Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 1-19)

DEPARTMENT OF TRADE AND INDUSTRY

6 FEBRUARY 2006

  Q1 Chairman: Welcome to this initial session in the Committee's inquiry into scrutiny of the energy review. May I ask you to begin by introducing your colleagues for the record?

  Alan Johnson: I certainly shall and it is a great pleasure to be here. On my far left is Richard Abel from the Domestic Energy Markets, on my left here is Paul McIntyre who is heading up the energy review team and on my right is Daron Walker, Project Director on energy.

  Q2 Chairman: Thank you very much indeed. As you know this is primarily about the energy review process itself, Our Energy Challenge, though some topical events have also occurred over the weekend which will feature in our questioning. Why do we need this review? Did the 2003 review not duck the issues?

  Alan Johnson: I was going to make a couple of comments for the record at the start, but the 2003 review did not duck the issues. The 2003 energy review in itself said that all these issues needed to be kept under close scrutiny and, actually, if you read parts of it, said that there may be a need for fresh documentation as we go along. What the Energy White Paper did in 2003 was rightly concentrate on building up a renewables market, which was non-existent at the time, and concentrating on energy efficiency. If they had done anything other than leave the door ajar on nuclear—did not close it, did not open it—all the focus would have been there rather than on renewables. Now the situation has changed even in that short time span: North Sea gas is running out more quickly than we expected; new technology has advanced more dramatically than we expected, particularly on clean coal technologies like carbon capture and storage; we also have a geopolitical situation around the world where security of supply is perhaps more of an issue now for all countries, not just the UK, than it was a few years ago.

  Q3  Chairman: You had something you wanted to say by way of introduction.

  Alan Johnson: Just a brief statement in opening. In November the Prime Minister and I asked Malcolm Wicks to lead a review of UK energy policy. On 23 January we launched a public consultation, the start of a wide-ranging and thorough energy review. The review will look at what further measures might be needed to tackle climate change and ensure secure and affordable energy supplies in the UK for the long term. The review is based firmly within the market framework and policy goals set down by the 2003 Energy White Paper, namely: to put ourselves on a path to cut the UK's carbon dioxide emissions by some 60% by around 2050, with real progress by 2020; to maintain the reliability of energy supplies; to promote competitive markets in the UK and beyond; and to ensure that every home is adequately and affordably heated. The challenge we face is starker than ever. Climate change is a reality which no country can now ignore. North Sea gas production has declined faster than previously projected and we are now a net importer of gas; we shall become a regular net importer of oil by around 2010. Our transition to being a net importer comes at a time of heightened concerns about energy security around the world. By 2020 the UK is likely to see decommissioning of coal and nuclear plants which contribute around 30% of our generating capacity and projected prices for long-term fossil fuels are now higher than they were at the time of the 2003 energy review. So the time is ripe to review our progress against the four energy policy goals that I have mentioned and, if necessary, to take steps to ensure we stay on track. There are no foregone conclusions in this review and we know there is no single solution. The review is not about the short term. However, I do recognise the need for learning lessons from this winter as we assess risks for the long term and the need for any further action. May I say that I very much welcome this Committee's very useful and constructive recent reports on fuel prices and security of gas supply? We are at the early stages of the review, but I look forward to the Committee's help and advice in addressing the important questions being examined.

  Q4  Chairman: And we were grateful for the very constructive response you made to our first report on gas; thank you very much indeed for that as well. What your initial answer to my opening question suggests is that this is indeed not a review really about energy efficiency and renewables, it is actually focusing on the nuclear question, is it not?

  Alan Johnson: No, and I am sorry my response gave that impression. No, it is not focusing on nuclear. Indeed, we have gone to great pains to say, exhaustively, that this is not focusing on nuclear. The whole team and where it has been drawn from, in terms of representatives including from the Department for Transport, Defra, and ODPM, is looking at our energy policy per se. It is not a review of nuclear. Nuclear is a part of our review.

  Q5  Chairman: Let us look at that team. This review is being conducted by an inter-departmental group of civil servants based largely, if not exclusively, in the DTI. Is that right?

  Alan Johnson: Yes.

  Q6  Chairman: The 2003 Energy White Paper was a much more extensive process, with lengthy consultation, committees of experts, a much more open and time-consuming process. Why do you think a team of civil servants, for whom I have the highest personal regard of course, working to a much tighter timetable can do as good a job as that last process?

  Alan Johnson: Because it is not a 2006 Energy White Paper. It is a review, building on lots of the analysis and the information that guided the 2003 White Paper, lots of analysis which has come since. We are not trying to recreate the 2003 White Paper. Indeed, as I said in my opening statement, we are taking forward the policy which was set out in 2003 and it is useful to have a review to look at that again and, yes, whereas in 2003 we could leave the door ajar on nuclear, I believe that now, as part of this review, we have to decide whether to close it or open it.

  Q7  Chairman: What will the output be from this new process? What will you actually do at the end of it?

  Alan Johnson: Produce proposals.

  Q8  Chairman: In what form?

  Alan Johnson: I do not know what form yet. We said in 2003 that if we were to go down the nuclear route, we would publish another White Paper, so if we were going to go down that route, we would need to keep to that promise that we made in 2003. If we are not going down that route, then there will not be a need for a White Paper in that context. We should have to see the result of the review and it is a very sensible process to take. Let us see what conclusions emerge, what proposals we shall be making and let us then decide whether that needs to have a White Paper, Green Paper, another form of consultation.

  Q9  Chairman: But your aim will be a statement to Parliament before the summer recess?

  Alan Johnson: Our aim would be to conclude this by the end of summer, which in parliamentary terms can stretch to about January of the following year.

  Q10  Chairman: Seriously?

  Alan Johnson: We very seriously want to keep to late summer.

  Q11  Chairman: So it may well be October before Parliament has a chance to look at this?

  Alan Johnson: We are going to try to keep very focused on this. We want this to conclude by the late summer.

  Q12  Chairman: I was quite struck by the list of other government reviews running in parallel to this review process. They are listed on pages 14 and 15 of the review document. How can you take the conclusions of all these various reviews on some very important issues—on climate change, energy efficiency, carbon capture and storage, land-use planning, radioactive waste management and so on and so on—into full account during this relatively short timescale for such a big consultation exercise?

  Alan Johnson: Well we can and those other reviews are very necessary in doing different things. For example, we had the energy efficiency innovation review that Defra ran last year. As a result of that, and stemming from the 2003 White Paper, we are due to produce a report on micro-generation in April, which we shall do. We have the Stern review, which is not looking, as we are looking, at the domestic situation for the UK, it is looking at the whole international situation and the economics of climate change on an international basis. The Stern review will be working very closely with what we are doing, so there will be cross-pollination, so to speak. One of the other reviews is the HSE review specifically commissioned by this review to look at various aspects of energy and to help to inform our review. As for the final point about the Committee on Radioactive Waste Management, CoRWM, which is due to report finally around June or July, they are due to produce their emerging conclusions, not just an interim report, but their emerging conclusions around about March/April and that will be a very important contribution to this review. There is not any duplication going on here and certainly the reason why we have drawn this review team so widely is so that we can keep in touch with all the other developments.

  Q13  Chairman: We shall see how successful you are in achieving that objective. One last process question from me before we get to questions of more substance. I was quite struck by the last sentence of the document, annex C ". . . a more complete presentation of and consultation on DTI projections, including fossil fuel prices assumptions, will be published shortly". Now what is "shortly" and is this not absolutely a central key piece of knowledge which we need to reach judgments on the review process?

  Mr McIntyre: May I answer that? The summary is actually in annex C and the fuller report, which I hope we shall produce from the DTI later this month, will be built around these same numbers; so the essential numbers are already here.

  Chairman: Right; so no significant changes to the numbers in annex C are anticipated, just more detail.

  Q14  Rob Marris: As you will be aware, the whole question of energy is very, very broad. The consultation document, somewhat frighteningly for me, says ". . . even if we had a completely carbon-free generation mix but took no measures in other sectors, we would fall short of our 2050 target", that is the target to cut CO2 emissions by 60%. You said today that this energy review is "not focusing on nuclear" and you also said "we are looking at energy policy per se". On a rough calculation, a third of the consultation document is on one relatively narrow area, albeit very important, which is the generation of electricity; not just electricity but the generation of it. That would suggest to some of us that there is quite a focus on the possibility of nuclear there, if a third of your document is on one smallish area. What is your response to that?

  Alan Johnson: You would be wrong in drawing that assumption. If you look at chapter three, we say an awful lot there about transport and heat, which are the other two elements of this. Yes, a preponderance of the document is around electricity generation, but that is a major aspect here; not that transport and heat are not as important, they are mentioned in the document and they are a part of this review. In electricity generation, it is not just about nuclear, it is about the objectives we set in 2003, it is about climate change in particular and it is about security of supply.

  Q15  Rob Marris: But you are talking about one chapter, chapter three on space heating and transport, both of which use roughly a third of our energy and there is some space heating by electricity, but most of it is not. Do you not think there is an imbalance in the consultation document on this?

  Alan Johnson: There are three chapters and if that covers a third, then that is just about right.

  Q16  Rob Marris: So you are satisfied the balance is right?

  Alan Johnson: Yes.

  Q17  Chairman: I just want to be absolutely clear on this, because I do have a concern that industry may be asked to pay too much of the burden in climate change issues; the domestic sector and transport sector have huge contributions to make as well. They will be a firm feature of your conclusion.

  Alan Johnson: A very large feature, yes.

  Chairman: Thank you very much indeed. We now turn to the question of gas.

  Q18  Mr Hoyle: Obviously, as you will quite rightly expect, consumers feel hard done by at the moment. They feel that they have taken a caning over gas prices and, to be quite honest, they are shell-shocked, if the press are to be believed, at a further 25% increase. Critics will say that the gas industry has let them down with their failure to invest in the long-term energy needs of the UK and some would ask why the Government has not intervened to ensure that that took place.

  Alan Johnson: First of all, there is speculation about gas price increases and it is certainly the case that the increases in the wholesale gas prices are likely to feed through in some respect to retail. That is not just a problem here, it is a problem in every other European Union country and it is a much wider problem as well. Gas prices in Germany have increased by 75% over the last year. Are domestic customers entitled to be concerned about this? Of course they are. Of course they are entitled to be concerned, but are they entitled to draw the conclusion that Government ought to intervene or that in some way we are not being well served by the market? I should not agree with those last two comments. First of all, in terms of government intervention, the review is looking long term. I have not met anybody in terms of short-term issues who has suggested that the Government ought to step into the market. There are people who have said the Government should do more in terms of storage capacity, they should do more to deal with that aspect of rising price increases which are not due to the tightness of the gas supply in this country and that is right. However, 50% of the price of gas is due to the doubling of the price of oil and not many people think that the UK Government have an intervention here that could have resolved that. The majority of customers recognise that actually the market has been good. In terms of domestic gas prices, I believe we are still at the level in real terms of gas prices in 1988 and we are certainly below domestic gas prices in the rest of Europe where they have not had the same level of liberalisation. Domestic customers need to understand more perhaps; we need to do more and Ofgem need to do more to explain the benefits of the market, that is that they can change suppliers. Ofgem put out a news release recently to show the kind of savings which can be made, on average £46 per consumer per year, through changing their supplier and making that market work for them. You are absolutely right about the concern about prices, but to put that in a context of saying we should be better off if we went back to state-owned monopolies would not be a sensible conclusion.

  Q19  Mr Hoyle: That is not what we are saying. What we are actually asking is whether the Government should have forced companies to invest in the long-term energy needs of consumers in this country. That is the problem: it is their failure which has also ensured that prices have gone up. We all know that when maintenance has taken place on rigs, it all seems to have taken place at the same time in order to force the price up, in order that the loser at the end of the day was the consumer. Unfortunately, whether we like it or not, we do know that British Gas have refused to comment on whether it is correct that a 25% increase is coming. It is that worry and quite rightly, as you say, it is important that we ensure we have warm homes, but we shall not be able to have warm homes with price rises like this. That is the great worry for the public out there. I just wonder what the Government can do to force the issue to ensure that we do plan for long-term energy needs, but also, more importantly, that we have long-term price structures in place. Being so self-sufficient in gas and allowing so much gas to go into electricity generation has been the failure and the householders, the consumers and industry have come second in gas needs and therefore the price has gone up substantially. That is presumably part of the issue that we have to face up to in the review.

  Alan Johnson: Yes, it is for the long term, but I just repeat that prices have been historically low, incredibly low, and domestic consumers have really benefited from that and so have industrial consumers. In terms of why we are in the situation we are this particular winter, about 50% of the price is because gas prices are tied to oil prices. There is no law of gravity that connects them.


 
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