To be published as HC 749-i




Energy and Climate Change Committee

Investment in energy infrastructure and the energy bill

Tuesday 13 November 2012

Ian Temperton, Peter Atherton, Nick Gardiner and Ian Simm

Evidence heard in Public Questions 1 - 52



This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.


The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 13 November 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Mr Peter Lilley

John Robertson

Sir Robert Smith

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Ian Temperton, Head of Advisory, Climate Change Capital, Peter Atherton, Independent Energy Analyst, Nick Gardiner, Senior Director, Energy and Infrastructure, BNP Paribas and member of the Low Carbon Finance Group, and Ian Simm, Chief Executive, Impax Asset Management and member of the Low Carbon Finance Group, gave evidence.

Q1 Chair: Good afternoon. Thank you very much for coming in. As you know, we scheduled this session originally in the expectation that we would be having a session with the Secretary of State later today. That has been put back until next week at his request, but I think it increases the significance of anything you may say to us in that there will be time for us and others to reflect on what you have said. We will kick straight off, if you don’t mind. I don’t think we need introductions as we are not on television this afternoon.

Could I ask a general question, which is what do you feel the impact of reported disagreements between DECC and Treasury on various aspects of energy policy has had on investor confidence?

Nick Gardiner: I will kick off, if I may, from the banking point of view. We are an international bank. In my particular case my credit committee sits in Paris, for example. The difficulty for credit committees and investment committees is understanding the UK context. They can’t always make that political interpretation. From my side I am getting a lot of comment from investors and credit committees saying, "Do I need to be worried?" They are picking up the fact that it is appearing on the front page of the Financial Times. I think there is that broad nervousness about what is actually going on here and not really understanding. Often investment committees and credit committees don’t understand the political context. It is slightly easier for me working in London to be able to see a bit more of that picture, but I think the general comment would be there is a certain undermining of confidence because of that.

Ian Temperton: UK energy policy has historically been relatively all-party and relatively technocratic in its nature and when some of us last saw you we talked about whether the counterparty would work or not and whether allocation should be in one, two or nine stages, and those were the kind of things that clients would ask people like me. I think since then the kind of things clients will ask people like me is, "Are these guys on the same page? Do they really want this stuff? Have they met?" It has become exceedingly political. You would hope in this process of getting a Bill into a Act that the questions were becoming more technocratic not less, but they are becoming more and more high level in terms of people talking to people like us about whether they should have confidence in the sector.

Ian Simm: From an equity investor perspective, confidence going into the political disagreement period, if we can call it that, is already relatively low because I think the EMR process is seen as unusually complex and unusually protracted. The political disagreements have merely compounded an already quite difficult situation with regard to investor confidence.

Peter Atherton: I think it has been no great surprise to anybody from my client base in the large equity funds. As I have mentioned in front of this Committee a few times, because of the great conflict between the goals of the energy policy, climate change on the one hand and affordability and security of supply, my clients have been expecting that conflict to manifest itself in a huge political row at some point. It has in other countries already and the UK is perhaps overdue a revisit to those issues and a new debate about priorities.

Q2 Mr Lilley: Are you saying that investors are worried that the outcome of these discussions between departments will not result in as large a subsidy as they would like or that they are less certain about any decision once taken being adhered to thereafter? One is worry, the other is confidence.

Nick Gardiner: I think it is the latter. It is more the confidence that there will be a very clear regime, set of rules, that everybody can understand and work to, not the size of the subsidy per se. You look at the subsidy and you do the maths to work out how that might work, but I think there is broad support for setting out a clear, concise policy that everybody can have confidence in and that we can work to.

Ian Temperton: That is particularly important in the supply chain. I don’t think anybody thinks that the UK is going to go around reneging on contracts or legal commitments it makes to individual projects but, for instance, if you are investing in the supply chain you have to believe that the policy is going to be followed through on over multiple years because you want to supply turbines, for instance, to people who are building multiple projects. The truth is that where you see the biggest uncertainties and the biggest problems is in that kind of investment where they have to believe the policy will continue to be followed through on. I don’t think anybody thinks that a future Government is going to renege on CfD or not grandfather the Renewables Obligation. That is not the state we are in.

Peter Atherton: Given the time that has elapsed and the events that have happened since the goals were set in the mid 2000s to now, it is implausible that the policies debate could not reignite and it has reignited up to a point. That has happened in many other European countries and countries around the world. The equity investor base has been fully expecting it and now it is just seeing what it was expecting.

Ian Simm: To add to the points of the other speakers, we do invest in this area on the expectation that there will not be any retroactive changes. Investors are pretty agnostic about where they put their capital, so they are not looking for subsidies per se. If the economics of a particular project don’t stack up they will simply put their capital in another country and/or another sector. I would firmly endorse the point that the real issue here is about having the confidence that once the Act has been finalised and secondary legislation has been finalised there is a sufficiently stable investment environment to commit capital for 20 years. Investors are really worried that with the political debate that has come into the forefront in recent weeks, a future Government or a future administration will simply change the rules of the game again, which would then potentially undermine the value of the investments made in the next year or so.

Q3 Mr Lilley: The Government has not, and surely is not expected to, change the rules of the game retroactively, so why does that worry people? If they are going to know by 22 November or whenever what the rules are, why should they be apprehensive once they are made other than that it will not be a high enough subsidy? Effectively you are saying-this is a second question-no subsidies, no investment.

Ian Simm: There are two elements to that. One is that future changes to the rules may well affect the economics, either directly or indirectly.

Q4 Mr Lilley: Of existing-

Ian Simm: Of existing projects, because existing projects generally speaking take a degree of market risk and the complexities of the CfD need to be sorted out so that market risk is minimised or eliminated, but there is definitely a question mark in the eyes of potential investors as to whether that will happen in practice. The second issue is the issue of the risk-taking equation for those who are seeking to develop projects in the near future and they will be committing a substantial amount of capital on the basis that the realisation of the value from their investments will not happen until three, four or five years in the future. If the rules have once again changed by that stage, they may find that what they had anticipated in value creation is no longer available to them.

Q5 Chair: Gas is not expecting a subsidy. Is confidence among investors in gas also affected by the policy debate taking place in Whitehall?

Peter Atherton: Yes, certainly. At the moment nobody would build a gas-fired power station virtually anywhere in Europe because spark spreads are too low. No company in their right mind would bring forward a project to their board at the moment because it is wholly uneconomic to do so. Then you get into the debate of why are spark spreads so low-it varies market to market-and what are the expectations for those spreads going forward. In the UK you couldn’t possibly commit to a new gas-fired power station even if you had a very high degree of certainty that the spreads would recover very quickly because you have no idea what the policy context for gas will be. You have no idea what load factor it will have, what life an asset will have in five to 10 years’ time. Until you know those things, you can’t bring a project forward.

Also companies are acutely aware of what has been happening in Germany where the high penetration of renewables has killed the returns on fossil and nuclear generation. If the UK is going down a similar route, those with fossil assets and nuclear assets will be looking at that and trying to take the lesson from Germany and apply it to their economic models for conventional plans and nuclear plans in the UK-not new nuclear, because obviously that will be protected by the CfD-and look at what the implications are for returns on that. Until you can get some sort of sight of how those issues are going to be resolved, you will not see any new gas-fired power plant built.

Q6 Sir Robert Smith: On that point about nuclear, you are saying new nuclear is protected. Are you saying there may need to be some thought as to how to sustain existing nuclear?

Peter Atherton: If the UK very quickly replicated Germany and got that amount of renewables on the system very quickly and we saw the sort of impact on the wholesale power price in the UK as there has been in Germany, the returns on existing nuclear would be greatly diminished. When you life-extend a nuclear station there is a cost benefit analysis. There is ultimately a health and safety issue but, provided it is safe, there is a cost benefit so you will have to spend a certain amount of money to maintain it. That is weighed against the amount of profit you can make and that depends on the power price that you can get. If the power price is structurally depressed because you have a lot of renewables on the system then the cost benefit will flip over, so you will close faster than you otherwise would have and you may not go for that final life extension on the existing fleet. Obviously we have not built anything like the renewables in Germany but most of the companies that operate here are very acutely conscious of what has happened in Germany, and indeed in Spain and Portugal and increasingly Italy as well.

Q7 Dan Byles: You mentioned that this has happened in other countries and you have pointed to Germany. Does the fact that there are similar levels of uncertainty in other European countries slightly insulate the UK from this sort of crisis of confidence that you are talking about? If the same concerns going forward are present in other European countries, it is not like we are necessarily going to see this capital fly across the Channel to France and Germany, because all European Governments are in the same boat.

Nick Gardiner: I think there is a certain truth in that. The UK is not insulated as such but we are seeing, as has been said by other witnesses here, that there is a general condition across the European market and probably elsewhere. I don’t think the UK is necessarily insulated per se but it is not a unique problem that we are facing.

Peter Atherton: Share prices are always a good indicator of things and most of the share prices of the major continental-based power utility companies are down 50%, 60%, 70% from their peaks of 2007-08. The UK stocks are basically flat, so there is no doubt that the UK generally has been seen in the sector as a bit of a safe haven for the last three or four years. There are number of strands to that. We have not built that much in renewables so we have not had that much to renege on or not pay on. We have not had a tax grab by the Chancellor on the sector, which they have had in many of the other European countries. We have not had the decision of Germany to close nuclear plants. There is a whole range of reasons, but interestingly enough we do seem to have reached some stability now in places like Germany and Spain and what we have been seeing in the last few months is that the UK stocks have started to under-perform in the sector. Before I came here today I canvassed about three dozen of the major equity investors over the last couple of days and one of the themes that they are definitely talking about is taking capital out of the UK stocks and putting it back to work in what are cheaper stocks in Europe. That is not a capital flight issue, it is just a relative value issue, but certainly as part of that they are saying the UK risk profile is beginning to rise relative to the Continent.

Ian Simm: Just to add to that, over the last seven or eight years or so we have been investing money for 15 UK pension funds into the renewable energy sector with a pan-European Union mandate. To date we have not made one single investment in the UK. We have made a considerable number of investments around the Continent. That is for the simple fact that in our view the economics and the risks of continental European countries’ regimes to support the renewable energy sector are much more straightforward and simpler than those in the UK, even pre-EMR.

Q8 Dan Byles: So this is not an EMR waiting for the Energy Bill issue?

Ian Simm: In our view-and I am speaking from our own perspective-the Renewables Obligation was complicated and innovative with a degree of complexity that meant that we were quite tempted to other countries’ regimes. In simple terms, if you invest in a renewable energy project in Germany you get what is effectively a Government-backed feed-in tariff for 20 years, you have a guaranteed access to the grid, so you guarantee that you can sell all your power, and you have a KfW Bank that potentially is willing to lend you money. The Renewables Obligation was already pretty complicated. Unfortunately in our view EMR potentially is going in the wrong direction, although I think if work is done to sort out the challenges of market access and the ways that CfDs work in practice it could become attractive but it is still extremely complicated and is going to cause a hiatus, a further delay in investment appetite until the details and the potential unintended consequences are sorted out.

Q9 Sir Robert Smith: You mentioned the German advantage, but are there any other European countries?

Ian Simm: Yes. In fact most other mainstream continental European countries have straightforward feed-in tariff structures with guaranteed grid access so if you produce your renewable energy you have a guaranteed off-take, which is something that is not currently envisaged within the Energy Bill. That is a major issue, to be honest, for equity investors comparing opportunities around the European Union.

Q10 John Robertson: Mr Temperton, you mentioned about things being more political and, Mr Atherton, you talked about the conflict. All these things have been expected. The Energy Minister, John Hayes, and the Secretary of State, Edward Davey, have publicly disagreed over the role of wind power in the UK’s future energy mix. Has this had any effect on investors?

Ian Temperton: Yes. I was talking to someone this morning. The problem is that those things appear in their CEO’s press clippings. I was told one story about supply chain investors who were the UK representatives of foreign investors being called back to their continental capital cities to explain what was going on in the UK.

Dan Byles: Can they come and tell us?

Ian Temperton: I asked them the same question. That is very unfortunate and at the level of hundreds of millions and billions of pounds of decisions, which is what this Bill is hoping to kick off, we would all prefer not to be fighting through what the CEOs are seeing in their press clippings.

Q11 John Robertson: Even though Mr Davey said, "I lead a renewable energy strategy and I decide the policy, and the industry has heard that", what you are saying is that they might have heard it but they don’t believe it.

Ian Temperton: I mean, sort of-

John Robertson: Yes will do.

Nick Gardiner: I think it is useful when senior Ministers step in and make those comments. That does resonate. Clearly there are these divisions coming out. Senior Ministers trying to calm it down does give a certain degree of comfort but there is still this undercurrent of uncertainty among investors. I talk a lot to my own credit committee and investment committees. I am out in Asia quite often and because they don’t get our political nuance they really don’t understand what is going on, so trying to give them some sort of confidence-the waters are quite choppy at the moment.

Peter Atherton: I think it surprises nobody, so in that sense it does not have a huge impact compared to many of the other challenges faced, as Ian was saying. Compared to the EMR and all the other stuff, it is not a big issue. It does raise a practical issue. I don’t know if this Committee has had issues in getting Treasury Ministers to present to you, but there is an issue of access to Treasury because their input is opaque. I know one fund manager who met with DECC recently and ended the meeting early because, "It is a waste of time talking to you. We really need to speak to the Treasury", but the Treasury are unavailable. I think there is a practical element like that but the fact that there is an argument, a debate, is no surprise, and frankly in the middle and long term it is probably very healthy because-

Q12 John Robertson: What about the turnover of Ministers? I don’t think there is a Minister left in this Department that started it off with the new Government, and there has been a turnover in Treasury as well. Does that give confidence to people when they start looking at energy?

Ian Temperton: I think Greg Barker is still there, isn’t he?

John Robertson: There is always a drawback somewhere.

Peter Atherton: That is democracy, isn’t it? I don’t think that is a big issue. The policy, at the end of the day, has been incredibly consistent. This is one of the key policies that has had virtually no change on the election and not a single comma has been rewritten from the Climate Change Act or the individual directives. In fact, I would argue that the consistency of the policy is part of the problem because the policy has not evolved to take account of the very profound changes that have happened in the last eight years since the policy direction was set.

Q13 John Robertson: That fits in nicely with my last question. When investors say they need political and policy certainty, what does that look like in practice? What would you call certainty?

Peter Atherton: They ask for that, of course, because you want somebody to guarantee to give you a profit for the next 20 years. So everybody who is investing in this, the corporates, the consultants, the banks, demand certainty. Who wouldn’t? Every business in the world would prefer you to guarantee your 20-year set of profits. My own view is that certainty in this area is impossible because it is evolving so fast. It will always be very highly political, very highly contentious, because politicians in real life very rightly have to take profound account of affordability and security of supply whereas the policy actually takes very little account of that. Its focus is very much on the climate change objectives. I don’t think certainty is achievable nor frankly would it be healthy, but of course everybody wants it. Who wouldn’t?

Ian Temperton: If you end up in one of these dinners in the City, at the starter normally people start off grumbling about the Government interfering with everything that they do and by dessert they just want to be told what to invest in. EMR is set up to be like the latter.

John Robertson: Should we just start with dessert then?

Ian Temperton: Just start with dessert, yes. EMR is set up to be the latter. It is meant to be basically technology, projects, specific contracts the Government signs up for. I think when you are looking for people to commit what in the three main technologies this is targeted for is billions and billions of pounds, to get them over the line you probably need that kind of certainty. I have become more interventionist through this process because I think that is what is going to give people the certainty they need. As we have always said, when you have one of these contracts under EMR you are probably in a better state than you are today. I think one of the big things that is still unresolved in EMR is people having confidence about how they get one of these contracts and what that does for people developing and what it does for people investing in the supply chain.

Nick Gardiner: You asked what does certainty look like. Ian talked about the RO and we worked with the RO for a long time. I fully agree it was very complex, but as a bank we worked with it and we got to understand it. Now in this EMR world there is uncertainty because we do not know the detail that underpins that-this has been touched on by a number of speakers here-and what we need now is the level of detail that provides that kind of certainty. I agree with Peter’s point, you always have to recognise that there is uncertainty and the energy world is a changing space so you build in a certain amount of flexibility with that, but it is the detail of EMR that is lacking. We are promised that it is going to come out soon but we have been promised it is going to come out soon for a little while now. It does need to come out soon, let me put it like that.

Ian Simm: Maybe just looking at this from the other way round, policy certainty to me is the confidence that I have in a particular government that they will not retroactively change the policy that affects the investments I have already made. That, if you like, is the bedrock. Unfortunately that bedrock has been undermined in Spain where they did retrospectively change policy. The next layer is the policy certainty that I have that, if I am making an investment in the development of a project, by the time that project has developed the rules have not switched adversely so that my development investment has been wasted. That is obviously for a different type of investor. I think political certainty is probably a bit of an oxymoron, if I may say so, so we don’t really take account of that. The political confusion around this issue is a secondary problem at the moment. The real problem is what is the granularity of the Electricity Market Reform process going to lead to in terms of expected returns and risk.

Peter Atherton: When we see the size of the Government deal for the first round of new nuclear we will have a sort of CfD-type arrangement. There will also be several other arrangements around it and I very strongly suspect if the deal gets done, when you look at those arrangements in the whole it will look very much like a regulated asset. Essentially what the Government will be doing is, through a series of mechanisms, locking in a rate of return on the investment, not just providing a revenue certainty. If it gets done it will look like that and in a way that is the sort of level of certainty that you may end up having to go to across the piece, which is to make these assets look like regulated assets. If you are going to make them look like regulated assets, then frankly you might as well make them regulated assets.

Q14 Dan Byles: I am a bit intrigued, Peter, by the point you have mentioned a couple of times that in some ways this political row was expected and overdue. Is there almost a sense that it is a bloody good job we are finally having it? Until it came, the very fact that the UK was the only country with its head in the sand, not recognising that the world has changed in the last few years, might in itself have been a risk because everybody must have known at some point they are going to pull their head out of the sand, look around and blink and realise the world has changed. Getting this kind of row and settling the dust on exactly what the way forward is out of the way now at a political level might actually be quite helpful. Is that what you are saying?

Peter Atherton: In my view, absolutely.

Ian Temperton: If I could slightly contradict. I think Peter and I have a slightly different view on how hard we should charge at mitigating emissions. I do think one of the problems with this Bill is it has everything attached to it; everyone has fallen for the "this is the one time in a generation we are ever going to do this" story and therefore everything has to be in it. I always saw it as an implementation bill. I think I have said when we met before that we had a bunch of targets, we were going to make a decent stab at meeting them, and this was about how we implemented some measures that got us there. When you see a lot of the rhetoric in the newspapers about what is going on around this, it is about a 2030 decarbonisation target and what happens, whether we have a specific renewables target post-2020 and those kind of things. My friends in the environmental movement will shoot me, but I would happily have those debates separately about where we go in the future if we could rein this back to something that is about implementing investment decisions over the next few years.

Q15 Dan Byles: You would not want to see this Bill delayed by further discussion about whether we should have a 2030 renewable target? That can be a separate argument?

Ian Temperton: Yes. That is certainly my view.

Q16 Dan Byles: That is interesting. Would people agree with that?

Witnesses: Yes.

Dan Byles: That is very helpful.

Q17 Sir Robert Smith: I had better remind the Committee of my entries in the Register of Members’ Interests to do with the oil and gas industry, in particular a shareholding in Shell. Certain organisations have been taking the counterargument that by having the 2030 target in the Bill it gives the investors an idea that the country still has a long-term strategy that it is aiming at and therefore what comes underneath it can still be clearer to investors than otherwise.

Nick Gardiner: I think the concern is probably to Ian’s point; it is more we are now looking for implementation of that Bill. It has to become boring again. The concern is that if you start to look at decarbonisation targets 2030, that is what happens after 2020, then you are going to see more delay. We are in a hiatus at the moment in terms of investment decisions so we need that Bill to be implemented and I think there is time for a proper debate, probably on a broader level, about what happens post 2020 out to 2030. It is about it is time now for implementation rather than delaying that implementation to consider 2030 or whatever else we are looking at.

Q18 Sir Robert Smith: One of the other things that may be coming up at the committee stages is to implement what the Prime Minister talked about on tariffs for consumers and whether there will be amendments to the Bill introduced by the Government at committee stage to try to make sure that all consumers get the best deal possible in the market. Do you think that is also going to delay things and maybe take the focus off the Bill?

Nick Gardiner: Will it take focus off the Bill? There are some very broad strands to the Bill and I don’t think what the Prime Minister has discussed there would deviate from the current underlying principle of what is in the Bill and what it is designed to do. I think there will be interesting discussions about that, we recognise that there is going to be further debate about how the Bill will look, but let’s start that process now. That is the message I am getting from my clients.

Ian Simm: This is a Bill that is essentially about electricity generation not about distribution and consumption, which is a separate but obviously connected area of policy. Our sense is that the Climate Change Act provides sufficient comfort about the direction of travel of UK energy policy over the next 20 years. The detail behind that and what it means for investments in 2030 can wait, particularly when the European Union is just now embarking on the process of trying to work through a policy for 2030 targets. I think it would be a mistake if the UK jumped the gun on that until there has been a proper debate at the EU level.

Q19 Sir Robert Smith: Do you think the Treasury should learn any lessons from the way it handled the North Sea in terms of thinking it could do the budget without talking to DECC, wade in with a windfall tax and then spend the last year and half talking with DECC and the industry and rebuilding the regime to encourage the investment that it had frightened off?

Ian Simm: There is certainly huge benefit for investors if DECC and Treasury have a close working relationship. One thing that is particularly concerning us at the moment is the Levy Control Framework, which in parallel to the Energy Bill appears to be putting another constraint on the investment sector as it applies to renewables in particular. We are concerned about the way that is implemented. If it is not properly co-ordinated between Treasury and DECC that could lead to adverse consequences and a further prolonging of the investment hiatus.

Peter Atherton: For every complaint I have received from institutional investors about vacillation on onshore wind, I have received 20 complaints about the language that is used against these companies in terms of their supply businesses. These are companies that have been used as a huge political football, maybe rightly, maybe their practices aren’t great, but they have been front and centre, conference speeches, Prime Ministerial speeches. These are the same companies you want to invest £100 billion and this language is not lost on those companies and is not lost on the investor community. It comes to the very simple point that if you invest in these companies and they do what you want them to do then they are going to make a lot of profit out of that. The return on capital may not be brilliant but their reported profit is going to go up and go up and go up. If you put £200 billion of new assets on the ground, the reported profit of the industry will be twice to three times what it is today. You have to have confidence that the politicians in five or 10 years’ time will happily defend both the prices that that will lead to for the consumers and the profits that the companies are making as a consequence. There is nothing that undermines that belief more than the rhetoric that is used about people’s supply businesses. Every CEO in the sector has the same anecdote. They arrive in London, they spend the morning being told by one set of Government ministries that they are a predator, they are horrible, and then go for lunch with another set of Government ministries and are begged to triple and quadruple their investment.

Q20 Sir Robert Smith: Another set or is it the same ministry?

Peter Atherton: They tend to describe it as different ministries. Everybody has that anecdote, because it is true, and that creates an almost impossible investment environment.

Chair: I too should draw attention to my entry in the Register of Members’ Interests about various financial interests.

Q21 Dr Whitehead: Turning to the Energy Bill itself-and we have touched on it on several occasions this afternoon-when we did our pre-legislative scrutiny of the draft Energy Bill we heard a number of views from investors and the financial community about the proposals as they stood at that point. Assuming that what was in the draft Bill goes into the legislation that will shortly appear before us, which of those elements would you characterise as showstoppers that would really need to be changed for the Bill to make progress in the direction that you think it should?

Ian Temperton: I think they are the same three things that we had last time, which is the counterparty, the allocation process and the route to market/reference price under the CfD. If they don’t have the counterparty right when it comes out in a couple of weeks’ time we should all go home. They were briefing a different solution, which was a bit better, the minute they published the old one, which was silly, so hopefully that has just been fixed. I think there won’t be a regulatory change to the route to market. The industry will have to find its way through the reference price and trading and liquidity, with potentially a bit of help from the reviews that Ofgem are doing. That is just life and we are all going to have to get used to. I think the allocation process is exceedingly important because there is going to be, particularly in offshore wind but perhaps other places too, an awful lot more development going on of projects than there is Levy Control Framework to pay for it. How that rationing happens and how that is done sensibly so that the supply chain gets the right signals and we get some growth benefits out of all this stuff is critical, in my view.

Ian Simm: As part of the Low Carbon Finance Group, we have been engaging with DECC in particular on those three issues that Ian Temperton refers to. Our general sense is that there is a solution to each of them. Therefore, provided the consultation carries on, we are cautiously optimistic that the Bill will turn into an effective law, although there is obviously still the secondary legislation to sort out there. The devil is in the detail.

Q22 Dr Whitehead: That was going to be my follow-up question in terms of the sort of changes that you think may be underway from the draft legislation onwards. Do you think they could make the changes necessary and place them in front of us as far as legislation is concerned in time for the timetable that we now believe is in front of us?

Ian Simm: The hiatus has been prolonged longer than we anticipated so in theory our view is the problems can be addressed to the satisfaction of the investor community. I think the Levy Control Framework is potentially the elephant in the room because, as was previously remarked, the risk that CfDs are not available to projects being developed by hard money to be spent in the next three or four years is highly unpalatable, particularly in comparison with the regimes in other countries. I don’t immediately see a solution to that, although to be honest the issue is relatively new compared to the other three points that Ian Temperton made.

Q23 Dr Whitehead: You have also anticipated my next question, which is that bearing in mind the Levy Control Framework is essentially outside the framework of the Bill itself and yet sits over the whole Bill as it develops, you mentioned you do not see any clear route forward. What sort of framework would you see or could you see as resolving at least some of those issues of the Levy Control Framework? Is it clarity for the next spending round? Might it be a different form of Levy Control Framework, or greater flexibility between years and over the spending round, or perhaps levies placed into a different context as far as taxation is concerned? What sort of mix would you see might be a route towards a resolution of that in the context of the Bill?

Ian Temperton: I personally think the Levy Control Framework is a perfectly sensible way to run a country, frankly, because this is a way of taxing off balance sheet the same money that could be taken as taxation another way if they were not spending on electricity bills. It is all right that the finance department gets to control that and there are not many businesses in the world that have visibility of their budgets out to 2020. If we get a Levy Control Framework settlement that does the next spending period, everybody will always ask for more, but I don’t think one realistically could. I have said all along that DECC is going to have to apply a lot commercial discretion in how they allocate these contracts, in the same way as anybody who has a finite budget to spend and has a few variables in it would have to in a business context. I think it is life, frankly. We have all taken a bit of time to get used to it. There are people who say that they did not understand about the Levy Control Framework until all this started. I think it is a reasonably sensible way to budget and we have to all learn to live with it somehow.

Q24 Dr Whitehead: Would you say those two points slightly conflict in terms of learning to live with the Levy Control Framework as opposed to the Levy Control Framework as the elephant in the room? Is that learning to live with an elephant or is that another room?

Ian Simm: One needs to recognise the different perspectives here. As an investor, the more certainty we have that we will have something to show for our work when we reach the endpoint of, say, a development investment the better. Therefore, the longer the period of certainty and the higher the ceiling the better from an investment perspective. Ian Temperton’s point is a public policy point, that one as a public policy advisor or a Member of Parliament needs to be conscious of the public purse. We live in a real world and of course I recognise that your job is to maximise value for money and look after the consumer, among other things.

Ian Temperton: It has taken a little while to dawn on the industry. In the Renewables Obligation it is institutionalised in something called head room that if you build more wind farms the target goes up, so you have an infinite put on the energy consumer as far as the RO as currently constructed is concerned. That clearly could not last and one of the problems with saying you should roll the Renewables Obligation forward is you would have to do something to it to remove that to make it fit within any kind of Levy Control Framework after 2017. We have an industry that has gone from whenever you develop something you are guaranteed to get paid because the target will go up to an industry that now has a budget. That has been a bit of shock for people in the renewables industry. I don’t think it is a shock that we should particularly hide them from.

Nick Gardiner: To add briefly to that, the truth is that financiers-certainly from my point of view-were aware of the Levy Control Framework but knew nothing of the discussions, how the levy control worked, how that fitted into this equation. To describe it as the elephant in the room is absolutely right because we really didn’t understand. What has happened now in this process over the last probably six months is that we have got to understand how the Levy Control Framework does fit in with overall renewables policy, with the Energy Bill, with EMR and so on. We have put it as another issue alongside the other issues that we have under EMR and I think there is more understanding of that now. There was a seeming disagreement between Treasury and DECC and the plea is to try to take the politics out of this as much as possible. I think that underscores what we have been saying throughout in terms of confidence for investment. The more politics that are in there the more uncertain that potentially becomes.

Peter Atherton: Even if Ian is right and DECC have found some ingenious solution to the counterparty risk and others, the solution undoubtedly, unless I will be flabbergasted, will be very complicated. So you will have a series of complicated mechanisms created by EMR overlaid by a series of other very complicated policies like the Levy Control Framework, like the carbon price, the carbon tax, like everything else. If you stand back and look at it in the round, if a corporate or a provider of capital has to try to make an investment decision on this, you have a hell of a lot of things, all of which are complicated, to take into account and it will take many years to see how those things interact with each other. Then, even if by some miracle the Government had optimised each of those policy mechanisms precisely on day one, as in 1 January 2014, very few of them are static so they will be changed over time. Even if you manage to optimise them on day one, it is very unlikely they will remain optimised going forward. So you have an absolute problem of a highly complex set of mechanisms all interacting with each other and then you have a relative problem of are our mechanisms more complicated than other people’s and whether capital might flow elsewhere.

Q25 Dr Whitehead: Would you regard that complication as a potentially eventual showstopper in its own right, the interaction of various policies, the overlaying of old policies on new policies and then the attempt to pull all of them into a carapace of control?

Peter Atherton: It will substantially limit the pools of capital you can draw on. There are lots of pools of capital that just can’t live with it and don’t want to take the attention. Let’s say if SSE was to go hell for leather into offshore wind farms, there would be lots of equity investors around the world who will not touch them because they just can’t understand how they are going to earn a return on that. There are lots of pools of capital. So you narrow your pools of capital down substantially and you are relying on specialists to interpret it for everybody and provide the funnel for the capital. That may be okay but it will make everybody’s lives very much more difficult and will probably push up the cost of capital as well. Nick, do you agree?

Nick Gardiner: From the finance side, I would agree with that. The plea has always been the more complexity you add to this the more limit you are going to put on liquidity. It is an easy plea to make but try to take the complexity out of it. Is it a showstopper? No. Does it limit liquidity? Yes. The RO is complicated enough and it took time for everybody to understand the RO and how that worked. If EMR as presented is a series of complexities then certainly liquidity could be an issue.

Ian Simm: I think in principle we are at a very opportune point in the financial cycle where the institutional investors, pension funds in particular, are very interested in infrastructure assets and raising their infrastructure portfolios at the same time as the utilities are keen to divest of assets to improve return on capital and deleverage, and banks are also seeking to get liquidity in their loan portfolios. If policy can be optimised to bring those parties together then you have a very natural transfer of ownership in the direction I just referred to. In that environment, a very complex electricity generation framework is likely to lead to delay because all those parties, or particularly the buyers, will want to see where the chips fall and what the consequences of the policy are, but provided the policy is the correct policy then in time the floodgates will open. It is a big gamble but if it pays off it could be a great outcome for the UK. Our fervent hope is that by engaging with the Treasury and DECC as a group of investors we can facilitate getting the details right.

Q26 Dan Byles: That leads very well on to my question, which is we know that there is a huge investment challenge facing the UK in terms of energy infrastructure. We have all heard different figures; £110 billion and many put that figure much higher. How likely are we, do each of you think, to actually achieve the level of investment in our energy infrastructure that we know we need? If we are likely to, where are we realistically going to be getting it from? Your comment there was wonderful. It sounded like if we get all this right a cornucopia of investment might come flowing.

Ian Simm: It is not just UK pension funds that are seeking to raise their infrastructure exposure. There is potentially a trillion dollars of interest in European infrastructure investments from pension funds just in Europe. If you multiple that by sovereign wealth funds and pension funds in other countries, there is a vast amount of capital potentially coming into European infrastructure. The challenge then, of course, is where is that capital going to go. It is going to go where the best risk adjusted returns are, which brings you back to the crucial comparison of the UK investment environment versus comparable investment environments in Germany and France, and in particular in the smaller European Union member states too. In theory energy can become an infrastructure quality investment. It helps if it is fully regulated. The EMR process is not leading in the direction of a fully regulated asset base but the CfD has the chance of emulating that to a significant degree.

Can we get £110 billion worth of energy infrastructure investment? Potentially over 10 to 15 years, yes, if the policy is right. Where is it going to flow to? It is going to flow to operating assets with proven operating track records, so it is going to initially flow largely to refinance operating onshore wind, which is a well understood, relatively stable asset base at the moment. In a few years’ time when the offshore wind sector has sufficient operating experience those sort of assets can be refinanced by institutional investors, as they are starting to be with certain guarantees in the Scandinavian markets in particular. There is no reason why the biomass co-firing sector couldn’t also make a major contribution to renewables over that timeframe.

Nick Gardiner: Ian has touched on a number of points. It is not just getting the policy regime right. There is still from the investment market, including from the banks, a general lack of education about renewables, hence Ian’s comment about looking at operating assets to start. Getting the policy framework right is only one part of it. It is understanding the other risk elements that go with that. With good experience you will see more investment monies flow towards it. Over that time there is the money available so potentially we will see that investment but you do need to get good operating track record underneath that and then you will see more investors attracted into the space.

Q27 Dan Byles: Is it the same source of funds that you would anticipate, pension funds, sovereign wealth funds?

Nick Gardiner: Yes, and insurance companies.

Q28 Dan Byles: Peter? You usually have a contrary view on this.

Peter Atherton: Zero chance. Not a cat in hell’s chance, not within the proposed timescales. Don’t forget the proposed timescale is 2020 for the famous £110 billion, £120 billion. It is not just that of course, you have ongoing expenditure. We will have to build gas plants. There is £40 billion in water. If you add up the total utility spend in the proposals up to 2020 you are well north of £200 billion, which means you need to be spending north of £20 billion a year from where we are now and current expenditure is probably about £10 billion to £12 billion all in. There might be some development of independents and things but the major utilities are going to have to do the heavy lifting on this. They have already set their capex plans for 2015, so they have already told the markets for equity and debt what they intend to spend for 2015 and in virtually every case those capex plans are lower going forward than they have been in the last four years because these companies are hugely retrenching. For example, SSE has told the market that it is going to spend absolutely no more than £1.5 billion a year out to 2015. If it was doing its share, it would need to be spending £4 billion a year. Is there a chance of a catch-up in the last five years of the decade where you are actually spending £30 billion to £40 billion a year rather than £20 billion a year? That is just infeasible. It is not going to happen.

If you say, "Well, actually we’re not worried about a 2020 date. What we are worried about is hitting what we thought we would do by 2020 by, say, 2025 and we have to spend £110 billion between now and 2025" then I might say there is some chance of that in a very fair wind. But what happens to the couple of hundred billion that you are meant to be spending in the 2020s to go to the next phase of the target? So in practical terms that goose has gone. She has flown away, she has been shot over France and she is being cooked in somebody’s oven at the moment.

Q29 Sir Robert Smith: You earlier touched on the difference in attractiveness of different parts of Europe. Is there any global examples of a better place for investors to go and put their money than the UK and Europe?

Peter Atherton: There are 1,000 places they are putting their money other than utilities and renewables. The utility sector is the most under-held sector in the market.

Q30 Sir Robert Smith: Globally?

Peter Atherton: No, in Europe. No, globally it has gone bang over the last few years. People have loved it because the rest of the world has gone to hell. But the European utility sector is unique among utility sectors across the world where it has had a very poor performance and it is massively under-held. I can’t think of a single fund manager who is overweight in the sector and the only way they could have lost more money than investing in utilities, of course, is if they had invested directly in renewables. If they had invested in renewable manufacturing companies or the spinoff companies that own renewables directly they would have lost even more money than owning utilities. The first thing is they are not putting any money in the sector. The sector is massively under-held. Fortunately one of the bits that they are overweight in has been UK stocks, for the reasons we have mentioned before.

Q31 Mr Lilley: On that point, how can everybody be underweight?

Peter Atherton: Pretty much.

Q32 Mr Lilley: If some people are underweight others must be overweight since the weight is the average.

Peter Atherton: No, against the benchmarks.

Q33 Mr Lilley: What benchmarks?

Peter Atherton: The industry benchmarks.

Q34 Mr Lilley: Investment has obviously changed since my day. You were usually against the share of the FTSE or the share of some international index, but you couldn’t all be underweight.

Peter Atherton: I will get back to you on the maths.

Q35 Mr Lilley: Please do. If the laws of arithmetic have changed since my youth that is big news. I have other questions but-

Ian Simm: From an equity perspective, the world breaks down into the United States, the European Union, China and Asia and the rest of the world. The United States is a very unattractive market for renewable energy at the moment because shale gas has depressed electricity prices and the tax credit regime is very unstable. China does have some attractive feed-in tariff type structures for renewables but it is quite difficult to take domestic equity positions in Chinese companies so they are quite under-held by foreign investors. Post-Fukushima Japan has embarked on a new energy policy in the direction of more energy efficiency and probably more renewables as well. They have just implemented a highly attractive feed-in tariff structure for solar, which is at a very high subsidy rate so that is drawing in a lot of capital at the moment. In the rest of the world there is a hotchpotch of different policies, most of which are leading to very small market potential.

So the European Union does stand out as a beacon of attractiveness-if that is not too clumsy a phrase-for renewable energy investments, which if they are structured along the lines of simple feed-in tariffs do qualify for many institutions’ infrastructure portfolios. Therefore, provided policy in the UK can lead to a regulatory environment that is "competitive" with those of our continental peers, there is no reason why a lot of global money couldn’t come here.

Q36 Barry Gardiner: Mr Atherton, I wanted to take you back to what you said about the tension between politicians getting up and criticising the Big Six and the need to get the Big Six to invest. You weren’t in any way suggesting that we should not be criticising the Big Six for doorstep selling or for multiplication of tariffs or for any of the other appalling practices that they have been engaged in, were you? I just want to be absolutely clear here.

Peter Atherton: No, I wasn’t expressing an opinion on whether the criticism was valid or not but it does have an impact on their-

Q37 Barry Gardiner: Does it really? They know what the rules are when they engage in the market, don’t they? They know what the rules are and they know when they are taking the public for a ride. Surely they would expect-god knows if the regulator is not going to do it then it is the job of this Committee and politicians to do precisely that, isn’t it? They can’t be thinking that they are so cushioned from the world that nobody is going to criticise what anybody can see is disgraceful practice.

Peter Atherton: Sure. I was not really referring to those individual criticisms of their supply practices. I was more referring to the criticism of the companies in terms of the bills and their profits.

Q38 Barry Gardiner: Some of the reasons that they have had those shady practices are precisely to maximise those bills and those profits, aren’t they? They are not unrelated. I will get back to you on that.

Peter Atherton: I am not here to defend the companies. What I was saying is when very senior politicians over a sustained period of time-and this has been going on for a number of years-are regularly critical of the companies in terms of their practices and particularly their profits, it does raise the question in the minds of their management and also investors, "If in five, six, seven, eight years’ time we make all this investment, our profits will be much higher than they are today. Can we really trust the politicians to allow us to make that level of profit?"

Q39 Barry Gardiner: That is taking us back to the discussion we had at the beginning about whether anybody is suggesting that the Government is going to renege on the regulatory certainty that it has given within a particular contract or whether it is going to change the regulatory structure. I would have thought your own remarks at the beginning made it clear that companies accept that once they have a contract that is going to be adhered to, the grandfathering and whatever are going to be stuck with by Government, and that the role of politicians is to make sure that this industry is a properly regulated industry going forward. What I am trying to get at here is what exactly are the political risks that you think do have an impact on the cost of capital? If you think it is us saying, "Clear off the doorstops" or "don’t multiply your tariffs" or "don’t have a LIBOR fixing rate style scandal" then I think we are in very different camps here, but if it is that we want regulatory certainty going forward then, yes, fine.

Peter Atherton: If the criticism of the supply businesses in pricing and so on is all completely valid then I guess fine, but there is a level of the criticism that is not just about individual practices. It is about the absolute level of profitability, it is about the fact that prices are rising and there is a trend by some commentators to co-impose rising prices and people’s profits. That does create a backlash among investors. They do get worried that companies won’t be allowed to make the level of profits that they will need to make.

Q40 Barry Gardiner: Surely they assess their rate of return on capital and the level of profits that they are going to make by looking at the regulatory structure and saying, "If we operate within that regulatory regime, if we take on contracts on this basis, then we know the return that we are going to get and we know we can make a profit and therefore it is a sound investment". What is not going to affect their actual decision-making is the amount of flak they get from politicians and anybody else for the gaming that they do and the desire that they have to push the envelope as much as possible within that illegitimately.

Ian Simm: Maybe just to jump in, there are two different constituencies of investment target here. There are the utilities, which in this country are vertically integrated and who have a range of interests along the value chain, as you are implying, and then there are the independent power generators who have no presence in the retail market. From the perspective of my company, we are acting as fund managers for a number of pension funds looking for investments in that second constituency. To my mind, the Energy Bill is limited to that issue and not to the retail market, which is a quite separate policy.

Q41 Barry Gardiner: Yes. Let me ask a more specific question. That is in relation to the letter that the trade associations sent through to the Secretary of State where they argued that the setting of a decarbonisation target by 2030 would, "Reassure financial investors by lowering the perceived political risks and could also reduce the cost of capital for decarbonising the power sector". It is open to anyone to comment on how you view those statements.

Ian Temperton: I said earlier that I would trade that and get on with stuff now, and I would. The answer to Sir Robert’s question earlier is, "Happily have both". My BlackBerry will be full of reminders when I get out of here from my colleagues who do international negotiations that bottom-up-only never works in this context, but I personally think far too much has been put on this particular Bill. We will all be here debating another Energy Bill in not very long for certain, we always are. It is about achieving something with this one in the technologies that we know we can deploy to decarbonisation and renewables targets, or have a decent stab at them, that we know we have now that concerns me most. If I had to trade the debate on longer-term targets for that then I would and I will take the abuse from the trade associations when I leave the room.

Nick Gardiner: Broadly the same answer and again if, by setting those targets and agreeing on 2030 or whatever target, that is going to delay the implementation of this Bill again, or further, that is a real concern. We are in this hiatus now and we need to break that cycle. That would be the concern. If it can be done speedily, which I doubt, then I would agree. That is not to say we should take our eyes off the 2030 ball, because this is all a process and investment is a long-term decision. What happens in 2030 or post-2020 is very important but, in terms of immediate action plans, let us move forward with the implementation of this Bill.

Q42 Barry Gardiner: Could setting a target like that reduce the cost of capital?

Ian Simm: The cost of capital is quite a difficult thing to pin down. As per my earlier remarks, setting a 2030 decarbonisation target now could fly in the face of what the European Union is trying to achieve with input from the UK and may be difficult to reconcile with the targets of the Climate Change Act. Cost of capital, in simple terms, reflects the risk premium that certain groups of investors want to put on a sector that has inputs from a wide variety of sources and what happens in 2030, to be honest, is a second or third order issue compared to all the other points.

Ian Temperton: Peter has been telling us, by implication, in his earlier evidence that the constituency, which he talks to more than I do, do not believe the current set targets for 2020, and a lot of them do not.

Dan Byles: It is a bit academic beyond that.

Barry Gardiner: Thank you.

Peter Atherton: It could become counterproductive because if you put targets that are implausible then what people worry about is, "Okay, you now have a target. That will require another range of measures and policies to push it forward".

Q43 Mr Lilley: I do not know whether your interest in investment is focused exclusively on low carbon or extends more widely, but the Government’s overall economic objective is to rebalance the British economy by rebuilding the manufacturing sector. Could you offer any view on what impact the high-cost energy scenario, which is implicit in making low-carbon investments attractive, will have on rebuilding our manufacturing sector when we are competing with, say, America or other countries that are not going down this route?

Ian Temperton: I think if it is Climate Change Capital I could dodge that one, couldn’t I? We need to do it cheaper. We need to manufacture more of it in the UK. That will help enormously. I have written some stuff on this recently. That is why the fuss is about allocation mechanisms a lot, because we don’t bring enough of the green economy benefits into the UK that we should do. We clearly have to do a number of these technologies a lot cheaper. It is unfortunate that what offshore wind currently costs has become known as the marginal investment in the energy sector, because it is clearly too expensive to be done at massive scale in the long term and the industry has to get its costs down.

To Peter’s point earlier, at the risk of joining in and defending the utility CEOs, which is never a good place to be, there will need to be deals between industry and Government that realise both that economic benefit and the cost reductions in a number of these technologies or we will end up with something that the general investment community does not believe can be delivered. That does require those two parties to come together, which is why I do agree with Peter to the extent that it wouldn’t be a bad thing if they didn’t spit nails at each other for a little while.

Ian Simm: The European Union has embarked on a journey of decarbonisation and my understanding is that our prospective costs of power generation in a low-carbon world will not be excessive compared to our European Union neighbours, and may well be cheaper given this country’s track record in driving value for money. Our competitiveness relative to other parts of the world is a much bigger issue that we should be working on with our European Union colleagues.

However, to Ian Temperton’s point, if we as the European Union can use these relatively high energy prices to stimulate demand for domestically-grown manufacturing sectors in low-carbon equipment, energy-efficiency-based equipment, equipment providing renewable energy, then we will generate the potential for an enormous export industry to other parts of the world at a time when other parts of the world are seeking to save money on oil imports and the threat of climate change would suggest that energy prices for everyone around the planet are going to be heading upwards. There is a potential for a competitive advantage as well.

Q44 Dan Byles: Come on, Peter. You have to comment on that.

Peter Atherton: Thanks very much. I think European policymakers have not even begun to think through the implications of what has been going on in North America and the energy revolution that is happening there. Gas is done now. The next one is oil and some of the forecasts out there are quite amazing. I will try not to be too optimistic but it is quite amazing that the US will be energy self-sufficient in a decade and a major exporter of not only oil but gas by the middle of the next decade.

For politicians this is tremendously important because, if I listen to you guys, the way you sell this European energy policy to constituencies, yes, there is a climate change element but I have noticed over the last few years that does not get much of a say. What you talk about mainly is the economic benefits, "This is going to protect us from high and volatile energy prices and fossil fuel prices. It is going to create these great new industries and there is a tremendous benefit in being ahead of the curve here and being the first mover in terms of creating new industries and export potential". It is predicated on this view that fossil fuels are going to become increasingly scarce and therefore increasingly much more expensive, and while we may take some economic pain in the short term there is a great benefit to be had in 15, 20 or 30 years’ time. That may still be true. However, if you have a comparator, which is North America, that is enjoying some very nice economic growth based on low-energy prices and that continues for a very long time then I would suggest it is going to be a bigger challenge to sell the impacts of high energy prices to the consumers of the UK and Europe because the basic idea that fossil fuels are scarce and increasingly expensive is proving to be not true.

Q45 Chair: Would you advise your clients making a 25-year investment to bet confidently that fossil fuel prices will remain at very low levels?

Peter Atherton: There is a significant chance that that is the case. One thing you can certainly say is it is not 100% certain that they will not.

Chair: That is not quite answering the question.

Peter Atherton: No. I have literally no idea where oil prices will be in 15 years’ time and nobody does. That is the point, but Europe has made a very big bet that they are going to be extremely high and/or everybody adopts a very high carbon price. That is a hell of a bet to take for the economy of Europe, particularly as we now have some quite significant evidence that that may well not be the case.

Q46 Chair: Do you regard that as a bigger or smaller bet than an energy policy that is going to say, "Fine, we will just burn gas for electricity and forget about everything else"?

Peter Atherton: A gas-based energy policy would be a considerably smaller economic risk, yes.

Q47 Barry Gardiner: But they are bets that mature at a different time, aren’t they?

Peter Atherton: Yes. Firstly, it would not just be gas because you always have other stuff going on. The world does have a lot of gas and we are very fortunate in this country that we have numerous different sources of gas. It is not as if we are, like the Ukraine, sitting on the end of one single pipeline out of Russia. We have multiple sources of gas and we know there is an awful lot of it.

Q48 Barry Gardiner: But the Stone Age did not end through a shortage of stone and the Oil Age will not end through a shortage of oil.

Peter Atherton: I agree. As a global population, we may decide to leave the stuff in the ground. The Americans, though, are not.

Barry Gardiner: "There yet". I just finished your sentence.

Peter Atherton: I have not seen any-

Ian Temperton: To agree and disagree with Peter, I think we are all becoming increasingly confident there are only enough carbon molecules locked in the Earth’s crust to destroy future generations-that is the good news apparently-and we seem to be able to get at them, which is the other good news. I would say the other thing that I understand this Government is about is not incurring debts for future generations in order to sustain the standard of living that we have today. That is what the environmental agenda is fundamentally about. It should be a very easy agenda for this Government to pursue, frankly, because that is what the entire climate change agenda is about, which is not incurring environmental debts in the future in order to have a lifestyle today that is unsustainable without future generations being able to pay those debts back.

Peter Atherton: But if you have structured lower economic growth than you otherwise could have had you are incurring financial debts for future generations.

Q49 Dr Whitehead: How do the capacity payment provisions in the Bill fit in with that scenario, in your view?

Peter Atherton: In what way, sorry?

Dr Whitehead: Are they necessary as part of the legislation? If they are necessary, how might they be structured in order to take account of what you said about gas availability? If they are structured in that particular way, at what stage in the process do they come on stream and indeed how might they be prevented from leading to such an over-supply of gas that we might live to regret it, or are those considerations that you do not think are relevant to the discussion?

Peter Atherton: Shall I have a go? This is a classic example of intervention begets intervention begets intervention begets intervention. There will not be a single power station on the system in a few years’ time that does not have its own support mechanism and a guaranteed capacity payment. Given the way we are going, you are going to have some sort of capacity payment. We will wait to see how it is going to be structured. I have not seen any evidence around the designs of the capacity payment as proposed that would lead you to build your base-load gas plant. It might lead you to build some peakers, but the capacity payment itself does not normally deliver you base load, even if that base load is going to be held there for winter peak periods. You will need something else, hence DECC have the gas strategy process underway. It will be capacity payment plus something else that would get you to build some gas-fired power stations. I do not know what that something else is yet.

Dr Whitehead: We will pass on the something else.

Peter Atherton: Well, we will wait for the gas strategy to be published. I am not sure when it is due.

Q50 Dr Whitehead: Will the evident existence of capacity payments themselves have any effect on what we were just talking about earlier in terms of the unlikelihood right this minute of people investing in gas-powered stations but the possibility down the line, as you say, if a number of people have capacity payments attached to their projects, of going in the opposite direction?

Peter Atherton: It could work both ways. Capacity payments on an otherwise wholly-owned economic plant on the system would depress the price for everybody, which I think is what one or two of the generators who are not particularly in favour of capacity payments have been arguing. Capacity payments are very complicated things to design well and to get the outcomes that you want to get from them, particularly if you include demand side into some sort of auction process, which tends to crash the price experience of capacity markets around the world. That could be seen as a good thing because the demand side is setting a price, but what it tends not to do is deliver you generation capacity that otherwise would not have happened. The design is crucial, but it will need more than a capacity payment to get people to build more CCGTs for sure.

Q51 Chair: We are running out of time and I know, Mr Simm, you need to go at 4.45pm. Feel free to do so and thank you for coming in. Just one final point. Treasury announced a UK guarantees programme in July. Do you think that is going to have any impact on investor confidence in the energy industry? It looks like the answer to that is no.

Peter Atherton: I must admit I do not know enough about them.

Q52 Chair: It is to provide some potential support for various large infrastructure projects, which could include energy construction.

Nick Gardiner: To be honest, I am not clear in my own mind what it extends to, certainly looking at the renewables. I think the present style of Government guarantee is of the type-I only know the real basic outline of this-that does send a very positive message out. I think the answer to the question is, for large renewables projects that could be that measure of support. I am bound to say the devil is in the detail on how that works and I do not know enough about that to comment substantively, but I think the overall message is it is a very strong message that has been given.

Ian Temperton: There are some changes in where the money is coming from, which is going to take some time to play out in the financial markets for this stuff and that stuff could potentially grease the wheels on that and speed it up, compared to how long it will take the market to get there in its own right. As with all instruments, applied intelligently they could only be good news.

Ian Simm: To add to that finally, there is definitely an issue about where the construction finance is going to come from for the next round of generating stations. Most of the discussion this afternoon has talked about the environment for operating projects, whereas we are facing an even more extreme challenge in finding the money to build these assets, particularly because the natural investors in construction, which are the utilities and to some extent the equipment suppliers, are balance sheet constrained. In that context the guarantee programme, which I understand is designed for a fairly limited period, would match the construction period quite nicely and, in that sense, it could augment the outcome of the Energy Bill quite nicely.

Chair: Thank you very much indeed for coming in. It has been very helpful for us.

Prepared 30th November 2012