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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