Examination of Witnesses (Questions 240
- 242)
TUESDAY 1 MAY 2007
MR MIKE
PARKER AND
DR JOHN
RHYS
Q240 Dr Turner: I was personally
very unpopular with government whips during the Energy Act for
attempting to give Ofgem different responsibilities, in particular
what could best be described as a climate change responsibility
which it now has to a degree in that it has an obligation to sustainability
but how effectively do you think it is discharging that and how
effective is Ofgem being, for instance in its current recognised
remit of consumer protection, given the massive windfall profits
that generators made during the first round of the ETS? The benefits
of which, to the best of my knowledge, have not been passed on
to customers.
Dr Rhys: Of course the generators
are not regulated directly as to pricing because they are deemed
to be part of the competitive market and suppliers will purchase
from them and pass the costs through. It is a commonplace among
merchant bankers that when you start on something like this, it
is very difficult to avoid generating windfall profits for clever
operators and there are many clever operators out there. The more
general issue is that it is actually very difficult to change
the culture of regulation, particularly when you have primary
objectives that are focused on consumer protection, competition
and so on. That is a much harder issue to tackle. It is going
to be very difficult for Ofgem to consent to break with its own
tradition.
Q241 Mark Lazarowicz: In your memo,
you argue that concerns over the impacts of carbon reductions
on the competitiveness of the UK economy have been exaggerated.
Would you like to expand a little more on that statement?
Dr Rhys: First of all let me say
that I agree in principle with the general argument of principle
that it is important that UK industry should not be disadvantaged
relatively and that is particularly important, if the outcome
were to be a transfer of industrial activity away to countries
which may actually be less carbon efficient than we are. It is
also possible to exaggerate the likely scale of carbon measures
in the context of competitiveness for a number of reasons. One
is that, first of all, the relevant CO2-intensive industries
are a very small part of overall GDP. Secondly, we are talking
very largely in the context of EU trading as to the actual measures
which are involved so there is going to be very little interim
EU impact and I would expect extra EU impact to be dealt with
at an EU level. As far as most industries are concerned, energy
costs are really quite a small part of the total and the overall
effect of competitiveness, even if you are talking about energy
taxes, is essentially going to be dwarfed by the much broader
impact of exchange rate issues which of course impact not only
energy costs but all domestic costs including wages. Then I guess
finally, in terms of the sectors that we have identified as being
the key ones to focus on, electricity, buildings and transport
rather than industrial processes per se, if necessary,
if one did see serious competitive disadvantages which were also
going to be energy inefficient, then they could if necessary be
dealt with by appropriate derogations. That is my general perspective.
Q242 Mark Lazarowicz: To what extent
do you think the UK will actually benefit from a greater investment
in low-carbon technologies? Are there opportunities for us both
domestically and internationally?
Dr Rhys: In a dynamic sense yes.
Our feeling is that by being at the forefront of what is going
to become a worldwide trend, we do have the opportunity to benefit
very substantially. That is separate from what I might call the
short-term, very obvious impact of price or taxation changes.
Chairman: Thank you very much for coming
in. We have absorbed both what you have written and what you have
said in the last half hour or so. We are very grateful to you.
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