Energy and Climate Change Committee - Minutes of EvidenceHC 554

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Energy and Climate Change Committee

Review of DECC Policy

TUESDAY 2 July 2013

RT HON MR Edward Davey MP, Stephen Lovegrove, Simon Virley and Phil Wynn Owen

Evidence heard in Public Questions 1 - 157

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 2 July 2013

Members present:

Barry Gardiner (Chair)

Dan Byles

Dr Phillip Lee

Peter Lilley

Albert Owen

John Robertson

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Rt Hon Mr Edward Davey MP, Secretary of State, Department of Energy and Climate Change, Stephen Lovegrove, Permanent Secretary, Department of Energy and Climate Change, Simon Virley, Director General, Energy Markets and Infrastructure Group, and Phil Wynn Owen, Director General, International Climate Change and Energy Efficiency Group, gave evidence.

Q1 Chair: Secretary of State and gentlemen, may I welcome you as witnesses? I am sorry that we are starting slightly late due to the private business session beforehand. May I ask you, starting with Mr Wynn Owen, to introduce yourselves? Although you are known to us, you may not be to the cameras.

Phil Wynn Owen: I am Phil Wynn Owen. I am the Director General for International Climate Change and Energy Efficiency at DECC.

Mr Davey: I am Edward Davey, Secretary of State for Energy and Climate Change.

Stephen Lovegrove: I am Stephen Lovegrove, Permanent Secretary at the Department of Energy and Climate Change.

Simon Virley: Simon Virley, Director General for Energy Markets and Infrastructure at DECC.

Q2 Chair: Gentlemen, welcome. We have a very busy agenda, so we will try to crack straight on. Secretary of State, obviously the big issue from last week is the spending review. Can you just outline briefly, because I am sure this could be a very long answer, what the implications of the spending review announcement last week are for DECC’s budgets?

Mr Davey: For our budgets? We obviously had detailed negotiations with Treasury, but we reached an agreement that, while we have to find significant efficiencies, I think we can live within that envelope. Some of the efficiencies come in 2015 and 2016, when some of our busiest and biggest teams will be less busy, because most of the policy will have been implemented and they will be moving more down to what you might call a business-as-usual team. That goes particularly for electricity market reform teams and the Green Deal team, but we have also managed to find savings in some of our arm’s-length bodies like the Coal Authority and the NDA. Those efficiencies, both within the Department and within our arm’s-length bodies, enabled us to find the efficiencies.

Q3 Chair: You mentioned the NDA, which of course is a substantial part of your budget; I think at the moment it is 43% of the total resource available to you. Cuts at 8% of DECC’s budget in 2015-16 amount to a cut, if we look at the 2014-15 plans, of about £87 million because so much is ring-fenced by the Nuclear Decommissioning Authority. If you ring-fence the NDA at net costs, at 43% of total resource, that £87 million from the 57% of the departmental expenditure that remains is, according to my calculations, the equivalent of scrapping the following four core programmes: the Green Deal and support for vulnerable customers at £44 million in 2014-15; action on climate change at home and abroad, which is £13 million in 2014-15; the Committee on Climate Change, which is £3 million in 2014-15; and the Coal Authority at £27 million. Together, that would save you the £86 million. This is not just little bits of programme that you are going to have to sacrifice here, is it? Either that or you are going to have to find a heck of a lot of money either in increased revenue or reduced costs from the NDA. How are you going to do that?

Mr Davey: Let me reassure you, you do not need to worry about your calculations, because we are not taking the measures that you suggested. As I said to you in my initial-

Chair: But it is of that order of magnitude, isn’t it?

Mr Davey: 8% is a significant amount of savings to be had, but it is a few years away and any prudent-

Q4 Chair: It represents 14.12% of the disposable budget, doesn’t it?

Mr Davey: Any prudent Department ought to be able to make those savings and we have managed to do that.

Q5 Chair: What we are asking you to do is to cash out exactly which programmes you are proposing to cut.

Mr Davey: With respect, Chair, in my initial response I said that we will be reducing the size of our EMR team and our Green Deal team as they will have gone through their bulge in terms of the level of activity, and because we will have implemented those programmes we will not need so many officials. That saves a significant amount of money, but we have also asked the NDA to produce revenue savings as well.

Q6 Chair: In Ofgem’s report on the de-rated capacity margins and the loss of load expectation, they have said that the key driver of the unexpected tightening of margins is the failure to reduce demand. They say if the projected decline in demand does not materialise, margins could fall to 2%. They have identified failure of the Green Deal as one of the key factors here, yet the Green Deal is one of the programmes that you mentioned you were cutting in that period.

Mr Davey: First of all, the Green Deal has not failed. Secondly, I made it clear we are not-

Chair: I am quoting the Committee on Climate Change. I am not making-

Mr Davey: I am telling you the facts. The Green Deal has not changed, and no doubt we can go into the details of the fact that we have had 38,000 assessments. We have received from the supply chain a huge number of providers and assessors and installers, and we are very confident about it going forward. I do not accept your point that it has failed at all. Clearly, we do want to reduce energy demand. That is one of the reasons why we have in the Energy Bill the energy demand reduction proposal. That is key to it. But if you look at the issues around forecasting demand over the period we are talking about, one of the big issues is what is going to happen to economic growth. If they had taken the OBR figures-which I think National Grid chose not to use, from memory, which slightly surprised us-you might have had slightly different assessments.

Q7 Chair: Is that because the OBR figures would imply greater economic growth?

Mr Davey: Indeed, yes.

Q8 Chair: Would that not encourage a greater use of energy resource in industry?

Simon Virley: Yes. So far as my comments on that, they use growth figures produced by Experian. They have done that for a number of years. They have tested sensitivities against different growth assumptions, and you will see a range of sensitivity projections in both the Ofgem capacity report and the background analysis produced by National Grid.

Q9 Chair: Indeed, but, Mr Virley, precisely the point I am making is that their high-demand sensitivity is the one where the loss of load expectation in hours per year drives you right down to zero and their high-demand sensitivity is the one where the de-rated capacity margin goes below 2%. That is precisely the point I am making. If you are increasing demand for electricity, you are exacerbating the problem, are you not, according to the Committee on Climate Change?

Simon Virley: Indeed, and that is why the Secretary of State said we want to make sure the energy efficiency policies work but also while we are taking action on both the capacity market, initiating that next year, and the short-term measures that Ofgem and National Grid are taking forward.

Q10 Chair: Yes, but the Secretary of State was making the point that they had not used the figures that showed a higher trajectory of growth. The point that I am making back to you is that if they had used a higher trajectory of growth, that would have increased the demand sensitivity and would have produced the de-rated capacity margins still lower. Is that not the case?

Mr Davey: Chair, let me put it another way. When we had the previous assessments, which appeared to be done in a different way, the margins were less tight. There was a change in the assessments that we received, and we are told by them that was to do with different changes in the way that they had forecast demand.

Q11 Chair: It is also a change in the way in which they forecast the success of your energy efficiency policies, is it not? That has been driving their assessments of the risk on the capacity going down below 2%.

Mr Davey: I think this is as much on the supply side. One of the big changes has been that you have seen some plants coming offline earlier than had been expected. In many ways, that has been the biggest difference from the work that we have seen. As far as we can tell, although Simon may want to give more some detail, it is partly because some of the coal power stations have been running at higher capacity than expected because the price of coal has been lower because of the American exports, because they have been using shale. They have been using their hours up under the directive rather quicker, and therefore they are going to come offline quicker. That has been one of the major surprises. That, if anything, is probably the biggest shift.

Q12 Chair: But that does present us with a serious problem, doesn’t it? What you have to bank on is that you do not get the growth in the economy in order to keep the lights on, which seems a rather perverse situation to be in.

Mr Davey: No, because we have been looking at this for some time. The idea that we only received the assessment the other week and suddenly we were worried about it is complete nonsense. We have been focusing on this for a long time. We obviously published our energy security strategy before Christmas. I have been working with officials on how we deal with capacity issues ever since I became Secretary of State. One of the issues was whether or not we ran the capacity market auction, not just running it next year but when we run it for delivery. The choice I was faced with some time ago-I forget when it was, sometime last year-was whether we wanted to run it for delivery in 2015-16 or in 2018-19.

Clearly, if you do it for 2018-19, for a longer time, you are going to have more a liquid market and the impact on consumers is much less; you can have a much better deal for the consumer. Indeed, it may not cost them at all if you have a very liquid market. But then that raised the question-this was key to the decision-what would we do in the short-term if we did not choose to run the capacity market for 2015-16? When we looked at that, there was another option that was a better-value option, which was using existing powers under the Electricity Act by which Ofgem would allow National Grid to use its balancing powers to take on what they call in their report a supplemental balancing reserve as well as a demand side response reserve.

When we looked at it, that was a much more cost-effective solution, much more reliable, much more certain, using existing powers. The combination of National Grid using those powers and our running the capacity market for the medium term looked much better value and a much stronger option. That is what we opted for.

Chair: I am sure Dr Whitehead will want to investigate that a little bit later with you, but for now I will turn to Mr Owen.

Q13 Albert Owen: Just on the spending review, and I have not had time to digest the budget cuts that you have been talking about or where they are coming from, can you confirm that the renewable heat initiative programme, for instance, is not going to be cut back? Are you going to make savings there?

Mr Davey: Because it is demand-led, you are having to make estimates and to model forecasts, and we wanted to make sure we were on the sort of growth path that we had intended. The OBR forecast suggested we would be spending, I think, £371 million and they were looking at previous roll-outs of that, but we were slightly more ambitious and we thought we might end up needing to spend something around £430 million and we would be able to spend up to that amount.

Q14 Albert Owen: Up to £430 million? So you are actually increasing that budget?

Mr Davey: No. The discussion was trying to, in a demand-led programme, work out what you need to put into the Treasury figures and because it is under managed expenditure, it is not under resources. We have gone with our OBR figure of £371 million, but we have a spending envelope to go up to £430 million if necessary.

Q15 Albert Owen: Okay. What about carbon capture and storage? It is something I am going to come on to in more detail, but with respect to the capital spending, is that £1 billion still ring-fenced in your Department, or are the rumours that we are hearing in the press that it is down to £200 million a more accurate figure, and is that a cut that you were able to claim as a Department?

Mr Davey: The £1 billion is absolutely there. Anyone who doubts it should refer to the Budget this year and indeed the spending review this year-Treasury documents. If you look at the lines in the 2013 document, it says, "The Government intends to take forward two carbon capture storage projects to the detailed planning and design stage of the competition. This represents the next stage in the £1 billion carbon capture and storage commercialisation programme".

Q16 Albert Owen: That is being protected?

Mr Davey: Yes.

Q17 Albert Owen: Fine. One other question on administrative cuts; you have said-and I understand your reasoning-that as EMR is coming to an end, the team will be stood down, so there will be a considerable amount of redundancies within your Department once those projects are finished. You do not envisage their having plenty of work in the future given that the review announcements that were made last week were quite ambitious. You are going to be less busy as a Department?

Mr Davey: We have been extraordinarily busy in recent years and are at the moment, and we want to deliver the legislative framework for the market then to make the investments. Once we have delivered that legislative framework, we will not have another one to deliver. That will stay around, we hope, for several decades. This is the biggest reform to the electricity legislation since privatisation.

Q18 Albert Owen: No, I am just looking forward. As the Head of the Department, are you saying your Department is going to be less busy? There are lots of rumours around within industry and not just within this Westminster village-

Mr Davey: Rumours?

Albert Owen: Yes, absolutely. I have said it to you a few times, we now have a part-time Minister from BIS. Are we seeing a downgrading of your Department, less work in the future? You are getting rid of administrative cost and-

Mr Davey: No, I think that is the wrong conclusion to draw.

Q19 Albert Owen: Okay. Who is paying for the part-time Minister now? Is there a saving to your Department? Is BIS picking up the wages? Is it allocated in that way? It is a fair question.

Mr Davey: It is a fair question. I do not believe Mr Fallon is taking double lots of ministerial rations, if that is your concern.

Albert Owen: Who is paying his wages? Is it BIS or you?

Mr Davey: I think it is BIS, but I will check.

Q20 Albert Owen: So there is a saving there by having a part-time Minister, which you are happy with?

Mr Davey: I am happy if we have any efficiency savings. I would have thought that would be good, because then we can make sure that the money is on the frontline.

Q21 Albert Owen: You are quite content with not having a full-time Minister in your Department? You do not think that that leads to the kind of rumours that I was talking about, about a downgrading of your Department?

Mr Davey: The Department has not been downgraded. If anything, if you look at the way the whole Government is focusing on growth, including the Treasury and the Department of Business and No. 10, I think the Government is giving even more weight to what we are doing in our Department. Let us be clear, our country needs to grow. It needs economic growth. Everyone is clear that it is unlikely to come from the consumer at the moment, given the tricky times for people out there. It is unlikely to come from exports, given the difficulties-

Albert Owen: But just on the Energy Department-

Mr Davey: Can I finish my answer to your question? We obviously want export growth, but let us be clear, some of the export markets are not very strong.

Albert Owen: But my question was not related to that.

Mr Davey: It is in answer to your question. It is not going to come from Government spending because we are cutting back on deficit. One of the big sources of growth is infrastructure, and of the infrastructure opportunities for the United Kingdom, energy is right front of that. That has been recognised across Government. That is one of the reasons why the spending review brought forward announcements on things like the draft strike prices and the capacity market initiation, in order to make sure it was very clear to people that energy infrastructure investment is right at the front of our economic strategy and that is a view shared across Government. That is not downgrading us. That is putting it right at the front of the Government’s programme.

Q22 Albert Owen: Okay. If you have one fewer Minister and he is being paid for by BIS, you do not see that as a downgrade?

Mr Davey: Mr Fallon is doing a fantastic job as Energy Minister.

Albert Owen: That is not the question I am asking.

Mr Davey: You are trying to suggest that he is incapable of doing his work.

Albert Owen: No, I am not.

Mr Davey: He is capable of doing his work, and he is doing a very good job.

Q23 Albert Owen: Let me rephrase the question, then. You have now one fewer Minister in your Department, and you are making cuts on the back of downgrading the actual ministerial team. My final point to you: are you not disappointed that you, as Secretary of State, did not make those announcements yourself, because they are very significant announcements in the spending review to do with energy? Shouldn’t that have been your duty as Secretary of State for Energy?

Mr Davey: I was delighted that they were announced when they were. We had promised them in July, and I have to apologise to this Committee, because last time I was in front of you I said we would be making them in July and I was wrong. We made them in June. I was delighted we made them in June, because that gave even more confidence to investors that we are determined to press ahead with these investments.

Albert Owen: But you did not make them yourself.

Mr Davey: Listen, I am part of a Government. My colleague, Danny Alexander, made the announcement. He is of my party, not that we make those distinctions in our seamless Coalition. But you will also know that when Danny made those announcements he also made announcements on transport that the Transport Secretary of State did not make; he made the announcements on water investment that the Secretary of State for Defra did not make. In other words, he was speaking on behalf of the whole Government on our ambitious capital infrastructure plans.

Albert Owen: Okay. You are not disappointed that you do not make these big announcements for the Energy Department?

Mr Davey: I was very happy that they were announced when they were.

Chair: I think you can leave that hanging as a rhetorical question, Secretary of State.

Q24 Dan Byles: Secretary of State, I would just like to tease a little bit more out about this impending capacity crunch that Alistair Buchanan has warned us about. He said "imminent shortage of electricity supply", and of course the recent announcement has suggested that our capacity is going to be down to possibly as low as 2%. On Saturday, I think in an interview you gave to the Financial Times, you said this crunch will not occur due to a very well-thought-through plan. I think you were alluding to that earlier. I understand that you have also suggested that that is going to involve mothballed plants maintaining the ability to generate rather than closing. Is that right? What is the mechanism for that?

Mr Davey: It is worth pointing out, Mr Byles, that the Ofgem projections did not take into account the effect of our announcement, although in due course those graphs will have to be re-done because we have a whole set of new policies that we announced last week. I was delighted they were announced both by the Chief Secretary to Treasury, and indeed Ofgem. They basically formed a package and the package is both short-term and medium-term. DECC will be responsible for the medium-term policies by initiating the capacity market. National Grid, regulated by Ofgem, will produce a proposal in the short term. In the short term, the proposals are about ensuring that there is some plant there that is held in reserve so that if National Grid needs it, because it is worried that the margins are getting too tight, it can bring it on. That capacity that Ofgem holds in that supplemental balancing reserve will not be playing in the normal day-to-day wholesale market.

Q25 Dan Byles: The crux of my question really is about the financial implications of that. What are the cost implications of incentivising that plant that was scheduled to be mothballed, eventually closed, to not close and instead to be used in the short term?

Mr Davey: We will see after the consultation that Ofgem and National Grid are running exactly how that works, and then we will have a much better idea of the costs and indeed the benefits, because one of the things when you are talking about incentivising capacity, whether it is in the short term, as Ofgem and National Grid are doing, or in the medium term, as we are doing with the capacity market, is that by the fact that you have that capacity, prices will not peak as high as they otherwise would have done, so there are savings to the consumer to offset against any payments that are needed to have that capacity. We will see once we finish the consultation. But it was very clear to me when we were looking at this last year and we were looking at the different options for the immediate short term that the approach that we have adopted was the best value for money for the consumer, which is obviously why we chose it.

Q26 Dan Byles: Okay. When do you think you will be able to come forward with some ideas as to the costs and indeed the savings? A number of months?

Mr Davey: In the short term, we have to wait until National Grid and Ofgem’s consultation is completed.

Q27 Dan Byles: But Governments can take anything from weeks to months to years to respond to consultations. Do you have a view of how quickly that is likely to-

Mr Davey: This will be a speedy consultation. Do we have a date?

Simon Virley: Ofgem plans to put out details of how these balancing services extensions would work and they will be consulting on that over the summer. I would expect them to bring forward impact assessments showing what their estimated costs are once that consultation is complete, so probably in the autumn. But it is a matter for Ofgem on the short-term measures.

Mr Davey: It is worth highlighting that Simon said they are extensions, the balancing services. When you look at this, in your bill at the moment you are already making payments for balancing services. They exist at the moment under the Electricity Act 1989, so they are there and consumers pay for those services. One of the reasons why it was better to do it in the way we have gone is it goes with existing legislation, it is an extension of what already happens and we thought therefore it would be the quickest and the cheapest way of managing anything in the short term, while we wanted to incentivise new plant in the medium term, which is why the medium-term option is the capacity market.

Q28 Dan Byles: Okay. I would just like to move on to gas. Obviously there was a lot of controversy in March when the interconnector went down, and it was widely reported the UK had a severe crunch on physical gas supply.

Mr Davey: It did not, of course. It was reported as such, but it did not.

Q29 Dan Byles: You say that, Secretary of State. I have a company in my constituency, a heavy gas user. They manufacture roof tiles. They are not on an interruptible gas supply. They had a phone call from National Grid that morning warning them that it was possible that they might have their gas switched off by 2.00pm that afternoon. We might not have actually got as far as gas supplies running out, but there are companies that are not on interruptible gas supplies that were warned that they might. It is the case that there were obviously concerns on that day that gas supplies might be crunched. Of course, there are two sides to gas security. There is physical security, and there is price security. The cost of not running out of gas was a very severe, albeit short-term, price spike. I would just like to know what lessons have been learnt from that and what the Department proposes to do going forward to try to limit our exposure to those sorts of events in future.

Mr Davey: I think it worth pointing out the gas market works extraordinarily well. It may well be-I do not know the case in point that you refer to in your constituency-that National Grid was being particularly cautious and careful. That is what they are paid to do, so maybe that was what they would normally do. I do not know the details of your particular case, but we looked at this in significant detail, and what was clear was the market was working. One of the reasons why the UK gas market is very secure in terms of physical supplies of gas is that, first of all, we have our own domestic production from the North Sea, which can be about 50% of our supplies. Secondly, we have four pipelines from Norway, then we have two interconnectors from Continental Europe, then we have four LNG terminals. We have a very diverse supply of gas.

Then of course we have storage. We have nine commercial gas storage facilities. We have two new ones coming on, I think it is later this year, at Aldbrough and Holford, then shortly after that we should have a facility at Stublach coming on. We have commercial investments in gas storage as well, so you can see from that that we have a very, very diverse physical gas supply, and that is the reason why I think you need not worry.

Q30 Dan Byles: Okay. Do we have enough gas storage?

Mr Davey: I think with the amount of investment we are seeing, that should be very reassuring. Of course, we are not complacent in this. I do not want you to take away from what I have said about this variety that we have that we are at all complacent. Ofgem have been looking at the gas security significant code review, which would heighten the incentives for gas shippers to make sure they supplied. That has been consulted on within the industry. That is something that I think is likely to proceed, but it is for Ofgem to take that forward.

We have also been looking at whether or not we needed to intervene further and we have been looking at that and reviewing that. We will give our response to Parliament on our analysis shortly.

Q31 Dan Byles: In December you said you would publish whether there was a case for further measures for gas storage by spring 2013. Is that the response you are referring to? In a written ministerial statement in December, you said that in spring 2013 you would publish whether there was a case for further measures to encourage gas storage.

Mr Davey: It probably was. It sounds like we are a little later, because it is obviously past the spring.

Dan Byles: We all know Government timetables are flexible.

Mr Davey: But I can assure you we have been working away. I have seen a lot of the research and the analysis. We employed external consultants. It has gone through a big review, as you can expect, within Government, and we will be publishing our conclusions shortly. But I really wanted to drive home the point that were we to intervene, it is more about the medium to long term. We do not see a problem in the short to medium term.

Q32 Dan Byles: Just one more, if I may, Chair. I will not go on to shale gas. What progress has been on developing energy security indicators, as suggested in the strategic defence and security review? Is this something that is being looked at in the Department at the moment?

Mr Davey: I think I might bring in Simon here, but later on we will, when we publish the EMR delivery plan, publish our thoughts on a reliability standard.

Simon Virley: Yes, that is right. In the full delivery plan that we are expecting to publish in the next few weeks, we will publish details of the reliability standard for electricity, so the expected margin that we are expecting to deliver through the capacity market. More broadly, we did publish indicators in the energy security strategy that was published before Christmas last year.

Q33 Chair: Sorry, that sounds like you have not specifically said that you have published your findings on whether there is a case for further measures to encourage gas storage. Have you-

Mr Davey: No, we have not done that yet.

Chair: That has not yet been done?

Mr Davey: That has not been published, but we will publish it shortly.

Chair: Can you give us an indication? Shortly.

Mr Davey: I would have thought we would be publishing it before the summer recess.

Dan Byles: Is that a commitment?

Mr Davey: Almost.

Q34 Mr Lilley: You published the strike prices for renewables, essentially starting at £100 per MWh for onshore wind, £105 for biomass conversion, £155 for offshore wind and coming down slightly in the case of onshore wind to £95 by five years’ time, not at all for biomass conversion and down from £155 to £135 for offshore wind. Are you not rather disappointed by the speed of assumed improvement in cost-effectiveness of these?

Mr Davey: We have to look at each technology separately, as you can appreciate. On onshore wind, in the previous decade we have seen quite a lot of cost reduction, and that is important. If you look at how we expect the market for onshore wind to progress, it is becoming very competitive with gas if you add in the price of carbon, which is quite important, I would suggest. It is not at the wholesale price. I do not disagree with you on that, but gas and coal do not take out of their carbon emissions. In terms of biomass, one of the reasons why the CFD price is not going to come down is that biomass contracts will end in 2027, and therefore it is a much shorter period and you would not get the conversions that we wish to see, given that it is a much shorter period. Therefore, it is not really about technology innovation, it is about a short-term conversion from coal, using this as interim transitional technology.

In offshore wind we are seeing more reductions in the figures. We would hope to see, and believe we will see, significant reductions right at the end of this decade and going into the next decade. One of the reasons we have spent so much time on the Offshore Wind Cost Reduction Task Force is to look in very granular way at the different ways that costs will come down. We will be publishing shortly our offshore wind industrial strategy that will give you more up-to-date information on the different things that we are doing, working in partnership with industry, to get the costs down in offshore wind generation. You have to take each technology; there is a different story for each of them.

Q35 Albert Owen: Secretary, didn’t you tell us before that you would get it down to £100? Didn’t you have a taskforce that suggested that the reduction of offshore wind would be £100 per MWh?

Mr Davey: There are two parts to the response to that. First of all, the CFD figures are for a 15-year contract, so when you are trying to compare them with the-

Q36 Albert Owen: Fifteen years from when?

Mr Davey: Whenever a contract is signed. One of the things I asked when I had the CFD figures in front of me was, "Compared to the ROC, something seems slightly odd here", the very question you asked. But the ROC contract is for a 20-year period, so you cannot compare them, as they are for slightly different periods, with CFDs being five years shorter. The ROC would not be £100 if you were trying to compare apples with apples, it would be slightly higher than that. So, that is one of the reasons why-

Q37 Mr Lilley: Why would it be higher if they were getting it for a longer period? Surely it would be lower?

Mr Davey: No, no; sorry, higher than it is currently.

Simon Virley: So, adjust the strike price for the fact that you are only paying it out for 15 years as opposed to 20 years under the RO regime.

Q38 Mr Lilley: Yes, exactly, so given you are only paying it for 15 years you are going to have to pay the higher amount.

Simon Virley: Yes, and that is reflected in these figures.

Mr Davey: I am saying if you compared it, the ROC over 15 years, the ROC would be-

Simon Virley: The ROC would be higher, yes.

Mr Lilley: The ROC would be higher if it was 15 years.

Mr Davey: That was the first reason, trying to make sure we are comparing apples with apples, which is always the right thing to do. The other reason is that we hope and expect there to be cost reductions in the last years of this decade as well. It is coming down.

Q39 Albert Owen: But if the contract was signed in 2008-19, they get £135 to begin with?

Mr Davey: Yes.

Q40 Mr Lilley: For 15 years. Wouldn’t it be better to wait until then rather than signing contracts for £155 for 15 years?

Mr Davey: We need to get cost reductions through deployment. You are not going to get the cost reductions that we are going to see unless you start deploying at scale and people invest at scale. That has been our argument for a long, long time. If you did not deploy and just sat around waiting and hoping the cost reductions would happen, you would be waiting for eternity. You have to get the cost reductions through deployment. I will give you a classic example from my first week as Secretary of State, when I was fortunate to open what was then the largest offshore wind farm at Walney. The developers there said, "This is the original Walney offshore wind farm. This one that you are opening, same size, we built it twice as fast because we learnt from our experience on the first wind farm". When you talk to offshore wind developers and you look at the Offshore Wind Cost Reduction Task Force report, you can-

Q41 Mr Lilley: We have very little time. I take your point entirely, Secretary of State. So you have to do something to drive down the price?

Mr Davey: Yes.

Mr Lilley: Shouldn’t you be doing the minimum to drive down the price and delaying the maximum to get the lower price once you have driven it down?

Mr Davey: We like to think we are doing it in as an efficient way as possible. I am not quite sure how you would calculate the minimum. We sometimes get criticised for micro-managing everything. I think to do what you are saying, Mr Lilley, would be yet another step further. We have to allow the market to try to drive down the price.

Q42 Mr Lilley: I would quite like the German taxpayer to go that little extra yard and drive the price down, not the British taxpayer. Why don’t we just let the Germans do it? They have made this foolish decision over nuclear. They are going to have to do something.

Mr Davey: We are not the only country investing in offshore wind. It is true we are the world leader, but that is because we have the biggest-

Mr Lilley: I am sure it would be encouraged.

Mr Davey: I think it is because we have the best possible resources, much more than Germany. If you are trying to suggest that we are not careful with consumers’ bills, I assure you the reverse is the case. We spend a huge amount of time to make sure we are decarbonising in the most affordable way. It is something we are obsessive about, to make sure we are getting good value for money when we make these decisions.

Chair: We must press on. Dr Whitehead.

Mr Lilley: I am sorry. I have had very little chance to ask my questions because I have given way to my colleagues and let them-

Chair: You have been very courteous, Mr Lilley, but we do need to make progress.

Q43 Mr Lilley: Thank you very much, Chair. The key question I want to ask is, is it correct that none of these figures make any contribution to the capacity that is needed in essentially standby gas capacity? For every extra bit of offshore wind or onshore wind, you need some standby capacity built, do you not, but there is no allowance in these figures for the cost of building that additional capacity.

Mr Davey: I do not think we want to incentivise offshore wind developers for gas that they are not developing. That would look a little odd.

Q44 Mr Lilley: But the answer is there is no inclusion?

Mr Davey: No, you would not want to put it there. Of course you would not. But as for the idea that offshore wind, or indeed, biomass or onshore wind is not important to energy mix, I have to disagree with you.

Mr Lilley: But I did not say that. I am just asking a question, not making a speech.

Mr Davey: It creates capacity. It is the capacities of a different nature that have different characteristics in the way that nuclear has different characteristics from gas and gas has different characteristics from offshore wind.

Q45 Mr Lilley: But currently gas will cost, what, £50 per MWh?

Mr Davey: What is the latest in the-

Simon Virley: Yes, it will.

Q46 Mr Lilley: Thank you very much. That is all I wanted to know. What we are saying is onshore wind costs twice as much as gas without taking account of the costs that you incur to have an equal amount of gas capacity built for when the wind is not blowing.

Mr Davey: First of all, there are other ways of managing, not simply by having gas. There are things like storage, for example, and we are spending money on innovation through storage, because we think there is going to be a big role for electricity storage over the coming decades.

Q47 Mr Lilley: Is that cheaper than gas?

Mr Davey: We will see, because we are at very early stages of storage. It could well be very competitive. We hope it will be. But listen, we do think gas has a big role to play. It is cheaper, particularly if you do not include the costs of carbon.

Q48 Mr Lilley: But don’t you think it is very misleading to publish figures that suggest that onshore wind, for example, is only twice the cost and offshore wind only three times the cost of gas when actually it is twice or three times plus the cost of an equivalent amount of gas capacity or some storage capacity that, at present, is even more expensive than gas capacity?

Mr Davey: Those figures are not trying to paint the picture you are describing. Those figures are trying to say, "These are what the draft strike prices are". They are not trying to say what the full price of any technology is. For example, if you try to look at the costs of nuclear, you would also have to take into account the fact that you need capacity for nuclear, primarily because nuclear, as the baseload technology, comes in large amounts and if your nuclear power station has to come off at short notice, you need a lot of capacity to come on to take account of that nuclear. Different generating technologies have different characteristics, which have different implications for how you manage the system. Therefore, that is why we think you need a diversity and a mix, and relying on one particular type, one particular characteristic, is not sensible.

Chair: Colleagues, we must press on. Dr Whitehead.

Q49 Dr Whitehead: Just briefly, before we depart from strike price, what bits of it are indexed? The strike price is indexed against CPI for new entrants, but if you have obtained a strike price for 15 years, that is not. Is that right?

Mr Davey: No, I think it is-

Simon Virley: The full indexation is the policy that we have set out, so these prices you see here are in 2012 prices.

Dr Whitehead: Yes. That is not the question I was asking, forgive me. You set out the strike prices at 2012 prices, so presumably you move those forward on CPI as a strike price in years coming forward. However, if you already have obtained a 15-year CFD contract with a strike price, does that also go up with CPI?

Simon Virley: Yes, the strike price will be indexed with CPI.

Q50 Dr Whitehead: Okay; thank you. Could I turn back to what the Secretary of State mentioned relating to the two new proposals that had just arrived for consultation from National Grid? Particularly you mentioned the supplemental balancing reserve, which you said would be a cheaper idea over the next period, would work for 2014-15 and 2015-16. It is a strategic reserve really, is it not?

Mr Davey: I think for a strategic reserve you would have had to have a particular new measure. This is using existing powers. It is extending existing balancing powers.

Q51 Dr Whitehead: I appreciate that, but it is a strategic reserve that lasts two years. You have a situation where the operators of plants are mothballing plants, among other things, in addition to, I agree, the question of the unexpectedly high use of operating hours for coal. But a significant part of the projected narrowing gap is because a number of gas-fired power stations have been mothballed and therefore will not be available over the next period when you will be taking your calculation for capacity payments. This mechanism therefore is a method of bringing those mothballed plants back into operation, is it not?

Mr Davey: I think that is what National Grid imagine, that there will be almost certainly gas plant, currently mothballed, in its supplemental balancing reserve, yes.

Q52 Dr Whitehead: Yes, so these companies take the plant out of commission and mothball them, and as we know, there are different levels of mothballing. There is shallow mothballing, and then there is deep mothballing and there is taking the stuff to Australia, which is very serious mothballing.

Mr Davey: I doubt that is going to be in the supplemental balancing reserve.

Dr Whitehead: No, but assuming you have a shallow mothballed plant, then the proposal, so I understand it from the National Grid proposal, is that as a very last resort, regardless of utilisation cost, you are able to despatch that "had been mothballed plant" by warming payments and other forms of payments and so on in order to get that mothballed plant back producing under a process of-

Mr Davey: As I understand it, if you have identified a plant that is going to be in your supplemental balancing reserve, you will be making payments for it to be ready to be used when National Grid say, "We need you to come online".

Q53 Dr Whitehead: Right. We are making payments to companies who have mothballed plants, which reduces the capacity, in order to de-mothball the plants in order to increase the capacity over a short period of time, is that right?

Mr Davey: No. I think that is not right, because a lot of existing plant wants to stay online and play in the wholesale market just as they are doing now. There is some plant that has been mothballed, and the owners of that would have to decide whether they take it into deep mothball or off to Australia, to use your analogy, or get it into a position where they could be part of National Grid’s supplemental balancing reserve.

Simon Virley: If I may just add that the concept of balancing services obviously works on both sides of the market, so there is the demand side as well as the supply side.

Dr Whitehead: Yes, the other package.

Simon Virley: These measures already exist. What we are talking about is just an extension. They are very rarely used and we would expect them to be very rarely used over the next few winters, but they need to be there just in case. It would be talking about perhaps one or two plants, not across the whole market.

Q54 Dr Whitehead: Yes, indeed. It has been done under legislation that relates to stoRE, is it not?

Simon Virley: Yes.

Dr Whitehead: Therefore it has to be done for a limited period of time.

Mr Davey: Which is our intention.

Q55 Dr Whitehead: Yes; for two years, in fact. That is what National Grid have announced this for. If you did it properly, then you would have that mothballed plant available as a reserve to the system over a period of time, wouldn’t you?

Mr Davey: If you wanted to go down the strategic reserve route and hold mothballed plants ready to come onstream for a long, long, long period, that is a different policy choice. The concern is whether or not that would impact on investment decisions for people who wanted to play in the wholesale market. That was one of the concerns about a strategic reserve, because it was having some perverse incentives for customers on the wholesale market, whether it would increasingly grow and grow and grow and suddenly you would be with a very big cost to the consumer. We think our combination of extending existing balancing reserve powers for a short period, but then coming into the capacity market where it flows with market forces to keep the lowest cost possible is a much better combination than going down the strategic reserve option.

Q56 Dr Whitehead: But as soon as you take this temporary payment off, the plant presumably then goes back into mothball again.

Mr Davey: It would be up to the owners, but that might well be their choice.

Simon Virley: But it is worth saying that the announcement of the capacity market initiation-I think one would hope investors will be thinking about plants that they were going to take out of commission completely and may now think about what the availability payments might do to the economics of those plants. The capacity payments will obviously start for the first auction delivery 2018-19, but we would expect there to be some short-term impact on the market from the announcement of the capacity market because firms will be thinking about effectively the availability payments that will now be in existence after we have run the first auction next year.

Q57 Dr Whitehead: But pretty much all the companies that are going to announce mothballing have done that already, have they not?

Mr Davey: They have, but as you say, it is shades of mothballing, and what you do not want is plant being taken completely out of commission and irretrievably taken apart such that it could never play in the market again.

Q58 Dr Whitehead: Not being gamed here at all?

Simon Virley: We are doing lots more work on gaming because there is the potential for gaming, and we are obviously very mindful of that in the design that we will be consulting on this autumn.

Mr Davey: But on that, we did publish last week our detailed design proposals for capacity market that we are consulting on, because we want to make sure we have them right, whether it is for gaming issues or for other issues. Those have been worked up over a long period of time, where we have been studying capacity markets in other jurisdictions, and indeed the history of capacity markets in the UK.

Q59 Dr Whitehead: We have mentioned electricity storage and you mentioned that electricity storage will play, you hope, quite a substantial role within EMR. What sort of electricity storage would you expect to occur as a result of EMR? How much do you think there is likely to be by, say 2020?

Mr Davey: I do not have a figure for how much storage there is going to be. This is at the cutting edge of some of the innovations we are seeing. We are seeing storage innovations where people are effectively dumping their electricity into heat that is then being used in households or buildings. That is one form of storage. People do talk about using car batteries with electric cars as a form of storage. There is the more traditional big-scale storage where people use hydro storage. There are obviously batteries and other technologies that are being developed. But I stress we are at relatively early stages. We are spending money on helping innovations in storage, but I would not want to mislead you by giving you a figure for how much storage we expect by 2020, because I think this is quite an early stage for these technologies.

Q60 Dr Whitehead: That comes in capacity market auctions?

Mr Davey: Yes. Alongside the supply side of the capacity market, we will be running demand side response and storage capacity markets partly as a way of creating incentives for this new technology to come on.

Q61 Dr Whitehead: As separate auctions?

Mr Davey: I believe there will be separate auctions.

Simon Virley: That design is still to be determined, whether we run an auction on both sides, as it were, or whether you have to run something on the demand side and something on the supply side.

Q62 Dr Whitehead: I was just going to observe that bearing in mind that none of the existing players appear to have any intention of producing capacity for electricity storage to any great extent, would you be confident that an auction as part of an overall auction would succeed in producing any storage at all?

Mr Davey: It is one of the reasons why we have not made the final decision. We want to look at whether or not it could play in the full auction or whether it would have to be a separate auction. There are different characteristics to the demand side and to storage than of course supply, particularly on the demand side where often players believe that they can only plan a year ahead and they think it would be much more difficult for them to plan four years ahead. Therefore you are going to have different characteristics to the auctions. But that is part of the reason why we are consulting on this.

Simon Virley: Just to add to that, we have looked in detail at the experience in the PGM market in north-east United States. The demand side there has developed very rapidly under the capacity markets that they have run, so we are quite optimistic, based on the US experience, that similar products could be developed here in the UK.

Q63 Dr Whitehead: But storage particularly?

Mr Davey: Yes, as one of those.

Q64 Dr Whitehead: I think the thrust of my query right this minute is the relationship between how you develop electricity storage capacity in terms of the investment upfront that is required into it and how that then relates in terms of the value you are getting out of it subsequently and how the auction process will be undertaken. That is something I presume you are confident can be accommodated within the auction process as it stands, or you may be designing subsidiary auctions to take place.

Mr Davey: Let us be clear, I think the biggest contribution to a system is going to come from the supply side of the capacity market. But when we were considering this question, we did see an opportunity to encourage storage and demand side response and that ultimately electricity demand reduction led to more permanent demand reductions. We wanted to make sure that we consider those as we designed this market. But I am not going to pretend to you, Dr Whitehead, and the supply side is where we spent most of our time, where there is much more experience. I think there will be some learning on the storage side because, not least because the technologies are relatively new.

Q65 John Robertson: The storage that we were talking about there-just before I move on to nuclear, the US already do this, where they keep particularly gas power plants in reserve in case there is a need for increased output. Do you have a strategy at all for this? Have you thought about the future in this mothballing, of whether you are going to have X amount of power sitting in reserve or are you just going to make it a company’s decision.

Mr Davey: No, we are certainly not leaving it just to companies. We are having to intervene, and the Ofgem proposals with National Grid would be an intervention where they would make payments to have a supplemental balancing reserve, so that is not being left to companies. We would run the capacity market auction and we are very confident that the companies would respond, not least because the experience you were talking about in the United States is a very positive one, particularly in those states that have gone down the capacity market route.

Q66 John Robertson: It is also very, very expensive compared with the other forms of energy supply that they get in the States. This is probably the most expensive form of electricity in the United States.

Mr Davey: No, I do not accept that.

Q67 John Robertson: Go and ask them. Ask them. I think you will find it is.

Let us move on to nuclear. What progress has been made with the negotiations with the EDF on agreeing a strike price for Hinkley Point C?

Mr Davey: We have not agreed a strike price yet.

John Robertson: So where are we?

Mr Davey: We are in negotiations and those are very constructive negotiations. They are taking some time, you will have noticed, but that is because these are very complex negotiations and I am determined to make sure we get the best possible deal for the consumer. We are approaching this very seriously because the contract will go over a very long period.

Q68 John Robertson: When do you think we will get the details of this agreement? What kind of time scale are we talking about, because I have to tell you that the amount of time it is taking to get an agreement with the EDF is totally out the box. We would have expected to have had it well before now, would you not?

Mr Davey: I do not know what led you to that expectation.

John Robertson: Probably somebody told me at a previous meeting.

Mr Davey: I think many people realise we would take some time over these negotiations. I cannot give you a precise time, but what I can tell you is we will negotiate very hard and we will not agree to something-I will not sign a CFD with EDF if I do not think it is good value for money and meets our other criteria of affordability, of fair price and no public subsidy.

Q69 John Robertson: What if we try to promote some of the other companies and other sites and put them upfront, and let’s do a deal with them and let EDF think about it for a while?

Mr Davey: Well, EDF I am sure have noticed that Hitachi have bought the Horizon project and Hitachi are powering ahead. They are going to the Office of Nuclear Regulation for the GDA process; I think they have begun the GDA process. Certainly when I was in Tokyo recently, I visited Hitachi and the president of Hitachi was over here recently. We have had a lot of discussions with Hitachi and I think they bring an awful lot to the British nuclear efforts.

Q70 John Robertson: This bid seems to be a bit more, shall we say, in keeping with what we would expect. Perhaps we should be doing better deals with that company than EDF, because I always have the feeling with EDF they drag their feet to try to get the price up. Is it not time that we moved ahead and you can give us some dates when we can get Hitachi and Horizon on board and working?

Mr Davey: It takes two to do an agreement, Mr Robertson, as you are implying, and we will see whether both sides can reach an agreement. In the meantime, because we think there is a lot of opportunity and interest in the nuclear programme, we are talking, yes, to Hitachi, but there are other people who are looking at the UK as the place to invest in new nuclear. Sometimes we have been characterised as only talking to EDF and only thinking about Hinkley Point C in Somerset. That is not the case.

Q71 John Robertson: When do you think we could expect to get some concrete in the ground?

Mr Davey: It won’t be until we have signed an agreement. I am afraid, Mr Robertson, I cannot give you a date for that.

Q72 John Robertson: There comes a time, of course, when it will be too late. Things will have moved on.

Mr Davey: We think nuclear has a hugely important role to play, particularly in our decarbonisation agenda. We all know it takes a long time to build a nuclear reactor, so even if we agreed in the next few months, a new nuclear reactor at HPC would not be producing until the end of this decade at best. I think we should take a little bit more time to make sure we get the details right for the interests of the consumer and for British business.

Q73 Dr Lee: We had originally expected new nuclear to be generating by 2017. Now we are hoping for 2023. I wonder at what point will the Government consider its present reliance on the private sector leading on nuclear new build to have failed?

Mr Davey: I do not recognise the 2023 date. I think we are still hopeful that we could see new nuclear generating in maybe 2020, 2021. I am not going to say it is definitely going to be then because we have not signed the deal yet. But I think the negotiations have been going incredibly well; the process, the policy development has been going well. That is why we have seen such interest from so many nuclear vendors. If you are right, Dr Lee, that we should be revising our strategy, we would not have seen the interest that we have, but we have seen that. That encourages me, and I think we are on the right track.

Q74 Dr Lee: Does the Department have contingency plans if the present model of private sector-led new build does not occur?

Mr Davey: That is a hypothetical question. We believe it is going to occur. All the evidence I have seen both from the negotiations and from the interest from Hitachi that I have talked about, but from other players as well. There was recently in Seoul and Tokyo a meeting of companies there who have real huge experience in nuclear and are very interested in the UK market. I do think that means we should not be thinking about plan B, because we have plan A, which is working.

Q75 Dr Lee: What is the Government’s liability if you walk away from negotiations with EDF?

Mr Davey: I do not think there is any liability at all. I believe EDF have obviously invested money, but we have not.

Dr Lee: So we have no liability at all?

Stephen Lovegrove: I do not believe so. I think that they would have to think about what they were going to do with that site and there may be some clauses that allow us to get that site back, but I would have to look into that. I think that is-

Q76 Dr Lee: So, we do not know whether we can get the site back?

Stephen Lovegrove: The site is currently owned by-

Dr Lee: Yes, the previous Administration sold it in 2008, something that I find inexplicably stupid, but they did.

Stephen Lovegrove: They got a very good price for it.

Q77 Dr Lee: It depends really on the clauses, does it not? It depends what we have to pay to get it back if we need it, because most projections require nuclear build. We can argue the toss over whether it is 20% or 30% in relation to whichever model you want to try to work up, but ultimately we are going to need some nuclear, and at the moment all of the sites that are currently nuclear are owned by another country. It would be nice to know what the buy-back clause is.

Stephen Lovegrove: There are use it or lose it conditions in these agreements.

Q78 Dr Lee: Finally, I guess in terms of going back to the strike prices for offshore wind, £155 plus what Mr Lilley was saying about back-up-and we can argue whether we need full back-up or not, but it is another expense-and I would add to that also the capacity market cost as well, that by definition, if you are looking at these graphs, the more wind you have, the more this graph does not look so good if the wind does not blow. Why is it that we are so disinclined to break that £100 strike price for nuclear when we seem quite enthusiastic about pushing towards, in effect, £200 for offshore wind?

Mr Davey: It is quite clear, really.

Dr Lee: Particularly in view of the fact that, as you have already outlined, nuclear is on, its base load is there, you know it is coming, and wind is, by definition, not guaranteed, I just wonder why purely from a national-security point of view the current Government seems more inclined to go with an intermittent source than a continuous source.

Mr Davey: I think the current Government want to have a diverse set of sources.

Dr Lee: Yes, I know. With respect, this is not.

Mr Davey: You said we are just going for intermittent. We are not. We are going for base load, going flexible and intermittent. We are going for all of them.

Q79 Dr Lee: With respect, we all buy into the fact that we need mixed sources. I am not saying that we should all just run off a nuclear power station, but at the moment we do not have any nuclear power stations coming onstream. I am just slightly surprised that if we were going to choose an energy form in current geopolitical circumstances, we have gone with an intermittent source, not a continuous source. We seem demonstrably disinclined to be putting up taxpayers’ money to incentivise nuclear, but we seem quite eager to do offshore wind. I just find that-

Mr Davey: I disagree with your characterisation of our policy; I guess that is the point. You mentioned capacity market. That is because we want to incentivise flexible-supply gas. We have these detailed negotiations with EDF for nuclear and indeed discussions with Hitachi for nuclear. The way you describe it is as if the only thing we are doing is offshore. That is clearly not the case.

Q80 Dr Lee: No, that is clearly not the case because you have issued a series of strike prices for different forms of energy. I am not suggesting that for one second. I am just saying in terms of priority, from a national security perspective, keeping the lights on and so on, it does seem a bit bizarre to me that we are prepared to throw almost double at a form that is intermittent, not continuous. It is not about putting all our eggs in one basket, but at the moment, as it stands, we seem to be doing that, and I just find that surprising.

Mr Davey: That is the point that we disagree on. We are not putting all our eggs in one basket. We do agree-

Q81 Dr Lee: No, I have not said that. I am saying of the list-and we could add nuclear if you could put the strike price on here-it does seem surprising that we are prepared to give virtually double to a form that is intermittent and for which we do not know whether it will last for 25 years or not, but we seem disinclined to do so for nuclear. I just find that at the moment, from a national security perspective, somewhat baffling.

Mr Davey: First of all, any nuclear contract would be an awful lot longer than any contract for offshore wind. I think that is obvious, so one has to note that difference.

Dr Lee: Only because we know that it lasts.

Mr Davey: One also should note the difference that nuclear is a relatively mature technology; offshore wind is a relatively immature technology. We believe, and we have a huge amount of evidence to show this, that the cost of offshore wind will decline significantly.

Q82 Mr Lilley: New offshore wind, not the offshore wind we have built?

Mr Davey: Indeed.

Mr Lilley: We are building it while it is expensive, but we know it is going to get progressively cheaper.

Mr Davey: My guess is our first nuclear was quite expensive. I know it is, because most of my budget is spent on cleaning it up because the people who built it did not clean it up in the first place, just like the costs of climate change are very expensive for the whole world because no one has bothered to clean up gas and coal, and we are having to pay the cost of that now. When you take in the full costs of all these things and the costs of their pollution, yes, sometimes you make very interesting comparisons.

Q83 Albert Owen: Can I move on to the Energy Bill? Is the Bill still on track to get Royal Assent by the end of the year?

Mr Davey: Yes.

Albert Owen: You are confident of that, because it has been delayed a few times which is why I am asking the question. We have had serious delays, but you are confident that it will go through the House of Lords and Royal Assent by the end of the year?

Mr Davey: I was absolutely delighted at Third Reading in the House of Commons when 396 colleagues voted for and eight voted against. That was the largest majority at Third Reading for any Bill during this Coalition Government. I was delighted, as I stood at the table, to see my friends and colleagues around the table voting in favour of the Energy Bill, and I think that set it off with a good fair wind into their Lordships’ House and they had a good Second Reading. I hope and believe it will go through and get Royal Assent by the end of this year, but I would not want to prejudge their Lordships’ House, of course.

Chair: It may be worth pointing out that most Bills are not voted on at Third Reading-it is only if someone objects-but your point still stands.

Q84 Albert Owen: No, it was a good majority, and I was happy to support it because we have been waiting a long time for this.

Can you update us on whether demand reduction measures have been added to the Bill or will be added to the Bill?

Simon Virley: Yes, they have.

Albert Owen: They have? Can you explain?

Simon Virley: They were added at report stage in the House of Commons, I thought, in the debating room.

Mr Davey: Yes.

Simon Virley: I thought you were present.

Mr Davey: We have set out the policy.

Albert Owen: I was not. I am sure you know more, because you were taking the Bill through.

Mr Davey: You had me slightly worried there. I thought we put them in and I believe we had. We put them in on Report, and my colleague, I think it was Greg Barker, moved them.

Q85 Albert Owen: Okay. Is there in any provision in the Bill, or do you plan to introduce amendments to improve access to power purchase agreements for independent generators?

Mr Davey: We have been studying this issue in huge detail. It was debated in the House of Commons during the proceedings, as you will be aware, and we will be publishing some amendments in that area very shortly.

Albert Owen: You will be?

Mr Davey: Yes.

Q86 Albert Owen: Okay, and can you give us a flavour of what they will be?

Mr Davey: I can explain that we looked at the GPAM proposal and did not believe it was the right proposal.

Chair: That is the Green Power Auction Market.

Mr Davey: Yes, the Green Power Auction Market. But we believed it had some elements that we could take into our thinking, and so it will not be the Green Power Auction Market, but it will be a version that we think provides-

Q87 Albert Owen You have anticipated what I was going to ask. I was going to ask whether there will not be any on Green Power Auction Market.

Mr Davey: No, we have looked at that, and we engaged with the people proposing that idea, but we felt that it went against the thrust of the rest of the electricity market reform. It was almost bringing back premium FITs in a way that we thought did not create the right incentives, but we did believe that there was an issue about access to market, about independent generators, particularly independent renewable generators, getting power purchase agreements. If you remember, when we published the draft Energy Bill back in May last year we published a call for evidence about the PPA market, and it was that piece of work going forward that will result in amendments that we will table in the House of Lords to make sure that these renewable independent generators can have access to the market. It is very important for competition and that was one of the deciding factors.

Q88 Albert Owen: Thank you. Final question on the Energy Bill: are you confident that the promise made by the Prime Minister last year with regards to giving the lowest tariff to their customers-the Bill will deliver that?

Mr Davey: It has. As you know, we tabled amendments to-

Albert Owen: It has not, because the Bill has not gone through, but go on.

Mr Davey: In terms of what is now on the face of the Bill, obviously when the Bill was published those amendments had not been tabled. We tabled them earlier this year and the House voted for them, and we believe they will be a backstop to Ofgem’s reforms and encourage Ofgem’s reforms to go forward smoothly. It is obviously Ofgem’s reforms ultimately that will deliver on that promise.

Q89 John Robertson: Can I ask a question on that point? Can you guarantee that the lowest price will be the lowest price on the prices at present or will be the lowest price at the prices that will be in the future; for example, they will pick four prices, and it could be from the middle up to the top and not from the bottom up to the top?

Mr Davey: It will be competition that decides where the prices end up.

Q90 John Robertson: That is not answering my question. We have 400 different tariffs now, and what I am saying is will the lowest price be the equivalent of the lowest of these 400 tariffs or will it be, as a lot of us fear, well up the order and probably nearer the middle of the range rather than at the bottom of the range? Will you then be telling people that?

Mr Davey: I think competition is the way that that will work.

Q91 John Robertson: That is not competition. Your leader, your Prime Minister, said he was going to make it the lowest price, and if it is not going to be the lowest price-

Chair: If I can interrupt you; you said, "Yes, it has already been done".

Mr Davey: I think there are two questions here, if I can unpick them: Ofgem’s proposals that we have backstop powers in the Bill to support-

Chair: Yes, which would have happened regardless of what the Prime Minister said.

Mr Davey: They basically say that a supplier can have four core tariffs and that within those core tariffs it will be things like fixed rates or variable rates and so on. There will only be one rate within that core tariff, therefore there will be that lowest rate, and those-

Q92 John Robertson: So, you are conning us?

Mr Davey: Not at all.

John Robertson: It is not the lowest tariff. It is a tariff that will be invented that will be well above what the lowest tariff will be at that point in time.

Mr Davey: No, if you look at Ofgem’s proposals, for example, there are a number of people who, quite scandalously, are on so-called dead tariffs. They will be moved down to this new single tariff in each of the core tariffs.

Q93 Albert Owen: You have answered my question, and you have answered it in a way that suggests it will be Ofgem’s proposals that will go forward. So, the Prime Minister making that statement that the cheapest tariff will be available is an empty statement really; it is up to Ofgem, and that will have happened without the Prime Minister grandstanding in the Chamber.

Mr Davey: No, I do not believe it is an empty statement, and I believe if you look at what Ofgem said, what we said in our consultation paper, which is a separate consultation paper leading to the powers we put in the Bill, we made it clear that we wanted to ensure that people-when they have made their preferences around the core tariff, it will be on the lowest tariff, which is what is going to happen.

Q94 Dr Whitehead: You have mentioned about the early days of the Green Deal at an earlier stage, but the fact of the matter is in terms of particularly cavity wall insulation, that initiative has just collapsed, hasn’t it, between last year and this year? For example, the number of cavity wall insulations last year, say April 2012 compared with April 2013, has just collapsed into insignificance as the Green Deal has got underway. Is that a fair description?

Mr Davey: It is certainly true that there have been less easy to treat cavity walls or lofts done compared to last year. That is not surprising, and that is what we expected. Last year we saw a very large increase in activity in this area, driven by the ending of certain SES. Companies had to meet their obligations and they were up against a deadline and so we saw a large boom in work in that area. What is interesting when you stand back and look at the result of that, there are very few-relatively few-easy to treat cavities left, we estimate about 0.7 million, and in terms of uninsulated lofts, so-called virgin lofts, only 1% of the total. That suggests that the past policies in those areas have been pretty successful. It also suggests that going forward with the Green Deal and the energy company obligation we have to have quite a change in the industry to focus far more on hard to treat cavity walls and solid walls. That is what our policy has been designed to do. So, it is not surprising from a boom driven by a deadline to a changed problem that there has been a reduction in the activity in easy to treat cavity walls and lofts.

Q95 Dr Whitehead: On the present rate, it would take 350 years to insulate the easy to treat homes, wouldn’t it?

Mr Davey: The easy to treat will still be part of the new package, but the new package is designed to deal with the solid walls that the old package failed to tackle completely. In fact, only 3% of solid-wall properties have been treated to date, because the previous schemes just ignored them, effectively. SES did a little bit of work, as you will be aware, but certainly its predecessor did nothing. This is where there is a huge potential. It is much more expensive of course than cavity walls and lofts. It is probably why previous Governments did not bite the bullet and did not tackle it, but we are determined to tackle this, and that is why there is this shift, this sort of structural change in the industry, that ECO and the Green Deal is designed to support.

Q96 Dr Whitehead: The puzzle is, though, that as Green Deal was set up a number of insulation installers did say, "Look, we are worried about how we continue to run an installation programme. We are worried about our jobs. We are worried about the ability to maintain capacity in insulation", and indeed, as I think we agree, the number of insulations has dropped, I think, from 48,000 to about 1,000 April to April. Are there are going to be any measures to make sure that we do have a loft insulation industry for when and if those figures pick up?

Mr Davey: In the Green Deal cashback, you get support for loft insulation, so it is still part of the policy, but when you only have 1% of lofts left that are virgin lofts you can understand that that part of the issue has basically been dealt with. I have heard from the industry, of course I have. I have seen the press reports, I have seen the lobbying that suggests that we should continue as we have always done before, focusing on lofts and easy to reach cavity walls, but when so many have been done, when there are so few left to do, you do have to question whether you should keep the old subsidy regime focused on areas and installations that are going to much less needed in the future, particularly when you have these other ones that have been left untouched. So, I make-

Q97 Dr Whitehead: I take your point, but can you say, hand on heart, that was always the intention as Green Deal progressed, that there would be no concentration on traditional less hard to treat loft insulations in Green Deal? You are now saying, "There are very few left, not the intention, harder to treat".

Mr Davey: Administering through the ECO and Green Deal, if you get your home assessed in Green Deal and you are not eligible for Affordable Warmth or Carbon Saving Communities, you would have to pay yourself for loft insulation under the Green Deal, but there are people who will be eligible for parts of ECO where they could get loft insulation subsidised.

Q98 Dr Whitehead: Yes, or through cashback?

Mr Davey: You can get incentives through cashback, that is true. It is simply not true to say that loft insulation has no future, not least because there are some lofts that while quite a lot of the gains in terms of energy efficiency and carbon savings have been taken because they have some degree of loft insulation, they could still benefit from top-ups. We will see, I think, through the Green Deal assessments some people doing top-up loft insulation. That is not where the real prize is for carbon emissions and energy efficiency and savings on bills. Those are going to be in things like new boilers and in things like solid-wall insulation and so on. Phil, do you want to add anything to that?

Q99 Chair: Secretary of State, perhaps Mr Wynn Owen may be able to answer this as well at the same time. Given that it has taken so long to cope with the low-hanging fruit and you have said yourself that the solid-wall insulation is much, much harder to crack, is it therefore realistic to say, as you told the Committee at the beginning of this session, that you will be winding the Green Deal down in 2015?

Mr Davey: No, I did not say that. I am sorry. I said that the team of officials will be reduced significantly. The Green Deal-

Chair: It amounts to the same thing.

Mr Davey: No, it does not. The Green Deal, as a market in energy efficiency, is designed to last for decades. It is a market, unlike many of the schemes we have had before, and because it is a market and not administered by officials, once it is set up and running and the framework is in place you will need fewer officials. That is one of the benefits of having a market-based approach. When we had a nationalised industry, when successive Departments had energy within them, and they had very many different names over the years, they had many more civil servants and some in the CEGB because they were managing everything. We have a liberalised market in energy supply and we want a more liberalised market in energy efficiency, and that will mean fewer civil servants.

Q100 Dr Whitehead: The particular line of questioning that I was undertaking does indeed relate to the fact that there is a market here, but no one appears to be undertaking loft insulation. However, as far as the cashback arrangements in the new market are concerned, I think about 5,000 people have registered for the cashback, 920 have received a cashback, one has received a cashback for loft insulation and 927 have received cashbacks for boiler installations that they could have done anyway.

Mr Davey: First of all, there have been quite a lot of loft insulation and boilers and so on under ECO, which is obviously running alongside Green Deal. Some of the ECO has not involved Green Deal finance. We hope in due course there will be more blending of Green Deal finance and ECO, but to say there is not loft insulation and boiler insulation happening is not true. There were 82,000 measures by the end of April under ECO. So, the idea that there is nothing happening is simply not the case. What we will increasingly see, as people opt for Green Deal finance, is more of those types of insulations happening with the Green Deal separate from ECO.

Dr Whitehead: I did want to ask a question about ECO itself.

Chair: Mr Wynn Owen wanted to add to that.

Phil Wynn Owen: Just to illustrate my Secretary of State’s point, because ECO is off to an extremely good start, of the nearly 82,000 ECO measures over 45,000 have been loft insulation for the most vulnerable and 26,000 cavity walls. We did listen to the industry about the period of adjustment, so we made special allowance for the hard to treat cavities, of which there are still 3 million to do, so I think we have been responsive to the transition.

Chair: Secretary of State, can I just ask, are you happy to come back and continue?

Mr Davey: I would love to, yes.

Chair: Thank you so much. We stand adjourned for 15 minutes if there is one division, 25 if there are two.

Sitting suspended for a Division in the House.

On resuming-

Q101 Chair: Secretary of State, I just want to move us on a little bit to the issues that we have had recently. There has been the big mis-selling scandal with SSE and the problems there, and the largest-ever fine. We have two separate investigations currently into price-fixing by both the Financial Conduct Authority and Ofgem. I do not want to ask you about those investigations, because obviously they are continuing and I know you cannot give us any clarity on that at the moment, but what I do want to ask you this. The consumer has been ripped off with SSE, we know that for sure. A fine is then imposed upon the company; the company then has to pay that fine and the consumer who was ripped off in the first place is then in danger of being ripped off a second time having to cope with the payment of that fine on top of their bills. What steps is your Department taking to ensure that any fines or penalties that are levied are not paid initially from the consumers’ pocket, but that they are levied against perhaps any bonuses that those companies have set aside to reward their directors in the first instance, and that ultimately they should be taken out of the dividends paid to shareholders, rather than simply an extra double burden on the consumer?

Mr Davey: One thing that we have done, which I think begins to address the sort of issues you are talking about, is that, under the Energy Bill, we have given more powers to Ofgem, so that the fines that they levy in the future will not just go to the Consolidated Fund, but will go back to the consumers who were badly treated. So, the consumer who was badly treated in the first place at the moment does not see the benefit of the fine to themselves, but going forward, because of the changes and the tougher rules we have put into the Energy Bill, they will get the income from the fines to compensate them properly. I think that is quite a big step forward, and I think it has been welcome. It is good that SSE when it paid its fines, as it should do, also put some money aside for the people who had been badly treated to get them some compensation, so I welcome that, although of course they should never have treated people so badly in the first place.

Q102 Chair: Does that not then mean that given those fines are being paid, they are being paid currently or they could be paid out of funds that are levied on the consumer in addition, rather than out of funds that were set aside for directors’ bonuses and for shareholder dividend? Do you not think it is more appropriate that instead of allowing the company to load it on to the consumer that it should be ring-fenced in the way I have suggested?

Mr Davey: Of course trying to understand how that works requires greater transparency in accounts; and that is something that we discussed, and you were helpful at the last meeting in directing me to elements and recommendations to have greater transparency in the accounts of these large energy companies. I think that is really where we need to go, and therefore I am agreeing with your line of questioning from last time. It is very important. As you know, we, this Government and the last Government, want to see greater separation, greater transparency, and that will facilitate the sorts of things you are talking about.

I do not suggest that we should legislate directly. I do not think we are at that stage, not least because I am not yet convinced we have the level of separation and transparency that would enable us to do that in any sensible way. I think that we should focus on the transparency first. In the meantime, not only are these companies being fined, and the SSE fine was a record fine, but the Government is taking measures to make sure the income from those fines goes to the people who have been wronged, and I think that is a real step forward, and a very strong message to consumers.

Q103 Chair: Can I just tease out of you an undertaking that you will look very carefully not only at the transparency here, but about ways in which you might, if not through legislation, through regulation make it more difficult for companies to load these things on to the consumer, rather than on to their directors or on to the shareholders?

Mr Davey: If it is regulation it may be an issue for Ofgem, so I am certainly keen to bring your remarks and comments to Ofgem’s attention.

Chair: Thank you very much. Dr Whitehead, I think you wanted to go back to the issues on ECO.

Q104 Dr Whitehead: Yes, just very briefly on ECO, ECO is doing well, so I understand, but it is possibly or arguably going to not be quite on its initial budget in terms of the likely obligation costs per ECO treatment. Can you clarify whether ECO is definitely not ever going to be within the levy control framework?

Mr Davey: It is not now, and our agreements on the levy control framework with the Treasury do not have it in there, so, given the levy control framework has been agreed to 2020, I cannot say much after 2020.

Q105 Dr Whitehead: Yes, but what is in the levy control framework is determined essentially by what ONS classifies as what is putative tax and spend in terms of obligations, is it not, eventually? That is the mechanism by which a device is put into the levy control framework or is not put in it.

Mr Davey: The levy control framework focuses in on the support we give to low carbon. That is what it is there for, whether that is through the renewable obligation, through feed-in tariffs, through micro-generation or through contracts for difference. There are other things that end up on consumers’ bills. In many ways, certainly at the moment, the more significant one is the cost of CERT, as used to be, the cost of ECO as it is now, and indeed the cost of Warm Home Discount. Neither ECO nor the Warm Home Discount is in the levy control framework, and there is no proposal.

Q106 Dr Whitehead: All I referred to is that the original DECC question and answer document at the point at which the levy control framework was originally set out stated that this was a question of ONS classifying particular measures as putative tax and spend and if ONS did indeed classify those measures, then it would be within the levy control framework. I understand that those particular measures would be referred to ONS for classification and then consequently would or would not be within the levy control framework. So, presumably the question at that point is whether anybody has any intention ever of classifying ECO, which does look remarkably like putative tax and spend, as indeed they are under ONS classifications, and if not, then presumably that question could be definitively regarded as never arising.

Mr Davey: I am certainly not initiating putting ECO in the levy control framework. If you are telling me that ONS have the capability of making classifications, which you are a little bit surprised about, that I know is the case. I have seen it in one or two other areas, but they are an independent body, quite rightly, and their remit is to protect the integrity of national statistics, and if they make a recommendation to Government, then Government has to take that on board. I do not know whether any of my colleagues can-I do not believe they have made one yet.

Phil Wynn Owen: If I might add, the ONS keep all such matters under review, but the thing that distinguishes the ECO, as did its forerunner, the CERT, is that it is not a monetary obligation; it is a carbon reduction obligation, so it has therefore been seen hitherto by the ONS, and I have no reason to believe that they will change their view, as a piece of regulation rather than a piece of taxation.

Perhaps I could just pick up on one other thing that you mentioned, because I think you gave the impression that you thought ECO in monetary terms was going to cost more than we had forecast in our impact assessments. I just wanted to share with you the good news that certainly the last ECO brokerage auction that we conducted, and we are conducting them fortnightly-there is one, by chance, going on this afternoon as we speak, so I am looking forward to getting back and finding out the results-and certainly the last auction a fortnight ago was bringing out on the prices raised in the brokerage auction and the aggregate price, if we grossed them up from that auction, would have been around £1.35 billion a year. That is remarkably close to our central estimate of £1.3 billion and way below what some of the energy companies asserted early on, namely that this could cost them £3 billion or £4 billion a year, which in my view was simply scaremongering.

Q107 Dr Whitehead: So, within that sort of range; do not get me wrong, I am rather happy that ECO is not within the levy control framework-

Mr Davey: I assume so.

Dr Whitehead: Yes, but I presume within that sort of framework that can therefore be managed within its would-be budget without having the overall constraint of the levy control framework added to it? I think that is your conclusion.

Mr Davey: Whether it hits £1.3 billion or is lower or is higher is one question. Whether it goes in the levy control framework is another. We see no reason for it to go in the levy control framework, hitherto ONS have seen no reason to do so. Should, by surprise, they make a proposal then we would have to consider that, because they are the independent statistical body, but one would assume you make adjustments around that. We do not think it is the right thing to do, and we see no reason for doing that.

Q108 Mr Lilley: May I go back to the questions of cost of all this to our economy, to individuals and to industry, since we were moving on rather more brusquely earlier on than subsequently. In the opening sentence, Secretary of State, of your document Electricity Market Reform: Delivering UK Investment that was published on the day of the spending review, you say, "It will deliver the greener energy and reliable supplies that the country needs at the lowest possible cost". I wonder whether there is at least one exception to that, which is the interaction of the carbon floor tax with existing suppliers. Does it not give a windfall to existing nuclear and existing wind, because it raises the price of electricity above what it would otherwise be and what they were anticipating when they signed up or built their capacity and so they are getting a windfall. By definition, a windfall is an unnecessary cost. Maybe I am rash in asking a question when I do not know the answer, but-

Mr Davey: It is true to say that low-carbon generation, which therefore will not have to pay the carbon price, will be made more competitive as a result of the carbon price floor; more profitable. That clearly must be the case.

Q109 Mr Lilley: Are you considering any ways of clawing back this windfall? We claw back windfalls from the bank; we have clawed back windfalls in the past from oil companies. Why not claw back the windfall from the wind and nuclear that you have inadvertently given them?

Mr Davey: I do not think that is needed. I think that we need to make sure that we do pricing carbon more effectively than we have in the past, that is a good thing to do, and clearly over the next few years, few decades, you will see the nuclear one, because that is the biggest at the moment, those nuclear power plants that are getting this windfall, to use your words, will be retiring. So, the new nuclear plants will have been built, and agreements will have been reached on the basis of the carbon floor price being there.

As you have pointed out, there is a lot more wind coming on than there is at the moment, so I am not disputing your analysis, but I am not sure if it is a huge problem, because of this change in a lot of the existing nuclear capacity coming offline.

Q110 Mr Lilley: Would you be able to provide the Committee later with figures of the estimate of the windfall for existing nuclear over their remaining lives and committed and existing wind over the anticipated life of them as well? That would be very helpful.

Mr Davey: We can look and see if we can get those figures. We may not want to call it a windfall. We might want to think it is the impact-

Q111 Mr Lilley: I appreciate you are very good at dressing these things in innocuous sounding words, but it is a windfall.

Mr Davey: No, because it is the impact of trying to price carbon properly, that is all.

Q112 Mr Lilley: Retrospectively, yes. That is one helpful thing.

The other point you make in the third paragraph of your introduction is that, "This represents a huge opportunity for job and growth, with EMR designed to unlock up to £110 billion investment in our electricity infrastructure and support up to 250,000 jobs". Surely the correct way to look at these things is not how much you have to spend to get a given amount of capacity, but how much capacity you can get for a given amount of spending; not how many jobs it takes, how many people you have to employ to get a given amount of capacity, but how much capacity you can get for a given amount of employment, and that you could have this amount of infrastructure or this amount of capacity with half the amount of expenditure, maybe less, and far fewer people being employed on it. So, you would be able to deploy the money and the people elsewhere. It seems odd to say, "Well, 20% of our capacity is coming offstream because of the EU directive and old age, therefore let us replace it by 20% renewables plus a nearly equal amount of additional capacity as back-up". So, we have to replace 20% of our capacity with effectively 40% extra capacity. It costs a lot; you are right, it would employ lots of people, but it is-

Mr Davey: I do not recognise that last bit of the analysis, but let me help you in terms of the overall response. Energy climate change policy is not driven by, "We need to create so many jobs". It is not driven by that. Our three objectives are very clear: to make sure we have energy security, which we are doing; to make sure we decarbonise the power sector, which we are doing; and to make sure that we do that in the most affordable way, given that they are three objectives that you are trying to achieve together. It also happens that in doing those you get extra investment, you get growth, you get jobs. So it happens to be a fact that by meeting our energy objectives of energy security, decarbonisation and affordability we also, I would argue, make a contribution to growth. I do not want you to go away, having read that document, Mr Lilley, assuming that that is the core purpose of energy policy.

Q113 Mr Lilley: Then one unrelated factual point: on the issue of fracking, I understand that Friends of the Earth have received legal advice that the EU Minerals Directive is going to apply to onshore oil and gas drilling. Can you tell the Committee what impact that is going to have on both the cost of compliance for companies and the time that it will take to move ahead with drilling?

Mr Davey: I have not seen that legal advice, therefore to comment on its implications I think would be very unwise. We believe the way we are proceeding with supporting the shale gas industry in terms of the environmental protection that we have put in place, in terms of reassuring communities, meets our legal obligations, and I think that means that we will proceed with the exploration that is needed. Companies who wish to explore and have licences, when they meet all those regulations, they need to get the relevant planning consent and permit, and they will no doubt go ahead and do that. We will see whether that legal advice results in any legal action, but that is not really for me. That is a matter for the Friends of the Earth.

Mr Lilley: That is extremely encouraging news. As you know, I am no friend of the Friends of the Earth.

Mr Davey: They will be bitterly disappointed to hear that.

Mr Lilley: I think it would be helpful if the industry could be told this, because I have been told by a couple of companies that this is a worry that they face.

Chair: Secretary of State, perhaps once you have had the opportunity to see the legal opinion, at that stage if you felt able to write to the Committee that might help.

Mr Davey: Let me see if Mr Virley can help in the meantime.

Simon Virley: The Environment Agency have written to the industry I think on 26 June just to clarify what permits are required under the Mining Waste Directive, and they are setting out the permits that will be required and the process they need to go through, but it is going to be as streamlined as possible. There is a communication that has gone from the Environment Agency to clarify the position in the last week or so.

Chair: Perhaps you could make that available to this Committee. That would be very helpful.

Simon Virley: Certainly.

Mr Lilley: Also any indication of whether it is going to increase costs or delays for the industry and whether we should be seeking whatever they call it-

Q114 Dan Byles: The Prime Minister’s statement to the House following the European Council did say that the European Council said they were going to reduce unnecessary regulations across Europe that stood in the way of developing shale gas. It would be interesting to know whether there is a mechanism to follow that up.

Mr Davey: I can tell the Committee, as I attended one of the European Councils that discussed shale gas and there were a number of Ministers from different member states present, we had a presentation from a number of learned people about shale gas and we discussed a number of aspects, including some people talking about whether or not there was a case for an EU regulation or directive from this area. I made it clear, as did representatives of Ministers from other member states, that we did not feel that was necessary.

Subsequent to that Energy Council meeting, the European heads of state met at the European Council, and you quite rightly, Mr Byles, referred to the communiqué that came after that European Council.

Q115 Chair: Okay. I trust I have not been too brusque, but let me in that same spirit just pick up on one of the things that Mr Lilley raised about the carbon price floor, because the carbon price floor, I think you would agree, Secretary of State, has distorted the market between businesses in the UK and in the rest of Europe. Therefore, I wondered if you might care to comment on what the effect of voting against the backloading measures of the EU ETS were, whether that did not exacerbate the problem further, whereas in fact the problem for UK businesses could have been relieved if that vote had come through?

Mr Davey: As you know, there is a vote tomorrow in the plenary session of the European Parliament and a fresh vote on the backloading proposals following some amendments that have been tabled by members of the NV Committee who voted on them on 19 June, I think. I hope that the European Parliament will now back backloading, because I think reforming the EU ETS, Europe’s carbon market, is the right thing to do in itself and in relation to the carbon price floor would certainly reduce any impact that might have on British firms relative to other European firms. I should say, of course, we have taken steps to produce a scheme to help energy-intensive industries with respect to the carbon price floor, and I am not sure whether that has state aid clearance yet. I do not believe it has.

Simon Virley: No, it hasn’t. Discussions are ongoing.

Mr Davey: But that is in place.

Q116 Chair: Thank you very much. I want to move on to the major projects of the Department and the Major Projects Authority within the Cabinet Office, which obviously has the management and oversight of particularly large, technical, risky projects. DECC has not published delivery confidence assessments for 11 of the 12 major projects within the Government major projects portfolio. For a small Department, that is a large number of major projects. Why haven’t you published those delivery confidence assessments, in effect those risk assessments?

Mr Davey: I will bring in the Permanent Secretary in a second, but it is important to understand the different nature of DECC compared with many other Departments. If you are in the Department of Health, the Ministry of Defence, the Department for Education, for example, and indeed in many respects the Department for Transport, you are dealing with public sector projects delivered and paid for by the public sector. Therefore, it is quite important that that sort of information is available as much as-

Chair: The Department for Transport has published those for all the rail refranchising programmes, which I think would be deemed to be confidential.

Mr Davey: May I finish? Whereas most of our projects are related to private sector activity, which are not governed by franchise agreements because they are rather more individual, where there are issues of confidentiality and issues of confidence in the market-therefore I think it is quite understandable, given the different nature of DECC and the different nature of our major projects, that that has not been published. Stephen, do you want to add to that?

Stephen Lovegrove: Yes. I do not have very much to add. I think we are driven in these decisions not to publish, for the moment, the RAG ratings, although we would propose to be pretty forthcoming with information about these negotiations in due course. We are driven at the moment by a desire to make sure we get the best deal for the taxpayer and the reality is that quite a lot of these projects are in fairly delicate negotiations with private counterparties. It would certainly not be private sector practice to reveal to the world the exact nature of those commercial negotiations, because it would prejudice our ability to get the best outcome for the taxpayer.

Q117 Chair: Mr Lovegrove, first of all, let me welcome you on your first outing to the Committee. It was remiss of me at the beginning not to have done so.

Stephen Lovegrove: Thank you very much indeed.

Chair: I have to say, I was wondering whether you would get to the end in absolute silence as the new Permanent Secretary, but it has probably been one of the least gruelling initiations for a Permanent Secretary, I trust.

Stephen Lovegrove: I suspect it will not stay that way forever.

Chair: I suspect not. Just to take on what you were saying, the Department for Transport has published its rail refranchising major project assessments, and you half gave a commitment there to be forthcoming with them. Will you undertake to publish the assessments? Is it a straight blanket, "No", or is it a straight blanket, "Maybe"? Is it a, "When we think it is no longer commercially going to be prejudicial"? Can you give us clarity on the criteria that you will use?

Stephen Lovegrove: When we deem it to be no longer commercially prejudicial to the taxpayers’ interests, we will publish. It should be said that the rubric and the advice around the publication of the RAG ratings specifically accommodates these kinds of projects. They have all been assessed against that and approved by the Cabinet Office.

Q118 Chair: Let me ask you this then and this does not go to the detail of any individual project, and therefore it cannot be deemed to be commercially sensitive. Have any of them been given poor delivery confidence assessments under the red, amber, green traffic light system that is operated?

Stephen Lovegrove: Some of them have been given less confident assessments than I would ideally like.

Chair: Does that mean amber?

Stephen Lovegrove: It could mean amber. It could be red/amber. Now, I would just say that there is any number of reasons why we might not be able to get to a perfect resolution on some of these projects. Not all of them are in-

Chair: Within your power?

Stephen Lovegrove: Exactly so. For instance, the geological disposal facility is an interesting example. Clearly at the moment we have to take a view as to how quickly we are going to be able to get that project up and running. Clearly it is not entirely in our hands to be able to assess that because it is dependent on the democratic process in the north-west.

Q119 Chair: Indeed. For those who are less than a straight green, then, what actions will you be taking to ensure that projects are fit to be proceeded with? What priority has this been given by the Department, and what assistance are you getting from the Cabinet Office under their Major Projects Authority to do that? Are you confident you can bring things back on track is what I am asking.

Stephen Lovegrove: To the extent that things are within the power of the Department, yes, I am confident that we will be able to bring things into an optimal state. Since I arrived we have been spending a lot of time thinking about a variety of aspects of the questions that you pose. We have been receiving a great deal of support from the Cabinet Office, from my old shop, Shareholder Executive, from IUK and from the Major Projects Authority because I think there is a clear recognition that DECC has a very great number of very important projects that need to be brought to a successful resolution over the next two, three or four years.

We have been spending a lot of time thinking about in particular how we can build the capability of the Department to be able to make sure that we have our best chance of bringing them to a successful conclusion. We have been working with Lord Deighton in the Treasury to think about the capability from that side. We have been thinking pretty hard about whether or not we can bring in additional resource from the outside, either on short-term or relatively longer-term arrangements. I think that accords with the Chairman of the PAC’s observations the other day that the Departments do need to be able to build up capability internally to be able to respond to the commercial challenges they have.

Just going back to a question you asked the Secretary of State at the beginning about the Green Deal, the Green Deal is an interesting position here. Basically, the team that has been working on the Green Deal have been working on the Green Deal in order to be able to be able to launch the Green Deal. As we think about the resourcing that we need to put behind the Green Deal going forward, we need to think about whether that is exactly the right mix of skills to make sure that the Green Deal continues to deliver. Those are very active discussions at the moment.

Q120 Chair: Thank you. You raised the issue of the Public Accounts Committee. Of course, they recommended that the Nuclear Decommissioning Authority undertook to invite the MPA, the Major Projects Authority, to review its major projects that are outside the MPA’s usual remit. Can you just confirm that that has now been done and that it will be completed by October?

Stephen Lovegrove: I can certainly confirm that the MPA has been spoken to about this and that they are keen to get involved. I do not think I can give you an assurance that it will be completed by October, and the reason for that is that probably Sellafield in particular has so many large projects and the MPA has a comparatively limited amount of capacity that I do not think they are going to be able to do all of those by October. I would be surprised. I will return to the Committee with a precise assessment if you would like.

Chair: A revised timetable would be very helpful. Thank you very much.

Q121 Albert Owen: Just on the NDA for a second, if I may, if the NDA extends the generating life of some of its power stations, does it get to keep that money within itself or does it have to hand it over to DECC? If you extend the life of a current power station, which is-

Mr Davey: Isn’t it the ONR that grants the licence?

Q122 Albert Owen: No, it just grants it, and there is no problem. The licence is there. Does the extra generating revenue get kept within the NDA or does it go to DECC’s main fund?

Stephen Lovegrove: What happens is that it effectively, for the very short term, gets kept within the NDA, but as we, on a rolling basis, decide how much money the NDA needs to be able to continue with its decommissioning activities we adjust for any overages. Effectively that is precisely what happened at the last spending review. They did better last year than I think anybody anticipated, and we adjusted for that accordingly.

Q123 Albert Owen: Thank you. Can I move on to carbon capture and storage? I was very pleased, Secretary of State, when you said about the ring-fencing of the £1 billion. I mentioned the £200 million. It states in your estimate memorandum submitted to us that £200 million of the £1 billion will be re-profiled. What does that mean?

Mr Davey: We expect that, subject to concluding our negotiations for the contracts for the front-end engineering design phase that we are now in with our two preferred bidders, that in that year that is the amount of money from the £1 billion that would be spent.

Albert Owen: Okay, that is clear.

Mr Davey: But the rest from the £1 billion would be spent in later years. Obviously you do not spend money if you have not come to that point.

Q124 Albert Owen: No, that is very clear; good answer, and I hope the next one is going to be just as good. You have two preferred bidders. Are you still confident that you will meet the timetable to make a final investment decision by early 2015?

Mr Davey: Yes, pretty confident.

Albert Owen: Good answer.

Mr Davey: We hope the current negotiations will be completed soon, then they have to do the front-end engineering and design. An awful lot of work has been done both in the bidding stage and the bid improvement stage and in this negotiation to be clear about what happens there and to manage the project extremely tightly, but it would be very rash to say with something that is innovative like a CCS project that it is definitely going to hit that timetable. I have no information that worries me that we are going to not meet that timetable, but I can’t guarantee that.

Q125 Albert Owen: If you did not meet that, would Treasury say, "You are going to lose that money if you do not meet that timetable"? Is that the sort of agreement you have with Treasury?

Mr Davey: No. I won’t read out again what they have said in the Budget document or indeed in Investing in Britain’s Future for the spending review, but it is clear that Government-

Albert Owen: There is no "use it or lose it"?

Mr Davey: No.

Q126 Albert Owen: Very good answers up to now. The other one is with regards to the European Commission’s second call for CCS proposals; I think the deadline is tomorrow. Have any bids come forward and are you supporting them?

Mr Davey: I think we have written to the Commission, and we are supporting a bid.

Albert Owen: A single bid?

Mr Davey: I think we are only allowed, from recollection, a single CCS bid at the moment, because we won two in NER 300’s round for two renewables but, Simon, can you-

Simon Virley: The Commission have been very keen that we put forward a preferred bidder, and it is fair to say that some of the interested parties decided not to take forward their projects for the second round. We have put forward one of the bidders, and indeed we hope to be successful in the second round that will be decided on by June next year.

Q127 Albert Owen: Thank you. We also understand that you have awarded money to CCS projects as part of R&D funding to reduce costs and the risks of CCS. Could you provide us with information and updates on what types of projects have been funded so far?

Mr Davey: I cannot, off the top of my head. I don’t know whether my colleagues can. If not, we can write to you.

Albert Owen: Mr Virley is very keen to answer, I think.

Simon Virley: One of the projects would be Aberthaw, which has obviously captured its first ton of CO2 earlier this year, but we could write to you with further details about the other projects that we have funded.

Q128 Albert Owen: That would be very useful. Finally, Secretary of State, you responded to President Obama’s speech on climate change where he committed £8 billion to CCS and sequestration. Is your Department working closely with the Americans on this and on providing new technologies? What has been the response in practical terms?

Mr Davey: That new announcement-I do not think we have reacted specifically to that new pot of money. I have been saying for a long time that I thought President Obama would play a leading role in this area. I think his appointment of John Kerry as State Secretary was a very strong signal, as well as of course his inauguration speech. I have always thought that a big part of the play in the US would be on CCS. We have good relations, as you can imagine, with-

Q129 Albert Owen: How do you intend to work with him in the future?

Mr Davey: We have very good relations obviously with my Department and the Department of Energy over there. There are a number of fora that we meet them on that are international. We already co-operate internationally with a number of other countries on CCS. There is a four kingdoms co-operation where we are co-operating with the Dutch, the Norwegians and the Saudis on CCS. I am a big supporter of co-operation on CCS internationally, because I do think that enables us to get better bangs for the buck and learn. If we can get carbon capture and storage not just to work technically, which I think is already proven, but to be commercially viable, it is potentially a game-changer, which is why we have such an ambitious project and why I am keen on international collaboration.

Albert Owen: Thank you, I will leave it at that.

Q130 John Robertson: The Shareholder Executive has a role in overseeing the Nuclear Decommissioning Authority. What is that role, and how does it relate to what DECC does as a sponsoring Department?

Mr Davey: I am definitely going to give that-

John Robertson: I wonder who will answer that question.

Mr Davey: I will give it to Stephen as the former Director General of the Shareholder Executive.

Stephen Lovegrove: You are obviously aware of the way that the NDA governs the various sites, but I will go through those as a quick refresher. Effectively what it does is have a site licence company that looks after the operations on the site and then, just above that, it has what is called a parent body organisation, which effectively provides the management of that company. The NDA contracts with that parent body organisation in order to be able to make sure that it is doing what we want the NDA to be doing and those are effectively a bunch of commercial, contractual and corporate governance relationships. The NDA in its own right effectively works as a company. The experts in that type of area within Government are the Shareholder Executive and there has been a long-running arrangement whereby the Shareholder Executive will oversee the corporate governance arrangements that we have there, which are quite complex, and will also oversee the integrity of the contracts that are given by the NDA to the various sites.

In terms of what DECC does, in the first place the Secretary of State has ultimate responsibility clearly to the Department for the security of those sites. That is an incredibly important component of that. Also, the Director General of the Shareholder Executive has to report to me as accounting officer in DECC for the appropriate responsible discharge of the monies in question.

Q131 John Robertson: You headed the Shareholder Executive?

Stephen Lovegrove: I did, yes.

John Robertson: How is the relationship then with your previous employer and DECC? Has it changed since you took over as Permanent Secretary?

Stephen Lovegrove: If anything, I would hope it has become stronger. I am lucky enough to be sitting next to a previous Minister of the Shareholder Executive and the Chairman of the Committee is a previous Minister of the Shareholder Executive as well. Certainly when I was there-and my successor has always taken the view that it is there to assist Departments that have specific needs around corporate governance and commercial skill sets that it might not be able to or just does not carry in-house. We have been in extensive discussions with the Shareholder Executive since I arrived, and indeed before I arrived, to make sure we make the most out of the capability that they have. They are a very important part of not just our Department’s capacity but the whole of the Government’s capacity.

Q132 John Robertson: The nuclear decommissioning provision has risen this year. Most of this is due to the change in the discount rate set by the Treasury. However, you managed to find £1.7 billion worth of new work. When do you think you will stop finding new work for them?

Stephen Lovegrove: For the NDA?

John Robertson: Yes.

Mr Davey: The NDA has a huge programme of work. Let us be clear, it has a work programme going on for several decades. What is extraordinary when you go round Sellafield or Dounreay and you engage with the challenges that the NDA are trying to meet is the fact that previous Governments just ignored this. The last Government, to its credit, set up the NDA and started addressing it-so I am not making a party political point there at all-but now we have started to address it, I think we have realised the scale of the task.

It is worth just recording the scale of the chemical engineering projects that are going on at Sellafield are massive. They are world leading. We are having to do things that have never been done before and, despite lots of financial challenges, we are seeing some real technical breakthroughs. For example, in one of the silo ponds there, for the first time we have taken some spent fuel out. That is the world’s largest open-air lagoon full of nuclear spent fuel and other items that are highly dangerous. We have made some real progress and that was ahead of schedule. I just give you that one example to illustrate the complexity of the work, and, given the size of the challenge, I think the NDA is going to be there for many years to come.

Q133 John Robertson: The management partner’s contract at Sellafield is coming up for review in September. What weight is going to be given on past performance?

Mr Davey: Stephen may want to comment. The NDA, of course, have been focusing on this very robustly. It is their job to do it. I would not want to prejudge the decisions they will make. It is obviously quite a significant decision, and they will, as they are charged to do under statute, I believe, push for value for money.

Stephen Lovegrove: Yes.

Q134 John Robertson: Just before you answer, could the NDA run the Sellafield company itself?

Mr Davey: I very much doubt it, unless they took on a whole lot of the staff that are in other companies who specialise in this area. While they will have specialist engineers, the actual day-to-day tasks and the strategic tasks for major projects there require some extraordinarily specialist and skilled people. Stephen may want to add to this, but my impression is that the companies there are bringing talent from around the world as well as growing and training home-grown talent.

Stephen Lovegrove: Yes, that is right. The simple answer to your question under the statute is, yes, the NDA could run the site licence company itself. The question that it is asking itself at the moment as we come up to the first potential break point in the contract is what to do for the future, and I think there are broadly three options. One of them is to extend the contract with an MV. The number 2 option would be to use the opportunity to think about whether or not there is another partner that they wanted to use. The number 3 option is whether or not they wanted to do more of it in-house. Now, those are very complicated decisions in a site as big and complicated as Sellafield, and no decisions have been taken by the board. If they choose to extend, then they can do that by themselves. If they want to make an adjustment, then they need to come and get the Secretary of State’s approval for that.

Q135 John Robertson: The Public Accounts Committee have not exactly been complimentary in what has been going on, have they?

Stephen Lovegrove: What I think they have said is that the arrangements we have at the moment are a great deal better than the arrangements that there were before the NDA was set up. I think they are right to have addressed the fact that some of the arrangements around cost control, particularly at Sellafield, did not work quite as well as people wanted.

Q136 John Robertson: Let me quote what I have here. It says, "The basic project management failings continue to cause delays and cost increases to critical risk reduction programmes". That is at Sellafield; "John Clarke, the NDA’s chief executive, recently told the Financial Times that he has been disappointed by some lack of progress and some things that have gone wrong". Is it not time we got a grip of the situation?

Stephen Lovegrove: I think the opportunity to review the arrangements is coming up with the contract break in 2014, and that is precisely what John Clarke and his team are doing.

Q137 John Robertson: One last question I would like to ask is about some of the money. The NDA’s latest accounts reveal that the Chief Executive receives a housing allowance of £48,000 per year to allow him to rent a property in London. This is in addition to his salary and bonuses of £386,000 a year. How many days does Mr Clarke spend in London on NDA business that says he should get £48,000 for it?

Mr Davey: Mr Robertson, you will be surprised to know I do not know the number of days he spends in London.

John Robertson: You are going to tell me when you write to me?

Mr Davey: What I was going to say was under the Energy Act 2004 produced by the last Government, it makes it clear that the terms and conditions of the senior executives of the NDA are determined by the non-executives. In other words, they made it clear that there was no formal role for the Government setting or approving salaries or bonuses. There was a reason for that and it is worth remembering why the last Government went down this route. It wanted independence on executive pay and it was a conscious policy of the last Government to have independence on executive pay for the NDA to ensure that the NDA was able to recruit and retain the staff that it wanted. That is not to say that we do not take an interest and can voice concerns, but the Energy Act 2004 provides simply for the Secretary of State to endorse the NDA’s board appointment of the CEO, not all the privileges that you are talking about.

Q138 John Robertson: This is taxpayers’ money. The NDA earned £163 million from electricity sales in 2012-13, in the financial year. The electricity is sold in the market by EDF Trading, most of it bought by EDF. Isn’t that a conflict of interest? There is something not quite right there. Is it not time that you took control of the situation, not only in the wages but also in the fact that the NDA can earn money from sales to a company that buys it back? Is this not all part of the same malaise that we seem to have in this area?

Mr Davey: I repeat, in terms of the overall size of remuneration, there was a very good reason that the last Government, I think, in the Energy Act 2004, went for independence on pay. I presume the last Government felt that this agency had to scour the markets and scour the different companies around the world to get the expertise that it wanted and it would need to take on the most challenging tasks. That is not to say, whether it is through the Public Accounts Committee or through our oversight of the NDA, that we should not hold them to account and ask searching questions, but I would just ask you whether you think it would help the NDA carrying out its role if we overturn that independence on executive pay that was enshrined in the 2004 Energy Act.

Q139 John Robertson: I think the Public Accounts Committee have looked at this and they are not happy with how this has been run. I think it is ridiculous that a company buys its energy from itself almost, and I think it is ridiculous that for perhaps a handful of days £48,000 a year is given to somebody along with a salary and bonus of £386,000. I believe that as much as people might think it is easy, we should look at these things. To be fair, Secretary of State, that is your job. Sort it.

Chair: I think the point has been made and responded to. We need to move on because I am conscious the Secretary of State has other engagements to go to and he has been very generous with his time. Dan Byles, very quickly.

Q140 Dan Byles: Thank you. Just very quickly: I apologise, I have to leave immediately after this, so it is really just one question, and I am happy with a fairly short answer. It is about the impact of the EU import tariffs on solar. Obviously a lot of people are concerned at what that means for the UK solar industry and also the question mark of if it pushes up prices of modules, whether that would lead to a revisiting of the solar feed-in tariff.

Mr Davey: We have expressed our concern about these proposals and Greg Barker has gone to Brussels to talk with officials there. Clearly we are working with BIS, who have formal responsibility on trade matters for the Government. So we have been working across Government. The Trade Commissioner, Karel De Gucht, is a very good Trade Commissioner, and he is determined to push free trade. But on this issue we need to make sure that we do not take hasty decisions that have impacts on a really important industry. We will wait to see the outcome of the continuing work, because as you know there is still work in progress and still negotiations ongoing. But I hope we can get to a reasonable conclusion and that we do not see an escalation of these tariffs and do not embark on some sort of trade war with China, which I think would not be in anyone’s interests.

Q141 Dan Byles: Specifically on the feed-in tariffs, if the module costs end up rising as a result, would the feed-in tariffs be reviewed?

Mr Davey: That is a hypothetical question because we are hoping that the tariffs will not go up.

Dan Byles: Okay, thank you.

Q142 Chair: Secretary of State, the Government has supported a target to cut emissions by 50% on 1990 levels by 2030 as part of the global climate deal, if that comes about; 40% if not. Do you see any tension, any contradiction perhaps, that the Government at the same time is not willing to support a similar target for renewables or decarbonisation of the energy sector by 2030?

Mr Davey: The Commission has put forward in its initial discussions for 2030 targets that it wants to take forward the 2020 regime to 2030, where there were three target issues: one, greenhouse gases-

Q143 Chair: You have set an advance position, haven’t you?

Mr Davey: Yes. If I may, I am telling you what the Commission has done. We are responding to the Commission’s proposals. They were looking at the possibility of three targets. They did not propose three targets; they suggested there were three areas that could be targeted. They were particularly strong on greenhouse gas emissions. There are different member states who want one target, no targets, three targets. There is a real debate in this area. Decarbonisation target 2030 is not on the table in the Commission’s proposals. What we have responded to is the ideas around a greenhouse gas emission target, a renewables target and an energy efficiency target. We believe the most important target, the critical thing that we need to go for, is greenhouse gas emissions. We have said we are against a 2030 renewables target. That should not surprise anyone here; indeed, with many people in this room in previous Committee meetings we have talked about a decarbonisation target. Why? Because the logic of the Energy Bill, the decarbonisation target, is that we are technology-neutral, and therefore we do not think that Europe should be adopting for 2030 a technology-specific target. We have explained why we think that would potentially increase costs, and we think technology neutrality is a better approach.

Q144 Chair: I understand what you say about renewables. What I am asking you about is the overall consistency of the Government’s position in that part of the rationale for refusing and rejecting a decarbonisation 2030 target-

Mr Davey: We have not.

Chair: Well, you have refused to put on the face of the Bill that one must come in next year, and you have refused to put on the face of the Bill that one must come in at all.

Mr Davey: With respect, Chair, when we published the draft Bill there was no proposal to have any decarbonisation target at all in the Bill. Quite soon after I became Secretary of State I decided that I thought it was worth pursuing the idea of a decarbonisation target for 2030. There was no work going on in the Department so we initiated that work. Then I initiated discussions around Government. Through a Government amendment, there is now on the face of the Bill a process for setting a decarbonisation target in 2016. That process follows the recommendations of the Climate Change Committee, who said there should not be a target on the face of the Bill and it would be too inflexible; it should be through secondary legislation. That is what we have done. The difference between what we have done and what the Climate Change Committee recommended is that the Climate Change Committee wanted it set in 2014; we are saying it should be set in 2016 at the same time as the carbon budget. So we are talking about the difference between setting one in 2014 and 2016. We are the first country in the world-in the world-to make legal provision for setting a decarbonisation target. That is why, Mr Gardiner, I railed against this notion that we somehow rejected a decarbonisation target, because I think the record and the analysis and the words on the face of the Bill suggest otherwise.

Chair: I have to correct what you said, because you have not said that you will do it in 2016. Quite rightly, you have put on to the face of the Bill a process whereby one may be set in 2016, but the Government has given no commitment and indeed could have given a commitment to say that it shall be done in 2016. But that is not what was done.

Mr Davey: 2016 is after the election, when there will be a Government; I am not sure if it will be the same Government. So, therefore in 2016 I can only speak for my party. I am absolutely clear if we are part of the Government after the next election, we will set a decarbonisation target. It is something that we feel passionately about.

Q145 Chair: I was really trying to get you to address the inconsistency of principle in the Government’s position in relation to a 2030 target for decarbonisation. Many of the arguments put forward had been that it was inappropriate to set that mid-term, middle-ranking target and that it was unnecessary because of the 2050. I know your own personal position is very close to my own; I have no dispute with that.

I just wanted you to comment on the inconsistency in the Government’s position here in saying that at one level, at the European level, it makes sense to have a 2030 target, but the Government is not persuaded that it makes sense to have a 2030 target for decarbonisation. It has put in a provision whereby it may happen, but it has not committed to doing it.

Mr Davey: There are two different things. What we have said at the European level is not a carbon-reduction target just for the power sector; our carbon-reduction target is for the whole of the economy. That is different from the decarbonisation target in the debate in terms of the Energy Bill, which is for the power sector only.

Q146 Chair: How has the UN Energy Efficiency Directive introduced in 2012 impacted on UK energy efficiency policy?

Mr Davey: Obviously some aspects of what we already do comply and will help us comply with the Energy Efficiency Directive. It will however require us to take some new measures. For example-and we will be consulting on this-we need to look at energy-efficiency audits for larger companies. Some of the framework that we have already in the UK will enable us to do that in a very low-cost way. Nevertheless, some of the provisions of the Energy Efficiency Directive, particularly that one, will mean that we have to take action over and above what we are already doing.

Q147 Chair: The Ecodesign and the Energy Labelling Directives: have they had a beneficial impact on manufacture of energy-efficient appliances in the UK yet?

Mr Davey: I hope so. I have not seen any analysis one way or the other. It is not a question I have put my mind to, though one of my colleagues may have done.

Chair: Perhaps you can drop us a note on that.

Phil Wynn Owen: I will check back in DECC, but I believe those are the lead of Defra as a Department. We have the lead on the Energy Efficiency Directive’s implementation, which has to be transposed by 5 June 2014, and we are leading across Whitehall, working with others as appropriate. But I will check on that latter point and come back to you as to which Department is in the lead. No doubt we can arrange with them an appropriate response.

Q148 Chair: Finally, under the EU Energy Performance of Buildings Directive, the UK is required to ensure that by 2021 all new buildings are nearly zero-energy buildings. Can you give us an update on the progress in that area as to whether we are on track to meet the targets?

Mr Davey: I will try my best. I believe that is a DCLG lead.

Phil Wynn Owen: Correct.

Mr Davey: However, in the Budget this year DCLG confirmed that for new buildings from 2016 there will have to be zero-carbon. That may not be quite the target we need to reach for 2021, but clearly it takes us some way there. So, that is real progress, and I pay tribute to my colleague, Mr Foster, in the DCLG, who I know worked very hard to make sure that was in the budget this year.

Chair: Thank you very much. Alan Whitehead.

Q149 Dr Whitehead: I think we are coming to more or less the last question now. I imagine you were fairly fed up when the Treasury effectively decoupled the carbon price floor from EU ETS in the last budget.

Mr Davey: I am never fed up by any actions that come from the Treasury. We work seamlessly together, and I would refer you to the answer I gave a few moments ago when we were talking about the carbon price floor and Mr Gardiner was asking about it. We have cross-Government agreement to seek both short-term reform of Europe’s carbon market with the backloading proposals but also to have long-term structural reform. The UK has been leading in that area. You are probably aware that the Commission has six structural reform proposals for the EU ETS. While we have not had a chance to consider all of them across Government, certainly those proposals where we would set a 30% greenhouse gas reduction target for 2020, up from the current 20%, and cancellation of allowances, the so-called set aside, which are two of the six Commission reform proposals, we have very clear Government lines on and we are very, very strongly supportive of those, including from the Treasury. So, once again, we are very joined up.

Q150 Dr Whitehead: That is terrific in answer to another question.

The question is about the decoupling of the carbon floor price, which in the last Budget has meant that the carbon price support is now going up at a much greater rate than had been originally envisaged when carbon floor price was originally envisaged and that EU ETS now plays a very small role in the total carbon floor price as envisaged, as opposed to the original large role and the total that has been-

Mr Davey: The reason I did not answer your question is that I do not recognise the issue. As I understood it, Simon may want to come in here-when the carbon price floor was announced originally-it has really taken the shape now that was intended, and there was no direct link or hard tie to the EU ETS. But Simon may have something to add.

Simon Virley: When you take the combined effect of the EU ETS and carbon price floor, it is slightly less because of the falling carbon prices. So, I would not accept the premise of your question on that. There is a reduction in the total take because of the falling carbon price.

Q151 Dr Whitehead: There is a marginal reduction in the total take, but the carbon price support certainly projected forward is far higher than was originally suggested, so that the overall trajectory of the carbon price floor goes up at roughly the same rate that was originally proposed in 2010, but at a very different constituency where the original proposals were that the EU ETS would take the bulk of the lifting in the price and the carbon price support would take a minimal amount of the lifting. Now that has been completely reversed, so that about 80% to 90% of the lifting is undertaken by the carbon price support, which it is suggested will raise, I think, £1.4 billion for Treasury by about 2015 on your support documents.

Mr Davey: My understanding has always been that if the EU ETS price goes up, we will need less from the carbon price floor. I don’t see it as de-linking. If we reform the EU ETS in the way that Her Majesty’s Government wants, we would get more revenues in from the sale of allowances, and we would not be charging the carbon price floor on top of that. That is the whole point of it being a floor. I think when the Chancellor brought in the carbon price floor, the idea was to assist because Europe’s carbon market was not working as people had expected. Because you want to give a degree of certainty with a carbon price signal, a carbon price floor, the theory goes, gives you that greater certainty. But the Chancellor was not trying to put up carbon prices over and above what we had hoped the EU ETS would be at. We hope the EU ETS, if it is properly reformed, long-term will be above the carbon price floor.

Dr Whitehead: I agree. The difference is that the carbon price support does not save any carbon and the money all goes to the Treasury, £1.4 billion in 2015-16, as opposed to EU ETS, which does not do either. So I presumed you might be a bit worried about that.

Mr Davey: It sends a signal to investors into low carbon. I think we can agree on that.

Q152 Dr Whitehead: Yes. But what about the rest of it?

Mr Davey: The rest of what?

Dr Whitehead: That it makes Treasury £1.4 billion in 2015.

Mr Davey: So would the EU ETS if it was reformed. Unless I am seriously misunderstanding something, Simon, if the EU ETS is reformed and we have a higher carbon price in Europe’s carbon market-

Dr Whitehead: We will get some money from auctions.

Mr Davey: Yes.

Dr Whitehead: That is true, yes. But that also saves carbon inasmuch as it is traded against allowances whereas the carbon price support does not because it is not, but the money still goes to Treasury.

Mr Davey: That has been the case from day one. All I would say is we would prefer, and the Treasury prefers-to be clear, the Treasury prefers-to see a better-functioning carbon market in Europe. The carbon price floor, yes, brings in the revenue, but over and above that it does send a signal to investors that this country is determined to make sure we move towards a better pricing of carbon.

Q153 Mr Lilley: So you are not sure, Secretary of State, that it is better to invest in other countries?

Mr Davey: No. It is better to invest in low carbon in the UK.

Q154 Mr Lilley: Why? Surely it is better to invest in a country that is subject to the ETS but does not have this minimum carbon floor.

Mr Davey: There will be lots of people deciding where to invest in low carbon because a lot of investors want to invest in the technology of the future and the UK through the Energy Bill, through the carbon price floor, through the EPS, through a number of measures. I made it clear that we are determined to decarbonise our power sector, and I think that is one of the reasons why investors are looking so strongly at the UK.

Q155 Dr Whitehead: I think you would agree that carbon price support does not save any carbon, whereas EU ETS does, and in not saving carbon it also creates a much wider differential in price between us, for example, and the rest of Europe, assuming one does not recouple that amount with EU ETS. So, there are two questions, really: would it be your intention to ensure that the Treasury does not go ahead with its indicative price levels for carbon price support should EU ETS recover at all; and secondly, would you think it would be a good idea to secure some of that money that is going to Treasury as a result of carbon price support being far greater than originally intended for carbon saving measures such as demand side reduction?

Mr Davey: On your second point first, you are inviting me go down the route of a hypothecation and argue the Treasury should hypothecate-

Dr Whitehead: That is absolutely right.

Mr Davey: -which is a very kind invitation. But you will know that successive Chancellors of successive Governments have gone white at the concept of hypothecation, so I do not think that is likely to happen in that regard.

In your first question, maybe I am just misunderstanding what you are driving at, but the whole Government wants to see the EU ETS reformed. I organised this letter, which was sent yesterday, which was a joint statement by I think 12 of us Ministers in the European Council, to make it clear that we wanted to see reform of the EU ETS and we did that ahead of the backloading vote in Parliament. Most, not all, of the people who signed this, are members of a group that I have established in the EU called the Green Growth Group, which is trying to get Ministers around the table who are committed to an ambitious approach on climate change, to committed reform of the EU ETS, committed to ambitious 2030 targets, and we have the full support of the UK Government in this work. If we can get the market reformed and see a higher price of carbon in Europe, the Chancellor is not going to put the carbon price floor on top of that.

Q156 Dr Whitehead: But he has set an indicative price now two years out, which is a change from the original one year out that was in the original budget proposals as amended in the budget proposals last year.

Mr Davey: I am not sure how significant that is in reality, to be honest.

Q157 Dr Whitehead: I am just inviting you to perhaps suggest to the Chancellor that that might not be a good idea should EU ETS recover in any way, because an indicative price two years out does appear to suggest that that price is fixed regardless of what happens to EU ETS.

Mr Davey: Listen, the Chancellor and I, the Prime Minister, the Deputy Prime Minister, the Secretary of State for Business, Innovation and Skills are determined that we make this transition to a decarbonised economy in a way that does not result in carbon leakage. In other words, that energy intensive industries and business in general remain as competitive as possible. That is one of the reasons why we have the compensation packages for the indirect costs of EU ETS, for the carbon price floor and indeed for any costs of contracts for difference. But it is also why we are so strongly united in wanting to see the reform of Europe’s carbon market.

Chair: I think on that note, where we are all agreed that we want to see the reform of the EU ETS, we should end the session with a very big vote of thanks to you, Secretary of State. You have done three hours in the chair. It has been very informative and extremely helpful to the Committee. We look forward to getting your further advices by letter. Thank you very much.

Mr Davey: That is very kind. Thank you very much.

Prepared 12th August 2013