Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 51-59)


19 OCTOBER 2005

  Q51 Chairman: Good afternoon. Thank you for joining us; thank you for your memorandum. I will ask you the same question that I asked the two previous witnesses, which is the one about why it is thought that we need another Energy White Paper so shortly after the previous one was published?

  Mr Burke: I thought that Catherine Mitchell gave you a rather good answer to that question, and mine would be the same. It is quite difficult to see what has changed so dramatically as to require another White Paper. I think a point I would underscore—and it was implicit in what Catherine said, but perhaps not drawn out as sharply as I would want to draw it out—is that this acts as an enormous chill on investors. The issue in addressing this question is investment and what is going to create a climate in which, in particular, the large energy supplying enterprises are going to see long-running investments being made, and having this kind of uncertainty about the policy framework, let alone the regulatory and other frameworks, acts an enormous chill on investment and unnerves people and undermines confidence in which direction the government wants to steer things.

  Q52 Chairman: Is it fair to say that the biggest single change really since the government produced its last White Paper has been the shift in oil and gas prices, which you might have thought would have pushed the argument in a different direction to that in which it appears to be going?

  Mr Burke: Yes, but I think it is quite interesting to think through what that means. They are not arising from the same reason. There are pressures on gas supplies because we have infrastructure constraints which are going to change. Now, there are longer-run pressures on gas supply which are of concern—concerns about energy security, part of which I was addressing in my memorandum. That is different from the oil price rise, which has been driven in part by increasing demand—particularly in China and elsewhere in the developing world—growing very fast and partly by supply constraints caused by the hurricanes and other features. What they have actually done is to recreate the kind of shock, more psychological than economic, that the 1973 oil price had, and that will have an effect. Interestingly, if you go back and look at the 1973 oil price hike the real price of oil returned within two or three years to what it had been more or less before, but most of the investment in energy efficiency that led to quite a big decoupling between energy demand and GDP took place long after the economic signal had gone. So the importance of the psychological signal was a lot bigger than the importance of the economic signal then, and I think that is what is happening now. This is pretty difficult to model, so you would want to be fairly careful about taking the models before this year and running them forward as if nothing had happened, and it is pretty difficult to work out what adjustment factors you are going to put in for that. But I do not think that is the kind of thinking that will be going on in the Energy Review actually; I think it might be the kind of thinking that would go on in the Stern Review, I think that it would be quite unwise to be making major decisions or commitments in advance of that study coming out. But having made a big announcement about a new White Paper one has, in a sense, got everybody now putting not just their investment on hold but also their thinking on hold to see what decision the government makes. I do not think that is very helpful. It is extremely hard to see why you would have had to do that.

  Q53 Chairman: So the lack of progress is not to do with unrealistic goals, it is to do with a lack of political will?

  Mr Burke: I think that is exactly right and I think maybe a slight panic mood of saying, "Oh dear! The world has got a bit worse and we must do something," without much more depth in the analysis than that.

  Q54 Mr Chaytor: Do you agree with Catherine Mitchell's point that the new review is there because there was felt to be a need for a different result than that given by the previous review?

  Mr Burke: I hate to speculate on what was going on in the minds of anybody in particular, but it does seem fairly clear that the Prime Minister is the only person around here who is trying to pick a winner.

  Q55 Mr Chaytor: Therefore, in terms of the new review do you have any information about those who are charged with producing the new Energy White Paper, as against those charged with producing the previous Energy White Paper?

  Mr Burke: No, I do not, but I have a point which I addressed in my memorandum, which is in relation to the question of maintaining confidence in the investing part of the business community. It must not only arrive at conclusions which command confidence but it must also do so in a way which commands confidence, in a way that is transparent and people can see through the reasoning. Otherwise, there will be no delivery because government, unless it is going to go back to nationalised industries, does not have in its hands many of the tools to deliver the outcomes. So it needs to have the positive, constructive cooperation of others, which means that they must have confidence in the government's reasoning and they must be able to follow the government's reasoning. So I think it is extremely important that the process of arriving at the government's judgments on this is very clear. That is why I recommended in my memorandum to you that the government should separate the process of arriving at assessments of different pathways from the point at which it makes judgments about which ones it prefers and why it prefers them. If what you get is a rather traditional government White Paper which says, "These are our conclusions and here is our reasoning and, by the way, we have left out all the analysis that we did not like", then you will undermine the confidence necessary to produce the level of investment and risk-taking that is going to be needed to get delivery.

  Q56 Colin Challen: Do you think that the government's drive to tackle fuel policy and keep energy prices low has undermined its efforts to introduce sustainable energy policy?

  Mr Burke: No, I think its inability to resolve the difference between the importance of capital expenditure and the importance of operating expenditure, to get the Treasury rules right so that you can make energy saving investments as a way of helping to reduce the pressure on prices, has been more of an obstacle. I think there has been some element in which in a very crude way it has wanted to keep prices low in order not to exaggerate fuel poverty. But I do not have any quarrel with the need to drive down fuel prices; I think that is perfectly sensible for all kinds of reasons, including the fuel poverty reasons. I do not think the price signals—the ones we have seen, for instance, in the market recently, where the oil price has gone from $20 a barrel to $70 a barrel in the last six years without a noticeably huge impact, either on the economy or on the way in which people use energy—for investment terms the price signals are not very strong. I do not think that the need to preserve access to energy supplies for people in relative poverty is the driving force. I think government can do much more to square the circle, but it is not saying—at least in my view—"Somehow we cannot let prices rise because otherwise poor people will be disadvantaged." I think it is doing a bit better than that.

  Q57 Colin Challen: The main reason that prices have fallen is liberalisation in the market. Do you think the government should intervene a lot more in that sense to actually achieve these objectives?

  Mr Burke: I think it is perfectly correct for the government to intervene in markets to deliver up public goods, and fuel poverty is a public good. My own instinct is that it is better to give poor people money; it is better to help them invest in ways in which they can reduce their demand on income, but that is just a personal preference of mine. The idea that the government should intervene in order to deliver up public goods, like the relief of poverty, as I have been at pains to point out in my memorandum, particularly in relation to energy security and in relation to climate security, I think it is absolutely essential.

  Q58 Colin Challen: Has it gone too far in one direction since 1997, in favour of markets as against intervention?

  Mr Burke: I would not say it had gone too far. I would say it has not really been thorough in its thinking; it needs to think further, it stopped thinking, perhaps, a bit prematurely. It was resistant to OFGEM taking on a slightly broader view of life and I think that was a bit of a mistake that has helped to perpetuate this apparent conflict. So I think it needs to continue to think through how you square the need to deliver public goods—and there are at least three that we have mentioned already—with the need to have a liberalised market. But I would not say that it was wrong. I think compared to what we had in the past with the CEGB it is quite clear that the benefit to everybody in this country and the benefit to the economy has been very considerable from liberalising the markets. I think the government is absolutely right to want to continue to argue across Europe that there should be greater liberalisation of energy markets, but you do not abandon the public good because you think you can deliver a better deal, as it were, to the consumer.

  Q59 Colin Challen: One more question on that point. If the European markets were liberalised what do you think that would do to the French nuclear industry?

  Mr Burke: I think it would have somebody looking around for transparent accounts on the EDF and I think that would be a shock to the French taxpayer. I have no objection in principle to the French taxpayer subsidising British electricity consumption, and I am sure that the French taxpayer is not very aware of the extent to which they are doing that.

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