Session 2010-11
Publications on the internet

To be published as HC 742-vii

House of commons



Energy and Climate Change Committee

Electricity Market Reform

Tuesday 15 March 2011

Chris Huhne, Simon Virley, Mike Williams and Charles Hendry

Evidence heard in Public Questions 357 - 418



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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 15 March 2011

Members present:

Mr Tim Yeo (Chair)

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Albert Owen

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Chris Huhne MP, Secretary of State, Department of Energy and Climate Change, Simon Virley, Director General, Energy Markets and Infrastructure, Department of Energy and Climate Change, Mike Williams, Director, Business and Indirect Tax, HM Treasury, and Charles Hendry MP, Minister of State, Department of Energy and Climate Change, gave evidence.

Q357 Chair: Good afternoon and a very warm welcome back to the Committee. We are delighted to see you here. Thank you for making time to come and talk to us. I thought before we get on to electricity markets reform we might just spend a few minutes on what has happened over the last days in Japan and the implications of that, as clearly that is extremely topical. I think everyone is very interested to have your latest thoughts. Perhaps you could just give your reaction to what has happened in the last 24 hours and then we might just spend a few minutes exploring that.

Chris Huhne: This is obviously a very serious incident indeed. As a result of unfolding events in Japan I have asked our nuclear regulator, Dr Weightman, to look very carefully at the full facts of what has gone on and to prepare a report for us on the implications that there may be both for the existing nuclear reactors, which we have in this country, and indeed for any new nuclear programme.

The real concern here obviously will be particularly around lessons that might have a read across on things like operator safety, training and so forth because luckily we don’t live in a seismically active area like Japan. I think I am right in saying that the strongest ever earthquake in the UK was recorded at Dogger bank in 1931 and that the earthquake that hit Japan was 130,000 times stronger, so we can count our luck in happily living in an area where we don’t have to deal with those sort of problems. But there may well be read across in terms of human error and other issues, and I am absolutely determined with our nuclear safety regime, as with every other of our regulatory regimes, that we should be absolutely at state of the art, so I have asked, and recently met, Dr Weightman to make sure that we can be at the forefront of ensuring that safety is our number one priority, as it must be.

Q358 Chair: I think many of us believed that was already the case and that we were pretty near state of the art already. It is clearly quite right and proper to have this review but given what you have just said, the fact we are not in an earthquake zone here, I think many of us would be concerned if what has happened in Japan, under circumstances that it seems almost impossible to repeat in this country, led to a serious delay in decisions about going ahead with new nuclear, which I think looks, the more we examine it, to be very urgently needed.

Chris Huhne: I think we have to wait and see what Dr Weightman’s report comes up with. I don’t think he intends to dilly-dally. He understands the importance both in terms of ensuring that our safety regime is absolutely at the frontier now, and indeed the implications for new nuclear. There is certainly no intention for us to do other than to learn the lessons. Although obviously it is absolutely right to say that we don’t live in an earthquake zone, there may, for example, be lessons to be learned over the backup facilities for cooling. One of the assumptions that at this stage we have to make-we don’t have direct evidence of this because obviously those involved in the nuclear industry in Japan have been very busy, understandably. But what appears to have happened is that after the first failure of the first cooling system, as a result of the power cuts from the grid, the backup diesel generators began to work and began to operate but they were then hit by the tsunami, and therefore the backup cooling systems didn’t work and it took the staff on-site some time to re-establish and improvise cooling, which they did, of course, through the pumping of sea water.

Again, there isn’t a read across. Clearly we are lucky that we do not have to suffer from tsunamis but we do have within our recent experience some very extreme weather events, as you will remember, Chair, for example the floods in Gloucestershire and other parts of the country only a few summers ago, and we have to be sure that all of our backup systems are similarly proofed against those sort of extreme weather events.

Q359 Chair: Yes, of course, I think we would accept that absolutely, but I think we are also aware the danger that reviews of this sort sometimes feel almost obliged to make some recommendations that go further than present requirements, and the consequence of that inevitably is to increase costs and therefore make all this harder and perhaps slower to achieve, and I hope you will guard against that. The tone of some of the reporting of what has happened to the nuclear power station in Japan seems to be rather less than objective. In a climate that sometimes borders on hysteria there is a danger that, to try and assuage public concern, steps are taken that increase costs but are not strictly necessary for safety purposes.

Chris Huhne: I am as aware as you are, Chair, of the potential for those of us in the public eye to jump to conclusions and to rush to judgement. It was precisely for that reason that I thought it was important to establish the facts and establish what the lessons may and may not be for our own reactors and any new nuclear programme. That is precisely why I asked Dr Weightman to do the report, because I thought it was crucial that we should base any public debate on reality and on the facts, and not on a load of supposition, which frankly does appear to be a risk, not least in some other countries, at the moment.

Q360 Sir Robert Smith: I just wanted to reinforce of course that quite a few of our sites are low-lying and therefore obviously flood defence and the ability to cope with flooding is an important part of the safety regime. I wondered what the department was doing to assess- and this may be too early-the impact on the investment climate, firstly, the liability risks that may be being established in Japan for those owners of the plants, and secondly, just the reaction of investors. The ambition for nuclear rollout in this country requires an awful lot of financial investment from the private sector, which might be a bit more frightened now.

Chris Huhne: You are absolutely right that our whole electricity reform, whichever way we turn, whether it is very strongly relying on nuclear or whether it would be strongly relying on renewables, or indeed on clean coal and gas, will require enormous amounts of investment and an absolutely key part of this whole exercise for us is to ensure that that investment can be unlocked and comes on-stream.

On specifically your question about nuclear, it is, I think, just far too early to tell at this stage whether there will be any impact on the investment climate. In my view, investors are generally pretty rational when it comes to trying to get a reasonable rate of return, and they will make their assessment on the basis of costs, the likely returns, and that, in part, will indeed be affected by the sort of conclusions that Dr Weightman and others like him in other countries are coming to. You are right, that is clearly an ongoing potential risk, but I think it is far too early to tell whether this has changed the investment climate.

Charles Hendry: Can I just pick up, as well, on your point there about low-lying areas, because as you will be aware the national policy statements for nuclear have been site specific, so we have looked at very specific locations. We have been looking in terms of extreme weather conditions, in terms of the long-term suitability of those sites. In addition, the generic design assessment work, which has been going ahead through Mike Weightman’s team at the NII, have also been looking at the ability of the reactor designs to work in extreme circumstances.

Chris Huhne: Indeed, one of the reasons I think we decided not to proceed with Dungeness was for exactly those circumstances.

Q361 Laura Sandys: There seems to be, if one is looking at the overall investment climate, two impacts or two possible impacts of the Japanese situation. First of all, the rise of immediate fuel costs overall, with LNG being very important to keep the Japanese economy up and running in a much more competitive or a much more demanding environment. That is really the short term. But then in the medium term, our discussions with some investors are saying that Japan will pay anything to get its basic energy infrastructure back in place. Do you believe that that will have an impact on the cost of capital and also the availability of capital when we are looking to raise £200 billion?

Chris Huhne: Let me take the short term point, because I wouldn’t jump even to the conclusion in the short term-if by short term you mean over the next year or 18 months-that this is likely to have an impact necessarily increasing LNG prices, for example, because if the activity level in Japan has to be lower as a result of the damage inflicted by the earthquake, then with lower GDP levels we have already had a number of the Japanese car manufacturers, for example, voluntarily, it seems, shutting down production in order to make sure that the electricity available within Japan can be used by households. That is going to have an impact in reducing demand for energy over that period. In the longer run, you may be right and the mix will change.

But £200 billion is an awful lot of money for one country, but it is relatively modest by the standards of the international capital market. The international capital market is absolutely vast and if you compare it even with a sovereign bond market, for example, I think that it is unlikely that there will be dramatic shifts in certainly the overall cost of capital. There may be-and we will have to assess this but it is too early to tell-shifts in the risk premia that are asked by the markets for particular companies, depending on the mix of their generation capacity. But I think it is too early to tell and it will take some time for the markets to settle down and give us an adequate readout on that.

Q362 Barry Gardiner: Secretary of State, at the moment there is the 20 kilometre exclusion zone because of the risk of contamination to the public. My concern is partly with the investment climate but it is also with the public perception of nuclear. It seems to me that it is very important that at this juncture, and as early as possible, there are some reassuring noises made by the Government if they are going to be able to deliver what the Minister of State told us when he appeared before us previously, namely that 16 of the 18 gigawatts by 2025 would be coming from nuclear. That is one nuclear power station every nine months from 2017 onwards. That can’t happen without public goodwill and it seems to me that the effect that Japan may have may be less on the international capital markets than on public opinion and the market of public opinion, and it is important that we should understand how you propose to address that.

Chris Huhne: I think the most important way to start addressing any issues that involve public opinion is to base the public debate on the facts. With the best will in the world, I am not a nuclear scientist-I am not even a scientist. I can claim to be an economist, but I am also a politician and, sadly, one of the things that goes with our respective professions is that our fellow country people tend to distrust us, particularly when we stray into areas where they suspect other people might know rather more than we do. When it comes to making an assessment about the lessons that we can learn from Japan, I think it is important that it should be done by someone like Dr Weightman rather than jumping to conclusions or rushing to judgement. I think that is going to be more reassuring for public opinion, whatever the conclusions that he comes to in the long run, than if I were to start grandstanding, shooting my mouth off saying something is X when frankly it is simply too early to tell.

Q363 Albert Owen: Just on that, I think it is sensible that we learn lessons from Japan. It is far too early to tell now, and it might take some time to get the facts out, but what is concerning me is that the department will just sit back, not grandstanding but make genuine public statements that allay people’s concerns. The Minister has just rightly stated that the strategic site assessment has been done; it was robust in its outcome; the national policy statements are there. The generic design has been approved by Parliament and by the industry inspectors. We need to be telling the public that as well. I put it to you that you should be doing it and the department should be doing it and being quite bold on that, that we are not repeating the technology of 30, 40 years here. We have new robust technology that has passive mechanisms within it to withstand some of these tragedies that we have seen in other parts of the world. Do you agree with that?

Chris Huhne: It’s certainly the case that obviously technology improves over time in all areas. I think you have to come back to the point that the public is much more likely to be reassured by an objective review of the evidence, after considering the facts, than rushing to judgement, and therefore Dr Weightman’s report is the right way to proceed. Frankly, the public is also likely to be much more reassured on a day-to-day basis analysing what is going on in Japan by Sir John Beddington, for example, as the Government’s chief scientist, than by Ministers, if they don’t have a scientific background, and I don’t. But I take the point, and I think we have to separate two things out. One is the safety of our existing reactors, and of course many of our reactors are of a similar generation to the generation that was built in Fukushima, and we do have to make sure that all the backup systems and so forth that we rely on there are properly functioning. My own experience of visiting a nuclear plant is that our industry is very aware of the absolutely critical need to put safety as the number one concern, and the plants that I have visited are clean, they are well run, they are extremely well maintained, and long may that be so.

But there is an exact parallel here with the attitude that we took after the Gulf of Mexico disaster with our offshore oil and gas drilling. I want to make sure that our regulatory regime is completely state of the art, that we have the best possible regulatory regime, and what we would like to see is the same thing happen in this case as has happened with the Gulf of Mexico case, which was when the US Presidential Commission came out and said that our regime was one to model themselves on. That is devoutly to be wished, but we have to get to the bottom of the lessons before we are in a position to say that.

Q364 Albert Owen: Just to follow on there, I think you are right to separate the existing nuclear installations with the new ones, and we were talking about new build when I posed the first part of the question. But I still come to the point that politicians like yourself may not be that trusted with the public in general, but you have eminent scientists-

Chris Huhne: Ourselves.

Albert Owen: Ourselves then. I think my view on nuclear has been very consistent over many years and I stand by it. But the point I am making is a serious one about you have expertise within the department that can make some statements as well to counter some of the tabloids or newspapers that may be-because the facts are coming out very slowly. I have just spoken to a site manager of a nuclear plant in this country who has worked in other countries. The terminology that is being used in the press is not correct for a start, so we need to counter that to allay fears and concerns here in Britain.

Chris Huhne: The day that any Government Minister becomes responsible for errors that appear in the British press I think we will be a very different sort of society. I certainly wouldn’t put myself up to do that. Having been on both sides, both the writing side of what appears in the press and on the receiving end, I think I can vouch for the fact that you shouldn’t always believe everything you read in the newspapers. That said, I think we have drawn obvious distinctions. A very obvious distinction is the fact that we do not live in an earthquake zone and that we do not thankfully, given the horrifying scenes that we have all seen on the television.

Q365 Albert Owen: With respect, I have not heard your department making these statements in the media. Maybe I have just missed them.

Chris Huhne: My statement, when I appointed Dr Weightman to do the report, I said very clearly, I drew a very clear line in saying that obviously we do not live in an earthquake zone, we don’t have the same seismically challenged environment that Japan does, and I made that point. I have also made in media interviews the point that I made to you about the strongest earthquake we have ever had to suffer being so much weaker than the Japanese earthquake. I have made those very obvious points, because they are certainly within my ken as an untrained-

Q366 Albert Owen: I need to push you on this. You have the scientific background within the department that could be making those scientific statements, the safety of the current installations.

Chris Huhne: The right person to come to judgements about the lessons on this is Dr Weightman, and he will. I think that report will carry all the more weight when he completes it because of the fact that he will have done it properly. At the moment I could speculate on exactly what is going on in Japan and exactly what happened. There is plenty of hypothesis around. It is not possible to pick up the phone and have a sensible conversation with an informed person in Japan, for the very obvious reason that they have a lot of other things on their mind, and briefing me or any of us is not a very high priority, and nor should it be. We have to wait and see. I know sometimes that can be frustrating but it is the safe, sensible thing to do.

Q367 Chair: There is another angle to this. A lot of the reporting refers to other nuclear accidents. I don’t recall, for example, when the New Zealand mining tragedy occurred recently that we were reminded by the media frequently of other mining disasters, of which there have been a tragically large number. Just looking at this country, where you can speak, it might be helpful, I think, to remind people the record of the nuclear industry in Britain is very good in terms of safety. Sadly, the same could not be said of the coal mining industry, which over 200 years has suffered huge numbers of deaths and large numbers of undetected diseases, and even the oil and gas industry more recently has also had a number of tragedies. I think it would be helpful to remind people that among the sources of energy, as far as the UK is concerned, nuclear has been incredibly safe.

Chris Huhne: I entirely take on board that point and, as I say, when I have done media interviews I have pointed out that in my experience of the industry there is very, very high priority accorded to safety and that continues to be the number one concern for me and for the entire ministerial team and the department. I believe also, by the way, for those who want to invest in the new nuclear programme they understand the absolutely key importance of maintaining public confidence and an absolutely key part of maintaining public confidence is to ensure that we have a totally robust, state of the art safety regime and regulatory regime. I very much take those points on board. I hope that they will gradually get across to people.

Charles Hendry: I think, Chair, one of the greatest strengths we have in this country is a very independent regulatory regime, partly because we don’t have a national champion, and therefore they can be absolutely clear and categorical about the approach that they are taking. I think what we can also do at this time is to try and identify some of the areas where we can give people reassurance about why new reactors will be even safer than those that have been built historically in the past and, for example, to point out that one of the differences between what we have seen in Japan and the new generation here is the simple size of the core reactor, which is much smaller in Japan and therefore heats up much more quickly and to much higher levels than would be the case in a much larger reactor in the designs that are being approved here.

The critical thing is the independence of the regulatory regime here, which I think does give people grounds for believing this has been done very robustly and with great confidence.

Q368 Dr Lee: Developing the points already raised with regards to the Department’s possible responsibility here to try and educate the populace about risk, in the spirit of evidence base, I know from this document, which is a World Nuclear Association document on Chernobyl, that the Bryansk District around Chernobyl, leukaemia incidence is not higher than in the Russian general population. Thyroid cancers are 90 times more common in part of Finland than they are in the Bryansk District. In his words he says, in terms of death per unit of electricity produced Chernobyl is minor. I would suggest that at a time like this-and it seems well sourced, I might add-particularly when we are embarking upon new nuclear, and personally I would build more if we could, there is a responsibility to put out there the facts because most of what we are concerned about is health consequences to the surrounding population, and judging by this document there weren’t that many health consequences to the Chernobyl disaster. I suggest that if I stopped somebody in the street and asked them about Chernobyl they would immediately say it causes cancer, it has caused leukaemia, it has caused thyroid cancer in children, all this sort of stuff, but it would appear, according to this document, that that is not the case. I am no expert but I gather it is based upon the adoption of a linear no-threshold-hypothesis of radiological contamination, which was accepted in 1959 by the international community, an hypothesis that has not been proved to be accurate. I would suggest, along the lines of what has been said, that maybe there could be people in the department who might do some work on this and get the facts, as we know it, out there front and centre.

Chris Huhne: I would be delighted to have a look at the document that you are sighting and give you a view on it, and perhaps write to you about it. I am afraid I have not had the benefit of seeing it before you mentioned it today, so I can’t comment.

Q369 Ian Lavery: Just two or three very brief points. I have to respond to the coal industry one. You cannot compare the coal mining industry to nuclear. We’ve been mining coal in Britain-I know it wasn’t you, Mr Huhne.

Chris Huhne: I think you should have a pot shot at the Chair on that rather than me.

Ian Lavery: I am trying to deflect it off you straight back. You cannot compare the safety in the mining industry. We’ve been mining coal since the 1300s and before. It seems to me that Dr Weightman has an awful lot on his shoulders. What you have said two or three times is he is the man who will be informing the Government on what will happen, what has happened, and I think he has a huge responsibility. I hope there is more than one man who will be influencing-

Chris Huhne: He has the whole regulatory safety regime with him, but he is our chief inspector, so he is the person who is most responsible for nuclear installations. That is the right person to go to when it comes to a report on what the lessons of Japan are.

Q370 Ian Lavery: There were soundings from Europe this morning, from European Ministers saying that they would be advising Member States to rethink their future nuclear strategies. How influential will Europe be with the UK on insisting that the UK re-evaluates the future strategy for nuclear in the UK?

Chris Huhne: I think there will be many different views across Europe, depending on what part of the political spectrum, and indeed which country, people come from. All I would say is I think that in this country we have a good, longstanding tradition of trying, we don’t always succeed, to base public debate on what are, after all, pretty technical matters on an informed assessment of what has gone on, and I think that is a sensible approach. I am sorry to repeat it again and I know it can be frustrating in terms of those who want to come to more rapid conclusions, but we should not rush to judgement. Let’s wait until we have the full facts. I regret the fact that some Continental politicians do seem to be rushing to judgements on this before we have had a proper assessment. Let’s get the facts and then base the debate on those.

Charles Hendry: This is a matter of national competence. Decisions about the right energy structure for individual Member States is made at Member State level. It is not a matter for the European Commission in these respects. Although there are a great deal of issues where international co-operation, setting of international standards, can be helpful, but the decisions about the right balance are made at Member State levels.

Q371 John Robertson: I suppose I better declare an interest, Chair, as chair of the all-party nuclear energy group. Sorry I’m late but I was doing a tour of television studios on this very subject.

Secretary of State, I understand that we want to wait for the facts and that we want to see what has happened, but the facts will only apply to Japan and will only apply to the area where the tsunami and the earthquake has been. They will not apply to this country, so I am somewhat at a loss to understand why you can’t categorically tell us that the security of our nuclear power stations is second to none and in tip-top condition. If you can’t tell us that then I don’t know any politician who can because you must have received a great deal of information, expertise or not, over the last four days. What I am looking for from you is to allay the fears, rightly or wrongly, of the people of this country who do have the fears and they do think these things could happen here. What we want from our leaders is leadership. I would like you to go out there and tell the people that this country is safe for nuclear energy and that we do not have a problem, but as always we look at our security aspects of the job and we make sure that security of all our power stations, no matter what they are, they are always being looked at. Would that not be a better way forward rather than to say, "Let’s wait for the facts of what has happened in Japan"?

Chris Huhne: I said very clearly that I believe that we are running a very robust safety regime, a very robust regulatory regime, that our concern above all else is safety, and certainly my personal experience of the industry suggests that that is shared right the way across the industry, so I can give you that assurance, and everyone else. Does that mean that I am going to be complacent and say that we have no lessons to be learned from Japan? No, because although obviously there are major differences between our situation and the Japanese situation, both in terms of luckily not being in an earthquake zone and not suffering the secondary consequences of the tsunami, there may be parallels in how robust our backup systems can be, for example when it comes to the diesel generating electricity powering our secondary cooling systems, and we have to be open-minded about that, and make sure that we are learning those lessons. I said exactly the same thing when it came, as I said, Chair, to the Gulf of Mexico. I believe that we are running an extremely effective safety and regulatory regime. I want to make sure that our safety and regulatory regime is the best in the world, whether it is offshore oil and gas or whether it is nuclear, and part of that is making sure that we don’t get complacent and don’t simply turn around and say, "Oh, it’s in Japan. It’s somewhere entirely different. There can’t possibly be any lessons to learn from it". I don’t know that yet. If there are any lessons to be learned from it we will learn.

Charles Hendry: I think it is also right there are two very different levels, if I may just add. One is the national media who have a thirst every day for additional aspects for that story, and one is a very localised approach, which if you look at the aged sites that have been identified, the people of Anglesey, the people of Hinckley, the people of Sizewell, want to know exactly what this means for them. Those are the decisions that are going to be made over many months and years and where they want to believe that the precise failings, be they human or to do with the plant itself, have been understood and if there is any relevance whatsoever that we have taken that into that account before going forward. I think it is absolutely right that we recognise that there is a very local dimension to this as well.

Q372 Chair: Thank you very much. We will move on to electricity market reform. The Climate Change Committee has recommended that emissions per kilowatt hour should be down to 50 grams by 2030. That is, I think, half the level at which the department had built into its assumptions in starting the EMR consultation process. What is your view about this 50 grams target?

Chris Huhne: We have to respond formally to the Committee on Climate Change in terms of their recommendations for the fourth carbon budget period, and we will do that. We are going through that now. But the general direction of travel is not in doubt. The specific numbers obviously we have to look at and be careful on, but the general direction of travel is not in doubt. We do need broadly by the 2030s to be substantially decarbonising the power sector if we are going to be on a trajectory to meet the key targets that we have set for 2050 under the Climate Change Act and which I know enjoy a very broad amount of crossparty support.

Q373 Chair: Would you accept that to get to our 2050 target we will need to be below 100 grams per kilowatt hour by 2030?

Chris Huhne: As I say, I think we need to work through our formal response to the CCC on this. I certainly accept that the trajectory cannot be one-the point that they made-that is very back loaded. I think that wouldn’t be credible. It wouldn’t be credible to say that we are going to double or treble the pace of change simply because it happens to be 20 years off. People would then say, "You’re just deferring the tough decisions and we need to get going". That is a very important reason why I think electricity market reform needs to be undertaken. It is precisely to give investors the certainty so that we have this enormous amount of capacity in the electricity generation market that is going to need to be renewed, about a quarter over the period, as I remember, by 2020. In addition, we are anticipating a substantial growth over the period to 2050 in electricity demand as we increasingly rely on electricity for our residual heating in our homes and to power our vehicles. That means that we have to put in place a framework that really is going to provide the incentives necessary for very substantial low carbon investment.

If I may, Chair, I would say just one key point on this, which is that at the moment if you leave things as they are, the reality is there is a natural bias towards gas because gas is the marginal cost that you can align on. That means that, in effect, if you are building as a generator a lot of gas plant you have a natural hedge. The electricity price will tend to move in line with the gas price, and that will disadvantage types of low carbon generation like renewable, and indeed nuclear, which are very upfront heavy in terms of their capital cost but much lower marginal cost. Electricity market reform is precisely designed in part to even out that particular bias in favour of a relatively high carbon source-unless, of course, one has carbon capture and storage-in favour of these high upfront, low marginal cost sources, renewables and nuclear.

Q374 Chair: There are a lot of issues to work through, but at the same time there is an urgency about getting the new investment. Do you appreciate that the investment community are probably holding off making decisions at the moment until the outcome of the EMR consultation process is completed and, therefore, there is also an urgency about the Department’s own reaction to these? Although consultation is, of course, desirable, if the-

Chris Huhne: It is also statutorily required.

Chair: Yes, but there is not an unlimited timeframe for it and the longer this process takes, the later Britain will start on the urgent task of investing in the kind of electricity generating capacity that we are going to need to see us through the 2020s and 2030s.

Chris Huhne: No, I entirely accept that, Chair. I think Charles might want to add something on this, but we are very aware in area after area, most recently, for example, when it came to the review of the Feedin Tariff, that we have two not always easily reconcilable objectives. One is clarity and certainty and the other is getting the policy right. Those two objectives sometimes march together but sometimes they don’t. We want to get this policy right for the long term so that we can have this wave, crucially-and Ofgem has estimated £200 billion worth of energy infrastructure investment over the next 10 years-that we can provide the incentives to make that happen but we do so in a way that is right and after a consultation, which we have been doing with the industry where we have been getting a lot of different views. Charles, do you want to add something?

Charles Hendry: I think also if you look at, for example, what we have been doing on the ROC regime, we have shown how we are trying to deal with those uncertainty issues, because we are beginning to see a bit of a hiatus in the investment coming forward because people simply couldn’t build, for example, a biomass facility in time now for the 2013 deadline when the ROC banding will change. We have brought that forward by a full year. We will be making it clear in the autumn exactly what the future banding is going to be. I think what we have tried to do is identify where the uncertainty is and to respond quickly.

I hope you would also recognise, Chair, the progress that has been made. It is only 10 months since the new Government came in and in 10 months we have now completed a consultation on the most fundamental reform of the electricity market for 25 years. There hasn’t been a slacking on this side, but in order to give people the long-term certainty that is required and to secure the investment that is necessary we have had to go through this process.

Chris Huhne: I think that probably I should just introduce Simon Virley, the Director General who is responsible for electricity market reform, and Mike Williams from the Treasury who has been running the consultation on the carbon price floor, backing up. I answer the easy questions. When they get difficult for me, they go to Charles, and if both of us are stumped then we can bring in the real experts.

Q375 Laura Sandys: We have been having quite a lot of conversations with investors right across the board, including the debt markets, and they are not over-enthusiastic about the way the reforms look. There is also uncertainty not just about this reform package but also about the other issues in reform of the wholesale market and also some of the demand functions and mechanisms. If we are not able to raise the £200 billion, do we have a plan B? Are we going to refocus on renewing our existing capacity or are we still going to stick to the renewables target?

Chris Huhne: Well, I am not sure it is quite an either/or like that. I am tempted to repeat the answer that I think you will recognise in another context, which is that we are working on plan A before we get to plan B, and at least we have a plan A. I think that the electricity market reform, if you look at the instruments that we have consulted on, is explicitly designed to make sure that we can deliver. If you take the Feedin Tariff with the Contract for Difference, what it is is effectively a price at which output is guaranteed for a particular investor. If, as you are suggesting, there might arise a situation where investors were sitting on their hands, then it would be totally open to us to come back with a higher price. Being an economist, I have to say I believe that in general at some point there is a price at which investors will come forward. That in a way is the key framework that we are putting forward here.

In order to guarantee that the price is the lowest possible price that we can attain for low carbon generating capacity, we explicitly in the consultation document talk about the possibility of auctioning. We would very much like to reach a situation where the costs of particular technologies are sufficiently understood and able to be taken and planned for by investors that we could auction the Feedin Tariffs for the Contracts for Difference. That would, of course, provide the best possible guarantee to our electricity consumers that they are getting the lowest possible price at which they can get low carbon electricity. The price mechanism I strongly recommend as being a way of reaching that perfect balance where we can both assure consumers that they are getting the lowest cost electricity and we can make sure that the investment is going to happen.

Charles Hendry: Can I also separate out the issue of securing the investment and the capacity of the industry to build? I am more comfortable about the available investment, because there are many investment funds, pension funds, other sources of finance around the world that have not looked at the opportunities in the UK energy market and so I think we can put in place a structure that will appeal to them. But these policies have to bring in new entrants, because I think it is a real constraint on the existing players to deliver the capacity that is necessary. We do have to, through the changes we are making, make it attractive for people who haven’t previously looked as big players in this market to come in to invest as well.

Chris Huhne: Absolutely.

Q376 Laura Sandys: That in some ways raises one of the issues that the investors have been talking about, and that is that it is not that they don’t trust the regulatory regime but they don’t necessarily trust the political regime into the future. They said very clearly that unless Government is absolutely clear with the consumer about the impact that this will have on prices, they don’t believe that the regulatory regime will be sustainable into the future. In many ways, they are saying that we have to be absolutely clear about the pain or about the price impact. If we are not, they don’t believe that we will be able to sustain this particular package.

Chris Huhne: Let me give you two parts in answer to that point. First of all, it is precisely because investors see political risk on what is a very long-term investment that we could not, for example-I think we talk about this explicitly in the consultation documents-rely simply on having a carbon price floor. Our friends in the Treasury, what one Chancellor says is going to be the carbon price over the next five years may be reversed by another Chancellor and another Government. It is precisely that uncertainty that led us intellectually towards thinking that Contracts for Difference were the right approach because a contract is something that you can rely on and take to a court of law. It does not depend on Charles Hendry or Chris Huhne or George Osborne still being in office. Once you have your contract you have an absolutely clear guarantee that that is going to be the return because it is written into your contract. That would be my first point.

The second point on the price impact is simply that this is much more conditional, and I think I talked about this in another context. I want to be totally transparent about what we believe to be the price impacts of our policies. That is why in the first Annual Energy Statement-and we will go on doing this in every Annual Energy Statement-we produced an estimate of the overall impact of our policies, including all of the low carbon policies on the supply side for electricity generation, plus the energy saving policies and their effects on consumers; we produced an estimate of what that would mean for the British electricity consumer. Remember that what my first concern is is to get the best possible deal for the British electricity consumer not today, not tomorrow, but over the long term, and that means security of supply but it also means affordability.

We calculated at the time of the last Annual Energy Statement that the extra impact on bills was 1%, but the crucial thing in making that calculation was to assume what was actually happening to oil and gas prices. If you assume gas prices move in line with the oil price, which broadly is still the case in Europe but it may come unpicked in the long run-we can discuss that-at $80 a barrel, which was the assumption that we made at the time of the Annual Energy Statement, the extra cost of all of our policies is 1%. I then asked our economist to calculate what the breakeven point was of the oil price at which it then becomes cheaper to go down the road of the low carbon electricity generation, which doesn’t rely, obviously, on fossil fuels to the same extent, and of our energy saving. The breakeven price was calculated at $100 a barrel. I know you will be aware obviously that the recent price of a barrel of oil is about $115 a barrel. At that price these policies will save the British consumer money.

So, please, when people start saying that these are going to be expensive policies and you have to be open and honest about what the effects are going to be, be explicit about what your assumptions are on what is happening to the alternative, because if the alternative is over time becoming substantially more expensive then this is a lower cost route. Don’t forget, too, that these are very volatile markets, as we have seen over the last year. $80 a barrel was the average through last year for Brent and we have already seen a very substantial increase. We have had periods in the 1970s and 1980s where we have had dramatic changes. I think you have to be explicit. There is a bit of sloppy thinking among critics of these policies who say, "Oh, it is bound to be more expensive". Well, it’s not true. You have to specify what you think the world is going to look like if you are going to make those comparisons because we are dealing with very long-term investments that are going to have their payback over 30 or 40 years. We have nuclear power stations that are still operating that were built in the 1960s and 1970s, and we have to get the framework in place for that and we have to make sure that the British consumer has cheap electricity not for just a few days or weeks but for decades.

Q377 Dr Lee: Developing Laura’s point, the target here is low carbon, isn’t it? That is essentially what we are looking for: low carbon with energy security and the two of them go-

Chris Huhne: Low carbon, energy security, at the most affordable price, absolutely key. I am an economist by background and I will absolutely stress that I am not going to go in to bat for any particular part of the industry, any particular type of electricity generation. I want the best possible deal for the British consumer in the long run.

Q378 Dr Lee: In which case the renewables obligation, which we are part of, seems to distort the market. What you hear when you talk to investors is they bemoan the fact that solar and wind attracts more of a subsidy. Going back to what Laura said about long-term return for investments-and, like you, I think pensions and SRIs and things like that are going to invest in this. It is a no brainer. It is a long-term return because electricity demand is going up, so I think they are going to invest. But what I think they have a concern about is the subsidy, because essentially each Government in the future could withdraw that subsidy to a certain degree, so the smaller the subsidy the less they can withdraw and the more insecure. But the ROCs, you see, at the moment create quite a significant subsidy in particular areas.

Chris Huhne: Well, obviously, the electricity market reform puts forward in the consultation document that the ROCs regime would last until 2017 and would then be replaced. The lead proposal is the Feedin Tariff with the Contracts for Difference. Remember that a very key feature of a Contract for Difference is that you are guaranteeing a price and you are making up the difference between that guaranteed price and what the company will get in the marketplace. The company still has to sell into the market; they don’t get anything if they don’t sell into the market. They sell into the market and then you make up the difference. If the market price goes higher than the Contract for Difference price, then contractually the generator has to pay back. Then, in those circumstances, the whole basis for the presumption in your question and in Ms Sandys’ question is simply wrong. It is that there is bound to be subsidy. In fact, you could have equally the opposite. You might well get the generators paying back into the system money because the market price is higher than the price that they got. Who knows what is going to happen to energy prices over a 20year period? I certainly don’t and I don’t think anybody in the Committee does.

We have to build a regime that is robust to a whole range of possible outcomes, which in some circumstances, as I said in a speech last week, if we have very high fossil fuel prices, oil and gas prices, we may find that the electricity market reform regime is pushing us much more towards low carbon sources of nonfossil fuel and energy. If we have very low gas prices, which is a scenario I think that you have discussed with Dieter Helm or he has certainly been advocating, because of what has happened in shale and unconventional gas-in the United States the last time I looked the gas price was 27 pence a therm, which was literally half of the gas price in Europe; again, the last time I looked it was about 54 pence a therm-the reality is that increasingly investors would be investing in clean coal and gas with carbon capture and storage to take advantage of that because that would be the cheapest option. You get a real market solution but what you get is the most affordable, cheapest electricity that we can possibly manage.

Q379 Dr Lee: Just one supplementary question in terms of investment: is there any work being done at the Treasury or within the department about intergenerational fairness in terms of at the moment one generation is expecting to pay the public sector pension liabilities debt of the country? If you are under 40 at the moment it is looking pretty bleak. Are we also adding in the fact that this particular generation is also investing in infrastructure that future generations, if you follow your line of thought, are going to have cheaper and more secure electricity? Is there any work going on in that area in terms of the particular generation of taxpayers who are bearing the burden of quite a lot at the moment?

Chris Huhne: I am not aware of work that we have done that explicitly addresses the issue of intergenerational equity. It is a very interesting question. I will come back to you if I have second thoughts about this. I think, just off the top of my head, that the best guarantee of intergenerational equity is the sort of system that we are putting forward because it will ensure that the British consumer gets the cheapest possible electricity from low carbon sources over a prolonged period of time, that we don’t get dazzled by just the shortterm outlook for a particular market but we are looking at a long term. The market will and energy providers will, of course, reach a portfolio of different sources of electricity, depending on their judgement of what the future is likely to hold. I think that is a sensible approach. It is certainly the approach that we are also adopting in the department when it comes to bringing on new types of technology. We want a portfolio in exactly the same way as any of us would invest our pension funds in, not just in one share because it happens to look like the most attractive this week but in a portfolio of shares precisely because we want to spread our risk and not have all our eggs in one basket. That is exactly the same approach that we are taking in bringing on some of the less well developed renewable sources, for example: wave technology, which is obviously quite a long way from commercialisation but which we are supporting and which currently get a very high level of ROCs. Charles, do you want to-

Charles Hendry: One of the consequences of the market system we have had in this country is that by focusing on today’s prices rather than long-term prices it has sweated assets beyond their natural lifetime. We now have to rebuild our asset base at a much higher rate than anybody else in Europe; £200 billion over the next 15 years in the UK compared to a trillion or so across the whole of the 27 Member States. We have an absolute enormous mountain to climb and in any rational world one would have liked to have seen rather more new construction under way than is currently the case. I think what we are learning now is that in terms of trying to deliver longterm stability for prices, one has to have supply rising ahead of demand. What we have seen is supply not keeping up with demand to the level that was necessary, and therefore one is going to see inexorable upward pressure on prices if one doesn’t do more to secure additional supply into the mix.

Chris Huhne: Part of that will come out through Contracts for Difference in themselves, and there is a debate that you have no doubt plugged into about whether Contracts for Difference are in themselves adequate to ensure that supply margin or whether we need the capacity payments that we are talking about. Simon, you wanted to add something there.

Simon Virley: Just to add that we have published some analysis alongside the consultation that shows that the net present value of the cost to the economy over the next 20 years of our preferred package is about £4 billion cheaper than the next best alternative. The simple reason for that is that the stability of the return offered through a Contract for Difference can lower the cost of capital to investors and, therefore, lower the cost of making this transition.

Chris Huhne: That is particularly important for very high capital cost types of generation, so it is particularly important for nuclear and particularly important for renewables. The funding, for example, of the Gwynt y Mor offshore wind farm was a bit touch and go for a while. The sort of system that we are proposing here, with a guaranteed price, would provide the certainty to investors, which will bring forward that investment at a lower cost, and because such a large part of the cost is the capital investment that actually goes through into lower costs for the consumer as well.

Q380 Sir Robert Smith: I can understand the logic that a Contract for Difference sends a signal of security and longterm predictability.

Chris Huhne: It is more than a signal. It is a legal contract.

Sir Robert Smith: But how does it stop though, if it turns out the contract has really gone in favour of the supplier, the Treasury then coming along with a new tax regime for energy production?

Chris Huhne: Well, you are right. Obviously, we have to try and reach a view at any particular point. It could equally well work the other way. It could equally well work that investors will come along who have contracted to supply the grid with electricity at a certain price, and because of developments in world gas markets and in world oil markets that the price is much higher and that these generators end up paying back money into the system. This can work both ways, and the uncertainties involved are almost by definition at the point at which the contract is struck, providing there is a proper competitive process for reaching the striking of that contract-and I have said that we would like to have it by auction-almost by definition the uncertainties are going to be equally balanced because the market price in any market is the price at which there are equilibrating buyers and sellers.

Q381 Sir Robert Smith: If you are taking the public with you then there is less chance of political pressure on the Treasury to try and do something retrospectively after the fact of the contract.

Chris Huhne: I certainly want to take the public with us and I am absolutely determined to go on being absolutely open about how we see this, which is dealing with immense uncertainties in the future about the development of the world energy market, and with the absolutely key objective of reaching security of supply, low carbon sources of energy at the most affordable price. That is exactly what this electricity market reform is all about.

Q382 Barry Gardiner: Chair, very briefly I just want to come back to Laura’s original point. Secretary of State, you spoke about the $100 per barrel breakeven point and you said that at that point post 2030 we would be going into a cheaper regime.

Chris Huhne: Post 2020.

Barry Gardiner: Mr Virley, you gave the scenario of over the next 19 to 20 years and said it will be cheaper than the next cheapest alternative. Isn’t this precisely why we politicians do get a bad name, because what we are not saying is it may be cheaper than the next cheapest alternative but it is still going to be a damned sight more expensive. To not catch out what was the import of Laura’s question there about being honest with the public that the costs here are likely to rise in the short term, albeit if we get to the nirvana and all that investment comes into play they may go down in the long term.

Chris Huhne: Let me try and disentangle two separate things. One is a simple fact, which is that if you buy something new, given that out there in the competitive marketplace it is not full of people who have part-time membership of the Salvation Army, they are out there to make a return on their capital, then it is going to cost you. If you or I decide that we are going to trade in our old banger for a new car, there is going to be a cost, which is the cost of the leasing or the cost of whatever.

Q383 Barry Gardiner: But the point that we are making is that your D\department isn’t being upfront and saying that to the public, and we need to.

Chris Huhne: I disagree with that. I think that that, frankly, is blindingly obvious; everybody knows that. If you buy a new home, you take out a mortgage, it costs. The key point here is not that when you replace new capital equipment there is a cost; the key point is what is going to be, from a policy point of view in putting this framework in place, the lowest possible cost option. What is, in technical terms, the counterfactual? That is why I was testing Ms Sandys’ counterfactual because you have to ask what is the counterfactual if we were to say, "Forget about all this low carbon malarkey, we’re going to assume that the market should run without any nonsense about low carbon and as a result we are going to rely-"

Barry Gardiner: We don’t have a disagreement on that.

Chris Huhne: No, but let me finish the point.

Barry Gardiner: This is a straw man.

Chris Huhne: No, but some people do. Not you, but some people do, so it is a point that is worth addressing. So we are going to rely instead on the most cheap, short-term form of energy, which might be unabated gas in current circumstances. But what is the gas price actually going to be in 20 years’ time? Now, it may be that Dieter Helm is right, but on the other hand it may be that Centrica is right and that the Far East is going to tighten up the gas market. I don’t know, you don’t know, we don’t know. We have to work in a world that is inevitably uncertain. My job, as I see it, is to get the cheapest possible deal for British consumers in a world that is highly uncertain over things that-and I am not about to try and teach grandmothers to suck eggs about the fact that if they buy a new car they are going to have to pay for it.

Q384 Dr Whitehead: Capacity mechanism, one of the four pillars of EMR; what is its purpose? Is it intended to bridge the gap between the capacity that is going out of commission into the early 2020s or is it to ensure that there is sufficient peaking and flexible backup to cover the increasing variability of that replacement capacity coming on stream in the 2020s? Which one is it?

Chris Huhne: I think that there are four different things that the capacity mechanism is designed to do. One is certainly to make sure that we have an adequate margin. The ultimate objective is to make sure we have an adequate margin of spare capacity to meet our needs. There is a widespread view that that has not been the case recently. It has now opened up again because of the recession. We envisage in the consultation four clearly different ways in which that might happen.

One is clearly support for a peaking plant, which is effectively there to provide us with help during those key moments like the advertising break in Coronation Street whereby legendarily we all go off and put the kettle on and there is a sudden big surge in electricity demand. Also, of course, as the system becomes more reliable on renewables, then we will have potentially more variability, particularly because of wind, so a peaking plant has its part. But we explicitly say that it could also support interconnectivity with our partners in the European Union. I think that the trade in electricity is an area I would like to encourage very seriously because I think that the gains to trade are potentially enormous. Different countries have different peaks. As we increasingly, all of us, become more reliant on renewables there will be a natural portfolio effect of renewables generation, so interconnectivity is absolutely key.

It could also encourage storage of the sort that we have at Dinorwig and Ffestiniog, using off-peak electricity to pump water uphill and then releasing it during peaks. Absolutely crucially, we envisage it supporting the negawatts concept, that is supporting an ability to pay companies that might go into a particular area and say, "We will pay all of the consumers in this area a certain amount to install a gadget that will turn off the fridge and the freezer for those few minutes over the Coronation Street advertising break. It won’t affect their ability to keep the frozen peas frozen, but it will save us electricity and it will save us the need for a peaking plant". The capacity payment can do all of those things, but it is there in the consultation document to provide us with the guarantee that we can keep the lights on in all the circumstances that we need to keep the lights on. Charles, did you want to add something there?

Charles Hendry: I think what we learned from the period before December, when it was so cold and the wind was not blowing very much, is that the great challenge for us in this decade is how we move from the power being available when the resource is there to the power being available when the consumer needs it. The technologies that Chris has been outlining very much take us in that direction and I think that that is the big technological challenge this time. But the capacity mechanism has no single structure to it. It is to enable us to look broadly either at backup capacity or, alternatively, at ways of taking demand out of the system. It is a very new approach to capacity mechanism.

Q385 Dr Whitehead: That is pretty much everything with one instrument. Is that likely?

Chris Huhne: Well, it is not everything because obviously what it doesn’t do is provide you with the base load. The way we envisage it, it is the Contract for Difference that is arguably doing the really heavy lifting in encouraging the investment. The capacity mechanism is envisaged in the consultation document as a marginal mechanism, and a number of the respondents have been saying that maybe we don’t need it in the current circumstances precisely because of the spare capacity that has been opened up by the recession. Over time, it may become important and be one of the weapons in our armoury but we don’t need it in the short run. Certainly, the way we envisage it in the consultation document is as something that can support those different technological ways, all of which do the same thing, which is to meet the variability in the system.

Q386 Dr Whitehead: You have also envisaged it in the document as a targeted mechanism. We have heard evidence from elsewhere around the world, where capacity payments have been looked at on a targeted basis, that because you are targeting those payments, the investment outside that target then falls away and you, therefore, have to extend the target in order to incorporate that investment. It then becomes a universal mechanism with everything inside, although you appear to have pre-empted that by putting everything inside before you started. Is that your view?

Chris Huhne: I don’t think that is quite fair. I take the point and I think that that is one of the things that we have to take away from the consultation and get to the bottom of. But I take the basic point, which is obviously at the moment what happens is that when you get peaks, surges of demand, you get also peaks in the price. That becomes an important part of the revenue stream for particular types of generating plant in coming on grid. I take that point and obviously as the capacity mechanism begins to operate what will tend to happen is that you will even out the rather alpine-looking chart of price changes and that might also have an impact on the total rate of return to particular types of plant. I think the fundamental point that you are making is right. I wouldn’t go as far as you to say that it then effectively has to cover everything. I think it depends on the circumstances. I come back to the point I would say where actually the Contract for Difference in terms of the economic analysis is what is doing the heavy lifting. Charles or Simon, do you want to add anything?

Simon Virley: Could I just add there are obviously trade-offs either way and we are looking at the responses to the consultation now. If you have a capacity mechanism covering the whole market then you have to be careful you are not paying twice for the same capacity. There are obviously arguments both ways. The real prize, as Charles was indicating earlier, is to link the demand side and make sure the demand side is no longer passive but is responding and consumers are able to respond through the rollout of smart meters, through the rollout of smart grids, to the demand they really want to see and whether they are willing in some way to see a slightly lower reliability, revealing the preference of consumers. The longrun solution is obviously linking the demand and the supply sides together.

Q387 Dr Whitehead: But are there not circumstances where if you had a targeted capacity mechanism you could target on things such as storage, as you have mentioned, Secretary of State, and then other issues of filling in the capacity gap, as indeed has been suggested to us, might be dealt with by sharpening imbalance payments, extending short-term operational reserve and so on? Are you wedded to a method of doing it that appears to go down a slippery slope?

Chris Huhne: You could. I’m not sure that I would accept that we would be going down the slippery slope, but clearly one of the reasons for having the consultation is precisely because we are not wedded to particular elements and we do want to make sure that the whole system fits together in a coherent manner. That is precisely what, taking account of all the responses that we have had, we want to do, so we are certainly very aware of that.

I would merely come back to one point with the capacity mechanism. I don’t envisage this as being something that you have specifically for one thing like storage and then you have some other sort of capacity payment for something else. Think about it rather like the Contracts for Difference idea. It would be a capacity payment designed to handle the variability in the system and we would be neutral as between the technologies that might handle that. It might be demand side, it might be storage, it might be a peaking plant, and it might be interconnectivity with our European partners. But all of those, if they handle the variability in an assured manner, would be eligible. We would be aiming with the capacity payment exactly in the same way as we would with the Contracts for Difference to get the cheapest possible means of getting our objective, which is to handle the variability in the system.

Q388 Dr Whitehead: Could I briefly touch, then, on another pillar of EMR, which is the question of emissions performance standards? As they are set out currently in the consultation document, certainly at the levels consulted on, it does appear to a number of people that they really, as has been mentioned previously, are not a backstop. They are a nonstop.

Chris Huhne: I don’t think that is true.

Q389 Dr Whitehead: That is, at the high level, in order for coal to get inside it just requires a little bit of biomass. It doesn’t require to be abated. At the lower level gas escapes entirely anyway. Do you think that perhaps either you don’t have an EPS as a pillar or you have a pillar that does actually stand up and do something?

Chris Huhne: Well, obviously the pillar can change over time, and that is an important point. The question is, in terms of this consultation, if we have an emissions performance standard, where it starts off, and the absolutely key issue for us is to make clear through the emissions performance standard that we would not be allowing unabated coal. Now, I have said that, Charles has said that, we have all said it until we are blue in the face, but a number of people want that absolutely written in stone and the emissions performance standard is a very, very clear way of doing precisely that. Over time, obviously there could be changes in the emissions performance standard and it can be an instrument that can be tweaked, but we have to recognise at the moment that it is there explicitly to deliver on what we have said: no unabated coal.

Q390 Dr Whitehead: Could I give you a very brief example right now? Drax is introducing a fair amount of biomass to its-

Chris Huhne: Yes, not a marginal amount as you implied, I think, before but it would have to be a fair amount.

Dr Whitehead: Well, a fair amount on the basis of co-firing, and on that basis it appears that they could, without any abating of the rest of the coal in the plant, get down below 600 grams per kilowatt hour. Alternatively, if they build a biomass plant on the site of the power station, the whole of the existing power station then continues unabated with the new biomass plant that is sited next door to where the plant is at the moment counting as the reduction of overall emissions. Is that your intention?

Chris Huhne: You clearly have obviously spotted something. I don’t think that we addressed that particular issue, and I think that anybody who relied on the consultation document for that as our intention would be mistaken. The clear intention is to make sure we have no unabated coal, no new unabated coal, but we also obviously have-and it arises in this context as in others-to allow for the fact that, to use a slightly overworked metaphor, we are changing a massively big system with a lot of sunk capital and sunk costs. It is an oil tanker and it takes a long period of time and space in order to turn that oil tanker around. This EPS is designed to give us the assurance that there will be no unabated coal. Charles, do you want to come in on this?

Charles Hendry: I think that what we are trying to do is to use this as a driver for new investment. It would be very easy to set an EPS at a wrong level that drove away investment. The easiest way to meet it is not to build any new coal plant. What we are trying to do is to say let us set it at a level that shows a clear sense of direction and sense of travel but to do it in a way that then makes people understand what is happening in the United Kingdom and it puts the other countries at a disadvantage that haven’t set it.

We have to be aware as well that there can be very perverse consequences in going too far. It would be very strange indeed to have an EPS set at a level where we have a pilot plant for carbon capture and storage, hopefully at Longannet, which we may ultimately close down if the EPS was set at the wrong level and the rest of the plant was going to be affected in that way. That is why on the lower level we have looked at exempting CCS projects

So there are many consequences that we couldn’t predict at this stage of setting it at the wrong level, which we have to be very wary of doing. The other thing to look at is, if you look at the coal plant that is already coming out of commission, we lose a third of our coal plant in 2015 because of the Large Combustion Plant Directive; we will lose much more at the end of the decade because of the Industrial Emissions Directive. Many of those companies have not yet decided whether they will spend the vast amounts of money necessary to comply with the IED or whether they will simply close their plants down. To set the EPS at the wrong level would mean the plant, which could continue to play an important balancing role, an important role for the future, may end up being closed down at an early stage, which would have very significant consequences for our security of supply.

Q391 Chair: I think we all understand that stability, predictability, certainty are the key ingredients to get investor confidence. Would you say that your department’s actions in the last few months have created that confidence among investors in the solar sector?

Chris Huhne: Well, Chair, since you broach the subject, let me say that I reply perhaps by telling you that rather marvellous quote from Maurice Chevalier who, when he reached the age of 85, was asked by a journalist what it was like to have reached the ripe old age of 85, and he said it was better than the alternative. I think that what we did on solar was not ideal, because in an ideal world the department would get everything right, spot on, from the word go and no changes would ever then have to be made, no adjustments of course. I don’t want to criticise the old Government for setting the tariffs that they set, because I think it is very difficult when you have a new technology to set exactly the right level of support for it that means you are going to get what you intend and not very much more, and you can get it wrong both ways. Frankly, we got it wrong as a department the other way with anaerobic digestion, where we’re not getting enough. You don’t hear much about that because it is off the radar, but it is just as significant in terms of meeting out targets that we are not getting enough anaerobic digestion as we are getting too much large scale solar.

But the alternative to announcing a review and looking at the payments that we are making above 50 kW on large scale solar would have been far worse. It would have been to effectively have the entire budget gobbled up by the big solar farm investors so that there was not the money to provide to householders at whom the scheme was originally aimed, and it is very well worthwhile pointing out that we have not announced a review of the tariffs below 50 kW. By the way, current technology on solar panels is about two tennis courts worth. So when we talk about large scale or small scale-and you will no doubt have had some businesses come to you as I have had, and Charles has had, and say, "But we are small scale"-two tennis courts I think most people would regard as being a reasonable size and will cover most community projects and others. We simply have, if we are going to protect our determined attempts, which I know have important cross-party support-and we supported when the last Government announced this scheme-if we are going to protect the incentives for the smaller scale, below 50 kW, then we had to announce a review of the larger scale. That is what we have done.

Charles Hendry: Can I give an indication of the magnitude of that challenge as well? The working assumption that had been made, where solar farms was not an issue that had anticipated at all, was that there would be no applications of more than 50 kilowatts before 2013. Not a single one anywhere in the country. We are now seeing megawatts coming through, so a completely different level of application coming through than had possibly been anticipated. The other issue was that there was no threshold between 50 kilowatts and 5 megawatts, so in terms of the desire to protect community schemes and some of the ones that are a bit above the 50 kilowatts but not in the megawatts area simply didn’t exist. So the reason for doing this with great urgency and the speed at which we are doing it is to look at the right structure for that to see whether additional thresholds should be put in place in that process and to provide the longer term certainty. But we came back to the principle that part of the purpose of the Feed-in Tariff was to have a transformational change in terms of the attitudes of individual consumers. If they have solar panels on their roofs then they think, "I am part of the solution here. What do I do on energy efficiency? What do I do as a generator?" If they just go past them in fields then it is remote and it doesn’t involve them.

Q392 Chair: As you know, sadly, a diminishing number of members can afford even one tennis court, let alone two, but those who have one if they can fill it with solar panels they will be able to acquire neighbour’s land and have a second tennis court. On the Feed-in Tariffs with Contracts for Difference, who will be the countersigning agency?

Chris Huhne: That is something that we do intend to put forward proposals on partly as a result of the consultation. But it is absolutely crucial that the countersigning agency is a very creditworthy counterparty and therefore, from a financial point of view, if it is to have the positive investment effects that I was describing when questioned by Ms Sandys and Mr Lee, has the force behind it, an ability to require payment from our collectivity as electricity consumers, and that is absolutely key.

Q393 Chair: Do you envisage a completely new institution being designed for this purpose?

Chris Huhne: One option is clearly to go for a completely new institution, another would be to look at existing institutions to try and fulfil that role, and we are looking at precisely that issue now. As I say, the absolutely key element that has to be provided is that when a hopefully new investor comes into the market and signs up the Contract for Difference, so we are encouraging more competition in the market, they know that they have a counterparty that is utterly creditworthy and will respect the legal contract that they have signed. That is absolutely the necessary-I don’t know whether Charles or Simon want to add anything on that.

Simon Virley: It is important obviously to learn the lessons from other countries that have operated CFDs, for example Denmark and some of the other countries. So we are looking at the international precedents for the kind of institutional set-up we may need.

Q394 Chair: You have said you favour an auction process for awarding long-term contracts. Some people are suggesting that won’t really work because there won’t be enough bidders. What do you think about that?

Chris Huhne: I think I carefully said that in the long run we would aim to have an auction process because I can see that in the short run, with almost all of the technologies that we are dealing with, there would be potentially enough uncertainties about the costs that anybody bidding at auction would probably have to make a substantial investment before doing so. One of the circumstances in which auctions, in terms of the economic theory, do not work very well are those circumstances where the potential bidders that you want to get in the auction room have to make a big upfront investment in order to get there but are, of course, by the process of the auction, uncertain about what the outcome will be and about, therefore, their return on that investment. So what I would envisage is that we will move towards an auctioning process as an understanding gets deeper about the costs of particular technologies and we will then be able to use auctioning much more widely. But I think in the short run I would entirely take your point. I think the risks are, if we were to attempt prematurely to run an auction, that we would end up one of the things that comes out of the economic literature on this, which is the empty auction room.

Q395 Sir Robert Smith: I had better remind the Committee of my entry in the Register of Members’ Interests as a shareholder of Shell and also the fact, relevant to this inquiry, I am an Honorary Vice-President of Energy Action Scotland. Just on the next phase, if you have the Feed-in Tariffs offering long-term contracts for low carbon technologies, why is there a need then for a carbon price support?

Chris Huhne: What is envisaged, obviously, in the Treasury’s consultation document on the carbon price support and in the electricity market reform is that these four key elements lock together, hopefully in a mutually supportive manner. Various things are offered by carbon price support. One is clearly that it sends signals about the marginal plant. So, for example, at points like the circumstances I was talking about, the Coronation Street ad break or the five or six still, cold days in February when you need the backup plant, the carbon price floor will tilt that towards low carbon rather than high carbon plant. It is an underpinning for the signals that we would be sending out through the Contract for Difference. It ensures that the likely price variability around the strike price on the Contract for Difference is less than it might otherwise be, so that we are not going to get too much of a wild variation.

So those are all reasons that we would anticipate help with the carbon price floor locking into the rest of the electricity market reform. I don’t know whether Mike would like to add anything at some point, but, Simon, why don’t you kick off?

Simon Virley: Just to add to those points, clearly the carbon price floor provides incentives for all investors. Obviously the Feed-in Tariffs with Contracts for Difference are just about low carbon generation. The Secretary of State is making the point there that it affects the whole market in terms of the incentives, and there is a public finance implication, of course, because there is tax revenue being generated and, of course, the electricity price being pushed up means that the difference, as it were, to the strike price is lower than it would otherwise have been, so the subsidies-

Q396 Sir Robert Smith: How do you avoid creating windfalls gains and raising bills?

Chris Huhne: There is clearly a potential windfall gain to any generator who currently has low carbon generating capacity. So there will potentially be windfall gains, both to renewables and to nuclear. There are people out there who will argue that these are exactly the people that you want to invest and therefore you should happily take windfall gains. My own view about windfall gains is that they are rents, they are economic rents. The definition of an economic rent is a payment made to a factor of production beyond that which is required to get it to do what it is doing and therefore public policy ought very firmly to aim against the generation of economic rents wherever they be found. But there are ways of handling that. One would be, for example, to have a profile on the carbon price floor that minimised that situation. Obviously there might be others as well but why don’t I kick over to Mike to talk a bit on those issues.

Mike Williams: On that, clearly the impact on existing generators is one of the issues that has to be taken into account in designing the carbon price floor and, as the Secretary of State has said, it impacts particularly on the profile of getting to a particular target carbon price in, say, 2020. I think equally it is worth bearing in mind this argument tends to focus on windfalls that are described as windfalls for low carbon generators but I think it is important to recognise that the carbon price floor also impacts on fossil fuel generators who, for example, are using fuels like gas that have relatively low CO2 emissions as compared to, say, generation with coal, which would generally have higher CO2 emissions.

Q397 Sir Robert Smith: What work has the Treasury done with the European Commission on the impact of the carbon price floor in our country with the wider EU ETS across the rest of Europe?

Mike Williams: We think the two are quite complementary. The ETS has been successful in reducing emissions across the EU. That is its prime aim, and this is back to the £200 billion of investment in new energy generation needed by 2020. The ETS carbon price, which is fairly volatile, does not of itself offer enough certainty to investors and by having a carbon price floor as one of the pillars you are providing some greater certainty to investors.

Q398 Sir Robert Smith: Isn’t there a risk that the UK bill payer will be subsidising mainland Europe by reducing the value of the ETS and therefore making it easier for them to carry on with higher carbon generation?

Mike Williams: If you look at the impact overall, I think if there is an effect of that sort it would be very small.

Chris Huhne: It would be very marginal. You are absolutely right, as a matter of economic analysis it must be the case that if you introduce a carbon price floor in one Member State it will have an effect in reducing the demand, the need, for allocations under the Emissions Trading Scheme, but it will be a marginal effect.

The other point where there will be potential cross-border effects is of course there will be a limit to the extent to which the carbon price floor can push the carbon price in the UK higher than the carbon price in neighbouring countries, both when it comes to the impact on energy intensive industries and the impact on the siting of generation. I wouldn’t want to encourage, for example, a large amount of unabated gas to be built in Belgium with an interconnection that then exported it to the UK merely because the Belgians would not being paying the carbon price floor and we would.

Q399 Sir Robert Smith: If there is a carbon price tax on electricity and there is a carbon tax on transport, is there a carbon tax coming on gas?

Chris Huhne: We are in budget purdah, is the answer.

Mike Williams: I think if we look in particular at the carbon price support mechanism in the consultative document, to the extent that gas is used for electricity generation then the intention is to change the way the climate change levy works so that it is no longer exempt from it.

Q400 Dr Whitehead: The problem is that, yes, we maybe don’t want a Belgian gas plant at differential rates of carbon pricing support to invade our energy economy but, as indeed was mentioned a little earlier, we are moving quite solidly towards a much greater degree of interconnection in Europe and this is presumably a good thing.

Chris Huhne: It is desirable, if it is based on sound economics rather than on distortions due to subsidies or taxes.

Dr Whitehead: The present proportion of the UK electricity market represented by interconnection is about 3%, a little less than that, I think. Future interconnections, or indeed early stage of the European super grid, would immensely increase that percentage. There presumably, therefore, comes a point at which either one should switch the interconnectors off in order to protect the UK’s carbon price support based market or switch the carbon price support base off in order to protect the interconnect. Which one is it going to be and at what point?

Chris Huhne: I think what you are highlighting is simply that we live in a globalised world and we have to take account of differences of prices and we have to take account in all of these areas and it is not, by any means, just in the energy area but income tax, for example, as well, about the competitiveness of our tax regime compared with other countries. We will have to keep a very weather eye on how far the carbon price can diverge in the UK in any particular area without causing unacceptable distortions.

Q401 Dr Whitehead: Forgive me for putting it like this: we don’t know then?

Chris Huhne: There have been industry estimates, which I think you have probably seen as well as I have, but I am very acutely aware of that as a distorting issue and I don’t want to introduce a distortion that is unnecessary. But obviously it does depend on an assessment of the costs of interconnectivity in exactly the same way as the potential for trade in any particular area depends on the transport costs. So we don’t tend to trade an awful lot of cement because the transport costs are rather high. We do trade an awful lot of high value manufactured goods because the transport costs as a proportion of the total value are very low. So we have to keep an eye on that.

Q402 Sir Robert Smith: In terms of stability for the market, setting the carbon price for any kind of long term is going to require a lot of confidence that the Treasury isn’t going to change that tax.

Chris Huhne: I think that is one of the reasons why, as I say, intellectually we were drawn towards the Contract for Difference, precisely because I think the carbon price can have a very valuable role in sending out signals to the wider market, in making decisions about marginal plant and so on. If you want to provide the sort of certainty that investors require if they are going to make very big upfront investments in high capital cost, low carbon sources like renewables or nuclear, then you do have to provide them with something a bit clearer than merely the word of a politician who may or may not be a Minister after the next election.

Q403 Albert Owen: On that, would you say that different levels and kinds of low carbon generation require different kinds of support? I am talking about the differences in operation and differences in the technological maturity.

Chris Huhne: I am sorry, Mr Owen, can you say that again?

Albert Owen: Yes. Do you think different levels and different kinds of low carbon generation require different levels of support, in particular because of their maturity in the technology and indeed their operations?

Chris Huhne: Yes, I do. I think that the key that comes out of the economic literature on when something deserves public support, there are two points. One is an external point, that the greatest market failure of all time is the failure to take account of the carbon emission consequences of the market. So we need to fix that. Therefore, in fixing that, obviously in an ideal world we would do it through the European Union Emission Trading Scheme sending out a strong enough signal through the carbon price that we would have to do nothing else, but in the current circumstances we have to do it in the electricity reform market context through the Contract for Difference. In addition, the economic literature is very clear that it is legitimate to subsidise particular technologies that are early stage or pioneer industries. That explicitly means that the further away from commercialisation something is, exactly as we already run with the ROCs regime, the greater the level of support.

So, effectively, we will be envisaging a Contract for Difference, which is the base low carbon Contract for Difference available to any low carbon technology that is there, essentially, to fix the Nick Stern greatest market failure of all time problem, and then an uplift to early stage technologies, the most obvious of which, the furthest away from the market is probably wave, but tidal stream, offshore wind and so forth, which is an uplift beyond that Contract for Difference.

Q404 Albert Owen: Would you consider each one having a different level or would you consider banding the Contract for Difference?

Chris Huhne: I think the assumption that we would make at the moment, but we are looking at the consultation on this, is that an uplift for each technology type, a sort of handicap if you like, would be the sensible way of going forward. My approach to this, and it is always difficult, is to try and make sure that we are sending out very clear signals about phasing out that level of support over time as well as the technologies get closer and closer to the marketplace. They should be absolutely transparent, it should be absolutely clear what the level of support is, and I am determined about that, on the view that we should gradually phase them out as they reach full commercialisation.

Q405 Albert Owen: We are talking levels of support here but we really mean in the real world is subsidy. You recall, I am sure, in September of last year when you were asked, "What is a subsidy?" I think you responded, "I think the key here is whether there is something specific to the industry". Which of these following ones would you consider to be industry-specific subsidies: a flat rate contract for difference, the banded contract for difference or a long-term tailored for different types of low carbon technology?

Chris Huhne: The key point, as I think I just described in my opening remarks, is if the Contract for Difference is there to take account of the low carbon element and it is available to everything then that is not a subsidy to any particular industry. It is a subsidy paid by virtue of the fact that we have a market that doesn’t take account of this very substantial market failure. Any premium paid to a particular technology is there by virtue of the fact that we want to have a portfolio of technologies on a 20-year view and that some of these technologies are so early stage and so pioneering that they will not come forward unless we do bring them to full commercialisation. That is simply a way of spreading our risks because I can’t play God and you can’t play God about deciding what is going to be the most effective technology on a 20-year view. As we have seen from events over the last year or so, a lot can change in attitudes towards the market: the Gulf of Mexico, and now Japan and so forth. So it is to try and bring on those early stage technologies so that we have a full portfolio that we can rely on.

Q406 Albert Owen: Early stage in developing technologies, but what about the argument that the Feed-in Tariff, and indeed the Contract for Difference, is a subsidy for mature technologies such as nuclear?

Chris Huhne: It could be a subsidy or it could be a payment. Clearly we have already envisaged a circumstance where if the market price in the long run goes higher than the strike price of the Contract for Difference then far from being a subsidy to the industry, the industry will pay back and it would be a subsidy to the consumer in other circumstances. So that will be one point, but in the current circumstances obviously we envisage that the price that the UK electricity consumer will have to contract with an investor is going to be higher than the market price at present, even though it may in future be lower than the market price. In those circumstances that is a subsidy but it is a subsidy to take account of the low carbon element and it is not industry specific.

Q407 Barry Gardiner: Secretary of State, has your Department carried out any specific analyses of different energy saving scenarios for the period through to 2030 so that you can look at the different policy interventions to ensure that market structure facilitates the demand management? Many of the criticisms that we have heard in the past weeks have been that the focus is insufficiently on energy savings. If you look at the McKinsey cost curve, you are focused up here and you are not focused down here at the beginning of it where most of the savings can be made. Do you think those criticisms have any strength?

Chris Huhne: I really don’t. I think, to be perfectly frank, this Government, you can accuse us of many things but the one thing you cannot accuse us of is not taking energy saving seriously. I wanted the Energy Bill that is about to come to the Commons, that is nearly finished in the Lords, to be called the Energy Saving Bill because the vast burden of that bill is about energy saving and particularly about the Green Deal. The Green Deal as a programme, when it begins in October 2012, will be the most comprehensive and most ambitious energy saving programme for our homes of literally any developed country. So this is going to be a complete step change. All of the old thinking about energy saving-again, I am delighted that this has real cross-party support and that all the main parties, including nationalist parties, were advocating the central principles of this scheme before the last election. But don’t underestimate how significant it is going to be in delivering real change.

We have had some British Gas evidence from the work that they have done in doing similar types of a green deal type scheme, where they are getting a 44% reduction in gas usage where they have installed these measures. So I think you are going to see a real impact here and I don’t think people have begun yet to appreciate quite the extent or the ambition of this scheme, or the impact that it is likely to have.

Q408 Barry Gardiner: You are talking very much about domestic here. Let’s look at sectors. You will know, because your analysts will have shown you the bar charts that show that if you look at the cement industry, for example, or the steel industry and you look the implications of the ETS and credits that they are in surplus with at the moment, that they don’t need to do anything at all. They are sitting very comfortably on some very large volumes of credits and there is not a great deal of pressure on them at the moment. What are you going to do to drive down energy consumption in sectors rather than just saying, "Well, let’s look at households"?

Chris Huhne: Households obviously are a very, very significant part of our overall emissions. Beyond households obviously there are a number of measures that we have introduced that are going to have implications in terms of energy saving: the renewable heat incentive, for example, is going to be quite an important part of that; heat accounts for 47% of our carbon emissions. But you are absolutely right, I don’t claim that we are yet doing everything that we could on the energy saving agenda but I do simply claim we are doing more than any comparable government in the developed world and we are doing more than any government so far has done, although I don’t want to claim a particular credit for that because it was genuinely a cross-party thing. But we are not perfect. Ideas on a postcard greatly received. We will get at them.

Q409 Barry Gardiner: I take that as a commitment that you will now, in the department, commission those specific sectoral analyses looking forward to 2030 that can drill down into these areas where energy reduction can be achieved.

Chris Huhne: There has been a lot of work done, and I pay tribute to the work the Carbon Trust has done on this, particularly the Carbon Trust work that has been done on supply chain energy saving, which I think is some of the most fascinating. In business, one of the big difficulties in getting businesses to move is that for any individual business in a long supply chain, energy looks like a relatively modest part of the overall costs that the finance director faces. But if you add up the energy costs of all the suppliers and the implicit energy costs in the component cost, you begin to get a very significant figure. The faster we can move our business in that way through the schemes that we already have and trying to push those schemes, then the better we can get both the energy savings with a national interest and also reductions in costs for business.

Q410 Barry Gardiner: So the future of the Carbon Trust is secure?

Chris Huhne: Obviously the work of the Carbon Trust is secure; I hope very much that the future of the Carbon Trust is secure. The Carbon Trust is obviously a company limited by guarantee. It is not a quango of the Government. It has a lot of revenue stream of its own as well as the revenue that it has traditionally got from the-

Q411 Barry Gardiner: How much have you cut that revenue by?

Chris Huhne: From the department? We have had, without any doubt at all, to do our bit in terms of the quite dramatic cuts in spending over the whole of the spending review period. We have had to do our bit in the department.

Q412 Barry Gardiner: That has hit the Carbon Trust quite hard, hasn’t it?

Chris Huhne: It is inevitable, I’m afraid, that where there have been particular elements of public spending that the department is responsible for we have had to prioritise absolutely ruthlessly. There are lots of things that I would love to do and it would be nice to have-

Q413 Barry Gardiner: The gearing effect from the £1 million the Carbon Trust puts in to ensure reduction in energy, the savings to business, the gearing effect, that is about seven or eight to one, isn’t it?

Chris Huhne: I think the key point with the gearing effect is that-excuse me being slightly cynical on this-where you do have a strong gearing effect that is precisely the sort of service that can pay its own way. The parts of the Carbon Trust offering that are the most effective are the ones that it ought to be able to continue to offer to private business, precisely because the paybacks are so obvious. The ones that may be more a threat are going to be the more marginal ones. So the higher the payback-and I entirely take your point, I very much like the work of the Carbon Trust for exactly that reason-the more likely it is that work will continue without the subsidy.

Q414 Sir Robert Smith: The Green Deal is going to be quite an important part of that package but even in the past with free insulation being offered on the doorstop, many a household has refused that offer with no strings attached. So is there not still for the energy efficiency a very important part of regulation in driving forward efficiency of housing stock and of equipment?

Chris Huhne: I think you are right that we need to get people at the moment when it is most attractive to them to install the Green Deal and that may involve regulation. We have explicitly envisaged in the Energy Bill that when it comes to the private rented sector, for example, if there is not substantial movement-it is the worst sector of housing at the moment for installation of energy saving measures, the least energy efficient sector of housing. We have explicitly envisaged that if there isn’t real progress then in 2015, first of all, tenants will be able to insist-and they are people that pay the energy bill-that the Green Deal goes ahead. There is, after all, no cost to the landlord. Secondly, local authorities will be able to insist on F&G rated properties being compulsorily improved before reletting. That is if there is not improvement within the private rental sector. I am not saying there isn’t regulatory backup, there is clear regulatory backup, but I personally would lay more stress on getting people at the key moment.

We have done quite a lot of work with-I can’t remember what it is called, it has a grand name, but I call it the Nudge Unit at Downing Street, which is basically the unit that looks at how we can try and get people to think about these things. The work that they have done and that we did on economic costs of energy insulation and energy saving packages shows that one of the big costs that people anticipate and that really puts people off is getting the builders in, it is all the disruption, it is the dust, it is the tramping through the hall, messing up the carpet with dirty boots and all the rest of it. So if you can do the Green Deal at a point when householders are normally and anyway doing work on the home, and that tends to be when they first move house, then you can dramatically reduce the so-called hassle costs and you can get them absolutely at a moment where they are most likely to think, "Yes, if I’m going to get a new bathroom, going to get a new kitchen, redecorate everything, I may as well do the whole thing properly, I’m going to be in the house for nine years on average".

Q415 Sir Robert Smith: Do you think in branding if you called it the Money Saving Deal rather than the Green Deal, it might be more-

Chris Huhne: There have been a number of suggestions about whether we are calling it the right thing. I tend to think that a rose by any other name would smell as sweet but it is absolutely key that the assurance is that if the householder goes for the Green Deal they will end up with saving money, providing that they don’t do anything radical like marrying a Brazilian and turning the heating up or whatever it happens to be. I can’t account for changes in circumstances such as that. But the reality is they ought to be able to save energy that will pay back not only the cost of the package to the business that has installed it, and an adequate rate of return to that business, but will also save them money. I think a lot of other countries are looking at our experience here and are looking at it with great interest, including a number of US states and others. It is a genuinely radical innovation and on the energy saving front I think it is going to be really important.

Energy saving, to come back to Mr Gardiner’s point, literally is where we see it in the department. It is one of the four big pillars of what we are trying to do in the move towards the low carbon energy economy. Energy saving, renewables, new nuclear, clean coal and gas, the four pillars of the policy, and energy saving is up there as one of them. It is just as good in the Corinthian pillar as all the others.

Q416 Chair: Just going back to long-term contracts for a moment, there are different types of low carbon technology and they may have different needs in terms of the type of long-term contract that will be most appropriate to promote them. Would you consider offering different types of long-term contract for these different technologies?

Chris Huhne: I think one of the things we are obviously doing with the consultation is looking at the specific detailed suggestions that have been made. There are a number of ways in which we could approach the need to provide early stage technologies with an uplift beyond the base level Contract for Difference. One of them would be a handicap that was set previously and then, in the end, people could all go in for an auction on the Contract for Difference. There are a number of ways of doing it so I don’t want to anticipate what we-Simon, do you want to come in?

Simon Virley: The broad principle would be the same irrespective of what kind of low carbon technology, that is the contract over the lifetime of the plant providing the fixed return for investors, but obviously there a lot of design details that we are still going to be considering in light of the consultation responses on exactly how that works for different technologies, and that is obviously what we will be saying more on in the White Paper.

Q417 Chair: The White Paper is coming out when?

Chris Huhne: We aim to get the White Paper out as quickly as we can, taking account of your own strictures, Mr Chair, and the importance of clarity and certainty, but certainly before the summer recess.

Q418 Chair: Before the summer recess, so around about 20 July?

Chris Huhne: I see that you are more than aware of all the Whitehall ways but it is a Whitehall summer.

Chair: Right, okay. Thank you very much for your time. We are grateful to you for giving us some extra time.