Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 20-39)

DEPARTMENT OF TRADE AND INDUSTRY

6 FEBRUARY 2006

  Q20  Mr Hoyle: Should they be separated?

  Alan Johnson: They should be separated and liberalisation will separate them by a natural process. Another 25% of that increase is probably caused by the point you made: not enough foresight to see that we would need more facilities for gas this particular year. That was not done deliberately. We have debated this in Parliament. All of the experts said that the UK Continental Shelf would run down, we should become a net importer of gas by 2006 and it happened much earlier than anybody predicted. It would have been foolish to build great storage capacities when we had reserves. Norway has no storage capacity because it has reserves and they certainly did get it wrong; everybody got it wrong. I do not think there was anything deliberate in that to drive up prices.

  Q21  Mr Hoyle: When can we look forward to the decoupling between oil and gas and quite rightly because we both know that is half the problem causing the price to be so high? Do you see that short term or long term?

  Alan Johnson: Medium term I hope.

  Q22  Miss Kirkbride: You just said that by shopping around consumers could save £46 a year off their bill. Given that average family household bills are going to be around £1,000, would that really show a great level of competition?

  Alan Johnson: Actually I am not sure whether that is £46 per year or £46 per month; it may well be monthly. I am going by the Ofgem press release, so we will get back to you on that.

  Q23  Chairman: Quite a big difference; £500 or £40 is quite a big difference.

  Alan Johnson: The point Ofgem are making is that there are potential savings to be made by shopping around and we became used, in this country, certainly I speak from my own experience, to one supplier and you think that is the only supplier you can ever have and although there has been a liberalised market for a long time, people still tend not to take advantage of that in terms of getting a better deal on prices. The £46 is annual.

  Q24  Miss Kirkbride: So not a lot to be done by shopping around.

  Alan Johnson: It is a saving.

  Q25  Roger Berry: In the consultation document we are told that to meet our fuel poverty targets 1.1 million households will need to be removed from fuel poverty by 2010 through a policy intervention. That is only four years away. What policy intervention do you have in mind?

  Alan Johnson: This is one of the most worrying aspects of rising prices, because we have taken four million out of fuel poverty and because prices are going up it is bound to slip back. The Chancellor announced in his Pre-Budget Report an additional £300 million to tackle fuel poverty which, together with the other available resources that were announced in the spending review of 2004 means there is over £800 million available. The kinds of market interventions or the kinds of support we can give are: the winter fuel allowance, which the Chancellor also announced would be there for the rest of this Parliament; initiatives like the Energy Retail Association's Home Heat Helpline which gives vulnerable customers a one-stop shop to which they can go to get advice on energy efficiency measures, payment advice, benefit entitlements, which would also help of course; the Warm Front campaign and other associated initiatives where there is a huge benefit in somebody visiting somebody's home, not always pensioners. There is a point about other vulnerable groups as well which I know this Committee made in their last report, but for pensioners in particular, the Pension Service will go to pay a visit and at the same time as sorting out entitlement to pension credit or savings credit and other benefits, they will also ensure that they have insulation in their home, that they have facilities to make the heating that they do have go further and that has been enormously successful. We need to do more of that. We need to get to more people through those kinds of initiatives. That is the kind of policy intervention.

  Q26  Roger Berry: The Committee has drawn attention to the fact that there are non-pensioner households which are vulnerable in terms of fuel poverty and households with disabled or ill members and in your response to our last Committee report, you did accept the Committee's recommendation that tackling fuel poverty in households containing someone who is disabled is a very important element. Could I tempt you to go slightly beyond that and at least make a commitment to consider the possibility that winter fuel payments may, in specific circumstances, be a very effective way of helping those who are under 60 who suffer from high fuel prices, particularly disabled people?

  Alan Johnson: What we pointed out in our response was that fuel poverty would be an important area for the review, particularly the aspect which you have raised, which is vulnerable groups such as the disabled. We have seen the statistics change dramatically for families with children and the elderly. It is disabled people that we need to concentrate on and we said we would look at that in the review.

  Q27  Mark Hunter: You will be aware that a lot of concern has been expressed over the hike in energy prices, both those which have already happened and indeed those forecast to happen. One of the key areas of concern is how it impacts on fuel poverty particularly for older people. You will probably have read this morning in the national press the comments of the Director General of Age Concern, who pointed out that older people and those on fixed incomes are hit hardest by energy price increases. He said that the choice facing many older people is likely to be between heating and eating. What would your comment be on that? Do you think that is scaremongering or do you think that is accurate?

  Alan Johnson: No, I do not and that is why when we came into government in 1997 and we found five million people in fuel poverty making that choice between eating and heating, we made it an absolute priority. We have taken 4.1 million out of fuel poverty and that is a great achievement but, because the definition of fuel poverty is that you are spending 10% or more of your income on fuel, then rising prices are bound to bring more people into fuel poverty and a figure of one million is not unrealistic. We have to redouble our efforts. That is why Gordon Brown made his announcement in the Pre-Budget Report about extra resources being available. That is why we now have more than £800 million available. That is why with the winter fuel allowance, £200 for the over-60s, £300 for the over-80-year-olds, the Warm Front scheme and other initiatives, we need to redouble our efforts to ensure that these most vulnerable domestic consumers receive help and support.

  Q28  Mark Hunter: Do you think those measures will be adequate, if the forecasts are to be believed and average households will be facing energy bills of £1,000 a year?

  Alan Johnson: We have to have adequate measures available; that is what we are committed to.

  Q29  Mr Clapham: Just following on the questions that Lindsay was asking, one of the things that the energy review is concerned with of course is ensuring that we have efficient supplies of energy and what further the Government can do to determine that. It seems that much of the information which is being put out to consultation is really placing the focus of reliance merely on gas imports. Are there any other adjustments that you can see being made to the market framework of the gas market, that are going to be necessary and essential to ensure reliance?

  Alan Johnson: Yes and they follow on with our forecast of what is going to happen on gas. What we are saying here is a mixture of EU directives focusing on emissions from coal-fired power stations, together with the decommissioning of nuclear power stations means that by 2020 we shall have lost 30% of our energy supply from those areas, from coal and nuclear. That would mean, if they were replaced by gas, that we would be reliant to the tune of around 80% on imports for our gas. So the questions we pose and the questions we ask during this consultation are: given the geopolitical situation around the world, given that we shall not be able to take that from our own resources, from the UK Continental Shelf—which puts us in exactly the same position as other G7 countries except Canada: there is nothing new, indeed we were a net importer until 1998 and we have only been a net exporter between 1998 and 2003—given that that is the situation, given some of the developments in the world, is that satisfactory, are we comfortable with that? That brings us on to the issue of diversity because for security of supply you need to look to see how diverse your energy mix is. For instance coal, which you may or may not be particularly interested in—I am just making a guess here—can have a bit of resurgence here. It would have been nowhere in the mix, because to get to 60% reduction in emissions by 2050, coal, with twice the CO2 emissions of natural gas, would have been nowhere in the mix but clean-coal technology now adds a whole new dimension to this debate. That is why coal is going to be a central issue as part of the whole energy mix in this review.

  Q30  Mr Clapham: So other adjustments do need to be made. Given that there are some concerns about the amount of gas that we do burn off in power stations, we are talking in terms of 40%, is it possible that you may, within the context of the review, look at ring-fencing the various proportions of energy mix into the market?

  Alan Johnson: It is a question you have asked me before on the floor of the House. The review will come out with the conclusions that it comes out with. I find it difficult to comprehend that there would be a strict ring-fencing around each particular part, because that would interfere with a properly functioning market. That is obviously going to be the contribution from Barnsley West to the review and we shall look at it, but I just find it difficult to think that it will be there in our final recommendations.

  Q31  Mr Clapham: So will it all be down to the market?

  Alan Johnson: All down to the market, but with the very important caveat that we do things like the Renewables Obligation. The Renewables Obligation says that electricity generators must generate 15% of electricity by 2015 from renewables. Government can push policy, particularly on climate change, in the areas that it wants to push it towards. That is a different thing completely from putting our size 16 hobnail boots in and stepping into the market as we have seen in some other countries. There is a very good example, which you ought to have a look at, I think it was Toronto, it was an area of Canada that famously interfered in the market six years ago and they are living to regret it because of the results.

  Q32  Mr Wright: We are all very fine, according to this document, up until 2015 when we are talking about the ten-year plan. What really has not been looked at is what happens after 2015. Chart 13 on p 36 quite clearly shows that with the supply increasing, after 2015 it starts to decline. By 2020 we are going to be reliant on 90% of our gas coming from other areas. What projections have been made after 2015?

  Alan Johnson: There are projections. There are two things about this diagram. This is about gas. First of all, demand there is based on demand as we see things at the moment with the Renewables Obligation, with nuclear being gradually decommissioned et cetera. It also does not take enough account of energy efficiency. This is a really big issue about how we can concentrate on energy efficiency to tackle a major part of this problem. Within that caveat, that is the first thing, that demand level may or may not come about, and it is very much for the review to look at 2010 and beyond. On the other issue, I do not know whether we have projections beyond 2015. We must have projections beyond 2015 but just before Paul says something about that, the point you will notice here is, if you draw a line up from 2005-06 up to the line, that you will see our problems this winter and you will see how gas from the Netherlands in particular and the LNG imports into Milford Haven et cetera make the situation much better after next winter. We have another tight winter next year. It is precisely because of an unclear picture further down the route that we are setting up the energy review, but whether we have projections beyond 2015, I am not sure.

  Mr McIntyre: We have done some projections up to 2020 and they are reflected in other bits of the document, a number of scenarios for the energy mix up to 2020. During the review one of the things we shall want to do is extrapolate forward up to 2050, so we also have some basis for looking at that longer-term period as well.

  Q33  Mr Wright: In response to this, obviously we are looking at the question of the infrastructure needs to bring this gas ashore for our use. You mention within the report possible significant non-commercial barriers to infrastructure development or operation. What do you have in mind there?

  Alan Johnson: Planning and planning consents, which was projected by one commentator as being the major reason why we have a problem this year. I do not think that is right. As far as we can find out, only one planning consent has been refused that would have added 3% to our gas supply this winter. For the future, and certainly when you look at issues like renewables and the transmission system and how it gets into the national grid, you need to look at planning. There is the Barker review which was announced in the Pre-Budget Report, to which we have added the dimension of energy. That is the major issue that we are considering.

  Q34  Mr Wright: Is that a short-term issue that you have a problem?

  Alan Johnson: It is a short-term issue and there might be other ways to tackle it in the short term. However, given that this review is about the long term, feeding on the result of the Barker review, we should like to see how we can deal with some of those issues, if we can deal with them. They are some of the issues that companies and businesses, renewables businesses in particular, have said to us are a major barrier.

  Q35  Mr Wright: Just very briefly on the question of the gas. You mentioned the problems that we have up until next year. Is it not going to be a problem that we may well create a dash for gas straight after 2006-2007?

  Alan Johnson: I do not think there will be a problem about a dash for gas. Our problem at the moment is having gas to dash to; it is having the supply system right so we can get the equilibrium right as we demonstrated in that chart. Dash to gas was a particular phase; we have tried to encourage a dash to renewables and we are now up to 4%; 2004 was a record year. When we get the figures for 2005, it will be better still. If we can get some of these transmission problems sorted out and some of the barriers, we can improve on that even further. It depends how you define a dash for gas, but, as I said in answer to the previous question on whether we should be comfortable with 80% reliance on gas, the answer would probably be no, not comfortable.

  Q36  Mr Wright: You mentioned the question of the storage facilities that we have. Did you say 90%?

  Alan Johnson: I am not sure what storage facilities we have now in percentage terms.

  Q37  Mr Wright: The ones which are being planned and actively developed. The report says "if they all went ahead". What would be the "if" within that concern which you have?

  Alan Johnson: There are always "events, dear boy, events" waiting around the corner on these things. However, if everything goes to plan, we have the new LNG terminal at the Isle of Grain now, we have doubled the capacity of the Belgium/GB gas Interconnector—and the fact that it is not coming through as well as might is being examined by the European Commission—we have a new storage facility at Humbly Grove in Hampshire, we have three projects expected to be commissioned in 2006, one of which is very close to my constituency, the Langeled pipeline importing Norwegian gas to Easington, the further upgrade to the existing connector and the very important BBL line connecting with the Netherlands. It goes back to what we were just talking about. They have to get specific planning permission, that all has to go ahead and there are commercial considerations which could affect storage projects. These are not government-run, centrally determined Stalinist facilities going up around the country; it depends upon the commercial climate. That is the kind of caveat, that is the big "if", but certainly nothing has happened that has led us to expect that these will not ahead as planned.

  Q38  Mr Wright: So you are reasonably confident that they will.

  Alan Johnson: Yes, we are

  Q39  Chairman: There is a requirement on oil companies for a strategic reserve of oil, is there not? There is no such requirement in the gas area, is that correct?

  Alan Johnson: There is no requirement for gas, no.


 
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