Session 2013-14
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Environmental Audit Committee - Minutes of EvidenceHC 61
Oral Evidence
Taken before the Environmental Audit Committee
on Wednesday 24 April 2013
Members present:
Joan Walley (Chair)
Peter Aldous
Neil Carmichael
Martin Caton
Katy Clark
Zac Goldsmith
Caroline Lucas
Dr Matthew Offord
Mr Mark Spencer
Dr Alan Whitehead
Simon Wright
________________
Examination of Witness
Witness: Dr William Blyth, Oxford Energy Associates, gave evidence.
Q1 Chair: What I would like to do this afternoon, Dr Blyth, is to give you a warm welcome to our first session of this inquiry about energy subsidies. It would be fair to say that we regard the research that was commissioned, which you provided us with, as the starting point for what we hope will be an inquiry that will, as we go along, expose further themes that we need to be addressing, building on the starting point that you have provided us with.
Our first question as a Committee to you is that, in the way that we try to go about understanding the importance of energy subsidies and their usefulness, what are the main justifications that are put forward for having energy subsidies and are those justifications more reasonable than others? Is there a pecking order of justifications for them?
Dr Blyth: Thank you. The normal justifications for subsidies would be the infant-industry argument. If you have an industry that needs protection from full market forces in order to establish itself, maybe bring down costs and so on, there is an argument for providing an environment where new technologies can develop. That is typically one example where you might provide that kind of market support. The second area, typically, would be pro-poor policies, providing subsidies on products or goods that help alleviate poverty or allow access to those markets or goods for poorer consumers. The third area, typically-and this is not just within energy-would be protection from international markets if there is a need for particular countries-usually it is more relevant in a more developing-country context-to develop domestic markets before becoming exposed to wider international competition.
Thinking about those in the UK context, probably the most relevant in my mind for UK subsidies is still the infant-industry argument. It is a slightly unfortunate term because a lot of the technologies that we are talking about, when we think about the way the energy system is going and low-carbon energy development, have been around a long time, so they are not really infant, but on the other hand there is a lot of dynamic change in the energy market. Dealing with the dynamics of change and uncertainty, and the unpredictability of the future, is one aspect of the infant-industry argument that I think does provide a basis on which subsidies can be justified.
Q2 Chair: You just mentioned change and uncertainty. Would you tie that to the timeline, and how much is the necessity of having a subsidy for the short, medium or long term something that features in the design of subsidies? Where a subsidy was needed initially, how do you know when it has got to the stage that it is no longer needed? How do you factor in the length of time that subsidies may or may not be needed?
Dr Blyth: That is a very good point. That is one element of the infant-industry argument: that you do not want something to be an infant for ever. At some point you have to bring it to maturity and let it compete. The economic argument as to why subsidies are not considered a good thing in the long run is that the economics of that is really established in equilibrium economy. If everything was in equilibrium and going to be certain for the future and so on, you would probably scrap all subsidies because you do not need them. Subsidies help you through a process of change, but at some point you want to say, "We supported such and such a technology because we thought that it was going to reduce costs over a certain period of time." If you find that it has not done so, you would need to just bite the bullet and say, "We are going to remove that," and hopefully at that stage you would be identifying other technologies that would take their place. But some sort of timeline is very important.
Q3 Chair: It is interesting that you said that that was an economic aspect, but ours is a cross-cutting Committee, so we are looking at business Departments and we are looking at other Departments as well. How much is it a matter for other Departments who might have some remit for a subsidy either continuing or not continuing in respect of competitiveness, say, or overseas competitiveness? How much is that design of the subsidy a matter for other Government Departments and not just the Government Department that is responsible for financing the subsidy?
Dr Blyth: Energy costs would be one element, so you would want to be looking at the competitiveness of the energy market as a whole and identifying ways of reducing or minimising the cost of energy. If you are subsidising, it implies you are raising the cost, which may be true in the short term, but the view is that you are trying to support a transition to something that in the long run would be cheaper. From that point of view there is a business competitiveness element to having a long-run aim towards a low-cost, low-carbon economy. Then, obviously, the energy sector is critical to all of this. How you design an electricity market, for example, and have a fair system for different fuel sources to be able to compete in that market is clearly critical.
Q4 Chair: Do you think that others who might have an interest in that are sufficiently aware that that is a procedure they perhaps need to be having input to?
Dr Blyth: The difficulty with subsidies is that they immediately become very politicised. One of the things I have tried to do in the report is try to be as transparent as possible about what a subsidy is and when it is appropriate. Different Departments will probably have their different stake in which sectors they feel most exposed to or have the most interest in. Probably the key areas are for the electricity sector, and that combination between energy and climate change is the crucial area to be resolved in the transition to low-carbon energy systems.
Q5 Neil Carmichael: I was going to probe that issue about new technology. Often it is the most expensive because you have to basically invent it, test it out and so on. In particular, if you are not using a fuel but using the technology itself to generate energy, then of course the bill costs will be enormous. So, subsidies perhaps can and should be used to enable new technology to be developed.
Dr Blyth: Yes, I would agree with that. Typically, the basic economic theory would say you should always do your cheapest options first, because if you have a cheaper option available to you, why would you choose an expensive option? The problem with that argument is that it does not take into account the dynamics of how technology costs change over time. If the option you have available to you now is cheap, but there is a risk that it becomes expensive in the future, you do not necessarily want to lock into becoming too dependent on that source. That is the classic example of where you might want to support something that looks more expensive now, and you create a niche for it, and hopefully, if that becomes successful, then that niche will grow and perhaps become mainstream. But you need a fairly flexible approach to that. The way these costs develop over time are quite uncertain. If it turns out that the low-cost source you have now stays low cost, it may be that the thing that you thought was going to come down over time never reaches maturity and never competes with it, in which case you have to keep revising your approach to how you support that. But I think exactly in principle that is what you are trying to achieve with subsidies.
Q6 Zac Goldsmith: Politicians on the whole or Governments on the whole have not been particularly good at picking winners, picking the right technologies, and most people struggle to imagine what the future might look like. In 10 or 20 years from now, there might be energy sources that none of us has even really considered that are suddenly very economic. How do you avoid a situation where Governments pick winners and then risk creating an addiction to subsidies for unimpressive technologies and technologies that will never stand on their own feet? How can you have a neutral policy that still allows these start-ups on to the table?
Dr Blyth: Yes, that is a very good point. Sunset clauses is one element to that-building in, in advance, an expectation that subsidies are of limited time duration-and you can see that in some of the policy designs. For example, if you look at German support for solar PV, built into the time frame for those subsidies is a reducing rate of support over time, and that is tailored to the rate of uptake. So, if the costs of PV come down very quickly, then the rate of support comes down quickly as well. It is difficult and it does move you away from this idealised world where you can just let the market decide, but whether the market is in the right place to take some of the big strategic decisions over multi-decade time scales, which is potentially what we have to do to society for reducing carbon emissions-
Q7 Zac Goldsmith: Can I come back on that? The German solar example is a good one, and they seem to have made the right decision, but their subsidy regime was based on-There is an odd echo in this room.
Chair: I know.
Zac Goldsmith: Maybe it is just me; I am putting myself off. The regime seems to have been based on the triggers, so every time the unit costs came down for the subsidy there was a fairly predictable formula, which we have tried to replicate here now, after our own problems with solar subsidies not that long ago, but what would have happened then had the unit costs not come down? Had they made the wrong punt, had solar not been as successful as it now is, how would that have worked? You could potentially have had a situation in Germany with an unsustainable long-term addiction, a dependence on a subsidy for a technology that perhaps did not become more economic. It did, but what would have happened if it had not?
Dr Blyth: It is interesting. They have arrived at what looks like a very well-tailored policy design, but it has not been without its mistakes in the early stages. Certainly there have been boom-and-bust cycles-and there have been boom-and-bust cycles in this country-over solar, which have been repeated several times. You can look at the Czech Republic as an example where it boomed, and it boomed so much that they basically had to stop the scheme. Spain is in a similar sort of boat where they have suddenly realised that they have run out of public money for just about anything and so you pull the plug. It is not that difficult for Governments to decide that they are not going to fund anything any more. It happens all the time. It is not desirable to do it like that. You want to do it predictably, because you do not want your supply chain for these things to bubble and then crash. Ideally you want to pace it, and that is not straightforward and Governments are learning how to try to do it.
Q8 Chair: It might be helpful for you to face in to the Committee; I am reliably advised that if we sit a little bit too far away from the mic, we do get the echo, so I think the lesson is not to sit too far.
Dr Blyth: I see.
Zac Goldsmith: We ought to know after three years.
Chair: The echo is now getting worse. Can I go back to my previous question and ask you whether or not the research that you have done has highlighted any other aspects it would be useful to have in the design of subsidies? You mentioned sunset clauses, but are there other lessons that have been learned from your research that you would advise us to look at as far as recommendations and so on?
Dr Blyth: In my view, one way to try to avoid the picking-winners approach in the low-carbon sphere particularly is neutral technology such as carbon pricing that can support all technologies. All low-carbon technologies benefit from that. At the moment, carbon prices Europe-wide are too low to really be effective at all, but the UK carbon price floor is quite significant, and if the Government sticks to the current proposal of the rate at which the carbon price floor increases, it quickly becomes a very significant factor. In a sense, that lifts all boats equally, and you can try, with sunset clauses or planned reductions in the rate of per unit support, to let those things merge over time.
The difficult aspect within all of that is that you also have to take into account things like the gas price, which obviously is an international price driven by all sorts of drivers, not least of which is economic growth, and what is going to happen to shale gas, either in Europe or North America, and so on. So, there are all sorts of imponderables there that have a major impact on the cost-effectiveness of different-generation technologies. Those are the sorts of risk that companies are exposed to, but society as a whole is also exposed to those risks, and Government, in my view, in some cases does have a role to play in thinking about how society gets exposed to those risks.
Q9 Chair: Can you think of any technologies that would not require subsidy?
Dr Blyth: That would not require subsidy? At the moment, quite clearly, gas-fired generation is the part of the generation sector that has, in a sense, been left without any additional support. Coal is essentially ruled out unless it has CCS, and CCS will not happen unless there is a subsidy. Nuclear renewables are all subsidised through the contracts for difference going forward. Essentially, you have gas as the piece left over. That is it.
Q10 Dr Whitehead: Capacity payments?
Dr Blyth: Capacity payments? Well, they are changing the rules on how they create the market, so I would say that is a change in the market design.
Q11 Dr Whitehead: Are they classified as subsidies, effectively?
Dr Blyth: No, I do not think so; I would not class that as a subsidy. I would class it as a pricing mechanism. Whether it is a desirable one or not is an issue, but it is a way of providing payment for services. At the moment, they are paid per kilowatt hour and the proposal is to change it to some payment for kilowatts as opposed to kilowatt hours or some combination of payment for kilowatt hours plus a payment for kilowatts. So, it is a payment for services.
Q12 Dr Whitehead: For being there, really, as for gas-fired power stations? Isn’t that a subsidy?
Dr Blyth: It is a payment-being there is a service in that sense. The point of the capacity payment is to try to improve the robustness of the electricity system and have enough capacity on the system to be able to deal with peaks and troughs, so being there is a service. That is the principle and I am not necessarily defending it. I think you could, in principle, have an energy-only market that would bring forward sufficient capacity. Current policy is that that is seen as a risky way forward, which is why there is the justification for capacity payment, but I do not see capacity payment as a subsidy. It is just an alternative market.
Q13 Dr Whitehead: Is it to the extent that you were going to be there anyway and you are then getting paid for being there?
Dr Blyth: Presumably then the market price for kilowatt hours would go down. If the market is competitive-and it is a big if-players in that market will recoup their costs either through the capacity payment or through the energy payment, or a combination of the two. In a competitive market, the combination of the two would cover their short-run marginal cost. If you are receiving your payment through the capacity mechanism, you would expect the wholesale energy price to go down to compensate, so you are not adding more. You are not just paying for it to be there in addition to the energy that they are selling. Whether that works out in practice in a slightly less than competitive market is another issue, but that is not a subsidy issue. That is, "Are the markets competitive or not?" which is a different question.
Chair: We will move on to measurements and definition.
Q14 Caroline Lucas: One of the complications, of course, is that different institutions define subsidies differently. In your paper you describe some of the different approaches taken by WTO, OECD, IMF or whatever. Does any one of them stand out as being a particularly coherent and sensible approach to defining what an energy subsidy actually is?
Dr Blyth: I think you are right; they are quite different. In my view, what stands out probably is the OECD methodology, which tries to identify not just consumer subsidies but also producer subsidies. The earlier work from the International Energy Agency, which became quite widely known for energy subsidy estimates, mainly identified subsidies as being in the domain of developing countries where price support for products is pretty strong. Governments often subsidise energy products, petrol and so on, for consumers, and that is less prevalent by far in developed OECD economies where it is pretty rare to subsidise consumer energy products. The IEA methodology tended to say it is not a developed-country problem; it is all a developing-country problem. The OECD is taking a more rounded view and says it is not just consumer subsidies that count; it is subsidies to energy companies, and they need to be taken into account as well. In my view, that is the most rounded approach. The difficulty with it is you end up referencing everything to what the country norms are for taxation of energy products. Despite the large amount of work by the OECD that goes into those studies, it is quite hard to come up with a level playing field to compare one country with another because the definition of subsidies tends to be rather relative within an economy.
Q15 Caroline Lucas: That leads on perfectly to the next question, because some of the institutions like the OECD, as you say, emphasise that particular tax rates should only be considered as subsidies if they do differ from the so-called norm, the normal tax rate in that country. Is it the case that all of the institutions that you have looked at would agree that something like reduced VAT rates for energy should be treated as a subsidy? Would there be that degree of commonality of approach?
Dr Blyth: There probably would. In a case like VAT, deviations in VAT rates are usually based on some deliberate attempt to improve access to that particular product. In my view, that counts as a subsidy, and most organisations would recognise that. Certainly the EU is quite strong on trying to get member countries to harmonise VAT rates across the economy, apart from selected items like children’s clothes and that kind of thing. On energy, the EU is quite hot on keeping VAT rates at whatever the going rate is within the economy, so they would certainly recognise that, and the new member states have all been required to harmonise energy VAT rates.
Q16 Caroline Lucas: There seems to be a difference in approach between the various institutions in terms of whether externalities like environmental costs should be part of the subsidy calculation, which is quite a big issue. The IMF thinks that unless carbon costs of at least $25 a tonne of CO2 are being borne by an energy market, the failure to reflect that should in itself be deemed to be a subsidy. What do you think about that and what does it tell us, particularly now, when you consider the very low price of carbon with the ETS in the EU?
Dr Blyth: I would certainly agree philosophically with the idea that lack of or under-pricing of externalities counts as a subsidy because, economically speaking, they should be incorporated into economic prices. Most of the international institutions have recognised that, in theory, these things ought to be priced in, but they have stopped short usually, up until now, of calling them a subsidy or calling the lack of carbon price, effectively, a subsidy. But the IMF has now broken ranks with that, and I think that is really interesting politically again.
Q17 Caroline Lucas: Do you support it?
Dr Blyth: I do support it, absolutely. I totally support it. What is interesting is that again it brings the subsidy debate from it is not an OECD problem, energy subsidies are all out and they are all in developing countries. If you include the under-pricing of greenhouse gases in particular, that brings it right back into the lap of our economies in OECD countries, and so that is really interesting. In terms of the UK, you are looking at somewhere between £5 billion and £7 billion worth of subsidy if you were looking at the additional costing of under-pricing of greenhouse gases.
Q18 Caroline Lucas: Between £5 billion and £7 billion, did you say?
Dr Blyth: Yes. It depends which sectors. I would argue that does not include the sectors in the UK covered by the EU ETS, because they are covered by the carbon price floor, and the carbon price floor is there or thereabouts similar to the $25 that they are recommending. It is the other sectors outside of that.
Q19 Caroline Lucas: Just the last thing: do you get the sense that other institutions will follow the IMF now the IMF has broken ranks by including environmental externalities as a subsidy? Do you see that as something that is going to spread?
Dr Blyth: I think they probably will. I can’t see why the World Bank would not want to apply similar sorts of conclusions to the countries that they are focusing on. In some ways, it is the bravest move for the IMF. So, if they have done it, other organisations would follow. I am not quite sure where the $25 number came from. There are so many estimates of what the correct price is. It happens to be very similar to the current starting point for the UK carbon price floor, which is possibly an interesting coincidence.
Q20 Peter Aldous: Just at the outset, for the Register of Members’ Interests, I do have interests in farmland where there are renewable energy projects being pursued. If we can look at energy subsidies in the UK-so, trying to compare like with like-the first point is, in the calculation of energy subsidies in the UK, do you think it is logical to ignore the high rate of petroleum revenue tax applied to fossil fuel energy?
Dr Blyth: The petroleum revenue tax is obviously one of the ways in which the Government recoups money from the oil and gas sector. All Governments globally, if they are going to license companies to extract oil and gas that belongs to them as a sovereign state, will come up with some tax arrangement so that the companies have a right to access that oil and gas and to sell it in exchange for tax revenue. In the UK, companies are charged a petroleum revenue tax, also corporation tax and various other charges, so that is the revenue that comes to Government from the oil and gas companies. That is a tax rather than a subsidy.
Q21 Peter Aldous: But would you agree it is not what you would call a normal tax, if there is such a thing as "normal", that is applied to other goods?
Dr Blyth: I see what you mean. Yes, I would agree that is not the way that other companies are taxed. The oil and gas sector, or extractive industries in general, is somewhat different because the state is sitting on a resource that belongs to them and the question is how they effectively sell that via the energy companies, whereas mostly other companies are not sitting on a resource that has value. They have to create value through the goods and services that they produce. Extractive industries are slightly different in structure, and therefore I would argue they do need a different tax regime.
Q22 Peter Aldous: Just going forward in a similar vein, would you agree that it is logical to exclude from subsidy calculation the ability that oil companies have to set off exploration expenditure against revenues immediately, when with capital investment in other areas of the economy that can’t be done?
Dr Blyth: That is different. Again, it is a different tax regime. All I can say in answer to that question is that the OECD methodology recognises that that is a different approach, but they do not consider that that is a subsidy. I think that is because that is a relatively normal type of approach used internationally. So, although it is different from the typical way that corporations are taxed in the UK, it is not unusual internationally to operate in that way.
Q23 Peter Aldous: In section 2.7 of your report you pull together the subsidies that you have identified for each type of energy. In terms of the amount of energy output supplied by each type, what is your assessment of the relative levels of the subsidy? I think what I am saying is, which types of energy are most intensively subsidised in the UK for the winners?
Dr Blyth: You are quite right, the table shows the total values of which the largest is gas VAT, but when you look at the total amount of gas used, the size of that subsidy per unit comes out as relatively small. The two largest clearly are nuclear and renewables in this assessment. I would like to point out and apologise that the table, as it is presented here, is slightly misleading because the subsidy level for renewables in the third column of that table is for 2013, whereas the energy consumption figure is for 2011. They were both the latest available data, but they are not the same year, which is unfortunate.
Peter Aldous: It is a change in the-
Dr Blyth: In the case of most of them, it does not change very much, but in the case of renewables it changes a lot because renewables has been growing so quickly.
If you divide one by the other, the real figure should be something like £50 per MWh for renewables, which is roughly around the value of the ROCs, the renewables obligation certificates. If you divide one by the other in the nuclear column, you get something around £33. So, in answer to the question, the most subsidised on a per-unit basis is renewables.
Q24 Peter Aldous: Perhaps we should not speculate, but if we were sitting here in five years’ time, do you think that would be the same answer?
Dr Blyth: I think it probably would, because the renewable rate is-we do not know, is the answer to the question, because we do not know what the contract-for-difference strike prices are going to be. I suspect they will be similar to what they are now and decline over time, but I still think that they will be large. The size of the subsidy to nuclear will be very lumpy. It will stay as it is now until the first nuclear power plant is built, if and when that happens, in the early 2020s. So, in 10 years’ time you will suddenly get a spike in the total value of subsidies allocated to nuclear, because that is when the plant will start to generate and be paid. In 10 years’ time the table might look different, but for the time being renewables is the area that is growing, and, therefore, each time it grows it increases the total size, although the rate of support to renewables is either steady or possibly declining slightly.
Q25 Peter Aldous: Finally, is it possible to quantify any subsidy that is implicit in our public investment in education and training, which there may be in some energy-specific areas and in technologies and sciences? I suppose what I am thinking about is, should we regard the teaching of nuclear science in universities as a subsidy or not?
Dr Blyth: I have not managed to try to get data on breaking out that. It is difficult. I suppose yes, in principle, that would count as a subsidy. I think strategically, if you are thinking whether or not this country needs nuclear and if the answer is yes, then education is an extremely important part of that. So, you have to do it, and if you do not have those education systems in place, you are not supporting the industry. I suppose the answer to the question is yes, in principle. You should identify every service and aspect of Government service and infrastructure that goes into each individual sector and allocate that by sector. I am not sure how possible that is to do.
Q26 Zac Goldsmith: A slightly different question, but also on ancillary subsidies or implied subsidies, is, have you managed to look at the subsidies inherent in our Export Credit Guarantee Department, for example-which has not recently, but historically, provided favourable loans and has de-risked investments in the fossil fuel sector throughout the world and is still able to do so now, even though it has not over the last couple of years, I believe-and also through our World Bank lending and so on? Is that part of the calculation?
Dr Blyth: I think in principle it is, and one of the reasons it is not in here is because, as you say, they have not done any, so as I was looking through-
Q27 Zac Goldsmith: We have through the World Bank, though, I assume. I would be amazed if we have not through-
Dr Blyth: Through the World Bank, yes, and through the other development bank institutions, yes.
Zac Goldsmith: I am certain we have. I just can’t remember the examples.
Dr Blyth: That is right. The development banks themselves have active energy programmes and the EBRD, for example, will fund coal plant investments. They would argue that they are investing in coal plant to make them more efficient and therefore more environmentally friendly than they would otherwise be, so you can take your view on that. I suppose the fact is that the involvement of the international financial institutions does in some sense lubricate the wheels of finance and other sources of finance in that sense. It is kind of like a subsidy, even though they are supposed to lend at commercial rates. They would argue that they are not subsiding, but facilitating. This is where it all gets a bit blurry round the edges, but I have not tried to look at the flow of UK money specifically via the IFIs.
Q28 Zac Goldsmith: But from the point of view of the inquiry that we are doing now, would it be your recommendation that we look closer at some of those arrangements by the World Bank, Export Credit-
Dr Blyth: I suppose it depends what your scope is. If your scope is UK subsidies, then arguably no. Very little of that would flow back into decisions made at the UK economy level, apart from very marginally in terms of their impact on global energy markets. If your scope is UK subsidies, I would say that flow affects developing-country economies.
Q29 Zac Goldsmith: Except not from an environmental point of view. There is a growing trend of developed countries exporting their pollution to other countries in any case, whether it is waste or emissions and so on. If you are looking at the country’s fossil fuel dependency footprint-I can’t think of a more elegant way of putting it-then you would have to look, presumably, at those favourable loans made available directly or indirectly by the UK Government, surely.
Dr Blyth: I would argue that the Export Guarantee one is worth looking at, in the sense that it is relatively easy to look at it because it is all published and all the projects are there, and at the moment they are not doing it. I do not know whether that is a policy not to or whether it is just that nobody has applied for it.
I think it is a very reasonable question to look at the policy of the IFIs and what they are lending money to and whether the UK, in its broad environmental policy, is either comfortable with that or should be influencing that. It is an important issue, but I do not necessarily see it as linked to the subject, but I am not in charge of your scope, so that would be for your Committee to decide.
Q30 Chair: We decided not to restrict this just to UK subsidies. We will be looking at the whole aspect of global trade and the need to have leadership in terms of global negotiations. It would be very difficult just to restrict it totally to UK, wouldn’t it?
Dr Blyth: Yes. UK subsidies influence decisions in the UK in terms of what gets built, which affects our emissions, and then that affects our ability to negotiate internationally. So, in that sense, I suppose I see the subsidy question as being what are we doing at home and-I think your point is right-that that affects what you are able to say internationally, but whether the scope of your inquiry should look broadly at international subsidies is-
Q31 Caroline Lucas: Very quickly on the relative subsidies between the different energy sources, would you agree that your figure for nuclear is pretty conservative given that we do not know what the decommissioning costs are, and they may well be higher than you have factored in, but also on liability? In the main body of your text you point out that although the UK is increasing the cap of liability up to €1.2 billion, Fukushima, for example, is €175 billion. Can you just remind us what assumptions you have built into that figure? If you were to put that liability figure where it probably should be, the figure of the subsidy would be a bit bigger.
Dr Blyth: It would go up in that sense. Yes, I think that is right. I have a question mark in the table against how much the NDA budget might be required to be in order to cover decommissioning Sellafield waste in particular, and other liabilities. So, that is not included in those numbers that I just quoted comparing renewables and nuclear.
Going forward, I have left out of that table what the forward-looking subsidies are, which is where you referred to the cap on liabilities for accidents and emergencies and so on being €1.2 billion. That is a very difficult question to try to quantify, which is partly why I did not come up with a number for what those subsidies were. If you start to say Fukushima is €175 billion, it could have been a lot worse. If you have to evacuate the whole of south-east England, what is the economic damage of that?
Caroline Lucas: A lot.
Dr Blyth: A lot, exactly. The problem is that the only way of quantifying it properly is to try to get commercial insurance, but you just can’t get it. The fact that you can’t get commercial insurance on the one hand makes you think, "Crikey, this must be really high." On the other, I could argue that the liquidity of the market for insuring against Fukushima-scale accidents is just so thin it is not a proper market. So, is it reasonable to expect companies to go and get commercial market insurance? Markets are not perfect, and that is a particular example. I agree that the number is higher, that that is probably a bottom-end estimate, but I am not going to pin my hat on what the number should be higher than that.
Having said that that is a bottom estimate, could I just point out that the NDA budget is very visible, it is there, and that is what the Government puts into the NDA? The NDA becomes quite a complex issue, but when you look at the budget for decommissioning of Sellafield, it has not been in EDF’s hands for very long. It is picking up the back end of a commercial asset, and arguably it should not be responsible for the whole history of a lifetime of nuclear waste. There is a burden of balance between Government and industry in that context. You would have to look at whether the NDA budget was really a subsidy. You would have to look at the deal done when British Energy was sold to EDF at £12.5 billion and say, "Was that the right price for those assets, given the share of responsibility for the liabilities that came with it?" You could do a whole study on that, and I am not the right person to do that study.
Q32 Neil Carmichael: So far we have been talking about energy generation, but what about distribution? There is a fair bit of subsidy in distribution, not necessarily in this country now, but in comparison to other countries that still do subsidised distribution. What consideration have you given to that question?
Dr Blyth: Distribution? Are you thinking about electricity?
Q33 Neil Carmichael: Of energy, of electricity distribution systems.
Dr Blyth: The electricity distribution system is a monopoly, and it is a protected monopoly in that sense, so National Grid operates it, but it does operate as a commercial entity, and its costs are covered by the charges it makes to consumers.
Q34 Neil Carmichael: But in terms of international comparison? Obviously the Central Electricity Generating Board and its distribution mechanism was in the public sector and did get a subsidy. I do not know the situation in other countries and who should be comparing those, but I would like to.
Dr Blyth: The situation varies considerably. I would say Europe-wide there is still some public ownership, but it is not unusual to have a fully-funded private sector, albeit a regulated monopoly model, operating in the transmission system. In the US you have different sorts of model, some regulated monopolies, some private-market arrangements, so it does vary. I think the UK is probably, in the electricity sector where there is low levels of subsidy internationally, in the sense that it is fully privatised and it fully covers its own costs, within that regulated model.
Q35 Neil Carmichael: One other area of difference is, of course, VAT in energy. We have relatively low VAT levels and lower than our immediate competitors in Europe. Does that mean they are being a bit unkind to those who are heading into fuel poverty, or are there other mechanisms they are using to deal with fuel poverty?
Dr Blyth: I think the evidence on the extent to which the reduced rate of VAT is targeted to the fuel poor shows it does not target the fuel poor very well. In other words, all consumers benefit and therefore it is not very well targeted. I think there are much better ways of spending the money that that effectively costs, if you like. If you were to look at the amount of revenue you would get by charging 20% VAT and think how would you spend that money, giving it equally to all consumers is probably not the way you would do it.
I think other countries look at individual rebates in a more targeted way. The UK has some interesting anti-fuel-poverty approaches in the ECO, Energy Companies Obligation, and those sorts of requirement to invest in housing infrastructure, for example, is certainly an area that could be strengthened. If you had a certain number of billions of pounds available to you to strengthen those programmes, I think those would go a long way.
Q36 Neil Carmichael: Of course you could argue that measures to encourage better insulation and so forth are also an indirect subsidy. How would you, for example, describe the Green Deal, or at least earlier subsidies for introducing energy use savings?
Dr Blyth: A lot of those earlier programmes were focused on the fuel poor, also vulnerable families, elderly or low-income houses, so the energy companies were required to go and fit new insulation. I would say that was a subsidy and a good place to put the money. If you can improve the housing stock, that is good not just for the consumers, but for the energy system and the climate as a whole, so that seems to be the sensible way to go.
Q37 Dr Whitehead: Could we have some thoughts about developing subsidies and, to start with, shale gas? How does that fit into the subsidy pattern, in your view?
Dr Blyth: Essentially the shale gas is going to be almost like a new sector, a new part of the new gas sector, and the Government is going to have to come up with a tax regime that strikes a balance between incentivising companies to do it, if that is the way it needs to go to develop shale gas. If you tax too heavily, then companies obviously will not be incentivised to come and try to make a profit out of developing the resource. If you tax too lightly, then you are not making any money out of it as a Government and what is the point? You should not just be giving out this resource for free for companies to be making a profit out of.
I suspect in the early stages of shale gas the production profile of those fields is relatively uncertain. Until you start drilling and fracking you do not know what the flow of gas is likely to be, so there is quite a lot of learning in the early stages. I suspect that that will mean relatively light taxation and relatively little revenue in the early stages. You could look at that and say, "Why are you doing that when you still have North Sea gas coming in?" You have to balance the interests of onshore and offshore and try to create-I think "level playing field" is the wrong term-at least some sort of fairness while balancing strategic issues around whether the UK should be developing shale gas strategically over the longer term. It is a rather fluffy answer to your question. I suppose in principle you might look at low early taxation rates as a subsidy, or you could look at that and say that is the normal way that countries operate when they are trying to attract energy companies into a new and rather uncertain resource in the country. You have to work your way into that system rather gently and then you potentially increase taxation rates from there if the industry turns out to be successful.
Q38 Dr Whitehead: Does that come under the general banner of the industry support mechanism, even though the infant industry is in a commodity that is mature?
Dr Blyth: I suppose it does. It is a slightly odd way round, because the thing with the extractive industries is you are already sitting on the resource and the question is how much you tax companies to come and exploit that resource. The infant industry usually is the other way round where, as a Government, you are going to set a feed-in tariff for renewables, for example, and you are in charge of the relationship between the consumers and the energy companies. Do you see what I mean? It is a slightly different way round. You are mandating payments from the consumers to the industry in the case of what I would call straight subsidies. In this case, you are trying to come up with what is the right level of tax. It is small taxes, but big taxes as opposed to small subsidies.
Q39 Dr Whitehead: Is that a potential source of confusion in terms of how subsidies in general within the EU relate to state aid regulations and the extent to which, for example, the RO is defined as state aid but has a wayleave on it on the grounds that it is developing a commodity that otherwise would not be available?
Dr Blyth: I am afraid I can’t answer the specifics of how shale gas is going to be viewed in terms of state aid rules. I think that is something worth pursuing to try to clarify, because you are right: it becomes murky quite quickly, and it is much easier to think about developing a reference level for subsidies in a mature sector. For example, you have the mature gas sector. In 10 years’ time, if and when shale gas is established, you might look at what is the taxation rate for that compared to other sectors. It is all settled out, and you can then compare the different levels and see whether you think that is fair or not.
At that point, it might start to be sensible to think about the issue in terms of subsidies. At this point, when we are thinking about what is the tax regime for shale gas, I do not think it is sensible to think about it in terms of subsidies. It is easier to think about it in terms of what is the right strategy for the Government to pursue when it is thinking of working out the correct tax rate for exploiting those resources.
Q40 Dr Whitehead: Where you have a mature industry, such as the nuclear industry, and you have a public statement that there will be no public subsidies on that mature industry, in your understanding of what is a subsidy, how far away from the direct use of the word does a subsidy have to stand and to what extent does that then wrap itself back into EU state aid rules?
Dr Blyth: I think you have to contort yourself quite drastically to say that nuclear is not being subsidised under the CFDs, with the caveat we do not know what the strike price is yet, because it has not been announced, but we think we might know where it is heading.
Dr Whitehead: Or the length?
Dr Blyth: Or the length-indeed, yes. I should caveat that statement with the fact we do not know what the number is, but it looks as though the numbers being discussed are higher than market rates, in which case we should call a spade a spade and call that a subsidy. The question then becomes, "Is that a justifiable subsidy?" which is the same argument with renewables. The EU has to then decide, "Okay, this is a state aid. Is it an allowable state aid or not?" I think that is a very healthy discussion.
Q41 Chair: Do you think that will be a discussion that will be resolved in the European Commission on the state aid in terms of nuclear?
Dr Blyth: The contracts will have to be cleared for state aid rules in order to be able to proceed, so I am afraid I can’t answer in very much detail as to what that process is. I think all you can say is that the Government will have to be negotiating now with a view to those rules, that agreement being allowable. I suspect that it will follow the path of we need this to happen in order to create conditions under which a viable nuclear programme over the longer term can be sustained. If you don’t have one, you can’t have more than one. Given the lead time on how long these things take to build, I presume that is the sort of argument that will be made as to-
Q42 Dr Whitehead: As far as subsidies are concerned, bearing in mind we have slightly different conditions in the UK than in some places in terms of the relationship of the state itself to energy supply companies so that the subsidy is going to companies rather than the subsidy to the state itself for doing something in relation to energy, whether or not that subsidy is either passed on or borne by the consumer or is putative tax spend or actual tax or consumer obligation, and the same company is undertaking present supply as maybe is responsible for developing new supply-carbon price support, for example, which has been determined not on the basis of a particular category, but has been determined now-the extension upstream from CCL has been determined on the basis of carbon intensity. Is it a subsidy when a supplier avoids a tax as a result of the definition that was put into how that tax is extended and therefore stands much better in relation to that tax than they previously did and against other suppliers?
Dr Blyth: Are we talking about CCL-Climate Change Levy?
Dr Whitehead: CPS is based on carbon intensity and now does not apply to old nuclear, but does apply to, say, gas or coal, and therefore if you are a private-sector supplier of gas, you will pay CPS. If you are a private-sector supplier of existing nuclear, you will not pay CPS, but you are the same company that is developing that new supply.
Dr Blyth: I suppose I see the carbon price system as internalising the externality, so in that sense I would not say that was a subsidy. It is changing the incentive as to what you may invest in, and it is creating an incentive to invest in low-carbon sources because, as you say, if you are using fossil fuels to generate electricity, you have to pay the carbon price.
Q43 Dr Whitehead: How are subsidies treated internationally? In this instance, as a result of a definition of an extension of a previous arrangement, CCL, and its incorporation into claimed carbon floor price, CPS, people who had been doing what they had been doing suddenly had a differential in terms of what they paid. A company that had for years been running a gas-fired power station paid CPS; a company that had for years been running a nuclear power station did not pay CPS; previously they both did not pay anything. Does that count as a subsidy, bearing in mind there is no development going on, no incentive for an immature industry and no consumer benefit thereby? How does that work into the system that you have described?
Dr Blyth: I think when you change the tax regime generally there will be winners and losers, and typically you would try to smooth those out by having a transition arrangement to avoid stranded assets. If you, as a company, have set up your investments under one particular framework, you do not then want the Government to change the tax regime on you in a rather random way to change your income stream in an unpredictable way.
I suppose arguably the UK’s ambitions towards low carbon from a policy point of view have been rather well signposted, so I suppose you could argue the companies have had some forewarning, although they probably could not predict the details of those changes. You might look at that as not being a good example of how to transition towards a new taxation regime. I suppose I would struggle to see that as a subsidy issue. Again, it does become a bit fuzzy about whether we are talking about subsidies or changes in taxes.
Q44 Dr Whitehead: This is what I am trying to get a handle on. For example, as it happens there have been four extensions given for existing nuclear power plants to last December, to this December-
Dr Blyth: Yes, lifetime extensions.
Dr Whitehead: Two of five years, two of seven years, all of which will be covered by the payments under CPS or not. Those will now all be exempt from payments, whereas previously if someone had wanted to extend the life of a nuclear power plant, they would have been on a level footing with a gas-fired power station. There is no new development going on, just an extension of an existing power station.
Dr Blyth: I do not see that as a subsidy.
Q45 Dr Whitehead: Forty-four billion pounds?
Dr Blyth: In my view, if you are internalising external costs of environmental damage, that will create a benefit to the companies who are running plant that is not creating that damage. That is how I would classify it.
Q46 Dr Whitehead: On more specific renewable subsidy, bearing in mind that ROCs have translated to CFDs-one of which was about renewables; the other is about low carbon and not necessarily renewables, and there is a levy control framework for general development-how do you regard the role of- On the one hand, you have a development ambition, which is that there should be a doubling of deployment of renewables, particularly offshore, by 2020 on present deployment arrangements. That is provided for by a subsidy, either the ROC or CFD. Then there is the levy control framework, which limits the amount of subsidy that can be paid, and, as you have set out in your table on page 33 of your report, you indicate that, bearing in mind cumulation, there should be about enough room for the present of deployment of renewables. So, the subsidy arrangement contradicts the statement on the ambition of the subsidy.
Dr Blyth: Sorry, could you say the last bit again?
Dr Whitehead: On the one hand, you are saying there is going to be a doubling in deployment of renewables and that is based on a subsidy. The subsidy itself is capped, and you have shown in your chart that there is sufficient headroom, bearing in mind cumulation, for deployment at roughly the present rate, which therefore is half of the ambition that is set out for 2020.
Dr Blyth: I see what you mean. I have not done the calculation of whether that is sufficient. I suspect you may well be right that there is a conflict between the levy cap and the level of ambition. I have not done those numbers myself and I would need to defer to other sources of those calculations, but potentially I think you are right. If the cap is not high enough to get you to A or to B then clearly there is a policy conflict that needs to be resolved as to whether the cap has been set high enough. So certainly in principle, there is tension between those two issues and I think that needs to be investigated.
Q47 Chair: I am looking at my colleagues. This has been the first session using the academic research that there is here. We have had a very academic presentation. Before we bring this session to a close, do you have any gut sense yourself in terms of policy recommendations that you think might arise out of the submission that you have given this afternoon?
Dr Blyth: Ideally we would want to get to a stage where we can discuss these issues without them being heavily politicised. I suppose that is too much of an ask. There are such strong views on all sides about nuclear versus renewables and the proponents of each of those. In my personal view, I think it is clear that nuclear does receive a subsidy. I also think, given that the gas price that we are facing in the 2025 to 2030 time frame is so uncertain, while it is clear that that subsidy exists against current market conditions, it is not clear that it will still represent a subsidy over the time frame for which that plant will be operative. If we think of 2030, it may well be that it has turned out to be quite a good bet. You can see that that has already happened in some of the early NFO wind contracts that are currently below market price. They started off as a subsidy, it turns out-what do you class that as? Does it become a negative subsidy because they are generating electricity at a fixed price below market rates? You could quite easily see scenarios where the same thing happens for nuclear, so what might be a subsidy today may well not be a subsidy in 15 years’ time.
Having said that, I am not going to try to predict for you that gas prices are going to go up by 2030. There are quite plausible scenarios where gas prices go down. I personally feel that when embarking in that direction of building-I do not know how many nuclear plants are required to establish it-one or two or some is not a bad risk and a bad bet to make as an insurance policy against future gas price risk.
Chair: On that point, I will bring the proceedings to a close, so many thanks once again for coming to appear before us this afternoon and for the research.