CORRECTED TRANSCRIPT of ORAL EVIDENCE to Be Published As HC 1089-I

CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1089-i HOUSE OF COMMONS ORAL EVIDENCE TAKEN BEFORE THE ENVIRONMENTAL AUDIT COMMITTEE ENERGY SUBSIDIES IN THE UK WEDNESDAY 24 APRIL 2013 DR WILLIAM BLYTH Evidence heard in Public Questions 1 - 47 USE OF THE TRANSCRIPT 1. This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others. 2. The transcript is an approved formal record of these proceedings. It will be printed in due course. 1 Oral Evidence Taken before the Environmental Audit Committee on Wednesday 24 April 2013 Members present: Joan Walley (Chair) Peter Aldous Neil Carmichael Martin Caton Katy Clark Zac Goldsmith Caroline Lucas Dr Matthew Offord Mr Mark Spencer Dr Alan Whitehead Simon Wright ________________ Examination of Witness Witness: Dr William Blyth, Oxford Energy Associates, gave evidence. Q1 Chair: What I would like to do this afternoon, Dr Blyth, is to give you a warm welcome to our first session of this inquiry about energy subsidies. It would be fair to say that we regard the research that was commissioned, which you provided us with, as the starting point for what we hope will be an inquiry that will, as we go along, expose further themes that we need to be addressing, building on the starting point that you have provided us with. Our first question as a Committee to you is that, in the way that we try to go about understanding the importance of energy subsidies and their usefulness, what are the main justifications that are put forward for having energy subsidies and are those justifications more reasonable than others? Is there a pecking order of justifications for them? Dr Blyth: Thank you. The normal justifications for subsidies would be the infant- industry argument. If you have an industry that needs protection from full market forces in order to establish itself, maybe bring down costs and so on, there is an argument for providing an environment where new technologies can develop. That is typically one example where you might provide that kind of market support. The second area, typically, would be pro-poor policies, providing subsidies on products or goods that help alleviate poverty or allow access to those markets or goods for poorer consumers. The third area, typically—and this is not just within energy—would be protection from international markets if there is a need for particular countries—usually it is more relevant in a more developing-country context—to develop domestic markets before becoming exposed to wider international competition. Thinking about those in the UK context, probably the most relevant in my mind for UK subsidies is still the infant-industry argument. It is a slightly unfortunate term because a lot of the technologies that we are talking about, when we think about the way the energy system is going and low-carbon energy development, have been around a long time, so they are not really infant, but on the other hand there is a lot of dynamic change in the energy market. Dealing with the dynamics of change and uncertainty, and the unpredictability of the 2 future, is one aspect of the infant-industry argument that I think does provide a basis on which subsidies can be justified. Q2 Chair: You just mentioned change and uncertainty. Would you tie that to the timeline, and how much is the necessity of having a subsidy for the short, medium or long term something that features in the design of subsidies? Where a subsidy was needed initially, how do you know when it has got to the stage that it is no longer needed? How do you factor in the length of time that subsidies may or may not be needed? Dr Blyth: That is a very good point. That is one element of the infant-industry argument: that you do not want something to be an infant for ever. At some point you have to bring it to maturity and let it compete. The economic argument as to why subsidies are not considered a good thing in the long run is that the economics of that is really established in equilibrium economy. If everything was in equilibrium and going to be certain for the future and so on, you would probably scrap all subsidies because you do not need them. Subsidies help you through a process of change, but at some point you want to say, “We supported such and such a technology because we thought that it was going to reduce costs over a certain period of time.” If you find that it has not done so, you would need to just bite the bullet and say, “We are going to remove that,” and hopefully at that stage you would be identifying other technologies that would take their place. But some sort of timeline is very important. Q3 Chair: It is interesting that you said that that was an economic aspect, but ours is a cross-cutting Committee, so we are looking at business Departments and we are looking at other Departments as well. How much is it a matter for other Departments who might have some remit for a subsidy either continuing or not continuing in respect of competitiveness, say, or overseas competitiveness? How much is that design of the subsidy a matter for other Government Departments and not just the Government Department that is responsible for financing the subsidy? Dr Blyth: Energy costs would be one element, so you would want to be looking at the competitiveness of the energy market as a whole and identifying ways of reducing or minimising the cost of energy. If you are subsidising, it implies you are raising the cost, which may be true in the short term, but the view is that you are trying to support a transition to something that in the long run would be cheaper. From that point of view there is a business competitiveness element to having a long-run aim towards a low-cost, low-carbon economy. Then, obviously, the energy sector is critical to all of this. How you design an electricity market, for example, and have a fair system for different fuel sources to be able to compete in that market is clearly critical. Q4 Chair: Do you think that others who might have an interest in that are sufficiently aware that that is a procedure they perhaps need to be having input to? Dr Blyth: The difficulty with subsidies is that they immediately become very politicised. One of the things I have tried to do in the report is try to be as transparent as possible about what a subsidy is and when it is appropriate. Different Departments will probably have their different stake in which sectors they feel most exposed to or have the most interest in. Probably the key areas are for the electricity sector, and that combination between energy and climate change is the crucial area to be resolved in the transition to low- carbon energy systems. Q5 Neil Carmichael: I was going to probe that issue about new technology. Often it is the most expensive because you have to basically invent it, test it out and so on. In particular, if you are not using a fuel but using the technology itself to generate energy, then 3 of course the bill costs will be enormous. So, subsidies perhaps can and should be used to enable new technology to be developed. Dr Blyth: Yes, I would agree with that. Typically, the basic economic theory would say you should always do your cheapest options first, because if you have a cheaper option available to you, why would you choose an expensive option? The problem with that argument is that it does not take into account the dynamics of how technology costs change over time. If the option you have available to you now is cheap, but there is a risk that it becomes expensive in the future, you do not necessarily want to lock into becoming too dependent on that source. That is the classic example of where you might want to support something that looks more expensive now, and you create a niche for it, and hopefully, if that becomes successful, then that niche will grow and perhaps become mainstream. But you need a fairly flexible approach to that. The way these costs develop over time are quite uncertain. If it turns out that the low-cost source you have now stays low cost, it may be that the thing that you thought was going to come down over time never reaches maturity and never competes with it, in which case you have to keep revising your approach to how you support that. But I think exactly in principle that is what you are trying to achieve with subsidies. Q6 Zac Goldsmith: Politicians on the whole or Governments on the whole have not been particularly good at picking winners, picking the right technologies, and most people struggle to imagine what the future might look like. In 10 or 20 years from now, there might be energy sources that none of us has even really considered that are suddenly very economic. How do you avoid a situation where Governments pick winners and then risk creating an addiction to subsidies for unimpressive technologies and technologies that will never stand on their own feet? How can you have a neutral policy that still allows these start-ups on to the table? Dr Blyth: Yes, that is a very good point.

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