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

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

Investment in Energy Infrastructure and the Energy Bill

Tuesday 4 December 2012

mr John Hayes MP, Patrick Erwin, Jonathan Brearley and Hannah Brown

Evidence heard in Public Questions 215 - 324

USE OF THE TRANSCRIPT

1.

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

2.

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

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 4 December 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Dr Phillip Lee

Mr Peter Lilley

Albert Owen

Christopher Pincher

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Mr John Hayes MP, Minister of State, Department of Energy and Climate Change, Patrick Erwin, Head of EMI Strategy and Programme Office, Department of Energy and Climate Change, Jonathan Brearley, Director of Energy Strategy and Futures, Department of Energy and Climate Change, and Hannah Brown, Head of Renewables Industry and Investment, Department of Energy and Climate Change, gave evidence.

Q215 Chair: Good afternoon and a warm welcome to the Committee. We much look forward to further interaction with you, Minister, and your colleagues over the next few weeks. I suspect we are going to have quite a lot of dialogue. The Committee was pleased to receive eventually the Government’s response to our report, which we did at breakneck speed at the Government’s request; that urgency did not really seem to be quite matched inside Whitehall. It may be not entirely the fault of the Department of Energy and Climate Change, but at any rate, having accommodated the Government’s timetable and worked extremely hard for a number of weeks, we note with some disappointment that it was almost four months before we had any response to our efforts.

However, being as positive as we can, we might start with one of the areas where I think there was a significant response to our recommendations. That is the single counterparty that the Government are now proposing, which we had called for and is a very substantial improvement on what was in the draft Bill, though, of course, it does not go quite as far as we wanted because we did suggest that this should be even better if the counterparty was clearly underwritten by the Government. That would be the best way of inspiring investor confidence. Now you have come forward with this, can you tell us whether it is any different from the alternative model that was published in July?

Mr Hayes: As you know, Chairman, in your report on the draft Bill you made specific reference to your concerns about the counterparty body. The principal concerns that you expressed-I have them here-were that you wished to see a single counterparty body. The purpose of that kind of scrutiny and, indeed, a pre-legislative approach to legislation is that we learn from what this Committee and others say. We have indeed put into place a single counterparty body, as you know, and that was in direct response to the critique of this Committee and others.

I am conscious, however, that there are those who argue that this needs to be underpinned and that notwithstanding the progress we have made on dealing with your complaint about complexity there needs to be further Government support to ensure this body is fit for purpose. To that end, we have put into place clear private law contract proposals. Given that this will be a body supported by those means, we are confident that the understandable concerns that the counterparty body will not be sufficiently robust to do its job can be met by that means. While we appreciate the argument, we feel that we have got this right, and you would expect me to say that, but we wholly acknowledge that your original analysis that suggested this needed to be more straightforward, less complex, less confusing, less bureaucratic, was spot on, which is why the Bill now published looks rather different from the draft Bill.

Q216 Chair: We welcome that change very warmly. Given that the Government themselves will not be underwriting the contracts, did the Department explore what impact the decision not to underwrite the contracts would have on the cost of capital for the companies who are involved in these contracts?

Mr Hayes: You know they were offering developers, as I said, a private law contract in what is a Government-owned company. You will note, too, that the obligations of the counterparty body in respect of CfDs will be met by a levy. That is clear. We estimate that this provides protection against policy change, which is the principal reason that the argument had been made around whatever measures could be put in place. The model we have ended up with is very similar to that which applies in other countries, as you will know, not least the United States where there are a number of similar arrangements. We think that gives better assurance about certainty, a better regime than the alternatives. There may be a continuing difference between us on this, Chairman, frankly. We have gone a long way to meeting your original critique, but we are confident that this Government-owned company with the support of a private law contract will be sufficient and fit for purpose.

Q217 Chair: I do not necessarily reject those arguments, but the question was whether the Department had explored what difference to the cost of capital would be made by a Government decision not to underwrite the contracts rather than to underwrite them. As you did not say yes, I take it the answer was no?

Mr Hayes: It is a pretty fair question and I am more than happy to ask my officials to comment on that. By the way, before they do so-because we do not have any nonsense in my Department; Ministers make the decisions-if we have not explored it, we will. Jonathan, you tell me if we have or have not.

Jonathan Brearley: We have explored the impact of Government underwriting on the cost of capital. Our perspective is that we are offering a private law contract with a single counterparty and we are doing so across the board. If you compare our regime to most regimes internationally, the certainty we offer investors is much higher. If you believe that in five or 10 years’ time Government would abolish the counterparty body or would make it bankrupt, you would expect the Government to do that across the board for all its generation, so the risks Government would take in doing that both in terms of its own increased costs and its threat of judicial review mean that we think that is highly unlikely and, therefore, we do not think has a major impact on cost of capital.

Q218 Chair: Was that view shared by the investors with whom you discussed it?

Jonathan Brearley: There is a huge debate, as you know, among investors about what is best. Some of them agree, some of them do not, but I think all of them agree this is a better model than the one we had in May.

Chair: Absolutely. We are at one on that.

Q219 Dr Whitehead: The levy cap for the next five years after 2015 has now been announced, or rather it has not, actually. The final figure in 2020 that will be the amount that will be available for low-carbon energy has been put forward at £7.6 billion at current prices. What will be contained within that levy cap?

Mr Hayes: You are right that the Levy Control Framework settlement is as you described. I think it is probably fair to put on record that that was as the result of a perfectly healthy discussion between Government Departments, including the Treasury. You can imagine that it would not be anything other than that. That will cover renewable, it will cover, at the back end, possibly nuclear, it will cover carbon capture and storage, but again in the later part of the period because of the inevitable development timetable around that. Of course, we have said-it may be anticipating your next question; forgive me if it is-it will also include any measures we put into place on demand reduction.

Now, you will know we are consulting on that currently, as I think this Committee wished us to do so. Again, in your report on the draft Bill you made it very clear that you wanted more to be done on that. Now, we are not saying that we have a fixed view about what proportion of that total is to be allocated to each technology. You would not expect us to, given that we are as keen as you are to see costs of technologies falling over that period and it would be impossible against that dynamic backdrop to make predictions about the split between different technologies, but all of those that I have mentioned would be in the mix.

Q220 Dr Whitehead: In fact, my next question was going to be that bearing in mind we know the end point in 2020, £7.6 billion, and bearing in mind that we know the levy trajectory up to 2015 in terms of what the Department has already published, and we know that a good proportion of the increase in trajectory of the levy control mechanism will be for continuing to pay for projects that have come on previously-therefore, there will be a substantial cumulative amount within that £7.6 billion in 2020 that consists of continuing payments for plants that have a payment period for either ROCs or CfDs going over the period 2020-what proportion do you estimate at the end of that period would be available to new entrants in, say, 2020?

Mr Hayes: Sorry, Alan, I did not catch the very last word.

Dr Whitehead: What proportion of that total do you estimate would be available, say, in the year 2020 for new entrants? That is new renewables that come on stream in 2020, getting their what would be CfDs at that point in 2020. How would that overall figure break down between what one is already paying cumulatively and what one is paying new for new technology?

Mr Hayes: That is a very interesting question and, of course, slightly different from the one I anticipated, although you may have that in your armoury and I may have fended you off-I do not know. Let me think that; it makes me happy. You are right, though, Alan, to ask about the profile in the way you have because it is a different question, as I am sure you have realised, from what I anticipated, which was about the specifics. You will also know that that depends on the strike price for the different technologies because it is impossible to gauge that profile until you come to some firm conclusions about strike price over that period of time. Bluntly, the purpose of the CfD mechanism and the strike price that we agree will be to stimulate particular technologies around price. What we intend to do is finalise that profile in the New Year. We will be able to make more information available during the progress of the Bill, I hope, to this Committee and to the House as it scrutinises the legislation. As you know, the plan is to confirm strike prices in the middle of next year. Strike prices absolutely in place by the end of 2013; confirmed draft prices in the middle of next year; early information about the profile we anticipate during the passage of the Bill, too. Against your perfectly proper question, I think we could confidently say we will be able to provide a great deal more detail now that the Bill has begun its passage through the House.

Q221 Dr Whitehead: Bearing in mind that there is this effect of the cumulation overhang on any amount that you may consider to be part of the levy control mechanism in any one particular year, I would imagine within those caveats in terms of yes, indeed, the strike price will affect to some extent what exactly that overhang will consist of, but I would imagine that certainly during the discussions with the Treasury, for example, on what that Levy Control Framework might look like, the Department would have modelled very approximately the area for new entrants that there would be on a year by year by year basis. If we go through to 2015 we can see, for example, it is about £670 million, something like that, in 2015. Would your model move on from there towards 2020?

Mr Hayes: When the Secretary of State came before you, he described it as the grand bargain, and I think it is fair to say there was no grand bargain without bargaining. In the bargaining, or discussions, as you politely put it-I think I might call it negotiations-models were discussed about the profile that you now have more information on. Of course, the constraints and the determinants of those models are a renewable target that is already there, and that is the 2020 target as you know; our progress towards our 2050 emissions target, which again, given that we know we will have more information on that both in 2014 and again in 2016 in the fourth and fifth carbon budgets; and our determination to build the total renewables offer as we grow the renewable sector to a level that facilitates the mix of generating technologies that you know we are committed to. Yes, there have been discussions around those parameters about the model, but we need to build our final thinking about that profile around the development of the strike prices. As I say, the Bill has now begun. The process of delivering those strike prices is under way and I fully expect to be able to provide that over the course of the period in which we consider the Bill as well as to this Committee.

Q222 Dr Whitehead: May I just set perhaps a way of meeting the target as far as, for example, offshore wind is concerned by 2020? Indeed, you mentioned reaching those targets. The Committee on Climate Change pointed out in its 2012 progress report that about 0.5 GW of offshore was added in 2011, and that would be a total of 1.8 GW at end 2011. We know in terms of the present overhang from the Levy Control Framework what sort of payments are going out in terms of what has been installed so far. The Committee then said, "There needs to be a considerable increase in build rates for both onshore to 1.5 GW each year by 2020 and offshore to 1.8 GW each year to achieve the 27 GW of wind capacity by 2020", which is the target. So you have to ramp that up by three times on present expenditure. Is there the amount in new entrants’ money per year up to 2020 to allow that to happen, in your view, or is that some work you need to do?

Mr Hayes: There are three parts to that answer. The first part has been achieved in the discussions that have led to a Levy Control Framework figure of £7.6 billion, which you have already referred to. The second is the work we are doing with the renewables industries to assist them in sufficiently driving down their costs to get the kind of scale necessary to meet our objectives. I think the third is, very bluntly, getting the strike price right because unless we get the strike price right, as you understand, the incentive will be insufficient to achieve what you want. I think those are the three parts to that.

Q223 Dr Whitehead: Broadly speaking, you would expect for a ramping up threefold in terms of capacity coming on stream per year-just for offshore wind that is, not for other technologies at the moment-you would therefore expect the room for new entrants to be three times as large, all things being equal, wouldn’t you? Is that what your modelling has come up with?

Mr Hayes: Yes, I think that is fair, but I do not want my civil servants to come here and not have their chance to have their moment in the sun, or in the wind for that matter. Hannah is going to speak with the authority that only she can on renewables, so I might invite Hannah to say a word, too.

Hannah Brown: I think in terms of what the LCF enables us to deliver in terms of our renewables target, we fully believe that there is enough there to deliver all the new build that we need. What it means in terms of offshore wind very much depends on where the offshore wind industry’s costs go. We are working with the industry following the cost reduction taskforce work earlier this year to bring costs down from where they are now towards 100 MWh, but obviously quite how much we get will very much depend on where costs go.

Mr Hayes: To some extent you know this but again, for the record, this is partly about scale driving down costs and about prices achieving scale, so we get the prices right to grow the scale. As with any developing technology, you would expect costs to fall over time. There is a fair question to be asked-you are asking it, in fact-about how fast that will occur and the impact it will have on us meeting our targets. It is up to us to get that right.

Q224 Dr Whitehead: Just turning very briefly to what you had anticipated might have been my second question, which was the inclusion of demand-side reductions into that overall levy cap, what sort of indicative evidence of that levy cap up to 2020 do you think or have maybe modelled might be taken out of that overall sum available for new entrants from entrants from demand-side reduction arising from the successful conclusion, as I hope will happen, of the consultative paper?

Mr Hayes: My powers of prophecy are sufficient to anticipate the question but not sufficient to anticipate the answer, on the grounds that until we have completed the consultation it would hardly be appropriate for me to make any fine-tuned judgments about that proportion.

Q225 Dr Whitehead: The consultation says whichever way you go, with the exception of things like capacity payments, it does go into the levy cap.

Mr Hayes: Oh, yes, it is funded; there is no doubt about that. The Levy Control Framework will support any costs associated with demand-side measures that we introduce. It is our intention to use the vehicle of the Bill for that purpose, but it would be wrong to have a consultation and prejudge the outcome either on type or on numbers. Don’t forget that, as you know-this Committee said it previously-demand-side changes are actually also about reducing costs, not least because they are designed to have an impact on demand. Demand is related to capacity.

Dr Whitehead: I think we completely agree on that point.

Mr Hayes: Yes, quite.

Q226 Dr Whitehead: But the question I wanted to get a little bit of clarity on was what proportion of what will be available within the levy cap for renewable support generally, low-carbon support generally, might reasonably be taken up within that overall cap bearing in mind that does not grow. I assume there is no intention to grow the cap as a result of demand-side measures going into it and that, therefore, that will be a demand on that cap itself regardless of what it may save in future years as far as energy use is concerned.

Mr Hayes: Let me answer the question in a slightly different way. My unwillingness to anticipate the outcome of the consultation is not merely coyness or even courtesy. It is because until we have been through that process we cannot devise policies fit for purpose and we therefore cannot cost those policies. You are right, though, Alan; what you are getting at is that if you subtract the demand-side measures and the element that will contribute towards carbon capture and storage and, albeit at the back end of the period, nuclear, you then could take a view about the proportion that will be spent on renewables.

Dr Whitehead: Yes.

Mr Hayes: But I simply say to that so much is dependent on the strike price mechanism that to come to an early judgment about it now would not only be unwise, I think it would be almost impossible. The profiling you are describing that you asked your first question about is something we are absolutely happy to do, but I would not want to come to definitive judgments about what strike price will look like in each area, which would be necessary to give a refined or definitive answer to your question.

Q227 Dr Whitehead: If, indeed, you cannot do that until the strike price has been agreed, how are you able to judge the adequacy of the Levy Control Framework mechanism over the period for the purposes of reaching our targets for renewables in the way that we have already described that we want to do? Would that be of concern to you?

Mr Hayes: You all know that the figure we achieved was well within the range that this Committee had anticipated-the 6 to 10 range-that I think was widely regarded as where we would like to end in this. But I am more than happy to ask my officials to talk about the basis on which they conducted the negotiations with the Treasury because although, of course, this matter was signed off by Ministers, much of the detailed modelling work you are describing was done by Treasury officials and our officials.

Q228 Dr Whitehead: Do you think Treasury officials might be able to come to talk to us to explain their part?

Mr Hayes: I am well aware because I have read in your report that you would like to meet Treasury Ministers and officials at this Committee. I will say no more.

Jonathan Brearley: Is it worth explaining how we did the analysis behind those negotiations? We looked at the different generation pathways you might need to meet your renewables target, to meet any ambitions you have on nuclear and to meet different numbers and types of CCS projects. You also play into that a range of different cost scenarios for those technologies. What you do not come out with is a belt and braces breakdown-this amount for this technology by this year. You basically give yourself an understanding of what the aggregate amount needs to be for a different number of scenarios in 2020. We will publish the draft delivery plan in the middle of the next year and the final delivery plan at the end of the year, when we will look very closely at those trajectories of when things need to be built. On the basis of that, we will be able to say in more detail what that profile should be and, therefore, how much extra we need each year to pay different technologies. Until we get down to the detail of the strike prices, the specific prices we are going to pay, it is hard to set out that profile with any accuracy.

Q229 Dr Whitehead: But you have negotiated the outpoint already?

Jonathan Brearley: Well, the endpoint we are clear on but how we get there-so, for example, how many projects on offshore wind might come through in 2018 versus 2019-is something where you need a lot more granular detail about the investments themselves and how much we are prepared to pay for them.

Q230 Dr Whitehead: But it is a question, isn’t it, of how much goes into the pot at the end?

Jonathan Brearley: Exactly.

Q231 Dr Whitehead: That is, how many different technologies can be supported and what sort of energy efficiency level can be supported, all within a pot of £7.6 billion because that has been predetermined by negotiation?

Jonathan Brearley: Well, the £7.6 billion was based on our analysis of what we needed in 2020. Just to say, that is a tripling of where we are today.

Q232 Dr Whitehead: That is because of accumulation. It is not actually a tripling for new entrants, is it?

Jonathan Brearley: But it is a tripling of the amount of low-carbon support that we are offering, different low-carbon generation technologies and energy efficiency technologies. We are going to have to keep making trade-offs, so we are going to start this process next year but it is not going to end next year. As costs change, our view on the mix of technologies that should come forward would also change. The message to the industry, to all the industry, particularly those developing renewables and so on, is you need to get your costs down and you will get a bigger share of that £7.6 billion.

Mr Hayes: Just one final helpful word. I noticed, Alan, just checking back what you have said on previous meetings of this Committee, you have been very consistent with your call for demand-side measures to be included and thus the consultation and the work we are doing. I can assure you that the whole ministerial team share that determination and that view. Secondly, you said previously, Alan, that you want to make sure that the impact assessment associated with the Bill measures very carefully the effect of the Levy Control Framework. You will know that the impact assessment we published with the Bill anticipated some of the issues we are now discussing. We committed in a foreword to that impact assessment to bring a further impact analysis to the House, including to this Committee. I will ensure that we go as far as we can-without contradicting what we have said today about strike price-in that impact assessment to make clear our answers to the questions that you have posed today, very much in line with what you asked for in previous meetings.

Q233 Dan Byles: It is no secret that the uncertainty over this process, over the Levy Control Framework, the Contracts for Difference and the run-up to publication of the Bill has been delaying investment decisions. We have been told that by investors and I am sure DECC have been as well. I think we all agree we need to get on now with decisions being agreed and final investment decisions being made. You have a process for early final investment decisions ahead of 2014, ahead of all this kicking in, the obvious example being Hinkley Point C and EDF. We would all welcome some good news that this is not just about Hinkley Point C. When do you think the Government are going to be in a position to announce first agreement of some investment decisions coming forward other than the Hinkley Point C project?

Mr Hayes: You will know, and forgive me for saying so, that EDF also announced extensions to their plants in North Ayrshire and Hinkley B today. I just wanted to use this opportunity to signal that very good news.

Q234 Dan Byles: It is very good news.

Mr Hayes: In truth, Dan, until we get Hinkley C right in terms of the deal struck with EDF, I do not think we will get the same degree of confidence from other investors and so getting that right is salient. However, I think once we have it right, and I remain confident we will-I had a conversation with EDF yesterday on this subject and assured them that we will use every endeavour at our end of that discussion to ensure that we move with appropriate alacrity-I think it will then encourage a much wider group of investors to support the development of nuclear new build.

Q235 Dan Byles: It is not only nuclear I am thinking of. There are other investors out there who I think want to move forward a final investment decision but cannot wait until 2014. I was wondering if you think we are going to start seeing some of those coming through later this year, early next year.

Mr Hayes: It is very difficult to give specific dates on that. In a debate in the House, Mr Chairman, you spoke about an investment hiatus being created by the absence of the Bill. That hiatus has been sewn, filled, by its publication and clarity and certainty around its principles. A framework of certainty has been created, which itself I think is incredibly helpful in terms of sending a signal out to investors. But the continued passage of the Bill and the consensus around it that I hope will emerge is critical to underpin the confidence necessary to secure further investment. I think the direction of travel is right. Indeed, you welcomed the direction of travel. It has been widely welcomed by many others, including the CBI and the industry. In nuclear, EDF is critical. In other areas, the development of the strike price mechanism, as I mentioned in the question to Alan, will be critical to catalyse new, fresh investment. But I simply say this: this is a landmark piece of legislation. Frankly, something similar might have been brought forward 5, 10 or, some might say, 15 years ago to encourage investment to rejuvenate infrastructure that we knew required just that.

Q236 Dr Lee: A question on strike prices-and I would suggest that no company should be viewed as critical, Minister. As soon as you view them as critical they have you partially over a barrel with regards to price going forward. I am intrigued to know how this strike price mechanism will work, because clearly it is at the heart of how much this is all going to cost the British taxpayer/consumer. In the light of the fact that tomorrow apparently the Chancellor is going to fire the starting gun on gas if the reports are to be believed, how do you and how does your Department come to a conclusion about what a strike price for an energy form is when we do not know what the price of gas is going to be, and that is before we start exploring shale gas reserves of our own? I just wonder how you come to a conclusion. What is the mechanism by which you say, "Right, we are going to give x amount of money for that particular electricity generation"? Are we giving them a 5%, or 6%, or 7% return on their money?

Mr Hayes: I will come back to your point about criticality in a second, but the logistics of the process are that we will establish the strike price based on analysis of the market and likely market trends. You are right, of course, that is a difficult task because the character of the gas market, for example, is volatile. None the less, the counterparty body based on a careful analysis of the marketplace will make an assessment of costs. We will appoint a panel of experts, as you know-it is part of the provisions of the Bill-to advise on that process, through independent analysis. Ultimately, the decision will be taken by Ministers, so there will be a direct line of accountability to the House for that process.

You are right, this is about modelling. It is about scenario planning. It is about some of the things we have been speaking about earlier in this meeting. The choice of system operator in those terms is critical and the choice of the panel of experts is critical, too. As I mention the word "critical" for a third time, let me return to the first time I mentioned it. I have said to this Committee before, as well as to EDF directly, that these arrangements will only work if both sides can walk away from the deal. If the deal is not acceptable to taxpayers, we will walk away from that. I think it is an important deal and I would not want to do it. In that sense, I make no bones about saying that it is critical, but none the less we do have other options, in the sense that Hitachi have now, as you know, committed to the United Kingdom’s nuclear new build programme. They are very enthusiastic about developing up to six reactors. Clearly, they will want to start to put their plans together over time and the taxpayer interest, as you rightly say, Phillip, is arguably more critical.

Q237 Dr Lee: What I am trying to get to is that clearly your board of advisers is going to make a decision on what is an appropriate return on investment. I am presuming you have that figure, because if you haven’t, how can you start deciding on strike prices? If that has been the case, did the Department or, indeed, did Treasury model different ways of funding energy generation in the future? I have suggested here that maybe the state could own the company that builds the nuclear power stations, as an example. Were there models done of different ways of funding energy generation going forward and were they compared with the model that you are going to implement, I am presuming, of saying, "Right, they can get 7% on their money"?

Mr Hayes: Let’s use nuclear as an example, as you did yourself. You know very well that we might have gone down the road of several other countries of having some state-owned company that funded nuclear new build. But when the commitment was made by the previous Secretary of State to rejuvenate our nuclear capacity, it was very clear that we were going to do so without state subsidy.

Q238 Dr Lee: Was any modelling done of a different alternative, as opposed to setting a strike price and Contracts for Difference? Did you model it?

Mr Hayes: Again, I will ask Jonathan to comment, but certainly at a political level there was no doubt that the consensus we reached across the coalition on nuclear was founded upon the basis that it would be pursued without state subsidy. I said in the House that it would enjoy no subsidy that another technology could not access. Now, clearly, the strike price in this case for a particular project will be agreed around the particularities of that project, but I am very happy to ask Jonathan to comment on whether all alternatives were explored.

Sitting suspended for a Division in the House.

On resuming-

Q239 Chair: Are we ready to resume?

Mr Hayes: I just wanted to say, Chairman, that I would like Jonathan to explain what we had assessed in terms of Phillip’s question. Phillip was arguing that we needed to have looked at a series of models.

Dr Lee: I was asking you, not arguing. I was asking whether other modelling had been done.

Mr Hayes: Yes, what we have modelled, what we have assessed.

Jonathan Brearley: Just to say, throughout the EMR process we looked at all forms of buying power including what we called a single buyer, which is in effect a Government-owned company that tenders for different types of technology, including nuclear. We rejected that model for two principal reasons. One is the level of efficiency because you are right, in a sense, that you would get a lower cost of capital because it is ultimately Government borrowing that would be funding that, but equally when you look at a record of Government-owned companies and their ability to finish projects, we felt that is better managed by developers in the market. Secondly-

Q240 Dr Lee: Did you publish all the figures and so on?

Jonathan Brearley: We had a look at what we thought the cost of capital reductions might be and compared them with the level of efficiency that we would lose, both through the Bill but also remember that we have committed to create a market-based system and we wanted to make sure that generation has the ability to trade in the market to maintain all sorts of efficiencies both in the short term and the long term.

Q241 Dr Lee: What I am trying to get to is that if you model different ways of funding-specifically nuclear, because that is the contentious issue between both parties in the coalition-if you modelled different ways of financing it and it came out demonstrably that it was cheaper to have a subsidy, which I would argue is not a subsidy: it is more to do with paying for it up front than selling it on as an ongoing concern, so I would not describe it as a subsidy but the other coalition partner might-if evidence exists that it was cheaper, am I looking at a political cost here because of coalition politics? Is the British public going to end up paying more for its energy specifically from nuclear generation because one party in the coalition would not tolerate a solely publiclyowned company?

Jonathan Brearley: Our view is that any efficiencies you make through cost of capital would be traded off against the loss of efficiency, particularly if you do this at scale. Remember, we are not talking about building a nuclear power station. We would like a robust and vibrant nuclear sector and we believe that the best way to do that is to maintain the integrity of the market and to maintain a market-based system to generate that nuclear power, even though you might get some cost of capital advantages by doing this through the public sector.

Q242 Dr Lee: But in effect, what is actually happening here is you are going to be setting a strike price for the future and essentially pushing the cost of it on to future generations when the coalition Government will not be in power, so there is a political component to this-that is what I am suggesting.

Jonathan Brearley: In both models you end up pushing the costs on to future generations because the capital is ultimately going to be paid for through the way the electricity is sold. Even if you did it off the Government balance sheet, that balance sheet and that capital liability has to be paid back in the future by future generations. We looked very carefully at this. We also looked at, as I know the Committee know, premium feed-in tariffs, fixed feed-in tariffs-all sorts of different ways to pay for this.

Q243 Dr Lee: Are you prepared to publish the figures on the comparison of how you would fund nuclear?

Jonathan Brearley: We have published all our impact assessments throughout this process. Part of that looks at the different financing mechanisms.

Dr Lee: So all of this information is in the public domain?

Jonathan Brearley: If you look at the impact assessment, for example, of the consultation in 2010, that should set out the different ways of funding, not just nuclear but all low-carbon technology.

Dr Lee: So your answer is, yes, it is. I can go and access it now.

Jonathan Brearley: All of our impact assessments and all of our work on the different models and the different trade-offs are all public.

Mr Hayes: May I just say this? I am sure you have said this previously, Phillip. One of the critical things about investor confidence is avoiding political lurch-change of policy. This is particularly true the longer the investment payback term, so for nuclear build-with a 10-year build and maybe a 25-year payback on investment-the risk of political change of policy is really important. So from our point of view it is absolutely essential that we develop a model that will command support across the political spectrum and that what I said earlier about the Bill being built on a consensus is tied to our ambitions to build investor confidence.

Q244 Dr Lee: I suppose the final point is that in view of the fact that there is a likelihood that there will be a lot of gas knocking around-certainly a lot of gas-fired, gas-powered stations judging by what we are hearing-you are going to have to make a judgment to fund other technologies in a way that is more expensive than taking electricity from gas; I think that is a given. At that point, how are you going to make a judgment on which one gets the most support? Because ultimately you are going to have to make a call. There is almost going to have to be a prescription of, "Right, well, we are going to go with this much and this much," and I just wondered, is there some sort of mechanism that is written down, saying, "On balance, we are going to have this proportion, this proportion and this proportion"? If not, how on earth are you going to decide which one to back, particularly in view of the fact that for offshore wind, at the moment, the costs are pretty prohibitive and we still do not know whether they are going to come down into the affordable range yet.

Mr Hayes: The problem with that argument is that inevitably the costs of these technologies will change over time. You mentioned offshore wind; we have already had a conversation in this meeting about the forwarding costs of offshore wind as a result of the scale of investment, so in modelling the likely medium and long-term costs one has to take account of the fact that the technologies will change, patterns of demand will change, business models might change. The mechanisms that we have put in place under Contracts for Difference in the development of the strike price are about getting that right technology by technology in the low-carbon sector.

Q245 Dr Lee: The strike price you set will determine where the investor’s money goes; that is my point. If you set a strike price of £150 for offshore wind, you can have a cheque now from me; I will give you that. But if you set the strike price at £60 for nuclear then no nuclear power stations will be built. That is the point. You are going to have to make the call in the Department, are you not?

Mr Hayes: You are right and that is why I mentioned Hinkley as an example. The discussions at Hinkley on cost and price are important, and of course inevitably there will be a negotiation around that. We have been very clear that that process should be as transparent as possible, so that people understand the answer to the kind of questions you are posing. But of course, yes, there will be a decision to be made about what level is sufficient to encourage investment.

Q246 Chair: May we approach this from a slightly different angle? Your document suggests that if there are too many projects applying for support-let us say we get to 2018 and there is so much interest that you have to trigger this allocation round process, which I think is the term that has been used-and you suggested, "an objective methodology will be applied to enable the system operator to identify which projects are going to get support from the LCF," will that decision be made at least in part on the basis of cost? Because if we are trying to achieve the lowest possible emissions for a limited amount of money within the LCF cap it would surely make sense, would it not, to say to the system operator, "Favour those technologies whose strike price is lower"? The consequence of that might be-this is merely hypothetical-that you have an offshore wind farm competing against an onshore wind farm, both of which have the necessary consents, but the onshore wind farm might offer much better value. Will the system operator be encouraged to do what offers the best value for money?

Mr Hayes: The essence of the Bill, as you know, is to create a broad technology mix, a generating mix, and the reason for that is because we think that is the most likely way of creating resilience and sustainability. One would not want to construct a mechanism that stimulated an exclusive concentration of one kind of generation because that would be counter the whole essence of our strategy. But I think you are right that the destination we wish to get to is one where technologies compete against one another around the kind of parameters you are describing, of cost and price. That is why we envisage an auction system that would allow, once these technologies have matured, a much more marketdriven approach to which technologies prevail in which circumstances.

Q247 Albert Owen: I just want to concentrate on the implementation of the levy cap. You will be aware, Minister, that investors had raised concerns about the awarding of the Contracts for Difference and you have read all our documentation, I know. You have suggested that there would be a number of applications and if it exceeds the budget then they will be identified by using what you call "objective methodology." Can you share what that methodology will be?

Mr Hayes: I am going to ask Patrick to speak because he has not spoken yet and it does not seem fair.

Albert Owen: Okay, we will listen to what Patrick says but I might come back to you.

Patrick Erwin: We are trying to get to a situation where low-carbon technology is competing for price so we want to get back to that position. We think that is the best way of getting the lowest-carbon generation for the country, the lowest cost for consumers, and so on. We are not going to get there immediately, so up until about 2017 we think we are going to be doing something that looks very much like the RO administrative price setting, then from 2017 onwards technology auctions and then a bit later on moving to neutral auctioning. The mechanism by which we will give the CfD body a decision-making framework will be the EMR delivery plan. Jonathan is better able to speak about that than I am.

Jonathan Brearley: Let us talk about the different stages of EMR. Our aim is to get to a place where we can allow different technologies to compete. We are undergoing a huge transition in the power sector to try to get new low-carbon technologies under way.

Albert Owen: Yes, I understand all this.

Jonathan Brearley: What that means is we have to support some of the more expensive technologies early. Stage one of that will be setting prices administratively. Stage two will be moving to technology-specific auctions in particular groups, and stage three will be moving on to technology-neutral auctions. We will set all that out as part of the delivery plan. Sorry, your question was around the objective.

Q248 Albert Owen: Yes, I am just a little confused about how you are answering, how the implementation will take place. Are you suggesting now that there will be technology types that will be under that or will there be economic impacts and everything taken into consideration? Will it be specific? You have talked about nuclear but as they come in you will be making decisions and it will not be a first come, first served-that was the original proposal. We did not like that idea and we are glad that you have come to a two-stage application. When those applications come in, I am not clear what will happen if a large company has three or four portfolios plus three or four applications. How will the methodology work to do that?

Jonathan Brearley: Once you set the strike price and the contract terms we will set out a process that has very, what we call "specific and objective criteria." These are factual. Anybody, whether a big developer or a small developer, that meets those criteria will be part of that application process. There are two parts to it. The first part will say, "Well, we do not expect the Levy Control Framework level to be breached," in which case it is in essence, you come along, you demonstrate you have done the things you need to do to get a CfD. You get allocated a CfD, you then have to meet certain milestones after that otherwise that is revoked. But as long as you meet those milestones you will get your CfD and you can build and develop. There is a second stage, which is when we think that the Levy Control Framework cap might be at risk of being breached, then at that stage we will design a process that will take into account a number of factors. One of them will be the price of the technology, but also we will think about the wider economic impacts, the industrial growth that might be created by that and we will come up with, in essence, a different process and a different set of prices.

Q249 Albert Owen: There is a general pot now that all technologies can be put into.

Jonathan Brearley: Yes.

Albert Owen: Will you have a specific one for some difficult technologies or for technologies like biomass where the price might come down so you make a readjustment?

Jonathan Brearley: For biomass, where they can move quite quickly so you can grow quite quickly, you might have further limits on biomass because that sector can grow quite quickly and we need to learn from what happened on the small scale feed-in tariffs. You need that less for larger technologies because, to be frank, you can see those projects coming and therefore, it is harder to over-allocate the money in the Levy Control Framework.

Mr Hayes: The point that you are getting at, Albert, is about the transition process where you get to the stage where technologies are sufficiently mature to compete in auction. That might be different for different technologies because of the very nature of the level of maturity. We will be sensitive to that in the process that Jonathan describes.

Q250 Albert Owen: Just for clarity, there will not be a separate pot for nuclear. There will not be a separate pot for CCS. They will be included in the general pot.

Jonathan Brearley: They are included in the general pot.

Mr Hayes: There is no assumption about what proportion they will absorb of the £7.6 billion, and in a sense there could not be because to make that judgment now would be inappropriate.

Jonathan Brearley: Let us also remember that the CCS projects will be decided through the competition and the process would bring on the first nuclear power station, I think the developer envisages around 2019. That is how we would allocate the CfDs for those, but they all come out of that general pot and we have not said, "There is a ring-fenced part for different technologies."

Q251 Albert Owen: There might be a separate pot for special cases such as biomass.

Jonathan Brearley: You might have to have other limits for things like biomass just because of how fast they can grow.

Q252 Sir Robert Smith: I should remind the Committee of my interest in the Register of Members’ Financial Interests to do with the oil and gas industry, in particular a shareholding in Shell, and maybe deal with how the market is going to develop under this new regime. One of the healthy signs of a market is the ability of new entrants to come in. In the generating market there is a considerable concern among the independent generators that the switch from the RO, that put an obligation on suppliers to buy from them through the Contract for Difference, will alter the power purchase agreement. We were wondering whether you had looked at these concerns in your review of independent generators.

Mr Hayes: There are two aspects to creating a more plural market. One, as you suggest, is among generators, and the other is among suppliers and it seems to me they are both necessary.

Sir Robert Smith: It was the generators that we were concentrating on in the EMR, obviously.

Mr Hayes: Yes. In the renewable sector, of course, the very nature of creating greater certainty around price is an important incentive to smaller generators. The smaller generators often complain about a lack of certainty, a lack of confidence that makes it very hard for them to establish in the marketplace. It is certainly true in the low-carbon sector that the provisions of the Bill will create a more conducive environment for those energies.

Q253 Sir Robert Smith: Price has been dealt with by the Contract for Difference but their concern was that with no obligation to source from them they might not have a buyer, so they could have a price but no buyer, and if they do not have a power purchase agreement to go to the banks with they will not get the investment and they will not enter the market.

Mr Hayes: Yes, that is a fair point and an important point in that we take the view that we do need a more plural marketplace and we need more liquidity. We are looking at barriers to entry and we do share your view that we need to make the system less bureaucratic. But in terms of buying we know that Ofgem has proposals on how that could be addressed; those proposals include stipulating a proportion of power that would need to be purchased by smaller providers and we are looking at those measures now. The Bill of course empowers us to take further action should that become necessary, but I am very happy for Jonathan to comment further.

Jonathan Brearley: There are two elements to the issue. One is, for all generators and suppliers you need a liquid market that you can trade fairly in. In essence, there has been some concern raised that the current market is not liquid enough and therefore, we are looking to Ofgem to help us solve that, particularly through their work on the liquidity review. However, I think as you know we are taking backstop powers in the Bill to make sure that if those reforms do not drive the liquidity we need then we will take further measures to make that happen. But equally, independent generators have come to us and said there is an issue around accessing PPAs. Their perspective now is that that is an issue that exists under the RO as much as under any new regime. They are telling us that today, even with the RO here, they are struggling to get PPAs and one of the reasons for that is that they need further price guarantees to be able to get debt and therefore need price floors within the PPAs, for example. Those are hard for the suppliers to give, partly because they then get accounted on their balance sheet. We think CfDs have improved the situation. We do think they give greater revenue clarity for independent generators but allow them to sell at a variable price, which makes it easier for suppliers to offer PPAs. But as the Secretary of State said when we were here, the independent generators are incredibly important to this sector. We need a lot of new companies and new money and therefore will look harder at how we make the transition work and also consider regulatory options if we think we need them.

Mr Hayes: That is why we took the backstop powers, but to amplify that point very strongly, greater price certainty is not just about the price itself; it is about the relationship that has to investor confidence and the ability particularly of the smaller organisations to attract the kind of backing they need. As I say, Ofgem, as you know, are doing further work on liquidity and we are looking at that closely, but if we have to take further steps then we will because we take the very strong view that a more plural marketplace would create downward pressure on prices through greater competition, which of course is what was originally envisaged post-privatisation. Concentration of power in the marketplace was not what the architects of privatisation imagined would occur. They had expected a more plural marketplace where both the generator and the supplier were able to create downward pressure on prices.

Sir Robert Smith: Yes, because the suppliers pray in aid the wholesale price, so for the consumer it is as important that the wholesale market is working as efficiently as possible as well.

Mr Hayes: You need wholesale liquidity and retail liquidity.

Q254 Sir Robert Smith: We did recommend looking at the buyer of last resort being introduced or an incentive to source energy from low-carbon generators. In your response you did not touch on that. Did you consider those options?

Jonathan Brearley: We need to do further work with the industry on this issue. Part of that just needs to be to look at the transition into EMR and to examine whether that will unlock some of the issues in the PPA market. However, as we said in one of the many documents we published alongside the Bill, we would look further at regulatory options if necessary, but just to emphasise, buyers of last resort and other incentives do have quite strong downsides so we just need to be careful that we do not create unintended consequences by introducing more regulation into the market over and above what we are doing already. I do not think we are saying no to it; we want to solve this problem but let us have a look at some of the market-based ways of doing that first.

Q255 Sir Robert Smith: Do you have a back of the envelope idea of how much of the £75 billion will be coming from the smaller independent generators?

Jonathan Brearley: I do not think we do. That is mainly based on technology costs and how much it costs to fund investment, so we have not broken that down by group but without doubt, we are sure that we need a strong and vibrant independent generator sector to meet our targets.

Mr Hayes: The point you made on 20 November, Robert, was about the characteristic of vertically integrated companies and the relationship they have with the market compared with independents. It is a point that is well made, it is well understood and we are determined to do something about. To emphasise, we want a more plural marketplace. We have taken the powers in the Bill; we are working with Ofgem; we are determined to take the necessary measures both through price and other mechanisms to bring that about.

Q256 Sir Robert Smith: What sort of time scale would you put to judge on whether you need these backstop powers implemented?

Jonathan Brearley: For liquidity we need to look to the Ofgem proposals first. It is something that we are going to be taking forward, but on the PPA issue we are going to be taking forward a process with industry fairly soon to start that. We have not committed to end dates until we see first of all what the evidence is and how long that takes to resolve.

Q257 Sir Robert Smith: Obviously, if we are wanting investment we need to get some certainty. The very fact that you are looking at it suggests that it needs looking at, and if it needs looking at, people are going to be wary until you have finished.

Jonathan Brearley: Absolutely. We have our ministerial round table soon with independent generators. That will start that conversation but we already have had a call for evidence. We have built up our evidence base but it is just getting more detail to make sure we understand the necessary trade-offs. I think our view is that working hard with the industry to get a transition to EMR would be incredibly helpful in that process.

Mr Hayes: The test, Robert, as you well understand because you spoke about this before, is how much you can do by creating a different set of market conditions around things like greater investor confidence, as has been referred to, and how much you have to introduce obligations into the system to guarantee a place in the market for smaller businesses. That is precisely what Ofgem are looking at.

Q258 Mr Lilley: I find myself so out of sympathy with this whole bureaucratic attempt to rig the market that I cannot really enter into this fine-tuning debate. May I ask a more fundamental question? As I understand it, the Government’s policy is still based on the discredited Stone report. He reviewed all the other work that had been done and concluded with his own estimates of how much hydrocarbon prices needed to rise from the level they were in 2006 to make other sources of energy sufficiently competitive that we would spontaneously decarbonise by 2050 to the degree required. That increase in the crude oil price and hydrocarbon price that he thought necessary has been exceeded by what has occurred in the marketplace. The crude oil price was under $60 then; it is just under $90 now. It has risen by 50%, which is more than enough on his calculations to encourage renewables spontaneously. They should be competitive. Why do we need additional subsidies? I can see we might need to guarantee that the price does not fall. I can see we might need some subsidies to ensure capacity, but why over and above that do we need any subsidies at all?

Mr Hayes: I think there are three things. Other commodity prices have gone up too so it would not be fair to say that this was an isolated-

Mr Lilley: What do you mean, "other commodities"? Other than hydrocarbons? The price of wind has not gone up; the price of water has not gone up; the price of solar has not gone up.

Mr Hayes: But the more fundamental point is that our view about the energy mix that I described earlier is based on the judgment that you are projecting forward for several decades, which we will be bound to do as part of this Bill. In an unpredictable world where prices and costs will change, it is important to ensure that you do not put all your eggs in one basket, that you keep a number of doors open in terms of the way that you meet the fundamental requirement to ensure that supply meets demand. If energy security is the core objective-I will leave aside emissions, Peter, because I know you will not want me to talk too much about that-if energy security is the fundamental objective and linked to that is a desire to stop prices going up unsustainably, then it seems to me absolutely right and proper that we have a range of ways of generating electricity and that is what these measures do. There is another view, I guess, but it is not the prevailing view of the Government.

Q259 Mr Lilley: You are saying you no longer accept the calculations in the Stone report that the current level of hydrocarbon prices is sufficient to do the trick. You need on top of that to make energy even more expensive by all these taxes and transfers and subsidies.

Mr Hayes: I said earlier that we wanted to move to a more market-driven system. The destination we seek to get to is a system where technologies compete against one another in a more market-driven model, but I think the purpose of the Bill is to chart a route to that destination. If we think the mixed economy that I have described in terms of generation is important in terms of energy security then this legislation and the framework of certainty it creates is entirely fit for purpose.

Mr Lilley: I will leave those thoughts to ferment in the minds of yourself and your officials, but I do not think your reply remotely addresses them.

Mr Hayes: I was courteously avoiding any mention of emissions.

Mr Lilley: The concern is all based on emissions.

Mr Hayes: I mentioned the argument may be conducted around energy security. If we add emissions to the considerations, which given that we are committed to a 2050 target, we must-made long before me and well above my pay grade, by the way-I think the Bill does both. It allows us to move towards our targets in respect of emissions and simultaneously provides the vehicle to deliver the energy mix sufficient to guarantee energy security. That is what we are determined to do and I am proud of the fact that this Government have put legislation forward in that spirit.

Q260 Dan Byles: Minister, I am keen just to discuss the thorny topic of the 2030 decarbonisation target, which seems to be turning into one of the controversial aspects of the Energy Bill-whether there should be one or not. Quite a range of people have come out supporting one, including most of the industry bodies such as Renewable Energy, Carbon Capture and Storage, Nuclear Trade Associations and the CBI, and other people are against it. Interestingly, we heard from the Low Carbon Finance Group a strong suggestion that regardless of the merits of it, "For goodness’ sake do not delay the Energy Bill arguing about it." But I am quite keen to know what the Government’s rationale is behind saying that we might have a 2030 decarbonisation target but not until 2016. Is there thinking behind those dates?

Mr Hayes: Yes, the rationale is that 2016 is the date of the fifth carbon budget and essentially the fifth carbon budget sets the overall ambition for carbon reduction between 2028 and 2033, as you know, and that any additional target in respect of emissions should be linked specifically to that measure. It is absolutely appropriate that we should see this in the context of the wider economy on those terms.

Q261 Dan Byles: Some people seem to view it as a step back or see the danger that it will frighten investors because it suggests that there is perhaps a lack of commitment to renewable energy or to decarbonisation, I should say.

Mr Hayes: There is an argument that we might have set a target that was a range rather than a specific number. You could argue you could have set a target in the Bill that was sufficiently permissive to give you some scope to encompass the fifth carbon budget, but I suspect if we had done that, Dan, you would have had complaints from some of those that you mention that we were being woolly-we were not being particular or specific enough. My own judgment is it is better to wait until we know in precise terms what the fifth carbon budget delivers in order to be more accurate in how we develop and deliver that target.

Q262 Dan Byles: Would you not expect there probably to be a range then? My understanding is that the Government have said that the impact assessment for the Bill will be updated to include scenarios of average power sector emissions ranging from 50 g of C02 per kilowatt hour to 200 g.

Mr Hayes: Yes.

Dan Byles: There will be a range possibly in the impact assessment of this Bill. Is that sort of a halfway house?

Mr Hayes: Yes, exactly. There are ranges and ranges. If we set something out in the Bill anticipating the fifth carbon budget, the range would have to be so broad that it would attract the criticism that I described.

Dan Byles: So as not to be seen to be tying the Committee’s hands.

Mr Hayes: There is an argument, and I have heard it put, that once you have the fourth carbon budget figure the chances of the fifth carbon budget being substantially different defines that range, and of course in the end you will have to deal with it. It will not be a particular figure; there will be some flexibility but I think we have ended up with the best compromise in that respect. You are right, there was a lot of discussion about this and some of it was played out more widely in the media. I think not to settle for that compromise would have risked delaying the Bill in the way that you describe and I think that would have been extremely unhelpful. We have ended up with taking powers in the Bill to set a target, we are doing so around the fifth carbon budget and we have agreed a timetable that I think delivers the very rationale you wish for.

Q263 Dan Byles: You are not worried that there will be a problem with investors, particularly in supply chain perhaps, seeing this as a lack of commitment from the Government. Do you think that is unreasonable?

Mr Hayes: The certainty in the Bill coupled with the greater certainty around the Levy Control Framework are probably more significant in investing the renewables sector with confidence. The strike prices we agree for those technologies and the envelope that we have agreed in the Levy Control Framework, I think will send out a powerful signal to the renewables industry. If you look at the renewable industry’s response, by the way, to the Bill it has been very positive and I think that rather underpins my point.

Q264 Dan Byles: Finally, to turn the whole argument now completely on its head, would you not potentially say that a danger of putting a 2030 decarbonisation target on a specific industry such as electricity-in the context of an overall economy-wide carbon budget-might skew the efficiency with which we seek to reduce emissions because we might be seeking hard emissions in a particular sector where there might be lower-hanging fruit and more efficient emission reductions that could perhaps be made in a different sector altogether?

Mr Hayes: Dan, you are being very provocative because you are teasing me. You are on one hand inviting me to say that the rates for emission targets that we have ended with are insufficient and now you are teasingly asking me to say that they are too onerous.

Dan Byles: I am simply asking questions.

Mr Hayes: There was no criticism implied. I think that rather reinforces my point that this is a sensible compromise.

Q265 Albert Owen: Going back to what Dan asked, to unite all those groups against your decision not to have a Decarbonisation Act took some doing, to be honest with you. You have the CBI there who can hardly be called a left-wing leaning group; you will have a better word for it than I have. Here they are coming out saying that this is the wrong decision; you talk about carbon budgets, they know the carbon budget rounds as well, they understand how these things work as much as anybody else and yet they have criticised it. Both yourself and the Secretary of State when he made a statement and answered questions last week spoke about the compromise and I think you have let the cat out of the bag. This is a political decision and it is a political fudge to 2016. The coincidence that we are in a fixed-term Parliament and there is going to be a 2015 budget really drove this decision because you are standing in the face of a huge alliance of people. Yes, you are right, they welcome the main tenets of the Bill but they united in criticising this because of business decisions as much as anything else. I believe that you have adopted a political fudge. How do you respond to that?

Mr Hayes: Every compromise in history, Albert, has been described as a fudge.

Q266 Albert Owen: Is it a political compromise or is it to do with the budgets?

Mr Hayes: I think you have an absolute logical argument, a rationale in the words of Dr Lee and Mr Byles around the fifth carbon budget.

Q267 Albert Owen: You never indicated as a Government in all the evidence sessions that we have had with you that there was going to be-there were no manifestos in the political aspects you have answered but you never said, "We are going to wait for the carbon budget rounds" before. I put it to you that this is a cover because you could not get political agreement.

Mr Hayes: No, this was the consequence of careful consideration. When one contemplates these things over time and seeks different views.

Q268 Albert Owen: I understand how basic politics works and coalition government.

Mr Hayes: Yes, I know you do.

Q269 Albert Owen: But we had the Secretary of State in front of us less than six days ago saying that lots of things had not been decided. The carbon budget had been decided in the rounds a long time ago and there was no indication that that would be a reason for having or not having a carbon price. My concern is that investment will be put off by this. That many companies will be making final investment decisions on gas, on various other things and will be put off by it and that is why this opposition has arisen. It is not a political one; it is a business case.

Mr Hayes: I can tell, Chairman, that I perhaps slightly understated my case so let me have another go. I am known for understatement. It would be extraordinary given that we have arrangements in place around a carbon budget that takes account of the whole economy to set a target for a single sector.

Q270 Albert Owen: I am not talking about single sectors.

Mr Hayes: I made the point fleetingly to Dan but I will make it more forcefully. The purpose of the process by which we determine these carbon budgets is to take a view about decarbonisation, tied to our view about emissions for the whole of the economy. To have come up with a target for a single sector would be entirely out of keeping with that strategic position and I think we have the right solution. I do not apologise for describing it as a compromise. Anyone would think that compromises were a bad thing, Mr Chairman. I know that is not what the hon. Gentleman thinks but I know he is a man who always takes a measured view of these things.

Q271 Albert Owen: I try to take a measured view but I still think the business community is right on this one and the Government are wrong.

Mr Hayes: Let me try another angle, Chairman. I have many weapons at my disposal and I want to give you the full armoury. The other argument you could reasonably make is that the essence of this Bill-very much in line with what was called for by the industry, by this Committee and by colleagues across the House-is to deliver a greater degree of clarity with the certainty springing from that providing sufficient confidence to stimulate investment and rejuvenate our energy infrastructure sufficient to deliver supply to meet demand. Imagine if we set a carbon target that we then had to change because of the fifth carbon budget. Would that have added to certainty or would it have made investors and the sector less certain? I suggest the second.

Q272 Albert Owen: The Committee on Climate Change made a recommendation of a 2030 target, so they were not pulling that out of thin air.

Mr Hayes: As I said, the process was an iterative process based on the distillation following argument of the salient points that I have raised. We might disagree about it, Albert.

Q273 Albert Owen: It is not me, with respect. I am quoting other organisations who have lobbied every Member of Parliament, so this is not a personal view; it is a business view as well. The business community are making this argument and they want certainty and many of them that have lobbied me feel that there should be a target. It would give them greater certainty.

Mr Hayes: Indeed, we have said we will have one. Had we decided not to put any provision in the Bill I think your point would have held more water, but given that they asked for a target and the Bill creates a mechanism to deliver one we have answered their question in the affirmative.

Albert Owen: I think Coalition politics has won the day on this one.

Q274 Chair: I just return to an answer from a few minutes ago. I think I am right in saying that you said that to set a target now, as opposed to 2016, would be out of keeping with the strategy-I think "strategy" was the word you used-the Government are following.

Mr Hayes: I think to set a target for a particular sector rather than the whole economy-you know very well that to meet our emissions targets, of course, our Department has a big role to play. You also know that other Government Departments, notably Transport, have a big role to play too. I think to have set a target irrespective of the wider economic consideration would probably have been inappropriate.

Chair: Although setting a target for the electricity generation sector was explicitly what the Government’s statutory advisor, the Climate Change Committee, had recommended.

Mr Hayes: In the end we came to an agreement around compromise, as I said earlier.

Q275 Chair: Tomorrow we are going to get the gas strategy, which appears to be coming from the Treasury rather than DECC, but no doubt you have some advance knowledge of what it contains. It is widely trailed in today’s Financial Times. Do you think the projections for new gas-fired power stations will be compatible with the limits set in the fourth carbon budget, which were accepted by the Government last year?

Mr Hayes: I have the Financial Times close to hand, as I assumed you would mention it. You will know that our planning always anticipated a sufficient investment in gas in order to ensure that we achieve security of supply. Because of the age of the nuclear infrastructure, the time it would take to rejuvenate that, the age of much of our existing gas infrastructure, it was going to be necessary to maintain capacity to invest significantly in gas. You will know too, Chairman, the assumptions, which are long-established that, after 2030 that may be unabated gas because of the time it would take for carbon capture and storage to be developed and delivered commercially.

The announcements that you are anticipating-I obviously do not want to say too much about things that are not already established-are in line with that. The replacement of existing gas generating capacity would, in total, in net terms, take up most of what has been identified in the newspaper you mentioned. It will be a small net increase but it is very much a minority of that total that is mentioned in the press.

Q276 Chair: I think many people would interpret what was suggested in the Financial Times as the substance of tomorrow’s announcement as incompatible with compliance with the fourth carbon budget. If that was to be the case-I am not asking you to say whether it is or not, we have less than 24 hours to know whether it is-that would suggest that the Treasury has unilaterally pre-empted 2014’s review of the fourth carbon budget. I think some people will regard that as a further element of uncertainty in this picture rather than contributing towards the certainty and stability we were hoping for.

Mr Hayes: I think Jonathan will say a word about some of the details in terms of capacity, but you would hardly expect me to give an answer on behalf of the Treasury. What we are committed to do through the Bill is to provide sufficient certainty to deliver the gas investment necessary for us to ensure energy security. We have been very clear that gas is the important part of what we want to achieve. The Gas Generation Strategy will make that very clear, and it is my department that has written the Gas Generation Strategy. I do not know if Patrick or Jonathan want to speak about the details in terms of scale, because I do want to emphasise that even if you assume what you read in the paper today to be accurate, the vast bulk of that is to replace existing ageing gas infrastructure. The net additional investment in gas is a small minority of the total reported in the papers today.

Jonathan Brearley: Just to add two things to that, and I think the Minister has made the main point. First of all, we do want a diverse generation portfolio and that means we do want a healthy gas sector as part of that. In addition, by 2030 a lot of our existing gas needs to come off the system, therefore we do need to replace it. We have tested a series of assumptions around where we might get to by 2030, and I do not want to comment on the numbers that will officially come out tomorrow, but let us imagine that we had 25 or 26 GW of gas; under our analysis that is compatible with a pathway that is compatible with 100 g per kilowatt hour in 2030, which, as you will recall, is essentially the assumption we have used in previous EMR analysis.

Mr Hayes: If you are talking about gigawatts, to put some flesh on the bone, about 21 GW of that is to replace existing capacity.

Q277 Chair: So we can take it that DECC would oppose any attempt by the Treasury to achieve investment of more than 26 GW in gas?

Jonathan Brearley: What we do not need to be doing is predicting specific generation mixes in the 2020s from where we are today. What we need to do is make sure we are compatible with our emissions goals, but ultimately look towards costs coming down and to give sectors that have the least cost the greatest share of the market going forward. Remember, we have two CCS demonstration projects in this decade. We would hope that CCS begins to get deployed in the 2020s, and we are talking about both unabated and abated gas as part of that.

Q278 Chair: Just for clarification, the new gas plants that might now be built under the strategy will have grandfather rights through until 2045; is that right?

Jonathan Brearley: Under the emissions performance standard, yes.

Q279 Dr Whitehead: Forgive me, the emissions performance standard means that they will be grandfathered until 2045 without being abated, because the gas plant will come out under the level for the emissions performance standard as set out in the Bill.

Patrick Erwin: It is important to understand how power stations are used. What we would typically expect to happen with any new power station, particularly gas, is when it is new and operating at maximum efficiency it will be running pretty much at base load. As it becomes older it goes down the merit order and gas power stations at the end of their lives will be used as peaking plant. As any asset ages you use it for different things-where it sits in the merit order in terms of both field input prices and carbon prices, and that is why it is fully consistent with 100 g and the Committee on Climate Change recommendation. We then need a lot of capacity on the system if we are going to have large amounts of low-carbon electricity, which tends to be less flexible than despatchable fossil fuel.

Q280 Dr Whitehead: It will all be under the emissions performance standard level as set out in the Bill whether it is running intermittently or not?

Patrick Erwin: Yes.

Dr Whitehead: By 2045?

Jonathan Brearley: So it will be grandfathered, yes.

Q281 Christopher Pincher: Something like 18 months ago, this Committee said that demand reduction should be placed at the heart of the EMR. You have touched on demand reduction but I would like to explore it a little further, if I may. The Committee said that, and the following month DECC swung into action and initiated its electricity demand reduction project-not necessarily as a direct consequence of what this Committee said-to assess whether there are sufficient support and incentives to make efficiency improvements. The seasons moved on and changed and McKinsey produced their assessment in July 2012, comments were invited by 10 August 2012. Then on 20 November this year, a few days ago, the Secretary of State said that DECC would be publishing a consultation on electricity demand reduction with the consultation due to end at the end of January next year, some 18 or 19 months after the Select Committee first raised the importance of demand reduction. If we accept that demand reduction is an absolutely crucial component of managing energy strategy, reducing carbon emissions, and reducing bills for consumers, why is it taking so long to get to grips with these things?

Mr Hayes: I do not think that demand reduction has historically been given sufficient priority by Governments. I do not think the last Government gave it sufficient priority and I do not think, up until the Secretary of State assumed his role, it had been given sufficient consideration in the preparation of legislation. When our current Secretary of State assumed his role, as I am sure he told this Committee, he made it one of his key priorities. That encouraged a greater concentration of effort in this regard and the consultation you describe is a product of that effort.

You are absolutely right, Chris, this Committee has taken a view on demand reduction. I have several quotes. I mentioned one from Alan earlier from previous meetings of this Committee, it is complex and the reason it is complex is because one is trying simultaneously to take steps that change the assumptions about the relationship between production and consumption, while wanting to keep bills down, not wanting to create extra bureaucracy and costs in respect of commercial and business users, taking account of the changing character of consumption, which will come from smart grids and smart meters. These are all, as this Committee has previously noted, challenging areas of policy. None the less, for me, rather as for our Secretary of State, not taking account of sensible measures you can put into place to control demand is not acceptable, which is why we are consulting on it now.

Q282 Christopher Pincher: This is interesting, because you mentioned smart meters as one method or mechanism of managing demand. Your colleague, Greg Barker, came before the Committee some weeks ago and we asked him about the smart meter rollout plan and what the timetable was for it, what the plans to underpin it were, how localised it was going to be, and the impression we gained was, from officials as well, that the plan is rather laid back-that there is lots of aspirational talk but there does not seem to be yet a clear view of delivery. My concern would be that with the Green Deal, for example-a very innovative idea to get to grips with the most difficult to reach housing-that has not been taken up, it is fair to say, in the way we would like it to because the plan, it seems to me, to roll this strategy out was talked about and not delivered. Do you think you are going to get a grip of the demand side of the equation and find mechanisms to ensure that there is buy-in and take-up from consumers?

Mr Hayes: The demand-side response is already part of our considerations around the capacity market because, of course, if you are going to measure capacity you need to measure patterns and trends in demand. But I think you are right; what this consultation needs to stimulate is a fresh energy, a new vigour around implementing plans in respect of demand-side measures. It is important that we do so around mechanisms that deliver. If you look at the debate on demand-side controls over time, some of that debate has been characterised by a certain idealism. It is very important that those ideals are translated into positive deliverables. That means mechanisms, which both incentivise best practice, and once best practice is established allow it to be shared. I think that can be done and I think it can be done on the back of this consultation. I think you are right that a new enthusiasm and additional energy, a new vigour, is necessary to drive that through.

I hear what you say. It is close to my heart and the Secretary of State’s and we are pressing very hard in the Department to deliver that new vigour.

Q283 Christopher Pincher: Hearing that, the consultation ends on 31 January; what will happen then?

Mr Hayes: It is certainly our intention to use the Bill in this regard. I think it will be a missed opportunity if legislation was going through the House, given that we have a consultation that was coincidental with that legislation, that we did not take the steps necessary in the Bill to deliver the mechanisms that I have just described. I am confident that in planning the strategy new measures on the demand side can form part of that.

Q284 Christopher Pincher: On the timetabling of the Bill, which is very important if sufficient scrutiny is going to be given to the outcomes of consultation and the other elements of the Bill, I understand that the Second Reading will take place on 19 December, although the Vote Office seems to take a different view. It will be interesting to know when you think the Second Reading will take place. Then Committee stage, I am told, will take place between mid-January and mid-February. The consultation will end on 31 January, the outcomes you suggest are probably going to be coming through in the spring; where do you think that the outcomes of that consultation are going to be debated if not in Committee or the House of Commons-are they going to be introduced into the House of Lords?

Mr Hayes: You know the ambitions with respect to the Bill are much as you described. We would like to get Second Reading before the Christmas recess. We anticipate having a Committee stage, as you describe, in January. We want this Bill to receive Royal Assent by the end of next year, and that is following Report stage and its transition through the other place. We are determined it should have thorough scrutiny, for reasons I gave earlier about the need to build consensus. There needs to be a Bill that is scrutinised thoroughly and properly in order to engineer and, indeed, to deserve that wide support. Given all of that, the timetable you describe in respect of the demand-side consultation would allow us to amend the Bill accordingly. But I do say this is an intent at this stage because you are right to say that it has to work in terms of the outcomes of the consultation and it is not right for me to prejudge what those might be, but I understand the point you are making, that it will be a wasted opportunity if we did not take advantage of it. Patrick is our expert on timing and might want to add a word or two.

Patrick Erwin: I just say at this stage, as the Minister says, we are seeking a Second Reading before the end of the year but we do not have anything confirmed. Similarly, if that happened we would expect a Committee stage to run in January and February. This is a pretty large Bill so we would expect a fairly extensive Committee stage. If, following consultation, we judge that we need to legislate, then we would hope to bring forward amendments at Committee stage and certainly in the Commons.

Q285 Christopher Pincher: You will appreciate it will be ironic if these amendments are introduced into the House of Lords stage of scrutiny given that the House of Lords is not elected, given that the Members there do not represent our constituents who have to face higher bills potentially. It would be ironic if the first scrutiny of the changes that you propose to bring forward takes place in the Lords and not in the Commons.

Patrick Erwin: We have a timetable, which is seeking to avoid that eventuality.

Mr Hayes: We hear what you say, indeed that is our view too. That is what we are seeking and let me amplify that it is absolutely our determination to build a proper set of considerations around consumption into our view of capacity and the necessary level of production to meet capacity. Therefore a new paradigm around the relationship between supply and demand seems to me to be important in terms of developing a strategy to which this Bill gives life.

Q286 Dr Whitehead: The capacity payment proposals that are in the Bill are not subject to the Levy Control Framework, I assume?

Jonathan Brearley: No, they are not subject to the Levy Control Framework. The reason for that is that the costs of the market-wide capacity mechanism are, in essence, as we talked about it when we gave evidence with the Secretary of State, the net between the change in the wholesale price and the levies that come from consumers. That is an incredibly complex calculation to do on a year by year basis. Equally, it is a regulatory measure that is very close to other things we do in the market, like cash-out reform, and so on, and therefore I think we made a sensible judgment that it is better to keep this outside the scope of the LCF.

Q287 Dr Whitehead: The purpose of the capacity payments is to ensure we have sufficient capacity over a period?

Jonathan Brearley: Basically, yes.

Q288 Dr Whitehead: We are going to have the first auctions in 2014?

Jonathan Brearley: We have said we are minded to run the first auctions in 2014 subject to further advice from Ofgem and National Grid.

Dr Whitehead: For delivery in 2019.

Jonathan Brearley: Yes, 2018-19.

Q289 Dr Whitehead: That would mostly be for ensuring capacity of gas-fired power stations, is that right?

Jonathan Brearley: Yes, in part.

Mr Hayes: Very largely, yes.

Jonathan Brearley: But also demand-side response will play a part in that.

Q290 Dr Whitehead: In 2019 we will have a number of brand new gas-fired power stations as a result of the capacity auction?

Jonathan Brearley: If needed. What we will do is set a security standard and from that standard we will assess the amount of capacity that we think we need. If needed we will get new gas-fired power stations, but we also hope to get new demand-side response technology on the system, which will allow us to avoid building more than we need.

Q291 Dr Whitehead: So we hope to get; do we have anything more than "hope" in that respect?

Jonathan Brearley: There is quite a lot of gas in the pipeline, sort of through the planning system and potential to be constructed. That would depend on the investment case. We believe that the capacity market will help that investment case.

Q292 Dr Whitehead: The new plant will presumably form the majority, although we do hope there will be some demand-side response stuff, so how long is it, do you think, before that new plant on a system will start becoming a bit intermittent, as Mr Erwin said? Will it be mostly at that point mid-range running most of the time or is it the assumption of the capacity mechanism that the money will pay for the gas plant not to produce?

Mr Hayes: It is very hard to say that because you know that at the moment the current levels of demand-because of the shape of the economy-have led to the point where we have spare capacity of something like 15%. To answer your question, you would have to have an extremely clear view now about the kind of capacity that might prevail in the timetable you have described.

Q293 Dr Whitehead: That is what we have just discussed the process of-a clear view five years ahead.

Mr Hayes: The capacity market mechanism gives you an additional power to intervene to deal with capacity shortage at the time that you run the market. You are right; that would certainly stimulate, we hope, gas investment, and would be designed to do just that. But you would only do it against a measure of capacity at that time so it would not be appropriate at this juncture to set out the detail of that. The detail will be attuned to the prevailing circumstance.

Q294 Dr Whitehead: But we will be able to do that by 2014, presumably, because that will be for delivering in 2019, so we will need to know roughly speaking what sort of capacity we will want in 2019.

Mr Hayes: We will take a view then.

Jonathan Brearley: Absolutely. Just to say, though, what we are not doing now is pre-empting that decision and that discussion but, just again, yes we want gas investment but, yes, we want other forms of investment as well.

Q295 Dr Whitehead: Yes, sure. But that gas coming on-stream in 2019 will be brand new gas-fired power stations?

Jonathan Brearley: Yes, if needed, it will be brand new gas-fired power stations.

Q296 Dr Whitehead: So they would be unlikely to run intermittently, won’t they? For example, they will not be, as Mr Erwin said, end-of-life plants that will just occasionally come on-stream for peaking purposes.

Jonathan Brearley: What you always find with gas investments is when you start a plant, that runs at base load or close to base load.

Mr Hayes: It is a pretty well-established pattern in terms of gas generation we know, the kind that Jonathan sets out.

Jonathan Brearley: But remember, as one enters the merit order all of the other plants get pushed down the merit order.

Q297 Dr Whitehead: Bearing in mind those will be mid-merit running plants in 2019, what sort of capacity do you think will be necessary over the period-bearing in mind what those plants are doing-in order to reach the target that you have mentioned of the 100 g, which the Department is putting in by 2030? What sort of range would it be, do you think? Bearing in mind these plants will mostly be producing most of the time, that is the reason why they are being invested in, in the first instance, although they may become intermittent much later in their life and peaking and that there will be a number on-stream from, say, 2019, 2020 onwards. Then in order for the Department’s scenario of 100 g of CO2 per kilowatt hour by 2030 to be achieved presumably the Department must have some view about what overall capacity of plant-you have mentioned 26 GW-would be necessary at that point. Is that a position you hold to in the light of what is the likely scenario of the capacity payments coming forward?

Jonathan Brearley: We have set this out in our previous impact assessments and when you look at the capacity of different technologies that might be compatible with 100 g per kilowatt hour, when you look at a capacity of gas it is at or slightly above the capacity of where we are now.

Dr Whitehead: So that might be between 20 and 26 GW, something like that?

Jonathan Brearley: Potentially 26 GW of new capacity, some of that replacing old capacity that is on the system already.

Q298 Dr Whitehead: So if someone came forward with, for example, 37 as a target capacity, that would burst the figures, wouldn’t it?

Jonathan Brearley: That would only be compatible with a higher grams per kilowatt hour by 2030.

Dr Whitehead: Any idea how high that might be?

Jonathan Brearley: We are going to do further analysis as part of the impact assessment and come back to that, but clearly I think it is unlikely that will be compatible with 100 g per kilowatt hour.

Q299 Dr Whitehead: But if you were to try to mitigate that by running capacity payments in such a way that you try to, as you say, bring forward different forms of capacity, which would run alongside that, which would themselves be flexible, storage and devices, how might you do that within the capacity payment arrangements as they are presently designed? Is it just hope or are there circumstances in which you could specify that as part of the auction process?

Jonathan Brearley: I am quite optimistic about the role of DSR and how we might grow that. As we have said, and I apologise for the volume of documents that we sent out last week, as part of that we would like to pilot specific auctions for demand-side response. I think there is quite a lot of untapped potential for DSR over the course of the next few years and I expect those auctions to be able to do that. In fact, we think, and we have not done enough analysis yet, but that might be one of the more robust answers to the question of how we act if a security supply problem occurs earlier than 2018.

Q300 Dr Whitehead: If you were to do that-and I would agree with you, I would be quite optimistic about the extent to which that would start to seriously make inroads into how you might deploy your capacity over future years-how much capacity do you think that that would make unnecessary to bring into the system?

Jonathan Brearley: I do not think we know that yet and I think also it is quite dangerous today to try to specify what capacity we might need in 2025 or 2026. When we go through the capacity auction we will start that process. Remember, those capacity auctions are going to be running every year and our view of what we need, and what the mix might look like in the future, is going to change over time. My hope is that we do get demand-side response because, in principle, that should be cheaper and better for consumers. However, we have to see how that plays out before we can come to a view of how much volume of X we need versus Y. With all of this the EMR framework is trying to move to a place, but ultimately these decisions over time are pushed more towards the market and less towards any sort of central decision making.

Q301 Dr Whitehead: On the basis of that sort of scenario, I would imagine you would conclude that it would be very unwise to start talking about capacity figures that might be required, say, for gas in the medium to long-term future? You hope it would be as low as possible, I guess.

Jonathan Brearley: We do not take a view on it being as low as possible, we talk about scenarios. We talk about different scenarios based on different cost assumptions and different assumptions about technology growth. I take the view, and I think Government takes the view, that it is scenarios we talk about rather than specifying particular figures that we are saying somehow we are planning for. I think all of our documentation says that we are running different scenarios that test different assumptions.

Mr Hayes: Not least because of the point that has been made today, and that you have made before, about the patterns of demand. If you are right, Alan-and I think you are, by the way-that there is a lot of opportunity for significant demand-side measures then clearly the effect that is going to have on needed capacity and spare capacity is going to be profound. Not least because of your own argument, I think Jonathan is right.

Chair: We do have a couple more issues we would like to explore with you, so we will just suspend for a few minutes while we go and vote and return here. Thank you very much for your continued time.

The Committee suspended for a Division in the House.

On resuming-

Q302 Sir Robert Smith: I understand DECC are conducting a consultation on the potentials for conflict of interest for National Grid in its role as delivery body for EMR and its other businesses; obviously that is still on-going.

Mr Hayes: As you know, we have taken powers in the Bill to take further measures should we need to do so in respect of that potential conflict of interest. But just two or three things-the reason we have chosen National Grid is because their scope and scale, their expertise, is a good match for the purposes of a single counterparty body. Systems operators have tended to be the model adopted in other countries, including the United States of America where, as you know, they have similar arrangements. The network operator is usually the body that acts as the conduit of the kind we are describing in the Bill and we are discussing, including with Ofgem, whether there are any further necessary steps that should be taken to deal with any potential problems of the kind to which you allude.

Q303 Sir Robert Smith: Given that the National Grid have already started in their role by calling for evidence and you are still consulting-

Mr Hayes: As I say, we have taken powers in the Bill to take any further steps we deem necessary.

Sir Robert Smith: Have you put any interim safeguards in place?

Mr Hayes: The safeguards that are in place are in the form of a memorandum of understanding, which we have introduced to deal with the circumstances you describe. I think it is right to take account of all of the possible avenues, and some of those were identified by this Committee. Indeed I know you had reservations about the role of National Grid and you made those clear in your earlier reports. Of course we wanted to take those as seriously as they deserve to be taken. Thus the further powers, thus the memorandum of understanding and thus the commitment that I am amplifying now that we will take any necessary steps to guarantee the system is fit and proper.

Q304 Sir Robert Smith: Did you look at all at the recommendation of an independent not-for-profit body? Did you consider that had any merit?

Mr Hayes: The problem with that would be that it would not necessarily have the synergistic relationship that I describe between the competencies of National Grid and the necessary competencies for the counterparty body. We felt that the National Grid best matched the specification of a counterparty body with appropriate competencies to play the role set out in the Bill. We could have set up a new particular body to do this; that would have been an option. That option was considered by the Department but we decided in the end, notwithstanding some of the articles that were put by those who shared the view that you articulated, that National Grid was the best option for this job.

Q305 Chair: I am sure you will remember that about a month ago the Secretary of State said that your comments about onshore wind did not represent coalition policy. When did you decide, and why, to make public comments that went against Government policy?

Mr Hayes: The comments that you describe that were attributed to me were of course about a speech that I did not make, Chairman, as you know. I have been at pains to emphasise that the way forward in respect of onshore wind is around the call for evidence that was issued-after I became the Minister, by the way-on community engagement and community benefit. Actually I think that when we have analysed the responses-the call for evidence has ended and we are looking closely at the responses now-we will be able to come to a conclusion with which we can all agree in the Department about the different set of assumptions about how communities interface with wind turbines.

Q306 Chair: So, just to be clear, why, if you were going to base the policy on the results of the call for evidence, did you make a speech that went against Government policy?

Mr Hayes: No, I did not make a speech. There was no speech.

Q307 Chair: Okay. Why did you brief journalists about a speech that you had written and then did not make?

Mr Hayes: Comments in the media, as you know, Chairman, are quite different from a speech. One cannot be always certain about journalistic interpretation of one’s views.

Q308 Chair: So the views attributed to you in the Telegraph and the Mail were not your views?

Mr Hayes: No; I would not want to disassociate myself from my long-standing record on onshore wind. What I have said over a long period of time is on the record. By the way, I do think aesthetics matter in these things. I don’t think we should debate public policy wholly in terms of utility. I have said repeatedly that I think that there is an aesthetic consideration and that consideration lies at the heart of the planning system. After all, the planning system gauges the relationship between new development, the existing built environment and the landscape. That is its very purpose, and I was drawing to attention the significance of that aesthetic in respect of wind. But I think the way forward is around community engagement. I know that is a view shared by the Secretary of State. I know too that on the border of your own constituency there is a contentious proposal for onshore wind which I know that, as a diligent, prestigious MP you have taken a robust view about, Chairman.

Q309 Chair: Indeed. I agree entirely that the visual impact of any wind or indeed other energy development is a relevant and important consideration for the planners to consider and I also believe that we should not impose energy developments on communities against their wishes. However, do you think that investors might feel less confident about energy policy if there was at least the appearance through newspapers reporting what you acknowledge are your views when the Secretary of State says those views are against Government policy? Do you think that is a difficulty in terms of trying to achieve the goal, which I think we have all subscribed to, of building more certainty and predictability into the policy in order to encourage investment?

Mr Hayes: Well it might be, were it not for the fact that I have also argued repeatedly-including both before those remarks and after-that renewables are an important part of the energy mix and an important part therefore of our energy strategy. I think, as you describe, what goes where the deployment of renewables is a matter of legitimate debate and clearly if the Department did not think so, we would not have issued a call for evidence on it.

Q310 Chair: So you would agree with Lord Heseltine’s report, which concluded, "The Government needs to set out a definitive and unambiguous energy policy to give the sector the certainty to invest."

Mr Hayes: Yes. You described yourself, as I mentioned earlier, an investment hiatus which might arise from uncertainty. We all know that Areva has announced the development of a turbine factory since I made those remarks. Perhaps the proof of the pudding lies in the eating.

Q311 Chair: I was reminded by Sir Robert, and I should have drawn the attention of the meeting to my interests disclosed in the register, although I think everyone who has been taking part in this meeting will have heard me make that declaration many times before, so it will not come as a surprise. So can we look forward, after this call for evidence has been concluded and evidence has been received, to a period of public harmony between you and the Secretary of State?

Mr Hayes: The kind of harmonious relationship between me and the Secretary of State is not dependent upon the call for evidence. We work together in a common interest to deliver the common good and the Energy Bill is significant of that. It is, as I described earlier, a landmark Bill which has the full and enthusiastic support of both parties in the coalition, and both the Secretary of State, who is leading this process, and the Minister of State-me-who is going to be taking the Bill through the House. This is the embodiment of the unity that goes to the heart of all we do.

And just to bottom out this wind issue definitively, I think it is absolutely right that if you issue a call for evidence, and if that call for evidence solicits a significant number of replies, in which people choose to make their views known, that that is given due and proper consideration and that from that one devises and implements a new approach to these things. You will not be surprised to learn that as a result of my long-standing views on the matter of aesthetics and, in particular, in this case wind, I have received many letters and e-mails of support, which I am more than happy to provide to the Committee as evidence if they wish me to do so, although of course I would need to seek the permission of the letter writers though. I would never be intoxicated by public acclamation. I am absolutely dedicated to the purpose of driving forward Government policy and whilst acclamation is charming it is not central to my purpose.

Q312 Chair: So, since you are at one with the Secretary of State, those letters and e-mails are letters of support for the coalition policy.

Mr Hayes: They are letters of admiration for me. I hesitate to say that because it seems so egocentric, but one has admirers and one has to cope with that.

Chair: We extend to you our sympathy under the strain this must clearly impose on you.

Mr Hayes: Quite.

Q313 Dr Whitehead: I accept that there are letters of admiration for you and I am pleased that you got such a lot of letters of admiration; that is obviously good to know. But what are they admiration for?

Mr Hayes: I hesitate to focus too much on my own achievements.

Chair: No, do not hesitate, expatiate.

Mr Hayes: All kinds of things.

Dr Whitehead: Are they general letters of admiration?

Mr Hayes: All kinds of things, but particularly the impact I have made as Energy Minister. You know, Alan, I was recently made Minister of the Year though I did not want to have to mention it here.

Dr Whitehead: No, no. Is that what they were admiration for?

Chair: We were working our way round to it.

Mr Hayes: I did not want to have to mention it. But since you draw it to the attention of this Committee of the House, I suppose a whole range of things, but particularly the impact I have made as Minister for Energy. Now, you know, one has one’s ups and downs in politics; that is the nature of the game, and I suppose you have to enjoy the ups in anticipation that they will not always be what prevails. That is the nature of the business we are in, isn’t it?

Q314 Dr Whitehead: I just wonder whether, as a result of what we have heard today, which we are very pleased to hear about, would you anticipate those letters of admiration would dry up in the future?

Mr Hayes: I hope not. I mean, I am looking forward to taking the Bill through the House. I think that is a big opportunity. I am rather flattered that the Committee should be spending so much time on me, actually. I say that with the appropriate humility, but I am looking forward to taking the Bill through the House. That is a great opportunity and particularly given the character of this Bill. This is a Bill that sets out our ambitions for energy policy for the longterm future and it is not often one gets the chance as a Minister to be able to lead on that kind of legislation. So I obviously feel a deep sense of responsibility and quite genuine appropriate humility in that respect. I hope we can make it a very successful piece of legislation that becomes an Act that informs not only the work of this Government but Governments to come. That is why I have been at pains to emphasise in this meeting that we need to get consensus because that is vitally important in sending a signal to investors and future Governments-because Ministers change and Governments change-that this is not just a Bill for a Parliament, it is a Bill for the future.

Q315 Dan Byles: I apologise; I was not in the room when we moved on from capacity mechanisms, so I would like to go back to that very briefly. Obviously, the capacity mechanism has to achieve a number of things and I have had some concerns expressed to me by various people throughout the industry that it is not clear from what we have seen already about how the capacity mechanisms might work, how it is going to do more than simply look at headline capacity and how it is going to ensure cost-effectiveness, flexibility and efficiency of what that capacity is. In particular, we know that part-loading a gas plant, that spinning reserves are inevitably less efficient than some of the new smart power generation that can provide a standing reserve, for example-gas plants that can be switched on very quickly and don’t have to be maintained spinning. Now the question is, are there going to be sufficient incentives in this new mechanism to make sure that we actually get the flexible capacity that we need and the smart capacity we need? Because the danger is, if we go down a less efficient route that costs the consumer more, that there is no economic incentive among people such as a systems operator to go for the more efficient standing reserve type capacity.

Mr Hayes: Jonathan can talk about the pilots, but all I would say about that is that the capacity mechanism needs to be seen in the context of the Bill as a whole. The Bill is designed to create the kind of diversity that you describe, which is important from the perspective of taxpayers and from the perspective of consumers by creating a diverse range of generators and a more plural marketplace in the way Robert was recommending earlier. That can be good for taxpayers and consumers, as well as meeting our ambitions as far as energy security is concerned. However, in the specifics of the capacity market, I think you are right, we need to make sure that the capacity market is not solely and wholly about attracting investment in gas for example. It will perform that function, but it must not perform that function and nothing more than that. Maybe Jonathan can speak a bit more about that.

Jonathan Brearley: It might be worth talking about how just in broad terms the capacity market model that we have decided upon is going to work. What we have decided should happen, and we are still proposing this, but what we are proposing happens is that you as a developer basically sign a contract that says, "We will pay you something every year and in return for that, you have to be available at times of system stress." The best way to think about that is a system operator sees a problem, notifies the industries and the industries have to make themselves available. They either have to have capacity available or they have to have the ability to pull capacity off the system very quickly. In terms of the overall incentive, that is great for things like DSR because as long as you can target those particular times, you should be able to make a very economic offer when you bid into the auction. But also you need to think about how we are going to grow an industry that is very small by now, that only has a number of very small contracts for the system operator, and therefore we are talking about piloting auctions for DSR to try to bring that on and to grow the industry. As I mentioned before, we are quite optimistic that we might be able to get a lot of additional capacity at those times when things are really tight instead of building new forms of generation, be they gas or any of the others. It does not mean we do not want gas. We do want gas investment, but equally we want DSR too.

Q316 Dan Byles: I am not just talking about the demand-side response. I am also talking about more efficient modern gas engines that can be fired up in seconds and switched on from a standing reserve rather than a spinning reserve, but there is no real incentive at the moment. At the moment, if the system operator were to effectively commission capacities and somebody has to part-load an existing plant, they get some free headroom because that part-loaded plant could be ramped up later if it needed to, so there is almost a perverse incentive to maintain a less efficient part-loaded plant.

Jonathan Brearley: But you should, in this system, have the economic incentive. Anybody that can get capacity on at that particular point in time should be able to bid into this. If it turns out that open cycle gas turbines are more efficient at doing that, or indeed other forms of small turbines, they should be able to bid in and they should be more competitive than gas if they are cheaper.

Mr Hayes: I asked those questions too when I became a Minister, about an alternative model-and in fact there is such a model, in Sweden, where you have a gas reserve capacity. The trouble with that is almost the opposite of what you describe, which is the other side of that problem where you have no incentive for existing generating capacity to meet the changes in demand that Jonathan identifies. If you create a mechanism that incentivises new investment but actually has a perverse effect in providing no incentive for existing investment, you might do exactly what you describe-build up a massive amount of spare capacity, both around what is already there and around the new capacity that comes on. We felt that the flexibility that Jonathan has described-being able to call on that capacity from a number of sources-was the best way of avoiding that eventuality. But I did ask exactly that question, because I wondered whether the Swedish model might be a more appropriate one to use here, but I was persuaded for the reasons that I have just outlined that the way we are going is the right way, and indeed the way that almost every other country has gone, including the United States.

Q317 Dan Byles: I have had some specific suppliers come to me with specific concerns and they have costed it out, saying that the added cost to consumer potentially could be up between £0.5 billion and £1.5 billion. I do not want to go into the detail of a specific company; may I write to you separately about that?

Mr Hayes: Yes, and in return we will give further written evidence, if you want to write to me about that through the Committee. We would be more than happy to respond formally on our thinking on that, perhaps drawing on the examples I have described of the Swedish approach and the parallel approaches in other European countries and in North America.

Dan Byles: Thank you.

Q318 Christopher Pincher: I am still struck by the writing campaign for Mr Hayes. I hope the letters do not dry up; if they do I will happily pen one to you. I wonder if amongst them is a letter of admiration from Fred Udo, and if there is, how will you respond in your letter of thanks to him?

Mr Hayes: I do not want to dwell too much on my own role in these things. The key thing from a departmental point of view is that we have a very clear set of marching orders around the Bill and about our long-term thinking, and we are approaching that as a team.

Christopher Pincher: A wise answer.

Q319 Sir Robert Smith: Just on the capacity mechanism, traditionally it has been seen as coming in at peak times and ones when you can mainly predict, but has there been much modelling of the need to have quite a large chunk available for when the wind is not blowing?

Mr Hayes: Yes, that is true. If you have a greater concentration on nuclear, which by its very nature is inflexible, and you have a greater proportion of renewables, it is dangerous to be crude about renewables because they have different levels of intermittence according to the particular technology, but let us take wind, which is intermittent; then you do need the responsiveness that Dan was talking about in the rest. You know that currently much of the existing gas generation we have available is not working at full capacity because of the current level of demand, so gas can be switched on and off in the way that Jonathan described earlier. So you are right; getting that balance is very important.

Q320 Sir Robert Smith: Will the market deliver quite a lot of that without a capacity payment?

Mr Hayes: That is the other question I asked. One question I asked was around Dan’s inquiry about whether this is the best way of delivering extra capacity, and the other question I asked when I became the Minister was, would not this extra capacity come on stream anyway if you created the right market conditions? The only thing I would say about that, Robert, is you know very well, and in fact your Chairman mentioned it earlier, that there is a lot of gas out there that has permission to be built but has not been built, so there is new gas that has not come on stream because developers and investors are not currently building gas.

Q321 Sir Robert Smith: There was also a sense that if there was the dangling carrot of a capacity payment being mooted but not defined, it might be worth waiting on your development until you saw the colour of the money.

Mr Hayes: Yes. I think that would have been more likely had we said we were certain to run the capacity auction at a particular time, as some advised we should. We were, as you know, minded to run a capacity auction but if the other circumstances that prevail, as you suggested in your previous question, produce additional investment that builds capacity, then obviously we would take a view, as I think Jonathan said in response to Alan earlier, about when and how we should use the powers in the Bill to run the capacity market. I would not describe the capacity market as a long-stop or backstop power, but it is certainly a power that one uses as needed. In evidence I draw the Committee’s attention to page 13, chart 3, which identifies the pipeline of planning applications for power stations in November of this year, broken down by type. It supports the point I made about those which have permission and are awaiting construction or where submissions have been made for consent and are awaiting consent, and emphasises the point that I made that gas investors at present are not typically building. That has something to do with the international gas price, of course, something to do with the prevailing circumstances, but I think it is also to do with the fact that they, like others, have been waiting for this legislation to set out very clearly the direction of travel and the framework for investment within which they will now be operating.

Q322 Dr Whitehead: They may well be waiting to see how minded the Government is to run a capacity auction. Could that not be possible?

Mr Hayes: That is speculation, Alan. I suspect that it is about a mix of the things I have identified, but I think the clarity that is provided by the Bill can only be helpful in securing the kind of investment that is necessary. That is certainly what those that have commented on the Bill and welcomed it have said, both in the industry and beyond, and we have had a very warm welcome for the Bill.

Q323 Dr Whitehead: Would you not accept in general, however, that such mechanisms as being minded to produce a capacity auction tend to bring about their own predictions?

Mr Hayes: Jonathan has passed me a note so we have just agreed a new development.

Jonathan Brearley: It is worth saying Carrington has come forward without the capacity market.

Mr Hayes: Of course RWE would argue that Pembroke, which I opened, one of the first things I did as Minister, a very major gas power station. There are those who take the view that Robert offered me, that capacity may come forward without the mechanism. I think the prevailing view is that the capacity market is necessary; I have mentioned that it applies in other countries but I would not want to suggest it is the only means by which investment will be stimulated. I think the certainty in the Bill will do some of that too.

Q324 Chair: We are coming up to three hours. You have been very generous with your time. We are extremely grateful to you and to your officials for staying with us through this period. I am sure we have learnt a lot and I am sure we shall continue to benefit from a close interaction in the next few months. Thank you very much.

Mr Hayes: Thank you, Chairman. Ezra Pound said that the definition of genius was the capacity to see many things where an ordinary man sees one, and I can tell that on that basis this is a Committee of genius.

Chair: We accept that remark in the spirit in which it was offered.

Prepared 24th December 2012