CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 749-ii

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

Investment in Energy Infrastructure and the Energy Bill

Tuesday 20 November 2012

Rt Hon Edward Davey MP, Simon Virley, Jonathan Brearley and

PHIL Wynn Owen

Evidence heard in Public Questions 53 - 183

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 20 November 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Mr Peter Lilley

Albert Owen

Christopher Pincher

John Robertson

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Rt Hon Edward Davey MP, Secretary of State, DECC, Simon Virley, Director General, Energy Markets and Infrastructure, DECC, Jonathan Brearley, Director of Energy Markets and Networks, DECC, Phil Wynn Owen, Interim Permanent Secretary, DECC, gave evidence.

Q53 Chair: Welcome and good afternoon. Thank you very much for coming in. Firstly, can I draw attention to my entry in the register of members’ interests and in particular to interests I have in the energy and transport industry. Secondly, to be absolutely clear and on the record about the absence of the Minister of State, the Committee staff approached officials in the Department in the normal way about his attendance at this Committee and were clearly given to understand that he would attend; we then learned subsequently that he would not attend. I understand it is perfectly possible that neither you, Secretary of State, nor the Minister himself was aware that we had been given the impression that he would attend, but nevertheless we had been and of course, in the past, we did have the attendance of his predecessor, Charles Hendry, at hearings. In view of the fact that he will presumably be taking the Energy Bill through Parliament when it eventually appears, it would have been, I think, a very valuable opportunity this afternoon for him to have been present so we could have cleared up the possibility of any difference of view that people might have gained an impression about in the last few weeks. However, he has undertaken to appear before us at a later date, and we look forward to that. I just wanted to make that clear in advance.

Do you want to say anything to us first, or shall we just go straight into questions?

Edward Davey: Let’s just crack straight on.

Chair: Can I begin by asking you when you expect the Energy Bill to be published, and when it will have a second reading; will that second reading be before Christmas, as you recently told the CBI?

Edward Davey: I intend to publish it this month, and I intend there to be a second reading before Christmas. We are still in cross-Government discussions about the final package, but I still think we can publish it this month.

Q54 Chair: That is encouraging news in light of some of the rumours we have been hearing. This month means before the autumn; that really means next week.

Edward Davey: That is my intention, yes.

Q55 Chair: Given our concerns about the fact that a lot of time has gone by, if it gets a second reading before Christmas, I am sure the Committee would be very pleased about that. Will the full Bill be published on the day in question with supporting documents?

Edward Davey: Yes, there will be quite a lot of documents. When we published the draft Bill, you will remember that we published the overview document that gave a huge amount of background detail, with a lot of annexes for people interested in certain details and, of course, we will be publishing the Government’s response to your Committee’s report. Can I apologise to the Committee that we have not yet published that. It makes sense to publish it when we publish the Bill, I think it makes it a lot easier to read and to make sense of why we are responding the way we are, but I do know the Committee laboured very quickly, very hard and very diligently before the summer recess to get your response to the draft Bill to help the legislative scrutiny process, and I had hoped you would have had our response before now, but it is coming.

Chair: We appreciate that some of the delay may have been caused by factors outside your Department’s complete and total control.

Edward Davey: That is possible.

Q56 Chair: Do you expect that the Bill will actually be passed in this session, or is there a danger that it may become a carry-over Bill?

Edward Davey: I can confirm we intend it to be a carry-over Bill; that has been the plan for some time. We expect there to be Royal Assent towards the end of next year, depending on what Parliament makes of the Bill.

Q57 Chair: We have been told, and there have also been public comments, that there will be Government amendments that have to be introduced for the Bill, that it will not be complete on the day of publication. Does that run the risk that some unscrutinised, or much less scrutinised, measures will be introduced? We had the chance to look at the draft Bill, which we welcomed, and the outside world also welcomed that we had that chance, but if the Government is going to have to introduce Government amendments to the Bill, does that run the risk that there will be less scrutiny of some aspects in draft form?

Edward Davey: Potentially. I only say "potentially" because we have to see progress made on various consultations. The key area that you will be aware of today is that we published a consultation on reforming tariffs for consumer bills, and we intend that consultation to go over the next month and a half and to close in early January. We would expect to bring forward amendments to the Bill at the committee stage of the House of Commons process. If we can achieve that, and I believe we can, I do not think that will reduce the opportunity for scrutiny of those clauses because the Committee will have them. There are other measures that we may possibly end up bringing later on in the proceedings, but I can assure you we are very keen to have our proposals scrutinised, they benefit from scrutiny and we have had a lot of help from your Committee’s scrutiny of the draft legislation. When you respond, you will see that we have taken a lot of your concerns on board.

Q58 Chair: Thank you. We would like to ask some questions about the consultation paper that has been published today, but I propose to do that after we have dealt with some of the other matters which are more long-standing concerns for the Committee, although I am not saying the other matters are not of concern, but they are very new, since we only saw the document during the course of today. There will have to be some secondary legislation supporting some of the measures in the Bill itself; will there be a similar consultation process on that, or are they matters on which you feel you have already consulted?

Edward Davey: We will consult and publish them during next year, during the passage of the primary legislation, and it is probably going to be the third quarter of next year by the time we have got them out, but we will absolutely want to be consulting on them.

Q59 Chair: I am sure you will be as conscious as we are that there are a lot of investment decisions that are hanging fire at the moment, and may continue to do so until the final shape of the legislation is known. Therefore the longer this process takes, the longer the delay in some of that investment coming forward.

Edward Davey: I am acutely aware of that. One of my aims-both with how we are proceeding with the Bill and with the discussions in Government to reach an agreed position on a whole range of aspects of energy policy-is to deal with that very point. It has been made by your Committee, it has been made by many stakeholders, and I am absolutely determined that we can get to a point where people understand exactly what we are doing and have certainty, both in terms of policy and political commitment. I recognise, and investors and industry also recognise, that some of the secondary legislation was always intended to come later on next year, that has always been the plan. To that extent, we are completely on track to deliver electricity market reform for 2014 as we always said we would. However, we do want to give sight to investors and industry of all the policy details as soon as we can.

Q60 Sir Robert Smith: I should remind the Committee of my entry in the Register of Members’ Interests to do with energy, in particular a shareholding in Shell.

Last week we had representatives of investors in and they confirmed what our report highlighted on three major areas of the draft Bill that need to be sorted out if it is going to achieve the investment potential that was hoped for it. The areas were firstly the nature of the counterparty; secondly, the handling of Contracts for Difference and, in particular, how the Levy Control Framework would interact with the point at which people’s investment decisions would be made in terms of agreeing a Contract for Difference; and finally, the route to market for independent generators and how they could get a fair value out of a Contract for Difference compared with the vertically integrated companies. What has been going on to address these three key concerns?

Edward Davey: Let me start with the counterparty body; the evidence you took during the scrutiny period really confirmed what we had already understood from the industry, that they felt our multi-party counterparty model had some concerns. Although we disagreed with some of the analysis, we were absolutely determined to make sure that CfDs are an investable proposition. We have listened to what your Committee said, and listened to what industry have said, and we aim to address those concerns, and your Committee’s concerns. You will forgive me, some of the details of how we will proceed with the single counterparty model are part of the discussions with colleagues, and because nothing is agreed until everything is agreed in these types of discussion-that is exactly how it should be-I cannot go into too much detail except to reassure the Committee that we will be responding very positively in that area of the counterparty model.

You are absolutely right about the Levy Control Framework; getting the legislation is critical, getting the underlying financial regime is critical, and we will ensure that the Levy Control Framework is compatible with our renewable and low-carbon ambitions and now legal obligations. When people see the Levy Control Framework, they will feel that it does underpin the legislative framework and gives people confidence for investing ahead.

You asked about independent generators and whether they will be able to get routes to market; as I think I said to you when I came before the Committee previously, I was very concerned to talk to independent generators about their problems getting purchase power agreements at the moment, even before we get to electricity market reform. At the time of publishing the draft Bill and the overview document for electricity market reform, we also published a call for evidence on what was happening in the purchase power agreement market, and we have had a really good engagement with industry on that and will be coming forward with some proposals to assist. I do think that the Contracts for Difference will assist the market for purchase power agreements; this is something that is a matter of debate with the industry, but I do think it will assist, not least because it will reduce the risk profile of the investments and that will make them more attractive. However, because it is so important we have been paying particular attention to that, and when you see our publications I think you will recognise that.

Q61 Sir Robert Smith: Will you be publishing the responses to that consultation?

Edward Davey: I think we will be.

Jonathan Brearley: Yes, we will publish the response to the call for evidence.

Q62 Sir Robert Smith: When will that be?

Jonathan Brearley: I think it will be around the time of the Bill, but I will check exactly.

Q63 Sir Robert Smith: Right, so everything is heading towards next week?

Edward Davey: There will be a lot to read.

Q64 Sir Robert Smith: On the Levy Control Framework, the key concern was signals to the market going forward in terms of the supply chain, that there was a long enough commitment to make the supply chain viable in terms of ensuring cost-effective installations in the interim. Also, the secondary point was that a lot of work would go into putting together a renewable bid and then you would hit at the final investment decision; are you minded to bring forward some early indication of whether someone has a chance or not?

Edward Davey: There are two points there, the length and the process; the length of the period for the Levy Control Framework, which we are discussing, is until 2020. Giving visibility for investors of the underlying financial framework, the envelope of the control framework, in 2012 up to 2020 is quite some way ahead; I am not sure if that has been done in other countries, but we are certainly doing that and I think it will greatly assist and give confidence to the industry and to investors. On the allocation process, this Committee made recommendations that there should be a two-stage process. We have looked at that in some detail, and when we publish the Bill and the accompanying documents you will see that we have responded very positively to that. There are two tensions to grapple with when you are designing the system for allocation, first of all you want to make sure that people actually do make those investments to come into the auction, or into requesting a CfD in the first place, and that they are not put off because the investment barriers are so big to start with. You have to make sure that people actually do come, but equally you have to make sure that people who win a CfD in an auction have incentives to go on in a reasonable time and to proceed with the investment. That was part of the problem when we had auctions in the past in this country: people were holding on to the rights that they gained and not going ahead and developing. There are two different things there, so the design has to ensure that there are no perverse incentives and they encourage investment, and we have taken on board the Committee’s proposal that a two-stage process was a way forward.

Sir Robert Smith: Thank you very much.

Q65 Dr Whitehead: When the Bill is published-I assume next week-and the supporting documents alongside it, I assume it will include an impact assessment, will there be information included in the impact assessment on a support mechanism and the effect that the levy cap mechanism may have on the long-term availability of CfDs?

Edward Davey: I think so, but I will ask Simon or Jonathan to confirm.

Jonathan Brearley: We will have the impact assessment alongside the Bill. There may be some further work to do once the LCF numbers are published, to look at how they impact on consumer bills overall, for example, because that interacts with a lot of other DECC policies. However, as we did with the draft Bill, we will be publishing an impact assessment that sets out the implications of EMR.

Q66 Dr Whitehead: Will there be a further impact assessment published on that effect?

Jonathan Brearley: The impact on prices and bills will be published at a later date, once we have worked through all the analysis. All of the implications of the EMR will be set out in the impact assessment as we did at the time of the draft Bill.

Q67 Dr Whitehead: Presumably there will be a second impact assessment coming forward at some stage?

Jonathan Brearley: Yes.

Q68 John Robertson: When you set this level figure, will it be on prices at that point in time, or do you have a cut-off date in mind for the figures that you will work on and this is what you are going to come up with? Or are you very flexible at the moment in relation to setting prices?

Edward Davey: You are talking about strike prices?

John Robertson: Yes.

Edward Davey: This Committee will be aware that the National Grid published a call for evidence for strike prices on 9 November this year. That call for evidence will enable them to put out a draft set of strike prices in the middle of next year; I know industry is very keen to see that. It is working rather like the renewables banding review, when there was a call for evidence for that; it is quite similar to that. They will publish their draft strike prices in June next year, I think, and those will work up until 2017.

Q69 John Robertson: Based on?

Edward Davey: Based on the evidence they receive of costs of production. Simon will go into more detail, but to give you a full answer, after 2017 as we move to technology specific auctions, the strike prices will be determined in the market.

Q70 John Robertson: It is therefore to the Big Six’s advantage to bump up the prices now. Would that be a fair assessment?

Edward Davey: I think we are confusing two different prices, unless I am misunderstanding you. There is a strike price, the ones that the investors will get if they invest in offshore wind or a nuclear power plant for example, but the prices the consumers pay is a separate thing.

John Robertson: I understand.

Q71 Christopher Pincher: Staying with the investment community for a moment, when we have seen both publicly, and privately, members of the community, they have shown, it is fair to say, a degree of caution about the appetite to bring forward the famous £110 billion’s worth of investment and infrastructure by 2020, which is a lot of money over a very short space of time. Do you share their concern?

Edward Davey: No. If you look at what has been happening in the energy sector in recent years, we have been stepping up the pace in the way that we are going to have to in order to reach that £110 billion figure. In 2011, Ernst & Young estimated that there was £10 billion invested in the power and gas figure; that was a 20 year high of investment. Just very recently there was a report by Taylor Wessing on clean tech investment, and it showed that the UK was ranking first in Europe for project and asset finance with all of the top four project finance deals in the third quarter of this year. The performance is continuing with the UK being the star performer, and if you look at the way Hitachi decided they want to invest in Horizon, if you look at the Carrington gas fired power station that the deal closed on very recently, and if you look at today’s announcement by Areva for a new offshore wind turbine manufacturing plant in the east of Scotland, these are investments that are being announced now. In terms of the rest of this decade, one of the witnesses you spoke to-Ian Simm-said there were potentially trillions of dollars of interest in European infrastructure and investment from pension funds, and then he talked about the money that sovereign wealth funds across the world might also bring. I have to say that the recent record, the current situation, and this future pool of money, which one of your witnesses referred to, gives me some confidence. If we get the policy right, and I believe we will, I believe the Energy Bill provides the right framework to incentivise that capital to come to the UK, then I think we will meet that £110 billion need.

Q72 Christopher Pincher: We will come to the policy in a moment, but just to remind you that Mr Simm said, "potentially trillions of investment".

Edward Davey: I am saying "potentially"; I cannot guarantee it.

Q73 Christopher Pincher: He also talked about the challenge of where the capital is going to go. Nick Gardiner from BNP Paribas said that over time there is money available, potentially. Peter Atherton from Future Energy was less sanguine; he said, "There’s not a cat in hell’s chance", of the money coming forward in the timescale. It seems that the messages from the investor community are mixed; you mentioned a number of potential energy companies, but the investor community that sits behind them are delivering mixed messages it seems.

Edward Davey: The investor community, and the figures I have shown, are coming to the UK and backing real projects. If I talk Hitachi, Carrington, Areva, and some infrastructure investment funds like Macquarie and Barclays Infrastructure who invested in the Walney 2 offshore wind farms; these are seriously significant funds coming now to the UK. When I talk to those types of investors, they like the reforms we are proposing. As I said to the Committee at my last hearing, these global investors-some of whom have never invested in the UK-like the Contracts for Difference instrument because they feel it is akin to a private contract, and they feel more confident in it and they feel it has greater longevity and certainty than the Renewable Obligation Certificate route that we have at the moment. They like the reforms; they think they are much more likely to reproduce the cost of capital and incentivise investment.

Q74 Christopher Pincher: You mention that is where the investor community are coming from. They also say that they are concerned about the framework of policy, is it going to stick? I am sure that Caroline Flint is glued to the television watching your evidence right now.

Edward Davey: Hello, Caroline.

Christopher Pincher: Have you been working with her to ensure this cross-party consensus so the framework does stick?

Edward Davey: I hope we can get that cross-party consensus. I think it is for Government to come with our proposals and one of the reasons why it has been taking a little while to report to this Committee in the House about the overall energy policy of the Government is because I want to make sure that we not only get it right, but that it will stick and that both parties in the coalition are satisfied with it and will take it forward in unity. That has been really important. I am going to make no secret that there has been some debate within the coalition and that is not surprising, two political parties coming together with different histories and different views, there are some issues-not just in energy-that are challenging. If we can get agreement, if we can do what I have described internally as the grand bargain, that is what investors and industry want to see. They want to see not just the policy stability, the stability that the Energy Bill will bring, or the financial stability that the Levy Control Framework will bring; they want political stability as well.

One of the advantages of a coalition with two parties committing to policies is that when you get that it will send a very strong signal. It is up to the Labour party to decide whether they want to sign up to that overall package of support, and I cannot speak for them, but I believe it will be a very attractive package, it will really incentivise sorely needed investment in Britain’s energy infrastructure, and therefore it will be very tempting to get that final part of the jigsaw, that political consensus, that you rightly say is important.

Q75 Christopher Pincher: In terms of where the money is coming from, you have talked about the appetite constructors may have to invest in infrastructure, but do you anticipate that the money will come from the balance sheets of those companies, or will it come from pension funds or from private equity investors or other sources? Where do you think the money is going to come from?

Edward Davey: Sometimes I am accused of creating a plan that is micro-managing everything and that I want to control everything; let me tell you that I don’t. In fact, what I want to do is move away from the system, which is quite statist, to a solution which is more market. Therefore, I am not going to tell you exactly where the funds are going to come from, that would be up to the market. I am sure they will come from a plethora of sources, whether it is specific investment funds, clean tech investments funds that we see around the world, other private equity, bank landing, or from balance sheets. That is exactly how it should be.

Q76 Christopher Pincher: But you are confident it will come?

Edward Davey: We have some evidence that it is. I am not just basing what I am saying on a wish and a prayer, I can point to the fact that investment in the UK was at a 20-year high last year, and there are a whole series of projects-nuclear, in gas, in renewables- that are coming forward; not just individual plants, but the supply chain as well. When people want to invest in the supply chains, as Areva wants to do, that is a pretty sure sign that they believe there is going to be a lot of power plants built on the back of the turbines that they have been manufacturing. The evidence is certainly with me at the moment.

Q77 Christopher Pincher: You say the money is going to come forward, but where is it going to go? Ian Simm from Impax Asset Management suggests that initially the most likely home for the investment will be in onshore wind, and then potentially offshore wind. Do you think that is correct, or do you think that the investment will be spread more appropriately?

Edward Davey: Again, you are seeking me to second-guess the market. I think there are a lot of attractive opportunities out there, in wind certainly, but also in biomass conversion, for example, and in energy from waste, in solar, and, of course, not just in renewables as well. I think we have a very attractive proposition for gas, look at the Carrington plant, look at what Hitachi showed, and remember how attractive nuclear is and whether people will invest in that. When RWE and E.ON announced that they were pulling out and wanting to put the Horizon project up for sale, there were lots of headlines saying this was a vote of no confidence in the UK’s energy policy, that new nuclear was not going to be built, and what a damaging sign this was. I took the time to speak to RWE and E.ON, and they made it clear to me that their decision was not based on the proposition that the UK was putting forward; it was not based on UK energy or nuclear policy, but based on decisions that related to policy changes in Germany. What we saw when they put Horizon up for sale is huge international interest, and in many ways it was a really positive shot in the arm for policy, because you saw many countries and companies taking a much greater interest in the new UK nuclear market than previously. Hitachi, I am told, paid more than many people expected they would pay, so I think that was a vote of confidence. There is another example of part of our energy policy that is currently receiving big sums of international investment. Don’t get me wrong; I am not complacent. We have to get this right, and it is important we reach the consensus you are talking about so people have confidence in the long-term energy and climate change policy, we need that stability and consistency, but we will be delivering on that.

Q78 Chair: I entirely accept that it is an encouraging sign that Hitachi made the announced decision. Nevertheless, they are still a considerable way off making a final investment decision about building nuclear plants here and will need to have some investment partners to do so, and any contribution that their nuclear plants might make to UK electricity generation is well into the 2020s, so in terms of meeting our needs over the next 10 years it is actually irrelevant.

Edward Davey: I readily accept that they are not going to put up a nuclear reactor in the immediate future; it is going to take some time, and they have to go through their generic design assessment process, as you will be aware, with the Office of Nuclear Regulation, like any company. That is exactly as you suspect; safety is our number one concern. At the press conference when we had Hitachi explain to the world why they had done this, they were looking at 2022 as a time when they thought they might manage to build and be generating. Their track record of building nuclear reactors across the world on time and on budget is very impressive; in the last 40 years they have built 20 nuclear reactors on time and on budget. We are going to have quite a lot of confidence in their track record, they have a very good Canadian partner, they have signed memoranda of understanding with Babcock and with Rolls-Royce, which is very good news for UK industry. You are right that it is not until the early part of the next decade, but nevertheless we all know that nuclear takes a little bit of time, but we are planning energy policy not just for this decade but for the next three or four decades and beyond. That is the only way you can work in energy.

Q79 Mr Lilley: Am I correct that these Contracts for Difference effectively socialise and nationalise the risks if market prices are lower than those established by the Contracts for Difference, and leaves the private investor the upside if prices are high?

Edward Davey: No, I don’t think that is how they operate at all. You have the strike price; if the market price goes below the strike price, then there are payments up to the strike price.

Mr Lilley: Yes, so the Government pays the difference. The taxpayer bears the risk but the price falls below the strike price.

Edward Davey: I was going to finish. If the wholesale market price goes above the strike price, the generator pays money back.

Q80 Mr Lilley: So it is pretty much a guaranteed return?

Edward Davey: That is a very important point, and I am glad you asked the question. With Renewable Obligation Certificates and that regime, when gas and wholesale prices go up, the renewable generator is just making more and more money; there is no clawback at all. Because of the way Contracts for Difference work, if the wholesale price goes above the strike price, then the consumer, effectively, is not paying for that.

Q81 Mr Lilley: That is helpful as I did not hear any of the previous discussions on this. Of the £110 billion investment said to be needed over the next eight years, what proportion of that is the result of us trying to decarbonise electricity production? Do you have a ballpark figure?

Edward Davey: I may have to ask my colleagues, I am not sure if we have that together. Quite a lot of it will be, that is true, but some of it will also be the transmission distribution system.

Jonathan Brearley: If you break down the £110 billion, about £75 billion is for generation and £35 billion is for the transmission and safety networks. Out of that £75 billion, a rough ball park in terms of the amount of build that needs to happen, I would say a large part of that is for low carbon. The amount that goes through the low carbon incentive framework is about £40 billion, but then you have private investment on top of that.

Q82 Mr Lilley: We are frequently told that the costs of renewables are coming down, and are already not hugely different from the costs of conventional electricity generation; would it not be worth-if they are set to come down-waiting until they are more competitive and then it will avoid a lot of these subsidies?

Edward Davey: There are two points on that. First of all, there are so many different types of renewable energy technologies that their cost profiles and their recent cost histories are quite different, so you cannot treat them all the same. For example, the cost of solar panels has fallen quite dramatically in very recent times; it is still quite expensive but it is a lot cheaper than it was. The cost of onshore wind had fallen, although it is beginning to plateau. We expect the cost of offshore wind to fall significantly between now and 2020, although because the third round is in deeper water will add some extra cost. You can see similar stories, whether you are talking about biomass or micro generation and so on. It is quite a complicated picture when you start going into the detail.

Your second point, on whether we should just wait and see if China opens more solar-panel factories and that brings the price down even more, is not a route that I would go down. It is true to say that part of our structure is also a technology policy, to try to bring some of those technologies on, and that has indeed happened in the past in a number of industries where judiciously well-targeted and well-structured subsidies have supported bringing technologies to market. That is essentially what we are also doing, and if we did not do that, we would not see some of the costs come down. Take offshore wind for example: unless you do it at scale you are not going to get the costs down, because some of the cost reductions are going to come from the industrialisation of the process-big turbine factories, bigger boats, and new techniques. It is not appropriate to just simply wait and hope that someone else will do it and that the costs will go down elsewhere. The UK has a massive potential with offshore wind, and the Prime Minister has made his support clear on many occasions for reaping that potential. In many ways, Britain has some of the greatest potential offshore, so if we can be the leader-and at the moment we are one of the best, if not the best, places to invest in offshore wind-we can create a supply chain and an export industry that will support the UK economy, not just as we invest in the energy infrastructure but going on in the decades ahead. I don’t think the case for delaying and letting China or America, for example, be the ones to bring on the technology is the right approach.

Q83 Mr Lilley: Do you believe that we are going to be the source of much of these new technologies that are coming on and that are going to bring down the costs, and if we did not invest now in the less mature and more costly generating capacity we would not get the less costly and more mature generating capacity in the future?

Edward Davey: I think it will be a different story in different types of renewables. With solar, for example, many of the manufacturing plants are abroad, so I am in no way suggesting that by subsidising solar we are creating a supply chain in the UK. However, there are certainly one or two renewable technologies where we really could be world leading, I am thinking, in particular, of tidal marine as well as offshore, and the investments going into tidal marine-relative to other renewable sectors-are still relatively modest, but the potential is huge and we appear to be leading the world in many aspects of marine and tidal technology. The other low-carbon technology where I think we are really right to invest is carbon capture and storage. We have a lot of experience offshore in the North Sea where we want to store the carbon and we have a lot of the skills in the oil and gas industry that can used in the CCS industry, and indeed we have a lot of academics, scientists, engineering companies-in fact I visited one just a few months ago-who have some real world-leading skills and experience that will be needed if CCS is going to be made a reality. So I think it is right that we invest in something like CCS as one of the low-carbon technologies.

Q53 Chair: Mr Brearley, just to clarify what you said in the figures just now, the £75 billion for generation and £35 million for transmission, of the £75 billion, you said £40 billion for low carbon?

Jonathan Brearley: £40 billion paid through the incentives.

Chair: Through the incentives, okay.

Jonathan Brearley: So that is combined with private money overall. A large part of that £75 billion will be for low-carbon generation.

Q54 Chair: But that includes nuclear in the low-carbon category?

Jonathan Brearley: That does, but remember nuclear won’t be coming on before 2020, so a lot of the payments for it will be happening later.

Q55 Dan Byles: I just want to tease out a little bit more Peter’s point. I understand the argument that if you want to get the cost of offshore wind down, you need to invest and upscale, but isn’t there a danger that by being in the forefront of that, we are locking in structurally higher energy costs for the UK, and that the people who will then benefit predominantly from the lower energy costs from offshore wind-I am talking particularly in the future-could be our rivals, that we are going to do the heavy lifting, we are going to get the cost down to £100 per MWh and then everybody else will come in and have structurally cheaper offshore wind costs than us, doing a great service to the world?

Edward Davey: Not an unimportant thing, by the way, because climate change affects the whole world, but I do think that we will gain skills and knowledge and expertise in how this is done. Let’s remember, I think it is going to be different in different waters around the world, and building on the experience of the oil and gas industry, we will enable our companies and our people to have the skills to go worldwide. It is very interesting when you talk to people in the oil and gas industry. The North Sea in many ways is their springboard to the rest of the world; they work in the North Sea, they get experience, they get skills and they get knowledge, and then they market themselves around the world. It has been British companies and British individuals having worked in oil and gas in the North Sea who have made a global business for their companies. I think it is not impossible to see that in offshore wind. Let’s remember these are quite early days, so everyone has to be careful and humble. I can’t predict the future and I am not going to say it is any guarantee that what we do in offshore wind will mirror what happened in oil and gas. I just make that point because I think there are potential advantages.

My evidence of another example: I was in Shetland two months ago, and I saw where the first onshore wind turbines in the world had been sited. There is a lot of wind in Shetland, and Shetland had realised that this was a really significant renewable opportunity. Unfortunately, this country in the early 1980s decided it wasn’t going to take that technology forward. Other countries took it forward, and now we are buying some of their turbines and technology and it is costing us more. That money is going to those countries and to their companies and to their shareholders. I do think sometimes that while I am a free marketeer and a free trader and believe in competition and so on, as a former Trade Minister I had some interesting discussions with other EU Trade Ministers who did not necessarily believe in free trade in the way I do. Nevertheless, I still think there is a case for investing in energy infrastructure, not just because we need to decarbonise, but there is an economic opportunity that can power growth in terms of the infrastructure and the jobs that are created for the actual projects, but also longer term can provide the skills in the supply chain.

Q56 Dan Byles: I do accept that, but there is also a cost to the economy of embedding structurally higher energy costs for many years to come that may not then be shared by some of our rivals. Have you done any dynamic modelling of the sort of benefits to the economy of developing this green economy and this green supply chain versus the cost to the rest of the economy from the structurally higher energy costs that the rest of the economy are going to have to shoulder?

Edward Davey: In terms of the dynamic modelling, and I may bring in my colleagues, who probably did some of the modelling, but let me make the longer-term point, because I have been focusing in on the immediate investment and what will come from that.

One thing that struck me-and I think I mentioned this at my last appearance-was that many people say, "This fuel or this technology is the one that is going to solve it all, and this is what we should go for", and I am always struck by how many people seem so certain about the future. I am not. I will tell the Committee I am not. The policies that I am devising and that I inherited from Chris Huhne and that the Department is working on are to be rather more humble and to take a more mixed-

Q57 Dan Byles: Than Mr Huhne?

Edward Davey: No, than people who think there is one solution. Chris is very humble. He thought that he didn’t have all the answers. I believe that our strategy of going for a mixed approach, a balanced approach and a diverse approach is the right way. Let me just give you one example, and I don’t mean to say that I know the future of gas prices-guessing prices is a bit of a mug’s game, as we can all readily admit to-but if one looks at what the independent analysts are saying, if one looks at what the International Energy Agency is saying about future gas prices, taking account of all the new finds of unconventional gas around the world, taking account of all those, they still see medium- and long-term gas prices as staying high or going higher. So if we were to put all our eggs in the gas basket, even though we would need to import increasing amounts of gas-I accept that, even though it is a question of having security as well-even if we did, I think that could expose the economy to other risk on the other side of the equation. So when we think about this and we do our modelling, we believe a more diverse approach is the best way to de-risk, if you like, the cost of energy for the UK economy over the decades ahead. But let me bring in Jonathan.

Jonathan Brearley: Exactly that. What we do when we model the impact of our policies is look at them under a wide range of scenarios of prices, based on the fact that obviously there is a lot of uncertainty out there. When you look at that, the cost implications look quite different under a high gas price world than a low gas price world. Equally, we do look at the macro implications that the policies are bringing forward. On the one hand, you have some embedded costs for consumers under some gas price scenarios, which have some cost, but equally, you do have a situation where at a time when we are trying to stimulate the economy and generate investment, you get a lot of investment now. That investment stimulates the economy now. Some of those costs happen later and therefore you do have some balancing act that you have to maintain. But of course we look at two things: a wide range of different scenarios, and what those different trade-offs might be.

Edward Davey: Can I add just one final point-because it has not entered into the discussion, but it must-and that is climate change. Many people, including myself, believe we do have to think about it in our policies. We have to balance the trilemma-as you will be aware, that phrase applies to energy policy a lot-of affordability for consumers and business in this country, for the economy, energy security and decarbonisation, but we have to address them all.

Q58 Dan Byles: I take it from your suggestion that we need a balance but you don’t believe it should be decarbonisation at any cost? Because of those three, we collectively-us and the previous Government-have only enshrined one in law.

Edward Davey: Our whole approach to electricity market reform is to move to low carbon, to decarbonise the power sector in the least-cost way.

Q59 Dan Byles: That is not the same. The least cost way could still be unaffordable. Is there a cost at which decarbonisation becomes a lower priority than energy affordability?

Edward Davey: At the moment, because of the arguments for diversity that I put forward, I think the trilemma comes together in many ways. I could imagine a point where they diverged, but we have not yet built up the resilience that will come from diversity that we need. So I don’t think we are near that point now.

Q60 Dan Byles: Do you see that, and I am not going to ask you what the figure is, but there is a figure of cost at which we would have to say, "We can’t afford to decarbonise at this rate"? I am not asking what that is. I accept that you say we are not near it, but do you accept the principle that such a cost is out there?

Edward Davey: There could come a point where some people felt that they wanted to reduce the emphasis on decarbonisation. It would take an awful lot for me to get to that point, I have to tell you, and I will be quite frank with you, because when I look at the evidence on climate change, when I discuss it with Ministers from across the world, I do think we have to take that into account. Very clearly, the cost of climate change is a real cost. I think it was reported in The Independent how 200 institutional investors around the world were coming together to argue that as we approach the climate change negotiations at Doha later this month, the world needs to recognise the cost of not taking action on climate change. Therefore, I do think if we were to get to this point that you are hypothetically suggesting, there will have to be quite a deep debate about whether or not we could afford not to take action. Personally, when I look at what the World Bank said this week, and when I look at what the CIA said within the last 10 days, what the International Energy Agency said in the last 10 days on this subject of the cost and dangers of climate change, I have to say I am very persuaded that we really need these investments.

Q61 Dr Lee: Can I just clarify a few things? You said that it is a fool who predicts future gas prices, is that right?

Edward Davey: I said it was a mug’s game, I think.

Q62 Dr Lee: Okay. In that case, how do you predict a strike price?

Edward Davey: I think it is certainly a different purpose. Gas price is set in the market. The strike price is deliberately aimed at securing investment and getting long-term returns.

Q63 Dr Lee: Yes, but it is set against the background cost of the market at the time, and in view of the fact that we have a glut of gas, what you said to Mr Robertson before didn’t make any sense. You were saying the strike price was not related to the consumer price. It clearly is, if you have set the strike price at a level that needs to-

Edward Davey: No, I didn’t say that. I was trying to work out what-

John Robertson: You didn’t.

Edward Davey: Thank you. Mr Robertson sometimes disagrees with what I say, but this time he has come to my aid.

Q64 Dr Lee: But the strike price does affect the consumer price, yes?

Edward Davey: Yes, of course it does.

Dr Lee: Yes. If you don’t know what your future price is, it is a mug’s game for you to predict future gas prices, how do you set a strike price?

Edward Davey: I will tell you how you set a strike price, as I was explaining to Mr Robertson. The National Grid is doing a call for evidence and they look at the construction cost of a nuclear power station or offshore wind and so on and get evidence of those construction costs, and they are immediate, in the near future. They are not years away. Those construction costs to construct a nuclear reactor are now, and what the strike price is trying to do is to look at those low-carbon investments that have high upfront capital costs-that is a lot of the renewables, nuclear, CCS and so on-and is trying to encourage those investments to be made. The strike prices are about that investment proposition and the cost of that capital that will be required in the near future, not about construction costs in 20 years’ time.

Q65 Dr Lee: I understand that. So essentially, you are using taxpayers’ money to incentivise investment from the private sector, that is what the strike price is about, yes?

Edward Davey: I think you could characterise that, except I would say it is not taxpayers, to be precise-and we should be precise-it is consumers, although consumers are often taxpayers.

Q66 Dr Lee: Fine. In that case, over the summer, if we just take nuclear, there was a paper that said if the Government borrowed the money, the strike price for nuclear would be about £90 per MWh, but if we went down the path of incentivising in the way that we still seem to be doing, it would be £140 per MWh. Now, that £50 difference is a significant sum of money. If you are going to do that, you can have a cheque from me, because that is a sure-fire better return in the next 20 or 30 years.

Edward Davey: Mr Lee, there is no chance.

Dr Lee: Dr Lee.

Edward Davey: Dr Lee, I beg your pardon.

Q67 Dr Lee: My point is that I don’t see how you can arrive at a strike price that is going to be fair to the consumer, to the taxpayer when you don’t know what the background gas price is, which essentially is going to be the energy of choice-I would suggest in the near future-because it reduces carbon by 50% from coal. That is my point, so I don’t know how you arrive at the strike price, because that really is key, because Mr Lilley made the point about, "Are you socialising?" Essentially, it depends where you set the strike price, doesn’t it, because if you set it very high, you are essentially socialising a lot of the risk, because you are going to be guaranteeing a return over a 20-year period.

Edward Davey: Let us be clear what the strike price structure is all about. It is about trying to reduce the cost of capital of low-carbon projects.

Q68 Mr Lilley: To the investor, by taking the risk on board through the consumer and the taxpayer. You can never eliminate a risk.

Dr Lee: My point is if there is a £50 difference in that case-

Edward Davey: No, I accept we cannot eliminate risk.

Mr Lilley: Someone has to bear it.

Dr Lee: £50.

Edward Davey: Yes, and how that is shared out will be determined by the mechanism.

Q69 Dr Lee: But £50 per MWh; if it was £5 or £10-

Edward Davey: Dr Lee, you have made an assertion that I don’t accept.

Dr Lee: That is fair enough, but if it was that significant and if somebody who is more learned in this area than me is making that assertion, it just makes me slightly cautious about the whole concept of this being an exercise in trying to reduce the cost and reduce the risk. I do not see it, because it does not-

Edward Davey: We have every reason to want to do that. I have no desire to have higher consumer bills, so I don’t quite understand the underlying assumption to your question, but let me be clear: I am very happy to look at this paper, but there is absolutely no way that I, as Secretary of State for Energy and Climate Change, am going to sign a Contract for Difference where we are paying a nuclear investor £140 per MWh. It is just not going to happen.

Q70 Chair: We are pleased to hear that. It is, however, the case that in relation to the nuclear industry, historically the majority of nuclear power stations have been built with some sort of Government or quasi-Government guarantee, and that given the success of the Coalition’s policy on reducing the deficit and therefore the very good credit rating that the UK currently enjoys, the Government could borrow money at a finer rate than any private company, however substantial. If the Government decided to fund the construction of a nuclear power station and then once completed turn it over to the private sector to manage, the cost of the capital involved in the construction would be substantially lower.

Edward Davey: I have to say the record of Government procuring nuclear in a cost-effective way is not a good one, and I make no apologies for trying to incentivise market investment to try to do a market-based approach to nuclear. We have a Coalition Agreement, as you know, and indeed it comes from the Conservative Party manifesto that there should be no public subsidy for nuclear. My party’s manifesto was less keen on nuclear, as you are aware, but in the Coalition Agreement, we took from the manifesto-that certain Members of the Committee stood on-there should be no public subsidy. My friend, Chris Huhne, told the House in October 2010 exactly how that test would operate, and therefore I am grateful for the Conservatives lending that policy to the Coalition and I will pursue that Conservative policy with rigour and enthusiasm.

Q71 Chair: Your predecessor conducted an exercise of masterly obfuscation on this point, and we admired his skill. I don’t want draw it out any longer, but simply to say that I think the Committee would like to see a minimum subsidy, but given that the cost of Contracts for Difference, as indeed the cost of ROCs, falls on consumers-who are almost synonymous with taxpayers-effectively the cost of the CfD regime is a sort of subsidy. I know it is helpful for voters perhaps no to be perceptive about the true nature of it, but what we would like to do is to see nuclear and other low-carbon generating capacity built at the lowest cost to consumers/ taxpayers.

Edward Davey: We believe our approach will do that.

Chair: Good.

Q72 Sir Robert Smith: Mr Brearley was talking about £110 billion and breaking down roughly how those figures came up, and he was saying that nuclear would not be much part of it, but surely with nuclear being an upfront capital, an element of that £110 billion is-

Jonathan Brearley: I think what we need to do is give you a note on the investment profile. What I was describing was the profile of levy payments or the incentives you would need to get the investment in place.

Sir Robert Smith: Yes, but I think the question was more-

Jonathan Brearley: Based on the investment, so I think we should come back to you with a proper breakdown of the £110 billion.

Q73 Albert Owen: Secretary of State, I for one am glad that the Liberal Democrats’ position on nuclear is now different to what it was before the general election. We are at one on that, but I want to come back to the theme.

Edward Davey: Can I clarify, I think there are Members in my party-

Albert Owen: I am actually agreeing with you.

Edward Davey: But I want to help you too, in the spirit of co-operation.

Albert Owen: I do not need help on nuclear, with respect.

Edward Davey: But I want to be clear there are Members of my party who have not changed their view, and I respect them for it. My concern about nuclear over the years has been the cost of nuclear, and one of the reasons why I think the position of the Coalition is so significant and so important to keep to is it is going to make sure that if we do, as I believe we will, have a third generation of nuclear power in this country that for the first time it will be a cost-effective nuclear industry, which I think we should all see, learning from the mistakes of the past. Most of my Department’s budget is on decommissioning nuclear power stations. We are now paying £3 billion a year-and will for many years ahead-cleaning up for the electricity that was generated in decades past. We cannot do that again, so we have to go through a process where we insist that nuclear is cost competitive, and that is what I intend to deliver on.

Albert Owen: All right, thanks. That wasn’t really any line of questioning. I was just trying to break the ice.

Edward Davey: Thank you for giving me the opportunity.

Albert Owen: We have thawed the rumour once more, but I will proceed on the lines that-

Mr Lilley: It was, "A Labour Member welcomes Liberal Democrats’ conversion to Conservative policy".

Albert Owen: No, I have always supported it, and I have been pushing it for some time, Mr Lilley, on that.

Q74 Albert Owen: Going back to the theme of Mr Pincher’s questioning with regard to future investments, and what you said about the Coalition now working as one on policy, what is your response to some of the media speculation that there is a lack of clarity in Government policy by what you have said, and indeed your Minister has said, on many of the big issues? We do not have the opportunity of the Minister alongside you today, but you have had to issue statements that contradict what your Minister has allegedly said on record, and indeed briefing to the media.

Edward Davey: I am in charge of energy policy, and when John Hayes was appointed Energy Minister I was pleased, because I had worked with him in BIS and we got on extremely well in BIS, and we are getting on well now. We do disagree on this issue, and is one of the reasons why I, on his appointment, changed the ministerial responsibilities so that I took charge for renewable energy strategy, which previously Charles Hendry had been in charge of, and planning and consent policy went to Greg Barker. I made those changes to make sure that should what turned out to occur, if it occurred, that we already had policies-

Albert Owen: It did occur after he was appointed.

Edward Davey: It did occur, but I had been rather prescient in changing ministerial responsibilities ahead.

Q75 Albert Owen: I am making a serious point here, because future investors are watching what is going on. I understand the difficulties in the Coalition, but you are one Government and you do speak on behalf of the energy sector in the United Kingdom. So I will push you further to say the reason you had to slap him down-and I think that was your term, or it was certainly quoted in the press-was because he had a certain view. Are you saying that the "Enough is enough" speech was wrong and it doesn’t represent Government policy, just for clarity?

Edward Davey: It doesn’t represent Coalition policy, no.

Q76 Albert Owen: Okay, so the Government policy in the future would be a further development of onshore wind?

Edward Davey: We will stick to our existing policy and-

Albert Owen: Can you clarify it? We are very keen to clarify the nuclear one. Can you clarify what your position is on onshore wind?

Edward Davey: We had the renewable banding review. We came out with our proposals. That proposed to reduce the ROC from 1 to 0.9 for the rest of the banding review period, and that will enable us to deploy more onshore wind over the next few years; and, just to show that we are making progress in this, we have 5 GW installed, we have 6 GW that has been consented and received planning permission and we expect to see constructed over the next few years, and there is 7 GW seeking planning permission and consent. I don’t believe all that 7 GW will end up getting consented. There is quite a high attrition rate of some of these planning permissions, so I don’t know exactly where we will end up. I can’t predict that. I am not in charge of local planning, and that is quite right it is in other people’s hands. But we said in our renewables roadmap that we expected-it wasn’t a target-that on the least cost path to meet our renewable energy obligations for 2020 that we get about 13 GW of onshore wind by 2020. One can readily see by 5 plus 6 constructed or received consent plus 7 that is in the planning process, we are likely to get to that. Therefore I think we are doing well and we will continue that policy. There is no cap, and there is no limit on it, but we want to pursue onshore wind in a sensible way.

Q77 Albert Owen: So the consultation that your Minister of State has enacted, and many of my constituents have responded in general letters, is not for the next seven-year period? Did I hear that right, we are talking about beyond that because of what is in consent now and what is being planned and the ROCs modification is-

Edward Davey: There are two consultations. Which one are you referring to?

Albert Owen: The one that the Minister referred to.

Dan Byles: The call for evidence.

Albert Owen: The call for evidence, yes, for onshore wind.

Edward Davey: There was a consultation, a call for evidence. We were both called for evidence. Published in September, one was on the costs of onshore wind. We had done the renewable banding review. We had analysed all the costs and we made our assessments. They were independently looked at. The Treasury looked at them and they agreed that we had it right, but there was something that we should look at again and so we have published that call for evidence. That will respond in March next year, and we will see if there is any new evidence that has been found through that process.

Q78 Albert Owen: If there is new evidence, you could change policy?

Edward Davey: Yes. If you look at the renewable energy order, I think it is 2009, it says-and this is the last Government’s legislation-that if the Secretary of State sees big changes in costs and a number of other things, they can reopen the ROCs. But let us be absolutely clear, so people are not in any way misunderstanding this: there would have to be significant evidence that the costs had changed from those that we discovered through a significant piece of work only earlier this year.

Albert Owen: That is very sensible.

Edward Davey: Do you want to know about the second consultation?

Albert Owen: Yes, please, briefly, because this is not really the line of questioning that I wanted, but go on.

Edward Davey: The other consultation was on community benefits. This is something that I feel very strongly about and it was to address a problem that should have been addressed before. Both these consultations were really my consultations, and I will be making decisions as a result when we get to a conclusion on them, how we can ensure that communities who are able to host onshore wind can get more benefits than they do at the moment. We wanted to look at best practice, because it varies dramatically across the country, and we want to look at different models, from ownership to other models. I hope we can through that process come up with something that begins to take some of the sting out of the onshore wind debate. I really don’t want to see onshore wind all over the English countryside, I don’t want that at all, but we do need to-

Albert Owen: Or Welsh countryside.

Edward Davey: Or the Welsh or the Scottish or the Northern Irish countryside. But I do think there are parts of the country that are more welcoming than others for onshore wind, and I think they should get the benefit from that.

Q79 Albert Owen: So just to move on, the Minister should probably have said, "Enough may be enough", maybe?

Edward Davey: I didn’t agree with what he said.

Albert Owen: Okay, but do you not acknowledge that that has caused some uncertainty for future investment?

Edward Davey: I tried in my remarks immediately afterwards and since, and again today, to reassure people that that is not the case, that is not the policy, and I was pleased that the Prime Minister, when he was asked a similar question at the Prime Minister’s Questions, made it clear that the policy hadn’t changed.

Q80 Albert Owen: Okay, thank you very much. You also said in your response to the previous line of questioning that you were a free marketeer, and when it came to energy, some of the Ministers in Europe have a more interventionist approach. Therefore, I would just like your comment on the excellent report-and I haven’t read it all-by Lord Heseltine on growth, and in particular recommendation 61, which I will quote. I won’t do his voice, "The Government needs to set out a definitive and unambiguous energy policy, including the supporting financial regime, to give the sector the certainty to invest". Do you agree with that recommendation?

Edward Davey: Yes.

Q81 Albert Owen: Okay. From that, you think there should be greater state intervention?

Edward Davey: No. I think we will be, in the levy control framework-as I said to Mr Smith-setting out the underlying support that the state will give, which does go on to consumer bills, but we are doing that with a market reform, which is designed to use those subsidies in the most effective way and we would see them on a declining path. I don’t want subsidies to go on forever. The whole point of the regime that we have constructed is to reduce the costs so that they become competitive. They are being successful. The costs of onshore wind versus gas, the differential has halved in five years. I talked about the way solar costs have come down. Some people are predicting that solar will be at grid parity by the end of this decade, so there is evidence that the way we are operating this support, this technology policy, is having the exact effect that we want it to, to make them far more cost-effective.

Q82 Albert Owen: So you and Lord Heseltine are at one in that. What specifically-I know we have discussed many other topics-in the Energy Bill will satisfy Lord Heseltine in that recommendation? What will be specifically in the Energy Bill?

Edward Davey: I haven’t sat down and talked to Lord Heseltine about the details of the Energy Bill, but I am sure he has a lot to contribute to the debate.

Q83 Albert Owen: No, sorry, my question was-if you misunderstood-what would you see in the Energy Bill that gives that clarity that Lord Heseltine feels was needed?

Edward Davey: Oh, all of it, effectively. The moving to feed-in tariffs, Contracts for Difference, this major reform, it is the heart of the Bill so that there can be these long-term contracts.

Q84 Albert Owen: So the Energy Bill will be a lot clearer than the draft Energy Bill, which was criticised by many of our witnesses?

Edward Davey: It was criticised, but it was also praised by your witnesses. I did read quite a lot of the people who gave evidence to this Committee who strongly supported.

Albert Owen: They were in a minority.

Edward Davey: That is obviously a judgment. We could argue about that, no doubt, for quite a while, but what was clear from the work that you and your colleagues did on the Committee was there were some criticisms and we are going to address those. There was impatience for us to get on with it, and I recognise that. People want to see more information. As the Chair said, they want to see the heads of terms for the CfDs, for example; they want to see National Grid get on with their work in producing draft strike prices. All these things they want to see, and I completely understand that, but I think we are moving at some pace and I think over the next few weeks, people will have a lot of their questions answered.

Albert Owen: Okay, thank you.

Q85 John Robertson: So no Government amendments then? You have taken care of everything?

Edward Davey: Oh, I didn’t say that. I had already admitted to the Chairman there will be Government amendments.

John Robertson: You just said the Bill was perfect. Okay.

Q86 Ian Lavery: I think the questions are going to get easier from here onwards. I would like to just ask on the issue of decarbonisation, there has been a lot of debate about whether the Bill should contain a target to decarbonise the power sector by 2030, and this Committee discussed the very issue and recommended that that was the case. Can we expect to see a decarbonisation target in the Bill for 2030?

Edward Davey: Of course that is part of the discussions that we are having, which haven’t been concluded, and as I said to Sir Robert Smith when we were talking about details of the levy control framework and single party counterparty body, I don’t want to prejudge those. That wouldn’t be fair on colleagues who I have been working very closely with, but I can say this: I have always made it clear it is my personal view that there is a lot of attraction to a decarbonisation target for 2030. I think the broad thrust of the Committee’s recommendations on this, what the Climate Change Committee have said on this, I agree with. I think that we have to work out in Government how we will take those sorts of ideas forward. As I say, I am not going to prejudge the outcome of our discussions, but I just know there have been an awful lot of industry that think this is a good idea and an awful lot of people who see the virtue, particularly for the long-term supply chain investors, of such a target.

Q87 Ian Lavery: I am sorry, but have you made a decision on this yet?

Edward Davey: No, I have made it clear that the Government, when it makes its announcement on energy policy, will address that issue.

Q88 Ian Lavery: It is early next week, isn’t it?

Edward Davey: It is indeed.

Ian Lavery: They are moving on apace.

Edward Davey: Mr Lavery, we have been at these negotiations for some time, that is true, but I think that is the right thing to do, particularly if there are issues that are difficult and sometimes controversial. I don’t apologise for discussing with my Coalition colleagues to get to a settlement where we can say to you, we can say to the rest of Parliament, we can say to the industry, the world, "This Coalition Government has now a settled position on energy policy and all these different aspects, and that is what both parties will proceed and implement". That is exactly what industry wants to hear, and I would like to do it together rather than dribs and drabs, if that is okay with you.

Ian Lavery: This is a very important issue.

Edward Davey: It is.

Ian Lavery: This is so important.

Edward Davey: I don’t disagree.

Q89 Ian Lavery: I think every MP in the room certainly had a lot of emails with regards to this issue, and we are only days away from it. Have you made a decision yet?

Edward Davey: I have said, Mr Lavery, that what I want to do is make sure that I don’t prejudge the discussions that have been very intense and I think very, very soon are going to come to completion. It wouldn’t be fair on colleagues if I anticipated what I think is going to be in that agreement. I am sorry, I apologise to the Committee that I can’t, but I really hope that you recognise that is the way to do business in Government, to wait until the final agreement has been made. Just a little bit more patience, and you will hear the result.

Q90 Ian Lavery: We met investors last week who shared different views. Some of them said they would rather drop the target if indeed it was to delay the Bill in any way, shape or form. What would your view be on that?

Edward Davey: I don’t intend for the Bill to be delayed.

Q91 Dr Whitehead: So if there is a settled energy policy, this won’t be difficult to resolve, will it?

Edward Davey: I am saying the discussions are aimed at getting that settled energy policy, and they will get that settled energy policy, and I think that is very important. I think it is obviously the case that in a coalition-I think it is the case in single-party Government, let us be honest-different Ministers come together, discuss the merits and demerits of particular positions and reach an agreement. It is much better that they do that together, either as a single party Government, or in this case, two parties, and then make those announcements to the world. There will be a settled policy and both parties will support it.

Q92 Dr Whitehead: So when there is a settled policy, would you put your money on a decarbonisation target of 50 or a variable target of 50 to 100 grams, or maybe a target that might turn up next year? Which one would you put your money on in terms of the settled policy that would emerge?

Edward Davey: Mr Whitehead, you are tempting me to try to do what I have just said I am not going to do, so I am not taking up the temptation.

Q93 Chair: Do you, however, recognise the risk that if a decision is taken not to publish a target until after the passage of the Bill, that will prolong uncertainty for many investors?

Edward Davey: I made it clear in saying what my personal preference was, but I am part of the Coalition and we have to come to a joint agreement on this, but the arguments for a decarbonisation target are indeed to give certainty and stability, and that is what many investors in the industry have said. However, I think there is more than one way to give industry certainty, and the critical thing that industry want-and maybe this is what was being said to colleagues in the Committee by other witnesses-is the Energy Bill; they want to know the legislative framework. That is critical to them; they want to understand the details of CfDs and so on, and they want to know the levy control framework. I think if they were to list their priorities, they would be at the top of their list, though there are some particularly in the supply chain sector who would like the degree of certainty that a decarbonisation target would give them set for 2030.

Q94 John Robertson: Secretary of State, I don’t blame you for all the mistakes that have been made and for the delay in time. It is not your fault. This was other people who have caused it, but we shouldn’t be having this discussion at this stage, so late in the day. We should have been having it before, and we could have had a lot longer time to scrutinise the Bill if you, or your friends beside you, had done their work the way that it should have been done in the first place.

Edward Davey: Hold on, Mr Robertson. That is unfair.

John Robertson: But we are where we are at this stage, so let us move on. Let us go to one of my favourite subjects: energy company profits. We have heard some suggestions that if Government is criticising the Big Six about making excessive profits, they might feel less inclined to invest in new infrastructure. What is your view on that statement?

Edward Davey: I hope the Big Six, as you call them, will invest in energy infrastructure, and I hope many other smaller companies and global investors will want to invest. I think the criticisms that people make of the Big Six profits, if they have to make them, they have to explain why they are making them.

What I am determined to do-as I have set out today with the consultation on tariffs-is to make sure that consumer, whether they are the customers of the Big Six or other energy suppliers, get a better deal. It is one of the issues that I have been most obsessed about since becoming Secretary of State, because I am absolutely aware that energy bills, reducing gas bill are a real concern for many people. I am very happy to go on at length, Mr Robertson, about the things that we are doing and want to do to help those consumers.

Q95 John Robertson: You might be getting an opportunity with some of the other questions, but I just want to know your view on that statement. Peter Atherton told us last week, and I quote, "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 the confidence that the politicians in five or 10 years’ time will be happy to defend both the prices that will lead to and for the customers and the profits that the companies are making as a consequence". Will the Energy Bill put future Governments in a difficult position?

Edward Davey: No, I don’t believe so, because the whole purpose of the electricity market reform is to make these changes that I think many people agree are right, whether it is on energy security grounds or decarbonisation grounds, to make these changes in the least cost way. Our analysis, and it will come out when we publish all the documents, will show that our approach will save people money compared to what would have happened if they had just kept the existing policies. So that will be evidence that the design of electricity market reform will reduce the overall cost of making this transition.

Q96 John Robertson: The previous Government, and at that time the main Opposition party, the Conservatives, were in agreement with the Bill, which meant of course the vast majority of the House of Commons was in favour of basically the road we are going down today. But we have now come to a stage a few years down the line where we seem to having similar arguments that we should have had and did have three years ago. I don’t know whether it is because it is a coalition, but I do know there is an Opposition party who is willing to go down the road of support for this Bill, provided it is sensible measures, and also on the basis of we are trying to make sure the lights stay on. For the life of me, I don’t understand how we are in this mess that we are in at the moment. Can you explain to me exactly why my constituents, not only are they pulling their hair out, they are likely to come and pull my hair out, about these energy companies and their profits, and why we have allowed it to get to this state of affairs?

Edward Davey: First of all, I don’t believe that energy policy, the Energy Bill that we are putting forward to Parliament is a mess. I think it is a very well-thought-through, well-considered document, and I believe it will deserve support from around the House, and if Labour colleagues would support it, I would welcome that. I say this to your constituents and all Members’ constituents, I am extremely concerned about making sure we can help people with their electricity and gas bills. How do we do that? We don’t control global gas prices. They set the overall price of gas and electricity, as the Committee will be aware, and so given that, we need to try to drive a wedge, if you like, between these global prices and the bills people and businesses pay. There are two ways really of driving that wedge to help your constituents. One is competition, which may not be welcomed by some of the energy companies you are talking about, but certainly should be welcomed by you and me, extra competition, but also by energy efficiency. So I think the Bill and some of the measures we are taking, the consultation today and other measures, will help your constituents with their bills, because it will foster and support competition.

Q97 John Robertson: You are saying the Government has a responsibility to communicate to energy consumers the fact that investment in new energy infrastructure is needed and what is likely to have the impact on energy prices? Because I don’t think we have sold that message out there, and by "we" I mean the previous Government and this Government.

Edward Davey: I think it is incumbent on all of us to have a grown-up mature debate with the public and in Parliament about the costs that we face in providing these critical services. Let’s remember between now and the end of this decade, 20% of our generating capacity is going to come offline. Coal plants are coming to the end of their lives and some nuclear plants. They have to be replaced if the lights are going to stay on, and I am not going to pretend there is not a cost to that. The question is: can we do that in the least-cost way, and are there policies that if there are costs attached to this transformation, replacing this aging infrastructure, can we try to shield and insulate customers and businesses from those costs? I believe we can, and I am determined we will do our very best to help those people.

Q98 John Robertson: Do you think the public believe you can do it, and do they believe you when you tell them so? If not, why not?

Edward Davey: I think we all know that the public, for quite understandable reasons, have lost trust in a number of people in our country in organisations. That includes all politicians-I think we can be honest about that-it includes the banking industry and it includes the energy utility companies, and therefore we should recognise that and try to rebuild that trust. I think part of the way of doing that is to be really active and recognising the worry and concern that people face over their energy bills. That is my responsibility and while, as I say, to repeat myself, I can’t control world gas prices, I can do my utmost to drive competition and drive energy efficiency. So policies like the Green Deal, which you will be aware of, policies like the reforms to tariffs, reforms to the wholesale-

John Robertson: No, I appreciate what you are saying.

Edward Davey: -all of that is designed to meet what you want.

Q99 John Robertson: I might want it. The question is do people believe it, and it brings me back to the question I asked, my second question, and that was where Peter Atherton had told us that his view was that in the next five to 10 years, if there was a change of Government, there would be a change of policy. Let’s not kid ourselves, the next Government-whether it is a few years’ time or in seven years’ time or whatever-will have to change their policies from the previous Government to get elected. Where is the investors’ feelings then when they can’t rely on the Government to remain as it is?

Edward Davey: I think I said in answer to-

John Robertson: Because you said yourself, people are going to be upset, and if they are upset, then the chances of them voting for you aren’t good.

Edward Davey: I think there are two things that address that issue that you have raised. First of all, there is an importance in building political consensus. I have talked about that already in answer to a previous question, and I really want to do that. I think this Committee has an important role to do that, because you will be the most informed Members of the House during the passage of the Energy Bill and hopefully we can bring colleagues up to speed, because some of these issues are complicated. But having an informed debate is critical so we can get that consensus.

The second point, the Contracts for Difference that are at the heart of the Bill are long-term contracts, and when they are signed, they are contracts that the Government is legally committed to. So that will give investors the certainty, and I can’t think of an example where UK Government have welched on those contracts. That is a critical part. If you look at Britain’s record as a country in this area, we have very high ratings as a country that can be trusted to keep its word even when Governments change and particularly on contracts. That is something that we have, over many decades and across Governments, have managed to keep. If you look at some of the analysts who are comparing different European countries and different countries across the world for regulatory risk and political risk, we score very highly. We do very well in those comparisons, and I think that is a tribute to all political parties.

Q100 John Robertson: It doesn’t help in the sort of political merry-go-round, as it were.

Do you accept what our Committee said: "DECC should spell out provisions for recompense should the CfD be dismantled as a result of circumstances beyond its control"?

Edward Davey: I don’t see that at all, so-

John Robertson: So you are not hedging your bets, then?

Edward Davey: I am not hedging my bets in that regard, no.

Q101 Dr Whitehead: Will the Bill, when it comes out, provide any clarity about when a capacity market or capacity mechanisms might be introduced?

Edward Davey: We said in December last year that we were looking at a capacity market. We made it very clear that there is a good case for having a capacity market. The absolute details and things that you have alluded to again, I’m afraid, are part of the ongoing discussions, that when we make our announcements-

Dr Whitehead: That is four things to resolve by next week.

Edward Davey: There are a few things. I have not-

John Robertson: A busy weekend.

Edward Davey: Maybe it will come sooner than that. What I made clear, I am not telling the Committee that one thing has been resolved and one thing hasn’t. I would not want you to go away with the thought that these are all outstanding. I have said, quite properly, that when you are having internal Government discussion the way that we are doing, which has been very constructive and very helpful for everyone concerned, when you are having that, you shouldn’t announce things in dribs and drabs. It is better than it comes together. Nothing should be agreed until everything is agreed. I am sorry, Mr Whitehead; just a little bit more time, and we will answer those questions in detail.

Q102 Dr Whitehead: Is the ongoing discussion anything to do with the cost of the different modes that a capacity payment mechanism might take, such as the double cost of a capacity market across the board, as opposed to strategic reserve arrangement, and indeed at 10 times the cost for consumer bills of one as opposed to the other?

Edward Davey: I might bring in my colleagues, who know more of the detail in terms of the cost, but the Department did an analysis of different ways of responding to the capacity-

Dr Whitehead: Yes, I am quoting from the Department here.

Edward Davey: Yes, and we believe that a capacity market is the most efficient way of doing that, and it is interesting to note-and I am sure that the Committee would be interested-that a number of other countries have gone down the capacity market route. Now, there are a number of variations on a capacity market. There is not just one model; there are a number of models. We have been studying them in some detail to work out which suits the British market and what we are trying to do, but let us be clear, when you are doing some of the modelling about the cost of capacity markets, some of the modelling shows that the cost is zero or sometimes slightly beneficial, sometimes a slight cost, depending on the assumptions, but it is pretty small beer. Why would that be the case? Because if you don’t have sufficient capacity when you get to the peak, the price of electricity goes to the most marginal generator, and the price can go up very, very high, but if you have a capacity mechanism, you avoid those peaks in prices, you smooth them and therefore consumers and businesses aren’t having to pay those high prices when you get to that peak period, and that offsets-

Q103 Dr Whitehead: This is a question about the relative costs of different methods of providing a solution to that precise point.

Edward Davey: I was trying to give you a comprehensive response, but if you particularly wanted to focus on different methods of tackling the capacity problem, I don’t know whether Jonathan might want-

Jonathan Brearley: I am happy to talk through the cost comparisons. The capacity market has two elements, so the amount of money it takes from consumer, but the impact it has on the wholesale price, and so you have a set of levies that are taken off consumers, but you also have a price reduction from consumers, for the reasons that the Secretary of State outlines. When you take the net impact, which is the two things together, the cost of the market-wide mechanism is roughly the same as the cost of a strategic reserve. But let’s also look back at the reason why we chose the market-wide mechanism. That was also because we feared that under sustained capacity problems, your strategic reserve could grow and therefore you have what we call the slippery-slope problem, so more and more plant becomes part of that market, and therefore it becomes unsustainable. So if we have big problems in the future, we think a capacity market is both more durable, but roughly net around the same costs as the strategic reserve.

Q104 Dr Whitehead: Do you not accept that the end product at the same cost relies on a theoretical calculation about how high the margin price might go as opposed to a practical consideration of a very different apparent level of cost in the years 2020 to 2030?

Jonathan Brearley: What we do-and I am not going to underplay how complex an equation that is-internally is we have a model that models the behaviour of the electricity market and investors inside that market, so we can get an accurate description as possible as to what those two implications might be. They do range, but as the Secretary of State said, when you look at the different estimates, they all are very small and close to zero, because you have these two off-setting effects. So therefore, in our view, the capacity market is both the most cost-effective and most effective in terms of protecting against security of supply.

Q105 Dr Whitehead: So if that is that clear, why is there still no finality about the process in time for the Bill?

Edward Davey: I think, as I said before, everything has to be agreed, and we are very near that point. I am not going to disclose particular individual items of what has been a long but very important negotiation, because by bringing all those agreements to the House when they are all finalised, I think that is the best way to both show respect to colleagues, but also to show the industry that we now have the certainty they have been seeking.

Q106 Dr Whitehead: What about demand-side measures? Is that going to be in the Bill, the question of possible legislation to encourage demand reduction?

Edward Davey: As you know, there are two aspects of demand-side measures, demand-side response measures, which links to the capacity market we have just been talking about, so that when we get to the peak, potentially demand-side measures can mean that we don’t get to the peak. We are very keen, as you know, on that and certainly in the design and thinking around capacity market, that has been very much in our minds. I think there is a really interesting innovation in that regard. I had the pleasure of meeting Mayor Castro from San Antonio in Texas this morning, and he was telling me about some demand-side response measures that they have been taking there, so there is some real potential there, very cost-effective ways.

Q107 Dr Whitehead: Yes, but that is not demand-side reduction.

Edward Davey: The second one is permanent reduction. Interestingly, he said the work they have been doing on demand-side response for the peak had also led to permanent demand-side reduction as well. We will be publishing, however, consultation on electricity demand reduction, as I said we would, I think at our previous hearing. This is in addition and supports the energy efficiency strategy we published last week, and we look forward to getting the Committee’s response to that consultation.

Q108 Dr Whitehead: Has any work been undertaken in the Department in addition to that particular consultation as to how demand-side reduction might be incorporated into legislation, which is in front of us?

Edward Davey: The whole purpose of the consultation is get people’s views on firstly whether we need something in the legislation to do this, and secondly, if not, what is the best way to get electricity demand reduction? So I have been very clear about this. I am not prejudging the response to the consultation. I think this is a really important area. When I took over as Secretary of State, I didn’t feel enough had been done in this area, and we have tasked a new team, created a new team in the Department to work on this, and they have been working very hard over the last few months to bring forward this consultation. Maybe it would have been better if that work had been done before, maybe at an earlier stage, but I can tell you, as Secretary of State, that work is now apace. But I don’t prejudge it, because I like to be honest, based on the evidence about what is the most cost-effective way of permanent electricity demand reduction. There is more than one way, and when you see the consultation paper, you will that it has both targeted approaches and system-wide approaches for people to give us their views, and of course depending on what we then determine as a result of that consultation, what is the best route, will determine whether or not legislation is required.

Q109 Dr Whitehead: So are you now saying that it is quite possible that there will be no inclusion within the legislation-depending on what is the outcome of the consultation process-of anything that assists with demand-side reduction?

Edward Davey: Let us be clear. As I said, with respect to the capacity market, there is certainly demand-side response, which could also be linked to demand-side reduction.

Dr Whitehead: I think we have been through that.

Edward Davey: Some people, for example, let us be clear, have argued that we should have feed-in-tariff Contracts for Difference for electricity demand reduction.

Q110 Dr Whitehead: I think what I am trying to get at, is it a debate between best methods of demand-side reduction that you are seeking to resolve through a consultation process in order to get the best result as far as demand-side reduction is concerned-

Edward Davey: Yes.

Dr Whitehead: -or it is in your mind that it may well be the case there is nothing in the legislation, in the end, which facilitates demand-side reduction?

Edward Davey: The consultation is aimed at finding what is the best route for electricity demand reduction and that may then require legislation, but I am not prejudging whether it needs legislation or not, because we need to find out what is the best route, the most cost-effective route and the quickest route to get electricity demand reduction.

Q111 Dr Whitehead: Are you intending to make any changes to the issue of the energy performance standard level in the Bill?

Edward Davey: Emission performance standard?

Dr Whitehead: The emission performance standard; or will that stay as it is?

Edward Davey: I am going to ask my colleagues. Where are we looking-

Simon Virley: No, no changes to the level. We are of course looking at the Committee’s recommendation on exactly how the carbon capture and storage demonstration projects feature within the EPS requirements.

Q112 Dr Whitehead: So no change in the view that this will not, for example, in any way affect gas-fired power stations in future?

Edward Davey: It will not, for example, in any way affect gas-fired power stations. I guess what was being said, and I now remember-thank you for that aide-memoire-is that we are not fundamentally changing the EPS approach and the levels but there was some debate, and this Committee was part of that, during the pre-legislative scrutiny about how it applied in different cases. We have reflected on those, and when we bring forward the Bill you will see the result of those reflections.

Q113 Chair: You mentioned meeting Mayor Castro of San Antonio yesterday. I also had a chance to meet him during the course of the day. He made the point that in Texas of all places, one of the oil and gas-rich parts of America, 15% of the electricity generation capacity comes from onshore wind but on some days the cost of that onshore wind is so low that 30% of the electricity used is generated by onshore wind, and that has been achieved with a zero public subsidy for onshore wind. I thought that was an interesting circumstance in Texas of all places.

Edward Davey: I will ask my ministerial colleague Greg Barker, who visited San Antonio on one of his trips to the US, for a report on that. Clearly, if we can develop any renewable technology at a lower cost, I am attracted to that.

Q114 Barry Gardiner: Do you agree with Caroline Flint that we need a regulator with stronger powers?

Edward Davey: I think Ofgem is a strong regulator. I note that the Leader of the Opposition, when he was doing my job, made some measures to increase the powers of Ofgem and told the House when he was doing so that he was strengthening Ofgem. This Government, my predecessor and myself, are also giving extra powers to Ofgem to make it more powerful. Therefore I think the debate should be about Ofgem’s powers. I think the idea that Caroline is putting forward that we scrap Ofgem and create a new regulator is not a sound idea. It would take some legislative time and delay action, and really what we need to have a debate about is Ofgem’s powers, not getting rid of one regulator and creating a new one. That seems to me not a good approach.

Q115 Barry Gardiner: On 12 November you said you were in the process of giving Ofgem more powers to tackle abuses, didn’t you? So you agree that it should have more powers. Is there a level of agreement there?

Edward Davey: Yes, although I think Caroline Flint in the debate told the House that she had looked at whether or not she could reform Ofgem and give it new powers and she concluded that that was not the way forward. I did not quite understand her argument but that is what she was proposing.

Q116 Barry Gardiner: Ofgem said of the gas-trading fraud allegations that it had limited powers in this area "but would consider carefully any evidence of market abuse that was brought to our attention". Why were Ofgem not proactively investigating that aspect of market trading rather than waiting to have it brought to their attention?

Edward Davey: Obviously Ofgem can speak for themselves, but Ofgem have powers of monitoring and do actively monitor the energy market. Yes, people come to them with allegations, because they are the independent regulator, but they have powers under different bits of legislation for collecting information and monitoring.

Q117 Barry Gardiner: Why is it that ICIS then notified Ofgem of their suspicion in October, just after the incidents of alleged fraudulent trading on 28 September, but we only found out about it on 12 November in The Guardian, and I gather from your statement that you found out about it on 9 November? On the 13th I think you said that it was on the Friday afternoon that you had heard about it.

Edward Davey: I don’t think there is anything unusual about that at all. All regulators have a clear process about how they respond to allegations and information provided to them. If they immediately came to Government the day they got an allegation and said, "Look, we’ve got this allegation" they would not be doing their role. Their job is to receive those allegations, through active monitoring check whether they have any evidence of abuse of the way the market is operating, and then to respond to that. I think the reason it came into the public domain was because the individual concerned had told the regulators that he had told the newspapers and it was going to come into the public domain.

Q118 Barry Gardiner: Secretary of State, you are getting off the point.

Edward Davey: No, it is not. It is a very important point about protecting whistle-blowers. They wanted to come to us to explain the process because they wanted to make sure that before the publication that you referred to appeared in The Guardian, the whistle-blower’s identity was properly protected.

Q119 Barry Gardiner: Let’s leave the Guardian article aside here. You learnt of this on 9 November. Are you really telling me that as Secretary of State you are happy with the situation that you only find out about it a month and a half after a suspicious trading activity that affects the whole integrity of the market in this area? Who was it who told you on 9 November?

Edward Davey: I believe it was the FSA who told us but I would have to check that.

Q120 Barry Gardiner: So your regulator did not tell you?

Edward Davey: Hold on, let’s be clear. The initial complaints had gone to both Ofgem and the FSA and it was the FSA that issued a statement. The allegations of the whistle-blower at the time were made to the FSA. Separately ICIS had notified Ofgem of what they saw as an unusual trading activity. After that the FSA, when they understood it was going to go public, notified Treasury and ourselves of that happening. They were very clear even then that they have right and proper processes to protect their whistle-blowers. When you have an allegation and you go to a regulator you need absolute confidence that what you are telling them is treated in confidence, and rightly and properly they have processes to deal with that to make sure even within the regulator themselves-

Q121 Barry Gardiner: But this is not about protecting the whistle-blower. I am absolutely sure that we should protect the whistle-blower. This is about ensuring that the Secretary of State for Energy knows what is going on in the trading market.

Edward Davey: Mr Gardiner, can I put it to you that an independent regulator with the job of checking the markets will get information and allegations relatively regularly. If they were to come and knock on my door every time they had an allegation or piece of information, frankly they would find that I had a few other things to do. The reason why the last Government, I believe, supported Ofgem in its independent regulatory role, with its investigatory powers in order to take on this job, was because that was the most proper process, proper way of dealing with these issues.

Q122 Barry Gardiner: But it does not have sufficient regulatory powers, does it, Secretary of State?

Edward Davey: If I may finish, Mr Gardiner.

Barry Gardiner: Well, as long as you don’t filibuster rather than finish.

Edward Davey: I have all night. If you want to stay here all night I am very happy to answer your questions, Mr Gardiner. I have no problem with that. It is very important that if a regulator is doing an investigation it does that in the proper process, just like any investigatory body. You would not expect the police, if allegations were made against an individual, one of your constituents, to go to the Home Secretary, would you?

Q123 Barry Gardiner: When it comes to your attention, Secretary of State, you assume that it has then been verified, checked out, and that there is some substance to it or, given that the investigation is still ongoing, are you going to wait for the final decision? What is the cut-off point here? What is the point that triggers it coming to you, that there is clearly substance in these allegations or that the whistle-blower has been protected so that you and nobody else will know their identity?

Edward Davey: It was going to come in the public domain, because the whistle-blower was going to put it in the public domain. It was his choice, not the FSA or Ofgem.

Q124 Barry Gardiner: No, but that is not what I am talking about. I am talking about why does it come to you?

Edward Davey: I was about to answer the question. Since the whistle-blower was going to put it in the public domain, of course I was going to get questions about it. Many of the allegations that go to Ofgem, which they deal with in a normal way as an investigative body, do not go into the public domain. Therefore it was quite right that we were warned. We do not know the details of those allegations. We have not seen the details of those allegations and I did not expect to see the details of those allegations, just as the Home Secretary does not expect to see the details of allegations made against individual people who are alleged to be criminals.

Q125 Barry Gardiner: But you have read what the whistle-blower and some of the others involved in the market have said, somebody is taking the piss on the day-ahead index, traders regularly put price reporters under pressure to change prices. We have a regulator that admits it does not have the full powers to deal with this, and yet you think it is fit for purpose and you are happy that six weeks after these allegations have been made, that fundamentally affect the integrity of the market, you would not otherwise have been informed about it except that the whistle-blower decided to go to The Guardian. Are you happy with that situation?

Edward Davey: The independent regulator has legal powers to launch an investigation and when it comes to its conclusions it publishes those conclusions and makes recommendations and takes action. It has powers to fine and even in some cases, because it has competition powers concurrent with the OFT and it has some criminal sanctions. When it makes its investigation and comes to a conclusion it then decides the sanctions and any further recommendations. I have made it clear to Ofgem and the FSA on this occasion-and indeed we have made it in the past-that if they feel they need any further powers as a result of this particular investigation if manipulation is proven, then they should tell us. What has been very interesting in looking at this process is how many powers they already have, under the Competition and Enterprise Acts and also under the Electricity Act. One of the issues looking forward is whether EU REMIT, an EU regulation that we supported-

Q126 Barry Gardiner: In respect of which Ofgem does not have powers currently.

Edward Davey: It is a little bit more complicated than that. EU REMIT came into force in December 2011, so in terms of insider trading and abuse of markets, manipulation, that is already the law. The issues that are outstanding for the implementation of the EU REMIT in the UK relate to information-gathering and enforcement powers. One of the issues that we are waiting for Ofgem to tell us about is what extra powers they need in terms of information gathering and enforcement, over and above those they already have in other parts of their legislative framework. We have made it very clear that when Ofgem tell us that we will implement any other aspects of the EU REMIT as soon as possible and we intend to be, if not the first, one of the first member states to implement that.

Q127 Barry Gardiner: What is in the Bill to ensure that there will be greater transparency on the over-the-counter market?

Edward Davey: That is dealt with by EU REMIT, which is a separate piece of legislation. As I have said, as of December last year the prohibitions of insider trading and market manipulation are already in force.

Q128 Barry Gardiner: Is the investigation that the FSA is currently carrying out happening jointly with Ofgem or do the variation in powers that those bodies have mean that that is not possible?

Edward Davey: They have been working together on this. That is one of the first things I wanted to establish when I found about this on that Friday afternoon. Over that weekend I spoke to Martin Wheatley at the FSA and Alistair Buchanan. Before I came to the House, I had two long conversations with both of them to understand what they were going to do so I could reassure the House that action was being taken, to make sure I understood if there were issues around powers-it does not appear that there were-but also to understand that they were working together. They have rules about sharing information, proper due process, and I understand that those were implemented very quickly and they are working well together, as they should.

Q129 Barry Gardiner: When do you expect to be told the outcome of their inquiry?

Edward Davey: I don’t know. As I told the House, investigatory bodies need to take their time on their investigations. Obviously I would like it to be quick and then I can answer all your questions, because I will have a report from the regulatory bodies and we can all see it, and if there are any implications, we can act upon them. I think you will be very well aware, Mr Gardiner, that investigatory bodies, whether they are regulators of industries or the police, should be allowed to take their time without daily interference from politicians.

Q130 Barry Gardiner: Do you think that Ofgem should have had the powers to be able to be proactive in observing and regulating the trading that was going on in the day-ahead market and the over-the-counter market?

Edward Davey: They already have a lot of powers for monitoring and information collection. What the EU REMIT powers are about is looking far more at the physical gas market, and what we are trying to establish and what we want Ofgem to tell us is what they need under the EU REMIT for any additional powers of monitoring and information collection.

Q131 Barry Gardiner: What have they told you? They have already said publicly that they have limited powers in this area and that they would consider carefully evidence of market fixing brought to their attention. What have they told you about the additional powers that they require? They themselves say their powers are limited here.

Edward Davey: I think we are waiting for them to tell us, but let me go to Jonathan. I remember we talked about this the other day, that we were waiting for Ofgem to be absolutely clear with us about whether they needed any additional powers on top of what they have and what they might be.

Jonathan Brearley: The discussion is about how you transpose the EU legislation to create the powers both for investigation and redress. Coming back to the broad powers Ofgem have, they already have the powers to investigate different forms of market abuse. They already have the powers to look at a market and get data. The key question is what they need to respond to that, but equally remember, as the Secretary of State said before, the REMIT laws are in place and if individuals feel they have lost through any particular action they can also take their own action, based on the information that Ofgem finds. What we need to do now, and I know it is difficult, is wait for the FSA and Ofgem to come to their conclusion on the evidence and detail they have seen and then look to them for the appropriate response.

Edward Davey: Let’s be clear, Ofgem take action regularly. They have powers to fine companies up to 10% of turnover. Between April 2011 and March this year it fined companies more than £90 million for licence breaches or anti-competitive behaviour, so they are active. In one calendar year I think they found about nine breaches and they fined £90 million. So I am afraid to characterise them as not active and not out there, without powers, is just simply wrong.

Q132 Chair: I think perhaps this is the moment where we might move on to what was announced today as we have had a fairly good tour de raison of what is already in the Bill. Could you confirm, before we get into the substance of this, that the fact that the Department has published a discussion document today, five-and-a-half months after the draft Bill was published, in response to comments made during Prime Minister’s Questions last month and foreshadowing additional clauses that will be tabled in the Bill, is conclusive evidence, if any was still needed, that this was an initiative from Downing Street about which neither the Department nor Ofgem had any advance notice?

Edward Davey: I wouldn’t characterise it in that way, Chairman, for this reason. We knew that Ofgem were doing their Retail Market Review. They had been working at it for quite some time. We had engaged with the Department, as you would expect, in that, industry had engaged in that, and we were expecting their report. We did not know exactly when. They are an independent regulator and we do not set their timetable for publication, but we were expecting it around that time. While as Secretary of State I have taken a number of initiatives to help consumers with their bills, as I was starting to say to Mr Robertson earlier-for example, the voluntary agreement that I negotiated with the sector in the first two months, the initiatives I have been taking on collective switching and so on-I was waiting to get Ofgem’s conclusions as a result of the Retail Market Review and then was going to decide what to do as a result of them. As it so happened, their report was published very soon after the Prime Minister made those remarks, and it shows what a prescient Prime Minister we have because some of the proposals fit very well with the remarks that he made. Therefore we have the opportunity with the Energy Bill to take forward Ofgem’s proposals and the ideas of the Prime Minister, and we are going to take that opportunity.

Q133 Chair: It was two days before, I think. We knew that Ofgem were going to publish their proposals on the Friday and the remarks were made on the Wednesday.

Edward Davey: I am sure that is right.

Q134 Chair: Is it the case that the proposals now in this discussion document are pretty close to what Ofgem unveiled on that Friday?

Edward Davey: Yes, they are quite close.

Q135 Chair: Ofgem gave us helpful evidence in which they made clear that they could implement their proposals in full before the end of 2013-in fact much of it before the end of the summer but in totality before the end of 2013-without the need for any primary legislation at all.

Edward Davey: That is possible, but we have talked to them about our proposals for legislating, and giving a legislative framework, a legislative backstop, is actually quite powerful. Obviously they will be consulting with the industry, taking industry’s views, but by having powers in the Bill I think that will concentrate minds and make it absolutely clear that the Government is determined, along with the regulator, to make sure we have action in this area. Consumers who are suffering with high electricity and gas bills will expect the regulator and the Government to take action when we have that opportunity. We have so many tariffs, as you will know, Chairman. It has been very confusing and I am delighted we are going to take this opportunity to simplify that and get a better deal for many consumers.

Q136 Chair: We will come to the substance of the proposals in a moment, but I reiterate the point that the decision to include clauses in this Bill, rather than allow Ofgem to proceed as they were intending to do, has the effect of delaying the benefits that will flow to consumers as a result of these changes rather than bringing them forward at an earlier date.

Edward Davey: Ofgem will be able to implement their proposals more quickly if suppliers support their proposals. I think the very strong signal we are giving will focus minds and help the passage of these reforms.

Q137 Dr Whitehead: The curious thing, in terms of promoting what Ofgem is proposing, is that you already have powers to do this in the 2011 Energy Act, section 76.

Edward Davey: Maybe I should familiarise myself with all the Energy Acts before I come to this Committee. You might want to read out section 76 but, as I understand it, simplifying the tariff structure in the way that Ofgem have proposed is not a power that we have. What I think section 76 says, from memory-but I have a poor memory on some of these Acts–is the Secretary of State has the ability to bring forward powers to force things on bills, for energy companies to put things on bills.

Q138 Dr Whitehead: "The Secretary of State may modify a condition of a particular licence under section 7A of the Gas Act, a condition of a particular licence under section 6(1)(d) of the Electricity Act. The power under subsection (1) may be exercised for the purpose only of securing that the licence holder provides a customer on a domestic tariff with information about one or more of the licence holder’s lowest domestic tariffs. The information to be provided about a tariff by virtue of subsection (2) may, in particular, include information about the amount of a tariff, the amount a customer would have paid, where to find further information about a tariff, how to switch to it." That is all you need, isn’t it?

Edward Davey: I think my memory is better than I had expected, because I think that is what I said it said but not in the legalese that you have just read out.

Q139 Dr Whitehead: My point is that you already have powers to legislate to offer customers the lowest tariff on the terms that I have just set out. If the aim is to offer customers, rather than force them on to a particular tariff, which is what I understand is the Ofgem consultation and indeed the thrust of what is in the paper, then there are the powers and they can just do it straight away.

Edward Davey: I think the argument, Mr Whitehead, is that there are elements of the Ofgem package that we have the powers for, but we do not have the powers for the whole package. After the consultation that we go through, we will have to work out which extra powers we need. That is the purpose of the consultation.

Q140 Dr Whitehead: Ofgem can do it without any legislation, but if you did need legislation, you have it, except you might not have some of the legislation that Ofgem could do anyway and having a consultation on it in order to produce some legislation that might do it in the first place. Is that right?

Edward Davey: I almost feel like I am going to have to read Hansard before I can answer that question, but let me try to help you. I made it very clear that Ofgem does have some powers to make these changes. That is why it has put them forward. However, it will be helpful to have the strategy backing as expressed. Let’s be clear, Ofgem sometimes have asked us to take strategy backing to support the things they want to do through changes to their licence. This is not something unusual. This is not some sort of gimmick. It actually is helpful to the process. If you look at things like capping the number of core tariffs, removing poor value, dead tariffs, I am not convinced we have all the powers we would need for that full, whole package.

Q141 John Robertson: We are talking about there are going to be four different tariffs per company. If it is going to be, say, a fixed tariff, a variable tariff or a green tariff, have you not already made the decision of which tariff will be the lowest?

Edward Davey: Let’s be absolutely clear what the proposals are, following Ofgem’s work, what we have said is we are consulting on there being four core tariffs. We are suggesting that Ofgem prescribe two of the tariffs, namely the standard variable, which is the sort of tariff that the vast majority of people are on, but also a fixed-term tariff as well. The other two tariffs are up to the suppliers and the market to determine so there is still room for innovation on tariffs. But within each of those four core tariff types, there will be one tariff and therefore people will be on the lowest tariff in that tariff type, with the exception of course of payment methods. Within a core tariff it will be the core tariff per payment method.

Q142 John Robertson: So it is not four tariffs; it is four tariffs times the number of payment methods? You will allow them the flexibility to charge more depending on how things are paid?

Edward Davey: That is certainly what Ofgem have proposed. It is by payment method but also, to give you the full picture, there is still the option for dual-fuel discounts. That is what Ofgem have proposed and I think that is very wise.

Q143 John Robertson: So we are now into how many tariffs per company?

Edward Davey: You are right to say there will be a number of tariffs but there are four core tariffs and on that there is, quite rightly in my view, choice for payment methods. It seems quite sensible to allow people choice and preference.

Q144 John Robertson: Who will say what is the cheapest tariff for a customer?

Edward Davey: The whole point is we want to make sure that given a consumer’s preferences, given one of your constituent’s preferences-

Q145 John Robertson: The Prime Minister said we will put people on to the cheapest tariff. You have said there is going to be a core tariff that everybody will have and that will be the cheapest. That is what you said. What I want to know is who says that is the cheapest? Who picks it?

Edward Davey: Your constituent has supplier X. They have various preferences. They prefer a fixed-term tariff, they want to pay by direct debit and they want a dual-fuel. Under these proposals, given their preferences, the supplier must put them on the lowest tariff. There must be one tariff for those preferences. At the moment that often is not the case. There are a lot of people who are on outdated tariffs, on what you might call stranded tariffs, legacy tariffs, and bringing them down is going to save some of those people money, indeed some of the most vulnerable of your constituents and consumers, and I think that is the right thing to do.

Q146 John Robertson: So the company says, because that is the only person I can think of, "We can do this. We will say this is your cheapest tariff"?

Edward Davey: Yes.

Q147 John Robertson: Where do you come in this? How do you make sure that that is the case?

Edward Davey: It won’t be me. It will be Ofgem who will oversee the regulations. If Ofgem gets a complaint they will investigate in the normal way.

Q148 John Robertson: This is the problem. The Prime Minister said, "You won’t have to wait. We will do this for you. This will automatically happen. You will get this tariff and it will be the lowest tariff". Now we have got to the stage where the customer has to tell people or complain, but he or she will not know that that is not the cheapest tariff because they won’t be able to compare it.

Edward Davey: Let me help you more, because I think there is more to the package that answers your questions.

Q149 John Robertson: Secretary of State, I know what you are saying, but the point I am trying to make here is that this is not simple and it was never ever going to be simple no matter how many tariffs you picked. It was always going to be complex, and you have given the impression to every person in this country that it was going to be really easy, and they are all going to be disappointed when they find out it is not easy.

Edward Davey: I disagree with you on this occasion, and we started off so well, didn’t we?

Q150 John Robertson: The good thing about this is we are both going to find out who is right, and I will still be in a job and you might not be.

Edward Davey: That is very sweet of you, but let me just try to help you. In the four core tariffs, with consumers able to say which suits them best, there will be one tariff so they will be on the lowest tariff. It may be that if they change their preferences they could get a cheaper tariff. What Ofgem’s proposals also say, and what we are also putting forward in the consultation, is that the suppliers must put that on the bill and provide that information, in addition to making sure they are on the lowest tariff. The consumer will know that given their preferences they are on the lowest tariff, but if they change their preferences, there might be a cheaper tariff still. I think that is both implementing what the Prime Minister said but also making sure the consumer has the information to go and change their preferences and get a cheaper tariff if they want to.

Q151 John Robertson: Can I just say, Secretary of State, there is a saying, "It’s as clear as mud", and the more you say it the more complicated it appears to be. I was hoping that it was going to be like a petrol station. You went in and you took the pump for unleaded or you took the pump for diesel and everybody knew where you were. That is not going to be the case because we have six large companies who will have their tariffs and you have the smaller companies who will have their tariffs. It will be impossible to work out which one is the cheapest because they will all tell you something different.

Edward Davey: Thank you for reminding me. There is something else I have not told you.

Q152 John Robertson: I will just add this in because you can answer this at the same time. The complexity of the bill that you are talking about that customers will receive, if you put a nice simple front sheet that is one thing but the rest of the stuff that comes with it makes it even more complicated. How you are going to make that simple for customers to understand?

Edward Davey: I am sure you will respond to the consultation, but what Ofgem have also put forward, which I think is a good idea, is looking at tariff comparators. There will be fewer tariffs and they will be simpler and at least two of the four tariffs will be prescribed, therefore it will make it a lot easier for people to compare and I think will help competition. One of the criticisms that people have made of the 400-plus tariffs that there are is that they are so complex and so difficult for people to be able to compare and so it does not help competition. Ofgem have made the case-and I am sure you will appreciate this, Mr Robertson-that there are people who say that the Big Six hide behind that complexity. They hide behind it because they think it actually reduces competition. By going through a simpler tariff regime where there is still chance for competition and still chance for innovation, it will make it easier for people to compare and that will drive competition.

Q153 John Robertson: How many tariffs do you think there will be at the end of the day?

Edward Davey: There will be four core tariffs.

Q154 John Robertson: I have already counted 90, if you take in the Big Six-and they all have four tariffs-and then you have small companies. Are you saying that all companies will then have the same tariff in the same place?

Edward Davey: No, these are tariff types.

Q155 John Robertson: I don’t think so. I am right and you are wrong there.

Edward Davey: I think it is quite good that one company competes with another company to drive down prices. That is how competition works. It is one of the reasons why-and you won’t like this bit I am afraid-electricity privatisation has been a good thing for this country. You may disagree with me.

Q156 John Robertson: Why would I not agree with that?

Edward Davey: I don’t know. I thought you would, and I am sorry.

Q157 John Robertson: You are jumping to conclusions or assumptions here.

Edward Davey: I have and I apologise. Mr Robertson, if you are a supporter of electricity privatisation, I am delighted to hear that.

Q158 John Robertson: I am supportive of whatever gives my constituents the cheapest electricity and gas available.

Edward Davey: Privatisation has helped in that regard. We have some of the lowest domestic gas and electricity prices in Europe. That does not mean that they are cheap. We all know how difficult electricity and gas bills are for people because of the way wholesale gas prices have gone up and impacted those. The reason we are doing all this is to try to give some help to people who are struggling.

Q159 John Robertson: If you had done your homework you would have found that I was a member of the Committee, in the last Committee and this one, who called for greater competition, not less.

Edward Davey: I really should do my homework in that regard.

Q160 Mr Lilley: Yesterday morning your colleague, the Secretary of State for Business, issued a statement promising less regulation of business. Today you have come forward with some proposals for more regulation of business. Is this a case of the Coalition’s left hand not knowing what its left hand is doing? His specific proposal was any new regulation a department introduced must be accompanied by two equivalent regulations being repealed. Could you tell us which two sets of regulations you are going to withdraw to replace this?

Edward Davey: It is a very good question. As I understand it, the one-in-two-out rule that is now being developed in this case would not apply to my Department because it is the regulator who is fundamentally bringing in the changes. If I am wrong on that no doubt my officials will tell me and if subsequently I am proved wrong I will write to the honourable gentleman.

But let me deal with the basic charge. Your basic charge is this is a deregulatory Government and it would appear to be more regulation. Let me answer that charge. First of all, we are a deregulatory Government. When I was in the Department of Business I think I secured more deregulation than any of my other Ministers. Indeed, and you will be delighted to hear this, I think I achieved the first derogation for micro-companies from a harmonised European Union directive. I was told it could not be done but we did it. I am very keen on deregulation where deregulation makes sense to take burdens off business. But-and this is critical-there are some regulations that promote competition. There are some regulations that are important for consumers. I don’t think we should get into a mind set in this country where regulations are ipso facto wrong. I speak as a free marketeer but I can see many cases where regulations can actually promote markets, promote competition and promote prosperity. I would have thought those people who are familiar with the regulatory economics of the 1960s would have realised that there are two approaches to regulations: one can be quite ideological; one can be based on the analytical facts. I do not subscribe to the view that all regulations are inherently wrong.

Q161 Mr Lilley: This seems to be based on the fact that consumers can’t cope with a wide range of choices. Do you think that this precedent could be applied to other markets? Consumers cope with a massive range of choices when buying a motor car, in the range of different models, the different suppliers of those models and so on. Do you think life should be made simpler for them in that each manufacturer should only produce four models? When I go into the chemist, as I did this morning, to try to buy hair shampoo, there were practically more varieties of hair shampoo than I have hairs left on my head, or certainly it is going to be that way soon. Should we simplify that? Can people not cope with this? If they can cope in every other market with variety, why do we think they are particularly obtuse when it comes to electricity where they get the chance to change their bill every quarter if they want to?

Edward Davey: I think the markets differ. Taking one approach to every single market, every single good, every single service might not be the right approach. That is particularly the case with certain basic utilities. We can’t choose different types of water, for example, and one of the clearest characteristics and features of electricity is it is rather homogenous. Electricity is electricity, and therefore I think it is easier to make the case that having a simpler approach to tariffs can promote competition. I would argue back to you that there are examples, well founded in the economic literature, that sometimes companies deliberately can go out to confuse consumers. I don’t know whether you will accept that, Mr Lilley, but there are cases-and the Office of Fair Trading has run a number of prosecutions as a result of them-where companies deliberately confuse consumers by their pricing strategy. That is not fair competition, that is not fair practice, and I think there is sometimes a case, and electricity is one of those cases, where a regulatory framework is the right response, and that is what we are proposing.

Q162 Mr Lilley: Given that most of what we have been talking about and what you have been proposing in the early part of this session is about increasing the cost of electricity by making people buy electricity from high-cost suppliers instead of letting them buy from low-cost conventional suppliers, isn’t this a kind of displacement activity to try to put the blame for high electricity and energy prices on people other than ourselves?

Edward Davey: No.

Mr Lilley: Chairman, I failed earlier to draw the attention of the Committee to my declaration in the Register of Members’ Interests. This is partly because The Guardian has, over two pages, drawn attention to people today, partly because I can see no connection between the work of this Committee that would have any bearing on the profitability of a company that operates purely in central Asia, but if anyone thinks there is any connection I would be interested to hear it. Finally, it gives me a chance to disappoint the Committee that unfortunately I do not have options in Tethys Petroleum worth $400,000. The Guardian correspondent does not realise that the higher the exercise price of an option the less valuable it is, and as the exercise price is above the market price they are at present worth nothing. I hope it will one day be different and then I will treat the Committee, and indeed the correspondent of The Guardian, to the fruits thereof.

Q163 Chair: Can I personally extend my sympathies to you for having out of the money options for the time being. I hope they soon return to being in the money.

Just to help the Secretary of State and his Department with their deregulatory desires, can I invite them to look at the licence conditions that limit the ability of suppliers to offer differential tariffs, and thereby incentives, to those who operate at a very low level? There is a good report in the Financial Times today about Good Energy who are offering local communities a lower electricity price in return for accepting a particular type of development in their neighbourhood. The Big Six are prevented by regulation from doing this and I invite the Department just to consider whether they could relax some of those conditions. It would be a wholly deregulating measure, even to raise the threshold, and as far as I can tell it is only the Big Six who object to that threshold being raised. If Good Energy became too large a company, it would not be able to try to share the benefits that it feels it would have if a certain development was permitted with people who live in that area.

Edward Davey: Thank you for drawing my attention to that. I was aware Good Energy wanted to innovate in this area and I am very much in favour of that. I understand what they are proposing is very much along the lines of the community benefit consultation paper that I referred to earlier with respect to onshore wind to try to see whether more of these models can be developed. Clearly we want to make sure that licence conditions and regulations do not get in the way of that sort of innovation. One of the exceptions to the four core tariff rule that I forgot to mention is an innovation that I have been very keen on, as you know, which is collective switching that enables particularly vulnerable customers, but in no way only vulnerable customers, to come together to get a better deal in the market. Our proposals, along with Ofgem’s, would allow, for example, that type of tariff to be separate to the four core tariff structure. I think that is a good way of promoting competition on the retail side. Your proposal, Chairman, is another example of how we can still retain competition and drive it even more fiercely within this structure.

Chair: Just for the avoidance of doubt and to discourage any misrepresentation, wilful or otherwise, of my views, what I am suggesting is completely technology blind. It could apply to a gas-fired development, a coal-fired development, a nuclear-fired development, as well as other forms of low-carbon technology. The benefits could still be shared in the same way.

Q164 Barry Gardiner: I pay tribute to your defence of the Prime Minister’s policy against the ravages of Mr Lilley. I agree with you that it is right that we should have simplification of the tariffs, and in fact that something this Committee was first in calling for. Ofgem agreed with that and said that they were grateful to the Committee for having drawn it to their attention and now the Prime Minister is on board, so we should all be happy about that. Given that there is this simplification of tariffs and given that you have to be able to compare like with like and suppliers have to offer just a single price for each of the four tariff types, does that mean that we are now going to see the end of the standing charge or are you going to stipulate that the standing charge of each of the companies must be exactly the same? I would dearly love to see the end of the standing charge, I think we should be on rising block tariffs, but it strikes me that this is a rather important detail.

Edward Davey: I know Ofgem have done a lot of work on the standing charge and their proposals have a number of options. Our consultation paper does not talk about standing charges but I know Ofgem’s proposals do look into some more detail. If you will forgive me, I am going to pass over to Jonathan Brearley.

Jonathan Brearley: I think that is right. Ofgem face a trade-off, which is do we regulate the standing charge and therefore accept that that is inefficient for some companies, or do we allow flexibility and make that one of the elements consumers have to compare? I don’t think we have come to a conclusion on whether that will be the case.

Q165 Barry Gardiner: I was less concerned with what Ofgem’s view about it was than with what the Prime Minister’s view of it was when he envisaged his principle of making sure you are on the lowest tariff. Of course, depending upon your energy usage, it depends on how you trigger that standing charge or whether you go beyond a certain element of usage before you can determine whether it is the lowest for that particular household. It really is material to the Prime Minister’s proposals.

Jonathan Brearley: I think that is something that we should consider as part of the consultation process and we should look at the evidence that Ofgem has coming before them. It is not something that we have set out in detail and when we get to the stage of describing those four tariffs that is something we should think about.

Edward Davey: One of the advantages of building our proposals on Ofgem’s is we have the benefit of all their research, and they have been doing it for two years, as you know. One of the reasons I was attracted to going forward with Ofgem’s proposals is not only did it meet the test that the Prime Minister put down but it also enabled us to proceed with the consultation with a rich evidence base, tackling some of the issues like standing charges that you have raised.

Q166 Barry Gardiner: Can I ask you to address two further points? One is in relation to prepayment customers. I think there needs to be an assurance about what is happening with them because they have been left out of this picture, by and large, in the public debate. The other is how do you respond to the charge that simplification is well and good but what is going to happen here, given that the Government has gone a U-turn in its policy that what you have to do is switch, in effect? That is going to sort everything out because you will automatically be put on the lowest tariff. Surely everybody is saying the energy companies are just going to raise their prices. They are going to make more money out of this and, yes, you may be on the lowest charge but it is certainly going to be a higher charge than you otherwise might have been able to get. So the shrewd people who were doing the switching that the Government advised them to do were able to get some very nice tariffs going forward. They were able to benefit from that variety in the market. They are now going to find that they are going to be paying a lot more for their electricity going forward, aren’t they?

Edward Davey: You have two points there: one, prepayment meters; and one what you might call the internet-savvy customer who switches an awful lot. Let me deal with both of them. On the prepayment meters, they are not forgotten in these proposals. It is one of the payment methods. You will know I have been taking a lot of interest in collective switching, and prepayment meter tariffs are offered within collective switches. So we have not forgotten in any of the work we are doing, whether it is this work or collective switching, prepayment meter customers. We shouldn’t, they are very important, and there have been many concerns over the years about them. I am not sure that your point about the internet-savvy customer, the one who gets the best deal at the moment, being restricted is going to be the case in practice. Let’s be clear, this is not the end of switching. I think we will see more switching as a result of this. I hope we do. While we will be able to help those people who don’t switch, because of the end of these very poor value, dead tariffs and people will be automatically switched to the lowest tariff, that will really help those customers-

Q167 Barry Gardiner: I agree with you. I think initially that will be a real boost to those people who have never bothered to switch.

Edward Davey: We are in agreement; that is good. But I still think there will be a lot of room for competition switching. Switching may be made easier because of the simplification. It may well be true.

Q168 Barry Gardiner: They don’t between banks. The Prime Minister in this case will have assured them that they are on the lowest tariff so they may feel that there is no need.

Edward Davey: Savvy people can still switch because you are not just switching between one of the four core tariffs or different payment methods, you are switching between the companies. I think it will be more obvious and easier for people to decide whether they should switch companies because of the greater transparency through the simpler tariffs. Mr Robertson was saying, "We’ll see. The proof of the pudding will be in the eating. We’ll see who is right", but I think it is a balanced package. It tends to be more vulnerable people who are on stranded ones, as we have agreed, by automatically switching them down, but we keep the benefits of choice and competition and innovation, which I know Mr Lilley, myself and you will be in agreement is a valuable thing for those savvy switchers who want to search out the best deals.

Q169 Barry Gardiner: But those prices will be higher than they would have been had we allowed the multiplicity of choice to continue in the market.

Edward Davey: I don’t know if that will be the case because one thing I think we will also see-and I am guessing and you should not guess markets sometimes-is some of the smaller suppliers coming in and competing more effectively. If the smaller suppliers are coming in to compete with the bigger incumbents you may well see downward pressure on prices overall. Collective switching-which you know is my personal interest and I pushed when I was at BIS and now at DECC-is seeing smaller suppliers being able to compete with the larger suppliers and increasing their customer base and getting access to the customer base that, because of the inertia that we all know about, often does not engage with the market. Collective switching is helping more people engage with the market because people effectively are almost contracting out all the hassle of research and deciding because of the complexity and the time engaged. So I think, whether it is collective switching, which I have been promoting, whether it is simpler tariffs, which I called for in my Liberal Democrat Party conference speech, which I am sure you read, Mr Gardiner-

Barry Gardiner: I read it with alacrity.

Edward Davey: -and other areas, will result in more fierce competition, which is what I want to see.

Q170 Chair: Before the dash for simpler tariffs becomes a stampede, in response to Mr Gardiner’s reference to rising block tariffs, can I urge the Department to go on considering, carefully and sympathetically, the merits of rising block tariffs, both as an incentive for greater efficiency in the use of energy and a fair way of dealing with poorer consumers? They have the reverse effect of a standard charge or whatever it is, and I hope the Department will not overlook these advantages.

Edward Davey: I think you make a fair point, and I am glad you have come back to that, because I should have responded to Mr Gardiner’s very fair point. I was talking to the Chairman of the Fuel Poverty Advisory Group a month or two ago and they were making the argument for the rising block tariff. They were making the argument on social justice grounds as well as energy efficiency grounds. One of the first questions I asked when I became Secretary of State was, "Why can’t we have a rising block tariff?" because it seems logical. The evidence that I have been given to date is one should be slightly careful of unintended consequences. The examples that people put forward are where people with large families are living in poorly insulated homes, a rising block tariff could end up making those poor, low income families worse off. That is not an outcome that I or anyone on the Committee would like to see.

Q171 Barry Gardiner: Compared to other measures, the rising block tariff environment is much better.

Edward Davey: Mr Gardiner, you may well be right but let’s say there is 3 or 4 million of our fellow citizens who are living in such homes. Despite the huge success that I expect from the Green Deal and ECO and all our energy efficiency measures, it is going to take a while before all those homes are properly insulated. If we go to a rising block tariff too quickly, without properly thinking it through and doing an analysis, we could end up making some poor people even poorer. I know you and I would not wish to see that.

Q172 Barry Gardiner: But is it an aspiration? You said if we go towards it too quickly-so is it an aspiration of the Department, all else being equal, those problems that we both accept-

Edward Davey: Those famous words, ceterus paribus, all else being equal. I would not have asked the question in my first few days as Secretary of State if I was not attracted to the notion. I think most rational people can see the arguments for it, but we must not put poor people into even greater poverty. So let’s make sure that we think about this fully. When I spoke to the Chairman of the Fuel Poverty Advisory Group, they were going to go away as well and do some work on this. It is an issue that I don’t think has gone away. I thought it was going to be the Holy Grail. I was determined it was going to be one of my achievements, but when I looked at the evidence I realised I should think more carefully before acting precipitately.

Chair: Without wishing to sound too discouraging, when I advanced the arguments for standing block tariffs as a Minister of State in 1993 I was met with precisely the same objections, and I suspect every Minister has done so since. What we should show these people is this is a problem that has to be solved.

Q173 Sir Robert Smith: That brings me to my second point, which comes first now. I should declare another interest, non-financial, as honorary vice-president of Energy Action Scotland.

If that argument was being held in 1993 and is being held now, the underlying problem is that we still have not tackled the housing stock. The crucial thing for getting people’s bills down, while it is great to have the most efficient market and the most cost effective, is to make sure people’s homes are efficient to heat in the first place.

Edward Davey: I think we are going to all agree on that. The issue is how do we do that as quickly as possible in the least cost way. I believe the Green Deal is very much key to that. I don’t think we should put all our eggs in the Green Deal basket. I think the importance of the energy company obligations supporting that is very important, and we need to look at other incentives as well. For example, I announced recently £125 million for the Cashback to support consumers in the Green Deal, and working with local authorities in some of their schemes is very important. I know it is a cross-party thing. We all agree on this, it is so obvious. We have to put more and more effort into it to bring it about and then we can get away from the horror that some people live in cold, draughty homes that make them and their children unhealthy.

Q174 Sir Robert Smith: One other thing was on Ofgem’s proposals, for those customers who had not seemed to be switching for the last three years, Ofgem had argued the company had to go even further and not only give their lowest tariff on the bill but also to steer the customer towards the lowest tariff in the market.

Edward Davey: What Ofgem said is they want to do a pilot for vulnerable customers to see what would happen if the suppliers were giving information about the best market tariff, which was not necessarily their own tariff. This is an idea I have read about and I will be very interested to see the results of Ofgem’s pilot.

Q175 Albert Owen: I know it is the end of the day and you are very tired and we are all very tired, but a couple of points. Unintended consequences: Barry is right, isn’t he, when he says levelisation could mean higher bills for some people? Are you acknowledging that?

Edward Davey: We have based our proposals on Ofgem’s work, who have studied this in great detail and they believe this is potentially a great deal for many consumers. I still think that these people we are talking about here, the internet-savvy, the switchers, will still be able to get good deals in in our system.

Q176 Albert Owen: That is your opinion and I respect that. The other thing you said is we are going to look after the prepayment meter customers, which are the most vulnerable. How can you legislate for that and how can they have any real choice? Some of them have no direct debit facilities. They can’t get it from the banks. The cheque payment is going to be more expensive than direct debits so the choice they have is carry on with the prepaid meters. Is there going to be something in legislation that goes over and above? You have acknowledged a lot of the work that Ofgem are doing and voluntarily some of these customers are doing. What can you do in legislation to help those vulnerable people? I hear what you say about collective bargaining but in some circumstances it is just not practical. I share your vision for it but it is just not practical. What is going to be done to help those vulnerable people on prepaid meters?

Edward Davey: I think these simplification proposals have some-

Albert Owen: They are still going to be bottom of the pile, aren’t they, because they don’t have a direct debit facility?

Edward Davey: If they don’t, then they can’t get the benefits of direct debit.

Q177 Albert Owen: What are we going to do about that?

Edward Davey: Ofgem, and indeed some of the companies, to be fair, have improved in this area over recent years. I am not saying that there is not more to do. I think the role of CAB, for examples, as advisors is really-

Q178 Albert Owen: I understand that. What are you going to do as the Government?

Edward Davey: One of the things that you may not have noticed in the consultation document, because it is not just about core tariffs, is there are issues about getting better information, there is a chapter on collective switching, there is a chapter on-

Q179 Albert Owen: With respect, we wouldn’t have had a chance to see that, would we?

Edward Davey: No, of course you wouldn’t, but I want to bring it to your attention. There is a chapter on third party intermediaries who can help people and there is a proposal in there about whether we should have a new national network of advisors to help vulnerable people to make sure they get the best deals on energy. Clearly that would work with some of the existing people who do such good work in this area, but I am very keen to have people’s views on whether we could do better. That wouldn’t just be exclusively for prepayment meter customers, of course, but it would enhance a lot of the work that we are doing to help the fuel poor and the most vulnerable.

Q180 Albert Owen: I still think they are going to be bottom of the pile and I really don’t know what you can do in legislation to help them. I think some of these announcements that came out today are misleading for them. I have had people contact me already on this and they have said, "We have had this announcement now. Will we get cheaper bills? We’re on prepaid meters", which is why I am bringing it up. It is very topical.

Edward Davey: Let’s be clear. The announcement is not saying everyone is going to get cheaper bills. What we are hoping is through simpler tariffs and through the automatic switching from dead tariffs a lot of people will get cheaper bills, but I can’t guarantee that to every one of your constituents because they are all on different tariffs and different payment systems. I deliberately have not over-promised on this but I do think it is a very worthwhile reform and will help many people. I think it will help a number of prepayment meter customers as well.

Albert Owen: We will see.

Q181 John Robertson: Ofgem have done a good job and I have to thank them for the work they did, particularly taking up my 10-minute rule bill and surpassing what I even asked them to do on prepayment meters. But I have to say, Secretary of State, you are out of touch about how companies do not get in touch with those that have the least. I have been in touch with every single one of the Big Six and every single one of them came back and said the same thing, they wait for the customer to come to them. The kind of people I am talking about, the kind of people that need their help are the same people who don’t have the ability sometimes to communicate in the way others do, don’t have the facilities for the internet, and generally just feel that as they are the bottom of the pile there is no need for them to do anything. These companies go out of their way not to contact them, not to help them and, as my colleague has just said, the people down the bottom will always be there because nobody really wants to help them. The fact of the matter is the companies make quite a good earning off them. I want you to take this away and think about how we can force these companies to try to work harder to contact the least well off, the ones that don’t contact them, the ones that really need their help. They have all told me that they wait for the customer to come to them and these people just won’t.

Edward Davey: Mr Robertson, I share your view, Mr Owen’s view, and no doubt the view of other members of the Committee, that people who are on low incomes and in fuel poverty should be our priority. I believe that these proposals will help. For example, I think there will be some of the people you have just described who will be on dead tariffs, paying too much, and they will be automatically switched and they will make savings. They will not have to contact the energy company; it will happen automatically. But some of the other proposals we are making, whether it is the network advisors I have talked about, collective switching and so on, I think they will be all relevant. One of the reasons why I feel collective switching is important for these people is many of them won’t have switched before and if local authorities, community groups, faith groups-I spoke to the Church of Scotland about collective switching a few months ago and they seemed really interested in the idea-these trusted third parties, who are trusted rather more than politicians or energy companies, can assist people in their communities to come together to switch then we will make sure that those vulnerable people are getting the benefits of competitive markets, because a lot of them have been out of those benefits for far too long. When I announced the competition Cheaper Energy Together, which is trying to promote collective switching through a very small amount of public money, one stipulation I made for bids for that money that will come forward for people wanting to run collective energy switches in their community is that they must involve the fuel poor.

Q182 Mr Lilley: Thinking about this, those who benefit are either going to benefit at the expense of other consumers, who lose because of the swings and roundabouts, or by a reduction in the profits overall of the electricity and gas companies. Firstly, will you produce an estimate of how much you expect the profits of the power companies to decline as a result of this measure and, secondly, can you tell us whether it is going to be significant or trivial?

Edward Davey: They are very good points. I certainly don’t have the answers to those questions here with me. Whether the answers to those will emerge from the consultation and the impact assessments we will no doubt produce-I have just been told it will be an impact assessment, so I think I was getting to the right answer. It will be in there and we will provide you with the information.

Q183 Sir Robert Smith: Is there a third possibility that it actually makes the companies more efficient as they compete in a more effective market and then both the consumers and the investors win?

Mr Lilley: Or indeed less efficient if they compete less.

Edward Davey: These are all hypothetical issues, but I am sure we will end up with a better world as a result of the proposals.

Chair: Secretary of State, we are very grateful to you and your officials for your time this afternoon. I think we all wish you well in the remaining negotiations over the next few days, and we look forward very eagerly both to the publication of the Bill and to your response to our report on the draft Bill, which we sent you in July. Thank you very much.