, does not encourage any further investment in that direction. So against that background, question number one: what actually do you think within our known technology is the potential for further savings of greenhouse gas emissions from the electricity generating sector? Given current technology, how much more can we get out of you?

Mr Porter: May I give a fairly general answer and then perhaps pass it to John for a more detailed one. The other factor here is price and in one sense, you can have nearly anything you want if you are prepared to pay for it and of course, as an industry, we have right in our sights the environmental objectives and we cannot ever forget them. At the same time, we are given competitiveness objectives, fuel poverty objectives and almost above all, security of supply objectives. That is the context within which we work.

Q132 Chairman: Who gives you security of supply objectives? They were the missing words in the Energy White Paper and only in the latest government strategy document, which appeared a couple of months ago, do we actually see the word "security" creep in as a sort of bit player.

Mr Porter: For some time, the government has had three legs to its energy policy as far as our industry is concerned: one is competitiveness, one is reducing carbon emissions and the other one is maintaining security of supply. We take that very seriously because we know that we would be very firmly in the spotlight should that lead to any difficulties.

Q133 Chairman: So putting 70 per cent of your eggs into one basket is called "security of supply" is it?

Mr Porter: I suspect that you are alluding to the take-up of gas for electricity production.

Q134 Chairman: I am.

Mr Porter: We have not reached that level yet, but if it is any comfort in the industry, although the competitive market that we are required to work in does drive us in that direction, it has slowed a little bit recently with the rise in gas prices, but, having said that, there have one or two very recent announcements about new gas-fired projects. The industry nevertheless is just as aware as the informed public are that there are question marks against becoming that dependent on gas.

Q135 Chairman: Anyway, to come to my specific technical point, Dr McElroy, would you like to give us a specific answer to my question?

Dr McElroy: At the moment the options essentially open to us are investment and renewables.

Q136 Chairman: Let me hammer you right down. In terms of the parts of the generating system that produce CO₂, how much more is there that one could take out of you in terms of improving the efficiency, reducing the greenhouse gas transmission from your sector?

Dr McElroy: In terms of existing plant, those changes would be incremental. There are obviously investments that could be made to achieve some improvement in the efficiency of existing plant and I would say that the EU Emissions Trading Scheme will drive some of those investors and make them economic, but that is limited. If you really want to get a step-change in efficiency on the plant and the reduction of CO₂ emissions, then you are talking about building new plants. At the moment, in terms of fossil plant, the only plant which is close to the market at all is higher efficiency CCTG plant and linked with that, there is the CHP element which David previously mentioned and whether that has any advantages in the market, particularly a carbon market. At the moment, anything in the way of new coal is out of the market, as is nuclear.

Q137 Chairman: I will tell you the reason why I asked the question and it follows on from what Mr Tipping was saying. In response to his line of enquiry, you pointed out to us that the government's estimates are an act of political fiction, these numbers were created for some purpose and they did not reflect the true energy consumption situation, therefore by definition did not represent the true emissions position. I think you also said at the beginning of your evidence that you were pleased that aviation might be called upon to shoulder some of the burden. If we are to understand whether policy is right, what we have to know is whether you have the potential of dealing with the shortfall in meeting the government targets or whether in fact meeting that target is properly allocated amongst all the sectors. So are you able to put a number on your potential for us? If we say X million tonnes of carbon dioxide emissions which have to be dealt with, how much of that X can you account for?

Mr Porter: I think John said earlier that we could get to a point where we were carbon neutral and that possibly would not be enough. Is that part of the answer?

Dr McElroy: It is part of the answer in the longer term. At the end of day, the only mechanism available in the short term is to switch to gas. Effectively, at the moment we have somewhere around 120 terawatt hours of coal-fired generation in the UK which is responsible for just over 100 million tonnes of CO₂ emissions a year. Gas-fired generation gas emissions are pro rata about 40 per cent of those of coal.

Q138 Chairman: That would still lead you to an even more unbalanced energy portfolio would it not?

Dr McElroy: Yes. This comes back to the issue that David raised, that the decision on the part of government is how it is going to balance affordability versus security of supply versus its environmental ambitions.

Chairman: Could I ask you to reflect and perhaps let us have a supplementary paper? Perhaps you might just be able to quantify for us what you think is the target of CO₂ emissions that we have to deal with, particularly to bring us back onto the government's target, how much of that you think you could contribute and, ballpark figure, what has to be dealt with by the rest. I will move onto David Drew.

Q139 Mr Drew: The Chairman has already mentioned what is left out the equation which is what we do with nuclear. There does seems to be some warming - no pun intended - to the view that there is a role for nuclear, maybe not immediately but somebody has to talk reality into what was the fudge in the last White Paper over how we do have much more control over security of supply. I just wonder what your views would be on that.

Mr Porter: There are quite warm feelings towards nuclear power within the Association. I should say that we are an association which represents all the commercial generating technologies and we are most certainly not nuclear. We have, these days, five companies within the Association which have nuclear power interests: that is the two well-known British ones, one French one and two German ones. So we are not an anti-nuclear organisation and in fact, we are beginning to do some work now on our own position on where nuclear ought to fit in the fuel mix. This is a rather tricky thing to do because, although people around the table in the Association recognise the carbon benefits of nuclear power and they recognise the security benefits of nuclear power, the difficulty is how to bring nuclear into the marketplace in an environment which is so commercially driven. We do not have the answer to that at the moment, but if people want to pursue nuclear, that has to be addressed.

Q140 Mr Drew: What do you need, particularly in terms of a clearer strategy from government, as the signal for rather more than some outline research to see what are the commercial realities, the planning obligations and the political necessities of moving in this direction which some of us see as not just inevitable, but long overdue?

Mr Porter: I think the nuclear industry would answer that, at least partly, by saying that they need the political strategy for the disposal of waste dealing with rather more quickly than it has been; that has been dragging on a bit. I ought also to say that if the answers were readily available, we would have heard them by now.

Q141 Mr Lazarowicz: Another element in the energy mix is the renewables sector; in terms of that, a couple of points. It has been suggested by WWF, and I think others, that the Renewables Obligation (RO) should be extended to 20 per cent by 2020 along the line of the level in the Energy White Paper. How far do you agree with that aim, and if you do not, what would your alternative target be?

Mr Porter: We are always more comfortable when the government, which has quite a big hand in a liberalised industry, is clear and consistent about its policy towards energy. As an association, we are actually looking slightly shorter term with renewables. We accepted very readily the 10 per cent, in fact we put that idea forward before the government did and we have more recently accepted the 15 per cent by 2015. The renewables industry is fortunate in a sense that it does have these rather more firm targets out there. They seem to acknowledge that the industry is one with long investment horizons and big capital requirements and it is probably fair to say that we would like, in a sense, rather more of that sort of thing for the rest of the industry.

Q142 Mr Lazarowicz: Does that mean you do not agree with the target, but you do not object to it either?

Mr Porter: Exactly. We have no objection to the 2015 target for renewables.

Q143 Mr Lazarowicz: The idea is that the Renewables Obligation should be 20 per cent by 2020.

Mr Porter: Twenty per cent by 2020. We do not have a firm policy on that, but, equally, there has been no objection in the Association to it and bear in mind we represent all the different technologies.

Mr Green: Just setting aside for a moment the issue of the target, and I would share a lot of the views that my colleagues from the AEP have outlined, the more important thing that we tried to bring out in our submission is the technologies which are covered because of the way in which the RO is structured. It tends at the moment to drive companies towards one particular suite of technologies. A case has been made by the Royal Commission on Environmental Pollution for trying to find ways, and it may be done inside the Renewables Obligation, it may be done outside the Renewables Obligation, but in terms of delivering the overall target of 20 per cent, trying to find a broader suite of technologies which could be supported. One area that the Business Council has certainly taken an interest in, and indeed our Chairman John Roberts is on the government's task force on this, is the potential for biomass. For those people here who are constitutional anoraks such as myself, the Energy Act is entirely focused on electricity and completely misses out heat and its dimension. One of the issues that the Royal Commission on Environmental Pollution has raised is that if you were to reconfigure thinking, so you focused on waste heat, particularly the potential for renewable heat, you might actually broaden the suite of technologies that would enable you to get the 20 per cent target and perhaps do it in a way that could also help revitalise rural communities and other communities which are looking for new markets, for example for agricultural waste products. We certainly hope that the taskforce which has been set up, which involves Sir Ben Gill former president of the NFU and our chairman and a former chief economist at the DTI, will produce over the next few months some creative answers in this area which might help broaden a suite of technologies which are supported by the government, whether it is within the Renewables Obligation or by other mechanisms.

Q144 Joan Ruddock: I was going to ask about whether the current UK climate change plan actually addressed the issue of renewables and the importance of investment adequately. I think there is perhaps a bit of an answer there.

Mr Green: The current plan is effectively the climate change strategy that was adopted just after the change of government in the formal communication to the UN in 1998-99. What we are in at the moment is the review of the climate change programme (CCP). It was clear from the Secretary of State's early comments that the initial evaluation is that the measures we currently have in place are not going to deliver the 20 per cent target which the government adopted; hence my comments earlier about the need for new measures in a number of sectors. Yes, I am sure there is more that can be done in the electricity sector. There is similarly a lot more that needs to be done in a range of other sectors and quite frankly, having come back from a week's walk in Austria and seen the potential even a country like Austria has to do a lot more in energy efficiency, I came back wondering why we are so pathetic in this country on these issues.

Q145 Chairman: May I ask you for some guidance, as a sort of sub-debate from Joan's question, on micro schemes? Some people have suggested that instead of the large-scale generation that we addressed a few moments ago, micro schemes might be more efficient. Can you just give me a 30-second introduction to micro schemes and whether we ought to be looking at that?

Mr Green: Micro schemes as a family of technologies would include small-scale solar photovoltaics, the conversion of solar energy into electricity, would include small biomass schemes, would include small-scale CHP schemes, small-scale fuel cells; it is a generic term covering a number of different technologies. There are some exciting developments going on in this field, E.ON UK have committed to a programme to install quite a large number of micro CHP schemes and there is a field trial going on at the moment to see the extent to which they will actually save carbon. There is undoubtedly more potential to use solar photovoltaics across the UK, be it in industrial buildings or in commercial buildings. It is a pity, for example, that the government is not using its own power of procurement to do these things because the new Home Office building that you will all shortly be seeing rising 100 yards away is not going to be a shining paragon of solar. It will have energy efficiency measures built it, but it is those sorts of things that can be used to do much more to drive forward that market. Finally, bearing in mind the timescale, if I could just for a moment take off my hat as chief executive of the Business Council, I also chair the Mayor of London's London energy partnership. The Mayor is committed to setting up a climate change agency and at the centre of that is going to be a strategy for adopting a very distributive model for energy supply in London which, from the calculations that his staff have done will show a significant potential in London to have a much more distributive model of energy supply which would also relieve pressure on power imports into London and would hopefully over time make London's energy supply more secure, having more local sources of generation. As a London MP you will probably particularly interested in this.

Q146 Joan Ruddock: I would indeed and I have a personal interest in it, as you know. I thought Mr Porter was looking a bit sceptical during that response and I would just like to invite him to make some comment, particularly on the micro schemes but also about energy efficiency. Why have we got to make an assumption that the domestic consumption just goes up and up? Why can we not do what other countries in Europe have done so well?

Mr Porter: We have seen it happening for a long time and people who use electricity appear to want it to do more and more for them.

Q147 Joan Ruddock: But it can be done more efficiently; you know that and we know that.

Mr Porter: Absolutely, but in my lifetime, I have seen many, many government sponsored energy efficiency schemes come along and fade away and be replaced.

The Committee suspended from 4.32pm to 4.52pm for a division in the House

Joan Ruddock: I was simply asking why domestic energy requirements are just going up and assumed to be constantly increasing and why we could not do the energy efficiency measures other European countries have done so successfully?

Q148 Chairman: One of the problems is that as soon as you say that everybody leaps on the band wagon and says "Ah, future building regulations". We are going to get better but the emphasis on the existing stock of buildings is very poor. We fall back on what I might call the domestic standpoint, a diet of yet more insulation in the loft and draft exclusion, but we have not really gone beyond that. You might like to incorporate a comment on that in response to Joan's point.

Mr Porter: I mentioned that there had been many energy efficiency measures over the last few decades. It is very difficult to argue that one should not go for energy efficiency. It clearly makes sense, but it requires incentives to be built in to make anything substantial happen. It was also suggested that I looked sceptical when we discussed micro-production of electricity. I am sure that was a misunderstanding. I shall keep my eyebrows more firmly under control at select committees in future. The position is that it is fair to say that the jury is out on the effectiveness of very small-scale production. A trial is going ahead, but it is that; it is a trial. If the implication was that the existing producers of electricity would probably look upon that sort of thing with fear, I would say that is probably not the case and if they were convinced it was going to be practical and efficient, they would be into that business. In fact one of our larger members is involved in that now. However, we need time to see just how efficient that type of production actually can become.

Q149 Joan Ruddock: May I follow that up because again you seem to dismiss the energy efficiency as a hopeless lost cause and say there need to be incentives. Presumably your industry could keep up its income by charging more for people who are using less. Your business does not have to be affected in the long term, because people and their machines become more efficient and therefore use less energy because you have a price mechanism to deal with that. Why is your industry not more proactive? Why do you dismiss energy efficiency, given its environmental gains which we all know are so enormous?

Mr Porter: I would not like you to think that we dismiss energy efficiency. In fact, energy efficient is key in one sense to what our members do. The competitive market has driven power stations to become more and more efficient. I know that is not the point that you are making, you are looking at the domestic side.

Q150 Joan Ruddock: You are relying on the domestic demand continuing to increase.

Mr Porter: We operate in a competitive marketplace. It is so competitive that some of our members actually go bust and that is the context and it is not true to say that we can simply go on charging people anything that we want. I will ask John McElroy to add to that, if I may.

Dr McElroy: I think the issue on energy efficiency is that it has to be done by a mix of measures. Effectively, energy costs in this country are relatively low; most of us in this room do not over-analyse our electricity or our gas bills. Until we have incentives which encourage us to look at the issue much more seriously, then it sits at the bottom of the pile, rather than at the top of the pile. Whilst I know the issue of building regulations was raised, it is quite an important aspect for new buildings coming on and possibly also in relation to upgrading existing buildings. I think other issues, which I am sure David can cover in more detail, such as stamp duty, such as fiscal incentives in relation to installing energy efficiency devices, all have their part to play and also education of the consumer is absolutely core to all of this. So, it is not going to be solved by any single policy measure: it needs a basket of targeted measures and education to really drive it up the agenda. At the end of the day, you would need a very strong price signal, if you were going to drive it that way. Price signal on its own is not going to do it.

Mr Green: I would agree with what Mrs Ruddock said. There is significant potential for more energy efficiency. The Business Council very recently organised a meeting which was lead by Mark Clare, Chief Executive of British Gas with Lord Whitty, the then energy minister, to discuss the next stage of the energy efficiency commitment. What was interesting was that there was no doubting the firm commitment at the highest level in the companies to energy efficiency, very keen to get on with the job, but frustrated at the lack of an holistic approach across government in that at the moment, the drive from government for energy efficiency is very strongly focused on increasing the energy efficiency commitment, and that has cost implications for all of us and for poor consumers in particular, when what many of us feel is that there needs to be a much bigger suite of measures, so you need some demand for measures that encourage us all and to use energy more efficiently in our homes by, for example, changes to the VAT regime so that we could buy more energy efficient appliances and they are recognised, changes in the way in which white goods are monitored for energy efficiency, so that when we buy new appliances for our homes they are not necessarily bigger, but they are more energy efficient. That can be done through a range of EU regulations, most of which have not been revisited for five or six years and can be revisited again. There are more things that can be done with building regulations etcetera. As you have rightly said Chairman, and I am sure you know from your past political experience, one of the difficulties is that energy efficiency tends to be a bit like apple pie and motherhood. Everybody thinks it is great, but it is so great it is actually diffuse across government. So yes, the department you shadow has formal responsibility for it, but if you actually think about it, you have Defra with the formal policy custody for it, most of the levers to deliver lie to a certain extent with the DTI, but, certainly when it comes to housing stock, also with ODPM, when it comes to tax measures with Treasury and when it comes to executive arms to deliver, you have the Carbon Trust, you have the Energy Saving Trust, you have other bodies which hang off those. It is not that there are not enough people doing it, it is that they need to be more focused and more driven so things really do happen. The message I would suggest from other countries is that what they have had is a much more focused drive, it has really harnessed industry to get out there and deliver. It has happened in other sectors where consumer markets have been transformed; the telecoms market. You could argue that similar efforts and liberalised markets could make a real difference in energy efficiency. One only has to look at one's own home to think about the number of energy using appliances we now all have in the home that we did not have ten years ago. Most of those could have been, at the time of being introduced to the market, regulated in a way that was not heavy-handed regulation but made sure that when they came into our homes, they were more energy efficient. So instead of buying a digital TV box that consumes huge amounts of power, it was a low energy digital TV box or instead of buying a computer that is not particularly energy efficient, the ones you buy are all energy efficient. There are all things that can be done. It happens in America, it happens in Australia.

Q151 Chairman: You have made a lovely apple-pie-and-motherhood statement. You have just told us everything and I am sitting here looking at a printout from the Energy White Paper with this box that says energy efficiency savings at 2010 and it has this great list of things which can be done in the home and that is great. But it comes down to who is going to accept responsibility for driving the policy forward. Who ought to be driving it? Who ought to be talking to the manufacturers of washing machines, because some of them are now plastering the front of them with this kind of information, but who ought to be getting hold of this and saying "right, we are going to drive this policy forward"? What you said in your statement is that here are all the potentials, but it also says it is not happening as fast as it should be. Who should be getting hold of it and making it happen? Where does the buck stop?

Mr Green: In the current Whitehall framework we have - and it may change after election, that is not in our gift, I do not know - in the current framework I would argue that the department you shadow, Defra, are the key department and they really need to have the resources at their disposal to drive this forward.

Q152 Mr Lepper: Mr Green in a way has answered the question I was going to ask and that was your view of the connections and the liaison between government departments on this issue. In a sense, you have dealt with that already. Do you feel there are, whether they are working or not, mechanisms in place between government departments to drive this forward? I take the point you have made about Defra as the lead department, but are there mechanisms there to bring government departments together on these issues and they are not being used properly or are they simply not there?

Mr Green: I am not a civil servant, so I do not know. All I would say, and I think I probably speak for all my colleagues, and they could probably all give you apocryphal stories of complete lack of co-ordination, is that we would probably all like to see much stronger co-ordination and leadership on energy efficiency, both within Defra and between Defra and other departments. Now those mechanisms may exist or it may just be a lot of full e-mail boxes between different government departments.

Q153 Mr Lepper: Or a bit of both. People ought to know whether that exists or not and if you are not aware, then ---

Mr Green: We spend an awful lot of time, John, David, all of us, on actually informing the different government departments about what we understand is happening in other parts of the system.

Q154 Mr Lepper: Individually?

Mr Green: Individually. We are happy to do that because we want to make things happen. One could argue that if you had a better machinery of government in this area, the delivery would be much stronger.

Q155 Mr Lepper: You mentioned your recent experience of a visit to Austria and I think there are similar councils for sustainable energy to yours in Australia and in the US. Not necessarily now, but perhaps in some other information you give to us, are there examples there of how government departments co-ordinate, work together, on driving forward, for instance, energy efficiency programmes particularly in relation to the domestic consumer which you feel might be helpful to us?

Mr Green: I can certainly give you a note, but the key thing one has to recognise is that the two other countries are both federal structures, so a lot of delivery is actually not so much at national level but at state level where you tend to find co-ordination can be slightly easier because you have one functional tier to deal with. If it would be helpful, Chairman, I can certainly provide you with a brief note without going into too much detail.

Chairman: That would be very helpful.

Q156 Mr Mitchell: I thought David Green's answer on this question of energy efficiency in the household was much more imaginative and interesting than that of the producers who effectively said their business is to go on producing electricity as much as possible and if there is going to be any pressure to energy efficiency in the home, it will come from the pressure of the eternal escalation of prices. You demonstrated a degree of interest which bordered on total apathy.

Dr McElroy: I think that is contrary to what I actually said.

Q157 Mr Mitchell: You were not saying anything specific.

Dr McElroy: I said that price signals on their own would not drive the delivery of energy efficiency and that what was needed was a range of measures including fiscal incentives, regulatory schemes such as building regulations or applying standards and also the need to educate the consumer and engage the consumer.

Q158 Mr Mitchell: In other words, somebody else should do it not you.

Dr McElroy: We have a part to play in it, but we cannot deliver it on our own; we can deliver it in partnership.

Q159 Mr Mitchell: Why can you not think more imaginatively like, for instance, reducing the charges, or charging people on the basis of their success in reducing consumption by solar panels or other kinds of measures you can introduce? The more you reduce, the less you pay or charge more on those who do not do anything. It does need something, an approach like that, but you wanted to leave it to other people.

Mr Porter: I ought to point out Chairman that the generating industry is composed of a range of different types of company. Some of them are large vertically integrated companies with power stations and retail businesses, but the majority of generating businesses of course are free-standing power production only businesses.

Q160 Mr Mitchell: They just want to flog more and more electricity.

Mr Porter: Which indeed have an interest in selling electricity. We cannot help that. It applies to a number of gas-fired stations, it runs right the way through the technologies through to small family businesses. We have members who actually produce electricity as a secondary business to their farm. It is fair to say that they do not have an interest in the customer cutting his demand. The issue at the moment faces the large vertically integrated ones, who not only produce electricity through power stations, but also have retail businesses and millions of customers.

Q161 Patrick Hall: Can I just go back to something on renewables before turning to combined heat and power, just one point to David Green? I think he said earlier something about the Renewables Obligation adjusting the market to make it favour wind power. Why is that? Why can we not have a market in which a range of different renewable sources or generators is favoured?

Mr Green: When the government introduced the Renewables Obligation, it was a market-based mechanism so it incentivises Business Council members, David's members, John's company and others, it incentivises those companies to hunt out the lowest cost way of delivering renewables into the marketplace to achieve their legal obligations under the Utilities Act. At the moment - it could change - the lowest-cost technology in the marketplace is onshore wind which is why, although in theory the Renewables Obligation is technology neutral, the way in which the cost of the technology actually operates drives the companies towards onshore wind. There are other technologies which have been used. John's company has two small hydro schemes for example, at Windsor Castle; there are other companies developing and deploying some other quite innovative technologies but the vast bulk of the market is a drive towards wind, because that is the lowest-cost technology at the moment. That could change over time. As capital grants come in they bring down the cost of technology and other things become more cost competitive, but at the moment, onshore wind is the lowest cost option. That may well be, to be fair, a point you might want to pick up with my colleagues at the RPA because they have a much more detailed knowledge of that than I have.

Q162 Patrick Hall: Turning to combined heat and power, I think it is fair to say that the public's awareness of and understanding of this is perhaps not what it should be and that includes of course, the advantages and disadvantages of combined heat and power, never mind understanding exactly what it is. Could I ask David to explain what it is and how it works?

Mr Green: Just to say that if you actually want to see a scheme, I should be more than happy to arrange for you to go to the boiler room of the House of Commons, the main building, where there are two CHP systems, or, no doubt, if you signed the Official Secrets Act, you could go to see the secret boiler room underneath the Ministry of Defence where CHP is keeping the Prime Minister's lights on. So there are schemes very close to you. Essentially what it is, according to the DTI energy statistics, is that the average efficiency of a UK power station, traditionally coal, is about 34 per cent, whereas the average efficiency of the new generation of case combined cycle plant is about 48 per cent. The efficiency tends to be on the lower side of that, although, as David Porter has said, it has improved dramatically over the last ten years, because by and large, and you only have to go past a power station to see it, heat is dissipated into the atmosphere. If you design a power plant as a CHP plant, you capture and use that heat where you can do it. You cannot always do it for various reasons, but where you can on an industrial site or near a large urban area, you can do that. By capturing and using that heat, it increases efficiency from an average of 72 per cent to 90 per cent.

Q163 Patrick Hall: Does that mean therefore that combined heat and power is just a method of using the heat and is entirely separate from the method used to generate the electricity? So you could have combined heat and power attached to coal or nuclear or gas.

Mr Green: You could have it attached to anything which is a cost-effective fuel source. Traditionally CHP was coal fired and in the last ten to 15 years, it has been gas fired. There are methane fired CHP systems in Britain, there are geo-thermal-fired CHP systems, there are systems burning straw waste. You can use anything that it is cost effective to combust in a CHP system, although about 90 per cent of CHP systems are gas fired.

Q164 Patrick Hall: How come it is cited in the context of tackling CO₂ emissions then, because it could be attached to a generator that is belting out CO₂?

Mr Green: All power plants at the moment produce CO₂ unless they are using it a carbon neutral source. The big advantage for CHP, which is why it reduces carbon emissions fairly substantially, is because whatever the fuel input source is, it is burning that fuel about three times more efficiently and therefore you are getting less CO₂ produced per megawatt of output. Broadly speaking, according to the DTI energy statistics, every one megawatt of CHP that is produced in the UK is reducing the UK's CO₂ emissions by between 700 and 900 tonnes of carbon per year. This is why you get a substantial improvement in emissions from CHP plant, particularly where it is gas fired or biomass fired.

Q165 Patrick Hall: Does that mean that by definition it is only limited in its scope in the sort of distance that it can serve? In other words, has it got to be just a district system?

Mr Green: It depends. Europe's largest CHP system has just been opened in Immingham by Conoco and that actually serves one very large petrochemical site. The system in Whitehall serves 26 buildings. It depends on the heat demand in the area, because CHP is, by and large, not driven by the requirements for electricity. It is, by and large, driven by the demands for heat, or in some cases cooling.

Q166 Patrick Hall: So it is not a substitute for the traditional large power station.

Mr Green: Not necessarily. Quite a few large power stations have CHP output. Other countries have had a different model of developing their power generation industry. For example, in Denmark, where they have had a lot of municipally driven CHP systems, about 40 per cent of their power consumption for the whole country is from CHP; in the Netherlands it is about 60 per cent from CHP, they have had a different model of development.

Q167 Patrick Hall: I am fascinated to know how micro CHP can work, even one that operates within a single block of flats or one's individual house?

Mr Green: The technology for an individual house is still being developed, as my colleague, David Porter, mentioned. There are field trials going on for domestic CHP schemes at the moment, but there are blocks of flats already which have CHP systems in and indeed blocks of flats that are looking at CHP systems. In quite a few of the constituencies of members of this Committee, there are CHP systems operating in swimming pools and leisure centres. You have probably all been to them and do not even know they have CHP because it is just a grey box in the basement. It is actually operating on 1,500 sites around the UK. The difficulty has been, since the market conditions changed dramatically in 1997 and in 2000 with the introduction of NETA, the output of CHP schemes, because the market has changed so fundamentally, has gone down by about 50 per cent and there have been no major new CHP schemes since that time.

Q168 Patrick Hall: That was going to be my next point. The UK is falling behind its own modest targets and as you said in your evidence, capacity is actually falling. What is the picture overseas and how can we learn from that if it is a favourable picture?

Mr Green: It is broadly favourable. It may be one of the ironies of public policy that when President Reagan launched his energy strategy he did so at one of the US's largest co-generation plants and the US has quite an ambitious co-generation target and so have the Netherlands and Denmark, as indeed have other countries. If it would be helpful, Chairman, in view of the time, to give any more information on this, I should be more than happy to do so, because I get a sense that the Chairman is looking at the clock.

Q169 Patrick Hall: What he is wanting to do is go to the boiler room and see it for himself.

Mr Green: I am sure we can arrange that.

Chairman: I think we are going to have to draw our session, interesting as it is, to a conclusion because we have one other set of witnesses that I want to get through before colleagues have to go. It would be very helpful to have that information. Mark, you have a bursting postscript.

Q170 Mr Lazarowicz: Something which you might be able to supply in writing. You have told us quite enthusiastically about some of the measures that can be taken by domestic consumers in relation to energy efficiency. I should be interested to know a bit more about your suggestions as to what the commercial consumer can do in the field of energy efficiency to improve the current position.

Mr Green: I might have to give you a separate note; I would need to look into that a little more.

Chairman: One final question to you, which you do not have to answer now. We have heard a lot of information from both groups, but perhaps you could just jot down on the back of the proverbial envelope or postcard, the one thing that the government should be doing that would help to get it back on track to meeting the target that it set itself. With that, may I thank you very much indeed for coming and also for your written evidence. It was much appreciated.

Memorandum submitted by Renewable Power Association

 

Examination of Witnesses

 

Witnesses: Ms Gaynor Hartnell, Director of Policy, Mr Phillip Cozens, Shanks Waste Services Ltd, Major Project Development Manager, Mr John Strawson, Renewable Energy Growers Ltd and Mr Mark Candlish, Slough Heat and Power Ltd, Renewable Power Association (RPA), examined.

Q171 Chairman: Our final set of witnesses. I am sorry we are little behind schedule, but votes have not helped. May I welcome members of the Renewable Power Association? Gaynor Hartnell, director of policy; Mr Philip Cozens from Shanks Waste Services, major project development manager; Mr Mark Candlish from the Slough Heat and Power Limited - you must have been getting quite excited in the last exchanges - and Mr John Strawson from Renewable Energy Growers Limited. It is quite useful to have just a word or two to take stock. How are we doing with renewables? The impression I get is that you are not meeting your targets in rolling out particularly wind energy as fast as you would like. Perhaps you could also include in this overview, a word about the economics. Some people from the more conventional areas of power generation feel that you are getting favoured nation treatment by getting rather generous subsidies to get you off the ground. Have a go at those two propositions by way of starting.

Ms Hartnell: I will kick off with those ones. As to how we are doing with the Renewables Obligation, it is a fairly recently introduced policy, it is a market-based mechanism and is very novel. It was introduced with the objective of government saying what it wanted in terms of an overall renewable electricity target and then not wanting to have a role in deciding what the portfolio of renewable energy sources that made up that target would be; it wanted to let the market decide. I think early evidence is showing that the Renewables Obligation is really starting to work now. We have engaged the interest of the larger energy companies: those who comment on investment interest comment that the UK is a very attractive market now in Europe. You mentioned that it was primarily wind energy which was making progress and I would not disagree with you there. Because it encourages the cheapest renewables to come forward, we find that at the moment, the ones that have the resource to increase capacity are onshore wind, which has a very large resource in this country, landfill gas, which is limited in the extent of its resource but is very cost effective and is coming forward, a certain amount of co-firing and there is a certain amount of hydro, but wind is definitely coming to the fore and it was government's intention to let the market decide.

Q172 Chairman: What about the question of the subsidisation of it?

Ms Hartnell: Was the question about whether excessive profits were being made, along that line?

Q173 Chairman: No. I think there are some people who feel, that in terms of the money that is put in, you are getting a sort of favoured nation treatment. In other words, renewables certainly could never stand on their own two feet without having an additional payment made. Certainly the money that you get per kilowatt hour generated, means that your generation costs, taking them all into account, would be much more expensive than the existing "conventional systems"'.

Ms Hartnell: The way that the government has introduced its mechanism is that it has said it is going to allocate a certain amount of money and then that is independent in a way of how much renewable electricity we get. The nearer we get to the target, the less money will be going to renewable generators. It has a kind of in-built mechanism to speed up development if it is lagging too far behind target. I would not disagree that there are other areas of sustainable energy policy which really should also be rewarded as well and at the moment, renewable electricity is almost unique in having a kind of policy to deliver. The White Paper has set out wanting to achieve 60 per cent targets by 2050. Really it should be joined by other mechanisms.

Q174 Chairman: Help me to understand. In terms of straightforward government money, how much government, DTI, money, goes into renewables?

Ms Hartnell: I believe it is about £350 million. The majority of it is energy payers' money, but that money I referred to is going towards R&D, capital grants and other investments.

Q175 Chairman: So £350 million. On an annual basis or declining?

Ms Hartnell: No, that is over three years. I should not have admitted that.

Q176 Chairman: Over three years. Right. It would be helpful if you could just provide us, not to go into detail now, but with a breakdown of the amount of money that is going in. The reason I ask the question is that some time ago, if my memory serves me correctly, Sheffield Hallam University did an analysis to show where, for the expenditure of a pound of the public's money, you got the best reduction in CO₂ and the best reduction seemed to come from loft insulation. Renewables, particularly in the area I was interested in, biofuels and renewable miscanthus and timbers, seem to come round down at the bottom of the scale in terms of the pound to CO₂ saving. How do you see that spectrum operating? Are you good value for money or not? Mr Strawson is waving his pen. Do you want to come in on that?

Mr Strawson: I would if I may. You started touching on biofuels and the end that we as farmers can start providing and I have been tasked for the last three years, ever since the demise of the Arborough power station, with finding a market for the crops that we as farmers have in the ground. So I am acutely aware of the economics of how we are, as a price of fuel, to compete with fossil fuels also. The study to which you referred from the university may indeed at the moment be correct, but we have been growing energy crops now for four years and within that time have managed to halve the cost of production and therefore we have halved the cost of the fuel to the marketplace in four years of planting for Arborough which was just a small power station. If we could just have the inspiration now and a market to use up the crops that we planted for the Arborough, and then develop more plantings, which Defra are very much behind us on, then the cost of the fuel, which is already half the cost of oil at $50 a barrel, though it is twice the cost of coal to a power station; already half the cost of oil you have to remember and that in the absence of subsidy, so we are getting there.

Chairman: We are going to have a bit more of a detailed go at your area shortly. I do not want to hog the questions, so I shall pass to Joan Ruddock.

Q177 Joan Ruddock: We are on a very interesting point. What has been said initially and what David Green was alluding to in his evidence earlier was the fact that the market has been driven to onshore wind as the cheapest option in terms of development. Is that correct? That means that this remarkable halving of the cost of the biofuels within four years is not getting a fair reward for the progress which has been made. Given that you have a market-driven system, is this going to be the way that things are going to continue? If not, what is it that will make things change?

Ms Hartnell: That is indeed the way that it is working. Now the Renewable Power Association does not disagree with the basic philosophy there of allowing the cheapest technologies to come forward, but we do believe very strongly that there needs to be diversity in the long run; you cannot expect onshore wind to deal with our renewable energy targets. For that reason we advocate there be a policy which enables those technologies which are further away from commercialisation a chance to compete with the Renewables Obligation framework when their prices have come down. They need some form of transitional support to help them become commercial enough to play in that game and we did send in a proposed mechanism to help do that. The fundamental thing is that we do not think that the Renewables Obligation should be tweaked in order to deliver diversity. There should be separate mechanisms to do that. As we mentioned, the Renewables Obligation is market-based mechanism and my colleagues can tell you, from the coal face as it were, how important it is that once the government puts rules in place, it does not interfere with them, because they make investment decisions on the basis of the rules. So we agree diversity is important and that is why we have put forward a mechanism which we believe can deliver diversity without undermining the fundamental Renewables Obligation operation.

Q178 Joan Ruddock: We presumably do not have any details of this and we perhaps ought to know that so that I do not pursue the question, because we have a problem with time. I think we do need to know what that mechanism is, because it is very pertinent. I suspect most of us are going to conclude that we need diversity and what you are all saying is that we are not getting diversity, we really have the simple market mechanisms. Developing wind power is the cheapest. Is that the same as saying that wind farms are the most economic source of renewable energy per unit?

Ms Hartnell: I would not that wind energy is necessarily the cheapest; it is the one that is being delivered most rapidly at the moment, it has the resource to grow. Landfill gases are cheap, energy from waste ---

Q179 Joan Ruddock: Sorry, but you did say that the cheapest technology should come to the fore.

Ms Hartnell: All right, yes. I did say also that it was onshore wind, landfill gas, some hydro and some co-firing biomass which were basically making the progress under the Renewables Obligation at the moment.

Q180 Joan Ruddock: A wind farm, as we understood it, was the lead.

Ms Hartnell: It has the greatest capacity to grow. Landfill gas, for example, is limited by the size of the landfill gas resource. With wind, you do not need to worry about the size of the resource, you need to worry about how much you can actually take onto the system; it is not resource limited.

Q181 Joan Ruddock: Let me ask the question again then. Is it the most economic source of renewable energy per unit of electricity generated?

Mr Candlish: Of renewable energy?

Q182 Joan Ruddock: Yes.

Mr Candlish: At the moment, yes. To set the context of that, onshore wind in particular has taken the greatest advantage of the grant systems available for the last 50 years and so is the most advanced. I think it would unfair to say that that does not mean there are any other developments in other technology sectors, but the rules that have changed in co-firing and so on have created a great deal of uncertainty for the sort of entrepreneurs who are trying to develop biomass-fired power stations for instance. We commissioned a ten megawatt energy from waste plant which was combined heat and power as well. That project took ten years from conception to completion and when you get rule changes coming out every year in a market in which there are currently no developers in the UK and a very uncertain economic background, I think it would be harsh to say that that is representative of the potential of that technology to deliver. Right now it did not make the economics successfully earlier under the schemes which preceded the Renewables Obligation. Under the Renewables Obligation, contracts are not currently available to enable these longer lead time projects to emerge.

Mr Cozens: I think it is also important to understand that under the Renewables Obligation as it is currently written, there are certain technologies which are prescribed effectively as potentially contributing to renewable energy. I talk particularly about energy from waste, for example. To obtain energy from waste and qualify for a Renewables Obligation certificate, you must go through a qualifying technology which is prohibitively difficult. What we do see is a strand of opportunity within the energy sector which is not amenable; we cannot get to it because of the rock mechanism that we currently have. There is a locked up resource that we are not exploiting.

Q183 Joan Ruddock: So you are saying that are lots of stumbling blocks to creating diversity in the renewables field.

Mr Cozens: Yes, there are and I feel that many of them are self-inflicted in policy terms.

Q184 Joan Ruddock: What does that mean?

Mr Cozens: For example, within the Renewables Obligation, we see a qualifying technology as the route to being able to get energy from waste; you must go through gasification or pyrolysis or one of these processes. That is too much of a stumbling block really; the value is in the fuel not in the conversion technology. I would argue that a more rational approach would look at the value of the resource as a resource, waste biomass, rather than the means by which you turn it into power. The market ought to be able to determine that.

Q185 Mr Lazarowicz: I appreciate that this answer will vary considerably from one type of power generation to another, but I get the impression from what you are saying that the biggest single stumbling block to the development of other renewable power technologies is the Renewables Obligation and the way it is structured combined with the lack of the kind of mechanism that you are going to tell us about which would encourage presumably a stability of market for technologies other than wind power. Is that fair or have I over-simplified too far?

Mr Candlish: The Renewables Obligation is, in many ways, the right mechanism and certainly from an operator and developer's point of view, we would like to see as little change to it as possible. It is trying to introduce new technology to this country on the sort of scale which this country has not developed on before. We are talking about a large raft of smaller-scale projects and using technologies that we currently do not have a significant presence to develop. To get that sort of emerging market to work needs entrepreneurs and risk-takers, because the power industry is littered with the companies who tried it first and who went bankrupt. The large vertically-integrated players who administer the Renewables Obligation, who effectively collect the funds, will not take those sorts of risks; they will not invest in unproven small-scale technologies. The problem is: how do they engage the entrepreneurs into the market to take those risks? That is a fundamental issue that the RO needs to address: the big companies need to be hungrier to engage these entrepreneurs to go out and take the risks and do these early projects. We are looking at a development time of maybe 10 to 20 years to help these industries to emerge; they are not going to appear overnight. With a lot of the things here, when we talk about wave power and so on, we are talking about leading the world in these sorts of developments. Things like biomass have been already successfully done, as I believe you have heard already, in Scandinavian countries, so they are more proven technologies but with no real development base in the UK.

Q186 Mr Lazarowicz: Do we really lead the world in wave power? Yes, we are at the cutting edge in some respects to take one example, but my understanding is that there are other countries in Europe like Portugal and so on who are also very heavily involved in this area, probably in advance of what we are doing. How come they do it and we do not?

Ms Hartnell: In Portugal they have introduced a kind of market pool mechanism to encourage developers actually to build wave energy devices and put them in the sea. We have invested more in the research and development and indeed we are leading the world in terms of the device developers and it is true in tidal stream as well. We really do have a very strong advantage. We would like to see a market pool mechanism of the kind I have described in the proposal we have made to enable them to build on that success. The longer it is left with us not having that kind of mechanism, the more risk there is that those technology developers will move overseas.

Q187 Mr Lepper: I am just wondering what thoughts you have about encouraging domestic take-up of renewable energy. We have talked a lot about production and earlier we talked about encouraging the domestic interest in energy efficiency schemes. What about take-up of renewable energy from the home owner's point of view?

Ms Hartnell: That is certainly something that has great potential to deliver carbon savings. There was mention of building regulations earlier, that the ODPM Part L regulations consultations have really pointed out the advantages that can be realised from that. We have a capital grant programme at the moment for the domestic scale but the funds are due to run out fairly shortly and there is talk of replacing that with a technology-blind mechanism which would be for energy efficiency and renewables. Building regulations play a role, education plays a role, we just do need to bring these things out and get on with the job.

Q188 Mr Lepper: Is there more the government could be doing?

Ms Hartnell: There is. There is a Private Member's Bill which is being tabled today in the House of Commons on stamp duty rebates for households which have invested in energy efficiency measures and those could easily apply to renewable energy equipment as well and indeed we shall be encouraging them to see that opportunity. There are many fiscal measures; the VAT regime at the moment is not helpful. John I know has been involved in trying, indeed with some success, to get households and small schemes to take up biomass projects.

Mr Strawson: Yes, we have supplied a number of boilers more to the school size rather than domestic size, but we have one or two of our own members and also our own house is heated by a biomass boiler. Actually the advantage and the reason why we can sell that as working is because the fuel, in domestic terms, is actually the cheapest form of fuel. Woodchips from energy crop or forests are actually the cheapest form in energy value on that level. So already the market is an advantage for us. If there were some government forces to help that along, because the initial capital cost is the hindrance with household biomass boilers in that they are very reliable, they are very automated, but they are four to ten times the cost, depending on what size you are looking at ... There are capital grant schemes in place, but they are so complicated. If somebody identifies they have a market and they want to put a boiler in, you cannot budget on getting any grant and you might not know for six months whether you have the grant or not. What you need to do on that level is to look to countries like Austria, which has a very easy grant system. You can budget on getting the grant, a 50 per cent capital grant on the boiler if you are primary producer, thereby being able to pay yourself back at the forest a decent return for the woodchip. Other people can get grants, but only probably at a level of 25 per cent if they are not a primary producer. In Austria it works at that level and in the large CHP and power station and district heating size, I would suggest you look at Scandinavia. Their systems in there are very simple again, but they rely on fossil fuel taxes in the main to make it worthwhile. While I am on, Mr Chairman, you asked earlier whether wind is the cheapest. I agree that probably at the moment, it is the simplest, it is the easiest. It is less bureaucratic for an energy company to start producing renewables, because they do not have to worry about buying produce from a supply body and they know they can just get the electricity on the meter and they do not have to go through lots of hoops. It is the simplest: I would not say it is the cheapest. Offshore possibly, yes, is the cheapest but onshore I would say is not. If you look again to Scandinavia, and that is the reason I thought this, in Denmark for instance, it is saturated with wind and they only have the same amount of forest area as we in the UK at 10 per cent, but 70 per cent of their renewables, and they produce nearly 30 per cent of their power from renewables, comes from biomass and not from wind, even though they are saturated by wind. So, let us please concentrate more on biomass. We have had the failing of Arborough, we are working hard, we are nearly there. In the next few weeks you will start to see co-firing material going to two major power stations in the UK which we have got up, dependent on whether the processing machinery works through the commissioning, but that should now happen in the next weeks. Let us see some more emphasis please, not so much on wind but do not forget biomass is a big player.

Q189 Mr Drew: As far as I understand it, talking to the farmers who wish to grow various materials which would be useful to you, the biggest problem has been the stability in the marketplace, which obviously government could help overcome by making it clear that any subvention would be there for a period of time. In terms of looking at things like single farm payments, how much work have you done to see how you can stack up a variety of different means by which payments can be accommodated to ensure that there is a good return even if the price does not edge up, which obviously one would hope for producers, it would do.

Mr Strawson: The decoupled single farm payments opened the door to now supplying whatever crop we believe there is a market for. We do not now have to grow wheats or oil seeds to claim subsidy. We as farmers can now grow anything where we believe there is a market and that is a fantastic opportunity which coincides with the impetus behind renewables; that is one reason why we think farmers can really embrace it. We think there could be extra help with certain crops which offer an extra environmental benefit. For instance, willow is not particularly monoculture in its normal thought-of way and its biodiversity is far greater, plus it is giving carbon savings. We feel we ought to be eligible for some entry level scheme type payment that Defra is working on and that would be another big impetus through Defra which could give us an extra payment specific for an environmental crop like willow as against miscanthus. There is a lot of tinkering yet that we could still work on and I believe we should be doing, but basically we are about there. The Renewables Obligation is now a big driver which is beginning to work, we believe that is now having an effect on the marketplace. Our problem is that you need to be providing the power stations with the sustainability of the ROCs, so they can budget on it in the long term and they can, in turn, hand long-term contracts to us. It is the long-term contracts that we need to plant a long-term crop.

Q190 David Taylor: May I move you on from biomass to waste, but in passing say that I found what Mr Strawson had to say very interesting and very thought provoking? There are some biomass sources of energy which are in a sense also waste products and I was thinking about things like wood pellets. In Leicestershire several schools are heated from wood pellets and I switched on the boiler at one Castle Donnington school just some weeks ago. There seemed to be great potential there for it to be using biomass in the national forest in which Leicestershire sits, but let us move on to waste. Our Committee has spent a lot of time looking at the Landfill Directive and the government is in a bit of a bind on this; realistically it is doing what is can, but recycling rates are not increasing at a rapid enough rate and things like waste minimisation and re-use are not producing the goods either. So they are soft-shoe shuffling towards incineration, which is now being entitled energy from waste. I should like to ask Mr Cozens in particular to tell us how many energy-from-waste projects are actually running in the UK at the moment approximately.

Mr Cozens: There are approximately a dozen what you would call municipal energy-from-waste plants running now; approximately. There are one or two under development, but effectively we are seeing the barriers to entry of more of these plants so high that people are looking for other ways of solving the problem.

Q191 David Taylor: Is Edmonton your largest?

Mr Cozens: Yes, Edmonton is the largest, followed closely by Allington, which is under construction.

Q192 David Taylor: So there are about a dozen at the moment.

Mr Cozens: Yes; roughly.

Ms Hartnell: We could provide a list.

Q193 David Taylor: On a significant scale.

Mr Cozens: In scale everything from about 120,000 tonnes of waste a year to half a million. In the context of energy from waste, I think the debate needs to move on really. The origins of energy from waste were perfunctory really. Waste was perceived as a problem, burning it was seen as way of solving the problem; energy recovery was not really on the horizon. More recently, energy from waste was called thermal treatment by some people; again the context is something you do to the waste to get rid of it or to stop it being a nuisance. We have got to get over that as well. We have to be able to move towards a much more sensitive understanding of resource efficiency in the economy that we run.

Q194 David Taylor: You said earlier on Mr Cozens that we should not focus on the mechanism for converting the potential of the waste into the energy, we should ensure that we do in fact utilise it. Do you want to move us away from the concept of incineration and focusing on that? Is that the argument?

Mr Cozens: Yes, that is correct. When you look at the whole question of resource efficiency, and Joan Ruddock is one of the stars in my firmament and I saw her on a recent Bill, but there is more to resource efficiency that recovering materials. If you think about the sort of materials that we go to such pains to recover, they are not in fact rare. We recycle iron, we recycle aluminium, glass, they are the most common things you can find in the earth's crust. It is not their rarity that makes it worth recycling them. What makes it worth recycling them is the energy we save by doing that. There is a very interesting inter-reaction between energy and materials' recovery. There comes a point when effort spent on increased materials' recovery becomes counter-productive. We also have the parallel things which come through legislation, the Landfill Directive which you mentioned, which seeks to limit the harm done to the environment by landfill, the fugitive emissions of methane because of its greenhouse gas potential. At the moment, diversion of biomass from landfill is the big news in the waste industry. It is what is driving everybody with the prospect of huge fines for those local authorities which cannot comply. It ought not to pass our attention that that huge problem we are looking at, the diversion of biomass, and we are not talking about things that you could recycle here, we are talking about waste biomass, in the one context it is a problem, in another context it is a huge opportunity that we are blind to. There are enormous synergies with biomass production as an energy crop. Again, you need to look no further than Scandinavia to see how intelligent solutions to these problems have emerged. If we go back in time to the first oil price shock and how the Swedish economy behaved, I think you will see there a blueprint for the way we are going to need to live in the next 20 years. They looked at their indigenous resources to see how they could best optimise their use. If you look at a combined heat and power plant in Scandinavia, you will see a magazine of fuels in the bunker. There will be fuels which have been derived from waste, combustible elements of, you will see forestry wastes, sawmill wastes etcetera. The plant operator will use those opportunistically according to the economics of his business; when it gets colder, he might even be burning coal or oil. We need to look at our own resources in those ways. In particular, I think we should start to see energy from waste not as something which you would do maybe on a local scale to solve a local waste management problem, but something we should look at in terms of the fact that we have these materials, what is the best use to which we can put them and where can we best take them to realise that best use?

Q195 David Taylor: But some of the by-products of obtaining energy from waste by incineration are less desirable, are they not, dioxins, particulates, things of that kind? Are you saying that times have moved on and we do not need to be alert to the concerns that we have and local communities about that?

Mr Cozens: We need to be concerned about that, not just for combustion of waste but combustion of anything. If you look at the incineration plants which were running in the period up until 1996, you could produce dioxins by burning coal or oil in those plants, but the production of dioxins is not a function of the fuel. The precursor to dioxin production in such a plant can be found in many fuels, most of which are quite acceptable. It is the way you burn them that is important. In modern incineration plants, dioxin emissions are not a problem. It is the method of combustion that is the issue.

Q196 David Taylor: I know we have given biomass and biofuels a good run through, but looking at biofuels, we are lagging behind dramatically, are we not? Is it the case that France and Germany have some sort of figure like 100,000 tonnes a year of biofuels and we are only at about 10 per cent of that rate at the moment? Are those figures about right? Why are we lagging so far behind?

Ms Hartnell: Are you talking about liquid fuels for transport here?

Q197 David Taylor: Yes.

Ms Hartnell: We are behind. There is a lot of interest in promoting biofuels for transport and there has recently been consultation on the best mechanism for doing that, whether that might be differential fuel duties or a renewables transport obligation. There are powers in the Energy Act which have given government enabling powers to introduce some form of obligation. We are actually going to be making progress on that, but you are right to say we start from some way behind.

Mr Cozens: We should not neglect, in the same context, the potential of waste biomass to contribute towards a solution of that problem. This is an area where I feel the Renewables Obligation is somewhat misplaced. Taking Mr Lazarowicz's point, the Renewables Obligation is about 98 per cent right. There is not a lot wrong with it, so it is well-intentioned and it is fairly well-conceived; a bit of tweaking and it will be fantastic. However, what it does not recognise in advocating the use of advanced thermal treatments like pyrolysis in gasification is that to use a product of those processes just as a way of generating electricity is actually to throw away the major part of the opportunity. Those two processes are the route to convert biomass into transport fuels and the potential to do that is vast.

Ms Hartnell: We have mentioned the Renewables Obligation for electricity, we have mentioned now the potential for an obligation for transport fuels, we have not, although we sent in evidence about it, really mentioned much on the aspect of renewable heat. When we were talking earlier about different cost-effective forms of renewables, we did not really mention that renewable heat is really a very cheap and cost-effective form of renewable energy. Really, we are missing a trick if we do not reward renewable heat and that is why we have been working hard on our proposal for that.

Q198 David Taylor: The wood pellet example I gave.

Ms Hartnell: Yes; very important.

Mr Cozens: On the question of gasification of waste biomass, we have had some hesitant interest out of two oil companies who look at that as a route of providing additional hydrogen to existing refineries. Hydrogen in refineries is what you need to lighter fuels. So the concept of being able to take a waste material and return it to the economic environment as a transport fuel is alchemy, but it is doable. There is a plant in Germany which does that, Schwarzpunkt. They take urban waste biomass, they gasify it and it returns to the productive economy as methanol. It is doable.

Q199 David Taylor: You are using biomass as shorthand for biodegradable municipal waste as well as the biomass that we would more normally ---

Mr Cozens: To me, it is the same stuff.

Q200 David Taylor: I know it is, but we have tended to keep the two in separate categories. You are suggesting that we should not.

Mr Cozens: Exactly; it is a resource.

Q201 Chairman: One question area that I would like to close with in a moment is about security of supply, but I want very quickly to go through your evidence and ask whether you could write to me on one or two points. On the second page, there is a terminology "NGT Seven Year Statement". Can you drop me a note and explain what that means and likewise explain to me what the table under "Lifecycle emissions from renewables" is supposed to tell me. It would be very helpful if you could perhaps write a paragraph or two on the payback for domestic use of solar panels. It strikes me that there are some pretty high up-front costs for that and also photovoltaic equipment, which means the uptake at the domestic level is very limited. Under "Key recommendations for RO" you have a paragraph entitled "Keep the quotas rising". Could you please write a bit more and explain what that means to me? The question I wanted to ask is: in the United Kingdom at the present time, we have a declining share of CO₂-free electricity generation from nuclear. It seems to me at the moment that the renewables sector is taking the place of some of that lost nuclear, so we are not getting a net gain of new CO₂-free sources of power, we are getting a replacement. The second proposition I should be grateful for your comments on is about just how seriously we can take the actual 24-hour-a-day, seven-day-a-week, 365-day availability. In the case of something like hydro, you have a summer shutdown for maintenance. In the case of the United Kingdom, you only need a UK-wide high pressure system and you have knocked out most of wind. So we are left with one or two things you can burn and store as, if you like, the absolute core of a renewables proposition. Therefore, if you are going to be able to call on 100 per cent of what you need at any one time, you have a lot of potential redundant CO₂ producing capacity that you have to keep there. It does draw into question whether in fact, shall we say, benevolent as we might feel towards your technology, we could brutally say "Is it worth the trouble?" What we ought to be doing is going to make the other sources better, picking up Mr Drew's point about nuclear, perhaps having some more of that and not bothering with all this bitty stuff that you are talking about because we cannot count on it. Now, rebut that contention.

Ms Hartnell: To start with, the very bittyness is actually what often does provide the security. At the moment, we need to have about 1,000 megawatts of what they call "spinning reserve" which is coal-fired plant which is kept part-loaded to cater for when the electricity, going onto the system suddenly goes down. We need that spinning reserve at the moment to cater for the very largest power plants, in case they suddenly trip or for the interconnector, were that to trip. As the penetration of wind increases, you are going to need eventually to have some extra spinning reserve to cater for the wind. The cost will be very small. So much research has been done on this in the lead-up to the White Paper and even since then, which I can send reference to, but the costs are minimal. It is because of that bittyness, the fact that the wind is dispersed all over the country and you never really get the whole place totally becalmed. There are endless studies on the statistics of it. That in itself is an advantage for energy security. You mentioned the summer shut down for hydro. Again, there are many hydro plants in the country; they do not all shut down at the same time. I have never even heard that raised as an issue for energy security before.

Q202 Chairman: Well you ask the Italians; that is part of the problem they faced, but anyway we will not go into that.

Ms Hartnell: They choose to shut down all their plants at one time, so that is not very clever management on their part. It is not an issue here in the UK at all.

Q203 Chairman: In terms of where the potential for renewables lies, where can you pitch it, where you can say day-in, day-out, we can count on X per cent from renewable sources as being, if you like, a renewables contribution to base load? Are you ever going to be able to deliver that?

Ms Hartnell: We have an inter-connected electricity system. It works because it is totally inter-connected.

Q204 Chairman: I know it works, but you can count on nuclear, coal, those are here, now.

Ms Hartnell: You can count on a certain amount of renewable production, even it is intermittent. You can always rely on that being there, in the same way that you can rely on a certain thermal plant being there.

Mr Cozens: History tells us that we can also rely upon a certain amount of waste. It is difficult to prove, but it just keeps coming and the composition does not change much either. There is a huge resource.

Q205 Chairman: We have a huge public relations battle to convince people, taking up the points Mr Taylor was making earlier.

Mr Cozens: It is a battle, but it is very convenient for the same people who would complain about energy from waste to be myopic about their own profligate consumption patterns.

Q206 Mr Drew: What is the total capacity of renewables if we have the rate of increase in energy use at the moment or perhaps even slightly less? In other words, if we lock into this replacement of nuclear renewables, which has to get you to somewhere about 25 per cent, what is the capacity beyond that, that renewables will fill?

Mr Strawson: In my experience, looking round at other countries which are doing renewables to a far greater extent than we are, I would put that figure - and Gaynor would have her own idea - easily, given time, probably ten years, at 30 per cent from renewables and 10 per cent of that could be, with the land area that we have at our disposal, from energy crops. I think it is right for renewables to play a major role and it is quite right for a hybrid of renewables to be the right approach. On continuity of supply, energy crops and electricity from biomass and what we are doing as well are obviously not intermittent and just as secure as coal.

Mr Candlish: A couple of points, one on the intermittency. National demand is hugely intermittent, if you go from day to night; we have vast amounts of capacity summer to winter, which vary. So that is not unfamiliar to our system. Iit is also easy to say "The wind is not blowing so the turbine has stopped", but those are generally very small-scale examples across what would be a very broad network of a large number of schemes. You do not often get problems with the large 500 megawatt generation sets, but when you do, you really know about it. It was too warm in France last summer, so they could not cool their nuclear reactors and we were bringing on oil-fired plant here to back those up. You only need to look at the trips on the East Coast and West Coast of the United States last year to see what happens when networks of these, fantastic when they work, very large power stations, but when they go down, it is absolutely catastrophic. There are downsides there to the super grid, the 1950s model of power generation. What was the other point ?

Q207 Mr Drew: What is the figure that renewables can reach?

Mr Candlish: I think the number is high and the one critical point to get in here is that renewables is not just electricity. It is heat and heat has a massive contribution to play here. It is not represented in any government department at the moment. It is not lobbied for, because it does not have a multi-billion-pound industry representing it and it is a fantastically efficient use of the sort of resources that we can indigenously develop. Right now in Slough, we operate a biomass combined heat and power plant, but we do not operate it in combined heat and power mode, because there is no incentive for us to give the trading estate renewable heat. The lobbying is constantly focused on electricity production to the extent that when you are talking in committees like this and so on, throughout the government departments, if you mention the word "heat"' people say "Oh, you mean combined heat and power" which is the electricity version of heat. Nobody is talking about the incredibly valuable local small-scale grassroots projects which can deliver a vast capacity in a very short timescale.

Chairman: Upon that very positive note, may I thank you all for your contribution. I look forward to your further written evidence and thank you very much indeed for stimulating us with some interesting thoughts this afternoon. Thank you.