Examination of Witnesses (Questions 51-59)
MR TOM
BURKE CBE
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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