Examination of Witnesses (Questions 40-59)
DEPARTMENT OF
TRADE AND
INDUSTRY
6 FEBRUARY 2006
Q40 Chairman: Is that something you
are considering as part of this review?
Alan Johnson: It is something
that was raised with us, because that is the case in America.
I believe they have a strategic gas reserve, so we have said that
the review ought to look at that.
Q41 Roger Berry: On the question
of the projections in chart 13, how good has the DTI been at projecting
supply and demand in the past?
Alan Johnson: Excellent, I should
like to say.
Q42 Roger Berry: Sadly the premise
here of course is that you underestimated how rapidly we should
become net importers. That is the kicking-off point for much of
this consultation. On the margins of error on chart 13—it
is a serious question—are we talking about plus or minus
15% for each of them, or 5% or what? I am just curious.
Alan Johnson: We were not far
out on demand and we were not far out on what would come in from
the Belgium/GB Interconnector which we worked very hard on. We
realised the need to get liquid natural gas in. The one area there
which went down more quickly than we expected was the UK Continental
Shelf. In terms of other projections that we have made before
that we might be embarrassed by . . .
Mr McIntyre: Just on that one,
outside commentators were making rather similar projections to
the Government earlier in the decade. I am not sure that we were
very far out of line in terms of the projections we were making
about when we would become a net gas importer.
Q43 Roger Berry: I wanted to ask
about the European markets. The consultation document points out
that one factor in recent price rises has been our interaction
with Europe and it gives the European Commission quote about serious
malfunctioning of markets in Europe and we have heard all of this
before. We have in the UK realised that there is an issue here
about inadequate liberalisation in Europe. The document goes on
to talk about the lack of liberalisation and also implications
for the UK's reliability of supply. We had the UK presidency for
six months. From reading the consultation document, the only thing
I can spot that came out of that was a thorough debate at the
Energy Council. Am I being unkind?
Alan Johnson: Yes.
Q44 Roger Berry: In which case I
should love to be corrected, because I want to be fair to everyone
all the time.
Alan Johnson: When there is a
situation that other EU Member States are not putting EU policy
into practice, it takes more than six months to sort that out.
What happened at the Energy Council in December was that Malcolm
Wicks raised this at the Energy Council from the chair, all 25
Member States agreed. The first problem would have been if there
had been an argument about the need for liberalisation. There
was not. They all agreed. We had a Commission and a Commissioner
who were particularly vehement about tackling this problem and,
as a result, we have three inquiries going on. We have the big
one, that is the inquiry by the Commission into the situation
in the rest of the European Union as to why they are not being
liberalised as quickly as they should be. We have the inquiry
into the reasons why gas was not flowing through to the UK, which
could have had a price of 180p per therm when we hit the huge
peak just before Christmas, why it was not arriving. That is another
cause of an inquiry and there is another investigation which the
EC has agreed to initiate into whether abusive behaviour or distortions
in the European market may be causing short-term volatility in
the UK gas market. So those three areas were as a result of us
raising this issue very firmly during our presidency. It will
take time, just like liberalisation of other markets in the EU
has taken time.
Q45 Roger Berry: The obvious question
is: do you believe that there is the political will to deliver
on gas market liberalisation in Europe or are these three ways
of kicking it into the long grass? Is your candid assessment that
things will happen and if so, what kind of timescale are we talking
about?
Alan Johnson: It is my candid
assessment that things will happen and they will happen pretty
quickly and they will happen much more quickly after the events
over Christmas with Gazprom. Forty per cent of Germany's gas supply
comes from Russia. Europe as a whole, I am not sure of the statistics,
has a big dependency. We do not have any dependency on Russian
gas at the moment. In terms of the trauma that went round about
security of supply and about the things that could happen in the
European Union, breaking up large state-owned monopolies which
are used as political tools has to be a major, major priority
of the European Union.
Q46 Chairman: You were optimistic
about a timescale for that in the earlier section of your answer.
When do you think we shall see a significant step in the right
direction?
Alan Johnson: I hope that by the
time that Neelie Kroes, the Commissioner, finishes her report
that will lead to some short-term measures.
Q47 Chairman: Which is expected when?
Alan Johnson: This year; I am
not sure when.
Q48 Chairman: I rather feel we have
heard all about European gas market liberalisation before; it
is a tough nut to crack and I hope your optimism is not misplaced.
Let us just look at this geophysical security of gas question.
When you woke up and heard about Gazprom's behaviour in relation
to the Ukraine, what was your first reaction? What did you think?
Alan Johnson: Where is Malcolm
Wicks's phone number? Actually, for the reasons I have just described,
this was not a bad shock wave to send through the world because
the Prime Minister had said at Hampton Court last November, when
we hosted the European heads of state, that we ought to have an
EU energy policy, which Chirac agreed with and which is now something
which is gaining momentum. That includes an EU liberalised market
as part of that EU energy policy. That would have helped to galvanise
anyone who was sceptical about that. It was worrying, because
it could have led to a very serious political situation and you
can see how, if you look to other parts of the world, the Middle
East in particular, never mind security of supply, security of
the world can be flattened by disputes over energy. It is very
worrying.
Q49 Chairman: One of the major questions
in your review document, which this Committee will concentrate
on over the next few weeks, is views on the implications of increased
dependence on gas imports. You have given us some clues there,
but is there anything in particular that you would like this Committee
to look at? What are you thinking of? The document is quite coy
in this area and does not say very much.
Alan Johnson: You do not need
me to make suggestions, because I know you are already looking
at this: it is this geopolitical question. Where are the oil reserves?
Where are the gas reserves? Can we be sanguine about the future
if . . . ? A large amount of our gas will come from countries
which are perfectly stable like the Netherlands and Norway, but
these are issues which have grown in importance.
Q50 Chairman: What happens when Gazprom
buys a major British energy company? What does that do?
Alan Johnson: Gazprom have not
bought a major British energy company. We are in a position where
there has not been any bid. If there were a bid, we have very
robust competition policy in this country.
Q51 Chairman: Which is based entirely
on competition and not public interest.
Alan Johnson: It is, but then
government ministers have a role if there is a threat to the security
of the state. Those three mechanisms will be called into place
if any bid is made by any company to take over one of our major
gas suppliers.
Chairman: There are too many hypotheticals
here for me to pursue so I shall not. I shall move to the question
of the Emissions Trading Scheme.
Q52 Mr Clapham: We were talking earlier
about the impact that carbon prices can have, for example, on
reductions initiatives. That, in its turn, impacts onto the market
mix or it can impact onto the market mix. In terms of the current
European Commission review of the EU carbons trading emissions
policy, could you say a little about the UK Government's input?
Alan Johnson: Yes. We shall put
forward our suggested cap for Phase 2 by June 2006, which is the
European deadline. The point we would make is that under Phase
1 we showed leadership as we have shown on these climate change
issues and environmental issues for a long time in international
policy as well as European and domestic policy. We decided we
should bring the cap down by 6 million tonnes of carbon. It was
notable that not many other countries in the European Union followed
our lead. This has created a concern for British businesses which
are saying we have now made ourselves uncompetitive, for the right
reasons, and it has to be tackled, but we must not make the UK
uncompetitive. Everybody has to act in the same way. We have to
reduce EU emissions as a contribution to tackling environmental
climate change. The point I am making is that we are not rushing
in this time in the second phase. We are going to wait and see
what other European Union countries intend to do.
Q53 Mr Clapham: The competitive question
is very important. Is there anything more that we could do to
influence the EU to do more to ensure that others comply as we
did with Phase 1?
Alan Johnson: Yes. This is another
reason for an EU energy policy where you would have an EU Emissions
Trading Scheme which had a cap which was agreed right across Europe
and every country made the same contribution, or every country
that could make a contribution, made the contribution. We do not
have that. What we do have is that every European Union Member
State has signed up to Kyoto because we all signed up to it together
and there are many European Union Member States who are not, as
we are, in the happy position of having met the Kyoto targets.
Many of the major European Union countries, of course, are members
of the G8 which agreed last year in Gleneagles to a whole series
of efforts to tackle climate change. Margaret Beckett had a remarkable
success in Montreal before Christmas. It did not get the coverage
it deserved actually, because it was just before Hong Kong, but
there was a real breakthrough there on 2012 and beyond. For all
these reasons, the political pressure can be put on other Member
States to make a better contribution perhaps in Phase 2 than they
did in Phase 1.
Q54 Judy Mallaber: You are giving
yourself four months to sort out this row that has been reported
in the media over the last week between yourselves and Defra on
the size of the emissions cuts that should be imposed on large
industrial customers under Phase 2. It has been all over the newspapers.
Maybe you could tell us something about that. What would be the
effect on the price of carbon if the DTI got its way? You were
sounding much more cautious earlier. What would be the effect
on the price of carbon if Defra got its way, or is there no decision?
Alan Johnson: I know you are going
to be very disappointed about this, but there really is no row
between DTI and Defra; there really is not. In relation to the
climate change programme review where we are looking to get back
on track for a 20% reduction by 2010, this is obviously a feature
of this, but there is no disagreement between government departments.
There is no disagreement that we ought to ensure that UK businesses
are not affected adversely. If they are, they will up sticks and
move to a country which is outside the European Union, never mind
outside the UK, and will be emitting as much as they like. Everyone
recognises that and everyone is working to get this balance right.
In terms of the original question about Phase 2, we shall not
go in gung-ho. We were right to do that in Phase 1 to set an example
and show some leadership and in Phase 2 we shall be a bit more
circumspect. That is a view shared right across Government.
Q55 Judy Mallaber: What would the
effect be on the price of carbon of that balance you are trying
to strike?
Alan Johnson: I shall tell you
that when you have another meeting when we have actually put forward
our Phase 2 proposals.
Q56 Judy Mallaber: Let me try to
push you a bit further then. You are saying there is no disagreement
with Defra, but the suggestion is that one side of the argument
was that industry could sustain deeper emissions cuts. If there
were deeper cuts, would that actually make the nuclear option
more attractive because of the implications for the price of carbon?
Alan Johnson: It is not really
about the nuclear option. The nuclear option and the review are
focused on 2010 and beyond and well beyond 2020. We are looking
first of all at a Phase 2 that will run from 2008 to 2012 and
we are also looking at a Phase 2 figure that has to go forward
in June of this year. It is not being looked at in the context
of nuclear. It has been looked at in the context of whether business
is right in saying that a competitive disadvantage has grown up
on energy. Companies make long-term business decisions about where
to invest and the fact is, with Phase 1 and what British businesses
did to bring down carbon emissions, that has to put them at a
competitive disadvantage and we have to ensure that there is a
proper balance here and there is no disagreement across government
about that.
Q57 Judy Mallaber: Do you not think
that wherever the final decision rests on that is going to influence
the relative attractiveness of different forms of energy and therefore
influence that debate about that balance between different energy
sources?
Alan Johnson: Well it will. I
am just separating it from the energy review. There is no way
that the climate change programme review has anything to say about
nuclear or which particular path to go down because it is focused
on 2010.
Q58 Chairman: I could not help overhearing
a sotto voce comment from my colleague, Lindsay Hoyle,
which said "No row but a difference of opinion then".
Are you really saying that there is complete unanimity between
Defra and the DTI on the cap? If there is, you could tell us what
it is now, could you not?
Alan Johnson: There are always
differences of opinion; I am not saying there is not a difference
of opinion. I am saying there is a difference of opinion on this
between DTI and Defra, but differences of opinion obviously occur.
We should not be announcing a cap now anyway because we all agree
that we shall put our cap forward very late in the day when we
have seen what other European Union Member States are offering.
That is not a disagreement.
Q59 Chairman: That makes sense and
I accept that. I am a bit surprised by your lack of emphasis on
the importance of the Emissions Trading Scheme second phase in
determining commercial decisions. We are going to move on to a
few questions on coal and nuclear now in our concluding section,
but surely you can expect commercial organisations to make estimates
of the price of carbon fuels, because they have access to the
same kind of analysis as you have and your document is helpful
here and we are promised more detail later by your officials.
They cannot guess what the Government are going to do when setting
the price of carbon. Is it not the case that even the second round
of ETS has an appallingly short planning horizon, people making
major decisions on coal stations, never mind nuclear stations?
Is it not an absolutely key part of this energy review that governments
set the price of carbon?
Alan Johnson: Yes, is the answer
to that and you raise a very important point. The first point
is that we shall only get a projection of the price of carbon
when all the EU Member States have agreed to what they will do
under Phase 2. The second point is that I do not want anything
I have said to undermine the importance of the Emissions Trading
Scheme. Cap and trade is the big idea. Businesses like that much
better, for instance, than taxation as a policy. The idea came
from Chicago originally and you see what is happening now with
voluntary cap and trade schemes. It is really something that will
have an enormous influence on the future of this planet. I do
not want to undermine the Emissions Trading Scheme; that is the
last thing I want to do. We are arguing that air transport fuel
ought to be part of the Emissions Trading Scheme. The one simple
point I am making is UK competitiveness vis-a"-vis the rest
of the EU and the timing of when we go forward with the cap on
Phase 2, having seen what happened in Phase 1. It is not in anyway
saying that emissions trading is now less important and that we
are resiling from it in some way. The last point you make is crucial
because businesses say over and over again that they want long-term
certainty. One of the reasons why we are having this review—and
Phase 2 will take us to 2012 which is where Kyoto takes us to
and you are quite right that it is not very long—is so we
can stretch beyond there and we can get a long-term horizon. We
have done it domestically: 60% by 2050. There needs to be a real
international acceptance of the need to set these long-term targets,
to have measures to work towards them and to give business the
certainty that they need.
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