23 JANUARY 2004

Claire Durkin, Adrian Gault and Iain Todd

  Q20  Lord Sutherland of Houndwood: Without wanting you to speak on behalf of other departments, a more general question: are you satisfied that the inter-departmental mechanisms for discussion and exploring these issues are adequate?

  Ms Durkin: I have been in the civil service for 15 years and they are by far the best that I have experienced in terms of joint departmental working. It is a frustration that they are never as good as you would wish and that is just a matter of basic things like finding the time and different pressures of different Secretaries of State. The Secretaries of State get together regularly and certainly the two departments work very closely together, and Adrian's unit. Adrian, if you could say something about the Inter-Departmental Group on Analysts?

  Mr Gault: Yes, in support of the Sustainable Energy Policy Network and the Ministerial meetings on this subject, we also have an Inter-Departmental Analysts Group which meets intermittently to discuss core research work requirements to take forward the Energy White Paper agenda and feeds those back into the policy process. In particular, in recent times we have been trying to look at some of the spending requirements that may be around for taking forward the White Paper.

  Mr Todd: If I might add, specifically on renewable energy, we have for the last 18 months had a Renewables Advisory Board made up of Government and industry advising us as we go forward and that includes all of the Government departments you would expect. There is Treasury, there is Ministry of Defence, there is Defra, there is ODPM and representation from the Scots and the Welsh as well. That has been very valuable and it specifically has working groups looking at the key barriers that Claire mentioned at the beginning: grid, finance, planning and, indeed, communications as well, which we see as a key area going forward.

  Q21  Lord Lewis of Newnham: You are talking about energy targets for various dates, how do you go about actually measuring these energy commitments that you have and which department is responsible for doing this and reporting this? And how accurate are they? What is the sort of margin of error that is involved in this?

  Mr Gault: There will be annual report back on the Energy White Paper where we will be expecting to report back on our progress towards the longer term targets. Also feeding into this kind of work, we are doing a lot of work in terms of looking at projections of our energy demands and the sources of supply—where those demands will be met from. The Government's last projections on that subject were published in November 2000, which was Energy Paper 68, which looks at demands and the sources of supply. An update on that was published for consultation on the DTI website last July and we are currently engaged in refining and revising those projections now with the aim that final projections on that topic will be feeding into the final National Allocation Plan on the EU Emissions Trading Scheme by the end of March this year. Following on from that, we will be publishing a detailed set of those projections on a variety of different scenarios, as well as a central case. But projections of this kind are obviously extremely difficult, which is why we tend to look at a number of scenarios. Within Energy Paper 68 we also published various sensitivities and we published some information on the level of confidence that we had in certain elements of the projections. Clearly, in an econometric approach you can produce some evidence about your level of confidence in some of the estimated equations. Nevertheless, a huge element of uncertainty here is what will happen to underlying fossil fuel prices and I do not think that there are many of us who can really predict these accurately. We cannot predict accurately where they are going to be in 2010, 2020 or whatever. We have to try to make policy on that basis—that we have looked at a number of sensitivities and the risks.

  Q22  Lord Lewis of Newnham: But I think my question is even more direct. You have data at the moment, how reliable is that particular set of data?

  Ms Durkin: We have in-house statisticians, a significant team actually in comparison with most other areas that I am familiar with in Whitehall, and annual statistics are published each year and they are peer-reviewed. In addition, Ofgem obviously collects a huge amount of data and in terms of Renewable Obligation Certificates they manage that process. I am reasonably confident that, because the certificates are real certificates, that information is just straightforward facts, just counting. I hope that my confidence in the energy statistics is not misplaced—I have been told at regular intervals that they are very highly regarded and I think they are of quality. They remind me of my work with labour market statistics. They were two areas where the Government spent a great deal of time trying to ensure that they were as good as we could get in the world. So I hope that they are reasonable, but nobody would go to the wall on statistics.

  Q23  Lord Wade of Chorlton: The White Paper sets four objectives to cut the CO2 emissions: to maintain the reliability of supplies; to promote competitive markets and enhance economy growth and productivity; to ensure that every home is adequately heated. Is the development of renewable energy the best way to achieve these objectives and, most importantly, are these objectives, in your view, mutually compatible?

  Ms Durkin: I think for you, and for most people, it should be hugely reassuring that we have four objectives in that area rather than the White Paper coming out with just one and concentrating exclusively on developing a renewables market. If I may explain that certainly the renewables contribute most directly to the carbon abatement objective, which is to reduce climate change. We have said that we think that by 2020 we will have a significant contribution to make to that objective. In terms of the other objectives, the story is that we are not going to be developing a renewables market irrespective of liberalisation. We are not going to abandon a liberalised competitive market in order to simply "Stalinistically" go through and build wind farms. It also tells the story that neither are we doing it irrespective of security of supply. So we are not taking our eye off that ball and hoping that it has a significant contribution to security of supply. But to just remind on that at 2010 we are just talking, even if we are right on target, of just 10 per cent. So for security of supply it would be foolish not to be looking at what is happening for the 90 per cent. And finally, we are not developing irrespective of cost. Hence the reference to fuel poverty. So I think my message is that our aim is for a cleaner, competitive and friendly-to-the-consumer energy market in the future and it is by putting all of those things in place, not just concentrating on development of renewables, that we will succeed.

  Q24  Lord Wade of Chorlton: And yet that is not the sort of message that comes off from a practical of point of view because I have been looking at that answer and looking at the question of cutting CO2, there are lots of ways of cutting CO2 that would be a lot cheaper, easier and quicker than to build up on renewables, and yet the emphasis seems to be on the renewables. How do you answer that? And I am repeating criticisms that I have heard from other various sectors of the energy industry.

  Ms Durkin: From my point of view, the importance of developing the renewable sector is two-fold; one, it is developing an energy supply, so therefore it fits into the security of supply when we are looking for new energy sources; and, two, it is developing a clean energy supply. We could cut CO2 by closing down all sorts of energy or by just not going in planes and cars and it completely—

  Q25  Lord Wade of Chorlton: Or by putting up the price of electricity, for a start.

  Ms Durkin: In comes the ETS which marginally will put up the price of electricity.

  Q26  Lord Wade of Chorlton: No, but it seems to an awful lot of people that we have looked very narrowly at this issue and that, in the end, we have gone for possibly the most difficult way, in the short term, to resolve a lot of these issues. And what I do not understand is really how the Government generally have come to the conclusion that renewables are the most important thing to work on in the short term.

  Ms Durkin: I think part of the problem, certainly in terms of the receipt of the White Paper as much as anything else, was that nobody saw that there were four aims and everybody saw the windmill on the front. In a way that was the new story, so inevitably that was what people noticed, but our strategy is not purely to develop renewables. I have one director who is working only half on renewables and the other on oil and gas. We are looking right across the board. So I think part of it is a perception that this is all we are doing because this is all that people notice, but partly, and I will turn to Adrian, it is that we are developing a significant source of energy and it has importance in terms of developing energy as well as importance in terms of carbon abatement.

  Mr Gault: In terms of renewables, I think an important aspect of the policy is that we see big potential for the costs of these renewable options to come down over time so that although renewables might not this year be the most cost effective source of carbon reduction, we do see huge potential for those costs to come down so that if we are going to meet the longer term aims that we have in the Energy White Paper for carbon reduction, we want to develop some of those sources now so that they are available at a relatively low cost in future years. But in the Energy White Paper I think there actually is a very balanced policy mix in terms of areas where we are trying to seek carbon savings. Certainly one of the principle instruments is the EU Emissions Trading Scheme which we are putting at the centre of the policy mix. Through that instrument we are establishing a carbon price through a substantial part of the economy, which will encourage fuel switching in generation and in industry use and we are going to encourage more energy efficiency. And that is a route that we see expanding over time in producing carbon savings longer term.

  Q27  Lord Methuen: When you say "security of supply" does that include sources of primary energy, ie the political situation for the supply of gas and oil?

  Ms Durkin: We are doing a lot of work in that area.

  Q28  Lord Tombs: I would like to pursue this question Mr Gault raised of the good policy of cost reduction in wind energy and I think if you could flesh this out it would be helpful. There are a number of things militating against it, of course. Offshore wind will be considerably more expensive both to build and to operate than on-shore wind, the remoteness of a lot of work on-shore and offshore will push up transmission costs and the growing amount of renewables will require back up reliable generation. So all of these are additional costs and they would have to be substantial. You would have to offer a capital cost reduction that will more than off-set those for that contention to be true. It would be helpful, I think, my Lord Chairman, if we could have that spelt out.

  Mr Todd: If I could respond on precisely that point. One of the reports that we do hope to table is the report we commissioned from Garrad Hassan; they do address the expected cost reductions in terms of wind turbines. Just to say that there are several factors that will drive costs down: for the same size of turbine, technology will reduce costs over time; the turbines are always increasing in size and therefore the cost per megawatt will always come down (we are just dealing with a 4.2 megawatt turbine coming from one manufacturer at the moment, so you can see how that is going) and, thirdly, when we move to these very large offshore wind farms up to perhaps 1,000 megawatts, you get tremendous economies of scale and again the cost per megawatt comes down.

  Lord Tombs: Economies of scale, my Lord Chairman, are well known and frequently happen, but they are not endless. They turn out to be asymptotic and they flatten out quite sharply and other costs come in to militate against the economies of scale. So I have been a great protagonist of economies of scale in my lifetime, but I am now increasingly sceptical.

  Q29  Lord Flowers: But all these objectives could be met, could they not, by encouraging nuclear? Is it not a bit trendy to go for renewables?

  Ms Durkin: It would be the very first time in my life that I have been accused of being trendy. However, I would simply say that part of my responsibilities is to keep the nuclear option open and that we are very conscious of that—certainly I am putting a lot of work into nuclear skills development and some research and development so there is no question of us turning our back. So it is not an `either/or'.

  Q30  Lord Young of Graffham: Can I come back to this 10 per cent target by 2010? There is a caveat in it "subject to the costs being acceptable to the consumer"; how do you define "costs acceptable"? Cost level itself, will it be acceptable to us, and where is the market figure in this?

  Mr Gault: Essentially we set the level of what is acceptable through the buy-out price that has been set, three pence per kilowatt hour. And on the basis of the obligations set, we expect overall that electricity prices by 2010 potentially could rise by, I think, around five per cent on average. So that, I think, is setting the level at which we are saying that it is acceptable to have price rises by 2010.

  Q31  Lord Young of Graffham: But does that leave any space for competitive supply of energy coming in from other sources? Suppose that there are economic-to-run grids on the Continent or other areas where there might be other supplies. In other words, there could be downward pressure on energy supplies and would that leave the wind farms marooned?

  Mr Gault: That would mean that the overall price of generating electricity may fall for other reasons. It may rise for other reasons. The renewables will receive the three pence extra, on top of whatever the wholesale price is net of that obligation. So the electricity price can still vary and renewables will get something on top of that.

  Ms Durkin: But the point is that there is the buy-out and it is thus far and no further. So we would not be ensuring that they were supporting wind farms irrespective of the cost.

  Q32  Chairman: I am sorry, maybe I missed this, but it is a question of how you determine whether any particular level of increase in cost is acceptable to the consumer because the consumer has no choice. They use electricity and they have got to pay whatever their supplier asks.

  Ms Durkin: And the determination, as it was indeed for the buy-out price, is through considerable consultation and, needless to say, negotiation with the Government. The Treasury also plays a very important part in these negotiations.

  Q33  Baroness Sharp of Guildford: Could I come in with a supplementary question? Given your emission targets for 2020, you actually want the real price for electricity to go up because half of your target is to be met from efficiency—you are only going to get efficiency in use if the real price goes up.

  Mr Gault: The answer is yes, we do expect that medium and longer term the price of energy is going to go up and this is a reflection that there are costs of meeting our emissions targets. We cannot do it for free. We expect the price of electricity to go up and that is absolutely there within the Energy White Paper where we have said that we expect prices to go up and potentially by how much.

  Ms Durkin: But if I might add to Lord Wade's question of the four different aims of the White Paper; it is not irrespective of how much.

  Q34  Baroness Sharp of Guildford: And in the short term it has been going down to the consumer.

  Ms Durkin: It has been going down significantly in the last few years, but that has now turned.

  Q35  Lord Wade of Chorlton: But the point is that if the electricity prices go up, then other solutions will come in that might be a better solution to save CO2 than renewables because the reason why people are not investing into alternatives is because the electricity price is so low. Would you agree with that or not?

  Ms Durkin: Certainly I am regularly told by our friends in the City that the last two years were not a great two years for big investment in energy, but everything from the White Paper and from Adrian's work, which is public, gives a sense of the direction of energy and we are witnessing better investment now.

  Q36  Lord Tombs: I wonder if you could comment on the way in which recent changes to NETA and the hoped-for translation into BETTA have affected, or will affect, the prospects for wind energy?

  Ms Durkin: I would say that the changes in NETA have been to improve the system overall and, by improving the system overall, it has improved the chances of the smaller generators and renewables. But it has been in the context of just making improvements and I would cite two or three examples of that. One, which I needed explained to me I freely confess, was the gate closure. Moving from the three hours to the one hour does actually make a considerable difference to your smaller generators—far more than to the larger generators. The new consolidation will make a big difference and, finally, what will be brought in with BETTA is the shallow charging in terms of the connection to the grid. I think that will make a very big difference in terms of how renewable energy will get onto the grid. BETTA generally, I think, will improve matters for all of energy, but certainly for renewables. Together with the consolidation it means employing some of the renewable energy in Scotland and it can also be from The Wash etc. So all the trends, I think, are for improvement, but the purpose is improving the whole system.

  Q37  Lord Tombs: To the extent that wind energy has been very attractive for investment over the past five years, and looks like continuing with the extension of the deadline for ROCs, is there a danger of investment in standby plant or peaking plant, if you like, or plant that can operate reliably being squeezed out? At the moment there are lots of interesting investments in wind farms and not very much in fixed fossil fuel stations.

  Ms Durkin: Currently there is no evidence of that. We have obviously been monitoring extremely closely coming up to the winter period, and there have been plants which have been taken out of mothballs, and the large generators are showing every bit of interest in the gas that they have as well as their interest in offshore. So at the moment it does not appear so.

  Q38  Lord Tombs: I think one should be very careful about that, if I may say so. Taking plant out of mothballs involves no capital cost and one is looking at revenue cost only, very short term.

  Ms Durkin: Right, but we will be monitoring it.

  Q39  Lord Tombs: Would it be fair to say the European Emissions Trading Scheme will be generally favourable? The effects of it will be generally favourable to renewable sources?

  Ms Durkin: The short answer is yes, to a small degree it will be but the detail . . .

  Mr Gault: Yes, the extent to which it will be favourable is going to depend on the carbon price and that will be determined EU-wide, not simply by decisions made in the UK. That will depend on decisions made EU-wide on levels of allowances that are going to be issued under that scheme and it will depend on the cost of mitigation options across the EU as a whole. We expect that will then lead to an increase in the price of generation from fossil fuels and an increase in the electricity price. To the extent that that happens, that will tend to make renewables more competitive and will be of benefit to renewables. But the expected value of that is likely to be much, much lower, certainly in the first phase, or two phases, of the EU scheme, much lower than the level of the Renewables Obligation.