Examination of Witnesses (Questions 1-19)
DEPARTMENT OF
TRADE AND
INDUSTRY
21 FEBRUARY 2005
Q1 Chairman: Good afternoon. Welcome
to the Committee of Public Accounts, where today we are looking
at the Department of Trade and Industry and the subject of renewable
energy. We are joined by Sir Robin Young, who is the Permanent
Secretary of the Department and Mr Roy Collins who is head of
the Renewables Obligation Review Team. You are both very welcome.
Sir Robin, somebody tells me this might be your last appearance
before us?
Sir Robin Young: I believe this
is the case, unless the Committee summons me back very, very quickly.
Q2 Chairman: I was told that tomorrow
is your last day in the office.
Sir Robin Young: This is true.
You would have to shift a bit to get me again.
Q3 Chairman: I am very sorry that
on this happy day we have dragged you in. It is also Sir John
Bourn's birthday, so we wish him a very happy birthday. I apologise
to both of you. Back to the subject of renewable energy, perhaps
you would look at figure 16, page 36 and tell me how you justify
the extra cost of supporting renewable energy compared with other
means of reducing carbon emissions, especially given the fact
that this Renewables Obligation (RO) is, of the five current policy
mechanisms, the most expensive?
Sir Robin Young: Certainly, and
of course what I should say is that it is not either/or, it is
both/and. If you look at paragraph 1.2 in the Report, it makes
plain that the Government's climate change programme includes
approaches under five broad headings: energy efficiency, low carbon
transport, emissions trading scheme and then renewable resources.
So renewables is one of five, if you divide energy efficiency
into two, domestic and non-domestic, and in the Government's white
paper it is designed to hit around 20% of the total Kyoto target.
So the government is trying to hit its Kyoto targets by 2020 80%
in other ways but 20% by increasing the contribution of renewables.
As the Report says in paragraph 3.4 just opposite the table 16
you have drawn attention to, the high cost of renewables largely
reflects the high current costs of generating renewable electricity,
but obviously part of the hope or aspiration is that, as we drive
forward renewables, the cost will come down as we innovate and
as companies doing it make the economies which we want and we
hope that by encouraging it at this upfront high cost, we will
produce a lower cost renewable energy sector some time in the
future.
Q4 Chairman: That is all very well,
but it is a very complex scheme. Why not just have a carbon tax?
It is much simpler for people to understand and apparently it
was recommended by the Royal Society. It is based on the principle
that the polluter pays.
Sir Robin Young: We have an emissions
trading scheme which is similar in that respect but, as the Report
says at paragraph 3.4 "It is unlikely that a policy tool
focused directly on reducing emissions across all sectors of the
economy, such as a carbon dioxide tax, would have yielded the
same level of renewable generation in this time". So we are
trying to go ahead with greater energy efficiency on other schemes
to encourage low carbon energy, but also to produce a viable renewable
sector, which has the subsidiary objectives which are also mentioned
in table 16, of energy security, new technologies, jobs in the
UK and help for the rural economy.
Q5 Chairman: Could you please look
at paragraph 1.12, which you can find on page 13. Why do consumers
have to pay for the scheme, regardless of whether or not it is
successful?
Sir Robin Young: We hope it is
going to be successful and one good thing about the report is
that the consultants say we will very nearly hit our 10% by 2010.
Q6 Chairman: Mr Collins may wish
to answer this. The fact is that the consumer pays even if we
get very little renewable generation. That is right, is it not,
Mr Collins?
Mr Collins: The nature of the
scheme is that it fixes a size of market for renewable energy
and that cost to consumers is capped. That was a very important
element of the scheme that the government wanted when it set up
the renewables obligation. In such a situation, if we are behind
our obligation level, then that additional support from consumers
feeds through into higher ROC (Renewables Obligation Certificate)
prices, they are the certificates within the scheme, and that
will incentivise further renewable development. So the objective
is to design a scheme which both caps the cost to consumers and
is effective in stimulating a continued growth.
Q7 Chairman: It may be capped, but
the essence of my question is right is it not: the consumers will
have to pay for the scheme, regardless of whether it is successful
or not?
Mr Collins: The maximum costs
to consumers of the scheme are capped and are fixed by the obligation
level. It is not necessarily the case that if there is lower performance,
consumers will face those full costs. We do accept that the nature
of the scheme is that it creates a market for renewable energy
of a certain level. The alternative would be to fix the price
of renewable energy, a scheme of that kind, and that would deliver
a much closer correlation between the costs of the scheme and
the actual generation. That kind of scheme has its own disadvantages
in terms of the level of government intervention and the amount
that the government would be required to do in the way of fixing
prices.
Q8 Chairman: Could you look at paragraph
3.20, page 41 please. How can this renewables obligation provide
value for money when a third of the support for generation companies
is in excess of their needs? Mr Collins, if you wish to answer,
you may; I accept that this is a very complex area.
Sir Robin Young: The purpose is
to have a scheme which gives the necessary kick-start to this
currently tiny sector which would enable us to hit the rather
heroic target of 10% by 2010. Indeed, as the Report rightly says,
previous consultants had cast doubt on our ability to get that
kick-start, that sufficient acceleration to hit the 2010 target,
which is a key part of our overall climate change strategy. Where
we have erred, where we have obviously taken a risk or a judgment
call is in the relative generosity of the scheme designed to get
the necessary acceleration. If I refer you to the table on page
12, figure 5, it shows how far we have to go. So where some people
say "Oh well, if you made it less generous" we would
be even less likely to hit the 10% target than other previous
consultants have said we were. That is the context in which suggestions
about making the scheme less generous must lie; if you made it
less generous you would be less likely to hit the 10% target.
Q9 Chairman: As I understand it,
the way you have structured this renewables obligation you are
encouraging people to go for onshore rather offshore, is that
not right?
Sir Robin Young: No, not at all.
Q10 Chairman: You do not accept that.
Sir Robin Young: No. If you look
at page 2, you will see a table there, which admittedly is Oxera,
the consultants the NAO hired, but there is a prediction that
something between 4% and 4.5% of the contribution by renewables
will be offshore wind.
Q11 Chairman: Is the subsidy not
more marginal for offshore rather than for onshore and therefore
these companies are going to go for the onshore? You are aware,
Sir Robin, that this is probably the number one issue in the British
countryside in terms of planning.
Sir Robin Young: I am keenly aware
of this and there is a good section on planning in—
Q12 Chairman: What a lot of people
are saying in the British countryside is that the way you have
structured this, you are encouraging these companies to go for
onshore rather than offshore.
Sir Robin Young: The answer to
that does lie in table 1 on page 2, which shows that the contribution
by offshore wind is predicted to be a great deal higher and certainly
the increase in it even higher.
Q13 Chairman: That may be, but you
have not actually answered the question I put to you. Are you
denying the point I put to you that the subsidy for offshore is
much more marginal than for onshore, therefore companies are naturally
going to go for onshore first?
Sir Robin Young: Well they have
gone first by this marginal extent here, but actually the major
increase we are predicting and the Report predicts is in offshore.
So I am denying that.
Q14 Chairman: Well I have asked the
question and other members can come back to this if they wish.
Now, by requiring the use of more expensive electricity, which
I am sure you accept, are you not effectively taxing consumers
to finance subsidies for renewable energy?
Sir Robin Young: The cost of the
scheme does indeed fall on consumers; it is set out fairly in
paragraph 1.12 on page 13. The cost to consumers, because of renewables
obligation is estimated to amount to £1 billion per year
by 2010, which is 5.7% increase in prices. That 5.7% is between
1999 and 2010, so it amounts to around 0.5% per annum in price
increase and that is indeed the cost to consumers of this renewables
obligation policy.
Q15 Chairman: What I am putting to
you is that effectively this is a stealth tax. What you are doing
is forcing generators to buy more expensive energy, then you are
making consumers pay for it.
Sir Robin Young: That is exactly
what we are doing in order to—
Q16 Chairman: So it is a stealth
tax.
Sir Robin Young: I do not think
I can agree that it is a stealth tax.
Q17 Chairman: Can I just put it to
you that you are bypassing normal parliamentary procedures by
which you raise a tax, for instance by way of a carbon tax. Having
raised the money and having put that through proper parliamentary
procedures, you can then use that money to subsidise industry
in the way that you wish. The way that you have structured this
very complex scheme, which very few people understand, is effectively
bypassing annual parliamentary scrutiny.
Sir Robin Young: It has of course
had all of the proper parliamentary scrutiny, both the main primary
legislation and all the secondary legislation which we regularly
put through and we are putting one through as we speak. So it
has regularly parliamentary scrutiny, which is why I had to object
to the term "stealth". Otherwise, you are absolutely
right, Chairman.
Q18 Chairman: You have forced generators
to buy more expensive energy, and make the consumers pay for it.
Sir Robin Young: Correct. In order
to achieve the 2010 renewables target.
Q19 Chairman: I am not denying the
policy objective.
Sir Robin Young: No; quite. It
was only the word "stealth" I thought I ought to quibble
with because it has been completely above board.
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