Examination of Witnesses (Questions 1-167)
DEPARTMENT FOR
ENERGY AND
CLIMATE CHANGE
AND SHAREHOLDER
EXECUTIVE
3 FEBRUARY 2010
Q1 Chairman: Good afternoon. Welcome
to the Committee of Public Accounts where we are considering the
Comptroller and Auditor General's Report on the sale of the government's
interest in British Energy. We welcome back to our Committee Moira
Wallace, who is the accounting officer for the Department of Energy
and Climate Change, and we also welcome Stephen Lovegrove, chief
executive of the Shareholder Executive. Would you like to introduce
your other colleague?
Ms Wallace: I will let him introduce
himself.
Mr Higson: I am Mark Higson. I
am the chief executive officer of the Office for Nuclear Development.
Q2 Chairman: What the Report says,
in very brief summary, is that you achieved good value from selling
your interest in British Energy, but we have absolutely no guarantee
that we are going to get these new nuclear power stations with
or without public subsidy. Also, there are aspects of the sale
which are a concern to me and we want to pursue these so that
we can learn lessons for future sales of government interests.
Mr Lovegrove, perhaps I could start with you, please. I want to
ask you about the management of the sale which is dealt with,
amongst other paragraphs, in paragraph 19 of the Report on page
eight. You paid your financial advisers, the merchant bank UBS,
£4 million. What did you get for it?
Mr Lovegrove: This was a very
complex sale that was governed by the Takeover Code and it had
many players with many different objectives. It was multi-jurisdictional
so, with the best will in the world, the staff in the Shareholder
Executive were not going to be able to do all of the heavy lifting
that we needed to get done throughout the sale. For the nine or
ten months or so that we had UBS working for us as well as other
advisers, we had four managing directors I think working for us
on a daily basis, three directors, a couple of vice-presidents
and more junior staff to call on at will. In terms of what they
actually did for us, they were integral in our approach to the
negotiations. They were integral in our approach to the tactics
we adopted with the board. They were very important in the development
of the Nuclear Power Note that eventually was instrumental in
getting the deal done. They provided us with numerous valuations
and two fairness opinions, so they were very important in the
success of the transaction.
Q3 Chairman: You have your own merchant
banker working for you, do you not?
Mr Lovegrove: We have a number
of merchant bankers working for us, yes.
Q4 Chairman: The whole purpose of
your organisation is to advise the government on this sort of
thing. They did a couple of valuations for you. They advised on
strategy but let us look at it in more detail, Mr Lovegrove, shall
we? This is dealt with on page seven, paragraphs 12 and 13 and
page nine, paragraph 22. British Energy effectively ran the sale,
did it not?
Mr Lovegrove: The board of British
Energy ran the sale, yes.
Q5 Chairman: They had their own merchant
bankers, Rothschild, did they not?
Mr Lovegrove: Yes, they did.
Q6 Chairman: We do not know how much
they were paid, do we?
Mr Lovegrove: I do not know.
Q7 Chairman: We cannot find out.
The price was negotiated by its main investors. The EU had a big
role, did they not?
Mr Lovegrove: They had a big role
in making sure that the site disposal—
Q8 Chairman: They determined the
impact on UK electricity markets, so I ask you again: what exactly
did you do and, given that you have the expertise in house, why
do you need to spend £4 million on merchant bankers? What
is the point of your organisation?
Mr Lovegrove: The point of our
organisation I think, as much as anything else in this kind of
instance, is to be an intelligent client. I do not think that
a deal of this complexity and of this unpredictability could have
been done without proper—
Q9 Chairman: Precisely what value
did you add to this deal?
Mr Lovegrove: We advised the Secretary
of State closely at the beginning of the process about the hierarchy
of objectives which governed all of our decisions throughout the
process. We did that with colleagues from the Energy Group. We
ultimately dictated the tactics that we had to adopt throughout
the process of the sale. We led the exercise of integrating the
site disposal package with the potential bidders, with the site
disposal package which was being done simultaneously with the
NDA. All of these I think were very important in being able to
get a successful transaction completed and, without a successful
transaction, none of the government's objectives would have been
obtained.
Q10 Chairman: Let us have a look
now at the risk to energy security, Ms Wallace. Shall we look
at figure two? Obviously this deals with the very worrying strategic
issue of the energy gap facing this country. To be absolutely
up to date, Ofgem issued a press release only today saying that
there is reasonable doubt about whether the UK's energy market
will be able to deliver sustainable supplies in the coming decade.
Obviously Ofgem is not going to exaggerate what they say. You
see in that figure that we have this rather worrying gap between
electricity supply and demand. How much of this gap is going to
be filled with these EDF nuclear power stations?
Ms Wallace: This gap can be filled
in a number of ways. What this chart shows is the generating capacity
that currently exists. Of course we have a whole range of generating
capacity that is under construction or that has planning permission.
About 20 gigawatts is currently in that position. The dark line
that goes down will be increased by a range of sources of supply
that are coming on stream and we published full details of those
in the Low Carbon Transition Plan.[1]
Q11 Chairman: You are giving a very
general answer to a very specific question. I asked you how much
of this gap will be filled by EDF's new nuclear power stations.
Ms Wallace: In total, there are
three consortia of which EDF is obviously one, who are planning
to bring on nuclear and EDF is planning to bring on I think six
gigawatts.
Mr Higson: 6.4 gigawatts is what
they have announced with their plan.
Q12 Chairman: How many nuclear power
stations has EDF built, Ms Wallace, without a public subsidy?
Ms Wallace: I do not know the
answer to that.
Q13 Chairman: I am surprised you
do not know. I would have thought it was a fairly obvious point.
Generally you judge people's future actions by what they have
achieved in the past, so I repeat: can anybody tell me how many
nuclear power stations EDF, a French company, has ever built without
a large public subsidy?
Mr Higson: EDF has built 58 power
stations but it is impossible to say what level of public support
there is because—
Q14 Chairman: In France. It is very
difficult to penetrate, is it not?
Mr Higson: It is very difficult.
You are correct.
Q15 Chairman: If I suggested to you
that it is almost inevitable that EDF, this French company, will
come back for public subsidy, would you dispute that?
Ms Wallace: It is our very clear
policy which we legislated in the Energy Act that there will not
be public subsidy. We have taken a series of measures to require
operators to meet the costs.
Q16 Chairman: This report is not
worth the paper it is written on. It is there. They have given
you absolutely no guarantees whatsoever, no promises, no commitments
that they are going to build these things, have they?
Ms Wallace: No and nor would you
expect them to. Nor, before the sale was undertaken, was it remotely
likely that British Energy was going to do that. We have a very
clear policy. They understand our policy. So do the other operators
that are interested in nuclear.
Q17 Chairman: There are all sorts
of caveats in here about what might happen, depending on this.
We just do not know, do we?
Ms Wallace: We have a very clear
policy. I would not agree with you that it is almost inevitable.
Our policy is clear. There are many barriers to overcome in implementing
it but our whole policy is about getting those barriers—
Q18 Chairman: What happens if they
do not build any nuclear power stations? What happens if we believe
your stated policy and you refuse to give them public subsidy
and they say that it is not economic? What happens then? What
is your plan B?
Ms Wallace: We are not betting
the farm on EDF. We are indeed not betting the farm on nuclear.
Our policy is about diversity of supply, a range of different
forms of supply and competition between them.
Q19 Chairman: Tell me in detail what
you are going to do. How are you going to meet this energy gap?
What are your plans?
Ms Wallace: We have a range of
plans which are well set out in—
Q20 Chairman: You have already said
you have a range of plans. What are these plans?
Ms Wallace: We have plans to bring
on renewables which are well known. We have plans to bring on—
Q21 Chairman: How much of this gap
will renewables deal with?
Ms Wallace: Our lead scenario
is that 30% of electricity will come from renewables in 2020.
Q22 Chairman: By when?
Ms Wallace: By 2020.
Q23 Chairman: You believe that, do
you?
Ms Wallace: We are currently on
target to do that. Renewables have grown very fast. We have plans
to advance clean coal and we have plans to bring forward new nuclear.
We have a range of actions that are clearly set out which the
industry agrees are what is necessary to bring new nuclear on.
We have a range of operators interested in doing this. I am not
saying it is not difficult but we are on schedule. We are doing
the things we said we would and we have people interested in it.
Q24 Mr Bacon: It is correct, is it
not, Ms Wallace, that the ownership of the government's interest
in British Energy was held through the Nuclear Liabilities Fund?
Ms Wallace: They received the
cash sweep.
Q25 Mr Bacon: It says in paragraph
one that British Energy was a publicly listed company in which
the taxpayer held an interest through the Nuclear Liabilities
Fund. That is right, is it not?
Ms Wallace: Yes.
Q26 Mr Bacon: Can you just remind
us what the Nuclear Liabilities Fund was established for?
Ms Wallace: It was established
to meet the costs of decommissioning British Energy's bid.
Q27 Mr Bacon: It was established
to meet the cost of decommissioning British Energy's stations
without recourse to the taxpayer, was it not?
Ms Wallace: Ultimately, the government
has to stand behind it but its purpose was—
Q28 Mr Bacon: The purpose of the
fund was that the fund would be sufficient to pay for the decommissioning
costs without additional cost to the taxpayer. Somebody behind
Mr Lovegrove is nodding vigorously which is always dangerous in
this Committee, but very welcome nonetheless. That is right, is
it not? It was essentially to cover the costs of the decommissioning?
Ms Wallace: Yes.
Q29 Mr Bacon: What has now happened
to the money from the sale? EDF bought this government owned interest.
What has now happened to the money?
Ms Wallace: It has gone into the
NLF.
Q30 Mr Bacon: What is it being invested
in?
Mr Lovegrove: It has been put
into the National Loan Fund and is basically in gilts.
Q31 Mr Bacon: If you wanted that
fund to have a future life of 100 years or so, so that it would
cover the costs of decommissioning, would you put it into gilts?
Mr Lovegrove: I think that is
probably a question for the Treasury. Effectively, we are following
Treasury guidance on where the Nuclear Liabilities Fund is investing
its money.
Q32 Mr Bacon: Fortunately we have
a representative of the Treasury here. If you wanted to cover
this liability going forward for 100 years, is gilts where you
would put it?
Ms Diggle: It is a very difficult
judgment to strike, as you might think. Over the last decade,
anything else mostly would have gone down. Gilts are a safe place
to put it. It is where we tend to put things if in doubt. I will
look into it further and let you have a note.[2]
Q33 Mr Bacon: Is not the real reason
for putting it into gilts because it counts as a reduction of
the national deficit?
Ms Diggle: I think wherever it
went that would be the case.
Q34 Mr Bacon: Would it?
Ms Diggle: I think so.
Q35 Mr Bacon: That is very interesting
because it is not my information, but perhaps you could send us
a note from the Treasury on precisely that point,[3]
where it would and where it would not count as a reduction in
the deficit.
Ms Diggle: Of course. I think
you will find that, as it is a government asset, it would always
count like that.
Q36 Mr Bacon: I am intrigued to hear
you say that. That is very interesting but if you would send us
a note that would be very kind. Ms Wallace, this policy is designed
to give us energy security, is it not, basically, to ensure that
we get enough nuclear power stations built in time?
Ms Wallace: That is the top objective,
yes.
Q37 Mr Bacon: What is your main safeguard?
The assumption that you have a developer that has a great deal
of experience? They are the largest or one of the largest developers
of nuclear power stations in the world. They have a lot of experience.
We know that France has a lot of nuclear power capacity and that
they have developed a lot of that. Is it essentially a punt that
they, because they have a lot of experience, are more likely than
anybody else to be able to deliver what this country needs?
Ms Wallace: That is part of it.
I have to hand over to Mr Higson who is going to comment on this
in more detail.
Mr Higson: We have a layered approach
to give as much protection to our public interest as we can. You
are right. Having a company that is financially reasonably strong
and that has experience is a great help. However, we have not
put all our eggs in one basket. As you will know from our objectives,
we also had the objective of making sure that we were not unduly
dependent on one nuclear operator. We have two more operators
who have announced plans and already have sites that are suitable
for new development. If EDF declines to invest for whatever reason,
the next stage would be maybe the other companies will proceed
with their plans. The stage below that is that we are not completely
dependent on nuclear power for meeting our objectives. We said
in our various White Papers that nuclear power has an important
role to play, but there are many other policies: bringing on renewables,
increasing energy efficiency, a whole range of measures, so that
if no nuclear was to come forward we would clearly have to do
more elsewhere in order to meet our objectives.
Q38 Mr Bacon: If no nuclear was to
come forward at all, for the sake of argument, what is the percentage
contribution that you are expecting in your plans that would then
be missing? We know France is 80% nuclear. In 30 years' time,
what do your plans call for in terms of the proportion of energy
supply that is nuclear?
Mr Higson: What we said in the
National Policy Statement is that by 2025 we are expecting a need
for 60 gigawatts of new capacity, of which 35 is renewable and
25 is non-renewable. Out of that 25—
Q39 Mr Bacon: Can you just say that
again?
Mr Higson: For 2025, total new
capacity expected on projection of this is 60 gigawatts, of which
35 is renewable. That leaves 25 for non-renewable, all non-renewable
sources, so that is coal, abated coal, gas, nuclear, to fill that
amount by 2025. We have not taken a view about how much of that
25 gigawatts should be supplied by nuclear. That will be a matter
for commercial decisions taken in the market place.
Q40 Mr Bacon: Can you just remind
us: if we are going to have the 60 gigawatts for additional capacity,
what is the current capacity at the moment of generation in the
UK?
Ms Wallace: It is 80.
Q41 Mr Bacon: If we have an additional
60, is that because we are going to need 140 or is it because
some of the existing 80 is dropping out and needs replacing?
Ms Wallace: Some of it is dropping
out and the nature of generation is changing so that some of it
is intermittent.
Q42 Mr Bacon: Because of the wind,
yes. How much of the 80 will drop out?
Ms Wallace: In this decade, I
think it is something like 16.[4]
Q43 Mr Bacon: I am talking about
in total. You have said by 2025. If by 2025 we are going to have
60 gigawatts of new capacity, Mr Higson, what is your expectation
of the total capacity, given that some of the 80 will have dropped
out? What will the new 60 then comprise part of in 2025? What
total will it be part of?
Mr Higson: I am not too sure of
that figure but I think it must be around 100 gigawatts.[5]
Q44 Mr Bacon: I am surprised. These
are fairly global figures that I am looking for. I am slightly
surprised that you do not know. The Office for Nuclear Development,
of which you are the chief executive, is within the Department
for Energy and Climate Change?
Mr Higson: It is, yes.
Q45 Mr Bacon: Your job is to promote
nuclear within the department, is it? Are you a champion for nuclear?
Mr Higson: My primary job is to
identify the unnecessary obstacles to the deployment of new nuclear
power and to work in partnership with the industry to remove them
to enable nuclear to come forward.
Q46 Mr Bacon: Of this 25 gigawatts
of new capacity that will be non-renewable, do you have a view
on how much you expect to be generated from nuclear?
Mr Higson: I do not have a view
precisely about what we would expect. What we have said in our
National Policy Statement is that we would expect a significant
proportion of that 25 to be met by nuclear and I would just note
that, if you add together the announced plans of the three consortia,
that would come to 16 gigawatts. Again, we are talking around
2025.
Q47 Mr Bacon: 16 out of the 25.
Mr Higson: Correct. That is what
the companies have announced by way of their plans.
Q48 Mr Bacon: What guarantees can
you give us that the new generating capacity which the UK needs
will be delivered on time?
Mr Higson: I cannot guarantee
that nuclear power will be delivered on time. What I can guarantee
is that the government will do everything in its power to remove
unnecessary obstacles to facilitate the development of nuclear
power.
Q49 Mr Bacon: What guarantees can
you give us that the necessary generating capacity will be delivered
on time, not necessarily nuclear—perhaps it is a question
for Ms Wallace—but from whatever sources?
Ms Wallace: We are very confident,
for the reasons I gave earlier in response to a different question,
in our security of supply in the medium term. Longer term, the
whole purpose of the department is to deal with the very significant
challenges that there are as we see a decarbonised economy and
a change in the pattern of generation. We are looking very hard
at how much electricity we are going to need in the 2020 to 2050
period. As the Secretary of State has made clear, we are looking
very hard at the market framework that we will need to incentivise
that. No one is saying that this is an easy task. It is a very
significant task that requires action on a range of fronts and
that is the department's job.
Q50 Mr Bacon: Can I just ask you
about risk management arrangements? What risk management arrangements
do you have in place and what have you done to comply with the
previous recommendations of this Committee in relation to risk
management?
Ms Wallace: I am glad you have
touched on that because, having read the previous recommendations
of this Committee, we have learned a lot from looking at them
and making sure that we have the right monitoring in place. Indeed,
the sale of British Energy was part of our risk reduction strategy
because it was so obvious that the NLF was exposed. It was relying
on a company doing well when all its liabilities would arise if
the company did badly. We do our monitoring through the Shareholder
Executive and I would like to invite Mr Lovegrove to say a little
bit more about how we do that, but it does build on what this
Committee has recommended before.
Mr Lovegrove: We are very conscious
of the Committee's understandable interest in this area. I think
we accept the recommendation in the Report that we should formally
have recorded our monitoring arrangements sooner than October
2009, although in practice we have quite an elaborate set of monitoring
frameworks to look at these matters. Formally within DECC it is
the director general of energy markets and infrastructure who
is responsible for this. He is also responsible for the NDA. He
delegates responsibility on an operational basis to the Shareholder
Executive. The director who works for me, who also looked after
the sale, is the individual who does that. There is a great deal
of liaison with colleagues in DECC to talk about the various issues
which may arise from the conduct of the monitoring of NLF and
indeed issues arising from the NDA BE team as well. There are
quarterly meetings between those two individuals which are formal.
There is a great deal more ad hoc communication. Junior
officials have a great deal of ad hoc communication as
well. There is a schedule of reserved matters for DECC where we
know that it falls outside the competence of the Shareholder Executive
to take a view on these things without specific reference to DECC
officials. We do have a very elaborate framework for that. I am
sure it can be improved over time and we will continue to try
to do that.
Q51 Mr Bacon: Ms Wallace, this question
is about something you said about the intermittency of some of
the supply. If you are doing a calculation about the total supply
including the new that is coming on and the dropping out of the
existing, you must have made some assumptions about what you get
from supply from alternative renewable sources that are intermittent,
by which mainly we mean wind because things like tidal tend to
be highly predictable. You can predict the tide years ahead. What
assumptions have you made about the level of intermittency in
your models?
Ms Wallace: I cannot give you
the detailed assumptions. I do not have them here, but we have
made an allowance for them because that is implicit in going for
that different form of generation. We will continue to look at
the likely composition of supply and the likely composition and
amount of demand. That is one of the pieces of work that we are
doing in our road map for 2050 because this will continue to change
as we go forward.
Q52 Chairman: On renewables that
Mr Bacon was asking about, this is a very important point. Obviously
you are very confident but renewables have gone slowly. In 2008
only 5% of electricity supply came from renewables. If you want
30% by 2020, you need a six fold increase.
Ms Wallace: That is right, yes.
Q53 Chairman: Is that likely?
Ms Wallace: That is what we are
planning. There is a very significant programme behind this. There
are powerful incentives. We have just announced another round
of offshore wind. We are doing a lot to facilitate it. There is
an Office of Renewable Energy Development which parallels Mark
Higson's work in the nuclear field. We are aware it is a very
steep increase but that is what we are planning to do. We announced
only this week incentives for micro-generation, for small scale
renewables that people can have in their homes or in small businesses,
so there is quite a lot of punch behind this programme. We do
recognise it is a steep line but we are doing all we can.
Q54 Chairman: Apparently Ofgem do
not agree with you. Your comments are contradictory to what they
announced this morning.
Ms Wallace: Ofgem are pointing
to the risks. We agree there are risks. As I have tried to make
clear, we are not at all complacent about this. It is a very significant
programme of change and it requires change in incentives. It requires
investment and it requires us to remove barriers.
Chairman: If that is government policy,
that is fine.
Q55 Mr Burstow: I want to come back
to this question about plans, how real and hard those plans are
and try to go a little bit further on this issue of the delivery
of 60 gigawatts of new supply by 2025. In figure two the lines
cross in 2016 so I am wondering if you could tell me what amount
of those extra 60 gigawatts will be available by 2015.
Ms Wallace: There is 20 gigawatts
at the moment.
Q56 Mr Burstow: 20 of the 60 is already
available?
Ms Wallace: It is not available
but it is under construction or it has planning permission. We
would expect that to come on in the next few years. Our own predictions
when we last published them in the strategy that was published
last July, the Low Carbon Transition Plan, had us by 2014-15,
in terms of what was under construction—we took into account
what was already under construction then—over 20 gigawatts
above that line.
Q57 Mr Burstow: By 2020 what would
you be planning to have on stream?
Ms Wallace: There are obviously
broader uncertainties there but what we have again under construction
now—assuming it has been constructed by then, which you
would assume—and taking account of some things that by then
will have dropped out, it looks like it will be about 70 gigawatts,
so you would be ten gigawatts above the navy blue line on the
chart. There is more dropping out. There is more for which consent
will be sought, which will then be coming under construction.
It is two moving lines. That chart is completely accurate for
what it is trying to set out, but there is a range of lines above
that that you will want to draw in of supply that is under construction.
Q58 Mr Burstow: I am sure when I
read the transcript I will understand that but I want to make
sure I understand it now as well. In terms of 2020, how much additional,
new capacity of that 60 gigawatts that we are being told is planned
to be available by 2025 will actually be on stream?
Ms Wallace: I cannot answer that
definitely because we do not know. There are many contingencies.
In terms of supply that is being considered, where people may
seek consent and may get it, we could have 40 gigawatts by then,
but we do not know that that will all come on stream.
Q59 Mr Burstow: Obviously that issue
of risk management is one I am about to come on to but, specifically
to go back to the issue of EDF and the question the Chairman asked
at the beginning of the session, 6.4 gigawatts I think is the
figure that was mentioned earlier on in terms of possible nuclear
generation from EDF. What if the company does not come or will
not build that capacity? What is the plan B, because that is a
significant chunk of the capacity you are envisaging, notwithstanding
the potential obstacles that are in the way, to have available
by 2020?
Ms Wallace: I come back to this
point which is that we are committed to diversity as the strategy
for supply of electricity and that is why we are pursuing several
different strategies including renewables, which we have just
talked about, including nuclear, which we are talking about here,
including clean coal as well as gas, which we have plenty of now.
Our strategy is to have a range of different forms of supply.
Q60 Mr Burstow: Would not part of
the strategy also be to make sure there is the contingency built
in to deal with a situation where EDF have acquired land for one
purpose but then decide they cannot use it for that purpose, for
that land then to have to be sold on to be put to that purpose?
Ms Wallace: I think I will ask
Mr Higson to comment on that specific point. I do not know whether
that is something that there is any obstacle to.
Mr Higson: There are no requirements
on EDF to sell land that it owns if it chooses not to build power
stations on that land.
Q61 Mr Burstow: Why were no conditions
of that sort put on?
Mr Higson: We negotiated with
EDF a package which we believe was sufficient to enable more than
one operator to enter the market. We think we have been successful
in that. We do have two other operators who have other sites,
who have announced plans to enter the market. That is our protection
in depth. We have worked to identify the obstacles with EDF. If
EDF do not invest, we have made sure that they are not the only
show in town and if nuclear is not built there is a wide range
of other sources of power. We have to do more on each of them.
Q62 Mr Burstow: On that basis, given
that you cannot be certain and you are hedging everything understandably
around uncertainty here, what impact would it have on energy security
if EDF in the end decide they cannot build?
Mr Higson: Our intention is that
we have a diverse system so that if nuclear power is not built
by EDF then all other things going on in the market end up in
a market based system, ensuring that we have adequate capacity
to serve our needs.
Q63 Mr Burstow: The market will fix
it all?
Mr Higson: As we have said, our
department together with the Treasury is actually looking at the
operation of the market and in the Energy Market's Assessment
we ensure that we do have a market framework that is fit for purpose
for the longer term.
Q64 Mr Burstow: This discussion has
been about risks and management risks. Mr Bacon started to ask
some questions about that. Why was it that it required the NAO
to ask you to undertake a strategic risk assessment before you
actually did it?
Mr Higson: I think it might be
helpful if the Committee allowed us to spend a moment explaining
what the risks are that we are addressing and were addressed by
the sale. The most important risk that the government was exposed
to before the sale was a total loss of the cash sweep through
the NLF because the NLF was responsible for the liabilities and
the government stood behind that. Potentially, the government
was at risk for the whole of the value of that cash sweep which,
in the sale, was £4.4 billion. You can imagine a risk of
that magnitude required the most intensive monitoring. That risk
has been completely closed out, I understand.
Q65 Mr Burstow: That is applauded
and the NAO Report acknowledges that but, having managed that
risk, there are then consequential risks from the approach you
have taken which do not appear to have been identified until afterwards.
Mr Higson: That is not correct.
We did spend a lot of time thinking about the risks and there
are four other kinds of financial risk and two policy risks that
we are exposed to. It is correct that we did not put in place
the formal monitoring arrangements and document them until later
on in the year, although in practice they were operating and there
were meetings with EDF as early as August.
Q66 Mr Burstow: Would you though
think it would be sensible in future to make sure as part of your
practice that there were such risk assessments taken prior to
sale?
Mr Higson: Clearly it is very
important that the risks of sales like this are assessed and that
is what we did.
Q67 Mr Burstow: Can I ask the NAO,
just to be absolutely clear about this, because in the briefing
we have had, in the Report we have had, I take it that the NAO
requested this exercise to be undertaken. Was there anything that
you would recognise as a risk assessment around this particular
aspect, post sale or even pre sale?
Mr Clarke: There were obviously
previous risk assessments in place. What we were asking for was
for those to be updated given that there was a new owner.
Q68 Mr Burstow: Would you have expected
those to have been updated without you asking for it?
Mr Clarke: We asked for them,
expecting them to be there, yes.
Q69 Mr Burstow: I think that was
yes, in a way.
Mr Clarke: I said yes.
Q70 Mr Burstow: Can I ask you about
the monitoring that is now in place? It took ten months to set
that up. How is that now working?
Mr Lovegrove: It took ten months
to formally record the arrangements for the monitoring and that
was too slow. I think we fully accept that. It is working in practice
very well. As I said, the director general of energy markets and
infrastructure who reports at board level in DECC delegates most
of the operational monitoring to the Shareholder Executive. That
is done by a team within the Shareholder Executive who liaise
very closely with colleagues in DECC at a senior Civil Service
level at least once a quarter, on a formal basis. Much more often
on an ad hoc basis, there is a great deal of liaison also
with the NAO BE team. At the moment we feel that it is working
well. As I said before, I think we should always keep those things
under review because the nature of risks tends to change and I
think the monitoring framework will have to try and reflect that.
Q71 Geraldine Smith: Can you tell
me a bit about decommissioning nuclear power stations? Who is
meeting the cost of that?
Mr Higson: Are we talking about
new power stations for the future?
Q72 Geraldine Smith: No; existing
power stations. I am thinking that Heysham 1 will be coming up
for decommissioning in the near future. What year will that be?
Mr Higson: I think that is 2014
but I believe the company has also sought a lifetime extension.
Q73 Geraldine Smith: That information
will be important, I guess, when you are deciding the deal and
how much to pay for the sites containing power stations. It is
much more valuable if Heysham 1 is given an extension than if
it is not and if it is decommissioned in 2014. You would need
to know what the position was before that sale went ahead, to
make sure that the taxpayer got the best value for that site.
Mr Higson: I am not sure I am
entirely following. Clearly, it is in the commercial interests
of the operator of the station that they should extend its life
as long as is possible, consistent with safety and it being economic
to do so.
Q74 Geraldine Smith: Who will pay
for the decommissioning?
Mr Higson: The decommissioning
is paid for by the NLF.
Q75 Geraldine Smith: They have a
fund of £8.3 billion for all decommissioning. Do you think
that is adequate?
Mr Higson: It is difficult to
answer that question because the liabilities are long term. However,
set out in the NAO Report itself against that figure of the assets
is a liability of £3.6 billion. At this stage, the assets
exceed the liabilities as discounted.
Ms Wallace: The NLF's assets exceed
their liabilities by over four billion at the moment.
Q76 Geraldine Smith: To me that seems
not very much money really for nuclear decommissioning. You are
talking about a very large amount of money once you start decommissioning
a nuclear power station. Do you think those figures could have
been under estimated?
Mr Higson: They are the best estimates
that we have.
Ms Wallace: Just to come back
to the issue of risk management, one of the key results of this
sale is that we have turned round the risk position of the NLF
in that their assets do now exceed their liabilities by a significant
margin. We are using the best estimate we have of those decommissioning
costs. This is the decommissioning cost for the British Energy
fleet. It is not the decommissioning costs for things that are
not in the British Energy fleet or nuclear power stations that
may be built at some point in the future. It is a distinct group
of the British Energy fleet. These are the best estimates we have,
but we do have a margin of four billion there and we will keep
a close eye on the value of the liabilities. That is one of the
risks that they are monitoring as well as when they come to pass.
Mr Lovegrove: The decommissioning
estimates are put together by British Energy and then they have
to go through a process of audit by the Nuclear Decommissioning
Authority BE team. That is what comes up with the 3.6 billion
number. In fact, in the DECC resource accounts, there is a more
conservative approach to that even, so the decommissioning liabilities
in the resource accounts are actually nearly a billion higher
than that. Ms Wallace is absolutely right to say that these are
long term liabilities and there is a degree of uncertainty about
them.
Q77 Geraldine Smith: What about new
build at Heysham? The situation at the moment is you need quite
a large percentage of energy to come from nuclear. Most people
in my area think there is going to be a new power station built
by 2020. I think that seems pretty optimistic because EDF potentially
have to sell the land on. I think there is a choice between Heysham
and another site. Can you tell me where you are up to and what
is happening with that?
Mr Higson: There is a sale process
currently under way by EDF as required by the European Commission.
Q78 Geraldine Smith: How long will
that take?
Mr Higson: That is a commercial
matter. I am afraid I do not know how long it will take.
Q79 Geraldine Smith: An estimate?
Mr Higson: I cannot estimate.
I am sorry.
Q80 Geraldine Smith: If you cannot
estimate how long it is going to take and you have the planning
process, the building time and everything, how can you estimate
when you are going to have more energy on tap and more electricity
if you cannot estimate the timescales?
Mr Higson: We are not making a
specific forecast or estimate that there will be a nuclear power
station operational at any particular date at Heysham. That will
be a commercial matter for the operators. What we say in the National
Policy Statement is that, subject to public consultation, that
is a site which we believe at a strategic level is suitable and
credible for deployment by 2025.
Q81 Geraldine Smith: To make sure
that is suitable, would there have been checks carried out on
the land at Heysham because again, for years and years, local
people were always told that there would never be another power
station at Heysham because there was a geological fault and it
would not have been viable to build one?
Mr Higson: Issues like a geological
fault are very much site specific so clearly they would have to
be examined in detail if and when an operator came forward with
specific plans. At the strategic level that we conducted the nuclear
National Policy Statement, we have not looked at details like
that. We have only looked at a strategic level.
Q82 Geraldine Smith: At the moment
EDF will be allowed to build four nuclear power stations, two
power stations on each of the two sites?
Mr Higson: EDF have plans to build
two twin reactors at each of Hinkley Point and Sizewell.
Q83 Geraldine Smith: Are those plans
at the moment without any public subsidy?
Mr Higson: Our policy remains
that there is no public subsidy for nuclear power stations. EDF
are proceeding on the basis that that is our policy.
Q84 Geraldine Smith: What if EDF
said, "It does not really make financial sense to us any
more"? What would be the position then, because obviously
the government needs those nuclear new builds?
Ms Wallace: There are two things
to say about that. First of all, EDF have very well known views
on what they need to go forward and they do not include public
subsidy. They want us to take lots of the actions that we are
taking to facilitate nuclear and to remove barriers. They are
not asking for public subsidy. The second answer is the one we
have been giving before, which is that our plans cover a range
of technology to diversify so that we are not betting the whole
farm on any one operator or any one technology.
Q85 Geraldine Smith: Are you fairly
confident you will get the new nuclear power stations?
Ms Wallace: We have done everything
we can to get them. We have a very well developed plan which we
think makes sense. I cannot say that unquestionably this will
deliver new nuclear, but we think it should and we are looking
at all the things that anyone is suggesting we should look at.
We are not looking at public subsidy.
Q86 Geraldine Smith: Is there any
new information that is coming to light on any potential problems
or delays?
Ms Wallace: No, not that I can
think of.
Q87 Geraldine Smith: When would you
anticipate seeing the first power station up and running?
Ms Wallace: We should be seeing
people starting to make applications in the next year.
Mr Higson: EDF's plans are for
the first station to become operational at the very end of 2017.
Q88 Geraldine Smith: When would the
last of the four be?
Mr Higson: That is a commercial
matter for them. I think that will depend on how well they get
on with the first station but potentially they could be rolling
out power stations at 18 month intervals.
Q89 Geraldine Smith: There is still
quite a bit of uncertainty over the timescales for meeting the
energy gap and for having this new supply in place.
Mr Higson: I think that is the
nature of the market. We have published a timetable of the things
the government need to do in order to meet the requirements of
an operator to build a station ready for about that timetable.
You can see where the progress has been made along that timescale.
Q90 Geraldine Smith: There are also
still questions hanging over the lifetime of certain nuclear power
stations and Heysham, whether it is 2014 or whether it is going
to be later. Could you perhaps send me a note about Heysham, about
2014 and the extension of the life of that power station?
Ms Wallace: It is always open
to operators to apply for an extension and, to the extent they
do, that helps the graph.
Q91 Geraldine Smith: They have not
as yet done that, have they?
Ms Wallace: We believe they are
likely to or have but we will send you a note on it.[6]
Q92 Chairman: Just for the sake of
completeness, in paragraph seven it states: "EDF's purchase
of British Energy will not necessarily lead to new nuclear power
stations being built in the UK with no public subsidy. This will
depend on a number of factors, many outside EDF's control, including:
wider economic and market considerations such as the price of
carbon; the achievement of all necessary consents, including the
design of new power stations; and EDF's overall strategic priorities
and financial position." It means everything or nothing,
does it not?
Ms Wallace: There is no guarantee.
We are not saying there is a guarantee. If the question is: has
security of supply been advanced and indeed has the taxpayers'
interest been advanced by the sale of British Energy, yes, it
certainly has. We are now in a position where not just EDF but
also two others are looking to build new nuclear here. That does
not mean we can guarantee they will do it. No one is going to
sign up to do that given the uncertainties, but they are very
interested. They are spending a lot of money planning it. All
the signs are they want to do it.
Q93 Mr Mitchell: Apparently there
was no assessment of risk to the taxpayer if there was an earlier
need to decommission. You relied on an undertaking. The Shareholder
Executive believed a risk assessment was unnecessary because of
a legal undertaking British Energy had made to be reasonable and
prudent, scout's honour. Imagine under private ownership reasonable
and prudent became hell for leather because of the cross over
point in 2016 illustrated on figure two between total generation
capacity and demand and demand shoots ahead in 2016. Suppose at
that point the private owner changes reasonable and prudent to
hell for leather and we need decommissioning. Why was that not
taken into account in the sale?
Mr Lovegrove: There clearly was
a risk register. The point that the NAO has picked up was that
we did not perform a formal risk assessment of the change which
was brought about by the change in ownership.
Q94 Mr Mitchell: But with a shift
from public to private, public is more easily controllable than
private, is it not? It is nine months after the sale and the NAO
gets you to do this assessment.
Mr Lovegrove: The point that you
make about reasonable and prudent is not a subjective test. That
is a test which is applied by the Nuclear Installations Inspectorate
(NII).[7]
It is not a question I think of scout's honour or them deciding
that reasonable and prudent can be substituted with hell for leather.
There is a regulatory system which will make sure that reasonable
and prudent behaviour is undertaken by the owner of BE.
Ms Wallace: If they did not observe
that—by the way that is not happening—there is a whole
range of sanctions right down to closing the things if the regulators
were not happy with the way they were being run.
Q95 Mr Mitchell: You were satisfied
before the sale that you could monitor the activities effectively
without a tighter risk assessment?
Ms Wallace: Yes. What I would
like to say about the risk assessment is: I think it is a fair
point that there should have been a formal risk assessment and
it should have been put that way, but actually the whole policy
was about risk reduction. By having this policy and by selling
British Energy for a good price, we made substantial inroads into
two enormous risks, the first being that the NLF depended on British
Energy's success for costs that would fall due if British Energy
went under because obviously it would be an extremely unsatisfactory
position to be in. At the top of the market we got a very good
price. That money went into the NLF and means the NLF is looking
an awful lot more healthy than it was. That is the first risk
that was reduced and the second risk that was reduced was the
security of supply one that we have been discussing. We opened
up site access and—
Q96 Mr Mitchell: I will stop you
there. You say the NAO's insistence was not really necessary.
That tells us something. Let us move on again with the Shareholder
Executive because you were happy with a lower price for the shares
than the private shareholders in British Energy. Were they smarter
than you or were they greedier?
Mr Lovegrove: We were obviously
happy with the maximum amount of money that we could get.
Q97 Mr Mitchell: That was not the
maximum amount of money. They got a bigger maximum.
Mr Lovegrove: If you look at the
two key, private shareholders who held out for a much higher price,
they were not at all happy even at £7.74.
Q98 Mr Mitchell: Why were they unhappy?
You representing the taxpayer were happy.
Mr Lovegrove: The reason that
they were unhappy was because they had a very, very bullish view
of future energy prices.
Q99 Mr Mitchell: And you did not?
Mr Lovegrove: We did not. It has
to be said we have been proved to be more accurate in that than
they have. They took seven pounds of cash and the nuclear power
note and we took £7.74 in cash. The nuclear power note is
now trading at 35p, so if they tried to sell what they have at
the moment as a result of the sale they would be getting £7.35,
whereas we banked £7.74. That is the reason why they—
Q100 Mr Mitchell: I will stop you
there again. You are saying you were better at anticipating than
they were. Is it not true still basically that EDF got a real
bargain? They got the best sites for development. Therefore they
are in a better position than competitors to develop. They had
an inside track with government and they knew in the end if there
were problems the government would always fork out. You were really
selling them a bargain, were you not?
Mr Lovegrove: I will just talk
about the sale. I do not think we did sell them a bargain. I think
we sold British Energy at an absolute peak in energy prices. Since
the time when we sold British Energy, the closest comparator to
the company, another merchant generator, has come off in share
price terms by 47%. Oil prices have come off by 55%. By the time
that we sold it to EDF, there was absolutely no other competitor
in the auction at all.
Q101 Mr Mitchell: You were better
with energy prices but at the same time as that was one factor
construction costs were going up. If it does not pay them to construct,
they can walk away.
Mr Lovegrove: I will pass that
question to my colleague on my right.
Ms Wallace: There was no prospect
of British Energy building us new nuclear power stations. The
prospect of—
Q102 Mr Mitchell: Can I just stop
you there? I am the geriatric on this Committee. I was brought
up on The Daily Express and the great hopes of the 1950s
that Britain would lead the world in the construction of nuclear
power stations. Now all of a sudden we cannot build them. All
that expense has gone to waste and it is the French who have taken
over. Why did that happen?
Ms Wallace: I am not sure I can
answer for all the years of history that you are asking me to,
even though I remember The Daily Express. I think we have
to operate in the world as it is and the world as it is, well
painted in a series of reports from the NAO and recommendations
from this Committee, is that we need to manage the risk, both
the risk of British Energy as it was and the risk to security
of supply. We took a decision. We set priorities for the sale.
Q103 Mr Mitchell: Could they not
walk away if the costs of construction become too high?
Ms Wallace: There is nothing in
this sale that requires them to build new nuclear power stations.
We are not—
Q104 Mr Mitchell: The costs of construction
are escalating. I have a note here about the Finnish one which
is causing a lot of controversy. That is going to be operated
by a Finnish company, TBO, but it is constructed by Areva, a French
company. A French company, EDF, is likely to pass construction
work to another French company, possibly Areva. Costs are escalating
and the whole thing is in danger because of the escalation in
costs. That could happen here, could it not? In that situation
EDF has you over a barrel.
Ms Wallace: No, it does not because,
as we have already said, one of the objectives of the sale was
to avoid depending on one company, one technology, and as a result
of developments over the last year, of which selling British Energy
was a major part, we now have three different consortia.
Q105 Mr Mitchell: The European Commission
had to step in there and put that loan into you. You put fewer
constraints on them and the European Commission came in and said
they had to sell other sites if they were going to get this bargain.
Ms Wallace: The European Commission
did impose further conditions on the basis of competition.
Q106 Mr Mitchell: Which you did not.
Ms Wallace: They imposed some
extra conditions and fair enough. So they did, but actually in
terms of achieving our objectives for the sale, including opening
up to highly competent nuclear operators, we achieved our objectives.
We achieved them, as I think Stephen Lovegrove has just pointed
out, in a way we probably could not if we were selling it now.
We found the right moment to do it so it was a very good deal.
I do not know who had who over a barrel here, but this was an
extremely good deal from our point of view.
Q107 Mr Mitchell: What if they decide
that they will not build without a subsidy? At the kind of escalation
of costs we have seen in Finland, they are going to have to have
a subsidy. What do you do?
Ms Wallace: I can only repeat
that our very clear policy is that we believe these can and should
be built without subsidy.
Q108 Mr Mitchell: Your very clear
policy is to hand over the money whenever the nuclear interest
gets threatened. That is what you always do. If there are costs
of disposing of all the stuff, you fork out. If the costs overrun,
you fork out. This is not a very good habit of mind to face a
company which might well face a huge escalation of costs.
Ms Wallace: We have tried to learn
the lessons from the past which have been spelt out in the NAO
Report about this very subject. The framework for new nuclear
is all about calculating the costs of decommissioning and waste
up front, requiring people to make safe and secure provision for
that, getting independent advice on what that is so that this
is not something that is all to be confronted—
Q109 Mr Mitchell: You could have
required them to sell more sites if they were going to need a
subsidy for building.
Ms Wallace: Well, they are not
asking for a subsidy for buildings. I am afraid that is—
Q110 Mr Mitchell: Well, they are
not yet, but my condition was a future situation in which they
might well be because of the costs of construction.
Ms Wallace: I am afraid that is
so hypothetical.
Q111 Mr Mitchell: You could have
solved it. You could have put in a requirement that they should
sell sites so that you could have more competition.
Ms Wallace: Well, they did have
to sell sites and we put in some requirements like that and the
Commission added some more.
Mr Higson: We were very mindful
of our objective of making sure that the Government was not unduly
dependent on one operator and, therefore, as part of our agreement
to sell going ahead, we required EDF to sell their land at Wylfa,
we required them to sell, subject to conditions, either Heysham
or Dungeness, and we also required them to sell, subject to conditions,
land at Bradwell. The European Commission did a modest additional
tightening by removing the conditionality that we had envisaged
being attached to Heysham or Dungeness, and we think that is quite
a modest tightening of the package. We think the package that
we had agreed was adequate for our objective which was to ensure
that a second operator could enter the market. They have done
so, which I think demonstrates that we had actually judged that
right.
Q112 Chairman: Ms Wallace, I want
you to send us a note please, detailing the nuclear power stations
that EDF has built without a subsidy.[8]
Ms Wallace: Okay.
Chairman: We will look forward to receiving
that.
Q113 Mr Davidson: Like most of my
colleagues, I think I have a deepening and wide knowledge of the
nuclear industry gained from watching The Simpsons, so
I want to discuss how you got on with the French Mr Burns! In
terms of prices for electricity, have prices in the UK gone up
faster than prices in the rest of the EU?
Ms Wallace: I know our prices
are, in general, lower. I am not sure I can actually give that
comparative information, I am not sure we have it here.
Q114 Mr Davidson: Well, maybe we
could just come back to this because this is obviously part of
it. What I am interested in really, I think, is whether or not
the prices in the UK are high compared to the rest of the EU and
whether or not they have risen faster or slower. I think I would
also be interested in knowing whether or not EDF's prices in the
UK compare well or badly to EDF's prices elsewhere in Europe,
just to get an indication of the sort of nature of the people
we are dealing with, but you do not have any of that at all?[9]
Ms Wallace: No, I am afraid it
does not come up in the Report, so we have not brought that.
Q115 Mr Davidson: Fine, okay. I wonder
if I could turn to the Shareholder Executive and come back to
this question of valuation because, you see, my understanding
from looking at the Report is that you took the view that a valuation
of 703p was reasonable at one point, you then anticipated that
the company would accept an offer of 765p and then eventually
an offer of 774p was got. Now, in these circumstances, when your
estimates were that you would have let this company go for 703p,
I cannot understand why you gave your bankers a success fee.
Mr Lovegrove: I think the answer
to that question is that clearly, to a degree, assessments with
these very big and volatile inputs of valuation can change. I
think the lesson of this particular transaction was that there
were some shareholders who had a view of value which was well
over £10 and there were other shareholders who took the view
that the shares were only worth about £4. We were not at
the one end or the other.
Q116 Mr Davidson: I understand, but
the valuation, to some extent, is what the buyer is prepared to
pay.
Mr Lovegrove: Indeed.
Q117 Mr Davidson: Your advice was
that 703p was a reasonable price and you were then accepting or
prepared to accept, not unnaturally, an offer that came in at
765p.
Mr Lovegrove: Yes.
Q118 Mr Davidson: But in fact other
people who had a better idea of the nature of the market managed
to get it up to 774p, even though they would have wanted more.
Now, in all of this, the question of professional advice comes
into it. What would the bankers have had to have done not to have
got a success fee? Anybody can sell something for threepence,
as it were, but it seems to me that, given that they were advising
you that 703p was a reasonable price and you actually got 10%
more than that, if people get a success fee for that, then that
really is money for old rope, is it not?
Mr Lovegrove: It would be if you
took the view that the only thing that they were doing was providing
us with a fairness opinion, which was very, very far from the
case. The bankers also advised us throughout the process when
there were a number of the biggest European utilities looking
at this, which was a very complex matter. They advised us in the
way in—
Q119 Mr Davidson: Sorry, how many
of the major European utilities bid?
Mr Lovegrove: Well, by the time
that the auction was concluded, clearly only EDF was left in the
auction.
Q120 Mr Davidson: So it was only
for people who did not do anything at the end of the day.
Mr Lovegrove: At the beginning
of the process, there were obviously eight or nine, I think. They
were instrumental in the construction of this quite complex financial
instrument, called the `nuclear power note', and I think it would
have to be said that, without the nuclear power note, no transaction
would have occurred at all.
Q121 Mr Davidson: So they were your
merchant bankers then that constructed the nuclear power note
when in fact that was not actually a part of your submission?
Mr Lovegrove: We did not take
the nuclear power note, no.
Q122 Mr Davidson: No, but you put
it together. I just want to be clear about that. Given that you
were not interested in taking it, you are saying that it was your
bankers that did that, as distinct from British Energy's bankers,
as distinct from the other shareholders' bankers?
Mr Lovegrove: All of the bankers
worked together, but I can say that our bankers, UBS, were absolutely
instrumental in bringing about the successful design of that instrument,
without which there would have been no transaction.
Q123 Mr Davidson: But would the other
bankers say that they were also instrumental in bringing that
about? It is a question of who gets the success fee for this.
You see, it is a question of success having lots of fathers, et
cetera, et cetera, so that you will give me my success fee. I
just do not understand how people manage to underquote by 10%
and still rake in a huge success fee. As I say, it sounds like
money for old rope and that essentially you were just a soft touch.
Mr Lovegrove: I think we are very
far from a soft touch. When we went through the procurement process
to be able to get our bankers in, I believe and still believe
that in this very complex situation governed by the Takeover Code
we needed professional banking advice. When we then went through
that procurement process, we ended up with a fee of ultimately
around £4 million. The fee scale that is normally quoted
in these kinds of situations by investment banks, and I am conscious
that people may not like this, for a transaction of this scale
was around £12 million, and indeed one of the banks that
we spoke to at that time did put £12 million on the table.
UBS started off at £6 million and we ended up at £4
million ultimately, so I would certainly not agree that we are
a soft touch when we are hiring professional advisers like this.
Q124 Mr Davidson: So, if you had
not been there, are you saying then that British Energy's bankers
would not have been able to put this together because they were
not bright enough and it was only your bankers who could?
Mr Lovegrove: No, I am not saying
that.
Q125 Mr Davidson: I see that British
Energy's bankers also got a success fee, did they not?
Mr Lovegrove: They did.
Q126 Mr Davidson: For a scheme that
you put together.
Mr Lovegrove: Which we were instrumental
in. Nobody is claiming sole responsibility for all of these things.
Q127 Mr Davidson: Not when there
are bonuses going, yes, I can understand that.
Mr Lovegrove: The Government's
objectives in this sale were much, much more complicated and much,
much more subtle than those of the board of British Energy. We
not only wanted to get maximum value, but there was a secondary
objective for us—
Q128 Mr Davidson: But you did not
get that.
Mr Lovegrove: We wanted to maximise
value, which we did, but another secondary objective was that
we wanted to avoid undue dependence on one supplier, but the two
primary objectives were that we wanted to bring forward new nuclear
at no subsidy to the taxpayer and we wanted to ensure the viability
and safety of the British Energy fleet. Now, that put us into
a position where our, as I say, hierarchy of objectives was much,
much more complicated than the simple objectives.
Q129 Mr Davidson: But am I not right
in thinking that in fact you have not got new nuclear capacity
brought forward and you have not got a guarantee of no subsidy,
so in fact you have almost managed to scoop the pool by managing
to achieve none of your objectives.
Mr Lovegrove: I would not agree
with that.
Q130 Mr Davidson: Let me just go
back then again. You have got a clear guarantee about no subsidy
then, have you?
Mr Lovegrove: No.
Ms Wallace: No, we have not got
a clear guarantee about subsidy—
Q131 Mr Davidson: Sorry, let me just
be clear. That was one of your objectives, was it not, but you
did not get that though?
Ms Wallace: Our top objective
was to ensure that nuclear operators were able to build and operate
new nuclear power stations from the earliest possible date, and
they could not do that with British Energy, as it was, and what
we needed to do was open up the sites and get a new operator in.
Of course, we want to do it without subsidy; that is our policy.
Q132 Mr Davidson: Are you not now
getting these sites developed with a minimum delay?
Ms Wallace: We believe so, yes.
Q133 Mr Davidson: So we can expect
to see them coming forward to what timetable?
Ms Wallace: Well, we have already
touched on this.
Mr Higson: The first electricity
from the first station under EDF's plans is at the end of 2017.
Mr Davidson: So, if that does not happen
and there is a failure of that objective, do we get any of the
bankers' bonus back?
Chairman: They will be in Bermuda by
then!
Q134 Mr Davidson: That was an objective.
If it is not achieved, do you get any of it back or do they keep
it?
Mr Lovegrove: They will certainly
be keeping it, but the objective was not for new nuclear to be
built, the objective was to remove the obstacles and ease the
path of new nuclear being built, and on that basis I think that
objective has been achieved.
Mr Higson: There has been good
progress.
Q135 Keith Hill: So EDF hopes to
have the first nuclear power plant operational by the end of 2017,
and could I just ask what our general experience is of the length
of time it takes from start to finish to get a nuclear power plant
up and running?
Mr Higson: Experience around the
world is obviously very mixed. We would expect and hope that nuclear
power stations in the UK could be constructed within five years,
but that is very much a matter for the operator, their skill at
contract management and the way they go about the job; it is a
commercial matter for them.
Q136 Keith Hill: So the key variable
is the skill of contract management. What are the other variables
in the situation?
Mr Higson: There are a whole host
of things that need to be done, for example, the reactor design
needs to be approved by regulators, so there is a process going
on at the moment of generic design assessment, the site will need
planning approval, so that will need to go through the planning
system, and the site itself will need to be licensed by the Nuclear
Installations Inspectorate.
Q137 Keith Hill: Are there any planning
applications in yet?
Mr Higson: No planning applications
have been made so far, no.
Q138 Keith Hill: When do we anticipate
that the planning applications will be made?
Mr Higson: Again, this is a commercial
matter for EDF, but I would personally be disappointed if they
did not submit a planning application during the current calendar
year.
Q139 Keith Hill: During the current
calendar year? Just remind us about the current planning framework
for the development of these plants.
Mr Higson: The planning framework
has been reformed and the Infrastructure Planning Commission will
now deal with major infrastructure projects, of which a new nuclear
power station would be one. They are guided by a national policy
statement, and we have issued a national policy statement for
nuclear in draft and it is currently out for public consultation.
It would then need to be formally designated before it became
operational to the Infrastructure Planning Commission.
Q140 Keith Hill: The NPS, the national
policy statement, is out for consultation right now. When is that
process of consultation anticipated to conclude?
Mr Higson: On 22 February.
Q141 Keith Hill: And that forms really
the guidance framework for the way in which the Infrastructure
Planning Commission handles the planning application?
Mr Higson: That is correct. It
sets out guidance for the Infrastructure Planning Commission and
will include a list of sites which, at the strategic level, are
deemed to be suitable for new nuclear.
Q142 Keith Hill: Has the IPC started
work yet?
Mr Higson: The IPC has been created,
but it has not started work on assessing any nuclear applications
because as at this stage none has yet been made.
Q143 Keith Hill: How long is it anticipated
that the IPC will take to assess a planning application?
Mr Higson: There is a defined
timetable which should lead to a decision being taken within one
year.
Q144 Keith Hill: Within one year,
so that would potentially take us, if an application went in before
the end of this calendar year, to the end of 2011?
Mr Higson: 2011.
Q145 Keith Hill: You are aware of
course that it is official Conservative policy to scrap the IPC
and, in the event, Heaven forfend of course, of a Conservative
electoral victory, what is going to happen to these nuclear power
plant planning applications without an IPC to look after them?
Ms Wallace: I do not think you
would really expect us to speculate on that.
Q146 Keith Hill: You do not answer
hypothetical questions?
Ms Wallace: I think not.
Keith Hill: So will you confirm then
that it is actually official Conservative policy to scrap the
IPC?
Q147 Chairman: You know that because
you are having discussions with them.
Ms Wallace: I am Accounting Officer
for many things, but one of the things I am not Accounting Officer
for is that, so there are plenty of people you could ask about
that.
Q148 Keith Hill: Since it is rather
salient to your energy plans, the role of the IPC, surely at least
you must be aware of Conservative policy on the IPC?
Ms Wallace: Yes, we are preparing,
as you would expect, for a General Election, but I am really not
going to be asked to confirm Conservative official policy. As
you know, that is not my job.
Q149 Keith Hill: But this Committee
is at least at liberty to suppose that, in the event of the scrapping
of the IPC, there would be something of an impediment to the immediate
progress at least of the nuclear power plant process.
Ms Wallace: I think, Mr Hill,
you are doing quite enough supposing for both of us!
Keith Hill: Okay, I will leave it at
that!
Q150 Mr Williams: I was not going
to ask you a question, but, in view of the mischief of my colleague,
it is perfectly in order to ask you a simple question. If the
IPC were to be scrapped, what would be the practical results of
it?
Ms Wallace: I really am not in
a position to comment on what other arrangements would be made.
What I will say is that this—
Q151 Mr Williams: But what would
be the consequences of its not being there?
Ms Wallace: Well, can I answer
it in my own way and then, if you find that unsatisfactory, no
doubt you will come back. The Government's policy is to bring
in the IPC in order to simplify and shorten the planning process
on the grounds that that will help deal with the challenges to
security of supply, so the Government is doing that because it
will make things better. If another policy is the policy of the
Government, then we will implement that and we will risk-assess
it at the time.
Q152 Mr Williams: So you would have
lost the process which would have shortened the procedure?
Ms Wallace: That is the purpose
of the policy.
Q153 Mr Williams: And you do not
have any evaluation of the options that would be available to
you, if that happened, to minimise the impact, or what sort of
impact would you expect it to have on the programme?
Ms Wallace: I have already commented
on the intention of the policy and I really do not think there
is anything more I can say about this. The Government that we
work for has not asked us to evaluate the alternatives at this
point because it has a policy that it is pursuing.
Q154 Mr Williams: But it is not an
unrealistic question to ask. If it were taken away tomorrow by
this Government, what would be the effect, and I mean by this
Government, I am not asking you about the next Government?
Ms Wallace: Well, in fact we would
be extremely surprised, given that we have been operating on the
assumption that this Government is going to bring it in, so all
our plans are built around the assumption that it comes in and
that it has the effect described.
Q155 Mr Williams: So you are saying
it would make no difference?
Ms Wallace: No, I am not saying
that.
Q156 Mr Williams: I thought you were
saying it would make no difference.
Ms Wallace: Well, obviously, if
we have a change of policy, it will make a difference, and the
Government's purpose in introducing this is to shorten the planning
process.
Q157 Chairman: Poor Ms Wallace! I
feel a bit sorry for you!
Ms Wallace: Thank you, how kind!
You are all heart; you are famous for it!
Q158 Mr Mitchell: Just a quickie:
the French need much less by way of planning permission than we
have. If you want to establish a nuclear power station, well,
make your objections to the CRS and they will move in and satisfy
your discontent, whereas we have very tortuous planning procedures
here. Was there any part of the deal which said, "We'll see
you right on planning"?
Ms Wallace: Sorry?
Q159 Mr Mitchell: Was there any part
of the deal with EDF to take over that they would be given an
easier road on planning permission? That is one of a number of
obstacles on pages 16 and 17 which face the commissioning of any
new nuclear power stations.
Ms Wallace: There were no secret
deals. That would be quite inappropriate.
Q160 Mr Mitchell: No, so the publication
of the White Paper concurrent to these negotiations was just an
accident or coincidence?
Ms Wallace: I have no idea. There
are no secret deals.
Mr Higson: By "the publication
of the White Paper", you mean the January 2008 Nuclear White
Paper? I do not think it was a coincidence in the sense that the
board of BE wanted to be sure what government policy was before
they determined it was right to launch the process, so they were
waiting to see what the Government produced by way of its White
Paper in January 2008.
Q161 Mr Mitchell: Well, in December
2007, they had high-level discussions with British Energy with
parties who were interested in acquiring the company. They must
have found out then that the problems to acquiring the company
would have been to do with planning permission.
Mr Higson: Well, they would have
known at that stage that the Government had issued a consultation
paper in May of 2007 which set out the proposed policy by Government
on nuclear, so it would have been reasonable for them to start
some discussions with a view to waiting to see what the Government's
final decision was in January before launching the formal process,
and I am not surprised that the discussions took place before
the formal publication of the White Paper.
Q162 Mr Bacon: Ms Wallace, can you
just tell me what investment approach has the Government proposed
for decommissioning funds for new nuclear build?
Ms Wallace: I think I am going
to hand this one to you, Mr Lovegrove.
Mr Lovegrove: This is one of those
moments where, I suspect, it would be best if I offered to write
a note on this, but I believe that the new nuclear builders are
responsible for decommissioning the nuclear power plants.
Ms Wallace: I am sorry, I handed
it in the wrong direction. I do apologise for that.
Q163 Mr Bacon: Just keep tossing
the ball around and it will land somewhere eventually!
Ms Wallace: Well, this is probably
a matter for the Nuclear Liabilities Financing Advisory Board
(NLFAB), is it not?
Mr Higson: It will be a requirement,
before proceeding with new nuclear power, that new operators have
a funded decommissioning plan which sets out how they propose
to decommission the power station and how they are going to fund
the cost of decommissioning, and that plan needs to be approved
by the Secretary of State. Now, this is enshrined in legislation,
a fund is built up and there are legislative provisions in place
to ensure that, were the company to fail, the funds built up are
beyond the reach of any administrator.
Q164 Mr Bacon: When you say "a
fund is built up", going back to my question, what is the
investment approach? Is that laid down?
Mr Higson: The investment approach
is not laid down. It will need to be prudent and the investment
approach will need to be approved by the Secretary of State and
the Secretary of State will have advice from a specially constituted
board, called the NLFAB, the Nuclear Liabilities Financing Advisory
Board, who will advise the Secretary of State on whether the appraised
investment principles for the fund are suitably prudent or not.
Q165 Mr Bacon: It is correct though
that the approach would be different from that for the existing
decommissioning funds for nuclear liabilities?
Mr Higson: That is correct.
Q166 Mr Bacon: Perhaps you can send
us a detailed a note on that.[10]
I was interested in this question of how it is priced at the beginning,
that for existing nuclear decommissioning the money is going to
get put into gilts, which I do not think is going to be adequate
for the period involved, and that for new nuclear build there
is going to be a different investment approach, and I am interested
in that difference, so if you could send us a detailed note about
the approach for new nuclear build, that would be very helpful.
Q167 Mr Davidson: As to the point
I raised about energy prices and comparisons, just to confirm
you are going to give us a note about that?
Ms Wallace: Yes.
Chairman: Lady and gentlemen, thank you
very much. That concludes our hearing. Clearly, the Government
got a good price, but it got a good price because energy prices
have fallen because of the recession and it is not quite clear
to me what would happen if energy prices start going up. I am
also worried about the success fee which Mr Davidson was asking
you about and whether UBS may have set an easy goal in order to
get the fee, and I am also worried, as we all are, about the degree
of pressure there is on EDF to actually build these nuclear power
stations without any public subsidy, but all these matters we
can refer to in our Report, and we are very grateful for your
attendance. Thank you very much.
1 Note by witness: Chart 5, page 73. Back
2
Ev 15 Back
3
Ev 15 Back
4
Note by witness: Around 18GW are due to close by 2018.
Further power station closures will be driven by the Industrial
Emissions Directive (IED) which is currently under negotiation
in Europe and will replace the regulatory framework established
by the Large Combustion Plant Directive (LCPD). Back
5
Note by witness: There could be a need for around 110GW
of total electricity capacity by 2025. Back
6
Ev 16 Back
7
Note by witness: In addition, under the Restructuring Agreements,
there is a contractual obligation on EDF to run BE's nuclear power
stations in a reasonable and prudent manner. Back
8
Ev 16 Back
9
Ev 16 Back
10
Ev 16 Back
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