Examination of Witnesses (Questions 391-425)
MR MAF
SMITH AND
MR TIM
JENKINS
11 NOVEMBER 2009
Q391 Paddy Tipping: A warm welcome to
Maf Smith, who is the Acting Chief Executive of the Sustainable
Development Commission, and to Tim Jenkins, an economic analyst.
Would you just start us off because the SDC has done quite a lot
of work on the green stimulus package. Take us through your proposal
and in particular contrast your proposal with what the Government
are presently planning to do.
Mr Smith: I will give you some
background into the work we have done. We had our Sustainable
New Deal report and that report was built on a number of pieces
that we analysed, reviewed and provided advice to Government.
There was the Green New Deal Group, the Deutsche Bank analysis,
HSBC work and the Grantham Institute. There were a lot of discussions
around fiscal stimulus and the Green New Deal and we wanted to
look at that through the lens of sustainable development at how
we could deliver both social gains but also looking at how we
stay within environmental limits that support the economy. As
a result of that work and also as a result of another report,
which we may come back to, called Prosperity without Growth?
which was our analysis looking at the wider economy and how the
macroeconomic models worked and what we felt there needed to be
changed and what is not working within the context of sustainable
development, we looked at both the Budget and the Government's
last CSR. We looked at what we felt was needed based on how Government
had set out its climate change aspirations and other issues. Our
recommendations were that above and beyond what was in the Budget
and what had already been committed to in the CSR it needed a
significant stimulus package that needed to be up to 50% of the
wider package on low-carbon forms and we set out a number of priority
areas which we can go into in more detail. The reasons for that
are clear. If Government is to hit its climate change targets
and to hit its wider sustainable development principles it has
a lot further to travel and we have a very short time to do it.
It is an issue of urgency and scale. We did not feel that the
Budget and the issues set out sufficiently tackled that so we
highlighted a number of areas where we need investment. The key
thing to note is this is for investment through a range of vehicles,
but the priority is to get started on that. Initially this will
require government funding of itself, but the Government urgently
needs to look at other stimulus packages, other financial incentives
and means of taxation. That sets the context and if you like we
can then go into the detail of our individual recommendations.
Q392 Paddy Tipping: I got the impression
that you were fairly dismissive of the green element in the current
package. Alongside that, I do not want to make a value judgement
but it is a big leap that you are proposing. I just wonder how
far that is practical in a political sense in the current economic
climate.
Mr Smith: We do recognise in our
submission that there is a major issue with deficit and, therefore,
how you fund long-term investment. There has been a lack of long-term
investment, or delays in investment, that we know are needed,
for example in low-carbon forms of generation in different forms
of travel. If we delay some of those investment routes then we
are not going to get to where we need to be in terms of wider
Government targets, particularly on climate change. We have referenced
that in looking at the Grantham Institute and others. The Grantham
Institute, led by Lord Stern, recommended a stimulus package representing
4% of GDP and our submission recommends a similar level. To reiterate,
we are not saying the 30 billion is all from the Government's
pocket. What we desperately need is for Government to look seriously
at different investment vehicles—green bonds, pay-as-you-save
type options, market structures—that can help deliver this.
There is investment available on these things and we are looking
at a number of practical issues at the moment on energy efficiency
which we can highlight later perhaps about how you can lever in
this private investment, but it is for Government to set that
market and direction that the private sector and others can respond
to. We have seen that in limited ways, for example, in the renewable
electricity sector. Part of our submission is how we build on
those initial pieces of work to produce that change in direction.
The net result of the Government response to the financial crisis
is that we are further down the route to a sustainable economy
rather than saying, "Where did we leave off on tackling our
economy and turning it into a low-carbon economy?" We see
the danger if Government focuses on short-term measures and puts
carbon aside that it will make those longer term decisions harder
when they come back to them.
Q393 Paddy Tipping: If you put this
green stimulus package that is presently in the Budget in the
context of international efforts, how does it compare with the
States or Korea or elsewhere? Mr Smith: I will give
you a brief headline and then Tim can provide you with more details.
Our submission highlights that in the 2009 Budget that was 1.4
billion of extra funding and we calculate that being 0.1% of GDP,
so obviously a significant difference from the 4% we say is necessary.
International comparisons do vary markedly, but some countries
have done significantly more. Tim, do you want to give more details
on that?
Mr Jenkins: The review that HSBC
conducted I am sure you aware of, but that showed where they had
found a green element to a stimulus package an average of 15.6%
of the package was green in some way, largely energy efficiency,
renewables, public transport and also water infrastructure was
a major part of that. That varies from zero up to 80% in the case
of South Korea which believes that to be an extremely effective
way for them to get a stimulus for their economy going forward.
The UK's was 6.9%. That does include the car loan scheme which
accounts for two-thirds of that. There is still quite a lot of
debate about the low-carbon effectiveness of that particular measure.
One of the arguments the Government comes back with on why it
is lower is that clearly the Government as between 2008-11 has
committed a large amount to these things and they are saying,
"We do not need that element of stimulus because we have
already got this in place". There is an economic concern
which is obviously those commitments were already on the table,
they predate the crisis, so in that sense they are baseline. The
concern is that a stimulus is about announcing things that move
forwards and are additional. The second thing is, as the recent
Committee on Climate Change report that came out a few weeks ago
states, at the moment we are still falling well short of what
we need to do to be able to meet the carbon budget, not only the
longer term target but those first three budgets that have been
set. Just to reiterate the point that Maf made, the concern is
if you feel that the announcements for 2008-11 were sufficient,
the problem is if the stimulus package itself stimulates investment
and development in the economy then in actual fact it is higher
carbon and there is a potential of it being locked in, of us not
moving as quickly as we need to to hit the carbon budgets, which
are obviously legally binding. That also underpinned our approach.
Q394 Paddy Tipping: When you say
the car loan scheme, do you mean the Car Scrappage Scheme or something
else?
Mr Jenkins: The Car Scrappage
Scheme.
Q395 Dr Turner: You have made it
very clear that the present green stimulus package is inadequate
but I wonder if you would spell out what you see as the consequences
of that inadequacy and also what you would do if, let us say,
you were a benign dictator and had the 4% of GDP to spend? How
would you spend it and what would you achieve with it?
Mr Smith: Perhaps rather than
comparing with a benign dictator we can compare with the South
Korean Government and how they have chosen to do it. Their Prime
Minister, to quote briefly when they launched their scheme, which
Tim has already referred to, noted that they were in an unprecedented
global economic crisis and they needed to respond urgently to
that and then said the green new deal, which is how the South
Korean government did refer to their package, will provide these:
"The 21st century global environment is here, we will find
new growth engines for this area". There have been similar
statements from the Chinese government, which perhaps does accord
more with your model, of the Chinese government looking at future
economic opportunities and how it might get ahead in the global
competitive race on that. If you look, for example, at energy
generation and how smart grids work, how they will fit alongside
new forms of appliances in the home and workplace, there are new
markets for that and there is jostling to get those. If we look
at how our current grid system operates we have a very traditional
model, a very passive model, and the Government needs to set a
framework for how the grid will work alongside the regulator to
make that happen and that will drive investment. If we had a smart
grid, much more active management of decentralised types of energy
forums, that creates frameworks to invest in but the private sector
cannot do that itself. For example, there is a lot now working
on smart metering but it took the Government working with Ofgem
to set the framework for smart metering to ensure it happens and
how companies deliver it. There was not the incentive for them
to do that by themselves. In a range of areas we have identified
what we think is the overall investment, for example on retrofitting
of the housing stock, on transport, et cetera, what funding
is needed and what that might deliver.
Q396 Dr Turner: Apart from facilitating
a smart grid, is there more that you think we could be doing with
such a package to incentivise new renewable energy deployment?
Mr Smith: From the Government's
existing package?
Q397 Dr Turner: No, not the Government's
existing package but a package on top.
Mr Smith: There is certainly more.
In the renewable electricity field the Renewables Obligation is
being changed and that will create banding that will better incentivise
offshore wind, biomass, wave and tidal forms of generation, but
we need to realise that the targets that we have for renewable
electricity are based just on electricity being approximately
20% of the energy market, whereas we also know that the Government
is looking at low-carbon vehicles and a large part of that is
using electric vehicles, so the balance we can expect between
fuels, heat and electricity will shift and electricity will grow
and become a more significant component. We do need to start looking
at how our electricity markets can deliver large amounts of low-carbon
energy. We also know in terms of how the market works there are
significant delays between current government incentives for new
renewables and those renewables coming onto the grid and supplying
into the market. There are a number of factors, but one significant
factor is delays in grid investment and market signals on that.
It takes a significant time to plan and develop those investments
and we feel the Government needs to be proactive in working with
Ofgem looking at underwriting some of those assets because Ofgem
and National Grid are currently prevented from investing in assets
because of fear of creating stranded assets.
Q398 Dr Turner: Do you think the
Government is giving adequate market signals for newer renewable
technologies, such as marine technologies? The double ROC system,
for instance, will just about get round offshore wind going but
that is about all it seems to be perceived to do by would-be investors
at the moment. Do we need to do something in that area?
Mr Smith: Yes, we do. Partly that
is by providing access to the market. The most significant resources
for marine renewables are to the north of Scotland but that is
where the grid is weakest and the way that people connect. We
can put on and connect small amounts of renewable generation in
Scotland from, say, the Pentland Firth area for tidal on the west
coast and the islands for wave, but significant levels of generation
cannot take place. That sends a market signal to wave and tidal
developers about where their long-term future markets might be.
For example, that is why wave companies are in Portugal, because
they know they can develop there and they have easy and good access
to the grid. It is about creating a future climate. It is also
about why the obligation will help once wave and tidal developers
are at a semi-commercial level. It is insufficient to get them
to that level where they are manufacturing at scale, so we need
more funding, not for the early stage research and development
but that difficult period in-between where you have proved the
concept but cannot get quite it to market. That is where extra
support is needed.
Q399 Dr Turner: In the early deployment
phase Portugal was attractive because of its feed-in tariff regime.
We do not have anything comparable.
Mr Smith: We do not, no. Currently
the Government's funds for its additional wave and tidal fund
that it created have yet to be spent because the way it is structured
has not worked for developers at the stage they are at, so Government
needs to look at why those schemes have not delivered and renew
them.
Q400 Dr Turner: Are you offering
an answer? You are telling us there is a problem and we agree
there is a problem, but have you got an answer?
Mr Smith: On the wave and tidal
scheme, the issue there is about the constraints that were set
up on that and the conditionality of some of those schemes, so
we need less conditionality around some of those schemes. We could
provide further detail to the Committee if that would be useful.
Q401 Paddy Tipping: That would be
useful.
Mr Jenkins: I would add just a
couple of points on that. The first one is just to go back to
the Grantham Institute's work where they looked at different elements
of a green stimulus package and then ranked them according to
how they would deliver, and renewables came out as the second
highest in terms of being able to avoid lock-in, generate jobs
and give social returns. The other thing is the financial crisis
has dealt a body blow to price and the idea that increasing the
price maybe through the trading system will delivery virtually
everything. We point out in our report that there is a need to
revisit the types of financial instrument that will be able to
deal with two issues. One of them is the de-risking, that it is
not attracting prime feed-in tariffs, for example, to reduce risk
more effectively and looking at ways of doing that, and that is
some of the work we are putting forward on the green bond idea
and moving that forward. The second is the deeper pool of capital
that is required. If I could also pick up on the first point you
made. You asked what would be the implications of not going further
than the current amount, and in the case of renewables it is that
delay that will mean we will potentially miss out on markets that
we could develop technologies to exploit. We will miss out on
being able to get the investments which will become more expensive
later on and potentially it will threaten our ability to be able
to meet our carbon budgets. These are all important issues.
Q402 Dr Turner: I do not want to
put words into your mouth but it sounds to me as if you are saying
that we face the risk of losing our technology lead in marine
technologies that we currently have by a whisker and facing the
same position that we did with the wind industry where other countries
reaped the major benefits of the technology in terms of jobs and
other economic benefits, and we will end up years down the line
as customers paying through the nose for it.
Mr Jenkins: I think that risk
exists. Work that we intend doing on the back of Prosperity
without Growth? will start to look at how different types
of investment need to be evaluated differently, if you like, with
carbon budgets and affecting how we see the economy and what is
going to deliver. We have been doing some work looking at how
investment is taken forward, how it is structured and what the
instruments are to be able to make sure that both the scale and
type of investment delivers on sustainable development objectives.
Q403 Mr Weir: You mentioned in passing
the weakness of the grid in the north of Scotland, which is an
old chestnut argued over for many years. Can you tell us what
in your opinion needs to be done to upgrade the grid? What is
your projected cost of that? Who do you expect to meet that cost?
Mr Smith: In terms of our submission
on the redesign of the National Grid, that followed on a review
that we conducted of the work of Ofgem called Lost in Transmission.
The Lost in Transmission work looked at Ofgem's delivery
of sustainable development and through that we were able to look
at how it was supporting low-carbon generation, how it was looking
after vulnerable consumers, and a range of issues. In this submission
we highlighted that if we are going to achieve the 2020 targets
the Government needs to be prepared to commit up to £5 billion
a year on grid improvements. That is over and above the £7.6
billion that was already identified in the CSR 2007. What is needed
is two-fold. Partly it is about the way the regulation works to
make decisions on future infrastructure where at the current time
the transmission access market means that Ofgem and National Grid
cannot move until they have an element of certainty about the
level of generation, the contracts they have in place to allow
them to invest in new infrastructure, to put new lines out or
to upgrade the existing lines. If you look at the wave and tidal
sector that is likely to connect in Orkney, Pentland Firth, the
west coast of Scotland, those developers are not at the stage
where they can invest and give certainty about when they will
contract, what level of megawatts they wish to connect to and
the timescale of that. That means that Ofgem, National Grid and
the Scottish transmission companies cannot plan with certainty
because there is a big danger of stranded assets, that they may
build it but no-one will turn up and plug in. In that circumstance,
given that we know that wave and tidal will be a significant generation
technology in the future, there is a role for Government to look
at how it can help underwrite and provide alternative investment
vehicles for the grid. That will allow some of the early work
to be done. If not the actual physical construction of those lines,
some of the planning work and some of the technical work to take
place, and as we do that we will gather a timescale of when we
expect to see wave and tidal connecting and in what amounts. That
is how they can accommodate the physical. The other side is how
the regulation of the grid can be changed that will encourage
and incentivise a much more active form of use. Currently, the
grid is set up to encourage larger scale generation with transfer
of that power to the users, and large-scale generation tends to
be north of England and into Scotland and the net use is towards
the south of the UK. What it does not do is encourage distributed
generation. We have smaller units of generation located within
towns and communities, for example CHP and smaller renewables.
It does not look at microgeneration and how to encourage people
to connect their own equipment to sell power and trade and it
does not look at what you might need technically to allow that
to happen. The regulation needs to be changed to incentivise that.
Then there is investment in substations, in switchgear, in some
of the technology that will turn it into what we call grid 2.0.
We have talked about the way the Internet has developed and how
we now use the Internet, whereas the grid we currently have is
like the old copper wire phone system. We are still using the
old grid structure but when we know now how electricity is generated,
used and traded is going to be very different. The regulatory
system has not yet caught up with that and when that does the
investment work is not currently planned that can switch that
across quickly.
Q404 Mr Weir: Does it not boil down
to someone, presumably the Government, has to take a leap of faith
that marine energy is going to be substantial and to put in place
a process to ensure the investment in that grid so we are able
to bring it onshore and feed it into the grid? It seems to me
to be a chicken and egg situation where marine energy are saying,
"We are going to be wonderful but can't connect to the grid"
and the Government are saying, "Well, show us you're wonderful
and we will connect up the grid". How do you break up that
logjam unless somebody takes that leap of faith and puts some
money forward?
Mr Smith: I think that is true,
there is this Catch-22. I would not describe it as a leap of faith.
There is a calculation that needs to be made about when to invest
and how to send a signal, but it is more about creating a market.
The electricity market is a very regulated market and low-carbon
forms of generation is a structured market in the sense that we
have obligations, et cetera. It is not a free market where
we leave developers to themselves. The Government clearly sends
signals to electricity generators, be they the utilities or independent
companies, of what it wants from them. It should be using the
grid to send signals about low-carbon forms of energy, particularly
on your question about marine energy. Part of that is making sure
that the infrastructure that those developers need is in place.
We feel there is an element of saying, "This is the type
of generation we need and want, so we provide you with the obligation
to pay you when you generate but we are also going to provide
you with the route to market" because developers cannot provide
that by themselves.
Q405 Mr Anderson: Can I ask for more
detail on the funding. Your report said that the Government has
a long-standing commitment to the principle of environmental taxation
but has completely failed to capitalise on it so far. What do
you mean by that and what can we do about that?
Mr Jenkins: The statement about
the fact that it had a commitment to it started in the 1997 Pre-Budget
Report when there was a statement of intent on environmental taxation
with the general principle of increasing taxation on "bads",
such as pollution, and reducing taxation on "goods",
such as employment, mainly through employers' National Insurance
Contributions. During that period up to a high watermark of 1999
there were environmental taxes that were brought forward—the
Climate Change Levy, Aggregates Levy, increases in fuel duty,
increases in the Landfill Tax—and many of those, not the
fuel duty but many of the other ones, also included cuts in employers'
National Insurance Contributions as a reduction of taxation on
employing people. At that point the progress in terms of increasing
green taxation stopped and there was a large hike in employers'
National Insurance Contributions as well that removed the benefit
that had been gained from environmental taxation at that point.
The commitment still stands, however, as a percentage and the
Green Fiscal Commission's report recently has got the data in
thereon the percentage of the tax-take that is green in some senses
has reduced since that time. One of the things that the Green
Fiscal Commission also points out is that there needs to be more
public debate about these things. The way in which green taxes
have been used so far in some cases has been good and in other
cases has led to argument and accusations of them being stealth
taxes in some way. There needs to be a very open discussion about
that to be able to move forward. The Climate Change Levy, for
example, is a tax, the revenues from which are used to cut employers'
National Insurance Contributions. They are also used to provide
enhanced capital allowances, a tax break for investments by those
firms in the correct things. There are negotiated agreements that
allow them to commit to make reductions for only paying 20% of
the tax rate, and also an exemption for renewable energy. Also
it was the method by which the Carbon Trust was set up to provide
advice and saves UK businesses £1 million a year in its current
form. Those sorts of models about how green taxation can be taken
forward can be learnt from and the Green Fiscal Commission's report
shows that. Also, not only is there an issue about being able
to use green taxation in terms of shifting the tax base towards
those things and particularly on to carbon, that is a longer term
debate and needs public debate about exactly how it is going to
happen, there are implications in terms of how regressive it is
and how effective it is, but that debate should be had in earnest
and in public. In a stimulus package, and we have seen this in
the US, there are some short-term options of providing significant
tax breaks for where investment is really desperately needed that
can be paid for by increases in other taxes or even windfall-type
taxes that have been brought out. This country has the tax on
utility where it is believed that a public policy had led to a
loss or an inefficiency to be able to claw that back. There has
been some debate, for example, about the free allocation of permits
under EU ETS to energy companies as one possible option. We have
not looked at that but there are these options of a shorter-term
use of taxation to provide stimulus as well.
Q406 Mr Anderson: Can you take us
through how green bonds would work in practice?
Mr Jenkins: Yes. Green bonds are
both growing in terms of quantity and diversity in terms of how
they operate. Just to give some examples. In 2004 the Bush administration
in the US brought in $2 billion of triple-A rated bonds for a
combination of brownfield and renewable energy development sites.
In 2007 the European Investment Bank brought out its climate aware
bond. In 2009 the US, as part of the Obama administration's stimulus
package, brought in another $2.2 billion of green bonds which
were directed specifically at renewable energy. Largely, a bond
works on the idea that you are getting somebody to lend the government
money that they will pay back and you can direct that both at
institutional investors, where most gilts are put forward, but
also there is an argument for being able to look at retail investors
through, say, a green top-up on ISAs. We are at the beginning
of a process where the diversity of this as a vehicle is expanding
rapidly and it is something in the UK we need to have a debate
on how that might work. Broadly, often how they work is they look
at how investment can be encouraged that will provide a return
that allows the government to be able to pay those investors back.
Where there are clear economic benefits of doing so, renewable
energy being one, energy efficiency being another and the grid
investment being another, where you know there are savings to
be had and they are able to pay them back, they will be able to
use those. You can have different timescales and some of them
provide coupons where you are paid on a yearly basis. For example,
the EIB climate aware bond does not pay a coupon, in five years'
time you just get back the face value plus an amount that is indexed
to the FTSE for good rating. There are many ways in which the
detail of how they operate will happen. The big thing is there
is a real demand both in the investment market and in the policy
area to be able to develop these bonds going forward. Broadly,
they are effectively getting people to lend you money to do so.
They have got to feel it is a very good deal, a good return for
them to do so, and for the UK it has got to be a clear economic
benefit. The elements of the green stimulus package that we are
putting forward, all of them have that ability to be able to pay.
Q407 Mr Anderson: Is anybody promoting
this? I am not saying this in a bad way but it almost sounds too
good to be true. If it is as good as you say it is, why are we
not getting on with it?
Mr Jenkins: There is a lot of
debate and various bodies. I can certainly send you documents
of people who have come forward with suggestions, such as the
Aldersgate Group and there is another group within the City that
is putting forward ideas, Climate Change Capital. These are in
the detail of exactly how that operates. There is a connected
proposal about being able to disburse those funds and whether
you do that through a green investment bank is another idea that
has been put forward. I can certainly provide summary documents
on those to the Committee.
Mr Smith: To underline how those
things might be used, we are doing a project at the moment where
we are working with DECC, CLG and the Housing and Communities
Agency, and we are looking at a project that is called Delivering
Neighbourhood Retrofit which is looking at the scale of the challenge
we have in increasing the efficiency of the nation's housing stock.
Yesterday the Committee on Climate Change were discussing the
report and said they estimate £15,000 per household, that
is on average, may be needed. Different commentators say different
things. Those ranges are from £5,000 to £80,000 per
house. The £80,000 is problem houses, if you like, or hard
to treat houses. We know the scale of investment is going to be
difficult to achieve. The Government's vehicle so far has been
either through direct grant funding, so fuel poverty schemes where
they provide funding directly to householders, or through utilities,
so we have the supplier obligation where a percentage of people's
bills is used to fund back energy efficiency measures, but we
know the scale of that is going to be very difficult to achieve
just through those routes, so the Government does need to look
at options. One option is through green bond-type routes. Another
option is through the pay-as-you-save market where somebody takes
on that work and the cost of that work and it is recouped over
time. The Government is looking at trialling some of that. We
also know from discussions with financial institutions, particularly
pension companies, that they are looking for long-term investment
vehicles. One of the lessons from the financial crisis is that
they need to look more closely at different types of investments
they choose, so they need shorter term investments but also long-term
guaranteed investment routes. They are interested in this but,
again, they need the Government to set the framework for that
market. It is worth highlighting that it is not just Government
at the UK level, although that is obviously critical, but local
government as well. There are examples of local authorities who
have done very good work on energy efficiency, on local generation,
and these forms of investment could help them. There are links
there to pension funds that local government and the public sector
have stakes in or help manage.
Q408 Mr Anderson: You have moved
on to the Government's role and in your report you say there is
a need for the Government to take a stake in the ownership of
energy related assets. How is that different from old-fashioned
nationalisation? You also say that we will learn from the financial
crisis, but are you saying the situation in energy is as serious
as it was that faced us a year or so ago in the financial field?
Mr Smith: On that second point,
there are concerns about the long-term investment in future generation
and creating the vehicles that will produce efficiency gains,
so demand reduction. We are not seeing the scale of investment
needed to meet future sources to allow us to diversify and move
to a low-carbon form of generation both for standard electricity
generation and, as I said earlier, for things like electric vehicles.
The market is not shifting quickly enough so Government needs
to look at what it can do through regulation and investment to
do that.
Mr Jenkins: One of the proposals
is that at this time, and we have seen it in the finance sector
and more recently in the public transport sector with the East
Coast Main Line as well, Government in those particular cases
does so as a method of saving particular institutions. We have
raised in the green stimulus package that one of the options that
could be looked at is whether particularly in the energy sector
where—significant is almost a term that is not sufficient
enough to be able to describe it—significant investments
are required in the next two decades, it may be one of the options
for them to do is to look at taking an equity share in some of
those infrastructures, particularly when it will be government
money that is often flowing through those, to help them develop
particularly within the grid or particular pieces of infrastructure.
We have had debates and discussions around that and we put it
forward as one of the ideas that needs to be looked at in the
options. We do not have any specific proposals on that but we
are having discussions about how that can be taken forward.
Paddy Tipping: Let us move on and talk
about new priorities. We are having a valuable discussion but
in order to make the best use of our time if we can be a bit more
focused, and I am talking to my colleagues as well as you two—I
was going to say "lads" but that is a bit demeaning;
it is where I come from.
Q409 Dr Whitehead: The Government's
priorities, certainly as highlighted in their memorandum to us,
emphasise concentration on five key technologies and they underline
carbon capture and storage, particularly offshore wind generation
and wind generation more widely, development of marine energy,
as we have already discussed, and obviously the development of
nuclear energy as a low-carbon technology and the development
of low-carbon vehicles. What is your view of those priorities?
Mr Smith: If we start with carbon
capture and storage, that is a critically important area to invest
in based on the fact that it has yet to be proved how that is
done at scale, so the earlier the Government can invest and demonstrate
the technology and bring market confidence to that technology
is important. As you say, we have discussed renewables. Our input
on that is we particularly want to see a focus on the grid for
the reasons we have already outlined. There are currently investment
routes and things like the Renewables Obligation. We would like
to see more grant funding for new renewables, particularly marine
and decentralised renewables, what is missing from the Government's
priorities is that issue about how the grid is put in place because
we do see the way that is delivered is one of the things that
is holding back those technologies. On the question of nuclear,
we have reviewed nuclear ourselves and provided advice to the
Government some three years ago. To sum up very briefly, it was
a very thorough report and we felt that while nuclear was a low-carbon
form of generation we had concerns about the long-term impacts
of nuclear, issues about risk, cost and long-term waste implications.
Also, most relevant here is the concern about lock-in, that significant
investment in nuclear would crowd out other investments in newer
technologies. One of the things that the Government has highlighted
in its nuclear programme is that it sees nuclear as a mature technology
that the market can deliver. Therefore, we would see that Government
support should go into merging loads of technologies. The final
point you highlighted was low-carbon vehicles. Low-carbon vehicles
is important in making a shift, but we said that the Government
should focus on two things: firstly, on investment into the public
vehicle stock, which is significant, and that will provide both
leadership from Government proving some of these technologies
and ironing out some of the problems before we might then move
to asking every individual to buy an electric car and install
a plug-in point outside their house. The second area of transport
we said Government should invest in is more investment in walking
and cycling. As a low-cost option it ticks more boxes for different
reasons, but one of those is it provides people with transport
options which are healthy, easy to access, provide equality issues,
help with health and are cheaper for individuals. One thing Government
wants to do is encourage saving and move away from fuelling. One
of the reasons why we said we should move away from fuelling is
debt, so rather than encouraging people to get a loan for a new
electric car we should be saying, "How can we make it easier
for you to meet your transport needs without having to get in
a car?" We felt that was something we should be doing more
on. The other area we highlighted which the Government has not
is about how to upgrade the housing stock and increase the efficiency
of the housing stock. We feel that is a major challenge. The Government
has recognised that in things like its heat and energy savings
strategy, but we feel the scale of that and the pace at which
we want to see government investment in energy efficiency is not
there, so we need it to be a priority.
Q410 Dr Whitehead: Indeed, in your
memorandum you have identified a number of different areas, some
of which overlap with the Government's priorities and some of
which, as you have highlighted, are very different. Could I ask
you some specific questions on your particular priorities. You
have mentioned redesigning the National Grid and we have discussed
some of that. Do you not think that the mechanisms you are suggesting
in terms of investment, and you have mentioned investment in stranded
assets, might appear to suggest that, as it were, the Government
invests in things which are not going to work and the private
sector invests in things which will work? Does that strike you
as a problem in terms of how you might deploy the resources that
you identify for a green recovery?
Mr Smith: Certainly in the way
you have portrayed that, yes, and if that is what we have conveyed
that is not our intention. This needs to be done with care. This
is more about the Government setting out the market framework
to encourage investment in certain technologies. With renewables
as a technology, we know that renewable development has to occur
where the resource is. The traditional regulatory model for grid
investment does not look at resource, it looks at distance to
market, the balance between demand and generation. The current
regulatory model encourages people to build generation plants
near to demand, which means central and southern England, but
we know that the generation opportunities are further away. Having
said that, Government is now actively looking at this and the
transmission access review that DECC are doing alongside Ofgem
is taking a much more proactive stance. Government is saying that
the investment routes and the regulatory framework are too reactive,
they do not send those signals. The Government is looking at how
transmission can be better incentivised. We feel that the Government
is getting this lesson and trying to find ways to stimulate more
transmission and predict, if you will, where that investment should
be. Our point is that Government needs to be involved in underwriting
that investment to speed some of that delivery up.
Q411 Dr Whitehead: I am not entirely
clear from your evidence and what you have said today what difference
you are making between the extent to which the Government might,
as it were, physically provide the funding for renewal of the
grid and the dispersal of the grid and the redesign of the grid
in the way you have described and the extent to which they put
in place the framework within which that can be done. Which do
you think is the right way forward or do you think there is a
combination of both required?
Mr Smith: It is a combination
of both of those, putting in place the framework, so getting the
regulation right, but also helping support the investment. One
way we called for that was through a revolving fund that can help
underwrite the connection of new renewables, but that fund is
a revolving fund so it can be used for other investments later.
Once generators build and plug in they contribute back towards
that investment which can then be offset and used again to encourage
other investments. It is not simply a case of Government just
funding new grid infrastructure and that grid infrastructure being
a free asset, it is about how you share the risk of that with
developers, whereas currently the risk is almost solely borne
by those developers in how they commit and contract to connect
to the grid. The second side is about how Government invests in
new control equipment, substations, et cetera, and encourages
that active smart grid system that we do not have yet.
Q412 John Robertson: Part of the
biggest problem about the grid is planning. We have got the Beauly-Denny
line in Scotland which has been on paper since 2000 and we still
have not got it, so what makes you think we are going to get all
of these other substations and everything else that you think
you require? It is missing from your report but planning is a
major issue here. How do you see that being overcome?
Mr Smith: Yes, planning is not
in there. The report highlights the investment vehicles that we
could use. Delays in planning are obviously a significant factor
as you have said. There are no quick answers. We have looked at
planning in various energy reports we have done, including our
Ofgem report, and reports on wind and nuclear. One issue we highlighted
was the need for proper consultation and involvement in decisions
so some of the controversy can be taken away. You will never take
all of the disagreements and controversy away. It is worth highlighting
that good planning does not have to be slow planning. You can
be thorough but manage things with a clear timescale. We have
just been made a statutory consultee for the Infrastructure Planning
Commission, so one of the things we are now doing is looking at
the planning statements which are just coming out. We will be
looking at the energy statements that came out, although we have
not yet done that. I can provide further information back to the
Committee on what we say to those, if that would be helpful. We
have views about what the Government should do and what the Infrastructure
Planning Commission should do and one of our concerns was about
the democratic deficit of those decisions and how that works alongside
local authorities. Nevertheless, there is a speeding up of some
of those decisions. Some of the work has been done in Scotland.
My normal work is heading the Scottish team and we have engaged
with the Scottish Government and Scottish Parliament on the national
planning framework there and commented on that and provided advice
as to how Government can ensure that the schemes highlighted for
those are sustainable. There is evidence that those planning frameworks,
while there is a question about how they take sustainability criteria
into account, can provide that co-ordination in the planning system
which we have seen lacking to date.
Q413 John Robertson: There seem to
be a lot of discussions and your wish list seems to be very long.
Is it feasible that the Government could invest the kind of money
that would be required to meet everything that you want? Should
you not be refining it to what is really the bottom line, as it
were? I cannot see the Government wanting to talk forever on various
aspects of your suggestions, which are numerous. I would much
rather see if you think there is going to be the possibility of
an area and you need the Government's money to get the grid redesigned—I
think the grid is a major problem, not just on renewables but
energy in general—they need to start thinking about investment,
but if you give them everything you have given here how could
they possibly refine their ideas on what is needed?
Mr Smith: In our submission we
do call for a lot. We call for investment across a significant
number of areas and it is highlighting where we see investment
is needed because of the targets and aspirations Government already
identified for itself, particularly in the climate change targets.
Our shopping list, if you like, is not a new list that we have
come up with, it is our way to help Government deliver that.
Q414 John Robertson: But it is very
big. It is too big.
Mr Smith: It is varied but we
see those as the key six. In terms of how we are then working
to support Government on the energy efficiency in housing, we
are engaging actively with government departments on that, so
our work there is about practical solutions and practical investment
vehicles, so not just staying at the level of, "You need
X billion and you need it by 2010 or 2016", but saying, "If
you want to do this, and we have a shared view of what the level
of commitment is and timescale needed, how do you do that?"
Our project with HCA, DECC and CLG is about that, about saying
practically how we can do this, how can we learn from existing
schemes in parts of the UK that public investments have already
proved, what might Government need to do differently but how can
Government incentivise the input of private capital to make these
things happen. While this is very broad, we do try and engage
on that practical delivery level and help Government with some
of the solutions and tease out the difficulties.
Q415 Paddy Tipping: So it is not
all academic?
Mr Smith: It is not all academic
Q416 Dr Turner: Can I focus on the
two principal areas of disagreement between the Government and
yourself on priorities. The first of those is obviously nuclear,
where I share your view that there is a grave risk that nuclear
development will crowd out renewables. We are kind of stuck with
that because the Government is clearly committed to the nuclear
path and I see little prospect of Government rowing back on that
commitment. What would you suggest Government can do to ensure
that nuclear development is not at the expense of market investment
in renewables?
Mr Smith: Partly that is by the
Government ensuring that its funding is used on the development
of new technologies. Leaving aside our advice, part of the nuclear
debate that has gone on for a long time now but has been particularly
intense these past three or four years was about the generation
companies highlighting that they could provide a new generation
of nuclear and could provide it without additional support mechanisms
being needed and it was a mature technology well-understood, they
could manage the risks within the financial market and the way
the energy market is regulated. Therefore, if Government wants
to invest in new forms of generation it should be looking at those
forms of generation which are less proven. On a large scale one
of those is CCS and we support the need for investment in demonstration
plant on CCS because there are a lot of questions about how that
should be done. In looking at how a new generation of nuclear
may come through we would urge that Government looks at that being
done in the standard marketplace, if you like, the energy generation
market we already have. That was part of the original conditionality
the Government set for nuclear.
Q417 Dr Turner: That does not address
the real issue which is the fact that investment market funds
are being directed towards nuclear, but anyway. The other main
issue is energy efficiency. You want to see £11 billion a
year invested in retrofitting the bulk of our existing housing
stock which, like my own house, does not have cavity walls to
fill. How do you see this actually working? It is obviously not
realistic to expect the Government to stump up £11 billion
a year, so how are you going to do it? I am sure the capacity
is there in the energy supply market. Are you going to find a
way of making the energy supply companies cough up?
Mr Smith: Not primarily, no. I
mentioned the Government's heat and energy savings strategy earlier
in the discussions. The consultation there was looking at how
to invest in 400,000 households a year in what the Government
termed whole energy house makeovers. It asked as part of that
consultation what investment vehicles it might need and our response
to that was that it should look at pay-as-you-save vehicles. Those
could be run by the energy supply companies, the big six, if you
will, but they could also be run by local authorities, many of
whom have a track record in energy efficiency work, or by other
companies, installation companies. The idea is that those companies
would be the ones that invest in the house efficiency measures,
so you would have a bill this size, you invest in the house and
your bill falls, say, by 30% or 50% or whatever it is of the measures
and a portion of that saving is then recouped by the company that
paid for the measures. That is like energy service company models
which we have discussed in this country for a long time but have
yet to take off and that is partly because of the way the market
is regulated. There is good experience in countries like Germany
where they have done this and have created a framework and encouraged
those companies to invest in energy efficiency in households.
There are successes there that we should learn from. We understand
from discussions with Government and DECC on how they are going
to take forward that strategy that they do want to pilot this
pay-as-you-save model and we think that is a really good sign.
We do not see the existing model of asking the energy bill holder
to pay into a pot that the supply companies then spend back on,
although that works, working at the scale that is required.
Q418 Dr Whitehead: In terms of your
priorities you have suggested £11 billion a year on the existing
housing stock, £2 billion a year scaling up renewable energy
supply, £5 billion a year redesigning the National Grid,
£1.5 billion a year promoting sustainability mobility and
£3 billion a year low-carbon investments in the public sector.
How does that relate to your suggestion that a green recovery
package ought to consist of 4% of GDP, or is it just a wish list?
Mr Smith: It is not just a wish
list, no. We identify in our submission where we see funding might
come from. For example, on sustainable mobility we see that should
come from the existing road transport budgets, that Government
could easily switch priorities on that and direct a small proportion
of that to sustainable mobility. In terms of other funds, for
example one of the significant parts is the housing energy efficiency
and, as I have just highlighted, we see that through some Government
investment, particularly the Government investing in its existing
fuel poverty schemes for vulnerable households, but primarily
through looking at pay-as-you-save models. The fact the Government
is piloting one of those schemes is good to see but what we now
need is Government to move quickly into the pilot, learn from
it and see how it can apply that. The grid scheme, some of that
is direct investment but we see that through revolving loan funds,
et cetera. We are not highlighting that this should all come from
conventional deficit spending. Part of our wider work through
Prosperity without Growth? is that deficit model is unsustainable,
so we need to look at that for a whole host of reasons. What I
come back to is the lack of urgency and thinking about other investment
models, green bonds, et cetera, pay-as-you-save models and the
need for the Treasury in particular to look at some of those things
and, as Tim highlighted earlier, the role of environmental taxation
and the fact that the level of environmental taxation as a proportion
of the tax-take is lower now than it was in 1997 despite the fact
that we now know more about the problem, if you will, and the
urgency of reducing the impact of some of those taxation models
and the way the economy works. It is definitely not a wish list
but there is a combination of ways that Government needs to respond
to what we are calling for. Again, what we are calling for is
only a reflection back to government of what it itself says it
needs to do in terms of investment in the economy and moving to
the economy to a low carbon base.
Paddy Tipping: You have made some interesting
points about social returns on the green stimulus package. Mike,
are you going to pursue that?
Q419 Mr Weir: Can you tell us a bit
more what you mean by social returns and what you would get for
your £30 billion package and what value you would put on
these social returns?
Mr Smith: I will start and perhaps
Tim can take it on. In terms of what we outlined what we were
looking at in terms of social returns is a number of issues. Firstly,
whether they would reduce reliance on scarce resources, so increasing
efficiency would mean that the unit spend of the economy was less
reliant on material throughputs; whether they would reduce carbon
emissions and would produce economic savings, for example lower
bills, reduced congestion, less pollution, whether they would
improve quality of life through healthier lifestyles, so for example
mobility and calling for walking and cycling. We also support
wider government action on encouraging healthier lifestyles. And
then protecting and creating a significant number of jobs. In
terms of social returns we looked at a number of studies about
the job savings for different types of investment, because that
is obviously critical, and we felt that some of these areas were
viable and very useful because the number of jobs per pound spent
was high compared to other forms of investment, whilst also delivering
good wider issues about reduced carbon savings.
Mr Jenkins: The only thing I would
add, and unfortunately I am about to say that I have figures but
I will have to send them to you, is there is a social return about
balance of payments and security of supply. The German Government
commissioned work looking at how their energy efficiency programme
and their move towards renewables, which is significant, has affected
their balance of payments and security of supply. Financially,
it is significant to them for their economy. I am sorry I cannot
give you the figure right now but I can send that to you. Particularly
going forward at a time of increasing risk, that is a very important
return for the economy. Just one more thing, if I may, on reducing
carbon emissions and this may be going back to the idea that this
was a very, very significant amount of money that was being asked
for: we are not into an area of incremental change in what has
to happen to be able to reduce carbon emissions. Again, the Committee
on Climate Change report made it very clear that we are now at
a stage where we have to make a step change and so the social
returns that we were looking for, if we are honest, are those
not incrementally pushing things forward but would make the far
more fundamental changes that are required for the stimulus. That
is important in how we responded to this.
Q420 Mr Weir: In your report you
say that "significant unknowns in relation to potential job
creation and multiplier effects exist." Clearly the Government
in looking at where they invest their money are looking for returns,
particularly in the current financial circumstances. You also
say that the US economy potentially saves half a billion dollars
a year for every $1 billion invested in green energy initiatives.
Can you tell me how you think the Government should for one thing
resolve the so-called "significant unknowns" and is
it likely that the UK could see returns similar to those quoted
for the United States?
Mr Smith: In our submission we
highlighted those unknowns, if you like, and the work we did was
looking at studies that had been done, for example the HSBC study
comparing fiscal stimuli in different countries, but we also highlighted
that there has been a discussion in government led by the Treasury
for many years about a green revolution and a green fiscal stimulus
and moving to a low-carbon economy but that the comprehensive
analysis has not been done, so we would like to see the Treasury
look seriously at that and do that, and that is something we talk
about in detail in Prosperity without Growth? where we
have 12 steps we recommended to government, and one of those is
about investing in these forms of technology but getting more
clarity about that. In our reports to government, we did look
at a number of studies that had been done, as Tim mentioned, and
we can provide you with more detail on that, but those studies
did look at investment, the pounds per job comparator, and we
did do some initial calculations purely on their analysis of if
an overall £30 billion package was delivered by government
what the job creation potential might be, so we can submit those
details to you.
Q421 Mr Weir: One of the things that
the Government will say when the HSBC study is quoted at them
is that is fine but the UK started from a different place to many
of the other economies because they had made some effort prior
to the recession to actually invest in changing to a green economy.
Are the figures you are quoting, for the United States for example,
based on them starting from a lower baseline than the UK or can
the same sort of figures be achieved starting from where the UK
is starting?
Mr Jenkins: I actually mentioned
that point earlier on when I was saying that the Government often
responds by saying that £50 billion had already been earmarked
for spending between 2008-11, and I suggested the reasons as to
why that was not about a stimulus package now, and I think those
still stand. In terms of the US, again I mentioned that before
the stimulus package they had already for example produced those
$2 billion in terms of green bonds previously as well. Each country
will come from a different perspective in where they come forward.
The idea of a fiscal stimulus was that it was new things to stimulate
economic activity post the crisis, not things that had been presented
before.
Q422 Mr Weir: I understand that but
the point I was trying to make was if you had not done anything
in the economy, for example to retro-fit old houses, to deal with
insulation, or whatever, then clearly a huge number of jobs can
be created. If you have already got a massive programme going
then the significance of it might be less. I am just trying to
get some idea of where we stand in that.
Mr Smith: To go back to the HSBC
report, which we reference, HSBC calculates that the UK's investment
is £30 billion and of that they classify 2.1 as being green,
but if you look at, for example, France or Germany, both those
countries have a significantly higher proportion of green fiscal
stimulus, so it is those countries that are at a similar level,
or perhaps ahead even, in investment in low-carbon technologies.
I do not think it is the case that in this country we have already
put that investment in place and we are waiting for the returns.
As Tim highlighted, the Committee on Climate Change had noted
that it is a step change of investment that is needed and we have
yet to see that here. The HSBC analysis shows that when we talk
about Korea and China we could argue that those countries are
investing in parts of the economy that they do not have but we
already have, but if you compare us to Canada, the US, Germany,
France and other countries that have similar levels of economic
activity, they are choosing to put much higher levels of green
stimulus in place now because they recognise that is the investment
we need. We certainly cannot say we are ahead of those countries
in tackling some of these issues.
Mr Jenkins: The uncertainties
about how many jobs can be created and the potential for doing
so varies between different parts of this package. One of the
areas where the uncertainties are fewer is on retro-fitting and
energy efficiency. One of the reasons for the US's rate of employment
from their green fiscal package is that quite a lot of that is
towards retro-fitting and that is where it is very labour intensive.
It works geographically right across an economy, it is not concentrated
where there happens to be manufacturing plant or financial services,
in the South East for example, it is through all economies, and
it provides the benefits of savings for households and businesses
when that happens to invigorate all of those economies. I think
that is one of the areas where we can push for an increase in
the measures that will actually be able to deliver that type of
employment gain that you are referring to.
Paddy Tipping: We are coming towards
the end of our time but Alan particularly wants to talk to you
about your publication Prosperity without Growth? because
there are some interesting ideas in there.
Q423 Dr Whitehead: I am very sympathetic
to a number of the points that you make in your report Prosperity
without Growth? but if you put your document Prosperity
without Growth? next to this document on stimulus would they
not mutually combust?
Mr Smith: I take your point, yes!
I do not think they would mutually combust but they would rub
against each other and sparks might fly. It is probably just important
to highlight the intention of Prosperity without Growth?
It is part of a long-term project by the Sustainable Development
Commission called Redefining Prosperity, which is looking at how
you define the success of a country, if you will, and looking
at what the differences between growth and prosperity are in that,
and sustainable development highlights the fact that growth is
a means to an end; it is not the end. We do not have growth for
its own sake; we have growth because we want it to deliver for
our society, so Prosperity without Growth? looked
at whether growth as currently structured is delivering on those
aspirations, and we found serious concerns about that, based on
inequalities that are still present in society and based on the
ecological limits, both nationally and globally, that are not
being resolved. One of the questions that presents itself in this
discussion about moving to a low-carbon economy is that proponents
of that say if we can just take carbon out of the economy then
we will solve a lot of these issues. That is where there is a
definite friction because Prosperity without Growth?
finds that resource throughputs and material intensity is increasing,
not decreasing, and if we grow the economy then we can take carbon
out of the economy but the unit input of carbon into the economy
needs to fall substantially and much more than has ever been achieved
anywhere. There are difficulties in that but at the end of Prosperity
without Growth? we identify 12 steps for government
in moving towards a sustainable economy and we have tried to be
practical in those. We do not end with clearly defined and practical
solutions for what government needs to do but we do call for more
work and further thinking. We found that since publication it
has done what we wanted, and more, in that it has created and
sparked a wider debate. It is a debate that we are having within
government. For example Tim Jackson, who launched the report,
was in the Treasury last week giving a workshop and seminar with
economists on some of the findings, but it has also captured attention
in response to other work, so for example the Sarkozy Commission
that reported recently and the work of Joseph Stiglitz and other
economists and other institutions also trying to wrestle with
these ideas. Yes, they are not fully compatible but we are comfortable
with that because they highlight the discrepancy and the lack
of understanding that we have about our economy as a whole.
Q424 Dr Whitehead: The suggestion
you make there is that therefore they are the irritant that makes
the pearl rather than the pearl itself. One of the problems that
I am grappling with in terms of what we have discussed so far
this morning is that in order to get to a global economy of prosperity
which has no growth but develops knowledge within a sustainable
framework for example, is that in order to move to that, as Stern
for example says, you have a requirement for a large amount of
investment in the green economy, that produces a large amount
of jobs, but that investment is brought about by growth and recovery.
So the suggestion appears to be that a substantial amount of growth
and recovery brings about a no-growth economy through green measures.
Is that right?
Mr Smith: Tim may want to come
in but I think the answer from Prosperity without Growth?
would be that we are not sure and we do not have sufficient confidence
to justify that statement because in the way growth is currently
structured growth relies upon increasing efficiency, and so growth
does that partly through increasing consumption and increasing
resource consumption. As I highlighted, while we are calling for
changes to the economy to invest in low-carbon forms, there is
a concern that by itself that will not produce an economy which
respects the environmental limits and delivers on those social
goods, so more thought is needed as to how we measure wider progress
but also how government itself looks at monitoring and inspecting
some of those limits we have identified.
Mr Jenkins: One of the overlaps
between the two reports is around the idea of investment. I think
Prosperity without Growth? is clear that it is the beginning
or a milestone because that sort of work has been going on for
several decades. One of the things that it is saying at this particular
time is we need work, and particularly government needs to be
informed as well, on how we develop our view of investment and
what is a good investment from where we are currently now to one
that is within a finite constraint of carbon and delivery for
prosperity, and that is a debate. That is a huge area but a very
important one. That is one of the areas we will be taking forward
from Prosperity without Growth? to talk through government
about how that can be developed with different departments.
Q425 Paddy Tipping: I think it shows
that we need a workshop here to talk about this because this is
a very tough area to talk through. I am grateful for you putting
it on the agenda for us and we will need to do some more work
on that. Tim, you have promised us over the period of the last
hour quite a lot of information and we would be delighted to receive
it. Maf, at one point you talked about the NPSs that were released
on Monday. We have all got to do a lot of work on this over a
very quick period of time, so as soon as you have got something
that you could share with us, we would be very grateful. I think
there may well be an opportunity for us to talk some more about
that some time in the new year. Can I thank you both very much
for coming along. I found it a very stimulating and thoughtful
discussion. I know it was difficult for you to come today so thank
you very much indeed.
Mr Smith: Thank you.
|
