Examination of Witnesses (Questions 262-279)
DR DIETER
HELM
13 JUNE 2006
Q262 Chairman: Dr Helm, welcome to this
evidence session in which we are gathering evidence particularly
on the nuclear new build question but, of course, it is important
to emphasise the evidence you have given us would relate to any
part of the energy review and not just the nuclear question. Before
we begin questioning, can I ask you to introduce yourself for
the record, as I always do?
Dr Helm: My name is Dieter Helm
and I am a Fellow of New College Oxford.
Q263 Chairman: A very, very brief introduction,
thank you. What you have written about the Government's energy
policy has consistently highlighted the fact that the electricity
market is not meeting the challenges of climate change and security
of supply. Do you think the Government chose the right time to
conduct an energy review then, three years after the last one?
Dr Helm: The answer to that question
depends on what you think about the 2003 White Paper and whether
you think it is an enduring basis on which to construct energy
policy. My own view is that it does not provide such a base. It
does not provide such a base even to address the short-term problems
which were witnessed last winter and arise especially with respect
to the gas market. More generally, it has not provided incentives
to ensure sufficient investment in the energy sector to meet the
security of supply objective. On climate change, I think it is
already patently obvious that the strategy that is set out in
the 2003 White Paper, while making a contribution to dealing with
emissions, is a long way adrift from either the domestic targets
of 2010 or, more seriously, the longer-term targets.
Chairman: Thank you very much indeed.
We are now going to pick up the points that you made in your written
submission to us.
Q264 Mrs Curtis-Thomas: Last week
we took evidence from two major generators—E.ON and EDF—likely
to be involved in any potential nuclear build. Do you think that,
with six main energy firms in the UK, we have market players capable
of the competitive delivery of new nuclear build?
Dr Helm: It depends on the structure
of a nuclear project. You can imagine consortia being put together
which might comprise any of the players in the UK market. In terms
of companies with large balance sheets and the capacity to run
a nuclear programme and to carry through most of the main components
of a nuclear project then I think we are quite limited to the
big three European players.
Q265 Mrs Curtis-Thomas: Just to summarise
what you have said: we have got six major players but they would
only take a small role in the consortia. What role do you think
they might take and is it a significant role with the rest of
it being parcelled out to our European colleagues on the Continent?
Dr Helm: If you think about how
a nuclear project is put together, first of all there are the
sites, and British Energy and the remnants of BNFL own all of
those, so that is part and parcel. There is the question of off-take
contracts and if anyone commits to a fixed price contract to buy
the power effectively they are taking some of the risk of the
project and any of the players might want to take some of their
capacity in that form. Then there is the issue of the bidding
and construction costs of the plant and it is none of the UK players
as currently constructed, it is the French nuclear reactor developers
and the Americans. I think the idea of seeing this as a company
building a nuclear power station is to misconstrue the way in
which the risks of these pan out and the way in which consortia
may well be formed.
Q266 Mrs Curtis-Thomas: The construction
and build is not ours, that is for others, but service and contract
provision is ours.
Dr Helm: In the end somebody has
to buy the power and it might be that large suppliers take a chunk
of that, but it might also be that financial institutions do.
For example, in the Finnish case it is a nuclear power project
and large industrial customers. A financial intermediary might
buy the contract, break it up into all sorts of small bits and
you might personally like to take a little bit of your power on
a guaranteed price, but not all of it. I think we need to move
forward into a world in which contracting is a much more diffuse
and potentially diverse type of activity than simply some lump
sum big contracts, but there might be such contracts.
Q267 Mark Hunter: Dr Helm, can I
ask you how important you think is the need for political consensus
on any final decision on nuclear. Do you think the Government
is going about achieving this in the right way?
Dr Helm: I think it is very important
to have political consensus about the climate change targets,
the climate change instruments, the structure of the electricity
market and particularly the security of supply incentives. I think
that requires an overarching framework which has to look beyond
the natural life of one party's period in government. We need
to get political consensus around that. So far, although it seems
to me most political parties take the issue pretty seriously,
as yet there is not much evidence that people are going to sit
down and hammer out an all-party enduring agreement. By the way,
that is one of the reasons why I think some institutions are needed
behind this to provide that. A separate question is whether there
needs to be political consensus on nuclear power. The strong difference
between the really very, very poor record of nuclear development
in the UK and the much more successful development in France is
clearly political commitment in France across the spectrum and
not in the UK. If you are going to engage in a large lumpy capital
project, or series of capital projects, the chances that a government
might subsequently change the rules increases the risk of that
project, raises the cost of capital, and in a large capital-intensive
industry it is the cost of capital that really matters. The answer
is if there is not cross-party support for a nuclear programme,
or at least the framework within which one might be constructed,
then it is going to be very expensive.
Q268 Mark Hunter: The second part
of the question was do you think the Government is currently going
about achieving this in the right way?
Dr Helm: No. I have argued all
along that these long-term energy questions should be taken, to
an extent, outside the party process. That does not mean in the
end it should not be political, it has to be political in a democracy,
and when one is talking about industry with long-term waste the
politics of handling that is paramount. We need to find a framework
within which the parties can sign up to such a framework without
it being the initiative of one or the other. In the past there
were mechanisms for doing these things, things like Royal Commissions
and things of that ilk, but I am not sure that is appropriate
in this context. I urged at the beginning of this current energy
review that it should be cross-party and it is not, it is a governmental
review, and I think that is a mistake.
Q269 Mr Bone: From your comments,
and there clearly is not cross-party consensus on this, and you
quite rightly have said the Government has not encouraged any
cross-party discussion by doing it as a single issue for themselves,
can I conclude that because it is going to be very expensive you
would be against a nuclear option?
Dr Helm: I am neither for nor
against. It is utterly critical to my arguments about energy policy
that I am in favour of setting a level playing field in which
carbon and security of supply are properly placed in the market.
In that context I hear from the nuclear industry that they think
they are the cheapest way of achieving low cost emissions and
security of supply. If that is true then if the playing field
is level there will be nuclear build, but I do not know. I am
highly sceptical, having studied energy policy for 20 years plus
and watched the numbers the Government produced about the costs
of different technology, about any point estimates of the costs
of different technologies. I think the market will out who is
bluffing, who is not, and what those prices are. Additionally,
the nuclear side—this is where you fray the edges of the
playing field—has some issues which require solutions which
go across political parties. One of the reasons I propose carbon
contracts is that a carbon contract is a contract which will have
to be honoured, so it is important to recognise that the carbon
approach is a cross-party commitment because somebody has underwritten
a contract. It is not enough to simply say, "We are going
to have a carbon price in the future" or there will be some
sort of floor that we will deal with, that is open to political
movement. What is not open to political movement is offering a
contract, signing a contract and then delivering on that component.
Commitment is part and parcel of the way I have thought about
designing a carbon framework. I am sorry if that is a little convoluted.
Chairman: We will come back to the carbon
framework later, I know it is one of your principal points.
Q270 Mr Weir: I was interested in
what you were saying about markets deciding. Given that evidence
we have had, not only from nuclear but from some energy providers,
is they are looking for long-term guarantees, and perhaps some
guarantee on long-term pricing, is it truly the market deciding
on that basis or are we looking at a skewed market to deliver
energy for the future?
Dr Helm: I think you have to be
very careful of the word "guarantee". In a market you
can get contracts. Contracts establish a fixed price for certain
activities and those contracts are enforceable. A guaranteed price
by government is quite a different thing. For example, mechanisms
like the Renewables Obligation or—I am not in favour of
this—a nuclear obligation effectively guarantees that costs
will be passed through in one form or another. That is not a very
good incentive mechanism and can produce all sorts of outcomes.
Q271 Mr Weir: Is it your feeling
that government should not be involved in effectively setting
a base price for any form of energy?
Dr Helm: Absolutely. Why should
it, and how would it know? If you had a benign planner who had
perfect information about everything and could perceive the future,
was immune to lobby groups and interest groups, fine. I think
what government should do is sort out what its objectives are
here. It is for government to sort out what carbon policy it wants,
ie what targets, and it is for government to sort out what level
of security of supply it wants and is prepared to take a risk
on. Given that framework, what we want to find is the cheapest
way of achieving that outcome. If it is a sharp and sustained
reduction in CO2 emissions then the question is how we can do
that as cheaply as possible. For the government to go in and say,
"We know that the answer to that is wind" or "We
know the answer to that is a nuclear power station" assumes
a level of information and understanding and an immunity to lobbying
which has never been witnessed before in an energy policy. The
history of energy policy and governments picking technologies
has been at times quite close to disastrous, particularly in the
nuclear sector.
Chairman: I think we are getting into
the danger of stealing some of the territory Mark Hunter wants
to ask about.
Q272 Mark Hunter: Before I come on
to my next question can I take you back to your answer to my previous
question. If I heard you correctly I think you were implying that
it would help, if that is the right term, if this decision about
nuclear were taken outside the party political process. Could
you extrapolate briefly on that given the fact you are talking
to an audience of people very much involved inside the party political
process. I am intrigued to know what your ideas might be in that
area.
Dr Helm: The political process
is involved in setting the carbon targets and the security of
supply requirements, fuel poverty and other objectives. (On the
objectives setting on the carbon side, I propose that there is
an auction of long-term contracts.) Somebody has to run those
auctions and I propose that there is an energy agency which has
the job of delivering the objectives which Government has set.
The auctions are one form of that. Similarly, on the security
of supply, the capacity market has to function in a context in
which a view has been taken about that security of supply and,
again, in my world that would be delegated to an agency. I strongly
distinguish between the setting of objectives as a political activity
and the delivery of those objectives which I delegate to an agency
in my proposed framework.
Q273 Chairman: The challenge to the
political process is for us to agree a consensus on supply and
carbon emissions, is that right?
Dr Helm: It is. It has proved
very difficult. This is not about aspirations. We can aspire to
reduce CO2 emissions by 20% by 2010 but, to be blunt, it never
was going to happen and it has no credibility. On the other hand,
you can auction contracts for carbon and they have credibility
by definition because they are contracts. You can tie yourself
to an EU emissions trading national allocation plan and that is
it. So far the politics has not gone so far as to even have agreement
about what those carbon targets are before we get into all the
detail about how they might be delivered.
Q274 Mark Hunter: On the last scenario
you advocate I am sure you would accept there are some fairly
basic issues about accountability that would need to be overcome,
but that is perhaps best left for another day. I am keen to make
progress, if I might move on to my next question. You have also
suggested the possibility of a single agency for the implementation
of energy policy which would encompass the work of Ofgem, the
Carbon Trust, the Energy Saving Trust and parts of the DTI. Could
you elaborate on how you might see this working and how feasible
you think that would be? Perhaps, how would it differ from a Department
of Energy?
Dr Helm: In my framework the government
sets its targets on climate change on security of supply. It delegates
those targets to an agency to deliver and that agency reports
publicly on progress with respect to those targets and publicly
alerts ministers to any substantive problems that arise. It is
somewhat modelled on the Monetary Policy Committee of the Bank
of England. It has both security of supply and climate change
together because trying to solve them separately creates enormous
inefficiency and, indeed, that is reflected at both the government
level and the structure we have at the moment between Defra and
DTI and between the energy regulator and environmental interests.
It is less bureaucratic than we have at the moment. We have spawned
a very large number of organisations across the energy sector
solving problems on a piecemeal ad hoc basis. I would bring
together the expertise of the Carbon Trust, the Energy Saving
Trust and Ofgem in particular within that body, it would have
a core modelling skill and we would have people with substantive
expertise in that body who would be there full-time and we would
build up a level of knowledge which we clearly do not have in
Government at the moment to address these issues. It is a delivery
body with two objectives, publicly accountable and it is a reduction
in bureaucracy from what we have at the moment.
Q275 Mark Hunter: I am interested
in the accountability factor, as I mentioned before. You just
said it would be publicly accountable.
Dr Helm: Absolutely.
Q276 Mark Hunter: If it is responsible
for delivery how is it going to be publicly accountable if we
do not have the situation of the minister being able to account
for progress, or lack of, in front of Parliament?
Dr Helm: We have that problem
across all aspects of delivery of government policy, so there
is nothing new, whether it be in the health service, education
or elsewhere. In my view, the agency status would not be the same
as the Ofgem status. We have thought through, perhaps well or
badly, the relationship between Defra and the Environment Agency
and the Environment Agency's accountability in that framework.
I envisage the normal mechanism for doing that might include guidance,
it will include select committees, it will include the normal
ministerial relationships with agencies, but there is one separation
in that ministers cannot say, "This is our carbon target
but, by the way, it looks like it is much more expensive than
we thought it was. We charged you with delivering it but now we
do not like how you are delivering it, could you change it a bit
without undermining the targets?" The crucial thing here
is how ministers make it credible that they are going to stick
to their targets and take the consequences for prices that follow
from those targets. It is better to be honest and say, "We
are not going to have these targets" if you cannot do that,
but if you are going to do it I do not think we want to continue,
if we take climate change very seriously, with the current world
where nobody really knows what the 20% 2010 target means. That
is the difficulty. If you want credibility it is expensive, that
is what it is like in monetary policy. We have learned there is
a massive pay-off in monetary policy from having clarity, of the
inflation objective being the Chancellor's and the delivery of
that objective being the Bank of England's.
Q277 Mark Hunter: That is interesting,
thank you. You have talked this morning about the importance of
establishing a level playing field, as you put it, on which all
technologies can compete. To what extent do you think the current
market provides such a level playing field?
Dr Helm: It is certainly not a
level playing field. We have a whole host of different kinds of
interventions and they are for different time horizons and they
treat different technologies differently. I am in favour of a
technology-neutral policy. For example, the Renewables Obligation
is largely a wind obligation, it excludes nuclear power, although
nuclear power is apparently low carbon. The Climate Change Levy
is not a proper carbon tax. There are a host of other interventions
in support of particular options within the marketplace. No, it
is not, but more fundamentally it misses out long-term signals
for the two things that you want this level playing field to take
into account. There are no serious incentives in the market to
provide excess capacity, which is what you need for security of
supply. No rational capitalists worth their salt would deliberately
engineer excess supply unless they were paid to do it, and clearly
they are not paid to do it. On the carbon side, we have no idea
what the carbon regime is beyond 2012 and we do not yet know what
the Emissions Trading Scheme looks like from 2008-12. I cannot
think of any serious technology on the carbon front which is interested
very much in what happens before 2012 other than very established
technologies. The two key elements to energy policy are outside
the market and, therefore, not part of that level playing field.
This market, whatever it does do, cannot possibly provide a secure,
climate change friendly energy outcome.
Chairman: Let us move on to the specifics
of the carbon contract now.
Q278 Roger Berry: Dr Helm, you make
a powerful case for using market-based mechanisms for dealing
with CO2 emissions, the two obvious mechanisms being carbon contracts
and a long-term carbon tax. Could you comment on the relative
advantages of the two mechanisms?
Dr Helm: In theory, and forgive
me I am an academic—
Q279 Roger Berry: I understand, I
used to be one.
Dr Helm: My condolences! In theory
there is much to recommend a straight carbon tax over permits,
however international agreements are much easier struck in quantities
rather than prices, ie permit trading rather than taxes, and Kyoto
in itself is fixed in quantities. There are reasons for thinking
that if you want to approach this problem internationally you
have got to go down the permits route. Then there is the industrial
lobby which would much prefer permits than taxes because taxes
provide revenue for Treasury, permits tend to get grandfathered
and not have the income effect on industry. We have the European
Emissions Trading Scheme, it is probably the only main game in
town, and the scheme that I propose with regard to carbon contracts
is designed exclusively with a view to reinforcing that regime
and providing a bridge to the longer term for that regime and
also fitting in with a framework for thinking about more international
agreement about carbon. The carbon contract proposal I have is
essentially an elongation of the Emissions Trading Scheme and
has the nice feature that if it comes into form it gives politicians
an extraordinarily strong interest in making sure the European
Emissions Trading Scheme goes forward because they need that to
offload the contracts on subsequently.
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