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Environmental Audit Committee - Minutes of EvidenceHC 61

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 23 October 2013

Members present:

Joan Walley (Chair)

Peter Aldous

Zac Goldsmith

Mark Lazarowicz

Caroline Lucas

Dr Matthew Offord

Mr Mark Spencer

Dr Alan Whitehead

Simon Wright

________________

Examination of Witnesses

Witnesses: Gordon Edge, Director of Policy, RenewableUK, Keith Parker, Chief Executive, Nuclear Industry Association, David Odling, Energy Policy Manager, Oil & Gas UK, Emma Hughes, Senior Policy Officer, Platform, and Alan Simpson, gave evidence

Q135 Chair: I would like to give a very warm welcome to all five witnesses to our Environmental Audit Select Committee session this afternoon. We have had previous sessions and we are returning to this subject of energy subsidies. It might just be helpful for me to say at the outset I realise that we have five very different witnesses and I am sure each of you have a huge amount to say on this subject and we have a Committee that is very focused on this issue as well. We shall do our best to try to finish by 4 o’clock at the latest and I will bring in members of the Committee as we go through the different questions, so I hope that is helpful.

Rather than ask each of you to introduce yourselves, because time is short, what I would like to do is just go straight into the very first question I have for you, which is that the Government tells us that it defines the fossil fuel subsidy as any measure that reduces the cost of fossil fuels to below world market prices. The Committee are very interested to know whether you would agree with that definition, whether or not you think there should be a different definition, or indeed whether or not the Government’s definition is justified. I do not know how you want to respond, each separately and add or disagree as we go on, and I will try to do it in an inclusive way. Mr Odling, I think you were trying to catch my eye first of all.

David Odling: Thank you, Madam Chairman. Clearly there is no universal agreement on the definition of a subsidy and you only have to read the evidence submitted to your good selves to recognise that. From our point of view, I think the Government’s definition is a reasonable one, because there is a difference between, for example, something that underwrites in some form or another the cost of doing something versus, in our case, the tax that is applied on profits from the proceeds of production once all costs have already been paid. That does not seem to come through clearly in some of the evidence that has been submitted to you, but maybe that is a subject that we will develop during the course of the afternoon.

Q136 Chair: Okay. I am going to ask Mr Simpson to expand or otherwise on that definition.

Alan Simpson: I think the Government’s interpretation is a Queen of Hearts interpretation, that words mean whatever you choose them to mean. I prefer the International Energy Agency definition as a subsidy that either lowers the cost of production and raises the profits to the producers or reduces the costs to consumers, and I think that is a more all-embracing one. That ought to include the things foregone, like rents for access to national assets, so the starting point that the Government has and the successive Governments have had in the UK is not as helpful as the definition that your Committee have been given by the Oxford Associates and even less helpful than the one taken by the IEA.

Q137 Chair: Any further comments from the witnesses? Ms Hughes.

Emma Hughes: For the Platform, the key thing that the Government’s definition is missing is that the majority of fossil fuel subsidies are off-budget and do not appear in national accounts, and therefore it needs to veer towards a far broader definition of fossil fuel subsidies. In particular, in our submission obviously we highlight three things that they miss, the export credit, the diplomatic subsidies and the military subsidies as well.

Gordon Edge: I would expand on that further. We have a very wide view of what should be treated as subsidy or support of some kind and that can be qualitative as well as a quantitative monetary value. In particular, we think that the external costs of fossil fuels-and indeed, other energy sources-if they are not paid, that is a form of subsidy, in our view, and we should be accounting for those when looking at particularly fossil fuels but also other forms for which perhaps externalities are less.

Q138 Chair: Mr Parker, do you wish to contribute to that specific question?

Keith Parker: I would agree with what Gordon says about taking account of the external costs particularly of fossil fuels. In relation to my sector, nuclear, we think that the Government’s definition is reasonable, that there will no levy direct payment on market support for electricity supplied or capacity provided unless that support is available more widely across low-carbon technologies.

Q139 Chair: So if another sector was getting a similar support, you would not count that as a subsidy?

Keith Parker: No. I think that the Electricity Market Reform proposals are designed to incentivise investment in all low-carbon technologies, including nuclear, so we would regard that as an incentive, certainly not a subsidy.

Q140 Dr Whitehead: Forgive me, does that not mean that if I give three out of my four children sweets, I have not given any of them sweets? Is that what you are saying?

Keith Parker: No. What I am saying is that the Government has a policy of moving the energy mix, if you like, towards low carbon, particularly the electricity sector, and therefore in order to achieve that desirable outcome and to improve security of supply, they are putting in place policy measures that will incentivise investment in those particular technologies, and by implication, disincentivising investment in those technologies that they regard as being, if you like, less desirable.

Q141 Caroline Lucas: That is just a slightly separate issue though, isn’t it? I was just hoping that we could start the session with all of us being clear about what we are talking about here, and however much one might want to justify the subsidy or not, the fact that it is being offered to more than one energy source does not stop it being a subsidy. I think if we could start from that starting point at the beginning of this session, we would all be a lot clearer as we go through, because the idea that somehow, as my colleague says, just because you offer something to a range of other players-and that something that you are offering isn’t the same thing, but we will park that for the moment-does not change the nature of what is being offered. It is a subsidy.

Keith Parker: No, I understand. In that case, I would agree with Mr Odling that the Government’s definition of subsidy is reasonable.

Q142 Caroline Lucas: Sorry, the whole language of this is so important. Why is it reasonable if you were nodding when I was explaining that it is not reasonable to say something isn’t a subsidy just because it is being offered to more than one generator or type of generator? Why is that reasonable?

Keith Parker: Because the whole relationship, if you like, between the Government and industry and the basis on which Government would provide support or incentives to industry to go down a particular route I think is legitimate activity for Government and therefore-

Q143 Caroline Lucas: No one is disputing that. Well, they are, but not right this moment. What they are disputing is whether or not that is a subsidy. Subsidies can be used for good ends or bad ends and we can discuss whether we think the ends to which they are being used are good or bad, but I just wish we could clarify at the beginning of this session that just because you offer something to more than one generator does not mean that isn’t a subsidy, good or bad.

Keith Parker: In principle, yes, I would accept that what you are saying is correct, but then-

Caroline Lucas: Okay. We will capture that before you-good, thank you.

Q144 Chair: Just in terms of the common definition that we are trying to have as our starting point, I am wondering what you might feel is left out of what that definition might be. If you were describing the ideal definition of what a subsidy would be, are there things that would be included in it-that for the purposes of our session, Mr Odling started us off on-that are not included, if you see what I mean, if that makes sense. The Government’s subsidy definition that we started off with, are there items in that, the externalities, which are just not included that should be included?

David Odling: It seems there that you are probing towards the cost of carbon in the energy sector, and of course there is a cost, certainly for heavy industries, which is represented by the European Union’s Emissions Trading Scheme. That cost has not turned out to be as high as a lot of people would have wished by now and thinking back five or six years, there certainly was an expectation in the Commission that it would be climbing towards €30 a tonne. We are of course down in single figures at the moment, owing to the consequences of the recession more than anything else, which is perhaps not the outcome that policy-makers were expecting, but nonetheless there is a cost built in there and there is also a cost of all the other forms of regulation that were applied to industries. They are not free. They may not have an impost in the form of a tax or a cost of buying an emission allowance or something, but regulation itself inevitably imposes costs and there is plenty of regulation around in the energy industries, particularly in our own: environmental regulation, health and safety regulation, licensing conditions, you name it, and almost all of them entail costs.

Alan Simpson: It would be helpful if the Committee were firm with us as panellists about a definition that had to be inclusive of the cost of externalities, because otherwise not only do you get caught in convoluted language that reduces meaning to the definition-sadly that is the glaring gap between the Treasury’s response to the Committee’s evidence and the position paper to begin with-but also that it gets in the way of taking the next step into questioning what is the purpose of the subsidies or the intervention measures. In many respects, that is the welcome ground that the Committee can hopefully take the parliamentary debate into.

Q145 Chair: Just before we move on from the subject of definition, is there a current definition, whether it is from the OECD, IMF, WTO that you feel would serve as providing us that starting point? Is there a definition that already exists that we could perhaps adopt or-

Gordon Edge: For my part, I don’t think any of the existing definitions, from where I am sitting, account for all the different things that Government do to support or retard particular energy industries. I think it is important that we have a full accounting, including the legacy institutional support that is out there for technologies that have been around for a much longer time than the technologies that I represent. That forms a form of subsidy that is difficult to quantify, but it is definitely a support that needs to be set out and accounted for appropriately when you are looking at this whole issue.

Chair: We will just move on very briefly to oil and gas and I will bring in Mr Spencer.

Q146 Mr Spencer: Yes, we will drill down into more soil, shall we say. The Government does not regard fuel allowances as a subsidy: is that right or wrong? I suppose we will start with Mr Odling.

David Odling: We think it is right. I alluded to the reason, and perhaps I can expand on that. First of all, we pay all our costs, so the capital costs of investing, the costs of operation, we are responsible for all those. The taxation that is applied to us is a form of taxation on profits and it comes in several forms. It starts off with a particular version of corporation tax that is peculiar to us, and it is called ring-fenced corporation tax. By that, it means that the Treasury draws a circle, a fence around our businesses, the upstream oil and gas exploration and production business, and it taxes them as independent businesses regardless of what that company does elsewhere.

For example, if you owned a refinery that lost a pile of money downstream, but you had exploration and production upstream that made money, you could not offset a loss in the downstream refinery from the profits on the upstream production, and you pay the profit taxes on the upstream as an independent entity. That rate of ring-fenced corporation tax is 30%, which is seven percentage points higher than the rest of the economy. On top of that, the Treasury levies a supplementary charge of another 32%, which takes the starting rate up to 62%. On top of that, all the fields that had their development consent before March 1993 pay what is called petroleum revenue tax, which is a third form of tax. When you take that into account, those fields pay tax at a rate of 81%, so our starting rate is 62% and our top rate is 81%, which of course is far, far higher than the rest of the economy.

What do field allowances do? Field allowances give relief from some of that tax for a limited period, or limited scope in terms of the value of production, and it is done for particularly awkward types of offshore field where the economics are difficult, where there are technical difficulties and so on. What that does, the field allowances relieve the supplementary charge, the 32%, for a limited amount of value. Once you have exhausted that value, you go back up to 62%, so in other words, those fields will start paying corporation tax at 30%, which is above the normal rate of corporation tax, for a limited period and then they go back up to 62%. That is the way the field allowances work and if you want chapter and verse on it, our economic report that we published in the summer, in August, is available and there is a section explaining all of this. I am very happy, Madam Chairman, to submit that to the Committee as additional evidence if that would be helpful.

Q147 Mr Spencer: That would be useful. Do the rest of the panel accept that definition or-

Emma Hughes: I would not accept it. I would like to respond. So the research submitted to this inquiry by Friends of the Earth showed that the total value to the oil and gas industry over five years of the 28 field subsidies awarded in 2012/13 was £1.962 billion, and this is in fact a huge subsidy. As both the OECD and the WTO recognise, the oil and gas industry are foregoing a payment that would otherwise be due to the Government, a tax concession, and it is therefore a subsidy. Such field allowances lower the cost of energy production by reducing the overall tax payable on those fields, and under any of the broad definitions of subsidy-around which there is a growing consensus-they count as a subsidy.

The special tax regime for hydrocarbons that David Odling spoke about exists in the UK, but it is not legitimate for Oil & Gas UK to say that this adds to an overall industry tax bill that is particularly high. The reason for this is because these taxes reflect the fact that the fossil fuel companies have been granted a right to exploit a resource that is scarce in the UK, for example, oil and gas reserves. So when comparing how heavily taxed the energy sector is with other sectors, we need to exclude these special taxes because they arise due to the special circumstances of natural resource ownership. In the context of this, we would agree with the Oxford Energy Associates’ report, which says that the standard petroleum tax therefore defines the normal baseline tax rate for oil production in the UK.

Alan Simpson: I would just add that whether you want to justify it or not, it comes separate from the question of whether you recognise it as a subsidy. It is a subsidy. If it quacks like a duck, walks like a duck, waddles like a duck, it is a duck. It is a subsidy, and I think it is unhelpful for the Committee to be led down a path that pretends that some forms of intervention are not subsidies while others are. It goes back to Alan Whitehead’s point to begin with, the notion that if you are giving all of your children sweets and some of them are getting them under the table, they are not getting sweets. It just takes the debate or the discussion into areas of nonsense rather than what is the value, what are the merits or demerits of that intervention.

Q148 Mr Spencer: Mr Odling, did you want to respond to any of that or are you-

David Odling: If I may. There are several things here. Firstly, we recognise that of course we pay more tax than others and we do not expect otherwise, because we are exploiting a natural resource. We recognise that, but I would ask the Committee to bear in mind that various Chancellors over various years, with the agreement of the House of Commons, have approved different rates of taxation on the industry. For example, the current Chancellor put our rates of taxation up significantly in March 2011. The supplementary charge had been 20% before then, giving us a starting rate of 50%-30% plus 20%-and he put the supplementary up to 32%.

What I am hearing from the evidence of the other witnesses suggests that there is no circumstance in which altering the supplementary charge downwards is anything other than a subsidy, but if he can alter it upwards at will with the approval of Parliament, where do you stop? There has to be some point at which you say, "That is a fair rate of taxation for the industry to pay," but nobody has defined what that reasonable rate of taxation should be. What the current Chancellor has done-and the previous Chancellor initiated the concept of field allowances, by the way-is to provide a variation to take account of the different characteristics of some of the offshore fields that we now face, and in pursuit of the policy that is agreed by certainly all three main political parties, namely to exploit our offshore oil and gas resources to the maximum extent that is economically possible for the country. If you leave those oil and gas resources in the ground, you do not have the capital investment, you do not have the jobs, you do not have the development of new technologies, you do not have the tax revenues that the production causes and you do not have the potential exports that the supply chain is very good at creating, based upon the technologies it has developed. You lose always in that respect, and bearing in mind that we cannot satisfy our own total needs of oil and gas any more-we used to be able to, but that has not been the case for the best part of 10 years-all that will do is suck in more imports.

Q149 Mr Spencer: Obviously I have heard the argument made that reducing those tax breaks is contradicted by the fact that extra revenue comes in because of the extra fuel that is sold, but of course you could then make the argument that your customers are paying that extra tax, given that you have had that reduction on those sort of operations. It is tilting the whole thing the wrong way, in that then the more oil you sell, the more customers contribute in terms of tax, so it is skewing the whole thing in the wrong direction. Does that make sense?

David Odling: Except that consumption is not something that we can vary, because we are selling our products, oil and gas, at market rates. We are not selling them at something that we can dictate. They are at market rates. The consumption side is something, if I may say so, that is completely different and the volumes in consumption are completely different. After all, the volume of oil being consumed in all the mature economies of the world is going down, progressively down.

Q150 Zac Goldsmith: I just want to get clarity on one thing. The 32% supplemental charge, is that the equivalent of a licence, so almost a rent, to be able to drill?

David Odling: No. We pay licence fees separately.

Q151 Zac Goldsmith: What do they come to and how does that have a bearing?

David Odling: I am sorry, I don’t have that to hand. It is not a huge sum of money compared with the sums of money from the taxes I have been talking about.

Q152 Zac Goldsmith: But if the 32% supplementary charge is unique to your sector, which is what you were saying earlier, then that would imply it is a form of rent. It is the right that you have bought by paying that supplementary charge to access resources that you otherwise would not be allowed to access, so it is not a tax. It is a rent; it is a charge. Would that be fair or not?

David Odling: That is where I was trying to draw a distinction between something that affects the cost of operations- so a licence fee does affect the cost of operations because it is a fixed sum of money for the licence-against all the ones that we have been talking about, the ring-fenced corporation tax, supplementary charge, petroleum revenue tax, which are profits taxes.

Q153 Zac Goldsmith: Sorry, I don’t want to get nerdy about this, but a supplementary charge, it does not sound to me like a tax. Given that it is unique to your sector, it sounds to me like a charge. It is a thing you pay that gives you the right to do what you do and therefore by including it in the overall tax burden that you were describing at the beginning, it strikes me as being a bit misleading. I don’t know whether I have misunderstood what the charge is or anyone wants to jump in, but that is just-

David Odling: That is certainly not the way the Treasury looks at it.

Q154 Chair: What we are trying to do is look at what it should be, rather than how it is perceived by the Treasury.

Mr Simpson, you seem to be nodding. Do you want to come in on that?

Alan Simpson: Yes, I do. I think you just made the point that I was going to make, which is the distinction between the approach by this Committee and the approach taken by the Treasury, because in paragraph 13 of the Treasury’s response document, they open with the line that says, "We don’t think that any of any current policies are harmful." It seems to me on the back of the IPCC report about carbon emissions and the triggers on climate change that the compelling question about environmental impact says, "Do we want to be encouraging increased extraction of carbon fuels at a time when that is likely to be driving us into uncontrollable climate disruption?" The impact question is likely to be addressed by this Committee in ways I think it never has been by the Treasury. That is a right that I hope you reserve and guard jealously.

Q155 Dr Offord: Under the Electricity Market Reform, the Government is introducing Contracts for Difference and capacity payments. Do what extent do you see these as energy subsidies?

Gordon Edge: They are subsidies. It is pretty simple. There are many reasons why you would do that, but we should not be shy of calling it a subsidy, because that is exactly what it is-and we get accused of being subsidy junkies-and they are there for a good reason. We think on the one hand you need to, in the first instance, address that market failure that I was talking before about having the externalities unpriced. Until such time as you have a robust price of carbon, you can justify having specific support for low-carbon, non-carbon forms of energy generation, but in addition to that, you can also use it as a means of technology innovation and bringing technologies to market, that you will need, if you are going to decarbonise your economy in total. If you were reliant only on a carbon price in order to bring forward all the technologies you need, you would be paying a very high carbon price in order to get those currently very expensive technologies in the market and everyone else would be making massive rents. So targeted support on, for instance, offshore wind is helpful in bringing it down the cost curve so it can start to compete against a robust carbon price, whereas if, as I said, you just rely on the carbon price alone, it would be too much.

Q156 Caroline Lucas: I only want to interpret what you were saying just there. To that extent, is the concept of transition an important one in terms of how you are seeing the role of subsidies, in other words, that a subsidy would be alive for the period during which it enables a transition to take place, in this case bringing renewables to a market price, but it is not something that then goes on for another 40 years?

Gordon Edge: Absolutely. There is nothing we would like more than to be able to compete directly in a market supported only by robust carbon pricing, without direct support. The amount of potshots that get taken at our industry because we have this support are so large that we would like to be away from it as soon as possible.

Q157 Dr Offord: The Electricity Market Reform will eventually introduce a carbon price floor, but in the meantime, with a very low carbon price from the EU Emissions Trading Scheme, should we regard all fossil fuels as being subsidised because they do not cover the cost of their full emissions?

Gordon Edge: I have explained that I think that is entirely correct.

Dr Offord: Does anyone have a contrary view to that?

Keith Parker: I agree, but I would say that the Electricity Market Reform, as I said at the outset, is an incentive to encourage investment in those low-carbon technologies. Within the Government’s definition, they do not regard that as a subsidy, and that is not something that the nuclear sector, for example, has sought, but it wants that level playing field, the ability to be able to compete and to bring forward that investment, which under current market conditions would not otherwise come forward, so it is a mechanism to reform the market to bring forward that investment. So it is addressing a market failure, as Gordon Edge has said.

Dr Offord: Okay, thank you. I think that is pretty clear.

Alan Simpson: Qualitatively though, it is also important to acknowledge not only are they a subsidy, but that the Committee and Parliament needs to ask whether they are a subsidy that takes the UK towards an energy future or an energy past, and I think that that is the biggest question mark about the scale of financial undertakings by the public in one form or another that will be built into the current Energy Bill and whether it is money down the drain.

Emma Hughes: Just to add to that, I would say the Emissions Trading Scheme is setting up the wrong incentives for the transformation of the energy system. A marginally higher carbon price may at best, I guess, incentivise a short-term switch from coal to gas-fired power production, but this incrementalism serves to further lock us into dependence on fossil fuels rather than transforming to a low-carbon economy, which is what we need.

Gordon Edge: If I could just follow up a little bit on that one, having a price for carbon begs the question of how big should that price be. If you were being kind of a purist environmental economist, you would say, "Well, let’s price that. Let’s go out and find some evidence and find a level of damage that that pollution causes" and then you price it in through a tax. Virtually impossible to do that with carbon. I have seen varying estimates of what price should be brought back to the electricity sector for that and it ranges right up to things like $2,000 a kWh and it goes down to a few cents. It is impossible to set a single price that prices in the damage cost of that carbon. The best you can do is to set a robust target for where you think carbon needs to be, really enforce it, and that should give you a proxy for that level, but I think it also needs to be underpinned by a minimum level. My personal view would be that you have a reserve price in the ETS auctioning that means that the price of the carbon unit would not go below a certain level, and that would underpin the investments in low carbon that you need.

Alan Simpson: It is very easy for the Committee or Parliament to get waylaid by the technical detail of proposals that come forward in legislation, but the one thing that I would just try to remind the Committee about-and I recognise that many of you will not be old enough to remember this-the UK had some horrendous smogs in the 1950s and early 1960s, and the way that Parliament dealt with them at that point was not to say, "We all need to be issued with personal tradeable breathing quotas," or, "There isn’t a sufficiently robust market price for soot." The Government of the day, then the Conservative Government, introduced legislation that set minimum standards and it said, "There is a three-year transition period and all of industry will be required to produce against the following emission standards." There was a hue and cry from industry, saying ‘the UK will be a wasteland; no one will produce here’. Actually, three years later, by and large, we had the same production. That was driven by a very clear setting of a transitional phase towards a higher set of standards and I think that is a successful lesson to remember when Parliament is being presented with highly complicated mechanisms that will do pretty much the opposite.

Q158 Chair: A transformational effect in Stoke-on-Trent. Mr Edge and then I will bring in Mark Spencer.

Gordon Edge: I would caution that there is more than one way to skin the cat here. There are successful examples of using emissions trading very well. Sulphur dioxide in the States, utilities had to be dragged kicking and screaming to it, but then discovered that they could do it at minimal cost and it turned out to be the lowest-cost way of bringing down sulphur emissions from power generation in the States, they could trade it and it was successful. So it can be done. It depends whether you are targeting the right sectors. The thing about the EU ETS, it is focused on large emitters, the people who can trade and there is no reason philosophically why it should be by other sectors of the economy, the non-traded sectors, where you impose regulations and standards. That is absolutely fine and may be exactly the appropriate way.

Q159 Mr Spencer: Just to go back, you seem to be suggesting that because some renewable technologies reduce carbon footprint, they are good subsidies, if you like. I just wondered then if you would agree that supporting carbon capture and storage for coal-fired power, is that a good subsidy or a bad one?

Gordon Edge: Setting a robust carbon price is appropriate across the board for everyone. Then you have an additional slice of policy on top of that saying, "Do we want to do this for good industrial reasons?" and you may well want to do that for carbon capture and storage. I do not hold a candle for carbon capture and storage. I support the wind, wave and tidal stream industries and I think they are entirely justified for that, but that is entirely a policy choice. Do we use additional targeted support to bring forward these technologies in a time-limited way for other good reasons, which is part of our carbon reduction policy?

Q160 Dr Whitehead: Just for Alan Simpson’s benefit, incidentally, my mum sent me to school in these dreadful smogs. You couldn’t see three feet in front of you. You would not believe it looking at me, but this is true.

The Energy Bill indeed put forward a series of Contracts for Difference-which I think we have agreed are a subsidy-in order to, among other things, drive down the carbon content of energy by subsiding greener energy production. However, the Bill also does an interesting thing, which is that as a result of non-low carbon energy investment possibly taking place because an underwriting has been provided for low-carbon energy, the Bill introduces capacity payments in order to ensure that those bodies that might otherwise be investing in, for example, gas-fired power stations are able to do so, despite the fact that a price has been put on their power additionally, which it has not been for nuclear and wind and other forms of renewables. Is that a subsidy or is that a market instrument? How do you see the introduction of capacity payments for non-low carbon energy producers? Incidentally, not providing power, being available to provide power, as such.

Gordon Edge: In theory, it ought to be a zero sum game, in that what is paid out in capacity payments ends up lowering the wholesale price of power and therefore it is a recycling of money. I don’t think that is entirely true. There will be some hysteresis in all of that and you will end up with more money going through the capacity mechanism than you save through reduction in wholesale price. But I think it could be seen as a cost of moving to a system where there is a high proportion of high capital cost, low running cost, low carbon generation sources that require a lot of flexibility at the margins in order to cope with their variability or indeed their inflexibility, as nuclear is. So we need to think of it as a system cost. Whether you regard that as a subsidy, I would have to go and think about the philosophy of that.

Keith Parker: I agree that it is, if you like, an insurance policy against the transition towards the low-carbon mix, because there are characteristics of the low-carbon technologies that could potentially have an impact on energy security, so having capacity payments is a way of ensuring that the lights do stay on, that the power is available when it is needed. That requires flexible plant that can be ramped up quickly, but investors are not going to invest in that sort of plant unless they have some guarantee that they are going to have a return on their investment, particularly if it is lying idle for quite a substantial amount of time.

David Odling: But it also illustrates vividly the risks when you start to intervene, because one intervention begets another and begets and on you go, and certainly if you go back to the European Emissions Trading Scheme, one of the things that the industry as a whole across Europe, not just here in the UK, has been saying to the Commission when it starts to consider what happens after 2020-because at the moment, we only have knowledge of what goes on up to 2020, which is not that far away in investment terms-"Please, please, if you are going for a target for 2030, go for simplicity. Don’t let us have multiple targets that cross one another, which interact with another. Please, please try to keep the landscape as simple as possible." I fear that in this country, we are creating so many different policy instruments that we are in danger of getting lost in some of the fog that it creates. Where does it all stop? How do you get back to what Gordon has rightly said is the ultimate aim, which is to have no subsidies at all and have everything compete so the best wins?

Q161 Chair: On that point, Mr Simpson.

Alan Simpson: It is a subsidy, and the danger is that it will turn out to be a very expensive subsidy. If you look at the impacts of the first round of capacity payments and contracts awarded in the United States, 80% of them went to high-carbon energy production, because it was the cheapest to put in place, but it was the most environmentally damaging. It is important to ask whether we want to have those unintended consequences of making a situation worse by a system of subsidies that puts in place that safety net. I have suggested that we ought to consider other mechanisms, one of which should be legal duty, and I say that because, technically at least, in the banking sector you could not get a licence to operate unless you held reserve requirements in order to meet the liquidity needs and expectations of your customers. Whether they are sufficient is a matter of current debate, but that is a requirement.

If you look at any other sector of manufacturing, they always have their own reserve capacity and no one operates to 100% capacity, so that if you have additional demand coming through, you have your own ability to respond to that and you make it a condition of market access. I think that Parliament needs to think carefully about whether it has to respond to each demand from the energy sector that it can only do things if the public in one form or another pays them more money to do it.

Gordon Edge: I think you can mitigate that risk through careful design of a capacity mechanism to make sure that other non-polluting forms of balancing and flexibility, storage, demand-side response are properly and adequately brought into the system. I am not completely convinced. I don’t follow the capacity mechanism as closely as I do the CfD-I simply don’t have time-but my understanding is the capacity mechanism is too closely designed as a subsidy for new gas-fired plant when it should be thinking much more widely about how we provide that flexibility and response to the system as a whole.

I would also want to add just a little bit about the industry wanting simplicity. It is dangerous when it comes to simplicity of it becoming simplistic. Only having one focus on carbon and just carbon price I think is having a single blunt club and you would not go around playing a round of golf with one club. We need not to be scared of complexity, because this is a complex and difficult process, which therefore we may need to have multiple mechanisms and instruments to do various different bits of.

Dr Whitehead: I was just reflecting on the question of you might say strategic reserve against capacity payments and the extent to which, Gordon, your analogy of clubs, you have one club to get you out of the problem that another club has put you into and whether that constitutes a viable set of golf clubs under those circumstances. Sorry, that is not a question, I guess.

Chair: For those of us who do not play golf. Do we move on to nuclear? Yes, let me move on to nuclear subsidy.

Q162 Dr Whitehead: We have opened on this discussion already in terms of the question of the statement that new nuclear will have no public subsidy, but I think recognising that the debate has moved on from that new nuclear will have no public subsidy to new nuclear will only have public subsidy if other forms of energy have some form of public subsidy as well, and then perhaps the question of the extent to that those are-indeed, as I think we have accepted-nevertheless a subsidy. But then the purpose of the subsidy and how that then reflects on new nuclear, and indeed the nuclear industry as a whole, and indeed taking perhaps a slightly wider definition of subsidies, the question of Government underwriting for the Nuclear Decommissioning Authority, the question of the capping of insurance liabilities, the question of indeed underwriting other elements of risk, what does the panel see as the landscape of subsidies therefore as far as nuclear is concerned and new nuclear is concerned in particular, and how closely do you think that stands up to the general view that new nuclear will have no public subsidy? How far are we pushing the definition, do we think, and with what purpose?

Keith Parker: I return to my initial point, that the Government has a policy to move the energy sector and electricity-generating sector towards a low-carbon one. Nuclear is seen as a low-carbon technology; indeed it is. They want to incentivise in that particular technology, along with renewables, and carbon capture and storage, which have the characteristics of having high upfront capital costs, but then relatively low and predictable operating costs with the benefit of low-carbon emissions. So that is the objective behind the Electricity Market Reform, which is there to encourage that investment to come forward. As we have seen from announcements on Monday of this week, the investment is very likely to come forward and a number of other companies, other than-

Q163 Chair: Sorry, you said "very likely"?

Keith Parker: Yes. It is not the final deal, but it is a significant step towards that. EDF Energy still have to make their final investment decision, which could be several months off, so it is-

Q164 Chair: Sorry, I was just seeking some clarification on that from your own perspective.

Keith Parker: Yes, so I am not saying this is definite. There are still some steps to be taken, but on the back of the Government’s objectives for nuclear, as part of the overall energy mix, a number of investors have come forward not seeking subsidy, but on the basis of the framework that the Government has created to encourage investment, which is not just about Electricity Market Reform, but it is also about streamlining planning and licensing procedures, for example. It is creating the right sort of environment in which those policy objectives can be achieved. I know there has been a lot of debate around the policy statement, that there will be no public subsidy to nuclear unless it is available for other forms of low-carbon technology and we accept that definition of no public subsidy for nuclear.

Q165 Dr Whitehead: But insurance risks, assistance with decommissioning and short-term disposal risk-taking and long-term decommissioning underwriting are not available to any other technology.

Keith Parker: On the decommissioning and waste management, we have to distinguish between the legacy liabilities that are being managed by the Nuclear Decommissioning Authority, that those liabilities were in fact created in the public sector in the early days of nuclear development, including the operation of the Magnox stations, all of which bar one are now decommissioned, and the Government has accepted that it is appropriate for those liabilities to be funded and dealt with by the public sector. When it comes to the new nuclear build, the developers and operators will be obliged to pay into a fund, which has to be agreed by the Secretary of State, a Funded Decommissioning Programme, which will guarantee that the money will be available to cover all of the decommissioning costs of each of the stations and a fair share of the waste management costs. Given that these are very long-term commitments on waste management, the Government will come to some arrangement about taking title to the waste that is created by the new build developers. That is, if you like, a very different picture from that which applied in the early days of nuclear technology. The operators will be obliged to cover those costs and they will not be passed on to the taxpayer.

Q166 Dr Whitehead: The question of liability of the insurance and various other things that seem to have, frankly, dogged the industry over a period of time, ie, the extent to which the industry is able to insure itself and the extent to which therefore the Government undertakes a role as the insurer of last resort, again, which in terms of the Energy Bill with the introduction of counterparties to arrangements, appears to have a specifically opposite direction. Is that something that you feel is sort of a riding subsidy or does it have other purposes, in your view?

Keith Parker: I think it recognises what you said, that ultimately the Government is the insurer of last resort, whether it is for nuclear or any other industrial sector, if there were to be a major accident. I think the international agreements and treaties that the UK have signed up, what it does is formalise that arrangement, that recognition that if there were to be a significant or large-scale nuclear accident, then the operator, who has strict liability under the treaties, would not be able to cover all of the claims to compensate victims of that accident. I suppose that is a recognition, as I say, that there will be a sort of cap on the operator’s liability, which is being increased, incidentally, under the revision of the treaties, and then if the claims or compensation exceed that, then the Government will step in, but that would be the case in any other major accident. But I suppose what it does do is put the emphasis very much on ensuring that major accidents of that kind do not occur, so it is safety, security within the operating system, which is something that we have done very well in this country, a very good track record on safety.

Chair: Just before we move on, I know that both Zac Goldsmith and Caroline Lucas want to come in on this point before we move on.

Q167 Zac Goldsmith: Thank you, Chair. I wanted to press that point, because the liability issue that you have been discussed is not something that will be relevant to any of the other renewable energies, as I understand it. That is therefore a de-risking exercise by Government, effectively putting the risk on the taxpayer, so there is an element of indirect subsidy there. There would have to be. I don’t see any other interpretation of that. You were talking about waste management earlier and the pot into which the operators are going to have to be making annual deposits, but I think from what you said that that is not designed to cover all waste management costs going forward, but a serious proportion of them. That is something that would not apply to any of the other renewable technologies. In terms of security, I do not know what the deal is with the Government-I am not sure if it has been announced-but nuclear power plants require more day-to-day security than any other form of energy around the world. I think it is unique in its need for personnel, security and so on, and I am guessing that a significant proportion of that will also be taken up by the state or the taxpayer. These are assistances provided by the state at the cost of the taxpayer and it just seems bizarre to me. Perhaps you would, but it would be odd to me if you wouldn’t, if you were unable to regard those supports as a form of subsidy.

Keith Parker: In relation to safety and security, the operator has to pay for that, so the security arrangements at specific nuclear sites are paid for by the operators.

Q168 Zac Goldsmith: Okay, and on waste management?

Chair: But that would be much less than the full cost of insuring the facility, wouldn’t it? The operator will not necessarily be paying the full costs, so there is, if you like, a hidden subsidy insofar as-

Zac Goldsmith: There is a cap. In the event of something awful happening, there is a limit to how much the nuclear operator would have to contribute. The rest, anything in excess of that, would land on the shoulders of the taxpayer and I cannot think of any other form of energy generation, any other type of technology in the energy market that would require that kind of cap. The same applies and the question extends to the waste management, just taking you up on the point you made, that those are surely at least indirect subsidies provided by the Government to your sector.

Keith Parker: They are a recognition of the nature of the technology, if you like, that if there were, God forbid, to be a major nuclear accident in this country, then it is low probability, but high consequences.

Q169 Zac Goldsmith: No, I obviously understand that if there was an appalling accident, it could potentially, if there was unlimited liability, bankrupt the company. We could argue about whether or not the Government is right to limit the amount that the operators would have to provide, but my question to you is does that constitute a subsidy? Whether it is right or wrong, does that constitute a subsidy, given that that support is not being offered to all other forms of energy?

Keith Parker: I think, as the point was made, other forms of energy perhaps do not have that risk if there were to be an accident on that scale, so it is-

Q170 Zac Goldsmith: That perhaps is an argument in favour of those other forms of energy, but my point still comes back to whether or not, by your definition, the definition you used right at the start of this session, I would suggest that that does constitute a subsidy, and the same would apply to the waste management issue. If I understood you correctly, you were saying that you think the operators are obliged to provide a significant proportion in order to cover future costs, but not all. I don’t know what that proportion is in terms of percentages. I am not sure if that figure exists, but that is another even more direct form of subsidy, surely. This is a mess that has been created that our grandchildren perhaps are going to have to pay, in the same way that we are paying for the mistakes over the last decades. As I understand it, 69% of the DECC budget-I am not sure, and it is hard to imagine this is true-is devoted to clearing up a mess that the sector you represent has created for us. It seems to me that we are building into this agreement preparation for exactly the same thing to happen, perhaps not quite 69%, in the years to come. If that is not a subsidy, what is a subsidy? It takes us back to the first part of our discussion.

Keith Parker: I think if you are setting a limit on the third-party nuclear liability and the operators have to secure insurance for this and there is an active international insurance market that covers this sort of risk, it is justifiable, I think, in the public interest to ensure that the risk is appropriately managed.

Q171 Zac Goldsmith: But is it a subsidy, an indirect subsidy? Whether it is justifiable or not, we will have that discussion another time, but it is a support that is available to the nuclear sector and not the others.

Keith Parker: It is support that is available, indeed, but I think Mr Simpson’s point was that you have to look at the purpose of the intervention and the merits of the intervention and I think it is to manage the risks of a major accident in an appropriate way.

Q172 Zac Goldsmith: Just before we move on, the issue of waste management then. That seems to be even more direct, if my understanding is correct.

Keith Parker: The Government policy objective is to have a geological disposal facility for the high-level waste. When that is available, the operators of the new nuclear plant will, through negotiation-and I do not have a figure or proportion of how much they would have to contribute-about the appropriate level of funds that need to be put aside for the waste management as well as the decommissioning cost.

Q173 Zac Goldsmith: Can I ask you, can you think of any other example of an energy technology where the waste generated by that technology is picked up partially by the taxpayer? Can you think of any?

Keith Parker: I think if you look at the waste that is generated by a fossil fuel plant, for example, it is not covered at all, whereas the nuclear industry does contain its waste, it manages its waste from the time it is produced until its final disposal. That externality is not covered for other technologies, and you mentioned that there-

Q174 Zac Goldsmith: About half an hour ago, you agreed that that was a subsidy. By not pricing carbon into the market as an externality, by not internalising that externality, that was, according to you-not long ago-a subsidy, so what is different then about this subsidy that we are talking about now, this other externality which the taxpayer has to pick up?

Keith Parker: What I said was that the carbon floor price is a means of trying to price to that externality, but it has not been available and certainly was not available when the fossil fuel plant was and still is pumping out its own waste into the atmosphere.

Chair: Before I turn back to Dr Whitehead, I know Caroline Lucas wished to come in.

Q175 Caroline Lucas: Only simply to say that for the last 10 or 15 minutes, we have been piling up all the different levels of extra support that nuclear gets because of particular risks associated with it and therefore the particular costs that are associated with nuclear energy as opposed to other forms of energy. When the Government unveiled this new deal with EDF and China earlier in the week, it did so saying that this was necessary because it was going to reduce consumer bills over the long term. If that is taken as the Government’s objective of this deal, then can you see better ways of using measures or subsidies that would be more effective in reducing the cost of energy, if that is what the Government is trying to do, than a form of energy that you have just described yourself, which requires so many layers, so many unknown layers too, because we do not quite know how much we are going to be paying for cleaning up the waste. We are talking about a share but that share is not defined. There’s a cap. The cap is not defined. We don’t know how much the taxpayer will have to step in when it comes to liability either so you have all of these layers of many unknown extra sets of costs and yet we are being sold this on the grounds that it is going to reduce costs to the consumer in the long-term. Do you, firstly, think that stacks up and, secondly if you were to be designing a system to use subsidies more effectively with that end goal, would you end up with something that looks like this?

Keith Parker: I don’t agree. Caps, for example, are not defined under the Paris Brussels Conventions. There will be an increase in the nuclear liability on the operator from £140 million up to €1,200 million, so there is quite a significant increase-

Q176 Caroline Lucas: We don’t know the cap for the waste management though. That is for the insurance liability. I understand there is a cap as well on the share that the industry will share with the taxpayer when it comes to waste management. Do we know what that is? I have not seen a figure on that.

Keith Parker: No, but I think that the estimates that the operators have made of the decommissioning of waste management costs are quite a small proportion of the overall costs of nuclear so building up the fund to be able to cover those costs in the future should not be a difficult task during the 60-year operating life of a station. I think the benefits, and we have already alluded to this, is that once operating, a nuclear plant, as similar with renewables, has relatively low and predictable operating costs that, over the 60-year period of nuclear operations, should translate into lower prices for consumers as part of the fix.

Q177 Caroline Lucas: Would you say that would be lower than, for example, using support mechanisms for renewables? You think that supporting nuclear is going to be more cost effective than supporting renewables?

Keith Parker: I think what we need to have a more sustainable cost effective energy system is to have a mix and the mix should predominantly be low carbon. I think with nuclear, with its sort of base load qualities together with renewables, which are more variable in their output, it will ensure that we do have that more sustainable and cost effective mix into the future.

Q178 Chair: Mr Edge, did you want to comment on that?

Gordon Edge: No, I am staying well out of this one.

Chair: Mr Simpson?

Alan Simpson: Yes. I just wonder what we are all inhaling in taking part in this sort of discussion. I cannot understand why anyone in their right mind would want to subsidise old energy rather than new. I cannot understand why there is not a fairly radical degression rate that is built in to any form of market support here. I also question whether it meets any of the UK’s objectives, certainly about delivering energy security within the current decade and also about energy affordability in the decades that follow. So in relation to Caroline Lucas’s question about, are there better ways of using the £80 billion of lifetime price guarantees, the £14-15 billion loan guarantees for construction, the answer for me is absolutely and you only have to look at other parts of Europe to see how that is already happening.

The first, in a negative context, is that this is a huge investment, a huge public contribution towards yesterday’s energy thinking. At the end of the First World War France did not want to be vulnerable in the way that is was in the First World War so it took 30% of its defence budget and threw it into building the Maginot Line. It was a fantastic investment that would have been really relevant to the First World War and utterly irrelevant to the Second World War and CfDs for nuclear are the Maginot Line of energy thinking for the 21st century.

If the Committee members just take their own personal experience of phone systems. Some of us grew up when the telephone was the landline and as the lifeline now everyone carries a mobile phone around in their pocket and the telecommunications are much more versatile, they are quicker, lighter, brighter. Energy systems in the 21st century will be the same and that is the problem that nuclear has had in Europe because the impact of renewables into the European energy grid, where they have priority access for renewables, has really dramatically dropped the cost of wholesale prices for electricity, sometimes going into negative prices where producers have been paying up to €100 per megawatt to put electricity into the system.

Chair: I would quite like to just keep it just on the subsidy if you can, if you could just relate it to the subsidy.

Alan Simpson: If you are talking about the use of £14 billion of loan guarantees or £80 billion of revenue payments the UK would get much better value in building another couple of BritNed interconnectors to take advantage, in the next couple of years, of existing electricity surpluses. That is, if there is a crisis, what we are going to need to have access to. For two of those you could get them done at £500 million each and within 18 months to construct, which was the last experience. So in the short-term there are much cheaper and more sustainable solutions. In the longer term flexibilities of energy thinking is where the rest of the world is heading. The danger of this is that it is a huge subsidy that will be heading in the other direction.

Q179 Mr Spencer: Just briefly to pick up on your comment about what is new technology and what is old technology. Obviously we were milling wheat and pumping water with wind in the 18th century. We did not do too badly there until the 1940s. I don’t know. What is the new technology?

Alan Simpson: It is the energy source that is on the most rapidly rising cost curve and if you look at the performance of construction of nuclear power in an European or a north European context they are all way over budget and way over time and are being overtaken in the other direction by technology’s newer technologies whose cost curves are falling rapidly with the scale of deployments and also delivering huge boosts to innovation across other parts of Europe and we are not likely to see any of that. The danger is we may even find the migration of other production to other parts of Europe where it is just cheaper to produce.

Q180 Dr Whitehead: My final bit on this bit, and incidentally I do observe that there are no capacity payments available for interconnectors right now-but a minor point.

The EU state aid regulations, which the new nuclear deal will need to negotiate. Interestingly the previous regime, prior to CfDs, ie renewables obligation, was deemed effectively by a competition commission in the EU as state aid but was given a wayleave effectively on the grounds that it was a state aid that would bring about a non state aided form of energy supply.

I understand part of the issue of the EU looking at state aid will be the role of CfDs, which cover both renewables and low carbon but not renewable function of nuclear in the context of what was previously the arrangement on what would have been a wayleave for state aid. Do you anticipate any issues with the state aid examination that new nuclear will receive or do you think that the way that it has been pitched previously may well apply to new nuclear in roughly the way it did previously?

Keith Parker: You are right. The CfD agreement that was announced earlier this week will have to be assessed by another state aid authority so all I can say, and I am not an expert on state aid, is that what the Secretary of State said the other day that they are confident that there will not be an issue over this and that there will be approval, ultimately given, for this. I said to the Chair earlier that that is another step that needs to be taken before the final investment decision can be-

Q181 Chair: What discussions have you had with Brussels in respect to the state aid issue? You seem to imply it is a matter for the Secretary of State.

Keith Parker: Well, because it is a Government issue. It is for the Government to make the case to the Commission.

Q182 Chair: Sure, but I am asking you what negotiations you have had.

Keith Parker: I haven’t had any personally.

Chair: In your industry.

Keith Parker: No, our association has not had any direct discussions with-

Chair: Indirect?

Keith Parker: No, nor indirect. The Nuclear Industry Association has not been involved in that discussion at all.

Alan Simpson: What we do know is that Commissioner Oettinger wanted to include new nuclear within the legitimate state aid provisions of the current draft and that that has been thrown out. So we do not know what the exact wording of the final framework draft will be but we do know at this stage that is the decision that has been made. I think the UK may well wish to appeal but I think there is going to be a real struggle in getting this through and we need to take account of not what the EU has said in positive terms but we need to understand what they have already thrown out.

Gordon Edge: Yes, I just wanted to point out that there is a kind of plan B on this that DECC can segregate out the renewables and the nuclear bit if it appears that the nuclear stuff may derail the passing of the EMR package as a whole. It may well be that the nuclear one, which is going to be treated, as Alan Simpson was saying, differently to the renewables part of this because of the way the new state aid guidelines is coming forward. It may be that the nuclear part takes quite a bit longer to analyse.

There is also one other point I wanted to make in terms of one of the ways where the Commission might be looking at this, as to whether it is okay, is the comparability across the deal that is on the table for nuclear as it is for renewables. We have not seen the full detail of what is agreed for Hinkley C. What I have seen in the press release leads me to believe there may be some key differences around change in law provisions and risk reduction. We do not know how long the target commissioning window around that date has been set for this project. For renewables, it is going to be one year, after that you start losing your term of your CfD if you have not finished it by then. We do not know how long the window is going to be for Hinkley C and we do not know the terms of the guarantee that is being talked about with Treasury. So I think we need to look at the detail of that deal and go, "Well, is it really comparable to what is being put on the table for renewables as well?" I would be very keen for it to be comparable but it would be very difficult to work out sometimes what it is.

Q183 Dr Whitehead: Are you saying that things like investment instruments, which bring about a CfD, can be lost if a window is not adhered to in terms of that application?

Gordon Edge: The system that DECC is setting up for the contract for difference says, "You have a target commission date." That is where a target commissioning window comes in.

Q184 Chair: So what will the date be?

Gordon Edge: For Hinkley C they said it was 2023. Now, if the project does not start within the window around that date then the contract is automatically started and the clock starts ticking, in this case 35 years, in the renewables case 15 years. So how long that window is, is going to be a key parameter in the risks involved in the construction.

Q185 Dr Whitehead: Do you simply lose the end of your CfD period or do you lose the investment instrument advantage that has been gained by getting CfDs in advance of you using them?

Gordon Edge: You lose time of support. If you are not fully generating by the time the end of the target commissioning window-

Q186 Dr Whitehead: So you lose support at the end of your contract?

Gordon Edge: No, it eats into the front of the contract until such time as you start and that contract would be deemed to be-

Q187 Dr Whitehead: Sure. You don’t get the underwriting if you are not generating but if you have obtained an investment instrument, which is essentially a subsidy because it leads to CfDs-

Gordon Edge: You will get a shorter term of it if you commission after the end of the target commissioning window.

Keith Parker: The fact that the CfD only takes effect once you start generating is an incentive to meet that target because then you start earning money on the investment.

Q188 Dr Whitehead: If, say, you did not generate for four years-let us say you had an investment instrument that said, "This instrument will become tenable in 2023," for example, but you did not start generating until 2027, would you then hold that investment instrument in a cupboard in the meantime and the only effect at that point would be you would degrade a certain part of the end of that instrument, or would someone come up to you at some stage and say, "Well, hang on a minute, you are hanging on to this investment instrument and no one else can get into the market because you have it and therefore we are going to take it away"?

Gordon Edge: There will be a right to terminate that instrument at what is known as the longstop date, which will be a certain period after the end of the target commissioning window. For renewables it’s one year or two years. We have no idea what that period is for the Hinkley C CfD

Keith Parker: I cannot enlighten you on that date.

Q189 Mark Lazarowicz: A question for Mr Edge. What impact do you think the CfD arrangements for Hinkley C will have on the renewables industry particularly if they are replicated with similar agreements with other power stations in the future?

Gordon Edge: It depends how big the budget under the levy control framework is. All the money-there is a zero sum game for that, what is paid to nuclear is less for anything else. So it really depends when and by how much Government sets a budget for beyond 2020. As things stand even though the Hinkley project is meant to start in 2023 it still has to be accounted for within the budget that leads up to 2020 because at the moment we cannot assume that Treasury will allow any growth in that budget after 2020 and therefore you sterilise, and my back of the envelope says about £1 billion a year, round number, from that £7.6 billion that Government has set aside up to 2020 per year to pay for low carbon generation.

Q190 Dr Whitehead: Forgive me, that £7.6 billion includes accumulation from previous years.

Gordon Edge: Absolutely. It is in that year the support is allowed.

Q191 Dr Whitehead: So sterilising £1 billion is sterilising all the new entrances and-

Gordon Edge: It could do if they fail to set further budget beyond that.

Q192 Chair: That is a function of the definition of subsidy to cover both renewables and nuclear in order, presumably, to make the case for both from the Government’s perspective?

Gordon Edge: It caps the amount that Government is going to pay out for low carbon generation as a whole, yes.

Keith Parker: My understanding of Hinkley Point C, because it falls outside the current levy control framework, is not coming out of that-

Gordon Edge: I have had it from the Treasury’s mouth myself that they will not do that until such time as they increase the budget post 2020 and there is no guarantee they are going to do that.

Q193 Mark Lazarowicz: That is obviously a point we can pursue with a Minister in a future session. That is just one plant at Hinkley C. If there are more then presumably there will be other effects on the total available for low carbon energies.

Gordon Edge: I think it would become increasingly untenable for Government to say that comes out of the £7.6 billion in 2020 when we are talking about target commissioning dates that will be 2025, 2027. It starts looking increasingly ridiculous so there will become a point where the cognitive dissidence in this breaks and they have to say, "Okay, we will be increasing the budget beyond 2020. We won’t tell you by how much now but just work on that assumption." They will have to have, eventually, if they are signing loads more deals that far in advance.

One thing I would say though is this is an indication that Government is taking a much longer term view of the nuclear side than it is for renewables. We are being given some foresight at 2020 but they are signing deals for nuclear for 2023 and potentially beyond. So we think that is a bit of a mismatch in terms of commitment to the different sectors and one that we would like to see much more commitment to our sectors beyond 2020 in order to have parity.

Alan Simpson: Can I just say this is a uniquely British approach to the way we are trying to delivery energy transformation? Since leaving Parliament I have taken various groups, including politicians, to look at what is happening in Germany in terms of their energy transformation programme. When the Treasury response document recognises that pretty much everywhere else in Europe has moved towards a feed-in in tariff framework, which does not count as a subsidy. It does not count against public expenditure and that there is a European court ruling that supports that and yet the UK Treasury insists that it has to be put in a levy control framework and it has to count against public expenditure. When confronted with the scale that Germany, in particular, is using it differently UK politicians have tended to say to their equivalents in Germany, "But how come there are different rules that are being made for Germany that do not apply to us?" and the answer that they get is, "Because Britain, by and large, just will not take yes for an answer." The question, can we do this without it counting against public expenditure is an unequivocal, yes. It does not have to come within a levy control framework and it can be entirely a self-financing mechanism within the energy sector accounting.

That was the original intention in the 2008 Act that we put through, which then got hijacked into a fixed budget framework in the settlement in 2010 about public expenditure and we have not escaped from that. On Gordon’s points about this, we will continue to see that whole transformation agenda locked into a fixed budget with a diminishing slice of those resources being available for genuine energy transformation.

Q194 Chair: Okay. I presume that is a matter for us to take up with the Treasury Minister. Just before we leave nuclear can I just ask Mr Parker one quick question in terms of subsidy? In the instance, for example, construction costs of new nuclear carry take longer to build than what is anticipated, and that is covered by Government guarantee, if the costs do overrun will that be something that we will be required to pay back or will it be received by the companies concerned as a grant? In that circumstance, will that then count as a subsidy?

Keith Parker: EDF have made it clear, and this came out in the press conference on Monday, they will take the construction risk entirely.

Q195 Chair: The Government will not?

Keith Parker: No, the developer takes the construction risk. The interest-

Q196 Chair: Even if it overruns?

Keith Parker: Yes.

Q197 Chair: There is no Government finance to cover that?

Keith Parker: There is an infrastructure guarantee that is available to EDF, which would be available-

Q198 Chair: So is that part of the subsidy?

Keith Parker: It would be available if the investors were to default on the debt financed at-

Q199 Chair: Would you count that as a subsidy?

Keith Parker: Again I go back to the point that the infrastructure guarantee is available across technologies and going back to the definition of "no public subsidy for nuclear" it was unless support measures are available across technologies. So yesterday, for example, there was infrastructure guarantees announced for a range of renewable technology. Drax has received an infrastructure guarantee for the transformation of that station to biofuels. So within that definition that the Government has set down, no, I would not regard it as a subsidy.

Q200 Chair: Does anybody else wish to comment?

Gordon Edge: I would, in the same way that I would regard the CfD as a subsidy. It is a form of support and we need to be clear about that. I think it is an entirely justified support and one that uses the Government’s balance sheet in order to bring down costs and I think that is entirely good but it is also the case that Hinkley C will be taking about a quarter of the entire budget for this programme, which may be a little strong weighting for one project.

Q201 Chair: So it is the scale of it that you would have a concern about?

Gordon Edge: I think it is disproportionate to put that level of the budget into one project.

Chair: We must move on.

Alan Simpson: I might just like to look at the Drax deal because within the sector there are some concerns about just how much of an underwriting Drax has been given and what rate of return they are making on this in order to, firstly continue to burn coal at a large scale and not in an abated way and, secondly also to use biofuels at a greater scale than the UK produces so that the environmental impact of this is somewhat open to question.

Chair: We must move on

Q202 Peter Aldous: At the outset I will just declare an interest; I do have interests in family farms where renewable energy policy is being pursued.

Traditionally there are three justifications put forward for energy subsidies, to protect and support infant industries, to come forward with pro-poor policies and to protect industry from foreign competition. In your opinion, which should carry any weight? I might just add to that and say, perhaps, that the situation does change over time.

David Odling: Maybe I can come in here? We have no difficult with infant technologies getting support. Just about all forms of new technology in some way or another have benefitted and that is fine. Of course the question is, when does that support run out and when do they have to stand on their own two feet? Our view is very simple, as soon as possible and quite a lot of it, of course, comes out of academia and that kind of thing so inevitably has a hefty part of public money behind it in any event but some of it is industry sponsored as well so there is a bit of both in there.

Beyond that we believe in market pricing, and listening to all the evidence that has just gone through over the last 20 minutes, in some sense it is astonishing to my ears because the price of our products are determined in the market and we live by the risks of those. We think technologies need to stand on their own feet as quickly as reasonably possible.

Emma Hughes: I think from our point of view we are not against subsidies per se. What we are against is harmful subsidies. Subsidies have a useful role to play as a tool to transform a market and that is where I think subsidies can be really useful. I think as well what would be called the pro-poor subsidies also have some use and I think better targeted consumer subsidies could be useful for alleviating the very real problem of fuel poverty. The problem at the moment is that we have incoherent subsidy system, which means there is a roadblock to stopping the market transformation that we need towards a low carbon market and that is because of this incoherence between the amount of subsidies that go into renewables and fossil fuels.

Alan Simpson: I agree with Emma, and I would just say that in addition to the three points that you listed I would add a fourth, which is, do they deliver an open sustainable and accountable energy market? The difficulty is that what we have at the moment is that they fail most of those tests. That there are much better ways of doing things and some of our European partners are very good at leading the way on that. I know in my submission I pointed out that Germany, over the last 20 years, has delivered an average of 27% GDP growth and a 24% reduction in greenhouse gas emissions. They are also delivering 400 megawatts of energy savings per month in their approach as to how to raise the energy efficiency of their build environments and that is really pro-poor at a time when people’s energy bills are running away beyond their pockets. So it is not that those principles are wrong, it is just that we have got some really lousy mechanisms for pursuing them.

Gordon Edge: I would certainly support the idea that there is a fourth leg, which is dealing in market failures, particularly environmental. Coming back to the point about supporting industries, I think one of the problems we have is that misalignment between the environmental market failure support and the industrial strategies. We are finding a mismatch between what DECC is trying to do through EMR and in 2020 for offshore wind and the very welcome offshore wind industrial strategy that was led by BIS and DECC were involved. We do not feel that they are working together along the same lines and we would very much welcome that those two were made more coherent.

David Odling: Just to add, if I may, on the question on pro-poor. That is social policy, which obviously is a central part of Government’s activity and certainly we see it as more aligned towards social policy to deal with those specific groups of people.

Q203 Peter Aldous: So that should be funded out of general taxation?

David Odling: It is at the moment and to encourage energy efficiency in the homes that are ill served, particularly if they are heated by electricity, which is far and away the most expensive form of heating there is at the moment, which is what should be done. It is a social policy in our view.

Q204 Peter Aldous: Where subsidies are used to support infant industries and new technologies, and you did touch upon this, Mr Odling, how long should they last? You said as soon as possible. Does anyone else have any views on that?

Alan Simpson: Again, for me the most useful template and where most of the learning has been done on this is in Germany. They have a different matrix for different technologies. They have a built-in presumption about the rate of efficiency gain per year and they have a target of installations that they would then say, "If you exceed the three gigawatts of renewables per year then the degression rate increases by 3% per gigawatt," and they have a regular independent review process so that in terms of runaway success of the growth of maturity of that technology, which can be accounted for within the process.

Other elements of the new technologies will not mature at the same rate or on the same scale so that the review process has a longer tail to it. Maybe for those who play golf that is where having a set of golf clubs rather than a single one makes sense but the key for me is that they have set very ambitious targets and the expectation of degression rates combined with regular independent reviews, which can be as regular as quarterly.

David Odling: Can I just come in there? This idea that Germany is the paragon of all virtues I just find slightly difficult to swallow. Certainly from our industrial contacts both here in Germany and in Poland there are all sorts of shortcomings that I hear about, not least the total cost of what is being done, so I just think there is a little bit of a twist in the balance here.

Q205 Chair: Sure, when we are talking about costs we are trying to understand what the costs are on a level playing field, are we not, which is why we are trying to get to the heart of what does or does not amount to a subsidy?

David Odling: Indeed. There are some very big numbers in Germany on that front and it is affecting not just Germany but it is affecting its neighbouring states as well. You talk to the Poles and they are not at all happy some of the time. I am just trying to shift this-

Q206 Chair: Sure, but given that this a Select Committee that looks in a cross-cutting way across different Government Departments, on this issue about ensuring the supply of energy, the issue about securing energy efficiency, there is also the issue about the carbon limits, and the real issue is how to use the subsidy for a good purpose that will balance all of these three things.

David Odling: I understand and agree with that entirely, and we address that in our economic report.

Q207 Chair: Other European companies may have a different understanding of how much carbon may be consumed for example, which would put a completely different slant on it.

David Odling: Yes, I was just trying to get away from this view that Germany is perfection.

Chair: I am sure if you want to give evidence on-

David Odling: I don’t believe it is. That was the point I was making.

Chair: Perhaps we will leave that there. Mr Aldous, have you finished?

Q208 Peter Aldous: No, I have a couple more questions. Do the panel think there are any technologies that have been subsidised too long or, turning the question around the other way, are there technologies that have not been subsidised long enough?

Chair: Who wants to go?

Alan Simpson: I think pretty much the entirety of our existing energy sector has, as its fuel source base, been over-subsidised for overlong. In terms of new technologies I think that we have yet to really take seriously the national grid assessment of four or five years ago where they said that if we are serious about biomethane from waste we could deliver up to 49% of our domestic gas needs by 2020 but it would be on a much more decentralised production and distribution basis than we currently have.

The experiments in Newcastle in relation to geothermal-we have only begun to paddle in those, and I suspect that is one of the technologies with a longer tail to it. We also have not looked at other transformational issues, for instance, citizens having the right to reduce their energy bills by socialising the ownership of the local grid, because we have done a lot on energy production but not on the distribution. In large parts of the United States now, and other parts of Europe, people are looking at decentralised generation and decentralised distribution and selling themselves non-consumption in a market that has traditionally only ever understood more consumption. So those are the spaces that I think, as a society, we really have not begun to examine properly.

Emma Hughes: You won’t be surprised to hear that I think the oil and gas industry have been subsidised far too long. In 2009 at the G20 the governments committed to phasing out fossil fuel subsidies and there has yet to be any clear decisive action to show that happening and that is supposed to happen by 2020. The IEA called dirty energy subsidies, "The appendicitis of the global energy system that must be removed for a healthy energy economy", and there needs to be urgent action for that to happen.

Q209 Peter Aldous: Mr Odling, do you want to come back?

David Odling: Yes. I think we have to be careful. I understand perfectly where you are quoting from but you are talking worldwide there. I am assuming we are talking about the United Kingdom.

Q210 Chair: We are talking about the United Kingdom but clearly our policies do have an implication for wider international policies. I think sometimes it is very difficult to separate out what is international, national and local but please do go ahead with your comments.

David Odling: Yes, subsidies in some countries are very widespread for fuels. It is no secret that some fuels are extremely cheap in some parts of the world but not here. Western Europe or the EU generally is not a place that offers the fat subsidies that are being referred to, but some parts of the world, yes they are. Some countries, of course, are finding them unsustainable, the Indians for example, the Indonesians, so yes, but that does not apply here.

Emma Hughes: Just to come back to that and talk specifically about the UK the OECD found that the UK Government support for the fossil fuel industry had increased by £500 million to £4.3 billion between 2010 and 2011 and this does not include some of the indirect subsidies that we spoke about in our submissions.

Chair: We are going to have to draw our questions-

Q211 Peter Aldous: I have one quite important question. There is one technology we have not spoken about today, shale gas. Could you perhaps view that as an infant industry in this country and on that basis could you provide it with subsidies? Over to you, ladies and gentlemen.

David Odling: I will start if you like.

Chair: We need quick answers because-

David Odling: It is clearly an industry that, in this country, is in its very early stages so we don’t yet know whether it can work economically and so on. It has to be done satisfactorily from an environmental point of view, which we have to take as a given. We will not know for some time until we have drilled some wells and discovered the data of what is going on down there. The only way we are going to learn is to drill wells and the more wells we drill the more data we will get, the more we will be able to understand what the genuine possibilities are but I don’t think anybody is looking for a subsidy per se. In other words they are not looking to have their costs helped in one way or another. They are paying for the costs themselves, which is what this industry does.

Emma Hughes: Shale gas should not qualify for a subsidy both because it is unsustainable; it is a high carbon technology but also because it is unlikely to substantially transform the energy market. If that is what we are looking for subsidies to do shale gas is not a technology that is going to do that. Just yesterday the Government’s former chief adviser, Sir David King, said that the UK would need 3,000 shale wells per year to make a real difference to energy supply. This raises serious doubts about the technology’s ability to transform the energy market because that just will not be publicly acceptable.

Chair: We may return to this in a moment. I am just very conscious I need to bring Caroline Lucas in before 4 o’clock.

Caroline Lucas: Don’t worry, it is music to my ears.

Chair: All right, so who wants to comment on that response?

Q212 Peter Aldous: I think it would be a mistake to assume that shale gas here would have the same sort of transformational impact that it has done in the States and certainly it would be a mistake to divert us away from the direction of travel that we have already embarked on, towards low carbon energy mix on the assumption that shale gas is going to change everything.

Alan Simpson: On this Keith and I are absolutely at one, shale gas is not sustainable. It is not economic. It is not going to reduce people’s energy bills, and if my reading of things is correct I am not sure that politicians will find themselves electable on a pro-shale platform.

The key thing that I would direct the Committee’s attention to is that earlier this year Exxon ended their trial drillings in Poland. Their chief geologist basically turned around to a conference in Berlin and said, "Look, the problem here is not politics, it is not cost, it is the fact that some so-and-so a million years or so ago scrunched Europe and it is the geology that stuffs us. In the States we have big flat tectonic plates and lots of space and no one gives a stuff about releases. We can get it out cheaply. In Europe we cannot and it has an 85% depletion rate in two years and without subsidy it is a nightmare to try to get your money back." That is even before you get to this scale of drilling that would have to take place in the UK and the transport movements and the discharges on land from the fracking fluids and the uncontrolled releases. It not an answer to anyone’s energy crisis and it will only make the crisis worse.

Q213 Dr Offord: That was-

Chair: Okay. Caroline, we will let you ask your question.

Caroline Lucas: Yes, it is a question of platform essentially. You say that the support that the UK export finance provides for energy projects abroad should be considered as a subsidy and I wondered if you could tell us what the basis is for that.

Emma Hughes: Yes, sure. So the UK offer billions of pounds of public money every year as both credit lines and insurance for UK companies who are exporting overseas and this includes guarantees for fossil fuel projects. We reference in our submission a range of these projects including £1 billion credit line for ultra deep drilling by Brazil’s state company, Petrobas. If you look at both OECD and IEA definitions of what they include as a subsidy, export credit guarantees would clearly be included and categorised as this. Guarantee is a very specific type of subsidy and there are methodologies available to estimate the size and the value of guarantees as subsidies.

Another point is that the UK have not implemented the coalition agreement not to use export finance to support dirty fossil fuels. This has been shown both by the loans for deep sea drilling to Petrobas but also to coalmining in Russia.

Q214 Chair: Thank you. Does anyone else want to comment on that?

David Odling: It is interesting that according to the evidence submitted by the UKEF they are a net contributor to the Treasury, so you could say they are investing public money to make money for the public purse. I think the second point perhaps worth saying, certainly as far as exports of oil and gas, goods and services are concerned from this country where we have a substantial business amounting to about £7 billion per year, in most international trade if you are involved in projects you will not get export orders unless there is some form of guarantee offered. It just will not happen. It is not something that is new. It is not something that we are uniquely subject to. It is something that all countries are involved in. So this is not just a fossil fuel question, this is a much wider international trade question.

Gordon Edge: In some ways I would echo that in that we, in the wind industry, see it from the other side in that the export credit agencies of particularly Denmark and Germany, UKF and Hermes, play a very big part in financing wind projects around the world and indeed in the UK on the basis of products of their countries’ industries being used in those projects. So I do not think there is anything evil about export credit guarantees and finance but you can use it for particular technologies over others.

Keith Parker: We support the principle of having export credit available. One of the ambitions that the Government has in relation to the new nuclear programme is that it will help to revive the UK’s nuclear supply chain and give it opportunities to work in overseas markets where nuclear is also being developed. I think the availability of credit would be important in enabling that to happen.

Alan Simpson: I just think that the question is, what do you get out of it? For me the real value of this inquiry from the Committee is that it allows a proper focus, which never happened in the entirety of my time in Parliament, on where the UK wants to be in 10 years’ time and 20 years’ time. That is the period when energy markets will be transformed on the same scale that telecommunications have been transformed. The question is whether the current mechanisms allow us to be players in that or laggards.

Q215 Chair: Do we have any further questions?

Caroline Lucas: Only to say that, it is not exactly a question sorry, but I think this brings us back kind of full circle, does it not, in the sense that we are talking less about the mechanisms and more about the objectives of the mechanisms? I was only going to quickly ask if there were time, but maybe there is not, to ask Emma Hughes about her views of the submission from the UK Export Finance Organisation because just from my quick scanning they are completely upfront about what they are giving the money for, is things like oil and gas exploration in Brazil, Nigeria, petrochemicals in Saudi Arabia and the question then comes back to what extent is that delivering the transformation in our energy system, I guess that we have been saying that we want?

Emma Hughes: Just to come back on that I think that is exactly right. It is not delivering the transformation that we need. There are very good reasons that the coalition committed to not using export credit to continue financing fossil fuel projects. I think also to comment on her submission, another big problem with export credit is the lack of assessment of projects that they are guaranteeing. UKEF have only conducted impact assessments on six of the 26 loans for energy projects that they list in their submission and this includes a lack of assessment on both environmental and human rights issues. The reason for this is because the OECD common approach is, which UKEF reference in their submission, "This does not require any impact assessment if the support is a project bond rather than an export credit, if the loan is for less than two years or if the loan is for less than SDR 10 million." So what this means is that many of the projects are not being properly assessed and that is why many of the problems that we reference with the loans that they have given, in our submission, occur.

Q216 Chair: Who would you say would have the responsibility for doing that assessment?

Emma Hughes: I think that the UK Government has the responsibility to make sure that those loans are properly being assessed. In particular I would put that in the remit of BIS.

Chair: With BIS?

Emma Hughes: Yes.

Chair: Anyone wish to add anything at all? In that case I think we have come full circle. I think we have covered a lot of ground from five very expert witnesses. So I thank you all very much indeed and we shall continue with our inquiry. I am sure you will read our recommendations with some interest so thank you all very much indeed.

Prepared 29th November 2013