Examination of Witnesses (Questions 62-91)|
PROFESSOR DIETER HELM CBE
25 JANUARY 2011
Q62 Chair: Dieter, good morning,
and thank you very much for coming. I think that this is the first
time you have been to this Committee in this Parliament, so you
are welcome. Most, but not all, of us are new to the CommitteeI
You will know that we are engaged on an extremely
topical exercise, which is quite wide-ranging and, in some aspects,
quite complex. Would you like to say, in general terms to begin
with, whether you think that Electricity Market Reform is actually
needed if we are going to have secure and lower-carbon electricity
supplies in the UK?
Professor Helm: Thank you for
inviting me, Chairman.
Reform is needed, regardless of whether one
wants to pursue the particular objectives that the Government
have in mind. The market is not designed to produce investment
in an orderly and cost-effective way, and therefore intervention
is required. What really sets the context for this form of intervention
is just how extraordinarily demanding the targets are. In legislative
terms, we are driven to try to achieve the 15% renewable energy
target within nine years, and effectively to decarbonise the entirety
of the electricity system within 19 years. Even on a fair wind
with these reforms, they are not going to be in place until 2014-15.
We are on a five-year track to finish off an enormous build for
what is extremely expensive offshore wind, and then for a huge
charge to achieve full decarbonisation.
The only example that I can think of for a large
economy that will have made anything like that kind of transition
is the French programme to build 59 nuclear reactorsstate-driven,
state-financed and planned. I am not recommending any of those
things, by the way, but that is the only example that I can think
of, certainly since the second world war, on this kind of scale.
It is an enormous ask, and the idea that existing arrangements
could achieve that is quite close to absurd.
Q63 Chair: That's a clear
view. I wish all our witnesses were so concise and emphatic.
Now that we have started the consultation, do
you think that the balance of the objectives which have been put
outon the security of supply, sustainability and affordabilityis
right in this process?
Professor Helm: Achieving security
of supply, and achieving that by having a view about what mix
of low-carbon as opposed to high-carbon technologies one would
want, can be done perfectly consistently. The difficult bit is
the affordability bit. In my view, what is extremely implausible
in both the last Government's and particularly this Government's
views of prices under this regime is the idea that all the transition
can be done and that customers' bills will only go up by about
2% by 2020. You have to stand back to see the sheer scale of what
is being asked, and then think about the plausibility of saying,
"And by the way, it won't cost you very much."
The arithmetic behind that is the green deal
arithmetic. The green deal in itself is a good idea. But the idea
that that will actually achieve sufficient demand reductionsthis
is not about energy efficiency; it is about energy conservationto
such a level that that will offset the unit costs of offshore
wind by 2020 and to the extent that the effect on consumers' bills
will only be 2%, is again really stretching one's imagination.
My personal view is that, if one wants to decarbonise
and to achieve the climate change policy objectives, it behoves,
if I may say with respect, politicians to explain to the public:
"This isn't a free lunch. It is going to cost. Bills will
go up." However much energy efficiency we pursue, people
are going to be paying a lot more for their energy. My fear is
that, by about 2015-16, the costs of wind will start to feed through
to bills on a quite substantial scale. The public, having been
led to believe that this is essentially a free lunch, will, by
the middle of this decade or slightly later, face sharply rising
bills. The danger then is that they will lose faith in the climate
change objectives. The affordability bit is not plausible next
to the targets of 15% renewables by 2020 and complete decarbonisation
of electricity by 2030.
Q64 Chair: I entirely share
your view that achieving the first two objectives cannot be done
without the strong probability of much bigger price increases
for consumers. Assuming we accept the risk that prices may go
up much more than is anticipated, do you think that in other respects
the proposed reforms are sufficient to achieve the other two objectives?
Professor Helm: In principle,
the answer is yes. If we look at the components, we have the EPS,
which is essentially a closure programme for the coal industry
as we know it. Secondly, we have the carbon floor priceit
depends what the price is, but anyone who thinks that we can rely
on the EU ETS to deliver a carbon price that reflects a level
necessary to carry through decarbonisation is sadly misled. The
EU ETS produces a low, volatile and short-term price, and we want
a rising price that is stable and long term; that is that component.
The final bit, which is the crunch bit, is the reform of the market
itself, particularly the proposals on FITs.
At one level, it is absolutely right to say
that we need long-term contracts. In my view, that is essential
to drive this programme through, and it is one of the big flaws
of the old market system that we have at the moment, regardless
of the climate change objectives. But to say that we need contractsI
mean this in a non-controversial way, but the Government's proposals
are extremely ambiguous as to how that is going to be achieved.
There are potentially two routes. One is to
go down the route of using markets and auctions of those contracts,
so that we use the market to test out the cheapest routes, and
award the contracts on the basis of open, competitive tendering.
The other is to have a much more interventionist planning system,
which looks much more like the band of ROCs that we have at the
moment. If the latter, I question whether the Government would
have the capability to do it, and whether it will work very well
in practice. If the former, and provided people are prepared to
pay the prices that emerge from the auctionsthat is one
of the reasons why people are reluctant to use the market; they
might actually see what the true prices areand customers
are prepared to pay what the market reveals are the prices, of
course the objectives can be tailored to the capacity that is
developed over time.
Q65 Sir Robert Smith: On affordability,
the 2% is unrealistic. What is a more likely range of figures
that the consumer will have to confront?
Professor Helm: The first thing
to say is that the price is an outcome rather than an ex-ante
imposition upon the system, so there will be considerable uncertainty.
We know quite a lot about the costs of offshore wind. We know
that costs have not been falling for offshore wind and that, because
of the way in which the networks, and so on, have been developed,
it is pretty badly co-ordinated. Therefore, looking at that programme,
it is possible to imagine quite substantial cost increases coming
from that direction.
The question of the ultimate bills depends on
what else is going in. One good piece of news for consumers is
that we are now in a worldradically different from five
or six years agoin which we have abundant gas. Indeed,
we have so much gas that, from a policy point of view, it is probably
best to assume that it is an infinite supply. The resources are
now doubled at world level. Shale gas is competitive, and the
US is now beginning to export gas. This is a transformational
event in energy markets. If those gas prices were to see their
way through into the British market, and if quite a lot of the
wind-generation capacity is not built but quite a lot of gas generation
is built, the price profile looks gentler. If we really build
all the wind generation that is required to meet the objectiveif
we build the whole lot and we do it by 2020there will be
very substantial bill increases, because of course the gas is
being choked off this system.
Q66 Laura Sandys: I am interested
in your focus on the market at auctions. Affordability is certainly
a Government objective, but predictability is more important for
both consumers and industry. Is there a market structure that
could help with predictability? If we actually achieved the renewable
generation, would there ever be a decoupling from the gas price
for electricity that would be able to give a little less international
volatility to the market?
Professor Helm: If I can unpack
that, the first point is that, other things being equal, people
like stability in prices. But if they have stable, very high prices,
they prefer volatile, low ones. That is very important, because
the gas and oil price bring a degree of volatility into thismainly
the gas pricebut it may turn out to be volatility on the
downside rather the upside. There is a question about that. But
let us say that they want stability. In a market like this, one
would look for long-term contracts, which, in my view, are natural
to its economics. There is nothing that says the long-term contract
should just be about wind farms. My view is that there should
be long-term contracts for gas, nuclear and lots of other component
parts within the system.
It is rather disingenuous to think that renewables
somehow bring stability to prices, and that therefore that is
a good thing, whereas other technologies do not bring stability
to prices and that is therefore a bad thing. There are two points
to make there. Long-term contracts can be applied to lots of things.
It is the long-term contract that gives stability. There is a
perfectly plausible scenario, contrary to the Secretary of State's
view, that we may see very low fossil fuel prices in respect of
the fossil fuels that matter for electricity, which is gas.
Chair: I apologise. I should have drawn
attention to my entry in the Register of Members' Financial Interests
at the start of the session. I am a director, option holder and
shareholder in several companies involved in renewable energy.
Sir Robert Smith: I should also draw
attention to my interests in the oil and gas industry. I am a
shareholder in Shell.
Q67 Albert Owen: I have great
interest, but not financial. On the carbon price support that
you touched on, do you think that carbon price support will make
investment in low-carbon technologies, research and development
Professor Helm: Let us suppose
we do things in the right way in my view and auction these things,
and decide that we need slots of capacity brought on to the system.
We might want to say that the next lot of slots have to be low
carbon, and people can bid those in and get long-term contracts.
That in itself reduces the risk of the fixed cost of the investment.
It makes a great deal of difference to the investments, but does
it drive R and D? I think that was the question. The answer
is that it helps a bit, knowing that the market will be stable,
but it will not solve the R and D problem.
The R and D problem is that the investments
that companies make are long-term and speculative, many of which
might not turn out to work. We know across a whole chunk of industry
that R and D support policies are very important. That helps,
but it is not sufficient. We still need to think very hard on
the R and D front. On that scale, it makes a world of difference
whether you think that every company should be doing its own R
and D as well as every university and so on, or whether you think
that it is the sort of thing with which Europe should co-operate
and bring big budgets together. That is a bits-and-pieces approach
to such matters, but we need those policies in addition.
Q68 Albert Owen: Do you think
that that will crowd out new entries or will the carbon floor
pricing make it easier for new entries, as we move on? I am worried
not only about new companies, but new technologies and the ones
that have been advanced will take the advantage.
Professor Helm: I may have mistaken
your question, because the force of that is about the carbon floor
price rather than about the market mechanism.
As for the market mechanism and the auction
capacity, the brilliant thing about having an auction rather than
a planning system is that anyone can bid. Once you have a contract,
you are in. To go down the auction route is one of the best ways
in which to promote competition in the industry. It is a really
major advantage. The auction could have demand-side bids, so
you can bid in to reduce capacity of demand by so much in so many
years' time, and that brings a long-term contract into the energy
efficiency side of the market, which has been sadly lacking to
On the carbon support price, it is neutral between
technologies. That is the nice thing about it. It is just the
price of carbon. But what really matters is not what the price
of carbon will be this year because that is basically just a tax.
No one will do anything very different in the next two to three
years on the basis of that tax. You will want to know what the
price of carbon will be in 2020 or 2025, and the further out you
are on R and D, the further you need to know into the future.
It is very important to give serious policy consideration to
how you can develop a robust, credible, political framework within
which there is a clear understanding about the direction of travel
and the rules by which that carbon price will be adjusted.
We had cross-party support on the Climate Change
Act. There has been cross-party support for the Climate Change
Committee. From the perspective of someone who is neutral to
this game, that is extremely encouraging. To me, the most important
question about the carbon floor price is whether we can have a
degree of consensus that, whatever the swings and roundabouts
between political parties, an investor knows in 10, 15 or 20 years'
time what the direction of travel will be. That is missing at
the moment, but it augers rather well from the experience so far
of climate change policy that that might be achieved.
Q69 Albert Owen: If we achieve
that consensus and some sort of stability, will it really make
a difference if that the volatility is still with the gas prices?
Professor Helm: Yes, although
if you are really worried about volatility on the gas price and
think that the gas price or the oil price has a degree of market
power in the price, you might want to make the carbon price inverse
to the gas or electricity price, or some index of that. Much
like the discussions at the moment about petrol pricing, for several
years I have advocated indexing. If the oil priceI suspect
it is high levelgoes to $200 a barrel, there will be a
fat chance of a carbon tax making much difference in that context.
You do not need it. You have a very high carbon price implicit.
If the oil and gas prices fall very sharply,
which in the gas caseif not the oil caseis a possibility,
you would really worry about prices falling very quickly and then
consumers getting used to lower prices. You then have the whole
problem of bringing them back up again rather than locking in
the consumer expectation, which is roughly about where we are
at the moment. Indexation would be a great idea. You might not
be able to do that immediately, but, in the rules about how to
change the carbon price through time, you might be able to indicate
that one of the factors taken into account will be what the profile
of oil and gas prices turns out to be.
Q70 Albert Owen: On an international
comparator, what difference will the carbon price make to the
distortions in the trading of electricity to the continent and
to the Republic of Ireland?
Professor Helm: There are a couple
of things to say. The first is that almost every country in Europe
is toying with the idea of the carbon tax. Everybody understandsprivately,
at leastthat the EU ETS is not producing the stable, long
term, and rising carbon price. It is not the basis, and when you
talk about research and development, you are a long way adrift
from that framework.
Everybody is toying with carbon taxes; the problem
in Europe is that people are toying with different kinds of taxes.
So, the Irish now have a tax that concerns everything that is
not in the EU ETS, to give it a wider coverage. Our carbon tax
is almost entirely concentrated on electricity and nothing else.
So, there is mix and match across Europe, and the effect in particular
countries will depend on precisely how the tax is designed, its
domain and its level.
Q71 Albert Owen: Are you comfortable
with what you have seen in the consultation documents?
Professor Helm: I have advocated,
for at least five or six years, a floor price for carbon, so I
am delighted that that recognition is there. I am in favour of
a carbon tax that looks roughly like the current one, which is
applied to the whole economy.
I am very worried that in the decarbonisation
strategy we have said, "Transport is too hard and lots of
other areas are too difficult, so we will do it all on the power
stations." It seems that the great merit of a carbon price
is that you do not know what the alternatives will be in future.
The price gives everybody an incentive to respond, and you will
be surprised as technologies and other things come along.
The one thing I would like in the framework
of the proposed carbon floor price, in addition to the rules for
revising it through time, is a recognition of the scope to expand
its domain. So, even if we start with only electricity, we could
widen that, and transport is the obvious area in which to do so.
But there are lots of adjustments to be made, given the taxation
we already have in transport.
Q72 Albert Owen: You said
that you were delighted with the carbon floor price. Do you think
that the nuclear industry will be delighted with it? Is it, in
Professor Helm: I regard myself
as technologically neutral. By that I mean that we do not know
what the technology change will be.
Q73 Albert Owen: I will add
to nuclear, long-term contracts and the long-term investment that
Professor Helm: Yes, but nuclear
power shares a feature that is common to wind power, in particular,
and to a number of other technologies, in that it has long-term
sunk costthe marginal costs are way below the average cost.
The investment problem is therefore how to ensure that you are
going to get back all the capital that you have sunk. So the long-term
contract bit is essential to a range of technologies.
In addition, pricing carbon helpsit starts
to create a level playing field between the technologies.
Q74 Albert Owen: Is it a big
Professor Helm: It depends how
high the tax is: if the tax is £200, and it is credibly going
to stay at that, that will have a big effect; if it is £10,
it will not make much difference.
Q75 John Robertson: I was
interested in how youpromoted is not the right wordsaw
gas within the energy market. Correct me if I am wrong, but it
appears that you think that gas will probably be, if not the cheapest
option, an option that we will take, at least in the short term.
It seems that you think that wind power is too expensive and,
therefore, the research and development in that area will be curtailed.
Do you think that we should go down that road or that when we
set the price barriers, we should include a portion for the research
and development of those industries that we might not want to
Professor Helm: Let me unpack
the bits of that question. First, any energyclimate changepolicy
misses something if it fails to take account of the phenomenal
change in what we know about fundamental fossil fuel markets,
compared with what we knew only five years ago. Five years ago
we were worried about the Russians, Ukrainian supplies, and being
at considerable risk from a security supply perspective in terms
of gas. That has fundamentally changed, on an enormous scale.
The second thing to say is that gas has about
half the emissions of coal. If you are interested in global warming,
and if what we are doing in this country is supposed to address
global warmingnot Britain's national emissions but global
emissionsthis is potentially, in the short to medium term,
fantastically good news, because the driving force of global warming
is the increasing burn of coal internationally, in particular
by China, India and, to an extent, the US. The extent to which
these countries can now, at extremely low cost relative to where
they were before, build for gas rather than coal is already shown
through an IEA forecastyou see a tailing off of the increase
in the coal burn, through time being replaced by gas. This buys
us time in the global warming context, in which there is no international
So, gas for coal is a quick, temporary, short
to medium-term way of getting on top of some of the aspects of
climate change quickly. In the UK context, let us for the moment
set aside the renewables directivea legally binding constraint,
and I have been trying to think of how to achieve a legally binding
constraintand get the arithmetic into proportion.
We are projected to spendI don't know£100
billion on the offshore wind programme, which is over nine or
10 years, so £10 billion a year. The total infrastructure
capex in the British economy is about £20 billion historically,
so that is a huge ask. Ask yourself the following question, or
do the following thought experiment: if you close some coal stations
quickly today and replace them with gas CCGTs quickly today, how
much would you have to close, and bring on those CCGTs in two
to three years' time, to achieve the same reductions as the £100
billion being spent on wind? And how much would it cost? To get
a grip on this problem, you only have to have a ballpark number
in mind, but it would probably cost less than £10 billion.
We are, therefore, paying for a hell-for-leather,
nine-year charge to build extremely expensive offshore wind farms
at a cost 10 times more expensive cost for the same emissions
reductions. It is fair to say that, at the end of that period
in 2020, you would have the gas stations and not the wind farms,
and you would have to think what you did then. But even if you
scrap the gas stations quickly at that date, you would still be
quids in against this enormous capital expenditure. What makes
it even more ironic is that very few people think there is much
chance of achieving that offshore wind build to the scale required.
We live in this game in which we design policies
to achieve an objective that most people think we are not going
to achieve. That is a recipe for a very expensive energy policy.
Q76 Chair: You just characterised
the central approach of the Government's energy policy as the
emperor's new clothes. What would happen if we went down the route
you suggested, which is extremely interesting to this Committee?
I think you have already acknowledged that we would be left with
a lot of stranded gas assets which, by 2030, would not by themselves
be anywhere near delivering the nearly total decarbonisation of
electricity generation, which is an explicit goal of the Climate
Change Committee. What will we then do? Say we have £90 billion
in handwhich, admittedly, is quite attractive, and even
the Treasury might think that's a good ideawhat would we
then do to achieve the objective?
John Robertson: What happens to R and
D? How do we stimulate research?
Professor Helm: I once wrote a
piece in The Times, probably three years ago, suggesting
that if you really cared about climate change at the global levelthis
is not a British problem but a global oneand spent the
£100 billion on R and D rather than on a single wind farm,
you would make a much greater contribution.
I am not against building some wind farms, and
I want to answer the Chairman's question, but you have to look
at the credibility of the targets. In the period up to the 2020
target, there is only really one generation technology that you
can build to achieve the target in nine years. R and D will have
no effect and nuclear power is right at the end of that period,
with a lot of nuclear coming off. So, in that short-term period,
if you wish to achieve that objective, which we are bound to do
by directive, you have to go down that route, and you have to
accept that that is the cost consequence of what you are doing.
If you then want to say that by 2030 we will
decarbonise the electricity system, that is at least as demanding
as building all that wind within the next nine years. If you really
want to do that, you do have a bit more technological freedom,
because there are things you can bring on to the system between
2020 and 2030, which you cannot do in time. Let us think what
those are. First, there is the revolutionising of the grid itself.
There are smart meters, smart technologies and electric cars.
Those have really radical effects on how the electricity system
works. Looking at the French programme, if you wanted toI
am not recommending ityou could build 10 nuclear power
stations in that time. You could build even more, if you wanted
to do so. You could build some more wind farms, or a number of
other technologies. There are more degrees of freedom, provided
that you really mean that you will achieve that 2030 objective.
If you asked me whether I would bet on you achieving either the
2020 target or the 2030 target, I would not put much money on
the table. That matters, because if you want to achieve the objective,
you have to create a framework where investors credibly believe
that you really will do it. That requires all sorts of consequences
that follow through. As I have said, we are not really there at
Does it matter that we will have too much gas
brought on to the system? That was the Committee on Climate Change's
concern, if we push the gas forward in the next 10 yearswhich,
by the way, we will do anyway, and I might come back to that later,
if I have an opportunity. This gas will be there. All I am saying
is that if you really wanted to achieve your objective by 2030
and you just told it to closeyou used command and controlit
would still be a lot cheaper than what we are currently embarked
upon. In fact, having the option of some gas stations on the systemand
perhaps gas CCS as well later down the roadmight be a good
thing. Even if you didn't want it, you could still squeeze them
off and save a substantial cost.
Q77 Barry Gardiner: Professor
Helm, it has been fabulouswe love this. You have given
us Scylla and Charybdis, but we have to steer a course between
the two. You have said that, on the one hand, we have this immutable
directive that we have to achieve and, on the other, you have
given us the problems of stranded gas assets. In closing your
remarks, you said that we will build some of these gas stations
anyway. Will you map out for us a reality, rather than a fiction
on either side? If we can all see what the case is and follow
your numbers, we can do the arithmetic with you and say, "Yes,
that's ridiculous." Let us now chart what the reality will
be over the next 15 years, with perhaps too much gas coming on
to the system to provide that long, stable, incentive price to
invest in low carbon and onshore and offshore wind. What will
actually happen? The Committee has an interest in knowing what
the two extremes are, but we need to chart a proper course for
the Government, or to help them chart that course.
Professor Helm: The first thing
to sayit is really important to make this pointis
that if you are designing an energy and a climate change policy,
you should do so while recognising the degree of ignorance you
have. We do not know what will happen to a whole range of prices.
It is private sector firms that will make investments, and we
do not know whether and to what extent the enormous effort that
is now going into R and D will deliver new technologies. We do
not know how smart meters will come out, in what form and so on.
I have always been interested in designing robust
energy policies. I always ask the question: "You have this
energy policy and take your expectation of how the world will
be. Supposing it turns out the opposite way, what will happen?"
We designed an energy policy in 1979 assuming that the oil price
was going to go through the roof, but within five years it had
collapsed. Our current Secretary of State talks about a doubling
of oil prices, but my reaction to that is scepticalwhat
would happen if they halved? I want to stress that energy policy
must be robust against a lot of different outcomes. That said,
in the short runthe period through to 2020the technology
is basically given. We will not have a smart grid in that time
and we will not have much smart metering. That is pretty well
So, what do I think will happen? We won't build
all the windmills; we'll build some of them. You can write on
a piece of paper how many gigawatts you think will be constructed
by 2020, and it will be interesting privately to see whether people
come to a roughly similar numbermy guess is about half
of them. We will squeeze down coal, because of the EU directive
on other emissions, which will hit quite hard in 2015-16 and beyond.
In the meantime, some of the nukes will have their lives extended;
they will have a bit more of a run. On the gas side, we will build
lots of gas stations.
If the concern is that we ought to choke off
the building of gas, because you are worried that those gas stations
will be in the system after 2020, which will make the 2030 decarbonisation
target too hard, the irony is that the Government's set of proposalsif
you came down from Mars and didn't read the rhetoricis
incredibly pro-gas. EPS squeeze the coal off, so if you are building
a gas station, you know that coal, which is your main rival, will
be squeezed off the system. The wind is probably not going to
be built to the time scale, so you know that the amount of wind
will be limited compared with what it otherwise would have been.
Instead of designing a long-term capacity market, which I am in
favour of, we have a short-term capacity market, the main beneficiary
of which will be gas.
Adding those things together, if I was interested
in building gas power stations, the world would suddenly have
got quite a bit better. The carbon price is likely to be relatively
low, which disadvantages coal vis-à-vis gas. Of course,
in the climate change levy, coal does not pay its full carbon
burden, so in fact you have also improved the relative price between
coal and gas in favour of gas. The reality is that we are going
to build a lot of gas.
The question is whether we are going to build
enough gas for the security-supply objective, given that we're
not sure when the nuclear power stations are coming off, that
we don't know how fast the coal stations are going to fall off
the system, that we're not sure how much wind is going to be built
and that we're not sure when the first new nuclear power stations
are eventually going to come on to the system. That is the question.
Is this good news? It turns out that from a
climate change point of view, between now and 2020, more gas and
less coal is actually a very good and cheap thing to do. But that
does not address the longer-term agenda to decarbonise the entire
sector, and therefore to close down the gas industry by 2020 in
respect of electricity. That is in a context where you expect
electricity demand to have gone up a lot, because you want gas
to be the fuel used for electricity for cars so as to displace
oil. Actually, you do not want gas; you want wind farms for energy
for driving cars, which is again part of the framework of forcing
gas off the system.
I am sorry that that was a long answer, but
you asked a complicated question.
Q78 Barry Gardiner: No, it
was an illuminating answer.
Can I then ask for your response to the Minister's
statement to the Committee that he anticipated 16 GW of nuclear
being supplied, which means one new nuclear station being built
every nine months from 2017 to 2028? Do you think that that scenario
fits in with what you have said, or do you regard it with the
same sort of scepticism that I do?
Professor Helm: On nuclear power,
there is a very important sense in which a nuclear programme is
different from building gas, coal or conventional technologies.
My attitude to this has always been that if that's what you want
to do, let's do it properly. If you think about the example of
a large-scale nuclear programme being driven through on that timetable,
that is what the French did. They produced 59 nuclear reactors
in their programme.
What do you have to do to achieve that? First,
somebody has to be capable of making the things. We have only
one AREVA plant in Europe. It could perhaps make two of them
a year, but I don't know. So you need a whole scaling-up process.
The Dutch are now switching away from offshore wind to nuclear,
and everybody else is going in that direction. Adding up all the
nuclear orders, if you think about the capacity needed to build
them and that you need that capacity in place within eight or
nine yearsin fact sooner, if you are going to have a nuclear
power station on by 2017it is a big ask. There is a skill
chain to think about and there is a whole series of manufacturing
suppliers. As with the French, and as with the Germans actually
on their wind developments, you decide to have the programmenot
the individual station but the programme. How many stations could
you then build? As many as you like, but take the consequence
of doing it.
What are we doing? Well, here we are in 2011.
We still really have not sorted out the contracts. The new regime
will not be in place until 2014 or 2015, so we do not know what
the contract is. We are not yet clear what the carbon floor price
will look like and how it will go. On planning and a whole host
of things, we are still trying to sort them out. Progress is
being made, and if you want to achieve your 2030 target, in my
view it is almost inconceivable that you could do it without a
big nuclear programme, regardless of what you are doing on renewables
and other areas. I am not in favour of or against nuclear power;
I am simply putting it in that context. The answer is that it
could be, but we are not there yet, and you really have to get
your industrial and energy policies into a much moredare
I say it?command and control-driven system, if that is
what you want to do. It is yours to do.
The one thing that you would not do is build
nuclear power stations like we built them in Britain. The AGR
programme was the worst example. It probably turned out to be
the worst investment decision since the second world warcompared
with Concorde. Every one was first of a kind. They had to be
made in Britain. If you think of the industrial mistakes that
were made in our programme, it is a template of how not to do
it going forward. We at least have that experience to draw upon.
Remember that Dungeness B in that programme took 22 years to
produce a spark. If you contrast that with the success of the
French programme, you have an example of how to do it and an example
of how not to do it.
Q79 Sir Robert Smith: Let
us go back to the carbon floor price and the different European
approaches. If every country in Europe is taking a different
approach and you have an emissions trading scheme on top of that,
do you end up with whichever country is actually driving most
efficiently a low carbon price subsidising the rest of Europe?
Professor Helm: There is a real
danger of having strong discontinuities between both the coveragebecause
that affects industries and where they want to locateand
the levels. That said, all countries have had differential energy
taxes for a long time. Energy taxes have within them implicit
bits of carbon tax, so it is not as if we have suddenly come on
the territory. There is a sense in which everyone has some sort
of tax already.
Sir Robert Smith: We started the ETS
Professor Helm: Yes. The EU ETS
is added to the process. The ETS is probably not going to go
away. There are so many vested interests and so much money made
by traders, and so many incumbents benefit from the system. The
lobbying of political power is so great that we are not going
to get rid of it. My personal view is that, if you put a floor
price on carbona critically good thing about the Government's
documentindependent of the level of the EU ETS price, over
time my hope is that the carbon price can start to take up the
strain. We have a world in which unfortunately we have to have
both, but over time, since we really need to know that the carbon
price will be at a sufficiently high level, we can allow the carbon
floor price to pick up. If the EU ETS does not then deliver what
we want, we can take over somein my ideal world all, eventuallyof
the strain setting the carbon price.
Q80 Sir Robert Smith: If we,
uniquely in the UK, drive ahead with a carbon floor price, our
emissions will be reduced and we shall therefore reduce the value
of the ETS system and allow those in the rest of Europe to freeload
on the back of us.
Professor Helm: There are two
things to be said about that. First, we have already decided
unilaterally to put much higher costs here than elsewhere by virtue
of how we are driving the offshore wind programme. The cost of
our decarbonisation is very high. That leads to another point:
one of the great illusions about the EU ETS is that, because it
is tied up with the Kyoto targets, it is a good way of addressing
climate change. Remember that, since Kyoto and measuring the
production of carbon in this country, we have done very well15%
reduction in emissions from 1990 to 2005. If you look at our
carbon footprint and add back in all those energy intensive industries
that are now in China instead of here, the irony of the Kyoto
processes, because they encourage offshoring energy intensive
industries, is that our carbon consumption from 1990 to 2005 went
up 19%. These numbers are starting to be reproduced across Europe,
so let's not delude ourselves that the Kyoto framework and the
EU ETS are doing much about global climate change. As I said earlier,
global climate change is overwhelmingly about that wall of increased
coal burn and the coal power stations that go with that. That
is the story of the increase in global emissions since Kyoto came
on the scene.
I would argue that Kyoto has made virtually
no difference to global warming. Indeed, if the Europeans ramp
up their costs by opting, as in the case of the UK, for things
such as offshore wind, the policy might meet certain lobby interestscertain
companies might do extremely wellbut as a policy for dealing
with this enormous challenge that we face called global warming,
it won't get us very far. That is very important to bear in mind.
Are you interested, in the end, in unilateral
domestic targets, such as the 2030 target, or in global warming?
Those are not the same thingsthey are easily equated in
the political debate, but they are not the same thing, and we
ought to put our mind to that.
Chair: There are some interesting points
there, which we might want to pursue on another occasion, in the
context of another inquiryyou have suggested some things
that we could indeed pursue. However, we have got to be focused:
we have very limited time this morning, and we are trying to get
evidence on electricity market reform. Could we perhaps move on
to the capacity mechanism, which is one of the aspects of the
Q81 Barry Gardiner: Of course,
Chair, I will respect your ruling, immediately after I have said
that we must remember that the difference between Annex I countries,
which have legally binding commitments, and the others. Kyoto
was a start, not a finish. Therefore, the remarks you have just
made about Kyoto are somewhat unfair. Anyway, respecting your
ruling, Chair, I will move on to capacity mechanisms.
Respondents to this inquiry have shown a certain
uncertainty about the purpose of the capacity mechanism. Is it
to show that there is a certain total level of capacity of a particular
type in the system? Is it trying to encourage a certain level
of low-carbon capacity or is it aimed at dealing with increasing
intermittency and inflexibility? In your view, what is the primary
purpose of capacity mechanisms?
Professor Helm: I will say one
sentence on your first remark. The implication of what I said
is that we should measure carbon consumption, not production,
for setting our targets in Europe, so that we Europeans pay the
true cost and take the true steps to address our impact on global
warming. That is not against the treaty framework, but simply
says that if you measure the wrong thing and use market reforms
to drive that, you might just end up with energy-intensive industries
somewhere else. That is my point.
Now to the capacity market. The way to think
about this is to ask what the question is to which it is supposed
to be an answer. If the question is, in the very short term, how
to make sure that there is enough peaking capacity in the system,
particularly with greater wind penetration of the system, you
could use a variety of mechanisms. The national grid has to have
a mind to this anywayyou could let it do a bit of contracting
to do this, or you could have a short-term capacity market. The
problem has been with electricity systems for 100 yearsthere
are some pretty straightforward ways of handling it, and this
might be one of them.
Is that, however, the question that you should
be asking here? It seems to me that we should be more concerned
about there being sufficient capacity in the system, including
peaking capacity, rather than just being worried about whether
there is enough short-term peaking plant and that's it.
In my world, I want to auction capacity contracts.
However, my world is one in which we auction long-term capacity
contracts. In that world, the national grid or whoever is in charge
of balancing the system in the short run would have incentivesof
course, prices would reflect the scarcity value of that plant
in the short run.
Q82 Barry Gardiner: How confident
are you that it would be possible to specify the required level
and functionality of the capacity?
Professor Helm: You will not get
it perfectly right. It depends on how risk averse you are. You
might specify a bit too much, so we might have a bit more insurance
than we want. If you specify too little, you will have to do very
short-term purchasing to balance the system, as you do at the
moment. You would need to be pragmatic and balance out the asymmetric
risk. If you have too little capacity on a system at peak, the
costs are enormous to everybody. If you have too much, they are
a bit higher than they otherwise would have been, but not very
much. It is asymmetric.
Supply always equals demand in electricity.
The lights can always be kept on in the sense that there is always
a price that will clear the market. When you think about the security
of supply, you have to bear in mind that we are interested in
security of supply at reasonable prices. When people say that
we have one of the most secure electricity supply systems in Europe,
it does not tell you anything. What you want to know is, have
you got a reasonable security of supply at a comparable cost with
other people? We saw in California that that market would have
cleared itself. The price could have gone to whatever level necessary
to ration enough people off to make it hit, but it would not be
a good market. NETA is designed to reinforce the attractiveness
of those spot prices at pinches.
In the broader sense of security of supply,
why are gas prices going up at the moment in the UK? Why are we
having this big price effect in winter? Partly it is because we
do not have the infrastructure to back up the system to provide
the security that would provide the capacity to smooth out those
peaks, and that is the sort of question you need to focus on.
The capacity market is narrowly conceived. The short to medium-term
issue of capacity has a lot to do with infrastructure.
Q83 Barry Gardiner: Introducing
capacity mechanisms will clearly have an effect on the demand
side and on interconnectors. Are you equivocal in any way about
the effect that introducing capacity might have on security of
supply in the other context in terms of getting investment for
the interconnectors with the rest of Europe?
Professor Helm: Security of supply
is a public good. You do not get security of supply by the actions
of any individuals. It is a system property. That is why the market
will never provide optimal security of supply. It is something
that you have to decide about the system. What is more, the players
in any market have an incentive for the market to be tight, particularly
under a NETA regime. The most profitable way of looking at this
market would be for the lights not quite to go out but for the
market to be tight. So you have to decide what security of supply
you want for the system, and that is a part of policy, which is
underplayed in the Government papers that have come out. You are
putting excess supply in the marketremember that security
of supply and electricity means not that you predict to meet the
mean demand, but that you build in an extra cushion, so that you
have a capacity overhang on the market, which of course the incumbents
will not like, because it depresses their prices, therefore you
must pay for it.
In any sensible electricity market, you have
an energy market, but also a capacity market, which is the insurance
so that when you turn the switch, the light goes on. The energy
market is the energy that goes through the light bulb. The other
bit is the insurance when you press that switch, and you must
pay for it. That is why electricity is priceduntil we have
storage, electric cars, smart meters and all that stuffas
energy plus capacity. If we are going to introduce a capacity
market, you must have a proper way of rewarding that capacity
in order not to deter the incentives to build the capacity that
we need for the system. In my world, that is what the long-term
contracts are about. You need to specify what those frameworks
There is an important consequence. It is a general
comment on where the Government's documents go. The institutional
demands on Government include the skill set required, the expertise
to decide what contracts to sellyou are fixing price rather
than quantityand the contracting process itself. Those
are demands that I think would be readily acceptablethis
is not a controversial commentwhich DECC or Ofgem do not
possess. It is no good going down this route of doing the capacity
markets, the FITs and the long-term contracts, unless one wills
the means to the end. The means to the end are very substantial
changes in the institutional apparatus, whether that is an energy
agency, whether it is the Department doing things, the people
that we need or the framework of that. That is mentioned in the
documents, but if we want this whole thing to be rolling by 2014,
all the institutional stuff to do these things has to be rolling
by 2014 as well. Remember that I said there are only nine years
to go until 2020, and only 19 years to go until 2030. We are a
long way back down the curve to deliver that.
Q84 Laura Sandys: To be really
clear, you are saying that we do not have the institutional capacity
to deliver a reformone can argue whether your model will
be right or wrong. You are saying that we do not even have the
options on the table to look at different reform mechanisms, because
we do not have the institutional capacity, skills and, possibly,
Professor Helm: We can think about
the reform mechanisms, but I am saying that what comes with these
reform mechanisms is a demanding job. If you want to decarbonise
the entire electricity system in 19 years, the skill set that
you need to decide what the investment programme will be is substantial,
because you are deciding, not the market. You are imposing this
constraint upon the market.
The skill set to design and impose the capacity
market, to have the framework within this, to have enough flexibility
to adjust through time as the world changesas it most certainly
will in ways we will not anticipateto understand the impact
of the demand side on the framework, and to understand the impact
of smart meters, smart grids and the integration of those systems,
de minimis you need an energy agency and a substantial skills
capacity to do that. That is not a job for the regulator. It is
not an Ofgem job. NETA probably isn't an Ofgem job either, but
this certainly isn't. Ofgem's job is a narrow regulation of networks.
It is not, in my view, the job of DECC; DECC's job is to design
policy. It is a job of implementing policy. In this architecture,
you can call it what you like, but it is a job for something like
an agency, which is given a very clear remit by DECC as to what
the targets are that it has to achieve, and a legal framework
to the reformsI suspect that that will be one of the many
annual energy Acts that we will have going forward. It needs that
framework and it needs a skilled set of people who will not be
rotated around. This needs expertise and we have none of that
within our existing framework.
To be fair, the Department and others seem very
aware of it and it is mentioned in the document, but there is
no detail of how we will achieve that. If you think back to my
timetable, we get to a White Paper in the summer, we get to some
kind of outline legislation in the autumn, which gives secondary
powers to sort these things out, but where is the institution?
We are looking at 2012, 2013, 2014, 2015. With the best will in
the world, we are pushing that quite a long way out. That is a
sensible thing to do, because you want to do this properly, you
want this to last, you want this to be robust, you want this to
do us through 20 years. You do not want to hurry it. On the other
hand, the targets are so pressing. We are in 1936, and we need
some Spitfires by 1940. You cannot hang around, thinking it would
be nice to design a proper aviation market in which people might
have the right incentives to do those things. It is really pressing.
Abandon the targets and life is a lot easier, but that is not
where we are. These are legal requirements.
Q85 Sir Robert Smith: Another
intervention in the market is feed-in tariffs. I was wondering
how you felt the FIT with the contract for difference will affect
the cost of capital for low carbon?
Professor Helm: There are two
bits to the feed-in tariffs. The main bit is essentially about
long-term contracts. That they are called FITs does not tell you
anything interesting at all. These are long-term contracts granted
to low-carbon technologies going forward, such as nuclear power
stations and wind farms. In principle that is sensible, provided,
in my world, that those are done through long-term auctions of
The other part of the feed-in tariff is related
to the reform of the renewables obligation. In that world there
is both an optimistic and a pessimistic thing to say. The optimistic
thing to say is that since the existing system is about the most
expensive support system for renewables known to the developed
world apart from Italy, and so far has produced very little windso
little, in fact, that only Cyprus and Malta had less wind than
us when we came to adjust the targetsalmost anything you
do to it pushes you in the right direction. That is the good thing.
The bad thing is that if it means, effectively,
that we have a glorified banded ROCs system, it will probably
not be much better, because the Government will pick the technology
and put weights on each one. It will be wide open and vulnerable
to picking winners, picking technologies, political lobbying,
rent capture, and what I callto try to be non-controversialthe
climate change pork barrel.
In a banded ROCs system, every technology hires
lobbyists to explain to the Government, "This is the technology
of the future and you really must give us two ROCs, three ROCs"or
whatever number of ROCs it is. Of course, in any political system,
the idea that lobbying will have zero effect is naive. So, on
the ROCs side, we should go all the way and bring the renewables
into the broader framework of the market reforms, which should
be able to cover the low carbon programme. In the FITs for that
regime, we want long-term auctions. The danger is that the whole
system will become like a glorified banded ROCs system, which
would be cause for considerable concern.
There is a fork in the road: the Government
can decide how much low carbon they want and auction it, using
the market, or they can decide how much low carbon they want and,
essentially, plan it. That fork is unclear in the document, and
there are major consequences of going down one route rather than
the other in that framework.
Q86 Sir Robert Smith: Would
you go down the auction route?
Professor Helm: That comes back
to my point about the Government's capacity. If you say that the
Government's job in, say, an energy agency is to decide sequentially
to auction certain amounts of capacity, that requires quite a
lot. But if you say, "This agency not only needs to auction
to see what the market prices are, but needs to decide what the
answers are without the market," the demands on that agency
as a planning body are vastly greaterit becomes a bit like
There is one final point, which is not brought
out in the document. If you auction a contract to a nuclear power
station, wind farm or whatever, who is the counter party? Who
signs the contract? The answer must be that suppliers are obliged
to take those contracts. In other words, the counter party, which
is taking the liability of the contract, is not the Governmentit
might be, because it might be a central buyer, although it probably
will notit is the supplier.
It comes back to the notion that this is not
so radically different from a low carbon obligation. Essentially,
the suppliers are required to buy this stuff, it is just that
you are saying, "We will organise the market, which will
decide what you will buy, rather than you doing it for yourself."
That is the distinctionit is a difference of degree, not
kind. The RO, the low carbon obligation and the FITs in this framework
are part of a family, but they are not strongly distinguished
ways of doing things.
Q87 Sir Robert Smith: Is there
an argument for doing without FITs?
Professor Helm: My argument is
that you need long-term contracts. There are deep reasons for
needing those, regardless of whether you are worried about climate
change. You need them to underpin the sunk cost, and to get the
cost of capital down, which you rightly identify as a core issue,
and which is mentioned only about once in the whole document.
You need those contracts. If you want to call the FITs a long-term
capacity auction, great, I'll call it FITs, but that is not the
same as the Government's setting interventions such as banded
Let's think about the cost to capital. If, as
I suggested in a different context, the total capex for our infrastructure
by 2020 in this economy is £500 billion, which is more than
twice the usual spendit is a huge ask1% on the cost
to capital would be £5 billion per annum. That swamps any
other cost consideration you could think of. The NETA market,
particularly for entrants and for some of the technologies produces
very high costs of capital.
Once the things are complete, we want to refinance
them at relatively low cost if people are obliged to buy the off-take.
I have suggested separately that, at that point, particularly
for wind, one way of cascading down the capital costs would be
to have the equivalent of a utility-style regulatory asset base.
I propose that that could be run through the green infrastructure
bank. It is essentially the refinancing of completed projects,
and if they are backed by the contracts that come out of the energy
market reform, we have a way of really making an inroad into the
cost of offshore wind. The point is not just whether it is very
expensive to do offshore windyes, it isbut that
we are doing it in a very expensive way. So, on the cost of capital,
we can use the green infrastructure bank at the refinancing point,
building on the concept of the regulatory asset base, to bring
a really substantial change to that £100 billion cost number.
That is an expansion of the subject, but it
is important that we see the market reforms, the green investment
bank, the carbon price, the EU ETS, the overall targets and the
global-warming problem as part of a whole, and not design the
right answer for each bit and hope that they add up at the end.
That is the classic example of where the green investment bank
will come to bear.
Q88 Dan Byles: I am conscious
that we are short of time, so I'll be brief. Given the current
requirement for any new coal-fired power station to demonstrate
CCS on 300 MW of production, is there any point behind the emissions
performance standards on either of the two options? Will they
Professor Helm: There are two
or three points. One is how much of the coal is just going to
close, anyway. The other directives bearing on this close a lot
of it off, before you get anywhere near CCS and all the other
component parts. So, you might say, "It's going to happen,
anyway." The second side is to ask, "How far, as part
of the energy policy mix, do you see CCS as being crucial to the
frame?" You can think about that in two ways: either we are
going to say, "We're not having any fossil fuel unless we
have CCS, and if it's too expensive to have CCS we just won't
have any fossil fuels"; or you say, "We want to use
this as a programme towards really driving the technology forward."
With the best will in the world, CCS has become pretty marooned.
After four or five years, we have one competitor left in the competition,
and the station to which it is being applied is one of the oldest
coal stations in Britainit is hard to make it up.
If you think that carbon fuels are going to
go on beyond 2030, and therefore you think that CCS is an important
component, whether EPS rations out the fossil fuels depends on
the long-term FITs contracts that you are prepared to give to
these technologies. I am not advocating this, but if your energy
agency, the Government or whatever, wanted to reserve a chunk
of the market for CCS coal gas, there will be a long-term contract.
Therefore, the EPS is essentially redundant, except that you must
have one to carry on down the road. That is a bit belt and braces,
and I suspect, given that the binding constraint is below the
existing EU directives and that there is the question of what
you can do with the FITs, it is sort of superfluous, but probably
not doing any harm.
Q89 Dan Byles: But surely
it creates an additional policy risk. As long as it is there,
there's a fearwe have talked about the need for long-term
investment confidencethat it might be ratcheted down over
Professor Helm: Yes.
Dan Byles: So it represents a policy
risk, because there could be a disincentive to investment.
Professor Helm: You're absolutely
right. The important point is not the effect on coal, but the
effect on gas. The ambiguity hereone is aware of the discussion
before the Government's documents appearedis that CCS might
be applied to gas. That would raise the cost of capital for a
gas station. On the other hand, the gas stations being built now
are so competitive with everything else on the system, that if
CCS was not to be applied until 2025given that you want
to get nearly all the fossil fuel out by 2030, so there would
only be about four years leftit is probably still worth
building the gas station.
In a sense, on the one hand there is a lack
of clarity. Anyone who is interested in markets delivering at
low cost wants clarity. On the other hand, there is a fundamental
reason for that lack of clarity, which is that we do not actually
know a lot about whether CCS is going to work, but in 2020 we
might well do so. If we discover in 2020 that CCS is really what
we have to do, and that emissions are at a level where we really
have to act fast, it would not be unreasonable to use that instrument
in 2025 to ratchet it up. I am therefore more relaxed about that
bit than I am about the contract. The driving force is the FIT
long-term contracts. They are what drive the market. The carbon
price and the EPS are additional bits, but the meat is in the
contracts and that is what investors will be interested in, and
what drives the costs of capital.
Q90 Barry Gardiner: How successful
do you think that Ofgem has been in introducing real liquidity
into the market?
Professor Helm: Not very, but
then Ofgem was the key trumpet blower for NETA. The problem is
NETA. It is part of the folklore that we had an old market with
the pool. Because its capacity market did not work and people
were using market power in that market, which the pool revealed
beautifully, all that system was considered bad and NETA was perceived
to be good. Ofgem pushed NETA very hard. NETA replaced a compulsory
energy marketyou had to sell into it, and you had to buy
out of it, therefore, by definition, it was liquid and transparentwith
the opposite. You could vertically integrate; you could bilaterally
contract; you could pluralise the contracts, and that has the
inevitable consequence that entry is virtually impossible. You
cannot get liquidity and transparency through those fiddly little
mechanisms back to the degree necessary for a functioning market.
It also leaves us in the current position.
Under NETA, how can the generators prove that they are not abusing
market power, and how can anyone prove that they are? They all
have different contracts. They are all pluralised. The problem
for Ofgem is that, having finally admitted in Project Discovery
that security of supply would not be achieved by the marketit
claimed for a long time that it would beit now has to go
one stage further and admit that liquidity and transparency, and
NETA, do not mix. But since it advocated boththey are
part of its institutional historythe opportunity we now
have to reform Ofgem is as much about reforming the culture and
defining the constraints of that, as opposed to just fiddling
at the margins.
An important characteristic is that what happens
to NETA in the FITs long-term contract world and the capacity
market is not discussed in the document. If you have a proper
capacity market and your carbon price, NETA effectively collapses
into an energy-only market. That looks more like the pool. If
I had my way, I would push it just a bit further and go back to
where we started, but that might not be possible. We spent £500
million designing NETA and its net effects have not been successful.
That is an important component.
Q91 Barry Gardiner: What reforms
to the retail market would be required to introduce more liquidity
and to get new entrants, who are currently finding it difficult,
into the market?
Professor Helm: Trying to separate
the retail market from the wholesale market is not productive.
In other words, if the wholesale market is not working in a transparent,
liquid way with plenty of entry, you do not really have a wholesale
benchmark from which to work out what is going on in the retail
There were many flaws in the pool. The capacity
market was awful but, just because that capacity was awful, it
does not mean that all capacity markets are awful. Since everyone
could buy and sell in the pool, you could see what was going on.
Actually, abusing market power was pretty difficult. Indeed,
we discovered that market power was being abused, and we could
see what they were doing. I am not saying that abuse is happening
at the moment. We do not know. Getting the wholesale market
right is part of the package.
On the retail end, I am pretty pragmatic. You
want people to have the right to swap and switch supplier, but
how many people switch is not a measure of competition. Actually,
most people don't want to switch. We have seen this in the banking
case recently, toopeople suggesting that it is the fault
of the customers, because they don't switch. Most of us don't
really care who supplies our electricity, we just want to know
that it is being supplied in a reasonable way. The inertia in
the market is quite natural, because it is costly to switch.
There will always be an element of market power
and supply. It is going to be there for a long time. So, the real
issue is whether you want to carry on the current position, which
is what I call the "threat of regulation retail market"everyone
is being watched all the time and there is an inquiry every year
into what is going on. Do you want to go the whole hog and regulate
these thingsI think that is a step too faror is
there some intermediary bit?
If one really worries about that retail market,
people should be honest that one of their concerns is fuel poverty.
Historically, in all utility infrastructure industries, there
has always been some cross-subsidy. In the fuel poverty case,
with poorer customers or those who have difficulty paying their
bills and so onremember that, in my world, this green energy
would increase the problem substantiallyif you want to
do cross-subsidies, you can't do that and have competition. You
have to have levies and be explicit about what you are doing.
There is an honesty in that domain.
Going back to the discussion we started about
prices, if I am right about the cost of the green energy from
offshore wind flowing through to bills, we are not talking about
4.5 million people living in fuel poverty, but about 6 million
or 7 million. Once you start talking about such numbers, in a
decent society in which fuel, energy and heating are part of the
basic social primary goods for ordinary people, it is very hard
to live with that level of people in such an exposed position.
Historically, we always did a bit of cross-subsidy, just as we
do with water, broadband, housing, health or educationit
is part of our extended welfare state.
That issue should be honestly approached in
retail regulation, rather than pretending we're not really doing
that, and thinking that competition will solve all our problemsit
won'tor that you can proclaim it's competitive because
15% or 20% of people switch. Who cares? That's all a costit
costs those 15% of people to do something. That is a loss to the
system, which must be made up by additional benefits in bills
lower than would otherwise have been the case. That has never
Chair: We're out of time, I'm afraid,
but thank you very much indeeda very stimulating and provocative
session. I am sure that we will want to talk to you again, when
we have completed this inquiry, about some of the other issues
that you've touched on. Thank you.
Professor Helm: Thank you for