Examination of Witnesses (Questions 626-639)
RT HON
ALAN JOHNSON
MP, MR PAUL
MCINTYRE,
MR RICHARD
ABEL AND
MR HENRY
DERWENT
23 NOVEMBER 2005
Q626 Chairman: Good morning, Secretary
of State. Thank you very much for coming. I understand that you
would like to make some introductory remarks briefly?
Mr Johnson: Yes, and they will
be brief, Chairman. In 2003, we published a White Paper that produced
the first comprehensive forward-looking statement of energy policy
for over 20 years, based on the widest and most significant consultation
ever undertaken in the United Kingdom. It took in the views of
over 6,500 individuals and groups. That White Paper brought together,
for the first time, environmental concerns and the need to deliver
secure, competitive and affordable sources of energy. This liberalised
market-based approach is working. We have competitive prices.
Domestic electricity prices are 10% lower in real terms compared
to 1997 and the fourth lowest in the EU. Four million households
have been lifted out of fuel poverty since 1997; £10 billion
worth of private sector investment is underway in our gas infrastructure;
we have record investment in renewables with more coming on stream
last year than ever before; we have reduced carbon emissions on
our way to meeting our Kyoto target. We have also been clear that
we will keep our policy under review and update and amend it in
the light of experience, technological developments and global
events. This is exactly what the Government will do as we bring
forward proposals on energy policy next year. The terms of reference
for that work will be published shortly. The challenges we face
today are starker than ever. Climate change is a reality that
no country can now ignore. For the first time, we include a price
for carbon in the energy we use. North Sea gas production has
declined more quickly than expected and the UK is now a net importer
of gas. By 2020, the UK is likely to see the decommissioning of
coal and nuclear plants that contribute about 25% of our generating
capacity. Global fossil fuel price increases have fed through
to the price we pay for energy in our homes and businesses. All
of this means we need a hard-headed look at the way forward, not
just for next winter but for the next few decades. As the Prime
Minister has made clear, we need to take decisions in this parliament
if we are to ensure we have the energy generation and associated
technologies we need to meet the challenges of tomorrow. We are
genuinely open-minded and there is no pre-determined outcome of
this work. We will, of course, examine the question of civil nuclear
power as well as emerging technologies like carbon capture and
storage, wave and tidal energy and many other aspects. This is
not a nuclear review; it is an energy review. The review will
be objective and thorough, and I very much look forward to the
Committee's help and advice in securing a long-term and lasting
energy settlement.
Q627 Chairman: Thank you. That is a very
helpful introduction. We will have questions relating to some
of the things that you have already said. Can I begin by referring
to the story in today's newspapers about the current issue? This
committee's inquiry is really to do with the medium term, the
sort of issues that you have just addressed. We have an immediate
problem, do we not, with the price of gas, the problems that industry
is facing, the reports that industry is beginning, in Digby Jones's
words, to throw the switch because they are having some difficulty
about paying for the current gas rise. How has this situation
come about? I notice that Malcolm Wicks is quoted as saying that
it is highly unsatisfactory. Would you agree with that and what
are you doing to resolve it?
Mr Johnson: The first point to
make is that this is difficult for a particular group of energy-intensive
companies. That does not detract from the problems that we face,
but we need to get this into perspective. It is energy-intensive
users who are buying on the spot market rather than the forward
market. For those individuals, yes, today we will probably see
a record price of 165p. Three years ago we had the lowest ever
price recorded. On average over the last few years it has been
about 26p a therm on the spot market. In terms of the effect,
no less profound for those who are affected, these peaks are difficult
for these companies but we estimate it is only true for about
two-thirds of large, industrial energy users; that is only 0.2
per cent of companies that use gas; and that is 0.05 per cent
of UK companies altogether. So the first thing is to get that
into perspective. Secondly, how did it come about? This is a market.
We have introduced a market here. I do not think anybody who comes,
or very few people, before this committee would suggest that we
ought to interfere with that market. Indeed, there was a good
example from Ontario a couple of years ago that may well suggest
that those that do think interference is the way forward may like
to think again. But in this market situation, as I have just alluded
to it, the market has not adjusted quickly enough to what was
I think a decline in North Sea gas that very few people predicted;
it has declined more quickly than expected. For this winter we
have a combination of, firstly, a problem in terms of the amount
of supply and storage that is around. It will only be a really
difficult problem if it is one in 50 winter, but nevertheless,
after this year, things get better. Indeed, a number of measures
that have been taken running up to this winter, like the Isle
of Grain LNG store that was opened yesterday, like the extra capacity
we brought on stream at Didcot for coal, at Grain for oil, at
Killingworth for CCGT. That is all on stream for this winter.
Nevertheless, I think the market would have liked to be in a better
place for supply and storage. There is a second problem in terms
of our having a liberalised market in the UK but in the EU they
have not put their policy into practice, and that is a very serious
problem that we are seeking to assist with, particularly at the
Energy Council on 1 December when this will be top of the agenda.
We also have the problem of cold weather. It is a cold week. Whilst
it will not be a one in 50 winter, the Met Office are predicting
it may well be a one in 10 winter, which is still pretty cold.
All of those factors together are what is creating this particular
situation at the moment. There is a whole range of measures now
to suggest that the market will actually deal with that successfully.
Q628 Chairman: Briefly, can I ask you
whether you are satisfied that the Bacton Zeebrugge interconnector
is working properly and if that is not part of the problem as
well?
Mr Johnson: No, it is not working
properly. It is part of the problem and that is part of liberalisation.
There is not the flow coming this way that there should be because
of the lack of a liberalised market in the rest of the EU.
Q629 Chairman: The situation we have
at the moment in summary is not a foretaste of what we can look
forward to when we become more dependent on imported gas?
Mr Johnson: No, it is not because
we have £10 billion worth of investment going into new storage
and supply facilities that will be coming on stream over the next
few years. I think this is the winter when myself and my energy
minister will be getting up every morning, looking out the window
and, if there is a frost, we will worry. I think in future winters
we will not be quite so worried.
Q630 Joan Walley: Secretary of State,
it would be remiss of me, given what you have just said, not to
flag up the problems that there are for intensive energy users
as a result of the liberalised market that we have in this country
and the unliberalised market in Europe. For the short term, I
do ask you to look very carefully at the issue in terms of intensive
users of energy. In terms of the evidence that you have given
to this committee, can I ask you how seriously you take the work
of this committee? It has been very easy, I think, for many commentators
to scoff at the work that we have done but our previous inquiry
did really set out the problem and warned that emissions from
the generating sector were rising. That was very much in marked
contrast to the predictions that were contained in the DTI paper
only two years earlier. I wonder why it took your department and
Defra took so long to accept that the evidence that this committee
found is actually what is happening. Why did it take you so long
to understand what was happening to the emissions forecasts?
Mr Johnson: The first point to
make is that I take your point about intensive users. We talk
to them all the time; set up a specific working group; and we
are discussing these problems with them, even as we speak. The
second point is that I have not heard anybody scoff at this committee's
work. "Scoff" is not a word I associate with this committee.
Q631 Joan Walley: I was relating that
to a press interview over the weekend.
Mr Johnson: Also, I would find
it difficult to chart the course of action that took place since
your prediction and the DTI paper that you mention. As far as
emissions are concerned, we have taken a very realistic and hard-headed
approach here. Yes, we have set a stretching target, a 60% reduction
in CO2 emissions by 2050. We have been well aware that CO2 emissions
have been rising over the last couple of years for a variety of
factors, not least that the price of oil has meant that people
are switching to coal from gas because of this strange link between
gas prices and oil prices, which is something that may need to
be addressed on a wider international basis at some stage, and
also because of the problems of a growing economy. You find when
there is growth and high levels of employment that people are
travelling to work and it is a lot more difficult to tackle CO2
emissions than when there are high levels of unemployment. I do
not suggest that as a policy to deal with CO2 emissions. For all
of these reasons, we have taken a realistic view. We have made
an enormous amount of progress, again by stretching targets and
having a hard-headed approach to how we tackle this issue. If
there was any disparity and this committee were more far-sighted
than Defra or DTI at the time, I am willing to give brownie points
all round to this committee.
Joan Walley: I am very pleased to hear
that.
Q632 Mark Pritchard: Secretary of State,
you mention being fearful perhaps of frost in the morning. We
have had quite a few frosts recently. The Energy Minister in the
House a couple of weeks ago suggested that energy supplies might
be interrupted if we have a one in 50 winter. We heard from Ofgem
only last week that if we have a one in 10 winter, we might have
interruptions to energy supplies. What is your view in the context
of Ofgem's comments?
Mr Johnson: Ofgem have a central
role to play here, and so have the Met Office, and the Met Office
are not predicting a one in 50 winter. Even if we had a one in
50 winter, domestic customers would not be affected and it would
be major energy-intensive users with interruptible contracts who
may see an effect. In terms of what Ofgem said about a one in
10 winter, we cannot be complacent here. Once again, it is not
domestic customers. I think the concern of this committee has
certainly not been excitable about all this, but some have. I
note the title of your inquiry is "Keeping the lights on",
and that is fine as a medium term and long term issue, but those
that predicted that the lights might go off this winter in the
media and had front page stories saying "black out"
unnecessarily worried some very vulnerable and elderly people.
That is just not going to happen under any scenario whatsoever.
I think what Ofgem are saying is that we need to ensure we have
transparency of information throughout this winter and we need
to be in close touch with energy-intensive users. We want British
industry to be competitive. We are competitive and we have a competitive
energy market but we need to ensure that we do not take our eye
off the ball through this winter.
Q633 Joan Walley: Returning to how adequate
the DTI energy emissions forecasts actually are, the upward revisions
of the UK emissions cap in the National Allocation Plan are a
bit of a shambles, are they not? Do you feel that you have competence
and modelling systems you need to be able to forecast future energy
demands?
Mr Johnson: I am not going to
go near the words "scoff" or "shambles". I
do not know whether one of my colleagues here wants to help on
this. From everything I see, our analysis is in good order, but
whether it has always been in good order, I am not so sure.
Q634 Joan Walley: The upward revisions
of the emissions cap in the National Allocation Plan were all
over the place at that time.
Mr Johnson: You mean in phase
1. We have just won a court case on that this morning, by the
way, which is good news to us. I do not think it was chaotic.
Q635 Chairman: The numbers kept changing.
You won the court case against the European Commission: is that
correct?
Mr Johnson: Yes, which means the
European Commission now have to reconsider the allocation under
phase 1.
Q636 Joan Walley: What that leaves us
with is the importance of all the modelling that is coming out
of the DTI taking adequate account of the rise in carbon emissions
in the last three years. Would you see now that you need to bring
up to date the assumptions on which you base this modelling? Obviously
the price of oil has changed and the carbon emissions have risen
more than you anticipated. Are you intending to revise that basis
for your modelling?
Mr Johnson: We keep it under review
all the time.
Mr McIntyre: This is an important
issue. I can say something first about phase 1. We issued a consultation
with Defra about the National Allocation Plan for phase one. It
is the case that the numbers changed as a result of that exercise.
I suppose part of the point of consultation was to get a better
basis for the numbers. A great deal of work was done and a great
deal of consultation was undertaken to try to get those numbers
as accurate as possible. As far as where we are now is concerned,
work is being done, in association with the review that has been
ongoing, on the climate change programme. In association with
that, revised projections will be produced, so further work is
going on.
Q637 Joan Walley: When will we see those
final projections?
Mr McIntyre: They will be published,
as I say, in association with the climate change programme review.
That is the exercise to which that revision is linked.
Q638 Mr Caton: Moving on to the liberalised
market that you have just recommitted the Government to again
this morning, Ofgem has told us they are confident the liberalised
market would ensure security of supply without Government intervention.
Are they right?
Mr Johnson: Yes.
Q639 Mr Caton: Other witnesses, on the
other hand, have suggested that the current UK liberalised market
is very short term, characterised by a boom and bust approach
and the possibility of dramatic price spikes, which we have already
referred to this morning. Would you like to see any changes in
the structure of the liberalised market to provide investors and
power companies with more long-term certainty?
Mr Johnson: They certainly need
that long-term certainty but there is no doubt in my mind that
the market can provide that. There is no doubt in my mind that
we would never be able to get together the £10 billion worth
of investment that is going to go into new pipelines with Norway
and the Netherlands and the new storage facility in Milford Haven.
There is a market reaction here that could not be replicated in
the public sector. I also think the market is looking medium to
long term here. There is a role for our Energy Review here because
they want to know the Government's view on renewables, whether
there is a 2020 target and what happens beyond that if you are
thinking long term. They want to know what is happening with nuclear.
We left the door ajar in 2003. Are we going to close it or open
it? Certainly there is a role for Government there. The other
point I would make is this. There is something about interruptible
contracts that we have just mentioned. What businesses want is
a system where they are not subject to interference by Government.
If you look at what happened earlier this year in France, Italy
and Spain, they did not have interruptible contracts; their contracts
were interrupted by the Government. The Government stepped in
and interrupted their supplies. In this country that would only
happen in the most dire emergencies. If you look at prices, the
other issue, eight years pre-1997 and then eight years post-1997,
domestic electricity prices are down 22%; domestic gas prices
are down 15 per cent; industrial electricity is down 30%; industrial
gas is down 23%. For a whole host of reasons, I think the market
is working short term, medium term, long term. I certainly think
that once we get the same liberalised market in the rest of the
EU, we will resolve a lot of those problems we are experiencing
this winter.
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