To be published as HC 61-iv

House of commons



Environment Audit Committee

Energy Subsidies in the UK

Wednesday 30 October 2013

Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Evidence heard in Public Questions 217 – 314



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Oral Evidence

Taken before the Environment Audit Committee

on Wednesday 30 October 2013

Members present:

Joan Whalley (Chair)

Peter Aldous

Neil Carmichael

Martin Caton

Katy Clark

Zac Goldsmith

Mark Lazarowicz

Caroline Lucas

Dr Matthew Offord

Mr Mark Spencer

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Rt Hon Michael Fallon MP, Minister for Energy, Department of Energy and Climate Change, Patrick Erwin, Head, EMI Strategy and Programme Office, Department of Energy and Climate Change, David Godfrey, Chief Executive, UK Export Finance, Helen Dickinson, Deputy Director, Environment and Transport Tax, HM Treasury, and Josceline Wheatley, Acting Head, Climate and Environment Department, Department for International Development, gave evidence.

Q217 Chair: I would like to start by giving a warm welcome to the combination of witnesses that we have before us. I particularly thank you, Minister, for coming along with your colleagues and officers from other Departments. We have been looking at the whole issue of subsidy over the last few months. For those of us who were in Prime Minister’s question time earlier, the debate is very much a current and timely one.

Can I start by trying to understand where the Government is now in respect of the way the debate about energy and energy prices is linked to the green regulations and where we are, given the Prime Minister’s announcement that we need to roll back some of the green regulations and charges that are putting up bills, and the fact that now there is going to be a review? I wonder if, first of all, Minister, you could perhaps give some clarification about the review that is under way and where we stand on this.

Michael Fallon: Thank you very much and thank you for the invitation this afternoon. Yes, I am very happy to clarify this. As a Coalition Government we are constantly watching to see how we can reduce the pressure on the budgets of hardworking families. You will recall that we, much earlier, froze council tax. You will recall that we continue to freeze fuel duty and given the recent increases in wholesale prices and the quite dramatic increases we have seen from some suppliers I think it is only right that we look, too, at the total fuel bills being paid by our constituents, so we are looking very hard at that. It is not simply a question of the so-called green regulations, which I think you referred to them to as. We are looking at these bills across the board to ensure that there is sufficient competition in this market to ensure that network costs are no higher than they need to be and that where there are additional levies imposed on top of the bill these are as fair and as reasonable as necessary.

Q218 Chair: So where does that leave the greenest Government ever agenda?

Michael Fallon: The what?

Chair: The greenest Government ever agenda.

Michael Fallon: We have green obligations, of course. We have legal obligations to the European Union. We have other international obligations but we also have to ensure a securer energy supply for our people in the United Kingdom, which means more home grown energy, and we have to make sure that we keep the bills affordable. So we have to do all three things at the same time.

Q219 Chair: So do you have any idea how much money you would be shaving off energy bills as a result of the process that has started? Could you give us some idea of the timetable for the process as well?

Michael Fallon: So far as the amount is concerned we have not set a target of what we have to get off bills. I have simply drawn your attention to the very steep increases that we have seen and any responsible Government obviously wants to see what it can do to keep those in check or to mitigate them. So there is not a specific target but certainly we want to bring help, not least, to those who need it most and we have a number of schemes for doing that. We want to make sure they are working properly.

So far as the time scale is concerned we are looking very hard at all this at this moment and the Secretary of State hopes to make his annual energy statement to Parliament very shortly and there may be some detail there. Of course we then have in front of us the next fiscal event, which is the autumn statement.

Q220 Chair: Could you set out for the Committee the proportion of the bills that relate to the green agenda in terms of the information that was provided by the Climate Change Committee?

Michael Fallon: The total is around 9%. I can read out the actual figures if somebody has them to hand. Yes, the total is around 9%, which is taking Government policies in the round, both energy policies and-

Chair: Is that what relates to the gas bills? Is it the 9% that relates to the gas bills?

Michael Fallon: No, to the overall fuel bill, the dual fuel bill, and that is made up of 5% contributing towards energy efficiency and helping the very poorest households and 4% going towards supporting home grown low carbon sources of energy. You might classify both of those as green.

Q221 Chair: How do you square that with the statements that we have had from the Deputy Prime Minister suggesting that the review that you are about to undertake may result in the money being moved over to Her Majesty’s Treasury? How is this going to be funded, the green incentives that are needed for the decarbonisation agenda?

Michael Fallon: We have not come to any conclusions. We are looking very hard at each of these individual components but we certainly have not come to conclusions. Now, one option being canvassed, and not just by the Deputy Prime Minister, I have seen it canvassed more widely, is that you move some of these levies over towards general taxation but that is only one option.

Q222 Chair: Okay. Has that been discussed inside the Treasury?

Michael Fallon: If I may, I do not think we ought to draw individual officials into this. I am here to answer for the Government as a whole. We are looking at each of these levies and all the various options associated with them.

Q223 Chair: I just think it would be very helpful to hear from the official in the Treasury how this process of cost cutting on the green agenda is being taken up at the stage when the review is being planned.

Michael Fallon: I hope you will not mind if I resist that because I am here to speak for the Government as a whole.

Q224 Chair: May I ask what the officials from the other Departments are here to speak for, if they are not able to speak?

Michael Fallon: I gather you wanted some specialist evidence on the taxation of North Sea oil and you wanted some specialist evidence on the treatment of subsidies in relation to UK export finance.

Q225 Chair: We are concerned about subsidies as a whole, so clearly if there is going to be a change to the bills, if they are not going to be met through the consumer by the energy companies then the question arises, as indeed the Deputy Minister said, as to how this extra expenditure for the green commitments that have been given-and we have signed up to legally as part of the Climate Change Acts-is going to be found from alternative sources. That is what I had rather hoped that maybe the official from the Treasury could help with.

Michael Fallon: I think that is premature. We have not reached any conclusions.

Q226 Chair: With all respect I am not asking for conclusions. I am asking for the process whereby these are going to be discussed jointly and with DEFRA involved but also with DECC and with the Treasury because there are serious issues, are there not, if we are not going to be able to meet the green commitments?

Michael Fallon: These are serious issues but they are discussed collectively within the normal process of Government and that involves a number of Government Departments including my own.

Chair: Okay. So I take there is no response from the officials on that.

Q227 Dr Whitehead: On the most recently declared average dual fuel bill, I think it was suggested last week that £112 of that bill would be made up of what are generally regarded as green or energy efficiency levies or incentives, such as eco renewable obligations, carbon floor price, FITs, warm home discounts and smart meter rollout. Some of those are what you might call underwriting subsidies in the perhaps more straightforward sense, for example on renewable energy through the renewables obligation. Others, such as carbon floor price, are essentially a tax that goes straight to Treasury. Others are assistance for energy efficiency or indeed for fuel poverty or elderly people’s warm homes.

In terms of the review that is being undertaken do you have any preference for those that might be at the forefront of the review that would be more likely to be reviewed in terms of the policy commitments that the Government has? On the basis of that, what would you see are the main questions to be asked about how those changes might be successfully completed, for example, bearing in mind that carbon floor price is in the Red Book over the next three or four years with a very steep rising cost per tonne? Have you made any calculation as to how that might be replaced in the Red Book for future Treasury management purposes?

Michael Fallon: Well, we are looking at all these things now and I am not taking any particular one of them as a preference or priority. The point really is three-fold. They are now 9% of the bill. You might regard that as very little but of course the dual bill has increased, wholesale prices have increased, so it is now a sizeable element, £112, as you have pointed out, of the bill so that is a large sum.

Secondly, of course, it is a sum that is forecast to increase. These levies, as you know, better than anybody, Dr Whitehead, are due to increase over the next two or three years and grow even more. Thirdly, I think it would not be right to exempt these green levies from the other pressures that we are exerting on the retailers and on the transmission and network costs. It would not be right to say, "You cannot possibly look at these." So we are looking at all of them. Now, adjusting any of them is not easy. Adjusting any of them has implications. Adjusting the carbon price floor has implications for the Revenue and indeed others have implications across the levy control framework and so on. So there is no easy win here but I do not think we can start by taking any one of them completely off the table. We have to have a good hard look at each of them.

Q228 Dr Whitehead: Indeed. I was not suggesting that, nor do I gather from what has been suggested so far about a review, any will be taken off the table. I was concerned to find out what the particular principles of an investigation might look like in terms of what is at the centre of the table and what is towards the edge of the table, particularly in terms of the knock-on consequences of certain moves on certain levies as opposed to others. I wonder whether at this stage any such principles have been drawn up, or whether there is a very general review under way. As far as Treasury is concerned, for example, I would have thought that, if certain levies are being moved into general taxation, which would be a substantial cost to Treasury, or certain levies are being taken off, which would be a substantial cost to Treasury because of the lack of income coming in, it would be centrally involved in, perhaps, discussing with DECC what the consequences of that might be, for example, in terms of whether DECC might make up the difference from its own budget or whether Treasury would take it out of more general funds. Therefore, I thought that might concentrate the discussion on how those levy changes might be spearheaded. I wonder whether you have had any such thoughts and whether you have had any discussion with the Treasury along those lines.

Michael Fallon: If only DECC had the kind of budget that might help to sustain the kind of changes that are being discussed. We do not in DECC. We have a tiny budget and the vast majority goes on nuclear decommissioning costs.

The difficulty with laying down any sort of overarching principles for the review is all of these are slightly different, some of them are over time periods, some of them apply to the most vulnerable and nobody would want to see that kind of support withdrawn for the people we really want to help the most. Others of them are much more general and have applications to industry and, of course, to the Revenue as well. So it is quite difficult to lay down a general principle for the review. All I can say, I am afraid, and I keep repeating this, is that we are looking very hard at all of them.

Q229 Chair: I will bring in Zac Goldsmith but just before I do, is there not a danger that the whole commitment the Government has to the agreed agenda and to decarbonisation targets is just going to unravel as a result of the Prime Minister’s review?

Michael Fallon: No, I do not accept that. We have legislation almost through Parliament now, in its final stages in the other place. We have a significant degree of interest after publishing the draft strike prices from the low carbon and renewables industry. A healthy number of applications have now been submitted under the FID enabling process and last week we finally signed heads of terms with EDF to have a new generation low carbon nuclear plant built, so I do not think there is any danger-

Chair: We will move on to nuclear in a moment.

Michael Fallon: There is no danger to our agenda and I think I am right in saying in the last quarter renewables contributed some 15% of our electricity.

Q230 Chair: You would accept that the parts of the bill that are there to encourage investment in green commitments is as a result of the need to get the energy companies themselves to reduce the amount of carbon that they use.

Michael Fallon: Certainly.

Q231 Chair: You would. Can you then clarify whether the review that the Prime Minister has set up will come before or after the Government’s response to the Fourth Carbon Budget Review?

Michael Fallon: As I indicated we are looking hard at these things at the moment. We will have the annual energy statement to Parliament by the Energy Secretary, I hope, later this week. The next fiscal event after that is the autumn statement and I cannot go into any further detail on the timetable other than that.

Q232 Chair: But does that not leave an awful amount of uncertainty about the current situation?

Michael Fallon: No, I do not accept that. The autumn statement is on 4 December, which is only five weeks away, and we are seeing more and more investor certainty now as we put the legislation in place. We have published a lot of the draft secondary legislation with a big consultation document about four weeks ago. The draft strike prices are out there and the test is, is there interest in the FID enabling process, the investments that come forward between the ROCs and the new contracts for difference? Yes, there is.

Q233 Zac Goldsmith: You have described this 9% figure. More than half relates to energy efficiency, which is about reducing the cost of living. The remaining 4%, I am guessing, is largely non-negotiable in the sense that at least part of the 4% is made up of many contractual obligations the Government already has in relation to the feed-in tariff and so on. So the question would be, is there not a chance, a risk, the Prime Minister and the Leader of the Opposition are inflating or exaggerating the opportunities of reducing people’s bills in the context of these green measures and should they not be looking elsewhere?

Michael Fallon: Some of these items are relatively small. I think you are right to point that out, although they are scheduled to increase over the next two or three years. So I think it is worth looking at them. But that is not all we are doing, we are looking very hard at the wholesale costs of energy and how that is being passed through into prices. That was the subject of intense scrutiny in another committee yesterday. We are looking very hard at the transmission costs. We are looking too at the network distribution costs. We are looking at all the pieces that go together to make up this bill. I simply do not think it would be right to isolate this 9% and say we could not look hard at that as well.

Q234 Zac Goldsmith: Would you not accept that there is at least a risk? From the point of view of people looking in at Parliament, politics, and this discussion that we are all having in relation to energy bills, it does appear that the big six energy companies have managed to completely set the agenda so that all of us are looking at what is, in real terms, a less significant part of the bill-the green measures, much of which are non-negotiable, because these are deals that have already been done-as opposed to looking at the structures and the mechanics that have led to these enormous monopolies being able to engage in what many people regard to be bullying behaviour. It seems to be that we have allowed them to set the agenda and both the Prime Minister and the Leader of the Opposition have just rolled over and engaged on the narrative set by those energy companies. You would agree there is risk of that, would you not?

Michael Fallon: I do not think they should be allowed to get away with that. I agree with you. They should not be allowed to get away with that. The spotlight that is now being placed on the big six is encouraging people to dig deeper into their costs, whether they are passing through these wholesale costs in the way that they say they are. You will know the Energy Secretary has written to each of them demanding much greater transparency in the way that they discharge their various obligations, like the ECO. I expect the regulator, too, to be asking tougher questions of the big six.

The current interest in the big six and the dramatic price increases they have announced has also focused attention on the issue of competition and has, perhaps, highlighted what many of our constituents might not have realised, that there are 15 smaller companies out there. Therefore, it has concentrated minds on what we need to do to encourage more transparency, simplification of tariffs and ease of switching. I expect the Secretary of State to say more about that in his annual energy statement.

Q235 Dr Whitehead: On the question of the recent agreement that was reached on nuclear power with EDF, was there any discussion at that point of the effects that removing or reviewing the carbon floor price might have on the several billion pounds a year that EDF receive, because of their particular portfolio of generation, as effectively a subsidy, through the fact that while their existing nuclear power is traded with gas as a market maker they do not pay the carbon floor price? Therefore, they make £12-£13 a kilowatt hour through that mechanism. If the carbon floor price were to be reviewed they would lose a fortune and that might be a bit of a problem in terms of how they might see their arrangement to build a new nuclear power station. Have you discussed that with them?

Michael Fallon: No. I am not aware of linkage like that.

Q236 Chair: Who would have been the person to have discussed that with them?

Michael Fallon: Well, you are alleging it has been discussed. I am saying to you I am not aware it was discussed. It certainly was not discussed at any negotiation I was a party to.

Q237 Dr Whitehead: Would it be your intention to discuss that in the context of this review that is being undertaken, depending what is on the-

Michael Fallon: No. You are making a very early assumption that we are going to adjust the carbon price floor.

Q238 Dr Whitehead: Presumably if it is on the table then someone ought to know what the consequences of it being on the table are?

Michael Fallon: We are looking at all of these various levies. We have not come to any conclusions. It is at a very early stage. Certainly, in the negotiations with EDF that was not a matter that I am aware was discussed at any time.

Q239 Martin Caton: During this inquiry one thing we have looked at is the extent that subsidies have been used to help those in fuel poverty. In July Ed Davey said that the Government was changing the definition of fuel poverty. Has this resulted in you thinking of ways of making energy cheaper for poorer households?

Michael Fallon: Yes. I think the new definition-and we have taken the power to do this now in the Energy Bill-will be helpful in enabling us to focus on who is in need of most help rather than the household itself, which might be very drafty and poorly energy efficient but might well belong to somebody reasonably wealthy. I think we have a more sensible definition now. Without necessarily changing the amount spent it will make sure it is better targeted.

Q240 Martin Caton: The current definition talks about how much disposable income goes on energy bills. That appears to fit with the Prime Minister’s current review to reduce bills, doesn’t it?

Michael Fallon: I am sorry I am not with you there. Let me just check the definition.

Martin Caton: I understand the definition to be how much disposable income goes on energy bills. I am just suggesting that fits quite neatly with the Prime Minister’s current review with the aim of reducing bills.

Michael Fallon: No. The new definition allows us to understand much better what the actual depth of fuel poverty is in a particular household rather than simply the extent of it. It will give us, rather than a fluctuating population of people moving above and below the line, a much more stable population that we can really focus our attention on. So I think it is a much more useful way of looking at it.

Q241 Martin Caton: All right, which leads me on to what I next wanted to talk about. According to the OECD and IMF the 5% reduced rate of VAT on energy bills is a subsidy, albeit not very well focused on the poor, which is what you were implying just then. Is the Treasury looking at replacing that subsidy with better targeted fiscal measures?

Michael Fallon: Well, I do not accept that it is a subsidy. VAT, by definition, is a tax, so it cannot be a subsidy. It increases the cost of-

Martin Caton: The OECD and the IMF beg to differ with you.

Michael Fallon: I do not agree with the OECD and the IMF on that. By definition a tax increases the cost to consumers, it cannot be a subsidy.

Q242 Martin Caton: All other VAT is 20% and on energy it is 5%. VAT on energy in Europe is at that 20% rate. So we are different and it effectively reduces the price for British consumers. The problem is it reduces the price for all British consumers not just the fuel poor that you want to target better.

Michael Fallon: Member states make their decisions about the level of VAT they apply. You are not quite right on that. Other countries do have lower rates for certain types of fuel but this was not a reduction from 20% to 5%. You will recall that purchase tax itself-sorry, you will not recall, it was before your time. I am so sorry. Purchase tax, the origin of VAT, did not apply to fuel. Purchase tax applied to things that were regarded as luxuries rather than essentials so we never had tax applied to fuel of this kind. It was the Government in 1994, I forget what Government, which decided to end zero rating and move up to 8% and that then was reduced in 1997 to 5%. So we never had VAT at 20% so I cannot accept it is any kind of subsidy.

Q243 Martin Caton: Okay. It really doesn’t matter. Effectively it means energy prices are cheaper for consumers in this country.

You are probably aware that some academics have suggested that if you were quite ambitious in tackling VAT, even though it is politically sensitive-we do appreciate that-then you could far better target more resources to the very worst off. Is that even being considered and is not the Prime Minister’s review an opportunity to go for more ambitious thinking to ensure that those people do benefit?

Michael Fallon: I saw that submitted in evidence to you but I am afraid I can’t agree with it. Increasing VAT would increase bills for everybody. I think it would make it more difficult to get at the underlying price increases but it would be regressive. It would hit all poorer households harder and I don’t think that is the answer.

Q244 Martin Caton: If you are looking at the same piece of evidence that I am talking about, the whole point was the extra VAT income was then provided to help those very poor and they would be the only ones that were better off as a result of the change. All I am suggesting is that we should be thinking outside the box and that the Prime Minister’s review gives us an opportunity to do that.

Michael Fallon: It does give us the opportunity to think very widely and to think outside the box but I am afraid, Mr Caton, it is not one of the things that we are considering at the moment. I think it would be too complicated. Even if you raised all this extra money by imposing it as an extra tax on people who might not be very poor but are not that well off, I don’t think you would be able to target the help any more efficiently than the schemes that we have at the moment so we are not considering that.

Martin Caton: At least we have identified one option you are not considering. Thank you.

Michael Fallon: You have.

Q245 Chair: Just before we leave fuel poverty, the Government has obviously removed the commitment to remove fuel poverty by 2016. What weight will the Government be giving to those in fuel poverty as part of this review?

Michael Fallon: We have taken power in the Energy Bill to change the target to make it better identify a more stable population of those who are in greatest need. We certainly do not want, as we look at these-if you want a principle behind this review-to weaken the position of the most vulnerable, those who need the most help with their bills and who need the most help in terms of improving their energy efficiency. That is not the point of the review.

Q246 Chair: Given what the Deputy Prime Minister said about the likelihood of the Treasury having to fund more, and given that it was going to be taken away from individual bills, does that mean, as far as the support for those in fuel poverty is concerned-one of the first things that the Government did was to end the Warm Front Scheme and get rid of the taxpayer funded subsidy for those in fuel poverty-that the Government may be looking at a taxpayer funded scheme to deal with fuel poverty?

Michael Fallon: The Warm Front Scheme, and you may not know, was not working very well. Our Affordable Warmth Scheme is working far better and is helping more households. But the aim of this review is not to weaken the position of those who need the most help. We have not yet taken any decision about whether any of these particular levies should be moved across to general taxation. That is only one option that one Minister referred to.

Chair: The Deputy Prime Minister?

Michael Fallon: Indeed.

Q247 Caroline Lucas: I wanted to move to nuclear and we had the famous Coalition agreement that there would be no public subsidy for nuclear. Do you accept that you have used a bit of a sleight of hand by redefining that original commitment because no public subsidy means no public subsidy, presumably, and yet what we are now told it means is no subsidy unless it is being made in a similar way to other energy sources?

Michael Fallon: That is what was said to Parliament back in October 2010. There would be no levy or direct payment or market support for new nuclear that was not available in a similar way to any other low carbon type of new technology.

Q248 Caroline Lucas: I am an English graduate and one thing that really annoys me is when people redefine words. A subsidy does not cease to be a subsidy just because it is offered to more than one source, does it? It is still a subsidy whether or not you offer it just to nuclear or to nuclear and a range of other low carbon sources. It is still a subsidy relatively speaking.

Michael Fallon: I do not define it as a subsidy. If you are trying to get somebody else to put up £16 billion worth of money to build a nuclear station and to accept all of the construction risk in doing it, you obviously have to offer them some degree of reserved access to the grid at the beginning of the operating life of the asset when they start supplying electricity to it. So there is a support mechanism for nuclear just as there is for off-shore wind or on-shore wind or biomass or anything else.

Q249 Caroline Lucas: Exactly. I do not have any problem in saying that renewables are subsidised. I would be happy to say renewables are subsidised and I think we can justify that because renewables are going to be subsidised for a relatively short time and they are a new technology. If we can all agree that renewables are subsidised could we then also, please, all agree that nuclear is subsidised and we can disagree as to whether or not it is a good thing or a bad thing, but I just would like the Government, on record, to accept that nuclear is subsidised.

Michael Fallon: I am going to disappoint you slightly.

Caroline Lucas: I thought you might.

Michael Fallon: These are support mechanisms. I think it is important that support mechanism should be open and transparent. They should be, as far as possible, market based and competitive. They should be available to all, and I think you and I agree, high cost new forms of low carbon technology that cannot be supported by the market. They should be time limited, I think you and I agree on that, and where possible they should digress in terms of price support. Finally, they should be good value for money for the taxpayer. They should be underpinned by a robust impact assessment and evaluated afterwards by thorough monitoring and so on but I would not call them subsidies. These are market based support mechanisms designed to facilitate the earlier introduction of high cost low carbon technologies that the market would not otherwise have been able to finance as quickly as we need them.

Q250 Caroline Lucas: Okay. We will not agree on that but maybe we could agree on one thing, you said that subsidies should be open and transparent.

Michael Fallon: Yes.

Caroline Lucas: If we were looking at the subsidies around dealing with the nuclear waste, in other words decommissioning, then in what way is that open and transparent? There is a rather wonderful phrase you said in response to a parliamentary question where you said, "Nuclear should pay their full share of waste management and disposal costs." What is a full share? A share, how much is the share? Is it 40%, 50%?

Michael Fallon: This is the first time we have ever had a nuclear station built where we have made the developer build in a waste decommissioning cost right from the start.

Q251 Caroline Lucas: That is a different question, with respect. You were saying that subsidies should be open and transparent.

Michael Fallon: Yes.

Caroline Lucas: One of the subsidies is the fact that nuclear will not be giving its full amount towards the waste, there is going to be a full share. So, in the interests of openness and transparency, can you tell us what a full share is? What percentage of it, is it?

Michael Fallon: I do not have the exact figure. We did specify the decision at the time when we announced the heads of term. I think it gave the exact amount that had to be paid right from the start of the operation of the asset.

Q252 Caroline Lucas: Because it is also capped of course. Even if you can’t give me that figure, and I would be delighted if you can-

Michael Fallon: We will get you the figure.

Caroline Lucas: It is also the case that there is a cap. Beyond that you accept that the taxpayer would have to pick up the rest. So that does not feel very fair in terms of a difference that is being made for nuclear. It is not the same for renewables.

Michael Fallon: What we have said in a statement to Parliament is the support mechanism for nuclear has to be made available in a similar way for other low carbon technologies. Of course they do not have nuclear waste to deal with. So to that extent nuclear is slightly different. All of these new technologies are slightly different, one from the other. They all come with different associated costs, whether you are talking about insurance or waste or whatever.

Q253 Caroline Lucas: Nuclear is hardly a new technology. You would agree with me about that.

Michael Fallon: I would not entirely. This is the third generation nuclear technology. I think it is new in that sense and those are the terms that we will be presenting the support mechanism to the Commission for state aid clearance. This is a new form of nuclear.

Q254 Caroline Lucas: Firstly, I think it is a second generation but, secondly the very fact that you have to go to the EU to get state aid clearance surely means it is a subsidy. If it is not a subsidy you do not need to do it.

Michael Fallon: A great deal of the support mechanisms that we are designing as part of electricity market reform have to go through clearance procedures in Brussels, which is true of the capacity market, it is true of some of the other terms that we are offering. I do not think nuclear is particularly exceptional in that. The Commission, itself, will want to scrutinise the terms of this particular deal to make sure that the support mechanism is thoroughly fair and justified.

Q255 Caroline Lucas: In terms of other hidden subsidies-I know you are still getting me the figure for the full share and the cap-there is the issue of liability as well, because the Government now has increased its overall support of liability or the overall requirement of nuclear to pay its liability up to £1.2 billion. Again, if you look at something like the costs of Fukushima, we are talking about orders of magnitude higher than that. So, again, would you not see that as being a subsidy to nuclear, the fact that uniquely among technologies there is nothing similar about it? Uniquely to nuclear we have the risk of an extraordinarily high amount of money that the taxpayer could have to find.

Michael Fallon: Again we have been completely open and transparent about that. The current limit on nuclear liability is £140 million. We have increased it in this instance to £1,200 million, £1.2 billion.

Caroline Lucas: I appreciate that and I said that myself. My question though is, do you accept that in the event of a serious accident we will be looking at having to pay an awful lot more than that and that would be uniquely the case in nuclear in terms of the amount of extra money we would need to be paying and, therefore, another form of subsidy is going to nuclear that is not going to wind farms or solar panels?

Michael Fallon: Financial cover for unlimited liability is simply not available on the commercial market either for nuclear or indeed for buildings in the City of London insuring themselves against terrorism. There are certain sorts of cover.

Caroline Lucas: We are not comparing like with like, though, are we?

Michael Fallon: There are certain forms of cover that simply are not commercially available. What we have done is significantly increase the liability limit but beyond that the State has to step in and of course the developer will be charged a fee for that.

Q256 Caroline Lucas: It is very convenient to make a comparison outside of the energy question and talk about buildings in London. But if we are looking at the support that the Government is giving to the energy sector in particular then I do not understand why you can’t accept that the support that you are having to give to nuclear is qualitatively different from the support you are giving to the other energy sources because, uniquely, nuclear cannot find commercially available insurance on the market.

Michael Fallon: Clearly there are quantitative differences. We are dealing with much larger amounts when it comes to liability. We are dealing with a much longer construction period. We are dealing with a much longer lifetime of the operating asset. These stations will run for 55-60 years and quantitatively this is of a different order of magnitude to say the largest wind farm that might have a life of only 20 years. That is why the previous Secretary of State was very careful to use the word "similar". It cannot be exactly the same kind of support as is available to biomass, wave power or tidal. These are different technologies.

Q257 Caroline Lucas: It just seems to me that your Department has an extraordinary elasticity in its definitions. First of all around subsidy, we have now stretched the meaning of subsidy to mean something much broader than most people would understand of the word subsidy. I fear we are in danger now of doing exactly the same when it comes to the word "similar" because what we have been talking about for the last 10 minutes is a range of ways that nuclear is extremely dissimilar from other energy sources. You can see that not only in the sweeteners that I have just been describing but also if you compare the actual length of the contract that is offered under CfDs, the 35 years that nuclear gets, the much smaller amount that, for example, solar would get and yet figures from the solar industry itself show that it is going to be far more competitive. It will be beating nuclear on strike price alone by 2018. That is five years before even Hinkley C is due to be completed. If you looked at solar versus nuclear the idea that somehow those CfDs are being offered in a similar fashion does not add up.

Michael Fallon: Let me deal, first of all, with this issue of contract length. We are offering the support price for 35 years out of the potential operating life of around 60 years. The support being offered to off-shore wind, for example, is for 15 years under contracts for difference for a turbine that might only last for 20 years. It is a much greater proportion of the operating life of the asset than it is for nuclear. So I think what we are offering for nuclear is a pretty good deal and I know you do not agree with that.

On the issue of the definition I would slightly take issue with you. I think the evidence you have had as a committee shows it is very difficult to come to an agreed definition of the word "subsidy". I do not think this is a difficulty that DECC is causing you. I have noticed that there is not quite agreement out there on how you define a subsidy in the way that you would like to do so.

Q258 Caroline Lucas: I would just make the point that in terms of your saying that wind, for example, is getting a good deal and nuclear is paying a reasonable amount, I think there is a confusion in terms of what the working life of some of these renewable sources are because often it is about 60% of the working life of nuclear or 60% of the working life of a renewable source and that is somehow similar. There is a lot of feedback that suggests that what you are comparing when it comes to the renewables is their so-called warranted life, in other words the life that they are insured for, which does not mean their overall life. A car might have a warranty for five years, it does not mean on year six it stops working and so just because wind turbine or solar panels have a certain warranted life does not mean that that is a significant way of judging their life.

Michael Fallon: We will see. As I understand it after 15 to 20 years there is quite a lot of the turbine that may need replacing but there you are. It is very important though to get on the table that the strike price that is being offered for nuclear is only for a proportion of its operating life. It is not for the whole operating life.

Caroline Lucas: I think we are just disagreeing about the length of operating life.

Chair: Moving on.

Q259 Caroline Lucas: Sorry. Very quickly, could you give a figure that would have represented a subsidy in your mind in the Hinkley case? If 35 years at £92 is not a subsidy what would have been?

Michael Fallon: What would be a subsidy?

Caroline Lucas: Yes, what amount of money for the strike price? What could you ever have said was a subsidy?

Michael Fallon: That is not how we started the negotiation. We think this is a reasonable strike price taking into account a whole range of factors, the extent that all of the construction risk, all of the cost of it-if the build time is beyond schedule, if the costs rise-is borne by EDF and its consortium. These are considerable costs involved that have to be raised in the market. I think it is a reasonable price given those two factors and there are many others as well.

Caroline Lucas: The last question before the end-

Chair: Just before your last question, Zac and then Alan Whitehead.

Q260 Zac Goldsmith: I just wanted to press a point that Caroline Lucas made in relation to the waste. I do not know whether you are still looking for the figures or whether you are going to come back to us later with those figures.

Michael Fallon: Either.

Zac Goldsmith: It would be useful to know what percentage of the anticipated waste bill is going to be picked up by the taxpayer, what percentage would be left for the industry itself and what that means in terms of the actual bill. How much are we likely to be paying to clear up?

Secondly, I am struggling with the definition of subsidy as well. I can’t understand how it is possible, if one of the inevitable consequences of nuclear power is nuclear waste, that a chunk of that bill is going to be picked up by the taxpayer. That is an externality that the industry ought to be internalising by now. It is a mature industry.

I am interested to know how you can possibly maintain that that is not a subsidy-it just seems to be, by any definition, by any understanding of the definition of a subsidy. The taxpayer will be picking up a cost that the companies, themselves, ought to be taking on board.

Michael Fallon: I think we ought to get back to you on the exact figure because this is the same question that I have been asked as to exactly what the share is.

Q261 Zac Goldsmith: You do maintain that that is not a subsidy? That if the taxpayer picks up the waste bill or a proportion of it that is not a subsidy.

Michael Fallon: Mr Erwin may have found the figure.

Chair: Are you allowed to speak?

Patrick Erwin: I think there is a misunderstanding. When we talk about a fair share of decommissioning costs, we are talking about total decommissioning costs across the portfolio of nuclear assets in the UK. Most of the nuclear waste, most the nuclear bars come from the historical research programme and the early reactors in the 1950s and 1960s. In terms of new plants, the intention is that the decommissioning arrangements will completely fund all the waste that is created by that plant-so its proportion, its fair share of the costs of, for example, a deep geological disposal facility and there are mechanisms by which that funded decommissioning programme goes up and down to make sure that it covers the full waste liability over the lifetime of the plant and that is not 35 years. It is the lifetime of the plant.

Q262 Zac Goldsmith: After the plant is decommissioned as well or not?

Patrick Erwin: Lifetime of the plant in terms of operation and decommissioning.

Q263 Zac Goldsmith: It is not possible that the taxpayer will have to pay for any of the clean-up of the new generation nuclear power plants? It will all be paid for by the industry. Is that an absolute?

Patrick Erwin: The intent is a funded decommissioning programme that covers the cost of decommissioning in its entirety.

Chair: It is very difficult to hear.

Patrick Erwin: Sorry. The funded decommissioning programme is designed to cover the entire cost of decommissioning the reactor and dealing with the waste.

Michael Fallon: So there was a misunderstanding there about the word "fair".

Chair: I would urge you to use the microphone so we all can hear very clearly in future.

Q264 Dr Whitehead: A 35 year contract at £89 strike price, possibly rising to £92.5 if no more nuclear power stations are built is an interesting inversion in terms of how much you get for not doing something, as opposed to how much you get for doing something but perhaps we will pass that one by.

Is that going to be regulated by means of a varied investment instrument as set out in the Energy Bill?

Michael Fallon: The answer to that is yes.

Q265 Dr Whitehead: The varied investment instrument in the legislation enables variations to take place in that agreement if an agreement to do it is entered into at the time that the investment instrument is signed but only has to be reported after the variation has taken place. Has any such agreement been reached as far as the strike price is concerned?

Michael Fallon: No. We have not signed an investment contract with EDF.

Dr Whitehead: No. I mean has any agreement to do that been agreed, i.e. an investment instrument that will have those provisions within it?

Michael Fallon: No, we have agreed heads of terms. We have agreed the basis on which an investment contract will be signed but that has to await passage of the legislation to Royal Assent and it also has to wait approval from the Commission in Brussels. So we are not at the point of signing an investment contract. We have already given an indication as to the circumstances in which the contract could be varied and the number of events you will probably look at, like curtailment and change of the law risk and risks to changes of business rates and so on.

Q266 Dr Whitehead: Bearing in mind that the varied investment instrument does not require anyone to say what the terms of the variation were when the variation was agreed other than report at the point of variation that that agreement has been implemented, are you able to say, today, the strike price that has been announced is really going to be the strike price over the entire term of the contract or will there be a different strike price depending on the varied instrument?

Michael Fallon: No. It is the agreement between ourselves and EDF and its partners, this will be the strike price, but we have set out in the agreement the circumstances that it can vary up or down. Not least if there is a gain on a construction, we are going to share half of the gain. If there is pain on the construction, it slips behind budget by a couple of years, they have to take all of that.

Q267 Chair: Can I just interrupt you there and just ask for clarification on that because my understanding is that if there is a delay with the construction those costs could be met by the taxpayer?

Michael Fallon: No. If there is a delay in the construction that is a matter for the developer. The developer has to take all of the pain involved in that. If construction is delayed for something completely out of the developer’s control, supposing we had, God forbid, the return of a malevolent or anti-nuclear Government that suddenly decided to halt construction that is not something that can be laid at the door of the development. There are a range of circumstances that are outside the control of the developer.

Q268 Dr Whitehead: What I was trying to clarify is if there is a delay in construction or a number of other factors then within a varied investment contract arrangements can be made within the terms of the contract to vary the subsequent strike price, for example, over a period to reflect that delay or those circumstances. Indeed some of them were set out in the Secretary of State’s statement. Are you able to say that other than those things that have been set out in the Secretary of State’s statement nothing would be in a varied contract that would enable that price to be varied if circumstances arose that were not in what the Secretary of State had said in his statement about the circumstances that could lead to a variation?

Michael Fallon: That is our intention.

Q269 Chair: Just before I come back to Caroline Lucas, can I ask for clarification because I understand that the National Audit Office is intending to look at the arrangements? I am not quite sure the stage the negotiations have reached. Is it your intention that this NAO review will be completed prior to any finalisation of the agreements? On the uncertainties that Dr Whitehead has just referred to, would you expect that all of those would be scrutinised with full transparency by the NAO before any final decision is reached? Parliament has not had an opportunity to look at the detail of all of this because it has been subject to commercial confidentiality.

Michael Fallon: I understand that and this came up during the passage of the Energy Bill. They went at some length into this to try to reassure Parliament exactly what we would make available and published to Parliament and how we would define what was being withheld from Parliament for reasons of commercial sensitivity. There was an argument in the committee or at report stage about this and I think we accepted an amendment making this clearer. It may well have been Dr Whitehead’s amendment.

Chair: Given that the NAO is now going to be looking at this, which is a change-

Michael Fallon: On the timetable, yes. I am not responsible for the NAO’s timetable. I am not quite clear what that is.

Q270 Chair: Would you expect that review to have been completed before you finally sign off any of these arrangements that have just been referred to by Dr Whitehead?

Michael Fallon: I really do not know their timetable for doing this. We are not likely to sign an investment contract for this project before next summer. I am not sure how long an NAO review normally takes; perhaps somebody can help us on that.

Patrick Erwin: My understanding is the NAO review is about to start and is likely to be carried on in parallel but report probably afterwards. If that is different we will come back to you.

I should say this is probably the most transparent approach we have ever taken to this kind of contract. It is much more transparent than say a PFI contract or anything like that. We are really trying to do it as openly and transparently as we can within the confines of trying to do a commercial deal.

Q271 Caroline Lucas: Just the very last bit on nuclear. I do just want to come back to what Mr Erwin said earlier because I think there has been a bit of confusion, and I apologise if it is partly from me, but there were two things we were talking about in terms of whether or not the taxpayer would have any responsibility, one was on decommissioning and the other was on waste management. I think, Mr Erwin, you have clarified that on the decommissioning there is no risk of the taxpayer having to step in and fund any of that because the nuclear plants themselves, the nuclear companies, have said that they will do that.

On the waste management there is a cap and, therefore, I just want acknowledgement on that and acceptance from you that that is the case. Indeed, I have some text in front of me again from an answer from a parliamentary question that says, "The waste contract will, at the outset, set a cap on the level of waste transfer price. The cap will be set at a level that reflects the Government’s current analysis of risk and uncertainty. The Government accepts that in setting a cap, the residual risk that actual cost might exceed the cap is being borne by the Government." So that being the case can we agree that that is a subsidy?

Patrick Erwin: We are charging for that cap so we are taking a risk fee for that cap.

Caroline Lucas: Yes, but it is not the full amount. To the extent that-

Patrick Erwin: The fact that we are providing, if you like, that insurance, that is costed into the decommissioning process. It is not a certainty; we are insuring them against that cap.

Q272 Caroline Lucas: Yes, you are insuring them against that cap but if the cost of waste disposal exceeded the cap the difference between the amount they were insured for and the full cost would still be paid by the taxpayer, would it not?

Patrick Erwin: That is a very small risk and-

Caroline Lucas: I do not care how big the risk is. I care about the principle of whether or not it is a subsidy.

Chair: Is it or is it not?

Patrick Erwin: We would not describe it as a subsidy. We describe it as a-

Caroline Lucas: A what, sorry?

Patrick Erwin: It is an agreement we have made on commercial terms and charged a fee for.

Q273 Caroline Lucas: Maybe I am just missing something here, but surely we have just established that the Government has accepted that in setting a cap, the residual risk that actual costs might exceed the cap is being borne by the Government. The Government in this case means the taxpayer. It means us.

Patrick Erwin: Yes, but we are not providing that service for free, we are charging a fee for it.

Caroline Lucas: No, you are charging for it but there will still be an amount of money to be paid over and above that were this cap to be exceeded, surely?

Patrick Erwin: That is the nature of such a product.

Caroline Lucas: Quite. It is a subsidy.

Michael Fallon: It is an insurance policy.

Chair: Sorry, what was that, insurance-

Michael Fallon: It is an insurance policy.

Chair: An insurance policy.

Michael Fallon: Yes. They pay us for that.

Q274 Chair: Right, I think that is perhaps as far as we are going to get to on when is a subsidy an insurance policy.

Just before we finally move on from nuclear, in terms of state aid and discussions that you have been having in Europe, have you been leading in terms of discussions in the European Union from a point of view of making the same arguments about this not being a subsidy and therefore not subject to state aid?

Michael Fallon: Yes, we have pre-notified the likely terms of this agreement, the shape of this agreement, and we formally notified it, I think, to the Commission on the day of the announcement to Parliament. It is something we have been discussing with state aid officials from DG Comp over the last few months and we are not the only nuclear member state. There are around a dozen other member states that have the benefit of nuclear power so I hope this will proceed smoothly through the approval process.

Q275 Chair: Given that you think it will proceed smoothly through the approval process, does that mean that the Commission has already expressed a view to you as to what they see as a definition of subsidy?

Michael Fallon: No. I must be very clear on this. The Commission has not expressed any view at all. We pre-notify the likely terms and then we formally notify the project as a whole and it is then for the Commission and its lawyers and advisers to come to a view on it and that is almost a quasi-judicial process so they have not expressed any view.

Chair: We have a fair amount of ground still to cover. We will move on to capacity payments.

Q276 Dr Whitehead: You mentioned a little while ago that an instrument that is available to more than one form of generation, which involved money being collected to provide underwriting for those forms of generation, would not be a subsidy provided it was available to more than one form of generation. How do capacity payments fit into that definition?

Michael Fallon: Capacity payments are a form of ensuring that we have some kind of reserve when the system is at its tightest. This is not a support mechanism for any one technology. This is ensuring that there is sufficient supply four years out. We are designing the first auction next year to be run for delivery in 2018 to make sure in the medium term that there is sufficient supply. I do not think you can directly compare it to the strike prices that we are putting out for the various technologies.

Q277 Dr Whitehead: You can only get it if you are a gas fired power station, can’t you?

Michael Fallon: I think we have set out the various definitions of which technologies apply for it. I do not think that is quite right that it is only gas.

Dr Whitehead: Coal?

Michael Fallon: Coal under certain circumstances yes.

Dr Whitehead: Abated.

Michael Fallon: Sorry?

Dr Whitehead: Abated.

Michael Fallon: If it is abated, yes.

Dr Whitehead: But there will not be any abated coal in 2018.

Michael Fallon: That is not a matter for me.

Q278 Dr Whitehead: In practice only gas fired power stations can access capacity payments.

Michael Fallon: I am not sure that is right. There may well be other technologies that could apply.

Chair: I am sorry, I really cannot hear if you could speak up.

Patrick Erwin: The generation not receiving the RO or CfDs will be able to bid into this.

Q279 Dr Whitehead: What might they be?

Patrick Erwin: That will be gas. It will be coal plants.

Dr Whitehead: We have agreed there are not any of them.

Patrick Erwin: No, abated and unabated.

Dr Whitehead: Unabated?

Patrick Erwin: Indeed, and they will have to compete. The point here is that we are buying very different things here. With capacity payments we are not-

Q280 Dr Whitehead: But will they not be closed down under the large plant directive?

Patrick Erwin: Some will be, yes, and with the current price floor without capacity payment many might not be economic but with the capacity payment we allow ourselves the ability to keep generation of various kinds on the system.

Dr Whitehead: Forgive me but coal fired power stations under the large plant directive that cannot adhere to that will be closed down by 2017.

Patrick Erwin: Variously depending on various aspects.

Q281 Dr Whitehead: There will not be any abated coal fired power stations. Biomass might have access to CfDs and therefore would not be eligible for capacity payments. Nuclear, we just heard, would have CfDs and would not be eligible for capacity payments so what is left?

Patrick Erwin: There is demand side response.

Michael Fallon: Storage.

Dr Whitehead: Yes. Taken out of the auction as a separate part of it? It is not in the auction the first time round. For the capacity auction only gas fired power stations will actually take part in it, is that not right?

Michael Fallon: No, I don’t think that is right.

Patrick Erwin: No, some unabated coal plant will be eligible. Not all coal plant will come off the system in this decade.

Michael Fallon: But if the answer you are looking for is will a majority of it be gas, yes, of course gas will play a very large part.

Dr Whitehead: The overwhelming majority.

Michael Fallon: We will see.

Dr Whitehead: About 99%.

Michael Fallon: Gas will certainly play a very big part in the capacity market. That is the answer you are looking for.

Q282 Dr Whitehead: In what way therefore is that not a subsidy?

Michael Fallon: It is an insurance premium to make sure there is reserve capacity to call on when the system is at its tightest and I think it is a very sensible thing. A number of other countries are looking at it.

Dr Whitehead: I am not disputing whether it is a very sensible thing or not, I am just questioning whether it is a subsidy, or whether it is an underwriting of fossil fuel generation.

Michael Fallon: No.

Q283 Dr Whitehead: The way the capacity mechanism works is through an auction, you gain a sum of money for being ready to provide capacity and demonstrating that you are ready to do so. So the readiness to do so is underwritten and one kind of plant overwhelmingly gets that underwriting. Does that not look a bit like a subsidy?

Michael Fallon: No, as you will find if you fail to deliver it. It is an insurance premium we are paying as a country to make sure there is sufficient energy capacity. There is a reserve there available when the system is at its tightest. I think that is prudent.

Dr Whitehead: Maybe so but that is not my question.

Michael Fallon: That is my answer.

Chair: I think that is as far as we can go with this. I will move on to Dr Offord.

Q284 Dr Offord: Why doesn’t the Department count field allowances for North Sea oil and gas operations as subsidies?

Michael Fallon: I am sorry, I missed the first part.

Dr Offord: Why doesn’t your Department consider field allowances for North Sea gas and oil operations as subsidies?

Michael Fallon: North Sea oil is taxed at a far higher rate than most commercial activity. Overall they are paying some, as you know, 81% on the older fields, 62% on the new fields and even with the allowances they are still paying 30%, whereas corporation tax for every other form of commercial activity this year is 23% and falling to 21% and 20% in the next couple of years. North Sea oil is still much more heavily taxed.

Q285 Dr Offord: I understood, particularly from your submission to this inquiry, that you seem to suggest that field allowances should not be regarded as subsidies because they increase the volume of oil and gas extracted by what you would consider as uncommercial fields and making them viable.

Michael Fallon: If they are paying a tax higher than other businesses are paying it cannot be a subsidy. It cannot be both a subsidy and a tax, can it?

Q286 Dr Offord: No. Okay, on your logic particularly would you not also regard feed-in tariffs as the same?

Michael Fallon: As what, sorry?

Dr Offord: Feed-in tariffs.

Michael Fallon: As what?

Dr Offord: As the same as North Sea oil and gas operations.

Michael Fallon: No, no, no. There are allowances for a whole range of industrial and commercial activities. There are first year allowances that apply to a whole number of things, to energy saving investments, to water efficient investments, to gas refuelling and so on, and you will recall the Chancellor increased the annual investment allowance for two years from £25,000 to £250,00 for almost any form of industrial activity. I do not think there is anything particularly special about industrial allowances but the tax that North Sea pays is greater than any other industrial activity so I do not think that can be a subsidy.

Dr Offord: Okay, I am happy to leave it there.

Q287 Martin Caton: As I understand it, this is true of other countries that have oil and gas resources, all of which use taxation, because those oil and gas resources are regarded as the property of the state and in fact use that taxation mechanism to charge for those resources. That is why it is a higher level of taxation because it is the price for the product.

Michael Fallon: You have heard what I have said.

Chair: You do not wish to comment further on that?

Martin Caton: I have heard what other people have said as well.

Q288 Peter Aldous: At the outset I will just draw attention to the register of Members’ interests-I have interests in farmland where renewable energy schemes are being pursued. Minister, the Government provide different subsidy regimes for different types of renewable technologies. How is it worked out in each case how long those subsidy regimes should last?

Michael Fallon: We have set out the main features of the contract for difference. You will be aware of that and it is a 15 year term. We have then set out for the next five years, taking us up to 2019, which is budgeting for the whole of the next Parliament, how the levy control framework will operate for each of the different technologies. We have done that in consultation with the different industries and we have published those in draft. We have been consulting on them all summer. That consultation has just closed and we are now assessing the final strike price we should fix, I hope, before Christmas.

Q289 Peter Aldous: Have you identified any particular renewable technologies that might not longer need subsidies as they get established and get more competitive?

Michael Fallon: It is looking that way with solar. The costs are coming down all the time. It is becoming cheaper and cheaper so we might have to ask why there should be any kind of supported strike price for it after the current levy control framework period. Almost all of them, with the exception of biomass and energy from waste, show the prices digressing over the period of the levy control framework. They are all coming down and that was one of the principles I have set out in my definition of a support mechanism at the beginning. Where possible the prices should digress and should be time limited.

Q290 Peter Aldous: On fracking in the States, it is a well tried technology. Is there a need in this country, do you think, for there to be a special tax treatment for it?

Michael Fallon: It is new to this country. I think it compares much more readily with offshore exploration for oil and gas so the Chancellor is now consulting on a similar form of field allowance. Again, that would not bring it down below the tax rates paid by the rest of British industry.

Q291 Zac Goldsmith: A small add on to that question. I understand that there will be moves by the Government to make it easier for communities that do not want wind turbines to prevent that from happening, and probably rightly so. Will the same apply to potential fracking installations in communities and, if not, why not?

Michael Fallon: We have said for wind turbines we are now requiring developers to consult with communities in advance before even putting in a planning application. We have asked the planning inspectors to attach more weight to factors that are important for local communities, like the visual impact and whether or not there are already existing wind turbines in the same locality. We have certainly tilted the balance, if you like, to ensure that wind turbines are only sited where they are appropriate and where they are supported by the local community.

When it comes to hosting shale, the principle element of the decision is again, of course, local. Although there is a licence from my Department for the company, a licence bloc in which they are operating, and although they have to have permits from the Environment Agency if they want to drill or explore, and to have authorisation from the Health and Safety Executive and finally a consent from my Department, the key decision in that whole process is they have to have planning permission locally. That has to be obtained from the minerals authority, in most cases the county council. The community at that stage has the ability to decide whether the application is appropriate for their area. Obviously there are various factors they will want to take into account.

Q292 Zac Goldsmith: You do not anticipate situations where fracking takes place in communities where a clear majority oppose fracking in that area?

Michael Fallon: If the local authority is opposed to it then it will not be granted planning permission. That is first and foremost a decision for them.

Q293 Chair: Did you say exactly the same regime?

Michael Fallon: It is not exactly the same regime.

Chair: What would be the difference?

Michael Fallon: We are not formally requiring the developers to preconsult but they have already agreed to do that-they would be pretty silly not to-and they are already doing it. They are already involving the community long before they submit a planning application and I do not think we have put that yet formally into the guidance. There may be one or two minor differences like this. The answer is to consult the community early, to provide as much information as possible to reassure people as to exactly what the environmental impacts are likely to be and that the site they are choosing is the most appropriate in that area for getting down to the shale that they want to extract.

Q294 Caroline Lucas: Just on that, I thought that I remembered that the planning guidance to local authorities is that they cannot base their decision on views of climate change or other energy sources that they might prefer to see rather than fracking. When you say that it will only go ahead if it has local authority support, is that not a bit disingenuous?

Michael Fallon: No, it is for the planning authority to decide whether to grant the application.

Caroline Lucas: But the grounds on which it does that are very constrained in the case of fracking. They cannot decide that they do not want it on the grounds that they think it is going to be a threat to climate change.

Michael Fallon: No, what we have said for renewables, for onshore wind, and that will apply I think also to drilling for shale, is that they cannot allow environmental or energy policy considerations to trump their local decision. They must take the application into account on its merits and look at the merits of the case. They cannot simply be told by the developers, "The country needs more renewables so you have to pass my application".

Q295 Caroline Lucas: Can they decide that they do not want to pass the application because they think that fracking is going to pose an unacceptable threat in terms of climate change?

Michael Fallon: No, they have to look at it on its merits. It has to be balanced.

Caroline Lucas: That is the point. Please can we just have a straight answer on this?

Michael Fallon: I am giving you a straight answer.

Caroline Lucas: It is not a straight answer.

Michael Fallon: It is.

Caroline Lucas: I need you to confirm my understanding, which is that if a council’s primary reason for not wanting the fracking site to go ahead is because it is concerned about the impact on climate change it is not allowed to use that as a ground for opposing that planning application.

Michael Fallon: It could not use it as the sole ground, no.

Q296 Caroline Lucas: Your earlier answer to my colleague is not entirely true because you said it would not go ahead if local authorities did not want it to. It could indeed go ahead even if local authorities did not want it to if the reason the local authority did not want it to was because of the risk of climate change.

Michael Fallon: It is for the local authority to determine the planning application.

Caroline Lucas: Under certain criteria.

Michael Fallon: They have to make the decision.

Q297 Chair: It is the grounds on which they reach that decision that matters, is it not?

Michael Fallon: Yes, and I am saying it has to be balanced just as they cannot be forced by the developer to accept an application on the grounds that it aids the Government’s national energy objectives, nor can they turn it down on the grounds that they have their own energy policy.

Q298 Caroline Lucas: No, but the point was you responded to my colleague by saying that the fracking will not go ahead if the local authority does not want it to. All I want you to acknowledge is that that is not the full case. It depends why the local authority does not want it. If the reasons that the local authority does not want it happen to fall within the terms with which they are allowed to object, fine, but because of the way in which the planning guidance has been drawn up, if their principal and sole reason is that climate change is the biggest threat that we face and fracking is going to simply exacerbate it, we do not want it, they cannot refuse it on those grounds.

Michael Fallon: If that is the sole reason, no, they cannot.

Chair: Okay, we have clarification on that. Dr Whitehead wanted to come in.

Q299 Dr Whitehead: On an answer you provided to my colleague a moment ago you agreed that the subsidy for renewable energy through CfDs, because it was digressing over a period of time, would come to an end at a certain point, but it was a subsidy.

Michael Fallon: No, it is a strike price. That is what is digressing over time.

Dr Whitehead: Sorry, so there is no subsidy for renewables either?

Michael Fallon: We are going over ground we have already, I think, trodden on quite heavily. This is a support mechanism, a market based support mechanism that involves a strike rate that has been made available for the very early stage of the introduction of a new technology.

Q300 Dr Whitehead: Sure, yes, and that is identical to the renewables obligation really, is it not?

Michael Fallon: It is similar. The contracts are different from renewable obligations.

Dr Whitehead: Yes, I accept the difference in the way they work but they work with renewables in exactly the same way in as much as they provide an underwriting which digresses over a period of time and may then disappear.

Michael Fallon: There are some important differences. They begin earlier in the process, for example. They can be negotiated at the point at which you obtain planning permission and consent to latch on to the grid rather than at the point of commissioning. There are important differences between the contract for difference and the old renewables.

Q301 Dr Whitehead: Yes, but the renewables obligation essentially is an underwriting that digresses over a period of time and then maybe disappears. Indeed as I recall, that went before the EU Commission and competition directorate and was agreed to be a subsidy, but was given away leave on the grounds that it was digressing and therefore would lead to the introduction of new technology that might ultimately be beneficial. Therefore, no action was taken by the EU at the time of RO coming in on the grounds that it was a subsidy, even though it was agreed that it was. At the moment that same Competition Commission will be looking at CfDs as far as nuclear is concerned, which of course are now jumbled in with CfDs for renewables, on the grounds that it might conceivably be state aid. Indeed we visited Brussels a little while ago and we talked to some Competition Commissioners who said that that was exactly what they were going to be looking at nuclear on the grounds of. If those Commissioners at that point suggested that indeed CfDs for nuclear did look like a subsidy, wouldn’t that undermine the CfDs for renewables in terms of anything that had previously been agreed about those being a subsidy but would have away leave because they were introducing a new technology that would come to maturity?

Michael Fallon: If you are asking me would there be a read across from an unfavourable decision on the Hinkley notification to the rest of strike prices I am not sure about that and I have not speculated on that. I am not sure there would be an immediate read across but we are not expecting an unfavourable decision. We should be arguing the case.

Q302 Dr Whitehead: I appreciate obviously one would not go into all this very detailed work while expecting an unfavourable decision from the EU Competition Commissioners. Bearing in mind that they have already looked at something that looks remarkably like CfDs and have said it is a subsidy-but they have certain derogations from it on the grounds that it is a subsidy that may bring about an overall benefit on the grounds of the maturity of that new technology-is that not a worry that you might have in terms of how the Commission might then look at the immediate successor to the RO in its application to both nuclear and renewables over a period? They might say both are subsidies or they might not see either as subsidies.

Michael Fallon: I think we are able to show the Commission that most of the strike prices do digress over time. They do facilitate the arrival of a technology that can stand on its own two feet. Some of them digress quite sharply.

Chair: I think we must move on to other issues. I will turn to Mr Lazarowicz.

Q303 Mark Lazarowicz: Yes, thank you, Chair. Before we do go on I wonder if I could ask just briefly one question which follows up from the answers that you gave to Caroline Lucas? You understand, Minister, given my constituency, I do not have intricate detailed knowledge of planning legislation in England. When you said that local authorities could refuse an application for fracking I presume it does that on the basis that it considers it is out of the planning guidelines but that refusal can still be appealed to the planning inspectorate like any other planning application. Is that the case?

Michael Fallon: Absolutely.

Mark Lazarowicz: Therefore the local authority does not have the ultimate say. It will be the subject of more planning authorities.

Michael Fallon: No, the point I was making to Mr Goldsmith was that in the first instance the main decision is not made by Ministers. It is a matter for the minerals authority in each area and it is very important to put that on record. Both the developers and those who oppose the search for shale do have that reassurance that the principal decision is taken in the first instance by a local authority.

Q304 Mark Lazarowicz: I appreciate that. I wanted to clarify the position of the RO for potential appeal and refusal and we have now had that clarification. My principal questions relate to issues concerning DfID and also UK Export Finance. I do not know whether you want to answer it yourself, Minister, or to refer to your officials as we go along. In relation first of all to DfID, early in our inquiry we heard about the sometimes significant level of fossil fuel subsidies that applied in developing countries and the concern obviously therefore rises that on the one hand we as the UK will be providing climate finance to reduce emissions to certain developing countries while at the same time those developing countries may be pursuing policies that promote fossil fuel use rather than reduce it. Is there any linkage in the decisions you make about climate finance to assessment-

Michael Fallon: About what?

Mark Lazarowicz: Is there any linkage to the decisions we make about climate finance through DfID to an assessment of the fossil fuel subsidies available within those developing countries that are receiving the assistance?

Michael Fallon: No.

Mark Lazarowicz: Not assistance from the UK, assistance within their own policy framework.

Michael Fallon: No, I understand the question and let me say first of all we have a very strong presumption in the aid we give against investing in coal fired power stations in developing countries. Now you do have to look at this on a case by case basis. Some of the very poorest countries do want to continue with coal and I don’t think it is possible to have an absolute blanket refusal to help under those circumstances. On the specific issue of climate finance perhaps I could allow one of the hitherto silent officials to answer.

Chair: I was just wondering if they might be given a voice. Mr Wheatley, do you wish to comment?

Michael Fallon: Their chance to shine.

Josceline Wheatley: The Minister has covered the ground there. There is not a direct correlation between our support for climate finance and whether or not a country has fossil fuel subsidies or not. Having said that, all the programmes that we do support are to do with enhancing access for the poor and are based exclusively on renewables and other forms of noncarbon related energy. We also support World Bank programmes, which are to help developing countries work out how to deal with the social and economic consequences of coming back from fossil fuel subsidies. If you like, it is a series of programmes that are about carrot to help countries to work out how best to remove fossil fuel subsidies rather than stick in the sense of seeking to condition aid or support in some way to compel them to do so.

Q305 Mark Lazarowicz: But just to be clear-and I accept what you are saying about it is an approach of carrot rather than stick-do we make an assessment of their policies domestically with regard to fossil fuel subsidies when we consider whether we agree to give climate finance? It will be odd to have a situation of giving countries climate finance to reduce emissions when, for all we know, they are pursuing policies that are drastically increasing emissions. Surely we need to have some linkage in our decision making process there.

Chair: The Minister or Mr Wheatley?

Josceline Wheatley: We make the assessment on the merits of the proposal for support and whether or not that meets the country’s own stated objectives to decarbonise or seek a lower carbon, more climate resilient pathway. We do not, as I have said, make a linkage in any specific way to whether or not that country has fossil fuel subsidies.

Q306 Mark Lazarowicz: This is not just a theoretical question because the evidence that we have suggests that there were some countries, which we were significantly supporting with climate finance, which did have substantial programmes of fossil fuel subsidies. It does seem there should at least be an assessment. We should know what we are doing in a domestic fossil fuel subsidy policy when we are making decisions about climate finance. Is that not a reasonable suggestion that we should at least investigate and assess that wider energy framework in that country? Isn’t that reasonable?

Josceline Wheatley: As I say when applications are made for support through our bilateral programmes and those we support through the World Bank then, yes, we do look at the programme as a whole to see whether or not that makes sense and whether or not it is indicative of a country making a serious attempt to move towards a lower carbon, more climate resilient development pathway. There is not, however, any explicit benchmark or algorithm that takes into account the fossil fuel subsidies or the extent of those which then conditions whether or not we provide that support.

Q307 Mark Lazarowicz: Okay, I understand the position. Can I ask then about UK Export Finance, which is obviously a different departmental responsibility? May I quote briefly from the Coalition Agreement? It made a commitment and I quote, "We will ensure the ECGD", as it then was, "becomes a champion for British companies that develop and export innovative green technologies around the world instead of supporting dirty fossil fuel production." That seems a little unclear whether that means all fossil fuel production is dirty or just that some fossil fuel production is dirty and we do not support it. That is quite important to what I am going to ask.

UK Export Finance’s submission to the committee gave us a list of what energy projects are supported and without going through the list in detail it is pretty clear the vast majority of the projects are ones for fossil fuel energy technologies. At first sight I can only see a hydroelectric plant that presumably could be regarded as a low carbon technology. I may have missed one or two but I think the general position is clear. How far is that commitment given in the Coalition Agreement being put into practice in the policies and support given by UK Export Finance?

Michael Fallon: The policy has to be constrained in the end by the law. The Export Investment Guarantees Act of 1991 does not allow UK Export Finance to discriminate in this kind of support between different classes or types of export. That is the legal position. It would therefore be unlawful for the Secretary of State simply to declare a blanket ban on certain types of investment. We are constrained there. I think the objective is the right one but we are constrained by the existing legislation.

David Godfrey: Could I perhaps just add that we are, of course, governed and guided by the OECD Common Approaches for looking at projects and have to identify and define those projects in terms of their environmental, social, human rights impact. Those are categorised A, high impact; B, medium and C, and as part of that we would have to look at obviously the environmental impact that such a project would have. If it failed to meet those standards we would not be allowed or enabled to proceed with that programme. Those environmental assessments are public, particularly in the case of projects that are identified as category A, both before and after decision.

Q308 Mark Lazarowicz: Does that mean UK Export Finance can refuse to support projects that would be regarded as supporting dirty fossil fuel production and is that what you do?

David Godfrey: If it failed to meet international standards as implemented by the World Bank, yes.

Q309 Zac Goldsmith: Just very quickly on the innovative green technologies that Export Credits has been supporting the export of, can you give us a rough idea or even a better than a rough idea of how many such projects have received support from the Government? What sort of percentage of the overall support package has been geared towards green technologies? Are there any obvious examples of success?

Michael Fallon: We can get you that.

David Godfrey: I would say it is low at this point in time. The Department has been very involved through the fora that exist in international ECAs on a multilateral basis attempting to improve the credit that can be given to renewables and green energy programmes, for instance extending credit and terms, but within the UK the take up of such availabilities, such programmes has been very low.

Q310 Zac Goldsmith: Yes, early on in the Coalition Government’s life I asked the same question and there were not any examples at all-this is probably six months into the new Government-of innovative green technologies that have been supported through this agency. It would be really interesting to know, maybe in due course, what projects have been supported, how much support they are getting and if not a lot, as you have just implied, why do you think that is? Are we struggling to find them? Are they not coming forward or is there no open for business sign at the Department?

David Godfrey: It is certainly not that there is no open for business sign at the Department. We work very closely with the Renewables Association. As I say we have been instrumental in trying to push multinationals for better terms for green projects. I think to some extent it is the state of the UK industry. It is where they are exporting to in terms of not requiring state support to do that. I think there are a whole range of reasons why UK Export Finance has not provided a large amount of support to the industry, but I can assure you it is not because we are in any way discriminating. As the Minister said, our statute requires us to be even-handed in the support that we give and we certainly participate in fora that would promulgate those types of projects.

Zac Goldsmith: Thank you.

Q311 Mark Lazarowicz: If I can come back there, Mr Goldsmith’s question has helpfully allowed me to open up the attachment to the equity evidence, which was in quite small print. I just noticed, for example, just above the support for a hydro electric power station, which was supported to the tune of £38,000, we can see support for a petrochemical complex in Saudi Arabia where the support was £375 million. It does suggest that while we might have an open mind to different technologies there is not much, as Mr Goldsmith said, innovative green finance being supported by UK Export Finance. Perhaps when you provide the additional evidence, Minister, you could highlight those projects which you regard as supporting that objective of giving support to innovative green finance. That would be helpful.

Michael Fallon: We will certainly do that and we will update the position which I hope is improving. I think you have heard some of the reasons why it may not have improved as much as you would have liked.

Q312 Chair: We are almost at the end. In view of the Government’s support for the G20 in 2009 and similarly last year’s Rio+20 declaration, just how the Government can support the outcomes of those when the Treasury and the DECC submission to our committee tells us that the Government does not consider that any of its energy policies are harmful. Isn’t there an inconsistency there?

Michael Fallon: No, we certainly support the G20 commitment to rationalise and phase out those subsidies to fossil fuel in countries that are inefficient and simply encourage wasteful consumption. We see clear benefits to the British economy from that happening for our own domestic energy security and for our own budgetary stability it helps us too.

Q313 Chair: Does that trump everything, the security and the economy?

Michael Fallon: Security of energy supply trumps almost everything I can think of. The most important duty as an Energy Minister is to make sure that our constituents’ lights stay on and they do have access to the power that they need. That is important. Secondly, it is important they do so with bills that are affordable and, thirdly, of course, we are committed to meet our European and international obligations. There are three priorities there but if you ask me to rank them the first, of course, is absolutely security of supply.

Q314 Chair: Could I just finally ask how DfID are taking forward the ongoing discussions in respect of the outcomes from Rio+20 and how that links in to policies at home and the agreements that were made at Rio?

Michael Fallon: Sure. Who would like to take that?

Josceline Wheatley: We support the UN Secretary General’s SE for All undertaking, which was reflected in the high level panel outcome, which in turn is going to be considered by the open working group. So there is a good deal of discussion internationally still to be had about how that outcome will be reflected and what the energy commitments will be. The Department is now and will remain actively engaged in that process up to the conclusion of it in 2015. More details on that I am afraid I would have to come back to you in writing.

Chair: It might be helpful if you were to perhaps provide that in writing from DfID. The issue for our Committee is whether the UK needs to take action to eliminate fossil fuel subsidies at home. It is within that context of how we take forward the sustainable development goals, which are now part of the Millennium development goals, following the high level panel at the UN. Unless any of my colleagues have any further questions-I do not think that they have, you will be pleased to know-I must bring the session to a close. We will be looking at this whole issue of what we thought was subsidy but appears to be support mechanisms and insurance premiums in that order. Can I thank you and colleagues from other Departments for attending our sessions? Thank you very much indeed.

Prepared 6th November 2013