House of Commons Environmental Audit Committee

Energy subsidies

Ninth Report of Session 2013–14

Volume I Volume I: Report, together with formal minutes, oral and written evidence

Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/eacom

Ordered by the House of Commons to be printed 27 November 2013

HC 61 [incorporating HC 1089-i, Session 2012–13] Published on 2 December 2013 by authority of the House of Commons London: The Stationery Office Limited £0.00

Environmental Audit Committee

The Environmental Audit Committee is appointed by the House of Commons to consider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development; to audit their performance against such targets as may be set for them by Her Majesty’s Ministers; and to report thereon to the House.

Current membership Joan Walley MP (Labour, Stoke-on-Trent North) (Chair) Peter Aldous MP (Conservative, Waveney) Neil Carmichael MP (Conservative, Stroud) Martin Caton MP (Labour, Gower) Katy Clark MP (Labour, North Ayrshire and Arran) Chris Evans MP (Labour/Co-operative, Islwyn) Zac Goldsmith MP (Conservative, Richmond Park) Mark Lazarowicz MP (Labour/Co-operative, Edinburgh North and Leith) Caroline Lucas MP (Green, Brighton Pavilion) Caroline Nokes MP (Conservative, Romsey and Southampton North) Dr Matthew Offord MP (Conservative, Hendon) Dan Rogerson MP (Liberal Democrat, North Cornwall) [ex-officio] Mr Mark Spencer MP (Conservative, Sherwood) Dr Alan Whitehead MP (Labour, Southampton, Test) Simon Wright MP (Liberal Democrat, Norwich South)

The following members were also members of the committee during the parliament: Richard Benyon MP (Conservative, Newbury) [ex-officio] Ian Murray MP (Labour, Edinburgh South) Sheryll Murray MP (Conservative, South East Cornwall) Paul Uppal MP (Conservative, Wolverhampton South West)

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The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.

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Energy subsidies 1

Contents

Report Page

Summary 3

1 Introduction 5 Definitions 6 Our inquiry 8

2 The rationale for energy subsidies: Pro-poor policy 10 Lower VAT rates 10 Fuel poverty 11 Prime Minister’s review of energy bills 11

3 The rationale for energy subsidies: supporting infant and low-carbon industries 15 Subsidies, overseas aid and export support 15 Renewables and the need for time limited subsidies 17 New nuclear 19 Contracts for difference and capacity payments 22 Oil and gas 24 Shale gas 25

4 Eliminating harmful and inefficient subsidies 26

Conclusions 29

Recommendations 31

Formal Minutes 33

Witnesses 34

List of printed written evidence 34

List of additional written evidence 35

List of Reports from the Committee during the current Parliament 36

Energy subsidies 3

Summary

Globally, subsidies for fossil fuels exceed $500 billion a year. They are inconsistent with the global effort to tackle climate change, providing incentives for greater use of such fuels and disincentives for energy efficiency. Energy subsidies in the UK are running at about £12bn a year; much directed at fossil fuels. There is no single internationally agreed definition of what constitutes energy subsidy, which has provided a way for the Government to reject— erroneously, in our view—the proposition in some areas that it provides energy subsidies.

In the UK, the Government’s proposed change of definition of ‘fuel poverty’, and the weakening of the legislative commitment to ‘eliminate’ it, will place a greater imperative on the Government to demonstrate that it is committed to making fuel poverty a thing of the past. Unless the Government is prepared to make that commitment and show how it will be delivered, the changes should be stopped.

The Government is undertaking a review to examine the scope for reducing ‘green levies’ in energy bills. While such levies currently account for 9% of bills, in the longer term they will not increase bills. The biggest proportion of such charges is currently already directed at supporting the poorest bill-payers. If the review does find some levy savings in energy bills, perhaps by shifting them to general taxation, the imperative for energy efficiency measures must remain the priority because of the underlying need to tackle climate change by reducing our emissions. In the Autumn Statement, the Government should make clear how any changes to green levies will change the amount that those in fuel poverty will have to pay, by how much and how soon.

The Government uses energy subsidies to support some new technologies, but also some long-established and high-carbon ones. Subsidies for renewables are an essential lever to provide certainty to industry and drive investment in those technologies. The Government should rethink its hostility to a separate continued European target for the deployment of renewables. New nuclear is being subsidised by what the Government prefers to call ‘support mechanisms’ and ‘insurance policies’. The Government’s policy of ‘no public subsidy for new nuclear’ requires it to provide only ‘similar’ support to that provided to other types of energy, but even on that basis the deal for Hinkley Point C is ‘dissimilar’, notably on support for decommissioning and waste.

The Government’s capacity payments regime constitutes a subsidy for gas-fired electricity generation because in practice it will be the only eligible technology, as do field allowances for North Sea oil and gas despite the Government’s assertion otherwise. Fracking does not warrant subsidy through a favourable tax treatment.

The variation in definitions of subsidy allows the Government to resist acknowledging subsidy in many areas, particularly on nuclear energy and the lower rate of VAT on domestic and small business bills. It also allows it to claim that it has no ‘harmful’ or ‘inefficient’ subsidies—those in the firing-line of the UN Rio+20 Summit and the G20— despite fossil fuel consumption contributing to our greenhouse gas emissions.

The Government should use the Autumn Statement as an opportunity to provide a clear

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and comprehensive analysis of energy subsidies in the UK, to present its methodology and calculations, and to show how these figures differ from those produced using the methodologies of the main international institutions. This would bring much needed transparency and provide a basis for an overdue debate on the rationale and justifications for energy subsidies in the UK. The Government should introduce a target to reduce the proportion of energy subsidies that support fossil fuel, rather than low-carbon, consumption.

We do not believe there is any case for treating subsidies to mature energy technologies where there is little likelihood of cost reduction in the future in the same way as technologies that can, over time, compete in the market place without long-term subsidy. We consider that the Government should present a case for subsidy, and hence for the application of EU state aid rules, separately for each energy category.

More fundamentally, the Government needs to demonstrate leadership in increasing the deployment of renewables and in promoting energy efficiency through the careful and targeted use of subsidies and levies, to provide certainty over the longer term for the investment in the technologies on which these will depend.

With overseas aid often globally directed at countries which also have fossil fuel subsidies, and export support going to fossil fuel projects, DfID and UK Export Finance should assess how UK support in these areas correlates with fossil fuel subsidies in support-recipient countries and set out why continued support in each case overrides the need for eliminating fossil fuel subsidies.

Energy subsidies 5

1 Introduction

1. Globally, government subsidies for the use of resources—water, energy, steel and food— run at $1.1 trillion a year.1 The largest part of that figure is accounted for by fossil fuels subsidies. The International Energy Agency (IEA) identified global subsidies to fossil fuel producers alone at $523bn in 2011.2 The OECD estimates that its member countries spend $55–90bn a year on such subsidies.3 The IEA calculate that subsidies for fossil fuels are six times higher than for renewables.4

2. Such fossil fuel subsidies are inconsistent with the global effort to tackle climate change. By encouraging consumption they increase emissions and remove incentives to be more energy efficient. As Shelagh Whitley of the Overseas Development Institute puts it:

If their aim is to avoid dangerous climate change, governments are shooting themselves in both feet. They are subsidising the very activities that are pushing the world towards dangerous climate change, and creating barriers to investment in low- carbon development and subsidy incentives that encourage investment in carbon- intensive energy.5

In 2011 the IEA estimated that completely eliminating fossil fuel subsidies would cut global energy demand by 4%, and emissions by nearly 5%, by 2020. A similar OECD analysis envisaged a 6% reduction in emissions by 2050.6 More recently, the IEA estimated that even a partial withdrawal of fossil fuel subsidies by 2020 could reduce CO2 emissions by 360m tonnes, or 12% of the reduction needed to keep global average temperature rise to the 2oC limit set by the UN Climate Change Convention.7

3. In June 2012, the UN ‘Rio+20’ Earth Summit resolved:

... to phase out harmful and inefficient fossil fuel subsidies that encourage wasteful consumption and undermine sustainable development. We invite others to consider rationalising inefficient fossil fuel subsidies by removing market distortions, including restructuring taxation and phasing out harmful subsidies, where they exist, to reflect their environmental impacts.8

This followed a commitment by the G20 in 2009 (restated in 2012) to:

phase out and rationalise over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest. Inefficient fossil fuel subsidies encourage

1 ODI, Time to change the game: Fossil fuel subsidies and climate (November 2013) 2 IEA, World energy outlook 2012 (2012) 3 OECD, Inventory of estimated budgetary support and tax expenditures for fossil fuels (2012) (From an analysis of 34 countries (Q48)) 4 IEA, Redrawing the energy-climate map (2013) 5 Time to change the game: Fossil fuel subsidies and climate, op cit. 6 IEA, OPEC, OECD & World Bank, An update of the G20 Pittsburgh and Toronto Commitments (2011), Section 1.3 7 Redrawing the energy-climate map, op cit. 8 UN, The Future We Want (June 2012), para 225

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wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.9

Collectively, the G20 countries accounted for 78% of global carbon emissions from fuel combustion in 2010.10 But of the G20 countries, half (including the UK) claim to have no ‘inefficient’ fossil fuel subsidies (paragraph 66).11 This contrasts with assessments of the extent of fossil fuel subsidies in the UK, without the Rio+20 and G20 differentiation of ‘harmful’ or ‘inefficient’ subsidies, of $6.8bn a year by the OECD and $10.9bn by the IMF.12

Definitions

4. Because there is no single globally agreed definition of energy subsidy,13 we commissioned Dr William Blyth of Oxford Energy Associates to set out the theory and practice of energy subsidies and to review how the various definitions that are available apply to the UK.14

5. He identified a difference between ‘direct’ and ‘indirect’ subsidies. He noted that the subsidies definition used by the World Trade Organisation (“any financial contribution by a government ... that confers a benefit on its recipient”15) focuses mainly on measuring direct subsidies, including the transfer of funds, taxes foregone and government guarantees. Such guarantees transfer risk from producers to government, reducing the cost of capital for the producer which constitutes a tangible reduction in cost. Dr Blyth noted that the OECD, on the other hand, also include as subsidy the impact of “all forms of market price support involving transfers between consumers and producers created as a result of policy such as government interventions on tariffs”, which includes applying tax rates which are lower than those ‘normally’ applied.16 Like the WTO definition, the OECD definition uses the notion of ‘conferring benefit’.17

6. Rather than the OECD’s bottom-up ‘effective rate of assistance’ approach, which relies on identifying different aspects of subsidy in some detail,18 the International Energy Agency uses a ‘price gap’ approach. Its definition covers “any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers”.19 It considers the difference between the subsidy-produced price and the price in the absence

9 G20, Summary of Progress Reports to G-20 Leaders on the Commitment to Rationalize and Phase Out Inefficient Fossil Fuel Subsidies (2012) 10 Time to change the game: Fossil fuel subsidies and climate, op cit. 11 ibid, Table 1; Summary of Progress Reports to G-20 Leaders on the Commitment to Rationalize and Phase Out Inefficient Fossil Fuel Subsidies, op cit 12 Inventory of estimated budgetary support and tax expenditures for fossil fuels, op cit; IMF, Energy subsidy reform: Lessons and implications (2013); Time to change the game: Fossil fuel subsidies and climate, op cit, Table 1 13 Time to change the game: Fossil fuel subsidies and climate, op cit. 14 Ev 64 15 WTO, Uruguay round agreement: Agreement on subsidies and countervailing measures (1994), Article 1.9 (p44) 16 Ev 64; Inventory of estimated budgetary support and tax expenditures for fossil fuels, op cit. 17 OECD, Analysing energy subsidies in the countries of eastern Europe (2013) 18 Ev 64, para 1.2.2 19 Analysing energy subsidies in the countries of eastern Europe, op cit; IEA, Taxing and Subsidising Energy (2006)

Energy subsidies 7

of subsidy.20 The latter ‘reference price’ requires a judgement about what taxes are ‘normal’, because taxes are essentially negative subsidies. The International Monetary Fund (IMF) have a narrow (‘before tax’) and a broader (‘after tax’) measure, which uses a ‘price gap’ approach to compare the price paid for energy in a country with the international price available.21 The IMF has included reduced VAT rates within its definition of subsidies.22 Under the IEA methodology, however, lower rates of VAT on electricity generation are not treated as being a subsidy, on the basis that the electricity sector is often regarded as an “intermediate energy transformation process rather than a final consumer” and therefore not normally taxed.23

7. The imposition of carbon prices, Dr Blyth told us, acts to correct a market failure. In the OECD model, therefore, they should in theory be considered as “a correction to a sub- optimal prevailing market price signal ... In that sense, the absence of a carbon price in energy markets constitutes a subsidy since in a market without carbon prices, polluters are not paying their full production costs.”24 Renewable UK (one of our witnesses) supported this approach.25 The IEA methodology, however, “excluded environmental externalities from their calculations of subsidies on the basis that carbon pricing is not yet ‘normal’ practice within its member countries”.26 The IMF has actually included as subsidy any lack of taxes designed to internalise the cost of environmental damage, including a $25/tCO2 benchmark for emissions from fossil fuels.27 This shifts the focus of the energy subsidy debate. Since most countries do not tax carbon at this level (if at all), Dr Blyth pointed out that this under-pricing of externalities, combined with tax breaks, “swings the total level of energy subsidies from being dominated by developing country producers (as suggested by the IEA price-gap approach) to being dominated by the major energy users”.28

8. A definition put forward by the Global Subsidies Initiative (who gave evidence to our inquiry), largely based on the WTO’s definition, covers all forms of support—financial or otherwise—provided to consumers or producers. The GSI considers benefits to be a subsidy if they confer a considerable advantage to groups of market participants, even if some other groups may receive equal treatment (e.g. accelerated depreciation allowance is not specific to the oil and gas industry, but the GSI would still consider it a subsidy).29

9. A definition of subsidy is also implicit in EU state aid rules, which identify several tests which all must be met for state aid to be present: that is, whether state resources are being provided, whether they confer an advantage on the recipient which favours certain commercial undertakings or the production of certain goods, and whether that distorts

20 Ev 64, para 1.2.1 21 Energy subsidy reform: Lessons and implications, op cit; Time to change the game: Fossil fuel subsidies and climate, op cit, Section 2.1.3 22 Ev 64 23 ibid 24 Ev 64, paras 1.1.5, 1.2.2 and 2.1 25 Q137 26 Ev 64, para 1.2.1 27 Ev 64, para 1.2.4 28 ibid

29 Analysing energy subsidies in the countries of eastern Europe, op cit

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competition and affects trade.30 Platform, who also gave evidence to our inquiry, take a wider view than most others of what comprises subsidy, by including “diplomatic subsidies and military subsidies” as well as export credit support (paragraph 34).31

10. Some subsidies involve transfers between consumers and producers, or between different types of producers, or between different types of consumers. The UK feed-in tariff for residential solar PV power, for example, provides subsidies to those with solar panels on their roofs which electricity supply companies have to pay, but which they then effectively pass on to all residential electricity customers. The WTO definition of subsidy (paragraph 5) excludes such transfers because they do not involve government money.32 Other subsidies are paid for by government, however. Dr Blyth explained how for such subsidies the benefit is shared between consumers and suppliers—irrespective of whether the subsidy is directed at one rather than the other—depending on the elasticity of demand for that energy.33 The size of the benefit each receives then depends on the change in the quantity of energy produced and consumed, as well as the change in the price, resulting from the subsidising scheme. So, for example, Cold Weather Payments to pensioners in the UK are not subsidy, Dr Blyth told us, because although pensioners receive extra money there is no link to the quantity of energy they consume—they can spend the money on other things.34

11. There is no single internationally agreed definition of what constitutes energy subsidy. Methodologies differ widely, as do the nature of transactions and support mechanisms that might be subsumed in a measurement of subsidy. It is regrettable that this, as we note later in this Report (paragraph 65), has provided a way for the Government to reject—erroneously, in our view—the proposition in some areas that it provides energy subsidies.

Our inquiry

12. Dr William Blyth’s paper described the nature of energy subsidies, from first principles. He explained how ‘perfect markets’ might achieve ‘maximum social welfare’, and thereby how subsidies (like taxes) might represent a distortion from that ideal. But he also noted that perfect markets are in practice difficult to find because competition can be limited, because fixed costs present barriers to market entry, or because ‘externalities’ such as environmental damage (paragraph 7) are not reflected in prices.35 He concluded that “the market model still provides a very important benchmark, but this should not be used as the basis for a dogmatic rejection of interventions that seek to redress some of the more obvious failings”.36 He identifies three main arguments that have been put forward as rationale for subsidies:

30 ibid 31 Q137 32 Analysing energy subsidies in the countries of eastern Europe, op cit 33 Ev 64, Figure 1 34 Ev 64, para 2.2 35 Ev 64, paras 1.1.1 – 1.1.2 36 Ev 64, para 1.1.3

Energy subsidies 9

• to allow ‘infant industries’ and new technologies to be developed and be able to operate economies of scale;

• as part of ‘pro-poor’ policies (the most cited reason for subsidies at a global level); and

• protection from foreign competition.

Shelagh Whitley of the Overseas Development Institute, one of our inquiry witnesses, identified other factors which are often found as the cause for initiating and then failing to curtail fossil fuel subsidies, including the “national patrimony” of fossil fuel producing countries seeking to share the benefit of production across their societies, buffering against price shocks, the power of special interest groups (eg farmers in India), lack of information on the extent of subsidies, and a lack of other available policy levers in countries with weak government institutions.37

13. Against that background, we explore in this Report the rationale for energy subsidies— pro-poor policies in Part 2 and supporting infant and low-carbon industries in Part 3—and the extent to which the UK uses such subsidies. In Part 4 we consider the extent to which UK subsidies are ‘harmful’ or ‘inefficient’ and the extent of transparency in respect of energy subsidies in the UK.

14. In addition to discussing the paper we commissioned from Dr William Blyth of Oxford Energy Associates,38 we took oral evidence from others who have studied the extent of subsidies; representatives of different energy sectors; DfID, UK Export Finance and DECC officials; and the Energy Minister Rt Hon Michael Fallon MP. Our aim has been to produce our Report ahead of the Autumn Statement, which could provide the Government with a timely opportunity for addressing our recommendations.

37 Time to change the game: Fossil fuel subsidies and climate, op cit. 38 Ev 64

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2 The rationale for energy subsidies: Pro- poor policy

15. At a global level, the use of energy subsidies in developing countries is often derived from policies to help protect those countries’ poorest citizens. Subsidies are a readily available policy instrument when such countries have their own domestic energy resources. However, those benefits, when applied as blanket subsidies for all consumers are “inefficient economic and social assistance systems” because, as Peter Wooders of Global Subsidies Initiative told us, “everybody benefits ... particularly people who use more, and that just does not seem to make sense if your target is to protect the poorest. ... The UK VAT exemption has some of those characteristics too”.39 The World Bank calculated in 2008 that in developing countries with fossil fuel subsidies, the poorest 40% received only 15-20% of the benefit.40 Similarly, the IMF found that the poorest 20% of households typically receive less than 7% of the benefit.41

Lower VAT rates

16. The OECD, using its subsidy calculation methodology, identifies the main element of energy subsidy in the UK as a lower-than-normal VAT rate of 5% on energy bills. Domestic and small business use of oil, gas, coal and electricity (whatever the original fuel source) are all charged at 5%. Dr Blyth told us that this practice is unusual, with most European countries taxing energy at the standard rate of VAT.42

17. A March 2013 report from the Joseph Rowntree Foundation43 considered ways in which a carbon taxation regime might be structured to remove what its authors described as the “environmentally perverse subsidies” inherent in the current system. Prof Paul Ekins, one of the authors, discussed the report’s findings with us. One of his revenue- neutral proposals was to raise the rate of VAT on household energy bills to 20%, from a current rate which he saw as a regressive subsidy benefitting high-income households who tend to consume more energy, and using the extra revenue generated by the higher VAT to provide targeted compensation to low-income households through Universal Credit and Pension Credit.

18. The Energy Minister, however, did not agree that the 5% lower rate of VAT on household energy bills represented subsidy, in part because VAT on energy had always been low and had not actually been reduced from the higher standard rate.44 The review of energy bills instigated by the Prime Minister, which we discuss below, would not examine

39 Q61 40 World Bank Independent Evaluation Group, Climate change and the World Bank Group: Phase 1: an evaluation of World Bank win-win energy policy reforms (2008) 41 Time to change the game: Fossil fuel subsidies and climate, op cit. 42 Ev 64, para 2.2 43 Joseph Rowntree Foundation, Designing carbon taxation to protect low-income households (March 2013) 44 Qq241-244

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the scope for using a higher rate of VAT on bills to finance more targeted financial support for the poorest households.45

Fuel poverty

19. The Government centres pro-poor policy in the UK on its measurement of ‘fuel poverty’. This is currently measured in terms of households needing to spend more than 10% of their income on fuel “to maintain an adequate level of warmth”.46 In 2011 DECC calculated that, on that basis, there were 4.5m households (17%) in fuel poverty in the UK, including 3.2m (15%) in England.47

20. In July 2013, DECC published Fuel poverty: A framework for future action, which signalled the Government’s intention to change the definition of ‘fuel poverty’ following the Hills review.48 The new target would be focused “on improving the energy efficiency of the homes of the fuel poor”. Under a new indicator, households will be deemed as fuel poor “if they have above average fuel costs and were they to spend that amount on fuel they would be left with a residual income below the official poverty line”. Under the new measure there were 2.4m households (11%) in fuel poverty in England in 201149 (compared with 3.2m under the old measure). In financial terms, the ‘fuel poverty gap’ of those English households with costs above 10% of their income was £1.05bn, or £438 for each fuel-poor household.50

21. The Government has amended the Energy Bill in the House of Lords to reflect this change of definition, and to change the provisions in the Warm Homes and Energy Conservation Act 2000 to no longer require the “elimination” of fuel poverty by 2016, but instead allow fuel poverty to be “addressed” by a date to be set later by secondary legislation.51 The Energy Minister said that the new measure had the advantage that it did not just address the proportion of income needed for energy bills, but also the level of households’ wealth or poverty: “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.”52

Prime Minister’s review of energy bills

22. On 23 October, the Prime Minister told the House:

We need to roll back some of the green regulations and charges that are putting up bills. ... What we need to do is recognise that there are four bits to an energy bill: the wholesale prices, which are beyond our control; the costs of transmission and the

45 Q244 46 HC Deb, 28 October 2013, col 366W 47 DECC, Annual report on fuel poverty statistics 2013 (May 2013), Section 2.1 48 DECC, Fuel poverty: A framework for future action (July 2013) 49 DECC, Fuel poverty report: Updated August 2013 (August 2013), Section 2.1 50 ibid; HC Deb, 6 November 2013, col 207W 51 HL Deb 11 July 2013, col GC129 52 Qq239, 240

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grid, which are difficult to change; the profits of the energy companies; and the green regulations. It is those last two that we need to get to grips with. So I can tell the House today that we will be having a proper competition test carried out over the next year to get to the bottom of whether this market can be more competitive. I want more companies, I want better regulation and I want better deals for consumers, but yes, we also need to roll back the green charges that [the Leader of the Opposition] put in place as Energy Secretary.53

The Deputy Prime Minister was reported the next day as saying that the Government “will stress-test all these different levies”, and that a review of environmental policies might involve them being funded in future “from taxes rather than green levies”.54 The Energy and Climate Change Committee took evidence later that month, for its inquiry into energy prices, from the big energy companies, during which the significance of the green levies was discussed.55

23. DECC’s most recent analysis of the component parts of energy bills was published in March 2013. It lists 18 ‘energy and climate change policies’56, which add £112 (9%) to an average dual-fuel bill in 2013.57 Just over half of that was for “energy efficiency and helping the very poorest households” (eg. Energy Company Obligation and Warm Home Discount) and just under half “going towards supporting home grown low carbon sources of energy” (eg. Renewables Obligation, EU Emissions Trading System and Carbon Price Floor payments and Feed-in tariffs).58 Some levies are taxes, such as EU Emissions Trading System and Carbon Price Floor payments, whereas some are subsidies—Renewables Obligation and Feed-in tariffs.59

24. While some of the individual levies are not currently significant, overall they make up, in the Energy Minister’s words, a “sizeable” element in bills,60 and the ‘cost of policies’ in energy bills is forecast to increase.61 However, that is not the complete picture. While DECC expect prices of energy to rise, they also expect bills to be less than they would otherwise be, because some policies are aimed at reducing consumption through greater energy efficiency. DECC calculate that policies will not add significantly to gas prices in 2020 or 2030, and once the impact of energy efficiency policies on consumers is felt their bills will be 13% less (£107 in today’s terms) than they would otherwise be by 2030. For electricity, prices will be 41% higher than they would otherwise be by 2030, but bills 10% higher than they would otherwise be (£67 in today’s terms). Overall, DECC calculate, bills

53 HC Deb 23 October, col 293-4 54 BBC Radio 4, Today programme (24 October 2013) 55 Oral evidence taken before the Energy and Climate Change Committee on 29 October 2013, HC (2013-14) 773 56 DECC, Estimated impact of energy and climate change policies on energy prices and bills (March 2013), Annex B 57 Q220; Estimated impact of energy and climate change policies on energy prices and bills, op cit, Table D1 58 ibid 59 Q227 60 ibid 61 ibid

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will be less than they would otherwise be in 2020 by 11%, or £166, and in 2030 by 3% or £41.62

25. On 21 October 2013, the Committee on Climate Change published a note repeating its earlier analysis of the costs of green policies. It stated:

Energy bills will have to increase by around £10 (1%) to cover costs of low-carbon policies in 2013–14.

Very significant energy bill increases from 2004 to 2012 have been mainly due to increases in the price of gas in international markets, with only a small part of the increase due to low-carbon policies.

Energy bills are expected to increase by around £100 in 2020 due to low-carbon policies. This comprises around £70 related to the Electricity Market Reform and £30 due to the carbon price underpin.

A further £20 increase per household will be required from 2020–2030 to support low-carbon investments. This would be sufficient to meet the proposed target to reduce the carbon-intensity of power generation to 50 gCO2/kWh by 2030. Bills would then be expected to fall from 2030.63

26. The Energy Minister told us that an aim of the review announced by the Prime Minister was to examine “where there are additional levies imposed on top of the bill, these are as fair and as reasonable as necessary”.64 He could not, however, give us an indication of where any change might be made as a result of the review.65

27. Energy subsidies play an important and justified role in alleviating fuel poverty, which remains a significant challenge. The Government’s proposed change of definition of ‘fuel poverty’ and weakening of the legislative commitment—to ‘address’ it rather than ‘eliminate’ it—will place a greater imperative on the Government to demonstrate that it is committed to making fuel poverty a thing of the past. Unless the Government is prepared to make that commitment and show how it will be delivered, the changes to the fuel poverty definition and target, in part being made through amendments to the Energy Bill, should be stopped.

28. The Government is undertaking a review to examine the scope for reducing ‘green levies’ in energy bills. While such levies currently account for 9% of bills, they may not increase bills in the longer term because they will drive energy efficiency. The review cannot significantly assist the poorest bill-payers in the short term simply by scrapping some green levies, because the biggest component of such charges in bills—the Energy Company Obligation and Warm Home Discount—is currently already directed at them (paragraph 23). If the review finds some levy savings in energy bills, perhaps by shifting them to general taxation, the imperative for energy efficiency measures must

62 Estimated impact of energy and climate change policies on energy prices and bills, op cit, Table 3 63 Committee on Climate Change, CCC analysis: low-carbon policies account for only a small part of energy bill increases (21 October 2013) 64 Q217 65 Q227

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remain the priority because of the underlying need to tackle climate change by reducing our emissions.

29. To aid transparency, if the Government introduces its proposed new measure of fuel poverty, it should also continue to publish statistics on the current metric for the remainder of this Parliament, alongside the new figures. In the Autumn Statement, the Government should make clear how any changes to green levies will change the amount that those in fuel poverty will have to pay, by how much and how soon.

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3 The rationale for energy subsidies: supporting infant and low-carbon industries

30. Energy subsidies are often used as a means of promoting ‘infant industries’ (paragraph 12), and in particular renewable energy technologies. In this Part we examine two aspects: the UK’s support for particular energies overseas, and the Government’s support for renewables and other specific industries within the UK.

Subsidies, overseas aid and export support

31. In our 2011 report on Overseas Aid, we criticised DfID support for World Bank aid programmes which supported fossil fuel projects.66 In our current inquiry, DfID informed us that the World Bank’s approach to energy lending is now guided by its July 2013 Toward a Sustainable Energy Future for All: Directions for the World Bank Group’s Energy Sector document, which allows “financial support for greenfield coal power generation projects only in rare circumstances. Considerations such as meeting basic energy needs in countries with no feasible alternatives to coal and a lack of financing for coal power would define such rare cases.”67 The Government’s recent announcement about ending support for coal power plants abroad was couched in similar terms.68

32. The aid programmes of developed counties, sometimes involving renewable energy projects, may provide assistance for countries which are at the same time subsiding fossil fuels. Globally, fossil fuel subsidies are at least five times higher than the $100bn pledged to be made available in climate change finance at the 2009 UN Copenhagen climate change conference.69 Shelagh Whitley of ODI identified five countries (China, Egypt, India, Indonesia and Mexico) which were among both the biggest recipients of climate finance and the biggest providers of fossil fuel subsidies to their consumers.70 DfID told us, however, that the Government does not make the UK aid programme conditional on an absence of fossil fuel subsidies:

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 non-carbon related energy. ... 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.

66 Environmental Audit Office, Fifth Report of Session 2010-12, The impact of UK overseas aid on environmental protection and climate change adaptation and mitigation, HC 710 67 Ev 139, paras 11 68 HC Deb, 21 November 2013, col 56WS 69 Time to change the game: Fossil fuel subsidies and climate, op cit; Q51 70 ODI, At cross-purposes: subsidies and climate-compatible investment (April 2013), page 10

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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 ... make a linkage in any specific way to whether or not that country has fossil fuel subsidies.

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.71

33. Our witnesses from Global Subsidies Initiative and Overseas Development Institute did not favour overseas aid being blocked when potential recipient countries had fossil fuel subsidies. Some subsidy might be justified where it is targeted at the poorest, rather than as blanket support.72 Shelagh Whitley of ODI wanted greater transparency on where potential overseas aid is going to countries with fossil fuel subsidies, to help reduce cases which “are working full-time against you”.73

34. In our 2011 Overseas Aid report we also criticised UK Export Finance’s lack of support specifically for renewables rather than fossil fuel export projects.74 The OECD and IEA regard export guarantees as subsidies.75 Platform highlighted UKEF’s support for oil and gas contracts in Nigeria, Russia, Urals and Brazil; and diplomatic and military support for Nigeria, Iraq and Russia, which they labelled as subsidy.76 (UKEF provided us with a list of ‘energy’ exports and projects supported over the last 5 years.77) Oil and Gas UK, on the other hand, highlighted that UKEF are a net contributor to the Treasury.78

35. The Energy Minister told us that the Export Investment Guarantees Act 1991 does not allow UK Export Finance to discriminate in its support between different classes or types of export: “It would be unlawful for the Secretary of State simply to declare a blanket ban on certain types of investment. ... I think the objective is the right one, but we are constrained by the existing legislation.”79 David Godfrey, the UK Export Finance chief executive, assured us that a lack of green projects supported by the organisation was not the product of any discrimination on its part. The countries to which such technology is exported, he suggested, do not tend to require export support.80 He highlighted that the OECD

71 Qq 304-306; Ev 139, paras 5 and 9 72 Q68 73 Q64 74 The impact of UK overseas aid on environmental protection and climate change adaptation and mitigation, op cit, paras 70-71 75 Qq70-71 76 Ev 129 ; Q213 77 Ev 132 78 Q214 79 Q307 (See also Ev 132, paras 2 and 4) 80 Qq309-310

Energy subsidies 17

Common Approaches guidance, which the UK follows, requires export projects to be assessed in terms of their social and human rights, but also their environmental, impacts.81 The Government’s 2010 announced prohibition on supporting exports of ‘dirty’ fossil fuel technology82 is defined in terms of meeting World Bank standards.83

36. DfID should make, and publish, an assessment that compares its aid expenditures and the extent of fossil fuel subsidies for each aid-recipient country, and UK Export Finance should similarly provide a comparative analysis of export finance support and fossil fuel subsidies. DfID should then include these analyses in a revision of its Environment Strategy, along with the two departments’ assessment of why continued aid and export support in each case overrides the need for eliminating fossil fuel subsidies in those countries.

Renewables and the need for time limited subsidies

37. The main subsidy for large-scale renewable energy sources in the UK is currently the Renewables Obligation scheme which requires suppliers to provide a certain proportion of their electricity from approved renewable sources. Small scale generators receive a fixed price feed-in tariff for their generation. As a result of the Government’s recent electricity market reform, large scale renewable and non-renewable generation below a certain carbon intensity will instead receive an overall reward for electricity generation based on a contract for difference that will provide variable payments, representing the difference between an agreed ‘strike price’ and an average ‘reference’ price representing what would otherwise be obtained by selling electricity at market rates. If the reference price exceeds the strike’ price, the difference will be repaid by the generator. The strike price and the length of the contract will vary according to the type of energy technology.

38. While such renewables subsidies form part of a move to increase the proportion of energy from renewable sources and contribute to EU and national emissions reductions, the Government is resisting European proposals to increase the renewables targets. In our recent report on carbon budgets, we noted how the EU has agreed to raise its 2020 20% emissions reduction target to 30% if other developed countries and the more advanced developing nations pledged comparable emission reductions.84 As we reported in October 2013,85 the European Commission has been consulting on a 2030 Framework for Climate and Energy Policies, intending to publish at the end of 2013 new targets for 2030.86 The Government wants the EU to adopt a 50% emissions reduction target for 2030 in the context of a global deal, or 40% without a deal, but it did not support a proposal for a separate EU renewable energy target because it believed that that would compromise member states’ flexibility over how they secured a least-cost decarbonisation.87

81 Q307 82 Government, The Coalition: our programme for government (May 2010), p22 83 Q308; Ev 139

84 Environmental Audit Committee, Fifth Report of Session 2013-14, Progress on carbon budgets, HC 60, para 22 85 ibid, para 23 86 European Commission, A 2030 Framework for Climate and Energy Policies (March 2013) 87 Progress on carbon budgets, HC 60, op cit, para 23

18 Energy subsidies

39. Renewable UK believed that until there is a “correct” carbon price, subsidies to many renewable technologies will remain “necessary and indeed desirable”.88 However, different technologies, they told us, needed to be supported for different timescales:

For the time being, subsidies [for Renewables] remain essential, however our members are determined to reduce costs to a point where, in a market underpinned by a strong carbon price, no subsidy is required. However, it is important to understand that the varying technologies will achieve this on different time horizons.89

Subsidies for renewable technologies could potentially become harmful if these where pursued indefinitely and did not change to reflect the dynamics of the market. This is exactly what happened with feed-in-tariff for roof mounted PV systems in 2010 .90

40. Shelagh Whitley of ODI emphasised the importance of building-in processes to limit the duration of all types of subsidies:

What seems to be missing for existing subsidies and how they are structured is around this question of monitoring and reporting and around the question of exit and failure. I do not know ... what are the best ways to put in place sunset clauses, but planning for an exit, planning for flexibility, planning for modification, building that around a system where you have monitoring and reporting so that you can make decisions around milestones seems to make a lot of sense.91

Alan Simpson emphasised that “subsidies should be treated as transitional mechanisms rather than permanent support, addressing market defects and moving the energy market from its current structure towards the energy systems that will replace it.”92

41. DECC calculate ‘levelised costs’ for each energy sector, representing the ratio of the costs of a generic power plant in that sector to the amount of electricity expected to be generated by it.93 DECC expected the levelised costs of onshore and offshore wind and solar PV energy generation to fall, as “reflected in the proposed strike prices for such technologies”, and that “we might expect some projects within these technologies to reach parity with wholesale electricity prices in the latter half of this decade or 2020s.”94 The Energy Minister noted that costs were falling for solar power and that:

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 [renewables], with the

88 Ev 103, paras 34-35 89 Ev 103, paras 6-7 90 Ev 103, para 35 91 Q58 92 Ev 125, para 1.3

93 HC Deb, 14 October 2013, col 431W; DECC, Electricity generation costs 2013 (July 2013), Annex 1 94 HC Deb, 14 October 2013, col 431W

Energy subsidies 19

exception of biomass and energy from waste, show the prices digressing over the period of the levy control framework.95

42. Renewables energy has an important part to play in delivering the UK’s emissions reduction targets, and allowing the UK to play a full role in tackling climate change. Subsidies for renewables are, in turn, an essential lever to provide certainty to industry and drive investment in those technologies. While the Government has a helpfully positive view on the need to increase the level of emissions reduction ambition in the EU, it should rethink its hostility to a separate continued target for the deployment of renewables. Even without such a continued EU target, however, the Government should be ready to fully use the scope for renewables subsidies to help meet our climate change obligations.

New nuclear

43. On 21 October 2013, the Government announced the parameters of a deal with EDF for the construction and operation of a new nuclear plant at Hinkley Point in Somerset, including the £92.50/KWh contract for difference charge for the electricity it would provide.96

44. Back in February 2013, the Secretary of State for Energy and Climate Change told the House:

... Under [the Electricity Market Reform], ... new nuclear will receive no levy, direct payment or market support for electricity supplied or capacity provided, unless similar support is also made available more widely to other types of generation. By similar, we do not mean the same. Whether similar support is being provided must take account of the material circumstances. It is not a mechanical exercise; it is a matter of sensible judgment. It is obvious that the characteristics of a small onshore wind farm are very different from those of a large offshore wind farm and, indeed, those of a nuclear plant. ... These different characteristics are likely to require differences in the support provided under our electricity market reform.

... It is right that new nuclear power will be entitled to benefit from Energy Bill measures such as contracts for difference and investment contracts. ...

... I do not think that what is needed is a line-by-line comparison of the terms of each contract. That is not what our policy says or requires. In fact, there are likely to be variations in CFD designs between one technology and another, and perhaps also between different projects within the same technology. What is important is that the terms agreed deliver a similar result across technologies and projects, and that they result in a proper allocation of risk. In addition, each contract will need to deliver value for money for the consumer and be compatible with state-aid rules. A contract

95 Q289 96 HC Deb, 21 October 2013, col 23

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with a nuclear developer that does those things would be compatible with our no- subsidy policy.97

Accordingly, DECC and the Treasury told us that:

new nuclear will receive no levy, direct payment or market support for electricity supplied or capacity provided, unless similar support is also made available more widely to other types of generation. New nuclear power will benefit from any general measures that are in place or may be introduced as part of wider reform of the electricity market to encourage investment in low-carbon generation. This is about creating a level playing field for all forms of generation, not subsidising nuclear.98

45. Dr William Blyth had a different view. He told us, before the Hinkley Point announcement, that the contact for difference would constitute a subsidy:

not only because of the raised price compared to market levels, but also because long-term fixed price contracts with reliable counterparties allow companies to borrow money at lower interest rates—a particularly important factor for capital intensive projects like nuclear plant.

It is likely that in the early years of operation, this market price support will constitute a substantial subsidy compared to the cost of the cheapest alternative (i.e. gas-fired plant), but in the long run, the subsidy element is not so clear.99

46. When we questioned the Energy Minister on 30 October about the Hinkley Point deal, he maintained that the project would not represent subsidy as defined by the Government, nor even that it would be subsidised on “similar” terms to the subsidies available to other energy sectors. Instead, the Government would provide the contractor with a “support mechanism”100

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.101

The deal will now be scrutinised by the European Commission for potential state aid implications (paragraph 9).

47. The energy minister told the House on 23 October that:

... The Energy Act 2008 requires operators of new nuclear power stations to have arrangements in place, before construction begins, to meet the full costs of decommissioning and their full share of waste management and disposal costs.102

97 HC Deb, 7 February 2013, cols 488-9 98 Ev 110, paras 93-94 99 Ev 64, para 2.3.3 (Gordon Edge of Renewable UK made a similar point (Q200)). 100 Qq248-249, 252 101 Q249

102 HC Deb 23 Oct 2013, col 200W

Energy subsidies 21

The cost of decommissioning, DECC told us, would not be subsidised by the Government because “the intention is that the decommissioning arrangements will completely fund all the waste that is created by that plant”, for “the lifetime of the plant in terms of operation and decommissioning”—“the entire cost of decommissioning the reactor and dealing with the waste”.103 The Secretary of State told the House that the clean-up fund to pay for eventual decommissioning and a share of the waste management costs would account for around £2 of the strike price.104

48. The Energy Minister also stated on 23 October that:

... The waste contract will, at the outset, set a cap on the level of the waste transfer price ... The cap will be set at a level that reflects the Government's current analysis of risk and uncertainty around waste disposal costs and gives a very high level of confidence that actual cost will not exceed the cap. The Government accepts that, in setting a cap, the residual risk that actual cost might exceed the cap is being borne by the Government. Therefore the Government will charge the operator an appropriate risk fee for this risk transfer.105

Similarly, there will be a £1.2bn cap on the nuclear incident liability which, the Minister told us, was also not a subsidy because the developer will be charged a “risk fee” on “commercial terms” for the Government still having a residual liability. This arrangement, the Minister told us, was an “insurance policy” rather than a subsidy.106

49. The duration of the payments under the contract for difference for Hinkley Point will be 35 years, or 60% of its 60-year expected operating life. That, the Secretary of State told the House, would be “proportionally similar to the length of the [contracts for difference] that are being offered to most renewable technologies”.107 Gordon Edge of Renewable UK had a different view:

Government is taking a much longer term view of the nuclear side than it is for renewables. [Renewables] are being given some foresight at 2020 but they are signing deals for nuclear for 2023 and potentially beyond. So we think that is a bit of a mismatch in terms of commitment to the different sectors and we would like to see much more commitment to our sectors beyond 2020 in order to have parity.108

50. Although the scale and duration of the Hinkley Point project was “qualitatively different”, the Minister told us, overall the support was “similar” to that provided for other energy sectors.109 The Secretary of State said that “the price agreed for the electricity is

103 Qq261-263 104 HC Deb, 21 October 2013, col 24 105 HC Deb, 23 Oct 2013, col 201W 106 Qq255, 256, 271-273 107 HC Deb, 21 October 2013, col 24 108 Q193 109 Qq256, 257

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competitive with the projected costs for other plants commissioning in the 2020s, not just with other low-carbon alternatives, but also with unabated gas”.110

51. The Hinkley Point C deal will be scrutinised by the European Commission for state aid implications. It makes no sense to claim that a subsidy applicable to more than one technology therefore does not constitute a subsidy. It is already clear that new nuclear is being subsidised. The contractor for Hinkley Point will be able to use the guaranteed strike price for the electricity generated to raise capital at lower cost. It is debateable which of the various other Government-termed ‘support mechanisms’ and ‘insurance policies’ also constitute subsidy. Even in terms of the Government’s ‘similarity’ definition of ‘no public subsidy for new nuclear’, there are aspects of support which are not ‘similar’ to that provided for other types of energy, notably on decommissioning and waste.

Contracts for difference and capacity payments

52. The regime established by the electricity market reform envisages a strike price (paragraph 37) and ‘contracts for difference’ for electricity produced by low carbon generators, alongside a ‘capacity market’ to provide guaranteed incentives for the construction of fossil fuel plants to bidders for electricity supply contracts. The Government’s intention for the former is to move to a “technology-neutral competitive process as soon as reasonably practicable”, with ultimately no need to issue contracts for difference: but in the meantime, with technologies at different rates of development, this would be “preceded by a technology differentiated competitive process”.111 The difference between the strike price and the reference price in the proposed electricity market system (paragraph 37) points to an inevitable but variable subsidy—the price the generator receives in excess of the prevailing market price—complicated only by the theoretical possibility that generators may have to pay back that ‘subsidy’ if the reference price exceeds the strike price. Renewable UK were content to acknowledge that the contacts for difference strike prices for renewables were subsidies.112 Dr Blyth told us that for new nuclear whether the strike price represented subsidy would only be established with the passage of time.113 There is no reason to believe, however, that the relationship of the reference price to the strike price over the long life of nuclear contracts for difference will be such that the principle of variable but real subsidy will not also hold as far as nuclear is concerned. The Nuclear Industries Association though saw the arrangements as addressing a market failure, providing “enablers to facilitate the UK’s wider energy policy”.114

53. The first capacity auction will be run in 2014, for delivery in 2018–19.115 Whether the capacity payments regime would constitute subsidy depends on whether they over- compensate producers and whether they are fairly available for all appropriate types of

110 HC Deb, 21 October 2013, col 25 111 Ev 110, para 30 112 Qq155, 160 113 Ev 64, para 2.3.3; Qq24, 47 114 Q157; Ev 102, para 5 115 Ev 110, para 69

Energy subsidies 23

energy. Dr Blyth told us that he would not regard them as a subsidy, but rather as “a pricing mechanism, ... a way of providing payment for services”:116

If the market is competitive—and it is a big if—players in that market will recoup their costs either through the capacity payment or through the energy payment, or a combination of the two. In a competitive market, the combination of the two would cover their short-run marginal cost. ... Whether that works out in practice in a slightly less than competitive market is another issue, but that is not a subsidy issue.117

Gordon Edge of Renewable UK explained how any assessment of whether capacity payments would constitute a subsidy would not be straightforward:

In theory, it ought to be a zero sum game, in that what is paid out in capacity payments ends up lowering the wholesale price of power and therefore it is a recycling of money. I don’t think that is entirely true. There will be some hysteresis in all of that and you will end up with more money going through the capacity mechanism than you save through reduction in wholesale price. But I think it could be seen as a cost of moving to a system where there is a high proportion of high capital cost, low running cost, low carbon generation sources that require a lot of flexibility at the margins in order to cope with their variability or indeed their inflexibility, as nuclear is. So we need to think of it as a system cost. Whether you regard that as a subsidy, I would have to go and think about the philosophy of that.118

The Government expected “the net cost to consumers ... to be lower than the gross cost of the [capacity] auction as the capacity market will result in lower wholesale prices than would have otherwise been the case.”119

54. Where the capacity payment regime more clearly constitutes subsidy is in the restricted availability of the payments essentially to one type of energy. The Energy Minister considered that capacity payments would not be a subsidy because they would “not [be] a support mechanism for any one technology”,120 but he acknowledged that in practice the “majority” of the payments would be for gas-fired power.121 Gordon Edge told us that “the capacity mechanism is too closely designed as a subsidy for new gas-fired plant when it should be thinking much more widely about how we provide flexibility and response to the system as a whole”.122 In practice, of the ‘eligible technologies’ listed in DECC’s October 2013 Electricity Market Reform: Consultation on proposals for implementation,123 it is clear that energy storage participation will be minimal because capacity payments will only be available to non renewable technologies not receiving Renewable Obligation or contract for

116 Q11 117 Q13 118 Q160 119 Ev 110, para 71 120 Q276 121 Qq277-281 122 Q161

123 DECC, Electricity Market Reform: Consultation on proposals for implementation (October 2013), page 152

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difference payments, coal plants will not be able to participate since most existing plants will be required to close from 2016 under the terms of the Large Combustion Plant Directive, and it will not be possible to build new unabated coal plants because of the emissions performance standards set out in the Energy Bill. Demand side reduction measures have been excluded from the 2014 capacity auction, as have interconnectors. The capacity payments regime was another case, the Minister told us, of “an insurance premium” rather than a subsidy.124

55. The capacity payments regime will constitute a subsidy for gas-fired electricity generation because in practice it is the only technology that will be eligible for the payments when the capacity contracts are deliverable in 2018–19.

Oil and gas

56. Using the OECD ‘producer support’ calculation methodology, subsidy includes various tax allowances, such as ‘field allowances’, that can be set against petroleum revenue tax (although not tax allowances which allow exploration costs to be immediately offset against revenues).125 There was some argument, however, about whether the generally higher starting rates of corporation tax and petroleum revenue tax levied specifically on North Sea oil and gas should be taken into account in calculating the net effect of field allowances.

57. Dr Blyth pointed out that all oil and gas producing countries levy taxes or royalties on production, to “gain value from the resources being extracted”.126 The tax system for the North Sea provides a mechanism for the State to “sell” the national asset to the extractive companies.127 The standard rate of petroleum revenue tax therefore “defines the ‘normal’ baseline tax rate for oil production in the UK”.128

58. The Government did not regard field allowances as subsidy:

In the case of oil and gas the Government has introduced field allowances for more challenging categories of field that are economic, but commercially marginal at the high rate of tax. Such fields are relieved of tax of 32% for a certain portion of their income—but they still pay ring fence corporation tax at 30% for this portion, higher than the mainstream corporation tax rate. Field allowances do not reduce the cost of oil to consumers; rather increase what is extracted from the UK continental shelf.129

This oil and gas fiscal regime policy ensures the Government maximises the economic production of oil and gas in the UK, without giving undue support to otherwise uneconomic production. For that reason, field allowances cannot be seen as a subsidy.130

124 Qq282-283 125 Ev 64, para 2.2 126 ibid 127 Q21 128 Ev 64, para 2.2 129 Ev 110, para 10 130 Ev 110, para 113

Energy subsidies 25

The Minister told that “if [North Sea oil and gas companies] 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?”131

59. In a similar vein, Oil & Gas UK saw subsidy in terms of “the balance between the taxation collected ... and the amount of value that is transferred from the taxpayer back to these particular elements of the energy sector”.132 Accordingly, “allowances which reduce taxation rates to incentivise activity, and that remain set at such a rate that the effected sector remains a net contributor to the public purse, do not constitute a subsidy.”133 They considered that the higher starting point of tax for oil companies should be taken into account when assessing subsidy. Oil and Gas UK differentiated measures which underwrite the cost of an activity from a tax which is applied on profits “once all costs have already been paid”.134 Platform disagreed. They, like Dr Blyth, emphasised that “these [North Sea] taxes reflect the fact that the fossil fuel companies have been granted a right to exploit a resource that is scarce in the UK, for example, oil and gas reserves. ... These special taxes ... arise due to the special circumstances of natural resource ownership”.135

60. Field allowances for North Sea oil and gas do not fully offset relatively high starting rates of corporation tax and petroleum revenue tax. The allowances nevertheless represent a subsidy because the higher tax rates compensate for the use of state-owned fossil fuel deposits.

Shale gas

61. The Treasury announced tax concessions for shale gas exploration costs in July, reducing the rate from 62% to 30%. There is clearly no rationale for subsidy on the grounds of supporting low-carbon technologies. Shale gas therefore provides a case study for whether subsidies are appropriate for supporting a new industry. The minister told us:

[Fracking] 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.136

As the Energy and Climate Change Committee reported in 2011,137 hydraulic fracturing and horizontal drilling are both techniques that have been present in the UK for many years. They are not new technologies. Fracking is not a technology warranting financial support to become viable and competitive, and on that basis it does not warrant subsidy through a favourable tax treatment.

131 Q285 132 Ev 107 133 ibid (Without mentioning it by name, Oil & Gas UK refer to the effect of the ‘Laffer Curve’; in economics theory, where a tax cut results in more tax revenue because of the increased business activity it triggers.) 134 Q135 135 Q147 136 Q290 (Oil and Gas UK also regarded this as a new industry in the UK context (Q211)).

137 Energy and Climate Change Committee, Shale gas, Fifth Report of Session 2010–12, HC 795

26 Energy subsidies

4 Eliminating harmful and inefficient subsidies

62. In his research for us, Dr Blyth identified the extent of subsidy in the UK and how we compare with other countries. He concluded that “the UK has progressively reduced subsidies to fossil fuels over the past 30 years” but that there are still subsidies for all types of energy. His analysis showed subsidies totalling at least £12.7bn, with the most significant levels being for gas (£3.6bn), nuclear (at least £2.3bn) and renewables (£3.1bn).138 In terms of subsidy relative to the energy output involved, nuclear and renewables are the most subsidised:

• Coal: 20p per MWh • Oil: 55p per MWh • Gas: £4 per MWh • Domestic electricity: £6 per MWh • Nuclear: at least £33 per MWh • Renewables: £50 per MWh139

The main elements of these subsidies were the reduced rate of VAT (£6.2bn), renewables (£3bn) and legacy nuclear costs (at least £2.3bn).140 The latter figure is the Government’s net contribution to the Nuclear Decommissioning Authority, but there is uncertainty about the eventual size of the decommissioning liability which could increase this figure.141

63. International comparisons are difficult. Subsidies are defined by reference to the particular tax regime of the country involved, measuring deviations from whatever is deemed ‘normal’ rates of tax in that country.142 Nevertheless, Dr Blyth’s analysis indicated in particular that coal and oil subsidies in the UK are low compared with other countries, and gas subsidies in the UK are higher than other European countries and rising, but less than in Canada and the US.143

64. The Government told us that its policy is to incentivise the energy industry “to bring forward investment where there is a market failure that would act as a barrier to do so in the absence of those incentives.” It also stated that “the Government is open and transparent about where, how, and to what extent it provides support to incentivise the energy sector to help deliver the Government’s objectives, regardless of what that support

138 Ev 64, para 2.7 139 ibid; Q23 140 Ev 64, para 2.7 141 Ev 64, para 2.3.1 142 ibid 143 Ev 64, Figures 10 & 11

Energy subsidies 27

is called.”144 The Government drew distinctions between the methodologies for calculating subsidy applied by different institutions:

The IMF and IEA use versions of a methodology known as the price gap approach, which, similar to the EU definition, compares prices to world market prices. The OECD uses broad measures of Producer and Consumer Support Estimates (PSE & CSE), based on metrics used by the OECD in other sectors, such as agriculture. These measures take account of where lower rates of tax are applied than elsewhere in the economy and so give different results to assessing purely whether fossil fuels are subsidised.145

For G20 purposes, the Government, along with other EU G20 members, defines a fossil fuel subsidy as “any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies.”146

65. It was on the basis of this focus on comparison with world market prices that the Government in several areas rejected the proposition that it provides subsidies. On the reduced rate of VAT on domestic and small business heating fuel and electricity (paragraph 18), for example, the Government highlighted that because it was a tax, it “increases the price above the world-market prices.”147

66. That world-price view of the extent of the Government’s subsidies shapes its approach to the Rio+20 Summit commitment “to phase out harmful and inefficient fossil fuel subsidies that encourage wasteful consumption” and to the G20 commitment couched in similar terms of eliminating ‘inefficient’ and ‘wasteful’ fossil fuel subsidies (paragraph 3). The Government told us that it “does not consider that any of its energy policies are ‘harmful’.”148 The UK government is not alone. An ODI analysis notes that 10 of the G20 countries, including the UK, have reported to the G20 that they have no ‘qualifying emissions’.149

67. The variation in definitions of subsidy allows the Government to resist acknowledging subsidy in many areas, particularly on nuclear energy and the lower rate of VAT on domestic and small business heating fuel and electricity bills, and to claim that it has no ‘harmful’ or ‘inefficient’ subsidies despite fossil fuel consumption contributing to our greenhouse gas emissions. However, the reality is that energy subsidies in the UK are significant, cover all types of energy technology and run to about £12bn a year. Much of this is directed at fossil fuels.

68. The Government must use the Autumn Statement as an opportunity to provide a clear and comprehensive analysis of all energy subsidies in the UK, to present its methodology

144 Ev 110, paras 8 and 12 145 Ev 110, para 111 146 Ev 110, para 112 147 Ev 110, para 90 148 Ev 110, para 13

149 Time to change the game: Fossil fuel subsidies and climate, op cit, Table 1

28 Energy subsidies

and calculations, and to show how these figures differ from those produced using the methodologies of the main international institutions. This would bring much needed transparency and provide a basis for an overdue debate on the rationale and justifications for energy subsidies in the UK. It would also provide an evidence base for developing and refining policies for tackling climate change.

69. We do not believe there is any case for treating subsidies to mature energy technologies where there is little likelihood of cost reduction in the future in the same way as technologies that can, over time, compete in the market place without long-term subsidy. We consider that the Government should present a case for subsidy, and hence for the application of EU state aid rules, separately for each energy category.

70. More fundamentally, the Government needs to demonstrate leadership in increasing the deployment of renewables and in promoting energy efficiency through the careful and targeted use of subsidies and levies, to provide certainty over the longer term for the investment in the technologies that these will depend on. In the Autumn Statement, the Government should make a start on that path by making it clear which minister and which department will be responsible for fully delivering our climate change obligations in a way that avoids maintaining harmful fossil fuel subsidies and protects the fuel poor.

71. The Government has a target to increase the proportion of environmental taxes as a proportion of all taxes, which we examined in 2011.150 In that report we criticised the way that the Government has defined ‘environmental taxes’ and how that excluded fuel duty and other particular taxes which are included in the Eurostat151 definition used by all European countries (including the UK) to report environmental tax revenues. The Government should also use the Autumn Statement to introduce a new target: to reduce the proportion of energy subsidies that support fossil fuel, rather than low-carbon, consumption.

150 Environmental Audit Committee, Budget 2011 and environmental taxes, Sixth Report of Session 2010-12, HC 878 151 ‘Eurostat’ is formally the Statistical Office of the European Communities

Energy subsidies 29

Conclusions

1. There is no single internationally agreed definition of what constitutes energy subsidy. Methodologies differ widely, as do the nature of transactions and support mechanisms that might be subsumed in a measurement of subsidy. It is regrettable that this has provided a way for the Government to reject—erroneously, in our view—the proposition in some areas that it provides energy subsidies. (Paragraph 11)

2. Energy subsidies play an important and justified role in alleviating fuel poverty, which remains a significant challenge. The Government’s proposed change of definition of ‘fuel poverty’ and weakening of the legislative commitment—to ‘address’ it rather than ‘eliminate’ it—will place a greater imperative on the Government to demonstrate that it is committed to making fuel poverty a thing of the past. (Paragraph 27)

3. The Government is undertaking a review to examine the scope for reducing ‘green levies’ in energy bills. While such levies currently account for 9% of bills, they may not increase bills in the longer term because they will drive energy efficiency. The review cannot significantly assist the poorest bill-payers in the short term simply by scrapping some green levies, because the biggest component of such charges in bills—the Energy Company Obligation and Warm Home Discount—is currently already directed at them. (Paragraph 28)

4. Renewables energy has an important part to play in delivering the UK’s emissions reduction targets, and allowing the UK to play a full role in tackling climate change. Subsidies for renewables are, in turn, an essential lever to provide certainty to industry and drive investment in those technologies. (Paragraph 42)

5. The Hinkley Point C deal will be scrutinised by the European Commission for state aid implications. It makes no sense to claim that a subsidy applicable to more than one technology therefore does not constitute a subsidy. It is already clear that new nuclear is being subsidised. The contractor for Hinkley Point will be able to use the guaranteed strike price for the electricity generated to raise capital at lower cost. It is debateable which of the various other Government-termed ‘support mechanisms’ and ‘insurance policies’ also constitute subsidy. Even in terms of the Government’s ‘similarity’ definition of ‘no public subsidy for new nuclear’, there are aspects of support which are not ‘similar’ to that provided for other types of energy, notably on decommissioning and waste. (Paragraph 51)

6. The capacity payments regime will constitute a subsidy for gas-fired electricity generation because in practice it is the only technology that will be eligible for the payments when the capacity contracts are deliverable in 2018–19. (Paragraph 55)

7. Field allowances for North Sea oil and gas do not fully offset relatively high starting rates of corporation tax and petroleum revenue tax. The allowances nevertheless represent a subsidy because the higher tax rates compensate for the use of state- owned fossil fuel deposits. (Paragraph 60)

30 Energy subsidies

8. As the Energy and Climate Change Committee reported in 2011, hydraulic fracturing and horizontal drilling are both techniques that have been present in the UK for many years. They are not new technologies. Fracking is not a technology warranting financial support to become viable and competitive, and on that basis it does not warrant subsidy through a favourable tax treatment. (Paragraph 61)

9. The variation in definitions of subsidy allows the Government to resist acknowledging subsidy in many areas, particularly on nuclear energy and the lower rate of VAT on domestic and small business heating fuel and electricity bills, and to claim that it has no ‘harmful’ or ‘inefficient’ subsidies despite fossil fuel consumption contributing to our greenhouse gas emissions. However, the reality is that energy subsidies in the UK are significant, cover all types of energy technology and run to about £12bn a year. Much of this is directed at fossil fuels. (Paragraph 67)

Energy subsidies 31

Recommendations

10. Unless the Government is prepared to make that commitment [to make fuel poverty a thing of the past] and show how it will be delivered, the changes to the fuel poverty definition and target, in part being made through amendments to the Energy Bill, should be stopped. (Paragraph 27)

11. If the [‘green levies’] review finds some levy savings in energy bills, perhaps by shifting them to general taxation, the imperative for energy efficiency measures must remain the priority because of the underlying need to tackle climate change by reducing our emissions. (Paragraph 28)

12. To aid transparency, if the Government introduces its proposed new measure of fuel poverty, it should also continue to publish statistics on the current metric for the remainder of this Parliament, alongside the new figures. In the Autumn Statement, the Government should make clear how any changes to green levies will change the amount that those in fuel poverty will have to pay, by how much and how soon. (Paragraph 29)

13. DfID should make, and publish, an assessment that compares its aid expenditures and the extent of fossil fuel subsidies for each aid-recipient country, and UK Export Finance should similarly provide a comparative analysis of export finance support and fossil fuel subsidies. DfID should then include these analyses in a revision of its Environment Strategy, along with the two departments’ assessment of why continued aid and export support in each case overrides the need for eliminating fossil fuel subsidies in those countries. (Paragraph 36)

14. While the Government has a helpfully positive view on the need to increase the level of emissions reduction ambition in the EU, it should rethink its hostility to a separate continued target for the deployment of renewables. Even without such a continued EU target, however, the Government should be ready to fully use the scope for renewables subsidies to help meet our climate change obligations. (Paragraph 42)

15. The Government must use the Autumn Statement as an opportunity to provide a clear and comprehensive analysis of all energy subsidies in the UK, to present its methodology and calculations, and to show how these figures differ from those produced using the methodologies of the main international institutions. This would bring much needed transparency and provide a basis for an overdue debate on the rationale and justifications for energy subsidies in the UK. It would also provide an evidence base for developing and refining policies for tackling climate change. (Paragraph 68)

16. We do not believe there is any case for treating subsidies to mature energy technologies where there is little likelihood of cost reduction in the future in the same way as technologies that can, over time, compete in the market place without long-term subsidy. We consider that the Government should present a case for subsidy, and hence for the application of EU state aid rules, separately for each energy category. (Paragraph 69)

32 Energy subsidies

17. More fundamentally, the Government needs to demonstrate leadership in increasing the deployment of renewables and in promoting energy efficiency through the careful and targeted use of subsidies and levies, to provide certainty over the longer term for the investment in the technologies that these will depend on. In the Autumn Statement, the Government should make a start on that path by making it clear which minister and which department will be responsible for fully delivering our climate change obligations in a way that avoids maintaining harmful fossil fuel subsidies and protects the fuel poor. (Paragraph 70)

18. The Government should also use the Autumn Statement to introduce a new target: to reduce the proportion of energy subsidies that support fossil fuel, rather than low- carbon, consumption. (Paragraph 71)

Energy subsidies 33

Formal Minutes

Wednesday 27 November 2013

Members present: Joan Walley, in the Chair

Peter Aldous Mr Mark Spencer Martin Caton Dr Alan Whitehead Caroline Lucas Simon Wright Dr Matthew Offord

Draft Report (Energy subsidies), proposed by the Chair, brought up and read. Ordered, That the Draft Report be read a second time, paragraph by paragraph. Paragraphs 1 to 71 read and agreed to. Summary agreed to. Resolved, That the Report be the Ninth Report of the Committee to the House. Ordered, That the Chair make the Report to the House. Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report, in addition to that ordered to be reported for publishing on 17 April 2013 in the last session of Parliament, and 5 and 26 June, 9 and 17 July, 11 September, 9 October and 11 November.

[Adjourned till Wednesday 4 December 2013 at 9.15 am

34 Energy subsidies

Witnesses

Wednesday 24 April 2013

Dr William Blyth, Oxford Energy Associates. Ev 1

Wednesday 15 May 2013

Peter Wooders, Programme Leader, Global Subsidies Initiative, Shelagh Whitley, Research Fellow, Overseas Development Institute, and Charles Perry, Partner, SecondNature. Ev 11

Wednesday 10 July 2013

Professor Paul Ekins, Professor of Resources and Environmental Policy, and Director, Institute for Sustainable Resources, University College London. Ev 24

Wednesday 23 October 2013

Gordon Edge, Director of Policy, Renewable UK, Keith Parker, Chief Executive, Nuclear Industry Association, David Odling, Energy Policy Manager, Oil & Gas UK, Emma Hughes, Senior Policy Officer, Platform, and Alan Simpson. Ev 32

Wednesday 30 October 2013

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. Ev 48

List of printed written evidence

1 Dr William Blyth, Oxford Energy Association Ev 64 2 Nuclear Industry Association Ev 102 3 Renewable UK Ev 103, Ev 141 4 Oil & Gas UK Ev 107 5 Department of Energy and Climate Change and HM Treasury Ev 110 6 Alan Simpson Ev 125 7 Platform Ev 129 8 UK Export Finance Ev 132 9 Overseas Development Institute Ev 136 10 Department for International Development Ev 139

Energy subsidies 35

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/eacom)

1 Bryan Norris Ev w1 2 Calor Gas Ltd Ev w2 3 Energy Fair Ev w10 4 Dr David Toke Ev w14 5 Renewable Energy Association Ev w19 6 Association for the Conservation of Energy Ev w23 7 Wood Panel Industries Federation (WPIF) Ev w29 8 Friends of the Earth England, Wales and Northern Ireland Ev w30 9 BSW Timber Ev w35 10 EDF Energy Ev w36 11 Vestas Wind Systems Ev w40 12 Fuel Poverty Advisory Group Ev w42 13 Malcolm Grimston Ev w49 14 Energy UK Ev w57 15 United Kingdom Without Incineration Network Ev w59

36 Energy subsidies

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2013–14 First Report Embedding sustainable development: an update HC 202 (HC 633) Second Report Outcomes of the UN Rio+20 Earth Summit HC 200 (HC 633) Third Report Transport and accessibility to public services HC 201 (HC 632) Fourth Report Protecting the Arctic: The Government’s response HC 333 Fifth Report Progress on Carbon Budgets HC 60 Sixth Report Biodiversity Offsetting HC 750

Seventh Report Sustainability in BIS HC 613

Eighth Report Codes for Sustainable Homes and the Housing HC 192 Standards Review

Session 2012–13 First Report The St Martin-in-the-Fields seminar on the Rio+20 HC 75 agenda

Second Report Protecting the Arctic HC 171 (HC 858) Third Report Wildlife Crime HC 140 (HC 1061) Fourth Report Autumn Statement 2012: environmental issues HC 328 (HC 1087) Fifth Report Measuring well-being and sustainable development: HC 667 (HC 139) Sustainable Development Indicators Sixth Report Energy Intensive Industries Compensation Scheme HC 669 (Cm 8618) Seventh Report Pollinators and Pesticides

Session 2010–12 First Report Embedding sustainable development across HC 504 (HC 877) Government, after the Secretary of State’s announcement on the future of the Sustainable Development Commission Second Report The Green Investment Bank HC 505 (HC 1437) Third Report Sustainable Development in the Localism Bill HC 799 (HC 1481) Fourth Report Embedding sustainable development: the HC 877 Government’s response Fifth Report The impact of UK overseas aid on environmental HC 710 (HC 1500) protection and climate change adaptation and mitigation Sixth Report Budget 2011 and environmental taxes HC 878 (HC 1527) Seventh Report Carbon Budgets HC 1080 (HC 1720) Eighth Report Preparations for the Rio +20 Summit HC 1026 (HC 1737) Ninth Report Air Quality a follow up Report HC 1024 (HC 1820)

Energy subsidies 37

Tenth Report Solar Power Feed-in Tariffs (Joint with the Energy and HC 1605 (HC 1858) Climate Change Committee) Eleventh Report Sustainable Food HC 879 (HC 567) Twelfth Report A Green Economy HC 1025 (HC 568)

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Environmental Audit Committee: Evidence Ev 1

Oral evidence

Taken before the Environmental Audit Committee on Wednesday 24 April 2013

Members present: Joan Walley (Chair)

Peter Aldous Caroline Lucas Neil Carmichael Dr Matthew Offord Martin Caton Mr Mark Spencer Katy Clark Dr Alan Whitehead Zac Goldsmith 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 dynamics of change and uncertainty, and the Blyth, is to give you a warm welcome to our first unpredictability of the future, is one aspect of the session of this inquiry about energy subsidies. It infant-industry argument that I think does provide a would be fair to say that we regard the research that basis on which subsidies can be justified. was commissioned, which you provided us with, as the starting point for what we hope will be an inquiry Q2 Chair: You just mentioned change and that will, as we go along, expose further themes that uncertainty. Would you tie that to the timeline, and we need to be addressing, building on the starting how much is the necessity of having a subsidy for the point that you have provided us with. short, medium or long term something that features in Our first question as a Committee to you is that, in the design of subsidies? Where a subsidy was needed the way that we try to go about understanding the initially, how do you know when it has got to the stage importance of energy subsidies and their usefulness, that it is no longer needed? How do you factor in the length of time that subsidies may or may not be what are the main justifications that are put forward needed? for having energy subsidies and are those justifications Dr Blyth: That is a very good point. That is one more reasonable than others? Is there a pecking order element of the infant-industry argument: that you do of justifications for them? not want something to be an infant for ever. At some Dr Blyth: Thank you. The normal justifications for point you have to bring it to maturity and let it subsidies would be the infant-industry argument. If compete. The economic argument as to why subsidies you have an industry that needs protection from full are not considered a good thing in the long run is that market forces in order to establish itself, maybe bring the economics of that is really established in down costs and so on, there is an argument for equilibrium economy. If everything was in providing an environment where new technologies equilibrium and going to be certain for the future and can develop. That is typically one example where you so on, you would probably scrap all subsidies because might provide that kind of market support. The second you do not need them. Subsidies help you through a area, typically, would be pro-poor policies, providing process of change, but at some point you want to say, subsidies on products or goods that help alleviate “We supported such and such a technology because poverty or allow access to those markets or goods for we thought that it was going to reduce costs over a poorer consumers. The third area, typically—and this certain period of time.” If you find that it has not done is not just within energy—would be protection from so, you would need to just bite the bullet and say, “We international markets if there is a need for particular are going to remove that,” and hopefully at that stage countries—usually it is more relevant in a more you would be identifying other technologies that developing-country context—to develop domestic would take their place. But some sort of timeline is markets before becoming exposed to wider very important. international competition. Thinking about those in the UK context, probably the Q3 Chair: It is interesting that you said that that was most relevant in my mind for UK subsidies is still the an economic aspect, but ours is a cross-cutting Committee, so we are looking at business infant-industry argument. It is a slightly unfortunate Departments and we are looking at other Departments term because a lot of the technologies that we are as well. How much is it a matter for other talking about, when we think about the way the energy Departments who might have some remit for a system is going and low-carbon energy development, subsidy either continuing or not continuing in respect have been around a long time, so they are not really of competitiveness, say, or overseas competitiveness? infant, but on the other hand there is a lot of dynamic How much is that design of the subsidy a matter for change in the energy market. Dealing with the other Government Departments and not just the cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Ev 2 Environmental Audit Committee: Evidence

24 April 2013 Dr William Blyth

Government Department that is responsible for I think exactly in principle that is what you are trying financing the subsidy? to achieve with subsidies. Dr Blyth: Energy costs would be one element, so you would want to be looking at the competitiveness of Q6 Zac Goldsmith: Politicians on the whole or the energy market as a whole and identifying ways of Governments on the whole have not been particularly reducing or minimising the cost of energy. If you are good at picking winners, picking the right subsidising, it implies you are raising the cost, which technologies, and most people struggle to imagine may be true in the short term, but the view is that you what the future might look like. In 10 or 20 years are trying to support a transition to something that in from now, there might be energy sources that none of the long run would be cheaper. From that point of us has even really considered that are suddenly very view there is a business competitiveness element to economic. How do you avoid a situation where having a long-run aim towards a low-cost, low-carbon Governments pick winners and then risk creating an economy. Then, obviously, the energy sector is critical addiction to subsidies for unimpressive technologies to all of this. How you design an electricity market, and technologies that will never stand on their own for example, and have a fair system for different fuel feet? How can you have a neutral policy that still sources to be able to compete in that market is allows these start-ups on to the table? clearly critical. Dr Blyth: Yes, that is a very good point. Sunset clauses is one element to that—building in, in Q4 Chair: Do you think that others who might have advance, an expectation that subsidies are of limited an interest in that are sufficiently aware that that is a time duration—and you can see that in some of the procedure they perhaps need to be having input to? policy designs. For example, if you look at German Dr Blyth: The difficulty with subsidies is that they support for solar PV, built into the time frame for immediately become very politicised. One of the those subsidies is a reducing rate of support over time, things I have tried to do in the report is try to be as and that is tailored to the rate of uptake. So, if the transparent as possible about what a subsidy is and costs of PV come down very quickly, then the rate of when it is appropriate. Different Departments will support comes down quickly as well. It is difficult and probably have their different stake in which sectors it does move you away from this idealised world they feel most exposed to or have the most interest in. where you can just let the market decide, but whether Probably the key areas are for the electricity sector, the market is in the right place to take some of the and that combination between energy and climate big strategic decisions over multi-decade time scales, which is potentially what we have to do to society for change is the crucial area to be resolved in the reducing carbon emissions— transition to low-carbon energy systems. Q7 Zac Goldsmith: Can I come back on that? The Q5 Neil Carmichael: I was going to probe that issue German solar example is a good one, and they seem about new technology. Often it is the most expensive to have made the right decision, but their subsidy because you have to basically invent it, test it out and regime was based on—There is an odd echo in this so on. In particular, if you are not using a fuel but room. using the technology itself to generate energy, then of Chair: I know. course the bill costs will be enormous. So, subsidies Zac Goldsmith: Maybe it is just me; I am putting perhaps can and should be used to enable new myself off. The regime seems to have been based on technology to be developed. the triggers, so every time the unit costs came down Dr Blyth: Yes, I would agree with that. Typically, the for the subsidy there was a fairly predictable formula, basic economic theory would say you should always which we have tried to replicate here now, after our do your cheapest options first, because if you have a own problems with solar subsidies not that long ago, cheaper option available to you, why would you but what would have happened then had the unit costs choose an expensive option? The problem with that not come down? Had they made the wrong punt, had argument is that it does not take into account the solar not been as successful as it now is, how would dynamics of how technology costs change over time. that have worked? You could potentially have had a If the option you have available to you now is cheap, situation in Germany with an unsustainable long-term but there is a risk that it becomes expensive in the addiction, a dependence on a subsidy for a technology future, you do not necessarily want to lock into that perhaps did not become more economic. It did, becoming too dependent on that source. That is the but what would have happened if it had not? classic example of where you might want to support Dr Blyth: It is interesting. They have arrived at what something that looks more expensive now, and you looks like a very well-tailored policy design, but it create a niche for it, and hopefully, if that becomes has not been without its mistakes in the early stages. successful, then that niche will grow and perhaps Certainly there have been boom-and-bust cycles—and become mainstream. But you need a fairly flexible there have been boom-and-bust cycles in this approach to that. The way these costs develop over country—over solar, which have been repeated time are quite uncertain. If it turns out that the low- several times. You can look at the Czech Republic as cost source you have now stays low cost, it may be an example where it boomed, and it boomed so much that the thing that you thought was going to come that they basically had to stop the scheme. Spain is in down over time never reaches maturity and never a similar sort of boat where they have suddenly competes with it, in which case you have to keep realised that they have run out of public money for revising your approach to how you support that. But just about anything and so you pull the plug. It is not cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Environmental Audit Committee: Evidence Ev 3

24 April 2013 Dr William Blyth that difficult for Governments to decide that they are Q10 Dr Whitehead: Capacity payments? not going to fund anything any more. It happens all Dr Blyth: Capacity payments? Well, they are the time. It is not desirable to do it like that. You want changing the rules on how they create the market, so to do it predictably, because you do not want your I would say that is a change in the market design. supply chain for these things to bubble and then crash. Ideally you want to pace it, and that is not Q11 Dr Whitehead: Are they classified as straightforward and Governments are learning how to subsidies, effectively? try to do it. Dr Blyth: No, I do not think so; I would not class that as a subsidy. I would class it as a pricing mechanism. Whether it is a desirable one or not is an issue, but it Q8 Chair: It might be helpful for you to face in to is a way of providing payment for services. At the the Committee; I am reliably advised that if we sit a moment, they are paid per kilowatt hour and the little bit too far away from the mic, we do get the proposal is to change it to some payment for kilowatts echo, so I think the lesson is not to sit too far. as opposed to kilowatt hours or some combination of Dr Blyth: I see. payment for kilowatt hours plus a payment for Zac Goldsmith: We ought to know after three years. kilowatts. So, it is a payment for services. Chair: The echo is now getting worse. Can I go back to my previous question and ask you whether or not Q12 Dr Whitehead: For being there, really, as for the research that you have done has highlighted any gas-fired power stations? Isn’t that a subsidy? other aspects it would be useful to have in the design Dr Blyth: It is a payment—being there is a service in of subsidies? You mentioned sunset clauses, but are that sense. The point of the capacity payment is to try there other lessons that have been learned from your to improve the robustness of the electricity system and research that you would advise us to look at as far as have enough capacity on the system to be able to deal recommendations and so on? with peaks and troughs, so being there is a service. Dr Blyth: In my view, one way to try to avoid the That is the principle and I am not necessarily picking-winners approach in the low-carbon sphere defending it. I think you could, in principle, have an particularly is neutral technology such as carbon energy-only market that would bring forward pricing that can support all technologies. All low- sufficient capacity. Current policy is that that is seen carbon technologies benefit from that. At the moment, as a risky way forward, which is why there is the carbon prices Europe-wide are too low to really be justification for capacity payment, but I do not see capacity payment as a subsidy. It is just an effective at all, but the UK carbon price floor is quite alternative market. significant, and if the Government sticks to the current proposal of the rate at which the carbon price floor Q13 Dr Whitehead: Is it to the extent that you were increases, it quickly becomes a very significant factor. going to be there anyway and you are then getting In a sense, that lifts all boats equally, and you can try, paid for being there? with sunset clauses or planned reductions in the rate of Dr Blyth: Presumably then the market price for per unit support, to let those things merge over time. kilowatt hours would go down. If the market is The difficult aspect within all of that is that you also competitive—and it is a big if—players in that market have to take into account things like the gas price, will recoup their costs either through the capacity which obviously is an international price driven by all payment or through the energy payment, or a sorts of drivers, not least of which is economic combination of the two. In a competitive market, the growth, and what is going to happen to shale gas, combination of the two would cover their short-run either in Europe or North America, and so on. So, marginal cost. If you are receiving your payment there are all sorts of imponderables there that have a through the capacity mechanism, you would expect major impact on the cost-effectiveness of different- the wholesale energy price to go down to compensate, generation technologies. Those are the sorts of risk so you are not adding more. You are not just paying that companies are exposed to, but society as a whole for it to be there in addition to the energy that they is also exposed to those risks, and Government, in my are selling. Whether that works out in practice in a view, in some cases does have a role to play in slightly less than competitive market is another issue, thinking about how society gets exposed to those but that is not a subsidy issue. That is, “Are the risks. markets competitive or not?” which is a different question. Chair: We will move on to measurements and Q9 Chair: Can you think of any technologies that definition. would not require subsidy? Dr Blyth: That would not require subsidy? At the Q14 Caroline Lucas: One of the complications, of moment, quite clearly, gas-fired generation is the part course, is that different institutions define subsidies of the generation sector that has, in a sense, been left differently. In your paper you describe some of the without any additional support. Coal is essentially different approaches taken by WTO, OECD, IMF or ruled out unless it has CCS, and CCS will not happen whatever. Does any one of them stand out as being a unless there is a subsidy. Nuclear renewables are all particularly coherent and sensible approach to subsidised through the contracts for difference going defining what an energy subsidy actually is? forward. Essentially, you have gas as the piece left Dr Blyth: I think you are right; they are quite over. That is it. different. In my view, what stands out probably is the cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Ev 4 Environmental Audit Committee: Evidence

24 April 2013 Dr William Blyth

OECD methodology, which tries to identify not just Most of the international institutions have recognised consumer subsidies but also producer subsidies. The that, in theory, these things ought to be priced in, but earlier work from the International Energy Agency, they have stopped short usually, up until now, of which became quite widely known for energy subsidy calling them a subsidy or calling the lack of carbon estimates, mainly identified subsidies as being in the price, effectively, a subsidy. But the IMF has now domain of developing countries where price support broken ranks with that, and I think that is really for products is pretty strong. Governments often interesting politically again. subsidise energy products, petrol and so on, for consumers, and that is less prevalent by far in Q17 Caroline Lucas: Do you support it? developed OECD economies where it is pretty rare to Dr Blyth: I do support it, absolutely. I totally support subsidise consumer energy products. The IEA it. What is interesting is that again it brings the methodology tended to say it is not a developed- subsidy debate from it is not an OECD problem, country problem; it is all a developing-country energy subsidies are all out and they are all in problem. The OECD is taking a more rounded view developing countries. If you include the under-pricing and says it is not just consumer subsidies that count; of greenhouse gases in particular, that brings it right it is subsidies to energy companies, and they need to back into the lap of our economies in OECD be taken into account as well. In my view, that is the countries, and so that is really interesting. In terms of most rounded approach. The difficulty with it is you the UK, you are looking at somewhere between £5 end up referencing everything to what the country billion and £7 billion worth of subsidy if you were norms are for taxation of energy products. Despite the looking at the additional costing of under-pricing of large amount of work by the OECD that goes into greenhouse gases. those studies, it is quite hard to come up with a level playing field to compare one country with another Q18 Caroline Lucas: Between £5 billion and £7 because the definition of subsidies tends to be rather billion, did you say? relative within an economy. Dr Blyth: Yes. It depends which sectors. I would argue that does not include the sectors in the UK Q15 Caroline Lucas: That leads on perfectly to the covered by the EU ETS, because they are covered by next question, because some of the institutions like the carbon price floor, and the carbon price floor is the OECD, as you say, emphasise that particular tax there or thereabouts similar to the $25 that they are rates should only be considered as subsidies if they do recommending. It is the other sectors outside of that. differ from the so-called norm, the normal tax rate in that country. Is it the case that all of the institutions Q19 Caroline Lucas: Just the last thing: do you get that you have looked at would agree that something the sense that other institutions will follow the IMF like reduced VAT rates for energy should be treated now the IMF has broken ranks by including as a subsidy? Would there be that degree of environmental externalities as a subsidy? Do you see commonality of approach? that as something that is going to spread? Dr Blyth: There probably would. In a case like VAT, Dr Blyth: I think they probably will. I can’t see why deviations in VAT rates are usually based on some the World Bank would not want to apply similar sorts deliberate attempt to improve access to that particular of conclusions to the countries that they are focusing product. In my view, that counts as a subsidy, and on. In some ways, it is the bravest move for the IMF. most organisations would recognise that. Certainly the So, if they have done it, other organisations would EU is quite strong on trying to get member countries follow. I am not quite sure where the $25 number to harmonise VAT rates across the economy, apart came from. There are so many estimates of what the from selected items like children’s clothes and that correct price is. It happens to be very similar to the kind of thing. On energy, the EU is quite hot on current starting point for the UK carbon price floor, keeping VAT rates at whatever the going rate is within which is possibly an interesting coincidence. the economy, so they would certainly recognise that, and the new member states have all been required to Q20 Peter Aldous: Just at the outset, for the Register harmonise energy VAT rates. of Members’ Interests, I do have interests in farmland where there are renewable energy projects being Q16 Caroline Lucas: There seems to be a difference pursued. If we can look at energy subsidies in the in approach between the various institutions in terms UK—so, trying to compare like with like—the first of whether externalities like environmental costs point is, in the calculation of energy subsidies in the should be part of the subsidy calculation, which is UK, do you think it is logical to ignore the high rate quite a big issue. The IMF thinks that unless carbon of petroleum revenue tax applied to fossil fuel energy? costs of at least $25 a tonne of CO2 are being borne Dr Blyth: The petroleum revenue tax is obviously one by an energy market, the failure to reflect that should of the ways in which the Government recoups money in itself be deemed to be a subsidy. What do you think from the oil and gas sector. All Governments globally, about that and what does it tell us, particularly now, if they are going to license companies to extract oil when you consider the very low price of carbon with and gas that belongs to them as a sovereign state, will the ETS in the EU? come up with some tax arrangement so that the Dr Blyth: I would certainly agree philosophically with companies have a right to access that oil and gas and the idea that lack of or under-pricing of externalities to sell it in exchange for tax revenue. In the UK, counts as a subsidy because, economically speaking, companies are charged a petroleum revenue tax, also they should be incorporated into economic prices. corporation tax and various other charges, so that is cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Environmental Audit Committee: Evidence Ev 5

24 April 2013 Dr William Blyth the revenue that comes to Government from the oil around £33. So, in answer to the question, the most and gas companies. That is a tax rather than a subsidy. subsidised on a per-unit basis is renewables.

Q21 Peter Aldous: But would you agree it is not Q24 Peter Aldous: Perhaps we should not speculate, what you would call a normal tax, if there is such a but if we were sitting here in five years’ time, do you thing as “normal”, that is applied to other goods? think that would be the same answer? Dr Blyth: I see what you mean. Yes, I would agree Dr Blyth: I think it probably would, because the that is not the way that other companies are taxed. renewable rate is—we do not know, is the answer to The oil and gas sector, or extractive industries in the question, because we do not know what the general, is somewhat different because the state is contract-for-difference strike prices are going to be. I sitting on a resource that belongs to them and the suspect they will be similar to what they are now and question is how they effectively sell that via the decline over time, but I still think that they will be energy companies, whereas mostly other companies large. The size of the subsidy to nuclear will be very are not sitting on a resource that has value. They have lumpy. It will stay as it is now until the first nuclear to create value through the goods and services that power plant is built, if and when that happens, in the they produce. Extractive industries are slightly early 2020s. So, in 10 years’ time you will suddenly different in structure, and therefore I would argue they get a spike in the total value of subsidies allocated to do need a different tax regime. nuclear, because that is when the plant will start to generate and be paid. In 10 years’ time the table might Q22 Peter Aldous: Just going forward in a similar look different, but for the time being renewables is the vein, would you agree that it is logical to exclude from area that is growing, and, therefore, each time it grows subsidy calculation the ability that oil companies have it increases the total size, although the rate of support to set off exploration expenditure against revenues to renewables is either steady or possibly declining immediately, when with capital investment in other slightly. areas of the economy that can’t be done? Dr Blyth: That is different. Again, it is a different tax Q25 Peter Aldous: Finally, is it possible to quantify regime. All I can say in answer to that question is any subsidy that is implicit in our public investment that the OECD methodology recognises that that is a in education and training, which there may be in some different approach, but they do not consider that that energy-specific areas and in technologies and is a subsidy. I think that is because that is a relatively sciences? I suppose what I am thinking about is, normal type of approach used internationally. So, should we regard the teaching of nuclear science in although it is different from the typical way that universities as a subsidy or not? corporations are taxed in the UK, it is not unusual Dr Blyth: I have not managed to try to get data on internationally to operate in that way. breaking out that. It is difficult. I suppose yes, in principle, that would count as a subsidy. I think Q23 Peter Aldous: In section 2.7 of your report you strategically, if you are thinking whether or not this pull together the subsidies that you have identified for country needs nuclear and if the answer is yes, then each type of energy. In terms of the amount of energy education is an extremely important part of that. So, output supplied by each type, what is your assessment you have to do it, and if you do not have those of the relative levels of the subsidy? I think what I am education systems in place, you are not supporting the saying is, which types of energy are most intensively industry. I suppose the answer to the question is yes, subsidised in the UK for the winners? in principle. You should identify every service and Dr Blyth: You are quite right, the table shows the total aspect of Government service and infrastructure that values of which the largest is gas VAT, but when you goes into each individual sector and allocate that by look at the total amount of gas used, the size of that sector. I am not sure how possible that is to do. subsidy per unit comes out as relatively small. The two largest clearly are nuclear and renewables in this Q26 Zac Goldsmith: A slightly different question, assessment. I would like to point out and apologise but also on ancillary subsidies or implied subsidies, that the table, as it is presented here, is slightly is, have you managed to look at the subsidies inherent misleading because the subsidy level for renewables in our Export Credit Guarantee Department, for in the third column of that table is for 2013, whereas example—which has not recently, but historically, the energy consumption figure is for 2011. They were provided favourable loans and has de-risked both the latest available data, but they are not the same investments in the fossil fuel sector throughout the year, which is unfortunate. world and is still able to do so now, even though it Peter Aldous: It is a change in the— has not over the last couple of years, I believe—and Dr Blyth: In the case of most of them, it does not also through our World Bank lending and so on? Is change very much, but in the case of renewables it that part of the calculation? changes a lot because renewables has been growing Dr Blyth: I think in principle it is, and one of the so quickly. reasons it is not in here is because, as you say, they If you divide one by the other, the real figure should have not done any, so as I was looking through— be something like £50 per MWh for renewables, which is roughly around the value of the ROCs, the Q27 Zac Goldsmith: We have through the World renewables obligation certificates. If you divide one Bank, though, I assume. I would be amazed if we have by the other in the nuclear column, you get something not through— cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Ev 6 Environmental Audit Committee: Evidence

24 April 2013 Dr William Blyth

Dr Blyth: Through the World Bank, yes, and through Dr Blyth: Yes. UK subsidies influence decisions in the other development bank institutions, yes. the UK in terms of what gets built, which affects our Zac Goldsmith: I am certain we have. I just can’t emissions, and then that affects our ability to negotiate remember the examples. internationally. So, in that sense, I suppose I see the Dr Blyth: That is right. The development banks subsidy question as being what are we doing at home themselves have active energy programmes and the and—I think your point is right—that that affects what EBRD, for example, will fund coal plant investments. you are able to say internationally, but whether the They would argue that they are investing in coal plant scope of your inquiry should look broadly at to make them more efficient and therefore more international subsidies is— environmentally friendly than they would otherwise be, so you can take your view on that. I suppose the Q31 Caroline Lucas: Very quickly on the relative fact is that the involvement of the international subsidies between the different energy sources, would financial institutions does in some sense lubricate the you agree that your figure for nuclear is pretty wheels of finance and other sources of finance in that conservative given that we do not know what the sense. It is kind of like a subsidy, even though they decommissioning costs are, and they may well be are supposed to lend at commercial rates. They would higher than you have factored in, but also on liability? argue that they are not subsiding, but facilitating. This In the main body of your text you point out that is where it all gets a bit blurry round the edges, but I although the UK is increasing the cap of liability up € € have not tried to look at the flow of UK money to 1.2 billion, Fukushima, for example, is 175 specifically via the IFIs. billion. Can you just remind us what assumptions you have built into that figure? If you were to put that liability figure where it probably should be, the figure Q28 Zac Goldsmith: But from the point of view of of the subsidy would be a bit bigger. the inquiry that we are doing now, would it be your Dr Blyth: It would go up in that sense. Yes, I think recommendation that we look closer at some of those that is right. I have a question mark in the table against arrangements by the World Bank, Export Credit— how much the NDA budget might be required to be Dr Blyth: I suppose it depends what your scope is. If in order to cover decommissioning Sellafield waste in your scope is UK subsidies, then arguably no. Very particular, and other liabilities. So, that is not included little of that would flow back into decisions made at in those numbers that I just quoted comparing the UK economy level, apart from very marginally in renewables and nuclear. terms of their impact on global energy markets. If Going forward, I have left out of that table what the your scope is UK subsidies, I would say that flow forward-looking subsidies are, which is where you affects developing-country economies. referred to the cap on liabilities for accidents and emergencies and so on being €1.2 billion. That is a Q29 Zac Goldsmith: Except not from an very difficult question to try to quantify, which is environmental point of view. There is a growing trend partly why I did not come up with a number for what of developed countries exporting their pollution to those subsidies were. If you start to say Fukushima is other countries in any case, whether it is waste or €175 billion, it could have been a lot worse. If you emissions and so on. If you are looking at the have to evacuate the whole of south-east England, country’s fossil fuel dependency footprint—I can’t what is the economic damage of that? think of a more elegant way of putting it—then you Caroline Lucas: A lot. would have to look, presumably, at those favourable Dr Blyth: A lot, exactly. The problem is that the only loans made available directly or indirectly by the UK way of quantifying it properly is to try to get Government, surely. commercial insurance, but you just can’t get it. The Dr Blyth: I would argue that the Export Guarantee fact that you can’t get commercial insurance on the one is worth looking at, in the sense that it is relatively one hand makes you think, “Crikey, this must be easy to look at it because it is all published and all the really high.” On the other, I could argue that the projects are there, and at the moment they are not liquidity of the market for insuring against doing it. I do not know whether that is a policy not to Fukushima-scale accidents is just so thin it is not a or whether it is just that nobody has applied for it. proper market. So, is it reasonable to expect companies to go and get commercial market I think it is a very reasonable question to look at the insurance? Markets are not perfect, and that is a policy of the IFIs and what they are lending money to particular example. I agree that the number is higher, and whether the UK, in its broad environmental that that is probably a bottom-end estimate, but I am policy, is either comfortable with that or should be not going to pin my hat on what the number should influencing that. It is an important issue, but I do not be higher than that. necessarily see it as linked to the subject, but I am not Having said that that is a bottom estimate, could I just in charge of your scope, so that would be for your point out that the NDA budget is very visible, it is Committee to decide. there, and that is what the Government puts into the NDA? The NDA becomes quite a complex issue, but Q30 Chair: We decided not to restrict this just to UK when you look at the budget for decommissioning of subsidies. We will be looking at the whole aspect of Sellafield, it has not been in EDF’s hands for very global trade and the need to have leadership in terms long. It is picking up the back end of a commercial of global negotiations. It would be very difficult just asset, and arguably it should not be responsible for the to restrict it totally to UK, wouldn’t it? whole history of a lifetime of nuclear waste. There is cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Environmental Audit Committee: Evidence Ev 7

24 April 2013 Dr William Blyth a burden of balance between Government and industry I think other countries look at individual rebates in a in that context. You would have to look at whether the more targeted way. The UK has some interesting anti- NDA budget was really a subsidy. You would have to fuel-poverty approaches in the ECO, Energy look at the deal done when British Energy was sold Companies Obligation, and those sorts of requirement to EDF at £12.5 billion and say, “Was that the right to invest in housing infrastructure, for example, is price for those assets, given the share of responsibility certainly an area that could be strengthened. If you for the liabilities that came with it?” You could do a had a certain number of billions of pounds available whole study on that, and I am not the right person to to you to strengthen those programmes, I think those do that study. would go a long way.

Q32 Neil Carmichael: So far we have been talking Q36 Neil Carmichael: Of course you could argue about energy generation, but what about distribution? that measures to encourage better insulation and so There is a fair bit of subsidy in distribution, not forth are also an indirect subsidy. How would you, for necessarily in this country now, but in comparison to example, describe the Green Deal, or at least earlier other countries that still do subsidised distribution. subsidies for introducing energy use savings? What consideration have you given to that question? Dr Blyth: A lot of those earlier programmes were focused on the fuel poor, also vulnerable families, Dr Blyth: Distribution? Are you thinking about elderly or low-income houses, so the energy electricity? companies were required to go and fit new insulation. I would say that was a subsidy and a good place to Q33 Neil Carmichael: Of energy, of electricity put the money. If you can improve the housing stock, distribution systems. that is good not just for the consumers, but for the Dr Blyth: The electricity distribution system is a energy system and the climate as a whole, so that monopoly, and it is a protected monopoly in that seems to be the sensible way to go. sense, so National Grid operates it, but it does operate as a commercial entity, and its costs are covered by Q37 Dr Whitehead: Could we have some thoughts the charges it makes to consumers. about developing subsidies and, to start with, shale gas? How does that fit into the subsidy pattern, in Q34 Neil Carmichael: But in terms of international your view? comparison? Obviously the Central Electricity Dr Blyth: Essentially the shale gas is going to be Generating Board and its distribution mechanism was almost like a new sector, a new part of the new gas in the public sector and did get a subsidy. I do not sector, and the Government is going to have to come know the situation in other countries and who should up with a tax regime that strikes a balance between be comparing those, but I would like to. incentivising companies to do it, if that is the way it Dr Blyth: The situation varies considerably. I would needs to go to develop shale gas. If you tax too say Europe-wide there is still some public ownership, heavily, then companies obviously will not be but it is not unusual to have a fully-funded private incentivised to come and try to make a profit out of sector, albeit a regulated monopoly model, operating developing the resource. If you tax too lightly, then in the transmission system. In the US you have you are not making any money out of it as a different sorts of model, some regulated monopolies, Government and what is the point? You should not some private-market arrangements, so it does vary. I just be giving out this resource for free for companies think the UK is probably, in the electricity sector to be making a profit out of. where there is low levels of subsidy internationally, in I suspect in the early stages of shale gas the the sense that it is fully privatised and it fully covers production profile of those fields is relatively its own costs, within that regulated model. uncertain. Until you start drilling and fracking you do not know what the flow of gas is likely to be, so there is quite a lot of learning in the early stages. I suspect Q35 Neil Carmichael: One other area of difference that that will mean relatively light taxation and is, of course, VAT in energy. We have relatively low relatively little revenue in the early stages. You could VAT levels and lower than our immediate competitors look at that and say, “Why are you doing that when in Europe. Does that mean they are being a bit unkind you still have North Sea gas coming in?” You have to to those who are heading into fuel poverty, or are there balance the interests of onshore and offshore and try other mechanisms they are using to deal with fuel to create—I think “level playing field” is the wrong poverty? term—at least some sort of fairness while balancing Dr Blyth: I think the evidence on the extent to which strategic issues around whether the UK should be the reduced rate of VAT is targeted to the fuel poor developing shale gas strategically over the longer shows it does not target the fuel poor very well. In term. It is a rather fluffy answer to your question. I other words, all consumers benefit and therefore it is suppose in principle you might look at low early not very well targeted. I think there are much better taxation rates as a subsidy, or you could look at that ways of spending the money that that effectively and say that is the normal way that countries operate costs, if you like. If you were to look at the amount when they are trying to attract energy companies into of revenue you would get by charging 20% VAT and a new and rather uncertain resource in the country. think how would you spend that money, giving it You have to work your way into that system rather equally to all consumers is probably not the way you gently and then you potentially increase taxation rates would do it. from there if the industry turns out to be successful. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Ev 8 Environmental Audit Committee: Evidence

24 April 2013 Dr William Blyth

Q38 Dr Whitehead: Does that come under the discussed are higher than market rates, in which case general banner of the industry support mechanism, we should call a spade a spade and call that a subsidy. even though the infant industry is in a commodity that The question then becomes, “Is that a justifiable is mature? subsidy?” which is the same argument with Dr Blyth: I suppose it does. It is a slightly odd way renewables. The EU has to then decide, “Okay, this is round, because the thing with the extractive industries a state aid. Is it an allowable state aid or not?” I think is you are already sitting on the resource and the that is a very healthy discussion. question is how much you tax companies to come and exploit that resource. The infant industry usually is Q41 Chair: Do you think that will be a discussion the other way round where, as a Government, you are that will be resolved in the European Commission on going to set a feed-in tariff for renewables, for the state aid in terms of nuclear? example, and you are in charge of the relationship Dr Blyth: The contracts will have to be cleared for between the consumers and the energy companies. Do state aid rules in order to be able to proceed, so I am you see what I mean? It is a slightly different way afraid I can’t answer in very much detail as to what round. You are mandating payments from the that process is. I think all you can say is that the consumers to the industry in the case of what I would Government will have to be negotiating now with a call straight subsidies. In this case, you are trying to view to those rules, that agreement being allowable. I come up with what is the right level of tax. It is small suspect that it will follow the path of we need this to taxes, but big taxes as opposed to small subsidies. happen in order to create conditions under which a viable nuclear programme over the longer term can be Q39 Dr Whitehead: Is that a potential source of sustained. If you don’t have one, you can’t have more confusion in terms of how subsidies in general within than one. Given the lead time on how long these the EU relate to state aid regulations and the extent to things take to build, I presume that is the sort of which, for example, the RO is defined as state aid but argument that will be made as to— has a wayleave on it on the grounds that it is developing a commodity that otherwise would not be Q42 Dr Whitehead: As far as subsidies are available? concerned, bearing in mind we have slightly different Dr Blyth: I am afraid I can’t answer the specifics of conditions in the UK than in some places in terms how shale gas is going to be viewed in terms of state of the relationship of the state itself to energy supply aid rules. I think that is something worth pursuing to companies so that the subsidy is going to companies try to clarify, because you are right: it becomes murky rather than the subsidy to the state itself for doing quite quickly, and it is much easier to think about something in relation to energy, whether or not that developing a reference level for subsidies in a mature subsidy is either passed on or borne by the consumer sector. For example, you have the mature gas sector. or is putative tax spend or actual tax or consumer In 10 years’ time, if and when shale gas is established, obligation, and the same company is undertaking you might look at what is the taxation rate for that present supply as maybe is responsible for developing compared to other sectors. It is all settled out, and you new supply—carbon price support, for example, can then compare the different levels and see whether which has been determined not on the basis of a you think that is fair or not. particular category, but has been determined now— At that point, it might start to be sensible to think the extension upstream from CCL has been about the issue in terms of subsidies. At this point, determined on the basis of carbon intensity. Is it a when we are thinking about what is the tax regime for subsidy when a supplier avoids a tax as a result of the shale gas, I do not think it is sensible to think about definition that was put into how that tax is extended it in terms of subsidies. It is easier to think about it in and therefore stands much better in relation to that tax terms of what is the right strategy for the Government than they previously did and against other suppliers? to pursue when it is thinking of working out the Dr Blyth: Are we talking about CCL—Climate correct tax rate for exploiting those resources. Change Levy? Dr Whitehead: CPS is based on carbon intensity and Q40 Dr Whitehead: Where you have a mature now does not apply to old nuclear, but does apply to, industry, such as the nuclear industry, and you have a say, gas or coal, and therefore if you are a private- public statement that there will be no public subsidies sector supplier of gas, you will pay CPS. If you are a on that mature industry, in your understanding of what private-sector supplier of existing nuclear, you will is a subsidy, how far away from the direct use of the not pay CPS, but you are the same company that is word does a subsidy have to stand and to what extent developing that new supply. does that then wrap itself back into EU state aid rules? Dr Blyth: I suppose I see the carbon price system as Dr Blyth: I think you have to contort yourself quite internalising the externality, so in that sense I would drastically to say that nuclear is not being subsidised not say that was a subsidy. It is changing the incentive under the CFDs, with the caveat we do not know what as to what you may invest in, and it is creating an the strike price is yet, because it has not been incentive to invest in low-carbon sources because, as announced, but we think we might know where it is you say, if you are using fossil fuels to generate heading. electricity, you have to pay the carbon price. Dr Whitehead: Or the length? Dr Blyth: Or the length—indeed, yes. I should caveat Q43 Dr Whitehead: How are subsidies treated that statement with the fact we do not know what the internationally? In this instance, as a result of a number is, but it looks as though the numbers being definition of an extension of a previous arrangement, cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Environmental Audit Committee: Evidence Ev 9

24 April 2013 Dr William Blyth

CCL, and its incorporation into claimed carbon floor subsidy, either the ROC or CFD. Then there is the price, CPS, people who had been doing what they had levy control framework, which limits the amount of been doing suddenly had a differential in terms of subsidy that can be paid, and, as you have set out in what they paid. A company that had for years been your table on page 33 of your report, you indicate running a gas-fired power station paid CPS; a that, bearing in mind cumulation, there should be company that had for years been running a nuclear about enough room for the present of deployment of power station did not pay CPS; previously they both renewables. So, the subsidy arrangement contradicts did not pay anything. Does that count as a subsidy, the statement on the ambition of the subsidy. bearing in mind there is no development going on, no Dr Blyth: Sorry, could you say the last bit again? incentive for an immature industry and no consumer Dr Whitehead: On the one hand, you are saying there benefit thereby? How does that work into the system is going to be a doubling in deployment of renewables that you have described? and that is based on a subsidy. The subsidy itself is Dr Blyth: I think when you change the tax regime capped, and you have shown in your chart that there generally there will be winners and losers, and is sufficient headroom, bearing in mind cumulation, typically you would try to smooth those out by having for deployment at roughly the present rate, which a transition arrangement to avoid stranded assets. If therefore is half of the ambition that is set out for you, as a company, have set up your investments 2020. under one particular framework, you do not then want Dr Blyth: I see what you mean. I have not done the the Government to change the tax regime on you in a calculation of whether that is sufficient. I suspect you rather random way to change your income stream in may well be right that there is a conflict between the an unpredictable way. levy cap and the level of ambition. I have not done I suppose arguably the UK’s ambitions towards low those numbers myself and I would need to defer to carbon from a policy point of view have been rather other sources of those calculations, but potentially I well signposted, so I suppose you could argue the think you are right. If the cap is not high enough to companies have had some forewarning, although they get you to A or to B then clearly there is a policy probably could not predict the details of those conflict that needs to be resolved as to whether the changes. You might look at that as not being a good cap has been set high enough. So certainly in example of how to transition towards a new taxation principle, there is tension between those two issues regime. I suppose I would struggle to see that as a and I think that needs to be investigated. subsidy issue. Again, it does become a bit fuzzy about whether we are talking about subsidies or changes in Q47 Chair: I am looking at my colleagues. This has taxes. been the first session using the academic research that there is here. We have had a very academic Q44 Dr Whitehead: This is what I am trying to get presentation. Before we bring this session to a close, a handle on. For example, as it happens there have do you have any gut sense yourself in terms of policy been four extensions given for existing nuclear power recommendations that you think might arise out of the plants to last December, to this December— submission that you have given this afternoon? Dr Blyth: Yes, lifetime extensions. Dr Blyth: Ideally we would want to get to a stage Dr Whitehead: Two of five years, two of seven years, where we can discuss these issues without them being all of which will be covered by the payments under heavily politicised. I suppose that is too much of an CPS or not. Those will now all be exempt from ask. There are such strong views on all sides about payments, whereas previously if someone had wanted nuclear versus renewables and the proponents of each to extend the life of a nuclear power plant, they would of those. In my personal view, I think it is clear that have been on a level footing with a gas-fired power nuclear does receive a subsidy. I also think, given that station. There is no new development going on, just the gas price that we are facing in the 2025 to 2030 an extension of an existing power station. time frame is so uncertain, while it is clear that that Dr Blyth: I do not see that as a subsidy. subsidy exists against current market conditions, it is not clear that it will still represent a subsidy over the Q45 Dr Whitehead: Forty-four billion pounds? time frame for which that plant will be operative. If Dr Blyth: In my view, if you are internalising external we think of 2030, it may well be that it has turned out costs of environmental damage, that will create a to be quite a good bet. You can see that that has benefit to the companies who are running plant that is already happened in some of the early NFO wind not creating that damage. That is how I would contracts that are currently below market price. They classify it. started off as a subsidy, it turns out—what do you class that as? Does it become a negative subsidy Q46 Dr Whitehead: On more specific renewable because they are generating electricity at a fixed price subsidy, bearing in mind that ROCs have translated to below market rates? You could quite easily see CFDs—one of which was about renewables; the other scenarios where the same thing happens for nuclear, is about low carbon and not necessarily renewables, so what might be a subsidy today may well not be a and there is a levy control framework for general subsidy in 15 years’ time. development—how do you regard the role of—On the Having said that, I am not going to try to predict for one hand, you have a development ambition, which you that gas prices are going to go up by 2030. There is that there should be a doubling of deployment of are quite plausible scenarios where gas prices go renewables, particularly offshore, by 2020 on present down. I personally feel that when embarking in that deployment arrangements. That is provided for by a direction of building—I do not know how many cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:21] Job: 029662 Unit: PG01 Source: /MILES/PKU/INPUT/029662/029662_o001_kc_ CORRECTED 24 04 13.xml

Ev 10 Environmental Audit Committee: Evidence

24 April 2013 Dr William Blyth nuclear plants are required to establish it—one or two Chair: On that point, I will bring the proceedings to or some is not a bad risk and a bad bet to make as an a close, so many thanks once again for coming to insurance policy against future gas price risk. appear before us this afternoon and for the research. cobber Pack: U PL: COE1 [SO] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 11

Wednesday 15 May 2013

Members present: Joan Walley (Chair)

Martin Caton Caroline Nokes Katy Clark Dr Matthew Offord Zac Goldsmith Mr Mark Spencer Mark Lazarowicz Dr Alan Whitehead Caroline Lucas Simon Wright ______

Examination of Witnesses

Witnesses: Peter Wooders, Programme Leader, Global Subsidies Initiative, Shelagh Whitley, Research Fellow, Overseas Development Institute, and Charles Perry, Partner, SecondNature, gave evidence.

Q48 Chair: I would like to give a warm welcome to are a lot of decisions that have to be made in that each of you and thank you for taking the time to come calculation. The consumer side is very easy. You look along to our session on energy subsidies this at the price the consumer pays, you relate it to what afternoon. I know that two of you particularly have it would be if there were a proper free market and you expertise with respect to fossil fuel subsidies on the look at the difference. It is pretty simple. global stage. It is how we link that in a vertical way You asked about the scale of emissions. There has to what is happening in the UK as well. There is been modelling work done. Again, the IEA and the recent interest in this and reports on it, and the news OECD are very strong in this area and their models today about Shell and BP may be connected in some tend to show that if subsidies were all withdrawn, all way with subsidies or pricing. This is to give you an removed, the world would reduce its global opportunity to give us some idea of the extent of extra greenhouse gas emissions by something in the order global emissions that would result directly from of 5% to 10%. Those are very significant compared to energy subsidies. I will try to catch the eye of all three climate change. This is far from a throwaway of you and give you an opportunity to respond. comment. Peter Wooders: Thank you very much, madam Chair. You mentioned the news about Shell and BP and some Firstly, could I offer my thanks for being invited to of the other oil companies this morning. The ultimate the session today? I think the inquiry is extremely aim to remove subsidies is to move to deregulated important. To have a leading country like the UK and markets that work very well. In countries that have a G20 member saying how large its own subsidies are prices that are set on an ad hoc basis and are subject and whether they are good public policy or not is very to government interference, it is very hard to reflect important, both nationally and internationally. when the oil price moves that the local price moves On the scale of international subsidies, there are a as well, and subsidy tends to build up. However, all series of benchmark publications. The International countries have an ongoing challenge to make sure that Energy Agency, first in 1999, put together an initial their energy markets continue to function well. estimate of consumer price subsidies—consumer support in determining lower prices for fossil fuels. Q49 Chair: Thank you. Do you want to add to that? That figure is around $500 billion per year across the Charles Perry: I am Charles Perry. Hello everybody. world. When we say across the world, they look at 37 It is a great pleasure to be here and I am very pleased countries. Those are developing and emerging this inquiry is happening because I am one of the countries. They are not looking at the UK within that people who suggested it. I suggested it initially to the list and they are not looking at most of the developed Energy and Climate Change Select Committee but world. It is around $500 billion per year. Tim said that they could not fit it in. Then I came to Another very important publication that has been done see Joan and Simon and suggested it here. I am very for the last couple of years by the OECD is An pleased that it is happening, so I am glad also to Inventory of Estimated Budgetary Support and Tax participate. There is very little that I disagree with in Expenditures for Fossil Fuels. The OECD has looked what Peter said, even though we only met each other at its own membership in 34 countries and worked out today, and I have just had the pleasure of meeting how big subsidies are to consumers and producers for Shelagh today as well. fossil fuels, and their estimates are somewhere around I run my own business. It is called SecondNature. We $55 billion to $90 billion per year. Then there is a are a sustainability consultancy, but I used to be at BP whole bunch of other studies, including work by my so I have a bit of a cross-section of experience. We own organisation, Global Subsidies Initiative, that did the whole rebranding with John Browne in seek to get extra information, particularly on the 2000Ð2001 to Beyond Petroleum with the Helios. producer side. It is relatively easy to make estimates Then I ran the renewable energy division and left in of consumer subsidies; it is much harder to make 2006 before Tony Hayward became the chief estimates of producer subsidies. If we think about executive. I subsequently ran renewable at Good upstreaming oil or gas and there is a tax break for a Energy where I was Managing Director. particular field allowance or a particular initiative, is In my experience in energy, both on the fossil fuel that a subsidy or not? What is the benchmark? There side and on the renewable energy side, language is cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 12 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry very important and definitions are particularly research that I work on, I work with the Overseas important. There are lots of words that are used often Development Institute and we are looking specifically to confuse people, not intentionally but, for example, at climate finance—finance from developed countries the phrase “feed-in tariff” is a very confusing English to developing countries that was agreed in phrase when you first hear it. Some people use a very Copenhagen. The goal is 100 billion going from narrow definition of fossil fuel subsidies or energy developed to developing countries by 2020. subsidies and others use a much broader one. Peter The goal of that money is to address climate change, has talked about the IEA, OECD and WTO. They all mitigation and adaptation in developing countries. use a very broad definition, which I do too, but others, That finance, when we look at it, is really a drop in for example Her Majesty’s Treasury, use quite a the bucket compared to fossil fuel subsidies, both narrow definition in the UK of subsidies, quite a literal domestically in countries like the UK but also in these definition. I am going to throw just a few words out— countries themselves. This has been broadly ignored support, intervention, benefits, concessions, breaks, in terms of how important it is to understand domestic access, price manipulation, research and development. subsidies when you are, in a way, putting in place new For me, these are all part of the field of energy subsidies through climate finance. The goal of climate subsidies, or energy support if you like. That is the finance is to incentivise change and the goals are context from which I am coming in this discussion. directly contrasting with those being achieved through these different subsidies. Q50 Chair: How do you think it might be possible That would be the main link and it is important both in the climate finance that the UK provides directly to get some kind of consensus about a definition of but also what it provides through intermediaries such what constitutes a subsidy to include all those as the World Bank, the IFC and other development subsections that you just read out to us? banks. There are some fairly good statistics as well Charles Perry: I would suggest following the quite about the scale of fossil fuel subsidies that are being well-established definitions of the very credible provided by those institutions. There are estimates. sources on the international scale that have already Again, one of the main challenges of subsidies is that wrestled with this. Whether it be the OECD, the WTO the data are not very good. We do not have a lot of or the IEA, there are fairly similar definitions between transparent information, so all these are almost those three international groups and their definition is sometimes finger in the air estimates, but for very broad. I will read you the IEA definition right international financial institutions and national now, “Any government action that lowers the cost of development banks, the estimates, and you can tell energy production, raises the price received by the by the range, are between 15 billion and 150 billion energy producers or lowers the price paid by the annually for fossil fuel subsidies and from export energy consumers”. That is a very broad definition, credit agencies again between 50 and 100 billion. We which I like. The WTO definition is not dissimilar. do not have very much robust data but these are the However Joan, in particular on your question, in the estimates and some of that money will be coming UK I think it is about a discussion, and I would directly from the UK in order to support developing encourage more discussion on this in Government, countries. The question is what do we want to be across Government Departments but also with the supporting. public and NGOs. I think all of us could be involved. It is a very interesting topic that we need to know as Q52 Chair: How important do you think it would be citizens of Britain. We need transparency on this. The for us to get someone from the IMF—because they media in this country—especially for example the have just done a recent study—before our Committee Daily Mail—would like us all to believe that we are to give evidence about their role in all of this? paying a lot more for renewable energy as consumers Shelagh Whitley: I think it would be important but if you compare what we are paying for renewable because they are engaging other Governments directly energy versus fossil fuels, it is six times more for about how they can address fossil fuel subsidies. They fossil fuels as a taxpayer than it is for renewables. It are always looking at fiscal policies within countries is having that transparency. Another example is that I so they have a good sense of what is happening on have had conversations with the Treasury and they the ground and the potential for reform. We were would say that a lot of the things that I would argue speaking about this outside. The World Bank is are subsidies are not subsidies. For example, tax becoming more active in this space so it could be breaks, field allowances for the North Sea, they would worthwhile having someone from the World Bank argue are not subsidies. It is important to be broad in come to speak about the work that they are doing. I this definition if we want to establish transparency. understand that there is the potential for a facility to be set up on this by the World Bank. This was recently Q51 Chair: Shelagh Whitley, did you wish to add to discussed at the spring meetings. I think that would what has just been said about global emissions and be very useful. how we can measure them? Shelagh Whitley: Peter quoted the OECD number, Q53 Chair: When we were discussing this before we which I have as 6% if fossil fuel subsidies are were told that there were various justifications for eliminated by 2020, which some people think is having subsidies. We are going to be looking at possible. I would agree with that statistic. On linking inequality and affordability later. One of the reasons UK subsidies to global fossil fuel subsidies, in the that was suggested to us as a justification for subsidies cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 13

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry was to protect industry. Do you think there could ever development reasons. We all like to support our be a justification for a subsidy on that basis? industries as well. Can we come to some sort of Peter Wooders: I would be very happy to answer that agreement about what would be fair support and what question. The subsidies are given across the energy would be unfair support?” Maybe that can go through sector to different fuels, to different processes and to the official rules of the WTO or maybe it needs to different users. When we think about the $500 billion happen in a plurilateral-type way among the main per year on fossil fuel subsidies from the IEA, that is players. The UK is clearly one of those. low prices for energy consumers who tend to be drivers of vehicles. The most common source is Q56 Caroline Lucas: I wanted to see if I could risk gasoline (petrol) and diesel use. Some of that is for putting words in your mouth. You have all been quite productive economic use of transport and so on but a polite about the way in which different subsidies work lot of it is private transport use. Other subsidies are and the word ringing out hard in my head is that it is going to electricity, to kerosene, to LPG. Again, some just utterly incoherent. Would you agree that in a of that is for productive function but a lot of it is not. sense there is a fundamental incoherence between A lot of it is for heating homes, it is for keeping subsidies on the one hand that seem to be with one people going within their daily lives, but it is not set of objectives versus subsidies being given by the directly related to production. When we look at the same Government, often at the same time, to achieve energy side, very few of the actual energy subsidies a perfectly alternative objective? Fundamentally what are, in effect, making industry more competitive. we are looking at here is a real lack of coherence, for want of a better word. There are some industries that are heavy users of Peter Wooders: All subsidies are generally put in at energy but most industry is not. Most industry uses a the beginning for good reasons. Whatever subsidy you little bit. It is a small fraction of their operational look at, at the beginning there was a need to support costs. the public or to stop deforestation or to build up an Where it differs is when we look into renewables. industry or whatever it was. The Government had a There is a big debate at the moment. Whenever my legitimate aim that it wanted to follow. However, as organisation, the International Institute for Sustainable that subsidy goes through over time—five, 10, 20 Development, looks at a scenario for a more more years—it gets captured, in effect. The benefits sustainable world, it has more renewable electricity go to those we do not want to see get them. The generation in it. That is clear. So how do we best classic would be if we look at the subsidies that are encourage that and how do we best incentivise that? given in developing countries to consumers, less than There is a temptation for Governments that they 10% goes to the poorest 20%. The other 90% is going would like, therefore, to have that subsidy or that to other people who do not really need it and that then support to that industry generating jobs and generating gets defended as a right. world class industries and export competitive However, going back to the definition question about industries in their countries. That is a very legitimate subsidies, there is always a debate about definitions aim. Whether it is legal within all trade agreements and which is the right one to use. What we are really and so on is another question. That is a very important asking here is, is public policy good or bad. Often question for the UK and for this Committee to look at. when people use the term “subsidies” it implies bad subsidies, so we say, “There is $500 billion of Q54 Chair: Is it an issue that we should be looking subsidies, they should all be reformed, they are bad”. at in terms of how, through WTO or other On the fossil fuel side, on the consumption side, that mechanisms, this gets resolved? is a pretty good rationale because it is not a hard one. Peter Wooders: I think it is, yes. Most of the impacts are perverse, are unhelpful. When we look at renewables, it is a different question. Technically they are still subsidies but are they good, Q55 Chair: Do you think that there is a mechanism are they bad, are they indifferent? There is very little in place to establish what does constitute it and what information and analysis about evaluating those does not and whether it should be allowed? subsidies and that is what we really need to get to, Peter Wooders: The WTO has its ASCM, Agreement away from the kind of definition to measurement and on Subsidies and Countervailing Measures, which we, then to evaluation. the Global Subsidies Initiative, would say is probably Charles Perry: It is important to understand the the most useful definition of subsidies there is because context of history here. When the combustion engine it is agreed by the entire WTO membership of over was first developed in the early stages of the Industrial 150, has been legally tested and so on. However, Revolution, times were very different. It was hugely within that, lots of countries want to support clean expensive to own your own automobile and there was energy production sectors in the future and it is really support at the early stages of technology, as there an industrial policy type question, that everyone is often is. When you fast forward to a point where we trying to build up their industries. have never consumed as much globally as we are Is that WTO-legal or not? There has been a recent doing today—some people like to talk about us case just last week with Ontario against Japan, in burning 1.5 million years worth of fossilised matter particular, where various decisions were made. We every year with 7 billion people on the planet—you think it would be very helpful though if the major have a very different situation. What started off as countries within the WTO were to sit down and say, support, and of course most of it was nationally “We all want more renewables here for sustainable owned way back then, with private enterprise and cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 14 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry competition and the mass market applicability of went off to the Rio Summit where she was going to things like the automobile you get to a point where take it up. Unfortunately at the last minute this topic now it does become incoherent—your word, got bumped down the agenda at Rio, but the G20 has Caroline—because we are trying to use instruments to still committed to phase out fossil fuel subsidies so change behaviour. If you introduce a Climate Change there is a recognition that something needs to be done. Act because you recognise that things have changed Then it comes to the UK. To what extent does the UK and we are burning too much fossil fuel, then of need to phase out fossil fuel subsidies and what is the course you want to use carrots and sticks to change level of fossil fuel subsidies in the UK at the moment? public behaviour in line with that change. That is very One figure, for example in 2010, said it was 3.6 billion different from when the automobile was first invented, in UK fossil fuel subsidies but these figures change for example. and they are very different, depending on the source. As evolution happens, one has to use those carrots and William Blyth did some interesting work and he came sticks to incentivise the right sort of behaviour. Good up with some numbers as well. Getting to the bottom clean behaviour is what we want to incentivise, I of what it means to phase out fossil fuel subsidies for imagine. If subsidies are about protecting the the UK, what the current level is, what the objective consumer, which indeed they often are, it is around is in the next few years and having milestones to make what sort of policies we need to protect the consumer sure that we meet those objectives is vital. I think going forward. We all know what happened in Nigeria some people feel that we do not have any fossil fuel when fossil fuel subsidies were removed and prices subsidies to phase out in the UK unlike in Iran or were suddenly unaffordable. There were massive Saudi Arabia. riots. That is the other end of the scale. Iran is currently phasing out subsidies too. The USA has got Q58 Chair: Presumably there is a case for coming used to what they call “cheap gas” and certainly we up with a temporary subsidy, whether it is to get know that that was not the true cost of that gas at the fledgling new technologies on stream, or in certain pump. It was an artificial cost that had been helped by circumstances to perhaps relieve the worst effects of successive Administrations. In the context of history, withdrawing the subsidies. Is there a general rule that given that we are trying to solve the massive problem applies to how you might introduce a time limit or a of burning too much fossil fuel, we need to leverage specific time period that they would apply that has the right carrots and sticks. buy-in from other countries internationally? Are there Shelagh Whitley: Just to follow on Caroline’s any general rules about that? For example, by way of question, I have published a paper entitled At Cross UK legislation should we be looking at sunset clauses Purposes. I agree completely but I think that none of or things like that? Should there be a beginning and that is intentional. What you find is that it will be an end to these things? different Ministries with very different sets of Shelagh Whitley: I have done some work and I expertise and very different mandates that are putting realised that there is a correlation across these. I was in place the subsidies or incentives, both giving recommendations about how, if you were going internationally and domestically. If you look at this to put in place an incentive for the private sector broad definition of subsidies, it includes direct around low-carbon development, you would design financial transfers, tax treatment, regulation, such an intervention. When I was looking at that I realised that again these interventions or incentives are infrastructure support and trading and investment just another word for subsidy. What seems to be restrictions. Those are managed by very different missing for existing subsidies and how they are actors and within those different groups you may not structured is around this question of monitoring and have awareness of the different subsidies that exist, reporting and around the question of exit and failure. let alone across them. So it requires a certain amount I do not know—maybe others on the panel do know— of co-ordination and almost a very high level direction what are the best ways to put in place sunset clauses, that is put in place by the Government to say, “These but planning for an exit, planning for flexibility, are the goals we want to achieve, so which levers or planning for modification, building that around a carrots or sticks do we want to use?” That requires system where you have monitoring and reporting so quite a lot of co-ordination, which I think is one of that you can make decisions around milestones seems the main challenges. It is not intentional that these to make a lot of sense. things are happening at cross purposes. We talk about this often when we are talking about clean energy because we want to do it in a way that Q57 Chair: That raises a lot of questions as to who reflects the mistakes that we have seen so far in trying should have the responsibility for bringing coherence to balance the question of long-term signals that the to all of that. Do you have any proposals about what private sector needs or investors need with the fact our inquiry could come up with by way of that you do not want to be locked into an incorrect recommendations? pricing model—allowing for flexibility. I do not think Charles Perry: Just one point that seems fairly anyone knows how to do that perfectly and it would obvious. We have had some progress, for example, at be interesting to hear what others on the panel think, the G20 level. The G20 has already agreed to phase but it is more that you would incorporate monitoring, out fossil fuel subsidies and, indeed this was on the reporting and milestones and the concept of an exit, agenda of the Rio+20 Summit. I remember talking to and the concept that any subsidy also will involve Caroline Spelman at the Aldersgate event, before she some entities that receive that subsidy failing. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 15

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry

Q59 Chair: I presume you would do that that any sort of different assistance scheme, as long monitoring automatically? as Government has the credibility and the ability to Shelagh Whitley: Yes. implement it, will perform better. It can be a cash transfer, something through the tax scheme, payments Q60 Martin Caton: One subsidy that you have into the other functions of Government, or helping already identified in your answers so far is a blanket with schooling—all sorts of things that work in subsidy to consumers that is justified by trying to look different countries. If any of those can be put in place after the poor. Correct me because I am putting words they will tend to work better than the pricing into your mouth, but I get the impression that none of mechanism because the subsidies are so large. you thinks that that is a good way of going about Charles Perry: I would like to follow on to the theme things. Do you have suggestions about how we tackle of this, which is collecting revenue from the bad and fuel poverty without that sort of blanket support? using it to help the good. If you make the polluter Charles Perry: I think it is the principle of the polluter pay you collect revenue on that and then you use that needs to pay rather than paying the polluter. If you revenue to help where people need help, from an adopt a principle of the polluter pays, then of course affordability point of view but also from a doing the you can incentivise those people who are polluting right thing, cleaner behaviour point of view. At the less and less and you can penalise the people who are moment, subsidies are extremely costly for the UK polluting more and more. If that sounds like a good Government in a situation where our biggest problem principle, which I think it does, then using the carrots is getting the deficit down. These subsidies are hugely and the sticks around that principle makes sense costly. For example, the field allowances for the North because then you can help the people who also want Sea, where we have a boom now in North Sea oil and to help solve the problem, which is polluting less. You gas exploration, we are supporting, through tax reward the people who are polluting less and using breaks, to the tune of £2 billion. A recent study by less and you penalise the people who are using too Friends of the Earth found that for the last five years, much and polluting too much. That happens on a since Alistair Darling introduced it and George consumer individual level and also on a company, Osborne increased it, there is a total of £2 billion for industrial and commercial level. Then there is a North Sea oil and gas exploration in tax breaks where logical follow-through to how you take that from the companies exploring are paying a much lower rate of principle. tax as well. They are now paying 30% corporation tax where before they were paying much higher 60Ð80% Q61 Martin Caton: What about the domestic because North Sea is a national asset. They are getting consumer? Often the very poorest people do not have huge support and that is not about supporting a choice about what fuel they have. They can’t change efficiency, in my view. That is about supporting the technology they have in their home because, by inefficiency. How we use our carrots and sticks to definition, they are very poor. drive efficiency and the right behaviour is the critical Shelagh Whitley: I do not know if you want to speak challenge. about developing country examples, but there are developing countries that have restructured fossil fuel Q62 Martin Caton: Looking at the developing subsidies and instead of using an energy price signal world, if those developing countries are going to be to support the poor—so lowering energy prices—they enabled to wean themselves off fossil fuel subsidies, are using direct cash transfers. That allows the poorest what sort of action is it going to need from the consumers to make choices with the money that they developed world to assist them? have. The funds are being given to them to make those Shelagh Whitley: First, and this is what I argued for decisions as opposed to being given to energy in my paper, we have pools of money in the form of producers so that they can lower their costs. I am climate finance that are meant to be assisting countries guessing Peter might have some more to say on that. with this transformation from, let’s say, brown Peter Wooders: I would. We have produced a business as usual growth models to green growth guidebook recently at Global Subsidies Initiative models. The first thing that we can do is use some of collating a whole set of international experience on this money to support transparency so that they have subsidy reform, which does not tend to be an a clearer sense of what subsidies are, and there is an economic problem. It tends to be that the economics ability to report on subsidies, which then gives them is understood but it is a serious political problem; it is the information that they need to make choices about a political economy problem. We categorise subsidies these carrots and sticks. of the type you described, blanket population At the moment, this is very much a level playing field subsidies, as, “A basic inefficient economic and social where neither developed nor developing countries assistance system”. The corollary is that if you can have a clear sense of the subsidies on the ground, and think of any more efficient economic and social I guess in the climate space I would extend this assistance system, it will perform better than the beyond fossil fuel subsidies. I used data on fossil fuel pricing mechanism because the pricing mechanism is subsidies because those are some of the subsidies that so inefficient everybody benefits from it, particularly we have the best data on, but for climate change you people who use more, and that just does not seem to have subsidies to agriculture, you have subsidies to all make sense if your target is to protect the poorest. The sorts of different activities that have also a huge savings are vast on some of these schemes in certain climate impact. In enabling these Governments to countries, and I think the UK VAT exemption has have a clear sense—a cross-ministerial sense—of some of those characteristics too. We would advocate what is going on, the carrots and sticks that they are cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 16 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry currently using and the implications of those, is very we are comparing to, and that should be the important. unsubsidised fossil fuel price, asking Governments to At the moment, climate finance is already being used go ahead and make that change before we help them to do that in looking at the expenditure side. Looking with their investment in renewable energy is probably at public expenditure, there is already work around a step too far. Governments are trying very hard to this that is being done in a number of developing reform their subsidies. They understand what a big countries. However, for fiscal policies and other problem it is for them. levers, there is not much work being done, so my Going back to the previous question, there is a role argument is that we should start with that and then for a lot of players. It is very helpful for the UK with you have the data and information that enable its bilateral aid to support those countries. There is a Governments to make informed choices. role for civil society organisations like ours to help with the public debate, and then there is a role for Q63 Mr Spencer: Under the UN climate change organisations like World Bank and IMF to come in negotiations there has been a big push looking at the and advise the Government as well, and use their amount of cash that is going into developing levers of access. Moreover, that process to get to countries. To what extent do those subsidies distort subsidy reform on gasoline in Indonesia, or whatever and twist the market, and is that preventing private it may be, can take a couple of years. It has to be companies investing in those countries? Does it warp careful. You have to build support for reform, look at the whole thing so the private sector keeps out of the the options and so on. I would not advocate way? conditionality on the clean energy there. Shelagh Whitley: I would argue yes. What we are Shelagh Whitley: Although support, I guess—there is doing right now is using climate finance and other a process for reform so there could be support that tools, even carbon pricing, in order to reduce risk in could help at different stages of that. investing in these situations where the playing field is skewed against investment in clean energy. What we Q65 Mr Spencer: Why do you pick on Indonesia? need to be doing is both. In the short to medium term Where are the worst places on earth where they are we have to have reduced risk to private investors taking the most subsidy, subsidising their fossil fuels because the playing field is distorted, but you also to the highest level? need to be working on the larger scale for making Charles Perry: Iran, Saudi Arabia, Russia China, match-up. Obviously it is different in different India, but India, Russia and China are all making real contexts, but the main problem is that we just do not steps to reduce their subsidies for fossil fuels. have a sense of what instruments are being used and the impact that they are having. We know the playing Q66 Mr Spencer: So they are in a poor position but field is not level but we do not know what the main they are heading in the right direction. causes of that are and how we could change them. We Charles Perry: They are trying to. need to be doing both. In the short term we have to de-risk, but to think we are only going to use that Q67 Mr Spencer: Is there anybody heading in the money for de-risking is almost us conceding defeat wrong direction? that we can’t change the broader policy and Charles Perry: I think we are heading in the wrong investment climate of these countries. direction because we are incentivising high polluting behaviour, which is ironic. It goes back to Caroline’s Q64 Mr Spencer: Should we put measures in place point. It doesn’t really make sense. to make sure that if you are going to give subsidies Peter Wooders: An awful lot of developing country a condition should be the elimination of subsidy for Governments, when there is an increase in world oil, fossil fuels? gas and coal prices, find it very difficult politically to Shelagh Whitley: I am not sure if you want to go that pass that full increase on to their consumers. As the far. It is a possibility. It is what I have just said; it is world prices increase, the level of subsidy tends to this question of transparency. At least you should have increase, and that is really their challenge. They are the data available. Maybe you don’t force a all motivated to reduce those subsidies but it is Government to make a reform but what you want is difficult. It is possible but it is difficult. for the Government to be able to show you clearly, or to be able to report on, the subsidies that it has in Q68 Caroline Nokes: From some of your earlier place so that when you are making a decision to make comments I could probably predict the answers to a subsidy that is a de-risking you are at least doing it some of my questions. Can there ever be a case for in a place where they are not working full-time against allowing fossil fuel subsidies in order to encourage you, if you see what I mean. either economic development or to alleviate poverty? Peter Wooders: Governments understand how Peter Wooders: Yes to both, but the key is to target it. difficult fossil fuel subsidies are making their lives. If it is a blanket subsidy through a general price This is for fiscal reasons, for clean energy, investment lowering, lots and lots of people you are not targeting reasons; they understand that. To impose will benefit from it. Some of the keys are in your conditionality would possibly just hold back the move example; if you look at a country like Saudi Arabia, to cleaner energy. However, I support very much what which has a huge petrochemical industry, they will Shelagh is saying, that we must have in mind what is argue that they will supply oil at a low price for that the shadow price—an economic term. If we are going industry in order to build their economy, to make it to compare properly what should be the energy price more modern, to bring people into the tax system and cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 17

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry so on, economic development. There is a case for that, assistance, which are poverty alleviation, protection of but that is not the same as a low price for a private the poor, social protection. If you are also trying to transport user to have cheap gas. They are very assist in this transformation, specifically how can you different, so targeting is the key. use those resources to support transformation and Charles Perry: Back to my point about history. For a transition in those countries? long time Governments around the world have For instance, in Brazil where the UK may be supported the profitable extraction and production of supporting Petrobras through Export Finance, what coal, oil and gas since they were first used. That made you find is they have also set up a fund where some sense at the time because we had the Industrial of the revenue from oil is going to be directed towards Revolution and that is what economies were built on. mitigation and adaptation projects. What we should Moreover, things have changed and now we have a be doing is co-investing alongside those funds and problem we did not have at the beginning of the helping Governments to set up those facilities so that Industrial Revolution, which is that we are using too when they discover fossil fuel resources we can help much of an exhaustible resource and as a result we them redirect some of those resources back towards have pollution problems that are local, health transformation. These are the places where we can problems as well as international climate change engage with the fossil fuel industry. How do you problems. It is a valuable finite resource. Oil, gas and promote greening of an economy at the same time as coal are still valuable finite resources, but when the exploiting existing resource without single-handedly global rate of consumption has never been higher and they are getting harder and harder to exploit, plus the driving the economy towards business as usual or a added costs of pollution, of course you have prices brown path? rising and inflation, and this hurts people. Peter Wooders: It is a really good question and quite It is a very difficult situation when you are in a vicious a difficult one. We can start in general with the point circle and consumers are being hurt by the very thing that electricity is fundamental to development, and that you are trying to reduce. You are trying to reduce using overseas development assistance and other their dependence on an exhaustible resource—fossil investments to help countries build up their electricity fuels—that has become polluting and is no longer as infrastructure seems like, in general, a good thing. It beneficial as was once seen at the beginning of the helps people right at the bottom of the pyramid and it Industrial Revolution and the early phases of helps with general economic activity. There is a big combustion of vehicles and plants. When as a change when families and communities get electricity population we have become used to a resource where compared to when they did not have it. That is clear we can get it cheaply at an artificial cost and suddenly and that can be built up in essentially a technology- it starts to hurt our wallets—and these are voters we neutral way. You have a better grid and you can feed are talking about—you are in a very difficult situation whatever into it. and a vicious circle. However, in certain countries there is a real problem How do you break that vicious circle and turn it into at the moment, which you would think in some cases a virtuous circle? This is the challenge we are facing fossil fuels could help with. If we look at, for in 2013, which is no small challenge. We have a legal example, the case of Bangladesh, it is really struggling premise with the Climate Change Act to do to supply enough electricity to its country. It is trying something, and people generally recognise we need to generate larger amounts of access so more people to change behaviour. Moreover, how the Government are on the grid. It is subsidising the price of fossil actually helps people to change their behaviour is the fuels going into that system at the moment— point of this whole discussion, and that is back to principally fuel oils of various types and some carrots and sticks in the right way. For example, the diesel—and it is racking up huge debts of $1 billion- phrase “green taxes” to me is a total oxymoron. It is plus a year, which it is going to struggle to pay back. a total contradiction. I cannot understand why people In that case, better pricing would help but some continue to use this phrase that makes no sense— assistance in building up the electricity system and its “green taxes”. If anything it should be “green generation capacity might be useful there too. It is incentives” and “pollution taxes”. If you are trying to very country-specific. It goes back to the same point change behaviour, don’t tell people “green taxes”. again that everything is about targeting. They will run away from doing anything green, of course. Q70 Caroline Nokes: Going back to the Export Q69 Caroline Nokes: Do you think we should allow Credits Guarantee Department that we have in the overseas aid to support fossil fuel energy when it is UK, if such support were used in other countries to linked to achieving economic development or guarantee fossil fuel products would that necessarily poverty alleviation? constitute a subsidy? Charles Perry: Such as the UK Export Credits Peter Wooders: In the broader definition, yes. Guarantee $1 billion for Petrobras for offshore Shelagh Whitley: Yes. In the subsidy definitions that projects? I definitely think we should not be doing are used, at least in my paper and if you look at what that. the OECD and IEA would include, those would be Shelagh Whitley: I would agree. If we are going to included and categorised as subsidies. A guarantee is be using overseas development assistance it should be a very specific type of subsidy and there are towards achieving the goals of those organisations and methodologies to estimate the size and value of the goals of providing overseas development guarantees in the subsidy space. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 18 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry

Q71 Caroline Nokes: Even if the guarantee include producer subsidies and ideas around a clean arrangements were effectively just providing energy and externalities and so on. insurance in a financially neutral way, would you still Subsidy reform remains a national issue. It is not the regard that as a subsidy? same as trade. If I, as a country, reform my subsidies Shelagh Whitley: Yes, it is a specific category of I tend to benefit. I don’t benefit at your expense and subsidy, insurance and guarantees. vice versa. It is very much a national issue. However, processes like G20, G8, WTO, UNFCCC, all these Q72 Caroline Lucas: So far most of our discussion international forums, are very important to get that in the debate has been about reducing fossil fuel issue going, and to support those international issues subsidies in developing countries, but if we used a it is very useful if all the countries have a stake in the definition that was going to include environmental debate and discussion. externalities that would bring the debate right to our Shelagh Whitley: I am very new to the subsidy own doorstep. The first question would be to what space—I work mostly on climate policy—but what extent should the battle to eliminate fossil fuel you find is that there is innovation happening in the subsidies be waged in the rich world rather than the space globally, so there will be lessons for developed developing countries, if you use that definition? countries from developing countries and vice versa. In Charles Perry: One has to innovate the solutions at a way this is a journey that everyone is taking together the same time as reducing the technologies of the past and there are leaders and laggards in both spaces. The that we have depended on for generations. One has to more you can get common reporting templates, do them in a complementary way because we are common definitions that are internationally trying to get people to switch from yesterday’s world recognised, you can also get lesson learning on a level of dependence on fossil fuel consumption and usage. playing field across developed and developing Now that we know about these externalities that have countries. come round to haunt us, we are trying to get people to switch from those to the solutions that we are trying Q73 Caroline Lucas: To what extent do you think to innovate, and unless you incentivise the solutions it would be a good tool to internalise some of those side of it you just have more and more deficit on the externalities, if the emissions trading system were other side. You have a problem that you have no working properly, which it is not as we know? solutions to guide people towards. Building on what you are saying, Charles, would part It goes back to the other point about $1 billion for of that for you be about what you do with the Petrobras. Surely Great Britain should be innovating resources, the revenue that you get in? low-carbon technologies for export. If we can help not Charles Perry: Yes. I think that is why countries like only British citizens but international citizens reduce Australia and now China are introducing carbon tax, their carbon consumption then that is a good way of because essentially they are realising they have to take both helping our economy and their economy, our this matter into their own hands. We have seen what citizens and their citizens. Again it goes back to how happened after 20 years of international negotiations. we incentivise the solutions side of the equation using The carbon price is floundering at $3 per tonne. It is the carrot. I have wrestled with this long and hard in a total joke. In that sort of desperate situation one has my own energy journey and I honestly believe the to look at how to make one’s own economy only way to do it is by following the models of competitive internationally. In our case it is a very countries like Norway where you take the revenue from taxing the burning of fossil fuels and use that interesting situation because now we have had the revenue to incentivise R&D and the embracing of vote in Brussels and the motion was defeated, so cleaner technologies. Norway has done that extremely ironically the EU ETS is on its last legs and could successfully and I think we could learn a lot from completely disintegrate at any moment. We have to what they have done. There are a lot of parallels with make a decision on the carbon floor price in the UK, what we are good at in our history of innovation and which is a pillar policy of the Coalition Government. pioneering new technologies. We pioneered the steam If you look at it through one lens it makes us very engine and the Industrial Revolution. We should be uncompetitive to have a carbon floor price coming in able to pioneer low-carbon technologies for export. at a ridiculously high rate compared to $3 a tonne Peter Wooders: My organisation is an NGO. We have across the way. The Chinese for the word “crisis” is a global subsidies initiative and we get asked a couple two characters, danger and opportunity. That is if you of questions very commonly. The first one is, are you focus on the danger side. If you focus on the against all subsidies? The second one is, if fossil fuel opportunity side, you can look back at Norway and subsidies were eliminated would renewables become say they have made the polluter pay in order to take cost effective? The answer to the second question is that revenue and pump it into the low-carbon growth in fiscal terms generally not. There still remains a gap side of the equation. Indeed, our low-carbon economy between fossil fuel generated electricity and is growing at 4.2% per annum, which is very fast- renewable electricity, but if we include the growing compared to the rest of the economy. How externalities, that gap more than disappears. That is does one use something like the carbon floor price to the key construct there, and we think it is extremely take revenue from the polluter and incentivise the important that the issue becomes properly low-carbon economy? That is the sort of thing I would international. If we just focus on fiscal consumer be thinking for making Britain a more competitive subsidies, it is a developing world issue. If countries economy rather than fearing the converse, which is are going to move forward together, it needs to that we are going to become less competitive. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 19

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry

I would be taking a longer term view. Many people Charles Perry: It is a tough one. I am certainly no are suffering from short-termitis, where we are just expert on policy instruments to do that. Hypothecation using carrots and sticks for the short term to try to get is another big word, and I am not sure it needs to be the immediate results we have. There is reconciling literally hypothecation in a way. It is a very difficult the short and the long term because the point about one in the UK because of the tradition that we have. externality is that if we leave the cost for future To try to do something more lateral and creative generations, or for the environment or for society would take working across Government Departments down the track because we have taken those short- and looking at the problem from different term fixes without a view to the longer term solutions, perspectives. then we are certainly not going to be thanked by It reminds me of the work we do for corporates on future generations. embedding sustainability. Most corporates are siloed, Shelagh Whitley: On the carbon market point, I and when I was in BP it was the same case there. We worked in the carbon markets for five years before have been working for Tesco, and these corporates are becoming a researcher and I worked specifically on very siloed and they don’t often talk between the silos. the development of CDM projects in developing The role of a consultant in that situation is to try to countries. I guess that is why I have started to focus cut across the silos to show the costs and benefits of on the question of subsidies because we don’t have a new model. We talk about sustainable business time to waste and we don’t have this price signal that models that are more circular in nature rather than was incentivising investment in developing countries linear, which is the old business mantra. When I was in clean energy. What are the other things we can do at business school we were taught linear business that shift price signals so that you can enable that models not circular business models. investment? As Peter said, these are decisions that can I think the current times demand a different way of be made domestically and we know we won’t have a thinking and a different approach. In the corporate carbon price in the short to medium term. Potentially world it is the circular model approach, which we maybe in the medium term, but we won’t in the short know in the public world as well as the circular economy. Likewise, coming back to the issue here term have an international carbon price. What are the between Government Departments, what would a new things that we can do now to create the energy price approach look like that has new benefits in a time of shift that can incentivise investment? That is why I crisis? Difficult times demand new, innovative, am focusing on this, because of that change. creative approaches, so it would mean sitting down between the Treasury and other Government Q74 Dr Whitehead: Before I go on to what I was Departments and thinking about how this could work, going to say, can I take the question of floor price a not calling it something like hypothecation because I little further? The floor price in this country was don’t think one needs to open that can of worms. It originally devised as a rider on top of the EU ETS; a would just send people running about in different rather clunky rider but a rider nevertheless. directions. Incidentally the floor price is based on a three, four Here one is trying to encourage a collective solution year projection of what the forward trading price rather than an individual department solution—this might look like. As the trading price goes down, the whole idea of looking at best practice models and response in this country has been to put the floor price trying to embrace some of the learnings from Norway, up so that the overall price collectively stays the same, Denmark, Germany and other areas. If Germany’s but to some extent that has to guess on the collapse economy is so far ahead in many ways on the energy of the forward price. The legislation that is going side—they can be seen to be at least 10 years ahead through at the moment effectively institutes a of us—what radical new model should we embrace in substitute floor price for ETS so that in the event that order to mobilise and catch up with them? It is ETS happens to revive, the consequence is that the something like a new approach that is based around floor price gets even higher. The overall final making the polluter pay, taking those revenues from consequence is that the whole lot gets swept away into the polluter and incentivising in a way that meets all the Treasury. The only effect at that point is that there the objectives of the different Government is some indirect effect on possible investment Departments. decisions in terms of comparative advantage. However, there is the possibility of leakage, for Q75 Dr Whitehead: Norway, for example, example if you put a gas-fired power station on the effectively created a sovereign wealth fund that other end of an interconnector with that differentiation mediated between the tax take and the— in price between UK and Europe, say, you stand to Charles Perry: That is exactly the sort of thing, gain rather a lot of advantage thereby rather than absolutely. putting it in the UK. The issue as far as Norway is concerned depends on Q76 Chair: That has been particularly difficult in the hypothecation, which then stands out against all of the UK because of this silo mentality. Do you see any theory on how a tax regime works. Are there other way in which there could be some kind of a catalyst things that need to change in how that process works for getting the kind of collaboration and co-operation in placing externalities into a tax regime rather better you are referring to that is needed in a time of than might be suggested by a carbon floor price that austerity and crisis? simply does rather well for Treasury but doesn’t save Charles Perry: Exactly what your Committee is doing any carbon, for example? right here is, first of all, taking on the challenge of an cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 20 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry inquiry into an area that a lot of people are not going more carbon to be produced. Do you see that as an to thank you for inquiring into, because it is a very impediment to the particular national route that has political and pretty difficult area to get to the bottom been suggested for floor price arrangements, or with a of—taking on the inquiry and getting engagement combination of, say, not hypothecation but actually from other stakeholders into the value of what you are tax foregone or wealth funds or some such, and then trying to do. Some people will say you are wasting linking that to carbon reductions by the consequence your time and you should move on to some other topic of what it is you are doing with those funds, i.e. you and others will say, “This is what we have been are actually doing something with that incentive waiting for for a long time”. investment that really can be calibrated against carbon As I say, Tim Yeo was very supportive of the fact that saving? Is that the sort of direction you are thinking your Committee had taken it on. He would have liked about? to, but he said to me that the Energy and Climate Charles Perry: I would say it would be quite a Change Select Committee couldn’t take it on for the welcome development, ironically, to de-couple the foreseeable future. You have taken the step of taking two. I think then it gives more independence to how on this inquiry and I will try to get as much support to use the revenues from the carbon floor price in and engagement in what you learn from this inquiry, incentivising that sort of technological development both within Whitehall and outside in the corporate for the UK as a benefit. In terms of the UK’s world, because the corporate world is certainly very competitiveness it could be quite a welcome interested in this topic. I spend most of my time in development to de-couple them. and out of corporates consulting to them and they are Dr Whitehead: Provided you do something with it. extremely interested in this topic. Charles Perry: Exactly. Provided you do something, so quid pro quo. In a sense I think Australia is a very Q77 Chair: If you had to list the people we should interesting model. Don’t forget that Australia was one be engaging with to advance this thinking, who would of the countries that did not sign up to Kyoto, who you say should be around this table? was the laggard under the previous Government on Charles Perry: The very first person on my list would this, in the same position as the United States saying, be John Browne, formerly BP who is now head of “Well, this is going to hurt our economy and we’re Riverstone. He has been quite public about this topic. not up for being part of Kyoto”, to now with Julia Since he left BP he has been calling for the phasing Gillard introducing a carbon tax. Of course that has out of fossil fuel subsidies. I think he is expecting an been a very political thing in Australia but I think it invitation from you, to be honest. Lord John Browne is going to make Australia much more competitive would definitely be one of the first on my list. because it is going to drive efficiency and it is going Vivienne Cox, previously BP, has been very to drive low-carbon technological advancements. I outspoken about this as well. She is on the board of think that is the sort of thing that the UK should be Rio Tinto, etc. I think you should ask Vivienne Cox. doing. We have already talked about more public sector Peter Wooders: I would agree with that very much as people, IEA, IMF, World Bank and so on, but lots well. You can generate quite a lot of revenue from a more in the private sector from both the incumbent floor price, carbon tax, whatever it might be. If we side of the equation as well as the emerging side of look back to the subsidy analysis, this is about impact the equation. I think people who run renewable energy analysis as well; who would be adversely impacted by businesses, like Dale Vince from Ecotricity and Eddie a high carbon floor price and how much? You find O’Connor from Mainstream, would be delighted to when you go through that analysis that it is very few come and give evidence, but at the same time some particular industries or companies. It tends to be those of the big energy and oil and gas company bosses energy intensive industries. Steel is a big one; often should be invited to give evidence. because of their electricity, aluminium and some of the other non-ferrous metals; a bit of cement and not Q78 Dr Whitehead: I have a slight rider on the much else. You can put in a scheme here with a lot previous point. One of the problems of the carbon more revenue coming in. You can use some of those floor price, as it presently stands, is because it is or savings for general Government revenue, some to has been linked—arguably as of next week it will not be linked—to ETS then it was not particularly of reduce taxes on labour, or whatever you might want concern that the carbon floor price did not actually to do—a general benefit again—and a bit, if you need save any carbon. It was because people would offset to, to help those industries become part of a lower- allowances elsewhere if you wanted to spend the same carbon economy. There seems to be a way forward amount of allowances. If you completely de-couple there and I think it is— one from the other, which is effectively what has now happened, then that part of the process has been Q79 Dr Whitehead: It makes your own economy completely lost and you are entirely dependent on more energy efficient perhaps? supposed parallel mechanisms that react to that floor Peter Wooders: Exactly. It will have the impact of price. Then you are in the process of patching up making your economy more energy efficient. people who are disadvantaged by that mechanism, such as giving free money to energy intensive Q80 Dr Whitehead: I mean directly doing that rather industries to deal with the consequence of what you than indirectly, taking the proceeds of a carbon floor have done even though you are not saving any carbon. price and using it to make permanent energy savings, Probably the effect of that is actually you are allowing for example. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Environmental Audit Committee: Evidence Ev 21

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry

Peter Wooders: Improving the building stock, as was Peter Wooders: It is in there but it is in there in a done with many green funds and green growth and modelling sense. These estimates are based on models so on. rather than observed behaviour and models tend to say Charles Perry: We need, what, £200 billion for that markets work well and that companies will make energy infrastructure in the country. Well, there you rational decisions and so on. In the real world, if we go. have a carbon price that is going all over the place, for example, then companies will not be so Q81 Caroline Lucas: Does it affect the design if you incentivised to make those investments. It is are designing this carbon floor price with more of its somewhat a theoretical construct but is a good revenue raising potential as its top line rather than its indicator. reducing carbon? Is that what you are saying? Charles Perry: I think it is very difficult to give you Dr Whitehead: Yes. an immediate answer, sitting here right now, to your Caroline Lucas: Then does it affect how you design question, Joan. I think it is a very important question at all or not? What is the implication of that slight but I think it takes a bit of analysis and working out, change of end goal? What does that mean for what to be honest. There is a potential to look into that and you are designing? revisit it because I can’t answer it sitting right here right now. Q82 Dr Whitehead: If you are simply using it to Peter Wooders: Even if you do look at it in detail, it raise revenue then your considerations at the end of comes back to this investment decision. That is the the day will be the extent to which the pips squeak so key thing. In the short term we can make decisions much in raising your revenue that you can’t put it any about our use of energy, based on the technologies further, as opposed to what happens subsequently with and the equipment that we have. In the long term we that particular area of income. The position at the have the ability to make different investments. What moment, as far as I understand, is that the carbon floor we are trying to do here on the low carbon side is to price two years out from now is almost the whole of incentivise people to take those decisions on the low what was the trajectory upwards towards £30 by 2020, carbon side not on the high carbon side. so it has wholly replaced any considerations in ETS Charles Perry: It reminds me of exactly the but nothing whatsoever is happening with it. It simply conversations that we have in corporations. You are disappears off into Treasury. There is not any carbon looking for a win, win, win. What I mean by that is reduction as result of its substitution and that seems not a win, win, win across political parties but a win to me the fundamental problem. How do you gear one for the economy, a win for society and a win for the up against the other? If you are gearing one against environment. That is about building a business case. the other, does that have a positive effect on the extent If it ticks all three boxes then of course you would do to which what you are trying to do, simply by raising it. Why wouldn’t you do it? revenue, is patch up those areas that were adversely It is a very interesting situation because the Coalition affected by what you have done in the first place and came in promising clarity, confidence and continuity give back some of the money you have raised, which and this is about the framework in which businesses seems to be a wholly negative thing? operate. Then, of course, as a businessman I have seen Peter Wooders: Any price increase will encourage a lot of non-clarity, non-confidence and non- energy saving and the carbon floor price will support continuity. However, now if you provide something that. The other important point is we are looking here like the carbon floor price in a de-coupled way it at long-term signals. If we are going to move from a essentially becomes what Australia has done, a carbon higher carbon to a lower-carbon economy then tax, and it gives some clarity to the future for investors need to know that there is going to be a businesses to make those investment decisions. I think carbon price or other incentives reaching out for many that clarity is exactly what businesses are looking for. years ahead to encourage them to make those Also Government can take what is currently a very investments otherwise they will not. Otherwise they precarious situation with the carbon floor price, as a will say, “In five years time I don’t think the EU ETS result of the rebel votes in Brussels, to its advantage is going to be around or it is going to have a low price from a negative to a positive by using the opportunity or whatever. I won’t bother. I’ll stick with what I’m to take that bold step, not losing a pillar policy— doing”. We have to create that long-term incentive. It which is what we have all been told the carbon floor is very important. price is—and turning it into everybody’s advantage so that it becomes a win for the economy, a win for Q83 Chair: If I can go back to my opening question, society and a win for the environment. I think that is which was really looking at how much subsidies were exactly what the carbon floor price, in a de-coupled globally producing carbon emissions, how much is the way as a carbon tax, could actually do. point that you have just made? To what extent is that Dr Whitehead: If you don’t just nick the money in factored into the estimation of what carbon reduction the meantime. there would be in investment decisions that are in the Charles Perry: Exactly, which takes federal pipeline for the future, not just for this year? If you behaviour. That comes back to my other triple win as look at, say, the national investment programme or politically it would potentially tick all the boxes as whatever it is, it is going to be bringing about well because everyone is wondering what to do with investment now and in five, 10, 20, 30 years’ time, this thing called the carbon floor price now that the which we are linked into. EU ETS is in a mess. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

Ev 22 Environmental Audit Committee: Evidence

15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry

Q84 Dr Whitehead: Could I ask you the question I of which would seem very conditional; people could was going to ask you and that is what is the likelihood, argue, “Well, my subsidy is not wasteful and I’ve got the possibility, of any effective international a pretty efficient subsidy here and it is not very agreement on eliminating fossil fuel subsidies? harmful”—gives a get-out that overcomes the Bearing in mind what G20, the Rio+20 Summit has trajectory that you might otherwise be thinking about? already decided—and I want to come on to that in a Peter Wooders: It does. If we are thinking cynically moment—how do you think that framework works we would say people will just use those terms like into the possibility of any sort of real agreement? wasteful consumption, inefficiency and so on, but I Peter Wooders: To answer that question from the think there is also a lack of capacity to deal with the 2009 perspective, before the G20 made that political issue. If we ask even well-educated and co-ordinated statement, the commitment that they were going to Departments, “Could you write down the UK’s fossil phase out, over the medium term, inefficient fossil fuel subsidies and tell us which are good and which fuel subsidies that lead to wasteful consumption, this are bad?” it is very difficult to do. There is a process subsidy issue was hardly on anybody’s radar at all, so that needs to happen there about helping with the the change in the politics from that has been definition, with the measurement, with the evaluation, enormous. We saw at Rio+20 last year—and we were sharing how we measure, how we evaluate, what sort part of this—that the civil society got together and we of models might we need, what sort of experiences managed to get the public to vote it as being the most should we compare to each other. There is a more important thing that the Rio+20 leaders could do. It positive agenda here about building the capacity to did not mean that they actually did that but it was deal with the issue in all countries. very important. Shelagh Whitley: With that information there is also I think it is a slow process but it is one that is building the possibility for civic engagement. We were talking momentum. I was at a meeting the other day of the about this outside. When you have the information intergovernmental organisations who were talking you can have a public debate on the topic and then about co-ordinating their plans going forward for the each country can make the decisions about which are extra effort that they are going to put into subsidy efficient, which are inefficient, which are harmful, reform over the next few years. Again, a couple of which are beneficial, which are the subsidies and years ago that was not happening. This issue is slow incentives that meet the goals that a Government is but it is very much on an upwards profile. Keeping trying to achieve and which are those that potentially the issue on the G20 agenda, from our perspective, is undermine them. incredibly important. I think the leadership for that at Peter Wooders: This is where GSI has always come the moment has been largely the United States. The from. We would like to be involved in the public UK is in a very good position here. The UK is market debate about energy pricing decisions. It is very hard friendly as a rule. The UK understands this issue, has to get into it because a lot of it is technical. A lot of important bilateral aid programmes, is very interested the information is not easy to find even in developed in low-carbon development and is very interested in countries. You really have to work at it. renewable energy. There is a whole set of reasons why the UK should be at the forefront of this. Q86 Chair: So transparency is high on the agenda? It will be a step-by-step process within the G20. It Peter Wooders: Absolutely. is still the major international forum for this but, for instance, this year there is a big discussion about peer Q87 Chair: I think we have just about reached the reviewing the reports that each of the countries must end of our questions. Finally, you mentioned G20 as do within the G20. Taking those little steps, adding on being very important for getting it on the agenda. You to them, keeping supporting the process, keeping it did not quite give the same pre-eminence to the post- going, seems to us to be extremely important. Rio+20 discussions, particularly on sustainable Shelagh Whitley: Just to add to that, this idea of development goals and so on, but presumably you see template formats for reporting and support for that as a key process as well. transparency is something you could get in the nearer Peter Wooders: We would advocate very much multi- term. So potentially not an agreement on elimination forum, so G20, G8, UNFCCC, WTO, CSD, but an agreement around definitions and agreement discussions with the World Bank, IMF, OECD, IEA. around reporting approaches would make a significant Everybody has a role to play here. Let us spread the step forward. discussion about subsidies in all of those; not rely on Peter Wooders: We don’t envisage that suddenly any of them to actually make an international countries will say, “We’re all going to eliminate our agreement or make an enforceable international subsidies now and here is the agreement” but they will agreement but all of them can help push this agenda learn from each other’s experience, they will push forward. each other to some extent, they will be held Charles Perry: It is a really important point on this accountable by their electorates to some extent. It because a lot of them had this on the agenda for the seems to be not necessarily an agreement that will last few years but not much has happened. The happen but a jointly supportive set of activities. question is which forum is really going to make progress, which is going drive the change that we Q85 Dr Whitehead: Do you think, however, that the need. There are lots of get-out clauses, lots of excuses, wording that has gone into the declaration so far— lots of, “Well, that is not a subsidy”, “Oh, we’re not the Rio+20 Summit talked about eliminating harmful doing that”, “It is not classified” and so on, excuses subsidies, inefficient subsidies, wasteful subsidies, all for not doing things and not tracking the progress to cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG02 Source: /MILES/PKU/INPUT/029662/029662_o002_michelle_CORRECTED TRANSCRIPT 15.05.2013.xml

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15 May 2013 Peter Wooders, Shelagh Whitley and Charles Perry eliminating them. One thing about the Montreal Chair: That brings us to the end of our session. Each Protocol was there was a very clear agreement to of you has been really generous with your time. Thank phasing out CFCs and there was tracking as to that you for coming along and if you have further thoughts phasing out. In the same way with the phasing out of that you think will contribute to this inquiry, please fossil fuel subsidies, there needs to be a forum that is by all means let us have them. Thank you very much going to take it seriously, it is not going to get bumped indeed. off the agenda every time and someone is going to monitor that progress is made. cobber Pack: U PL: COE1 [SE] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

Ev 24 Environmental Audit Committee: Evidence

Wednesday 10 July 2013

Members present: Joan Walley (Chair)

Peter Aldous Mr Mark Spencer Martin Caton Dr Alan Whitehead Caroline Lucas Simon Wright Dr Matthew Offord ______

Examination of Witness

Witness: Professor Paul Ekins, Professor of Resources and Environmental Policy, and Director, Institute for Sustainable Resources, University College London, gave evidence.

Q88 Chair: Professor Ekins, you are no stranger to had to give very large over-compensation to low- this Committee, and it is a pleasure to invite you back energy using low-income households in order to again to give evidence on the paper that you have adequately compensate the low-income high-energy- been working on, funded by the Joseph Rowntree using households. Foundation. I think it is something which, in its detail, The single biggest thing that I discovered doing that is very pertinent to our current inquiry on subsidies. work was that there is enormous variation in energy To begin with, if you would like to tell us, this full use within low-income households. Even the lowest 20% rate of VAT on domestic energy bills and decile of incomes—that is, the 10% of households that transport fuels—just how that proposal that your paper get lowest incomes—have energy use that varies by a has come up with would work in practice and link that factor of six or more and very often, with some to the whole agenda of fossil subsidies. households within that group, is the same as the Professor Ekins: Yes, good morning, and thank you energy use in the top-income deciles. We came back very much for asking me to come and share this work to this issue with this piece of work because more data with you. You will know that the OECD and other had become available. We were using a new model definitions of subsidies include reduced levels of constructed by the Centre of Sustainable Energy taxation. In the UK, the lower rate of VAT on called DIMPSA, which had much finer granularity of household energy—that is gas and electricity—is household energy use, but I think particularly because effectively the largest subsidy to fossil fuel use; in of the Government’s proposals to move to Universal other words, it is an environmentally harmful subsidy. Credit as a benefit system, which is much simpler, we There is a lot of work on environmentally harmful wondered whether it would be possible to target low- income households more effectively. We were using subsidies around the world. It is estimated that they the IFS (Institute for Fiscal Studies) TAXBEN model result in substantially higher emissions, especially of that had been reconfigured for Universal Credit, and carbon dioxide, and bodies like the OECD and the we did indeed find that it was much easier to target European Commission recommend that they should low-income households. be removed. That was the rationale for this piece of Our results were that if one spent all the money from work. increasing VAT on these compensation schemes and We know that there is political history here in this on tax allowances—we also had the policy to increase country. The Conservative Government in the 1990s the tax allowance to the Government’s then target indeed tried to raise the VAT on household energy to income tax allowance of £10,000—then only 5% of then 17.5% and was not able politically to do so. The households would lose out, 16% of low-income reason often given for giving such subsidies—and in households, so 84% of low-income households would particular this subsidy—is that low-income be made better off, some of them substantially better households would find it difficult to pay and therefore off. The bottom three deciles, on average, would be energy bills need to be kept low. Less than 30% of £400 a year better off. This would be, on average, a the subsidy goes to the three lowest-income deciles very significantly progressive— because higher-income households use rather more energy than lower-income households, and therefore Q89 Chair: Okay. There is a lot of statistics and it is the seven higher-decile income groups that get figures in all of this, but I wonder if you could just most of the subsidy. In principle, therefore, it should encapsulate why, in strategic terms, you believe such be possible to raise the rate of VAT to 20% and with a change would be necessary. just 30% of the revenues to fully compensate low- Professor Ekins: The main argument against income households for the increase in their energy environmentally harmful subsidies is that it militates bills that would then take place. In practice, it is very against the efficiency and conservation of whatever it difficult. Work that we carried out in the early is you are subsidising, in this case fossil energy. If we 2000s—with the best data then available that we could take the example of the Green Deal, if VAT on find and the benefit system as it then was—suggested household energy use was at 20%, the number of that it was administratively impossible to find enough insulation and conservation measures that would pass of low-income households really to say that you had the Green Deal test, the golden rule, would be very carried out this comprehensive compensation. You greatly increased, and therefore households would be cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins able to access Green Deal finance for more measures. Professor Ekins: I am not aware of any work that has They would have a higher incentive to access Green specifically tried to compare those two policies. What Deal finance and make more efficient use of energy. this piece of work was explicitly setting out to do was Indeed, all households would have that greater to say that if your objective is to reduce fuel poverty incentive. and you would also like to reduce emissions, then one way of doing that more effectively than at present Q90 Chair: Isn’t part of the issue that the VAT that would be to increase VAT to 20% and use the is currently applicable at the moment is designed from revenues in the way that I have described. We stopped the perspective of addressing fuel poverty, whereas short in the report of recommending this, because I what you and your colleagues are looking to do is to happen to think that there is a better way of using try to find a way that would address the issues about those or other revenues to reduce fuel poverty, but that energy efficiency and changes towards a shift from was outside the scope of this particular piece of work. fossil fuels to renewables? That is not a reason for the I think that— current subsidy that exists, so, if you like, the whole thing is that there is a disengagement between all the Q94 Chair: Can I just say, we are not just necessarily different factors that are part of the policy that exists asking you to give evidence to us based on this at the moment. particular piece of work? If you have other— Professor Ekins: Professor Ekins: Indeed. I think the purpose of this Right. It is just that the broader issue of fuel poverty is not entirely linked to the subject of piece of work was largely to say that if one wants to your inquiry, which is environmentally harmful reduce fuel poverty, you would do much better to subsidies or the issue of energy subsidies. This was a increase the rate of VAT to 20% and use the revenues piece of work that looked specifically at that subsidy, to give benefit increases to those households on which is the low VAT rate, and said, “What happens Universal Credit. if we remove it? Do we then put more households into fuel poverty?” The answer is, “No, not necessarily, Q91 Chair: Okay, so you think that a change is provided you use the revenues effectively.” If you necessary from the dual point of view of both fuel were to say, “How should we best reduce fuel poverty and environmental enhancement? poverty?” which you have probably had an inquiry Professor Ekins: I think you would find that that about, which I will have missed or forgotten, then to policy had benefits on both those dimensions, yes. me the long-term answer to that is to improve the energy efficiency of homes. That, as we know, is Q92 Chair: I will bring in Caroline Lucas in a expensive. Simply diverting this £5 billion or second. Can I add, just in terms of where you think whatever into benefits would have an effect on public understanding is in all of this, given that the emissions, but we know that the price elasticities are existing arrangements are seen and viewed and relatively low and that people would save energy, but perceived by the general public, by and large, as a fuel perhaps they would not save as much as if you were poverty issue rather than as an environmental issue? to increase those prices gradually and use the money Did your research look at that? for actual targeted incentives for fuel efficiency. Professor Ekins: No, we did not do any work on public attitudes. I think that the communication of the Q95 Dr Whitehead: Since we are discussing slightly policy change would have to start with saying that the outside the scope of your research, I think I know the reduced level of VAT is not a very efficient or answer to this, but when you undertook the research effective way of reducing fuel poverty, that using this was based presumably on, as it were, a pre- those sums of money—and we are talking about discussed brief on VAT, so you did not look at indeed nearly £5 billion a year—to target fuel poverty, you different methods of attaching flow-through prices to could get a much bigger fuel poverty benefit than we elements that presently are not covered by, say, the are currently getting because, as I say, more than 70% present carbon floor price and Carbon Price Support. of it is going to households that are almost certainly I note, for example, that you have drawn attention to not in fuel poverty. the fact that gas is not taxed or taxed at 5%, whereas electricity is 20% and therefore is a perverse incentive in terms of domestic uses, as you have mentioned. Q93 Caroline Lucas: I was going to ask whether However, if you attached a carbon floor price to there is a comparison between the effectiveness of this landings of gas or risings of gas, that would have the policy in terms of the fuel poverty aspect, and same effect—would it not?—as to equalise— obviously there are objectives around perverse Professor Ekins: Yes. We looked at two ways of subsidies as well, but has there been a comparison equalising taxes across household energy use. The first between what this would do for fuel poverty versus one, which is what we call the small carbon tax, was something like ring-fencing the carbon floor price indeed applying a carbon floor price to household gas revenues, for example, the ETS revenues? The NGOs use, so that could be done upstream or it could be have a big campaign—don’t they?—called the Energy done downstream. That is one way, because at the Revolution Campaign, I think, that would look at ring- moment the carbon floor price only applies to the fencing the revenue that was raised through a carbon fossil inputs into electricity, and this would be floor price or the ETS revenues. Do we know which extending that to household use of gas because the would be more effective in terms of the fuel poverty electricity companies will pass that carbon floor price objective specifically? on to the electricity users. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

Ev 26 Environmental Audit Committee: Evidence

10 July 2013 Professor Paul Ekins

The second, which we call the large carbon tax, was Bristol. I said some 16% of low-income households, increasing the rate of VAT on both gas and electricity which is slightly less than 5% of all households, because they are both for households currently at 5%. would be worse off. Hardly any of those are That is the really large sum of money, and that is then households that are eligible for Universal Credit, so what we used to compensate through the Universal they are precisely the group that you are talking about. Credit. We did two scenarios—a small carbon tax and The great majority of those are either people who are a large carbon tax—with those different elements. income poor but have substantial assets and therefore they do not qualify for Universal Credit or they are Q96 Dr Whitehead: In terms of the large carbon tax, students and they do not qualify for Universal Credit. have you calibrated that—and I suspect we might That is the majority of households that would not be come back to this later on—against the very latest better off from this measure. activities of the Chancellor in the budget of changing Chair: Okay, we must move on. Dr Offord. the rate of increase of Carbon Price Support to change the relationship in terms of the overall carbon price Q100 Dr Offord: You did mention a figure floor between EU ETS and Carbon Price Support? previously, but I got a bit lost among the statistics that Professor Ekins: No, we did this work when the only you raised. announcements from the Treasury were that they Professor Ekins: I am sorry. would aim for a carbon price floor in 2013 of £16 a Dr Offord: Would you be able to tell the Committee, tonne. That was the carbon price that we applied to for the avoidance of any doubt, how much your tax gas, rising to £30 a tonne by 2020. proposed would actually raise? Professor Ekins: It is just short of £5 billion. This is Q97 Dr Whitehead: So, you have made the overall the VAT element of it, which is the element I am assumptions of the envelope, but not the focusing on today. That does not include the extension distribution— of the carbon floor price, which I have mentioned to Professor Ekins: Absolutely, not the distribution Dr Whitehead. between the EU ETS price and the other. Q101 Dr Offord: Okay. I understand in your report Q98 Chair: Just finally from me, in terms of the that is broadly cost-neutral, then. report that you have done, what difference do you Professor Ekins: Yes. We recycled all the revenues, think it would make to overall energy consumption both by increasing the personal income tax allowance and also to transport emissions, the new arrangements and through the Universal Credit increases. that you are exploring? Professor Ekins: Off the top of my head, I cannot Q102 Dr Offord: I will try to wade my way through remember. It will be a few per cent. It will not be those. In terms of being cost-neutral, that is obviously enormous. It will be a few per cent on the basis of quite a selling point. Is that in order to receive buy-in 1 past elasticities. The long-term and the short-term from the public, or is it because you have identified effect are expected to be quite different, so that the amount that you believe that poorer and lower- typically the long-term price elasticity of household income households need in order to address the issue? energy uses is two to five times higher than the short Professor Ekins: It was really to do with the project term. But I think with a measure like the Green Deal design, if I am to be honest, that it makes a project and the fact that suddenly all sorts of insulation and like that neater if you say, “All the revenues are conservation measures, which are currently outside coming from here, and they are all going there,” the golden rule, would come inside the golden rule, because you are not interfering with balances of one might find that therefore the take-up of Green public spending and the macro-economy and all that Deal measures were substantially higher, but we have other kind of stuff. You are trying to keep as much not done that analysis. constant as possible. Obviously, it is a political choice, given that the average increase in income of the Q99 Chair: Okay. Just for the purposes of definition, lowest three income deciles is just short of £400 a in terms of who would benefit and in what year. That is a substantial increase in income. circumstances from the changes that you propose, Overall, incomes would become much more how do you differentiate between different use of progressive under this measure, and whether that is a energy that different families have, and particularly good thing or not obviously depends on your looking at the variation between low-income families perception of how good progressive income outcomes and those who will be on Universal Credit, if you see are. There are some losers, and obviously they are the what I mean? There is a difference—isn’t there?— ones who will always cause the political problems between those who would be likely to receive credit when the media picks up measures like this. I think and those who would be looking to reduce their one would need to be saying two things. One would energy costs but would not be eligible for Universal need to be saying that this was a better way of tackling Credit. fuel poverty than the status quo and that overall the Professor Ekins: There is. We were able to explore distribution of income was much better and that that in quite a lot of detail because of the granularity applied to everyone who is effectively on Universal of this model of the Centre for Sustainable Energy in Credit. 1 See supplementary written evidence from Prof Ekins. Dr Offord: That is very helpful, thank you. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins

Q103 Peter Aldous: Professor Ekins, why would you small carbon tax, when we just did that, effectively channel the redistributed revenue to the Universal that policy measure swallowed up all the extra Credit? Do you think that is a good match with the revenue that we got, so there was not any left for sort of households who will otherwise lose out under Universal Credit. If you were just to do that, then you the increase in VAT? would not be able to compensate low-income Professor Ekins: It is a much better match for low- households for the increased energy costs that they income households than any other method we could face. find. It is certainly a much better match for low- income households than the previous benefit system. Q107 Peter Aldous: Just coming back, were there As I said, that was so complicated that if you were any other routes that you considered or— using the various elements of that benefit system to Professor Ekins: No, there were not. As I say, in other give compensation, in order to get people who are work that I have done for the Joseph Rowntree only getting one benefit, you inevitably had to give it Foundation that was published about six months to people who were already getting compensated before this piece of work, we did explore mechanisms through different benefits, so that you ended up that were more explicitly focused on energy efficiency spending all the money well before you had managed but made use of the greater targeting that was carried to compensate these high-energy-using households. out between the Department of Work and Pensions We used Universal Credit for administrative reasons and the energy suppliers for the purposes of the Warm because that seems to be what is going to exist and Home Discount. If I was going to craft a full policy there is no point advocating a reform of VAT and proposal in this area, I would be using increases in saying, “You can compensate low-income households VAT and channelling the revenues from the increases in general.” You have to look at what the in VAT through the Warm Home Discount kind of administrative means are for compensating low- mechanism, rather than through the Universal Credit income households, and the best we have is Universal kind of mechanism. Credit, so that is why we chose that. Q108 Peter Aldous: Finally, just taking that point Q104 Peter Aldous: Do you think there would be and going back to what you said at the beginning, that any low-income losers under your proposals and, if the Conservative Government in the 1990s did look at so, how would you seek to safeguard them? something similar but shied away for political Professor Ekins: There are low-income losers: some reasons—this is possibly a question for ourselves— 16% of households in the first three income deciles. but do you think it would be any different today? Why The majority of those are in the third income decile, are things different, that you might be able to look so they are not very low-income losers, and they are at this— effectively people not on Universal Credit. Practically Professor Ekins: I remember that time very well and any reform in anything is going to lead to some losers I was very interested in what was being proposed, so and they would be losers, I am afraid, because that is I tried to study what was going on. I think the mistake what reforms lead to. That is why you get the tyranny of the Government of the day was that it highlighted of the status quo, even when you can improve things the revenue-raising potential of the measure, and on average and overall, because it is quite impossible indeed there was a need in the economy for public to target things so exactly that you get no losers at all revenue at that time. The proposals to compensate and obviously their plight is amplified. low-income households came forward very late in the day. They were not part of the initial package. By that Q105 Peter Aldous: Could there also, by the same time, a very substantial head of public opposition to token, be some people who would benefit from this, the measure had been built up. the beefed-up Universal Credit, when they previously This would clearly be a politically-sensitive proposal were not paying significant energy bills? if it were to be introduced again. I think it would be Professor Ekins: I think everyone pays some sort of essential for the Government to emphasise that this is energy bills, but 84% of the lowest three income a better way of tackling fuel poverty than the status deciles do benefit from this measure. As I say, on quo and would make a very substantial difference to average, they benefit quite a lot, so they are £400 a the great majority of low-income households and help year better off on average. So 84% have that average them pay their energy bill, while also giving figure, whereas the 16% that lose out overall are incentives for non-low income households to save worse off by about £170 a year. energy through mechanisms like the Green Deal. That sort of messaging would be very different to the Q106 Peter Aldous: I think you did touch upon this: messaging that was carried out in the 1990s and could did you look at other routes that you could channel be politically more effective. the money effectively to the poorest households and why not the Government’s proposal of taking more Q109 Mr Spencer: Clearly, you have done a lot of low earners out of tax altogether? analysis on different levels of income. I just wondered Professor Ekins: We did raise the personal income if you had considered demographics within tax allowance to £10,000, which was then the target households and if you had compared households that for that policy, so we did do that. That was why the contain children and households that did not contain cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins children and compared the amount of energy that Professor Ekins: No. I now have the relevant those households consumed—in my experience, numbers. I did not quite understand your question, but children require a lot of energy—and whether there I think I now do. As I said before, the 84% of low- would be a positive impact in terms of the amount of income households that benefit from the measure, on actual Universal Credit or a negative impact because average, are £400 a year better off. So their energy— of the extra energy costs. Professor Ekins: I am just looking through the report Q112 Caroline Lucas: But it does not appear on their because the answer to your question is yes, because fuel bill, does it? this model contains very large numbers of nodes, as Professor Ekins: Yes, because VAT would be paid on they are called, so that we were able to distinguish the fuel bill, their bill would show the number of kWh, between household types, “Couples, no children, cost of energy plus VAT and that would be the total. under 60; couple, no children, over 60; couples with Then through their benefits, they would get that £400. children; lone parents; multi-person houses; one adult under 60; one adult over 60”. That was the household Q113 Caroline Lucas: Maybe I am types that we were able to distinguish between and misunderstanding, sorry, but when you literally get the there were a number of other criteria combined with fuel bill through the post or on your internet or those.2 whatever, the fuel bill will look higher under this When one digs down into the detail we were able to proposal, even though by the time it has been identify quite specific kinds of households that, as you compensated by your benefits it is going to be rightly say, you would expect to be differentially reduced. affected because they have differential energy use Professor Ekins: Now I understand. because each of those types of households is tied to a Caroline Lucas: If we still have a way of measuring particular use of energy. You are getting a quite fuel poverty—and obviously there has been a different cut across the population than if you simply statement just yesterday from Edward Davey that work in averages, and indeed, that was one of the changes this a little bit—but to the extent that until now, fuel poverty has been measured by the number purposes of doing that. If you are interested in that, of people who are paying more than 10% on their fuel then your researcher might like to have a look at some bills, would it not initially look as if we are putting of the detail of the sorts of households that were going more people into fuel poverty? to be better off— Professor Ekins: That would depend on how you Chair: I think we are more interested in getting the accounted for that £400. If effectively you said that information to the Committee as a whole, so we you were reducing the fuel bills of those people, then consider it as part of our inquiry. that would obviously have a much greater impact on Professor Ekins: Okay. I am sorry. There is a lot of fuel poverty than if you simply said you were detail there that I could obviously go into, but I doubt increasing their incomes, because if you are increasing there is time. their incomes, that has a lower effect on fuel poverty Chair: I think it is your time constraints that are than if you are increasing their fuel bills because of perhaps greater than ours, but anyway, we must move the way that fuel poverty used to be defined. I am on to Caroline Lucas. aware that that definition is likely to change. I do not see at the moment the actual amount that you would Q110 Caroline Lucas: I just want to look at it from increase the fuel bill by, but it certainly will have been 4 the perspective of the householders’ energy bill; what in the model and in the report. they see on their energy bill at that point when it gets sent to them. Have you calculated how much energy Q114 Caroline Lucas: Just in terms of bills would rise from the combination of the carbon communicating this to the public as a gain—because price floor and the higher VAT? obviously the whole issue of fuel prices is a very Professor Ekins: I think we did but, to be honest, the deeply concerning one, and people are concerned numbers are not off the top of my head and I would about the Big Six and all the rest of it, so fuel bills are going up and people are concerned—do you think need to look back through the report in order to find that this proposal could be sold in a way that would those.3 get public support behind it because they would see the benefits? Q111 Caroline Lucas: One of the sub-themes that Professor Ekins: I hope it could. I am not a politician, we have touched on a few times already this morning and so it is not my skill, but I think that is one of the is about how this gets sold to people in terms of being reasons why, if I was going to design a policy of this communicated and indeed sold to Government. Given kind, I would probably want to do it through the Warm that, at least up until very recently, fuel poverty was Home Discount kind of mechanism rather than most measured in terms of the proportion of household explicitly through the benefit system, because the income that has to be spent on energy, would it not Warm Home Discount does explicitly reduce people’s have the effect, at least on the surface, of appearing fuel bills. But in order to do that, you would have to to put a lot more people into fuel poverty? get better targeting than exists at the moment between those on Universal Credit and their energy bills. 2 See supplementary written evidence from Prof Ekins. 3 See supplementary written evidence from Prof Ekins. 4 ibid cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins

Obviously, there are all sorts of data protection issues. Q119 Dr Whitehead: I take your point that you In order to get the Warm Home Discount targeting, mentioned you had not looked at the latest effective you had to pass an Act through Parliament, so that decoupling of carbon floor price on the EU ETS. The DWP and the energy companies were able to share collective level of Carbon Price Support on gas at that data. One of our recommendations in that earlier piece point would be considerably greater than £16 a tonne of work is that that approach should be broadened, so probably. Has that changed your— that it was possible to identify a broader range of low- Professor Ekins: No, we assumed that the carbon income households with high fuel bills in this way floor price on gas would be the one that the Chancellor and therefore target them directly through their energy announced on electricity, which was starting at £16 bills, so that they would then see that this increase in and going to £30 by 2020. VAT was coming back to them through lower energy bills. Q120 Dr Whitehead: That is a composite figure, Caroline Lucas: I think that is very exciting, but that though, is it not? has not been written up. Professor Ekins: That was a composite figure, Professor Ekins: It has been written up as an idea in because obviously the EU ETS does not apply to gas general in another piece of research that I did with the or the household use of gas. We just used, “On a Joseph Rowntree Foundation with Matthew straight line going to 2017, that is going to be the Lockwood, so that exists. What we did not do was carbon floor price that we apply to gas in that year.” combine the two things in the single project, so that we were able to work out the full implications of Q121 Dr Whitehead: So you would include in that 5 that. the Carbon Price Support as announced by the Chancellor, but you would not add to that, because it Q115 Dr Whitehead: Firstly, there has been a is not relevant, EU ETS, although it is relevant to considerable volume of discussion on the have all— measurement of fuel poverty relating to the point at Professor Ekins: We would simply have a single which, post-rebate, the benefit income is taken into number that matched the single number that the account as the 10% marker or, pre-rebate, the benefit Chancellor said he would be using in 2017, and the income is the one that is taken into account. Have single number, he said, will include both of these you looked at that distinction in terms of the effect on elements, but we do not distinguish between them. fuel poverty? Professor Ekins: No. We were not explicitly Q122 Dr Whitehead: Okay. So he has put as an concerned with calculating the numbers of households indicative price £14.86, 2016–17? in fuel poverty as such. We were looking simply at the Professor Ekins: Indeed, yes. income distributions and the energy use within those distributions. What we did not do was relate that to Q123 Dr Whitehead: Is that your number, or is the definition of fuel poverty. At least part of the that— reason for that was we were aware the definition was Professor Ekins: No, the number is the full carbon under review and was about to change. floor price going from £16 to £30. Q116 Dr Whitehead: You mentioned on the big Q124 Dr Whitehead: Yes, but my point is that then carbon tax scenario, which is the VAT raise, that you takes into account a possible variable EU ETS over would raise about £5 billion. That would be a constant and above that CPS price. Let us say EU ETS feature, I guess? recovers somewhat. Professor Ekins: That would be annual, yes. Professor Ekins: Then obviously electricity would be more expensive, because if the Chancellor sticks to Q117 Dr Whitehead: Yes. If you did the small his announced thing two years in advance— carbon tax route, and you mentioned that you could, for example, include upstream gas into the carbon Q125 Dr Whitehead: But it would not be your support price, which of course rises or— purpose on the small carbon route to equalise prices? Professor Ekins: Indeed. Professor Ekins: On the work that we did, we simply Dr Whitehead: Supposedly rises. What would be the assumed that the carbon floor price announced by the result of that in terms of tax take? Chancellor would be that that applied to gas. Professor Ekins: It is just short of £2 billion. Dr Whitehead: £2 billion, presumably rising with whatever floor price goes up— Q126 Martin Caton: Professor, if not unique, we Professor Ekins: The year at which— seem to be very unusual in the European Union in choosing to try to tackle fuel poverty through effectively subsidy through VAT. Have other countries Q118 Dr Whitehead: £2 billion in what year? found ways of tackling fuel poverty, but targeting that Professor Ekins: In 2017, which was the year of our in a much more effective way? analysis, because that was the year in which Universal Professor Ekins: Yes, fuel poverty was almost Credit was said to be fully operational. exclusively a UK concept. I understand that the idea 5 See supplementary written evidence from Prof Ekins. is now spreading in other countries as affordability of cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins energy bills becomes a bigger issue in other countries. Professor Ekins: We included that. You obviously get Certainly the UK is unique in Northern Europe in different distributional effects because you have the having a reduced rate of VAT on the household use of rural/urban divide or differences between rural car use energy. In Sweden, they not only have a 25% VAT and urban car use. Rural people, for obvious reasons, rate on the household use of energy, they also have tend to use their cars more, so, other things being something like €100 per tonne carbon tax. Sweden equal, they would lose out, relatively speaking, from obviously is colder than we are here. The clue to that such a change. is that Sweden has rather better buildings than we have here in terms of energy efficiency, and indeed if Q132 Dr Whitehead: Yes, but I presume then the they had not, then they would have much higher same discussions would arise that arose with the winter death rates than we do have, which explains imposition of the general fuel escalator when it was why they have them. In a sense, we are the victim of around in terms of how indeed rural use or heavy our temperate climate, which allowed us to build very vehicle use under particular circumstances might be energy-inefficient buildings for so long. compensated separately? For most other countries, this is not an issue that has Professor Ekins: Indeed. had anything like the political purchase that we have found in this country. The Republic of Ireland is an Q133 Mr Spencer: Can I just finally ask, obviously exception to some extent from that. There is a fuel there are certain sections of industry that get a double poverty debate there. They have just introduced a discount, like agriculture at the moment gets a carbon tax there that does apply to households, and discount on its diesel use? Have you considered the they have the full VAT rate on household use of impact on food prices of some of these increased VAT energy, but that is an issue. Obviously, the costs on those types of industries? affordability of energy generally is an issue, given that Professor Ekins: No. This proposal was exclusively energy prices have been rising, quite apart from oriented towards households. Going back to the earlier anything the Government might like to do in terms question from Mr Caton about European comparisons, of policy. the UK is almost unique in that its environmental taxation on industry is higher than its environmental Q127 Dr Whitehead: One of your proposals is also taxation on households. Most European countries tax to put a carbon tax on transport fuels at the rate households environmentally relatively highly, like equivalent to the Carbon Price Support. Sweden and Germany, for example, and have Professor Ekins: Yes. relatively low environmental taxes on industry, for Dr Whitehead: I assume that is on the basis of obvious competitive reasons. We have chosen to do it completeness, for example, at the moment, the carbon rather differently, but this piece of work was not price floor does not affect transport fuels, for rather looking at either agriculture or industry generally at strange reasons. all. Professor Ekins: We were focusing particularly on aviation, which does not currently have any taxation Q134 Chair: That is all very interesting. Just finally, there, but yes, it was the idea of saying that current you have done this piece of work that, as you have tax rates on transport fuel are not intended really to said yourself, has a fairly narrow remit, just looking reflect external costs there, they are revenue-raising. at one aspect of it. Could you just set out for me how So if we are going to have a carbon price across the easy you think it is for a piece of research like this to economy, then what would happen if you had the be influential in terms of influencing Government same rate, a quite explicit same rate, on transport policy for the future, particularly when the whole fuels? subject area that we are looking at is such a cross- cutting issue and the confines of this particular Q128 Dr Whitehead: That would be on, you research study necessarily is so confined? How do you mentioned, aviation. There are separate complications get the cross-cutting agenda to be a shift of awareness in terms of how you tax aviation fuel. about that as far as Government is concerned? Professor Ekins: Indeed. Professor Ekins: I think the first objective of the research was to start the debate going again. After what had happened in the 1990s, this was politically Q129 Dr Whitehead: But presumably that would off-limits and I knew that even as an academic, if I cover road transport? even suggested to someone who was involved in the Professor Ekins: Yes. real world that you might like to think about increasing VAT on domestic fuel, you were regarded Q130 Dr Whitehead: That presumably would not be as some kind of weirdo. So, because I believed that it compensatable in terms of rebate on the basis of fuel would be possible to do some analytic work that poverty for Universal Credit? showed that in respect of both the fuel poverty and Professor Ekins: We still used all that revenue to the environmental agendas, leaving the economy in compensate households through the benefit system. the same place, you could get a better outcome on average than at present, I felt it was important to get Q131 Dr Whitehead: You included that when you that work done, get it in the public domain and get invented the benefit system, then? it discussed. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG03 Source: /MILES/PKU/INPUT/029662/029662_o003_michelle_HC 61-ii CORRECTED 10.07.13 (AM).xml

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10 July 2013 Professor Paul Ekins

I do not imagine that one little piece of work is going talking about here in order to achieve even better to change the political climate overnight, but I think outcomes, and perhaps I will be fortunate enough to that fuel poverty with rising energy prices continues get the funding to do some research into specifying to be a concern, and Government will continue to look that rather more sophisticated research programme at at ways of reducing that. It probably will not introduce some point in the future. But what I think this piece measures such as we have discussed here, because the of research does show is that it is not right to rule out main conclusion that we came to was not that this was increases in VAT on the grounds of fuel poverty, that a policy proposal that should simply be rolled out, but there are better ways of reducing fuel poverty than the that if you want to reduce environmentally harmful present, which could involve increasing VAT and subsidies—which is something all Governments say doing something different with the revenues. they do want to do, including the UK Government— Chair: I think on that point we must leave it. Thank and if you want to reduce fuel poverty, then it is you once again for coming along and giving up your possible to do that through a measure such as this. time and presenting your research to us, and also I think that using things like Warm Home Discount, making us aware of the tyranny of the status quo. you could tweak the kinds of proposals that we are Thank you very much indeed. cobber Pack: U PL: COE1 [SE] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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Wednesday 23 October 2013

Members present: Joan Walley (Chair)

Peter Aldous Dr Matthew Offord Zac Goldsmith Mr Mark Spencer Mark Lazarowicz Dr Alan Whitehead Caroline Lucas Simon Wright ______

Examination of Witnesses

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

Q135 Chair: I would like to give a very warm raises the profits to the producers or reduces the costs welcome to all five witnesses to our Environmental to consumers, and I think that is a more all-embracing Audit Select Committee session this afternoon. We one. That ought to include the things foregone, like have had previous sessions and we are returning to rents for access to national assets, so the starting point this subject of energy subsidies. It might just be that the Government has and the successive helpful for me to say at the outset I realise that we Governments have had in the UK is not as helpful as have five very different witnesses and I am sure each the definition that your Committee have been given of you have a huge amount to say on this subject and by the Oxford Associates and even less helpful than we have a Committee that is very focused on this issue the one taken by the IEA. as well. We shall do our best to try to finish by 4 o’clock at the latest and I will bring in members of Q137 Chair: Any further comments from the the Committee as we go through the different witnesses? Ms Hughes. questions, so I hope that is helpful. Emma Hughes: For the Platform, the key thing that Rather than ask each of you to introduce yourselves, the Government’s definition is missing is that the because time is short, what I would like to do is just majority of fossil fuel subsidies are off-budget and do go straight into the very first question I have for you, not appear in national accounts, and therefore it needs which is that the Government tells us that it defines to veer towards a far broader definition of fossil fuel the fossil fuel subsidy as any measure that reduces the subsidies. In particular, in our submission obviously cost of fossil fuels to below world market prices. The we highlight three things that they miss, the export Committee are very interested to know whether you credit, the diplomatic subsidies and the military would agree with that definition, whether or not you subsidies as well. think there should be a different definition, or indeed Gordon Edge: I would expand on that further. We whether or not the Government’s definition is have a very wide view of what should be treated as justified. I do not know how you want to respond, subsidy or support of some kind and that can be each separately and add or disagree as we go on, and qualitative as well as a quantitative monetary value. I will try to do it in an inclusive way. Mr Odling, I In particular, we think that the external costs of fossil think you were trying to catch my eye first of all. fuels—and indeed, other energy sources—if they are David Odling: Thank you, Madam Chairman. Clearly not paid, that is a form of subsidy, in our view, and there is no universal agreement on the definition of a we should be accounting for those when looking at subsidy and you only have to read the evidence particularly fossil fuels but also other forms for which submitted to your good selves to recognise that. From perhaps externalities are less. our point of view, I think the Government’s definition is a reasonable one, because there is a difference Q138 Chair: Mr Parker, do you wish to contribute to between, for example, something that underwrites in that specific question? some form or another the cost of doing something Keith Parker: I would agree with what Gordon says versus, in our case, the tax that is applied on profits about taking account of the external costs particularly from the proceeds of production once all costs have of fossil fuels. In relation to my sector, nuclear, we already been paid. That does not seem to come think that the Government’s definition is reasonable, through clearly in some of the evidence that has been that there will no levy direct payment on market submitted to you, but maybe that is a subject that we support for electricity supplied or capacity provided will develop during the course of the afternoon. unless that support is available more widely across low-carbon technologies. Q136 Chair: Okay. I am going to ask Mr Simpson to expand or otherwise on that definition. Q139 Chair: So if another sector was getting a Alan Simpson: I think the Government’s similar support, you would not count that as a interpretation is a Queen of Hearts interpretation, that subsidy? words mean whatever you choose them to mean. I Keith Parker: No. I think that the Electricity Market prefer the International Energy Agency definition as a Reform proposals are designed to incentivise subsidy that either lowers the cost of production and investment in all low-carbon technologies, including cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson nuclear, so we would regard that as an incentive, Q144 Chair: Just in terms of the common definition certainly not a subsidy. that we are trying to have as our starting point, I am wondering what you might feel is left out of what that Q140 Dr Whitehead: Forgive me, does that not definition might be. If you were describing the ideal mean that if I give three out of my four children definition of what a subsidy would be, are there things sweets, I have not given any of them sweets? Is that that would be included in it—that for the purposes of what you are saying? our session, Mr Odling started us off on—that are not Keith Parker: No. What I am saying is that the included, if you see what I mean, if that makes sense. Government has a policy of moving the energy mix, The Government’s subsidy definition that we started if you like, towards low carbon, particularly the off with, are there items in that, the externalities, electricity sector, and therefore in order to achieve that which are just not included that should be included? desirable outcome and to improve security of supply, David Odling: It seems there that you are probing they are putting in place policy measures that will towards the cost of carbon in the energy sector, and incentivise investment in those particular of course there is a cost, certainly for heavy industries, technologies, and by implication, disincentivising which is represented by the European Union’s investment in those technologies that they regard as Emissions Trading Scheme. That cost has not turned being, if you like, less desirable. out to be as high as a lot of people would have wished by now and thinking back five or six years, there Q141 Caroline Lucas: That is just a slightly separate certainly was an expectation in the Commission that issue though, isn’t it? I was just hoping that we could it would be climbing towards €30 a tonne. We are of start the session with all of us being clear about what course down in single figures at the moment, owing we are talking about here, and however much one to the consequences of the recession more than might want to justify the subsidy or not, the fact that anything else, which is perhaps not the outcome that it is being offered to more than one energy source policy-makers were expecting, but nonetheless there does not stop it being a subsidy. I think if we could is a cost built in there and there is also a cost of all start from that starting point at the beginning of this the other forms of regulation that were applied to session, we would all be a lot clearer as we go industries. They are not free. They may not have an through, because the idea that somehow, as my impost in the form of a tax or a cost of buying an colleague says, just because you offer something to a emission allowance or something, but regulation itself range of other players—and that something that you inevitably imposes costs and there is plenty of are offering isn’t the same thing, but we will park that regulation around in the energy industries, particularly for the moment—does not change the nature of what in our own: environmental regulation, health and is being offered. It is a subsidy. safety regulation, licensing conditions, you name it, Keith Parker: No, I understand. In that case, I would and almost all of them entail costs. agree with Mr Odling that the Government’s definition Alan Simpson: It would be helpful if the Committee of subsidy is reasonable. were firm with us as panellists about a definition that had to be inclusive of the cost of externalities, because Q142 Caroline Lucas: Sorry, the whole language of otherwise not only do you get caught in convoluted this is so important. Why is it reasonable if you were language that reduces meaning to the definition— nodding when I was explaining that it is not sadly that is the glaring gap between the Treasury’s reasonable to say something isn’t a subsidy just response to the Committee’s evidence and the position because it is being offered to more than one generator paper to begin with—but also that it gets in the way or type of generator? Why is that reasonable? of taking the next step into questioning what is the Keith Parker: Because the whole relationship, if you purpose of the subsidies or the intervention measures. like, between the Government and industry and the In many respects, that is the welcome ground that the basis on which Government would provide support or Committee can hopefully take the parliamentary incentives to industry to go down a particular route I debate into. think is legitimate activity for Government and therefore— Q145 Chair: Just before we move on from the subject of definition, is there a current definition, Q143 Caroline Lucas: No one is disputing that. whether it is from the OECD, IMF, WTO that you feel Well, they are, but not right this moment. What they would serve as providing us that starting point? Is are disputing is whether or not that is a subsidy. there a definition that already exists that we could Subsidies can be used for good ends or bad ends and perhaps adopt or— we can discuss whether we think the ends to which Gordon Edge: For my part, I don’t think any of the they are being used are good or bad, but I just wish existing definitions, from where I am sitting, account we could clarify at the beginning of this session that for all the different things that Government do to just because you offer something to more than one support or retard particular energy industries. I think generator does not mean that isn’t a subsidy, good it is important that we have a full accounting, or bad. including the legacy institutional support that is out Keith Parker: In principle, yes, I would accept that there for technologies that have been around for a what you are saying is correct, but then— much longer time than the technologies that I Caroline Lucas: Okay. We will capture that before represent. That forms a form of subsidy that is you—good, thank you. difficult to quantify, but it is definitely a support that cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson needs to be set out and accounted for appropriately subsidies awarded in 2012/13 was £1.962 billion, and when you are looking at this whole issue. this is in fact a huge subsidy. As both the OECD and Chair: We will just move on very briefly to oil and the WTO recognise, the oil and gas industry are gas and I will bring in Mr Spencer. foregoing a payment that would otherwise be due to the Government, a tax concession, and it is therefore Q146 Mr Spencer: Yes, we will drill down into more a subsidy. Such field allowances lower the cost of soil, shall we say. The Government does not regard energy production by reducing the overall tax payable fuel allowances as a subsidy: is that right or wrong? I on those fields, and under any of the broad definitions suppose we will start with Mr Odling. of subsidy—around which there is a growing David Odling: We think it is right. I alluded to the consensus—they count as a subsidy. reason, and perhaps I can expand on that. First of all, The special tax regime for hydrocarbons that David we pay all our costs, so the capital costs of investing, Odling spoke about exists in the UK, but it is not the costs of operation, we are responsible for all those. legitimate for Oil & Gas UK to say that this adds to The taxation that is applied to us is a form of taxation an overall industry tax bill that is particularly high. on profits and it comes in several forms. It starts off The reason for this is because these taxes reflect the with a particular version of corporation tax that is fact that the fossil fuel companies have been granted peculiar to us, and it is called ring-fenced corporation a right to exploit a resource that is scarce in the UK, tax. By that, it means that the Treasury draws a circle, for example, oil and gas reserves. So when comparing a fence around our businesses, the upstream oil and how heavily taxed the energy sector is with other gas exploration and production business, and it taxes sectors, we need to exclude these special taxes them as independent businesses regardless of what because they arise due to the special circumstances of that company does elsewhere. natural resource ownership. In the context of this, we For example, if you owned a refinery that lost a pile would agree with the Oxford Energy Associates’ of money downstream, but you had exploration and report, which says that the standard petroleum tax production upstream that made money, you could not therefore defines the normal baseline tax rate for oil offset a loss in the downstream refinery from the production in the UK. profits on the upstream production, and you pay the Alan Simpson: I would just add that whether you profit taxes on the upstream as an independent entity. want to justify it or not, it comes separate from the That rate of ring-fenced corporation tax is 30%, which question of whether you recognise it as a subsidy. It is seven percentage points higher than the rest of the is a subsidy. If it quacks like a duck, walks like a economy. On top of that, the Treasury levies a duck, waddles like a duck, it is a duck. It is a subsidy, supplementary charge of another 32%, which takes the and I think it is unhelpful for the Committee to be led starting rate up to 62%. On top of that, all the fields down a path that pretends that some forms of that had their development consent before March 1993 intervention are not subsidies while others are. It goes pay what is called petroleum revenue tax, which is a back to Alan Whitehead’s point to begin with, the third form of tax. When you take that into account, notion that if you are giving all of your children those fields pay tax at a rate of 81%, so our starting sweets and some of them are getting them under the rate is 62% and our top rate is 81%, which of course table, they are not getting sweets. It just takes the is far, far higher than the rest of the economy. debate or the discussion into areas of nonsense rather What do field allowances do? Field allowances give than what is the value, what are the merits or demerits relief from some of that tax for a limited period, or of that intervention. limited scope in terms of the value of production, and it is done for particularly awkward types of offshore Q148 Mr Spencer: Mr Odling, did you want to field where the economics are difficult, where there respond to any of that or are you— are technical difficulties and so on. What that does, David Odling: If I may. There are several things here. the field allowances relieve the supplementary charge, Firstly, we recognise that of course we pay more tax the 32%, for a limited amount of value. Once you than others and we do not expect otherwise, because have exhausted that value, you go back up to 62%, so we are exploiting a natural resource. We recognise in other words, those fields will start paying that, but I would ask the Committee to bear in mind corporation tax at 30%, which is above the normal that various Chancellors over various years, with the rate of corporation tax, for a limited period and then agreement of the House of Commons, have approved they go back up to 62%. That is the way the field different rates of taxation on the industry. For allowances work and if you want chapter and verse example, the current Chancellor put our rates of on it, our economic report that we published in the taxation up significantly in March 2011. The summer, in August, is available and there is a section supplementary charge had been 20% before then, explaining all of this. I am very happy, Madam giving us a starting rate of 50%—30% plus 20%— Chairman, to submit that to the Committee as and he put the supplementary up to 32%. additional evidence if that would be helpful. What I am hearing from the evidence of the other witnesses suggests that there is no circumstance in Q147 Mr Spencer: That would be useful. Do the rest which altering the supplementary charge downwards of the panel accept that definition or— is anything other than a subsidy, but if he can alter it Emma Hughes: I would not accept it. I would like to upwards at will with the approval of Parliament, respond. So the research submitted to this inquiry by where do you stop? There has to be some point at Friends of the Earth showed that the total value to the which you say, “That is a fair rate of taxation for the oil and gas industry over five years of the 28 field industry to pay,” but nobody has defined what that cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Environmental Audit Committee: Evidence Ev 35

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson reasonable rate of taxation should be. What the current David Odling: That is where I was trying to draw a Chancellor has done—and the previous Chancellor distinction between something that affects the cost of initiated the concept of field allowances, by the way— operations—so a licence fee does affect the cost of is to provide a variation to take account of the operations because it is a fixed sum of money for the different characteristics of some of the offshore fields licence—against all the ones that we have been that we now face, and in pursuit of the policy that talking about, the ring-fenced corporation tax, is agreed by certainly all three main political parties, supplementary charge, petroleum revenue tax, which namely to exploit our offshore oil and gas resources are profits taxes. to the maximum extent that is economically possible for the country. If you leave those oil and gas Q153 Zac Goldsmith: Sorry, I don’t want to get resources in the ground, you do not have the capital nerdy about this, but a supplementary charge, it does investment, you do not have the jobs, you do not have not sound to me like a tax. Given that it is unique to the development of new technologies, you do not have your sector, it sounds to me like a charge. It is a thing the tax revenues that the production causes and you you pay that gives you the right to do what you do do not have the potential exports that the supply chain and therefore by including it in the overall tax burden is very good at creating, based upon the technologies that you were describing at the beginning, it strikes it has developed. You lose always in that respect, and me as being a bit misleading. I don’t know whether I bearing in mind that we cannot satisfy our own total have misunderstood what the charge is or anyone needs of oil and gas any more—we used to be able wants to jump in, but that is just— to, but that has not been the case for the best part of David Odling: That is certainly not the way the 10 years—all that will do is suck in more imports. Treasury looks at it.

Q149 Mr Spencer: Obviously I have heard the Q154 Chair: What we are trying to do is look at what argument made that reducing those tax breaks is it should be, rather than how it is perceived by the contradicted by the fact that extra revenue comes in Treasury. because of the extra fuel that is sold, but of course you Mr Simpson, you seem to be nodding. Do you want could then make the argument that your customers are to come in on that? paying that extra tax, given that you have had that Alan Simpson: Yes, I do. I think you just made the reduction on those sort of operations. It is tilting the point that I was going to make, which is the whole thing the wrong way, in that then the more oil distinction between the approach by this Committee you sell, the more customers contribute in terms of and the approach taken by the Treasury, because in tax, so it is skewing the whole thing in the wrong paragraph 13 of the Treasury’s response document, direction. Does that make sense? they open with the line that says, “We don’t think that David Odling: Except that consumption is not any of any current policies are harmful.” It seems to something that we can vary, because we are selling me on the back of the IPCC report about carbon our products, oil and gas, at market rates. We are not emissions and the triggers on climate change that the selling them at something that we can dictate. They compelling question about environmental impact says, are at market rates. The consumption side is “Do we want to be encouraging increased extraction something, if I may say so, that is completely different of carbon fuels at a time when that is likely to be and the volumes in consumption are completely driving us into uncontrollable climate disruption?” different. After all, the volume of oil being consumed The impact question is likely to be addressed by this in all the mature economies of the world is going Committee in ways I think it never has been by the down, progressively down. Treasury. That is a right that I hope you reserve and guard jealously. Q150 Zac Goldsmith: I just want to get clarity on Q155 Dr Offord: Under the Electricity Market one thing. The 32% supplemental charge, is that the Reform, the Government is introducing Contracts for equivalent of a licence, so almost a rent, to be able Difference and capacity payments. Do what extent do to drill? you see these as energy subsidies? David Odling: No. We pay licence fees separately. Gordon Edge: They are subsidies. It is pretty simple. There are many reasons why you would do that, but Q151 Zac Goldsmith: What do they come to and we should not be shy of calling it a subsidy, because how does that have a bearing? that is exactly what it is—and we get accused of being David Odling: I am sorry, I don’t have that to hand. subsidy junkies—and they are there for a good reason. It is not a huge sum of money compared with the sums We think on the one hand you need to, in the first of money from the taxes I have been talking about. instance, address that market failure that I was talking before about having the externalities unpriced. Until Q152 Zac Goldsmith: But if the 32% supplementary such time as you have a robust price of carbon, you charge is unique to your sector, which is what you can justify having specific support for low-carbon, were saying earlier, then that would imply it is a form non-carbon forms of energy generation, but in of rent. It is the right that you have bought by paying addition to that, you can also use it as a means of that supplementary charge to access resources that you technology innovation and bringing technologies to otherwise would not be allowed to access, so it is not market, that you will need, if you are going to a tax. It is a rent; it is a charge. Would that be fair decarbonise your economy in total. If you were reliant or not? only on a carbon price in order to bring forward all cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Ev 36 Environmental Audit Committee: Evidence

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson the technologies you need, you would be paying a power production, but this incrementalism serves to very high carbon price in order to get those currently further lock us into dependence on fossil fuels rather very expensive technologies in the market and than transforming to a low-carbon economy, which is everyone else would be making massive rents. So what we need. targeted support on, for instance, offshore wind is Gordon Edge: If I could just follow up a little bit on helpful in bringing it down the cost curve so it can that one, having a price for carbon begs the question start to compete against a robust carbon price, whereas of how big should that price be. If you were being if, as I said, you just rely on the carbon price alone, it kind of a purist environmental economist, you would would be too much. say, “Well, let’s price that. Let’s go out and find some evidence and find a level of damage that that pollution Q156 Caroline Lucas: I only want to interpret what causes” and then you price it in through a tax. you were saying just there. To that extent, is the Virtually impossible to do that with carbon. I have concept of transition an important one in terms of how seen varying estimates of what price should be you are seeing the role of subsidies, in other words, brought back to the electricity sector for that and it that a subsidy would be alive for the period during ranges right up to things like $2,000 a kWh and it which it enables a transition to take place, in this case goes down to a few cents. It is impossible to set a bringing renewables to a market price, but it is not single price that prices in the damage cost of that something that then goes on for another 40 years? carbon. The best you can do is to set a robust target Gordon Edge: Absolutely. There is nothing we would for where you think carbon needs to be, really enforce like more than to be able to compete directly in a it, and that should give you a proxy for that level, but market supported only by robust carbon pricing, I think it also needs to be underpinned by a minimum without direct support. The amount of potshots that level. My personal view would be that you have a get taken at our industry because we have this support reserve price in the ETS auctioning that means that are so large that we would like to be away from it as the price of the carbon unit would not go below a soon as possible. certain level, and that would underpin the investments in low carbon that you need. Q157 Dr Offord: The Electricity Market Reform Alan Simpson: It is very easy for the Committee or will eventually introduce a carbon price floor, but in Parliament to get waylaid by the technical detail of the meantime, with a very low carbon price from the proposals that come forward in legislation, but the one EU Emissions Trading Scheme, should we regard all thing that I would just try to remind the Committee fossil fuels as being subsidised because they do not about—and I recognise that many of you will not be cover the cost of their full emissions? old enough to remember this—the UK had some Gordon Edge: I have explained that I think that is horrendous smogs in the 1950s and early 1960s, and entirely correct. the way that Parliament dealt with them at that point Dr Offord: Does anyone have a contrary view to was not to say, “We all need to be issued with personal that? tradeable breathing quotas,” or, “There isn’t a Keith Parker: I agree, but I would say that the sufficiently robust market price for soot.” The Electricity Market Reform, as I said at the outset, is Government of the day, then the Conservative an incentive to encourage investment in those low- Government, introduced legislation that set minimum carbon technologies. Within the Government’s standards and it said, “There is a three-year transition definition, they do not regard that as a subsidy, and period and all of industry will be required to produce that is not something that the nuclear sector, for against the following emission standards.” There was example, has sought, but it wants that level playing a hue and cry from industry, saying ‘the UK will be a field, the ability to be able to compete and to bring wasteland; no one will produce here’. Actually, three forward that investment, which under current market years later, by and large, we had the same production. conditions would not otherwise come forward, so it is That was driven by a very clear setting of a a mechanism to reform the market to bring forward transitional phase towards a higher set of standards that investment. So it is addressing a market failure, and I think that is a successful lesson to remember as Gordon Edge has said. when Parliament is being presented with highly Dr Offord: Okay, thank you. I think that is pretty complicated mechanisms that will do pretty much clear. the opposite. Alan Simpson: Qualitatively though, it is also important to acknowledge not only are they a subsidy, Q158 Chair: A transformational effect in Stoke-on- but that the Committee and Parliament needs to ask Trent. Mr Edge and then I will bring in Mark Spencer. whether they are a subsidy that takes the UK towards Gordon Edge: I would caution that there is more than an energy future or an energy past, and I think that one way to skin the cat here. There are successful that is the biggest question mark about the scale of examples of using emissions trading very well. financial undertakings by the public in one form or Sulphur dioxide in the States, utilities had to be another that will be built into the current Energy Bill dragged kicking and screaming to it, but then and whether it is money down the drain. discovered that they could do it at minimal cost and Emma Hughes: Just to add to that, I would say the it turned out to be the lowest-cost way of bringing Emissions Trading Scheme is setting up the wrong down sulphur emissions from power generation in the incentives for the transformation of the energy system. States, they could trade it and it was successful. So it A marginally higher carbon price may at best, I guess, can be done. It depends whether you are targeting the incentivise a short-term switch from coal to gas-fired right sectors. The thing about the EU ETS, it is cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Environmental Audit Committee: Evidence Ev 37

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson focused on large emitters, the people who can trade cost. Whether you regard that as a subsidy, I would and there is no reason philosophically why it should have to go and think about the philosophy of that. be by other sectors of the economy, the non-traded Keith Parker: I agree that it is, if you like, an sectors, where you impose regulations and standards. insurance policy against the transition towards the That is absolutely fine and may be exactly the low-carbon mix, because there are characteristics of appropriate way. the low-carbon technologies that could potentially have an impact on energy security, so having capacity Q159 Mr Spencer: Just to go back, you seem to be payments is a way of ensuring that the lights do stay suggesting that because some renewable technologies on, that the power is available when it is needed. That reduce carbon footprint, they are good subsidies, if requires flexible plant that can be ramped up quickly, you like. I just wondered then if you would agree that but investors are not going to invest in that sort of supporting carbon capture and storage for coal-fired plant unless they have some guarantee that they are power, is that a good subsidy or a bad one? going to have a return on their investment, particularly Gordon Edge: Setting a robust carbon price is if it is lying idle for quite a substantial amount of time. appropriate across the board for everyone. Then you David Odling: But it also illustrates vividly the risks have an additional slice of policy on top of that when you start to intervene, because one intervention saying, “Do we want to do this for good industrial begets another and begets and on you go, and reasons?” and you may well want to do that for carbon certainly if you go back to the European Emissions capture and storage. I do not hold a candle for carbon Trading Scheme, one of the things that the industry as capture and storage. I support the wind, wave and tidal a whole across Europe, not just here in the UK, has stream industries and I think they are entirely justified been saying to the Commission when it starts to for that, but that is entirely a policy choice. Do we consider what happens after 2020—because at the use additional targeted support to bring forward these moment, we only have knowledge of what goes on up technologies in a time-limited way for other good to 2020, which is not that far away in investment reasons, which is part of our carbon reduction policy? terms—“Please, please, if you are going for a target for 2030, go for simplicity. Don’t let us have multiple Q160 Dr Whitehead: Just for Alan Simpson’s targets that cross one another, which interact with benefit, incidentally, my mum sent me to school in another. Please, please try to keep the landscape as these dreadful smogs. You couldn’t see three feet in simple as possible.” I fear that in this country, we are creating so many different policy instruments that we front of you. You would not believe it looking at me, are in danger of getting lost in some of the fog that it but this is true. creates. Where does it all stop? How do you get back The Energy Bill indeed put forward a series of to what Gordon has rightly said is the ultimate aim, Contracts for Difference—which I think we have which is to have no subsidies at all and have agreed are a subsidy—in order to, among other things, everything compete so the best wins? drive down the carbon content of energy by subsiding greener energy production. However, the Bill also Q161 Chair: On that point, Mr Simpson. does an interesting thing, which is that as a result of Alan Simpson: It is a subsidy, and the danger is that non-low carbon energy investment possibly taking it will turn out to be a very expensive subsidy. If you place because an underwriting has been provided for look at the impacts of the first round of capacity low-carbon energy, the Bill introduces capacity payments and contracts awarded in the United States, payments in order to ensure that those bodies that 80% of them went to high-carbon energy production, might otherwise be investing in, for example, gas-fired because it was the cheapest to put in place, but it was power stations are able to do so, despite the fact that the most environmentally damaging. It is important to a price has been put on their power additionally, which ask whether we want to have those unintended it has not been for nuclear and wind and other forms consequences of making a situation worse by a system of renewables. Is that a subsidy or is that a market of subsidies that puts in place that safety net. I have instrument? How do you see the introduction of suggested that we ought to consider other capacity payments for non-low carbon energy mechanisms, one of which should be legal duty, and I producers? Incidentally, not providing power, being say that because, technically at least, in the banking available to provide power, as such. sector you could not get a licence to operate unless Gordon Edge: In theory, it ought to be a zero sum you held reserve requirements in order to meet the game, in that what is paid out in capacity payments liquidity needs and expectations of your customers. ends up lowering the wholesale price of power and Whether they are sufficient is a matter of current therefore it is a recycling of money. I don’t think that debate, but that is a requirement. is entirely true. There will be some hysteresis in all of If you look at any other sector of manufacturing, they that and you will end up with more money going always have their own reserve capacity and no one through the capacity mechanism than you save operates to 100% capacity, so that if you have through reduction in wholesale price. But I think it additional demand coming through, you have your could be seen as a cost of moving to a system where own ability to respond to that and you make it a there is a high proportion of high capital cost, low condition of market access. I think that Parliament running cost, low carbon generation sources that needs to think carefully about whether it has to require a lot of flexibility at the margins in order to respond to each demand from the energy sector that it cope with their variability or indeed their inflexibility, can only do things if the public in one form or another as nuclear is. So we need to think of it as a system pays them more money to do it. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Ev 38 Environmental Audit Committee: Evidence

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

Gordon Edge: I think you can mitigate that risk having high upfront capital costs, but then relatively through careful design of a capacity mechanism to low and predictable operating costs with the benefit make sure that other non-polluting forms of balancing of low-carbon emissions. So that is the objective and flexibility, storage, demand-side response are behind the Electricity Market Reform, which is there properly and adequately brought into the system. I am to encourage that investment to come forward. As we not completely convinced. I don’t follow the capacity have seen from announcements on Monday of this mechanism as closely as I do the CfD—I simply don’t week, the investment is very likely to come forward have time—but my understanding is the capacity and a number of other companies, other than— mechanism is too closely designed as a subsidy for new gas-fired plant when it should be thinking much Q163 Chair: Sorry, you said “very likely”? more widely about how we provide that flexibility and Keith Parker: Yes. It is not the final deal, but it is a response to the system as a whole. significant step towards that. EDF Energy still have to I would also want to add just a little bit about the make their final investment decision, which could be industry wanting simplicity. It is dangerous when it several months off, so it is— comes to simplicity of it becoming simplistic. Only having one focus on carbon and just carbon price I think is having a single blunt club and you would not Q164 Chair: Sorry, I was just seeking some go around playing a round of golf with one club. We clarification on that from your own perspective. need not to be scared of complexity, because this is a Keith Parker: Yes, so I am not saying this is definite. complex and difficult process, which therefore we There are still some steps to be taken, but on the back may need to have multiple mechanisms and of the Government’s objectives for nuclear, as part of instruments to do various different bits of. the overall energy mix, a number of investors have Dr Whitehead: I was just reflecting on the question come forward not seeking subsidy, but on the basis of you might say strategic reserve against capacity of the framework that the Government has created to payments and the extent to which, Gordon, your encourage investment, which is not just about analogy of clubs, you have one club to get you out of Electricity Market Reform, but it is also about the problem that another club has put you into and streamlining planning and licensing procedures, for whether that constitutes a viable set of golf clubs example. It is creating the right sort of environment under those circumstances. Sorry, that is not a in which those policy objectives can be achieved. I question, I guess. know there has been a lot of debate around the policy Chair: For those of us who do not play golf. Do we statement, that there will be no public subsidy to move on to nuclear? Yes, let me move on to nuclear nuclear unless it is available for other forms of low- subsidy. carbon technology and we accept that definition of no public subsidy for nuclear. Q162 Dr Whitehead: We have opened on this discussion already in terms of the question of the Q165 Dr Whitehead: But insurance risks, assistance statement that new nuclear will have no public with decommissioning and short-term disposal risk- subsidy, but I think recognising that the debate has taking and long-term decommissioning underwriting moved on from that new nuclear will have no public are not available to any other technology. subsidy to new nuclear will only have public subsidy Keith Parker: On the decommissioning and waste if other forms of energy have some form of public management, we have to distinguish between the subsidy as well, and then perhaps the question of the legacy liabilities that are being managed by the extent to that those are—indeed, as I think we have Nuclear Decommissioning Authority, that those accepted—nevertheless a subsidy. But then the liabilities were in fact created in the public sector in purpose of the subsidy and how that then reflects on the early days of nuclear development, including the new nuclear, and indeed the nuclear industry as a operation of the Magnox stations, all of which bar one whole, and indeed taking perhaps a slightly wider are now decommissioned, and the Government has definition of subsidies, the question of Government underwriting for the Nuclear Decommissioning accepted that it is appropriate for those liabilities to Authority, the question of the capping of insurance be funded and dealt with by the public sector. When liabilities, the question of indeed underwriting other it comes to the new nuclear build, the developers and elements of risk, what does the panel see as the operators will be obliged to pay into a fund, which landscape of subsidies therefore as far as nuclear is has to be agreed by the Secretary of State, a Funded concerned and new nuclear is concerned in particular, Decommissioning Programme, which will guarantee and how closely do you think that stands up to the that the money will be available to cover all of the general view that new nuclear will have no public decommissioning costs of each of the stations and a subsidy? How far are we pushing the definition, do fair share of the waste management costs. Given that we think, and with what purpose? these are very long-term commitments on waste Keith Parker: I return to my initial point, that the management, the Government will come to some Government has a policy to move the energy sector arrangement about taking title to the waste that is and electricity-generating sector towards a low-carbon created by the new build developers. That is, if you one. Nuclear is seen as a low-carbon technology; like, a very different picture from that which applied indeed it is. They want to incentivise in that particular in the early days of nuclear technology. The operators technology, along with renewables, and carbon will be obliged to cover those costs and they will not capture and storage, which have the characteristics of be passed on to the taxpayer. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Environmental Audit Committee: Evidence Ev 39

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

Q166 Dr Whitehead: The question of liability of the Keith Parker: In relation to safety and security, the insurance and various other things that seem to have, operator has to pay for that, so the security frankly, dogged the industry over a period of time, ie, arrangements at specific nuclear sites are paid for by the extent to which the industry is able to insure itself the operators. and the extent to which therefore the Government undertakes a role as the insurer of last resort, again, Q168 Zac Goldsmith: Okay, and on waste which in terms of the Energy Bill with the management? introduction of counterparties to arrangements, Chair: But that would be much less than the full cost appears to have a specifically opposite direction. Is of insuring the facility, wouldn’t it? The operator will that something that you feel is sort of a riding subsidy not necessarily be paying the full costs, so there is, if or does it have other purposes, in your view? you like, a hidden subsidy insofar as— Keith Parker: I think it recognises what you said, that Zac Goldsmith: There is a cap. In the event of ultimately the Government is the insurer of last resort, something awful happening, there is a limit to how whether it is for nuclear or any other industrial sector, much the nuclear operator would have to contribute. if there were to be a major accident. I think the The rest, anything in excess of that, would land on the international agreements and treaties that the UK have shoulders of the taxpayer and I cannot think of any signed up, what it does is formalise that arrangement, other form of energy generation, any other type of that recognition that if there were to be a significant technology in the energy market that would require or large-scale nuclear accident, then the operator, who that kind of cap. The same applies and the question has strict liability under the treaties, would not be able extends to the waste management, just taking you up to cover all of the claims to compensate victims of on the point you made, that those are surely at least that accident. I suppose that is a recognition, as I say, indirect subsidies provided by the Government to that there will be a sort of cap on the operator’s your sector. liability, which is being increased, incidentally, under Keith Parker: They are a recognition of the nature of the revision of the treaties, and then if the claims or the technology, if you like, that if there were, God compensation exceed that, then the Government will forbid, to be a major nuclear accident in this country, step in, but that would be the case in any other major then it is low probability, but high consequences. accident. But I suppose what it does do is put the emphasis very much on ensuring that major accidents Q169 Zac Goldsmith: No, I obviously understand of that kind do not occur, so it is safety, security that if there was an appalling accident, it could within the operating system, which is something that potentially, if there was unlimited liability, bankrupt we have done very well in this country, a very good the company. We could argue about whether or not track record on safety. the Government is right to limit the amount that the Chair: Just before we move on, I know that both Zac operators would have to provide, but my question to Goldsmith and Caroline Lucas want to come in on you is does that constitute a subsidy? Whether it is this point before we move on. right or wrong, does that constitute a subsidy, given that that support is not being offered to all other forms Q167 Zac Goldsmith: Thank you, Chair. I wanted to of energy? press that point, because the liability issue that you Keith Parker: I think, as the point was made, other have been discussed is not something that will be forms of energy perhaps do not have that risk if there relevant to any of the other renewable energies, as I were to be an accident on that scale, so it is— understand it. That is therefore a de-risking exercise by Government, effectively putting the risk on the taxpayer, so there is an element of indirect subsidy Q170 Zac Goldsmith: That perhaps is an argument there. There would have to be. I don’t see any other in favour of those other forms of energy, but my point interpretation of that. You were talking about waste still comes back to whether or not, by your definition, management earlier and the pot into which the the definition you used right at the start of this session, operators are going to have to be making annual I would suggest that that does constitute a subsidy, deposits, but I think from what you said that that is not and the same would apply to the waste management designed to cover all waste management costs going issue. If I understood you correctly, you were saying forward, but a serious proportion of them. That is that you think the operators are obliged to provide a something that would not apply to any of the other significant proportion in order to cover future costs, renewable technologies. In terms of security, I do not but not all. I don’t know what that proportion is in know what the deal is with the Government—I am terms of percentages. I am not sure if that figure not sure if it has been announced—but nuclear power exists, but that is another even more direct form of plants require more day-to-day security than any other subsidy, surely. This is a mess that has been created form of energy around the world. I think it is unique that our grandchildren perhaps are going to have to in its need for personnel, security and so on, and I am pay, in the same way that we are paying for the guessing that a significant proportion of that will also mistakes over the last decades. As I understand it, be taken up by the state or the taxpayer. These are 69% of the DECC budget—I am not sure, and it is assistances provided by the state at the cost of the hard to imagine this is true—is devoted to clearing up taxpayer and it just seems bizarre to me. Perhaps you a mess that the sector you represent has created for would, but it would be odd to me if you wouldn’t, if us. It seems to me that we are building into this you were unable to regard those supports as a form agreement preparation for exactly the same thing to of subsidy. happen, perhaps not quite 69%, in the years to come. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Ev 40 Environmental Audit Committee: Evidence

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

If that is not a subsidy, what is a subsidy? It takes us EDF and China earlier in the week, it did so saying back to the first part of our discussion. that this was necessary because it was going to reduce Keith Parker: I think if you are setting a limit on the consumer bills over the long term. If that is taken as third-party nuclear liability and the operators have to the Government’s objective of this deal, then can you secure insurance for this and there is an active see better ways of using measures or subsidies that international insurance market that covers this sort of would be more effective in reducing the cost of risk, it is justifiable, I think, in the public interest to energy, if that is what the Government is trying to do, ensure that the risk is appropriately managed. than a form of energy that you have just described yourself, which requires so many layers, so many Q171 Zac Goldsmith: But is it a subsidy, an indirect unknown layers too, because we do not quite know subsidy? Whether it is justifiable or not, we will have how much we are going to be paying for cleaning up that discussion another time, but it is a support that is the waste. We are talking about a share but that share available to the nuclear sector and not the others. is not defined. There’s a cap. The cap is not defined. Keith Parker: It is support that is available, indeed, We don’t know how much the taxpayer will have to but I think Mr Simpson’s point was that you have to step in when it comes to liability either so you have look at the purpose of the intervention and the merits all of these layers of many unknown extra sets of costs of the intervention and I think it is to manage the risks and yet we are being sold this on the grounds that it of a major accident in an appropriate way. is going to reduce costs to the consumer in the long- term. Do you, firstly, think that stacks up and, Q172 Zac Goldsmith: Just before we move on, the secondly if you were to be designing a system to use issue of waste management then. That seems to be subsidies more effectively with that end goal, would even more direct, if my understanding is correct. you end up with something that looks like this? Keith Parker: The Government policy objective is to Keith Parker: I don’t agree. Caps, for example, are have a geological disposal facility for the high-level not defined under the Paris Brussels Conventions. waste. When that is available, the operators of the new There will be an increase in the nuclear liability on nuclear plant will, through negotiation—and I do not the operator from £140 million up to €1,200 million, have a figure or proportion of how much they would so there is quite a significant increase— have to contribute—about the appropriate level of funds that need to be put aside for the waste Q176 Caroline Lucas: We don’t know the cap for management as well as the decommissioning cost. the waste management though. That is for the insurance liability. I understand there is a cap as well Q173 Zac Goldsmith: Can I ask you, can you think on the share that the industry will share with the of any other example of an energy technology where taxpayer when it comes to waste management. Do we the waste generated by that technology is picked up know what that is? I have not seen a figure on that. partially by the taxpayer? Can you think of any? Keith Parker: No, but I think that the estimates that Keith Parker: I think if you look at the waste that is the operators have made of the decommissioning of generated by a fossil fuel plant, for example, it is not waste management costs are quite a small proportion covered at all, whereas the nuclear industry does of the overall costs of nuclear so building up the fund contain its waste, it manages its waste from the time to be able to cover those costs in the future should not it is produced until its final disposal. That externality be a difficult task during the 60-year operating life of is not covered for other technologies, and you a station. I think the benefits, and we have already mentioned that there— alluded to this, is that once operating, a nuclear plant, as similar with renewables, has relatively low and Q174 Zac Goldsmith: About half an hour ago, you predictable operating costs that, over the 60-year agreed that that was a subsidy. By not pricing carbon period of nuclear operations, should translate into into the market as an externality, by not internalising lower prices for consumers as part of the fix. that externality, that was, according to you—not long ago—a subsidy, so what is different then about this subsidy that we are talking about now, this other Q177 Caroline Lucas: Would you say that would be externality which the taxpayer has to pick up? lower than, for example, using support mechanisms Keith Parker: What I said was that the carbon floor for renewables? You think that supporting nuclear is price is a means of trying to price to that externality, going to be more cost effective than supporting but it has not been available and certainly was not renewables? available when the fossil fuel plant was and still is Keith Parker: I think what we need to have a more pumping out its own waste into the atmosphere. sustainable cost effective energy system is to have a Chair: Before I turn back to Dr Whitehead, I know mix and the mix should predominantly be low carbon. Caroline Lucas wished to come in. I think with nuclear, with its sort of base load qualities together with renewables, which are more variable in Q175 Caroline Lucas: Only simply to say that for their output, it will ensure that we do have that more the last 10 or 15 minutes, we have been piling up all sustainable and cost effective mix into the future. the different levels of extra support that nuclear gets because of particular risks associated with it and Q178 Chair: Mr Edge, did you want to comment therefore the particular costs that are associated with on that? nuclear energy as opposed to other forms of energy. Gordon Edge: No, I am staying well out of this one. When the Government unveiled this new deal with Chair: Mr Simpson? cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

Alan Simpson: Yes. I just wonder what we are all not do too badly there until the 1940s. I don’t know. inhaling in taking part in this sort of discussion. I What is the new technology? cannot understand why anyone in their right mind Alan Simpson: It is the energy source that is on the would want to subsidise old energy rather than new. I most rapidly rising cost curve and if you look at the cannot understand why there is not a fairly radical performance of construction of nuclear power in an degression rate that is built in to any form of market European or a north European context they are all way support here. I also question whether it meets any of over budget and way over time and are being the UK’s objectives, certainly about delivering energy overtaken in the other direction by technology’s newer security within the current decade and also about technologies whose cost curves are falling rapidly energy affordability in the decades that follow. So in with the scale of deployments and also delivering relation to Caroline Lucas’s question about, are there huge boosts to innovation across other parts of Europe better ways of using the £80 billion of lifetime price and we are not likely to see any of that. The danger guarantees, the £14Ð15 billion loan guarantees for is we may even find the migration of other production construction, the answer for me is absolutely and you to other parts of Europe where it is just cheaper to only have to look at other parts of Europe to see how produce. that is already happening. The first, in a negative context, is that this is a huge Q180 Dr Whitehead: My final bit on this bit, and investment, a huge public contribution towards incidentally I do observe that there are no capacity yesterday’s energy thinking. At the end of the First payments available for interconnectors right now— World War France did not want to be vulnerable in but a minor point. the way that is was in the First World War so it took 30% of its defence budget and threw it into building The EU state aid regulations, which the new nuclear the Maginot Line. It was a fantastic investment that deal will need to negotiate. Interestingly the previous would have been really relevant to the First World regime, prior to CfDs, ie renewables obligation, was War and utterly irrelevant to the Second World War deemed effectively by a competition commission in and CfDs for nuclear are the Maginot Line of energy the EU as state aid but was given a wayleave thinking for the 21st century. effectively on the grounds that it was a state aid that If the Committee members just take their own would bring about a non state aided form of energy personal experience of phone systems. Some of us supply. grew up when the telephone was the landline and as I understand part of the issue of the EU looking at the lifeline now everyone carries a mobile phone state aid will be the role of CfDs, which cover both around in their pocket and the telecommunications are renewables and low carbon but not renewable function much more versatile, they are quicker, lighter, of nuclear in the context of what was previously the brighter. Energy systems in the 21st century will be arrangement on what would have been a wayleave for the same and that is the problem that nuclear has had state aid. Do you anticipate any issues with the state in Europe because the impact of renewables into the aid examination that new nuclear will receive or do European energy grid, where they have priority access you think that the way that it has been pitched for renewables, has really dramatically dropped the previously may well apply to new nuclear in roughly cost of wholesale prices for electricity, sometimes the way it did previously? going into negative prices where producers have been Keith Parker: You are right. The CfD agreement that paying up to €100 per megawatt to put electricity into was announced earlier this week will have to be the system. assessed by another state aid authority so all I can say, Chair: I would quite like to just keep it just on the and I am not an expert on state aid, is that what the subsidy if you can, if you could just relate it to the Secretary of State said the other day that they are subsidy. confident that there will not be an issue over this and Alan Simpson: If you are talking about the use of £14 that there will be approval, ultimately given, for this. billion of loan guarantees or £80 billion of revenue I said to the Chair earlier that that is another step that payments the UK would get much better value in needs to be taken before the final investment decision building another couple of BritNed interconnectors to can be— take advantage, in the next couple of years, of existing electricity surpluses. That is, if there is a crisis, what Q181 Chair: What discussions have you had with we are going to need to have access to. For two of Brussels in respect to the state aid issue? You seem to those you could get them done at £500 million each imply it is a matter for the Secretary of State. and within 18 months to construct, which was the last Keith Parker: Well, because it is a Government issue. experience. So in the short-term there are much cheaper and more sustainable solutions. In the longer It is for the Government to make the case to the term flexibilities of energy thinking is where the rest Commission. of the world is heading. The danger of this is that it is a huge subsidy that will be heading in the other Q182 Chair: Sure, but I am asking you what direction. negotiations you have had. Keith Parker: I haven’t had any personally. Q179 Mr Spencer: Just briefly to pick up on your Chair: In your industry. comment about what is new technology and what is Keith Parker: No, our association has not had any old technology. Obviously we were milling wheat and direct discussions with— pumping water with wind in the 18th century. We did Chair: Indirect? cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Ev 42 Environmental Audit Committee: Evidence

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

Keith Parker: No, nor indirect. The Nuclear Industry Q185 Dr Whitehead: Do you simply lose the end of Association has not been involved in that discussion your CfD period or do you lose the investment at all. instrument advantage that has been gained by getting Alan Simpson: What we do know is that CfDs in advance of you using them? Commissioner Oettinger wanted to include new Gordon Edge: You lose time of support. If you are nuclear within the legitimate state aid provisions of not fully generating by the time the end of the target the current draft and that that has been thrown out. So commissioning window— we do not know what the exact wording of the final framework draft will be but we do know at this stage Q186 Dr Whitehead: So you lose support at the end that is the decision that has been made. I think the UK of your contract? may well wish to appeal but I think there is going to Gordon Edge: No, it eats into the front of the contract be a real struggle in getting this through and we need until such time as you start and that contract would be to take account of not what the EU has said in positive deemed to be— terms but we need to understand what they have already thrown out. Q187 Dr Whitehead: Sure. You don’t get the Gordon Edge: Yes, I just wanted to point out that underwriting if you are not generating but if you have there is a kind of plan B on this that DECC can obtained an investment instrument, which is segregate out the renewables and the nuclear bit if it essentially a subsidy because it leads to CfDs— appears that the nuclear stuff may derail the passing Gordon Edge: You will get a shorter term of it if you of the EMR package as a whole. It may well be that commission after the end of the target the nuclear one, which is going to be treated, as Alan commissioning window. Simpson was saying, differently to the renewables part Keith Parker: The fact that the CfD only takes effect of this because of the way the new state aid guidelines once you start generating is an incentive to meet that is coming forward. It may be that the nuclear part target because then you start earning money on the takes quite a bit longer to analyse. investment. There is also one other point I wanted to make in terms of one of the ways where the Commission might Q188 Dr Whitehead: If, say, you did not generate be looking at this, as to whether it is okay, is the for four years—let us say you had an investment comparability across the deal that is on the table for instrument that said, “This instrument will become nuclear as it is for renewables. We have not seen the tenable in 2023,” for example, but you did not start full detail of what is agreed for Hinkley C. What I generating until 2027, would you then hold that have seen in the press release leads me to believe there investment instrument in a cupboard in the meantime may be some key differences around change in law and the only effect at that point would be you would provisions and risk reduction. We do not know how degrade a certain part of the end of that instrument, long the target commissioning window around that or would someone come up to you at some stage and date has been set for this project. For renewables, it is say, “Well, hang on a minute, you are hanging on to going to be one year, after that you start losing your this investment instrument and no one else can get term of your CfD if you have not finished it by then. into the market because you have it and therefore we We do not know how long the window is going to be are going to take it away”? for Hinkley C and we do not know the terms of the Gordon Edge: There will be a right to terminate that guarantee that is being talked about with Treasury. So instrument at what is known as the longstop date, I think we need to look at the detail of that deal and which will be a certain period after the end of the go, “Well, is it really comparable to what is being put target commissioning window. For renewables it’s one on the table for renewables as well?” I would be very year or two years. We have no idea what that period keen for it to be comparable but it would be very is for the Hinkley C CfD difficult to work out sometimes what it is. Keith Parker: I cannot enlighten you on that date.

Q183 Dr Whitehead: Are you saying that things like Q189 Mark Lazarowicz: A question for Mr Edge. investment instruments, which bring about a CfD, can What impact do you think the CfD arrangements for be lost if a window is not adhered to in terms of that Hinkley C will have on the renewables industry application? particularly if they are replicated with similar Gordon Edge: The system that DECC is setting up agreements with other power stations in the future? for the contract for difference says, “You have a target Gordon Edge: It depends how big the budget under commission date.” That is where a target the levy control framework is. All the money—there commissioning window comes in. is a zero sum game for that, what is paid to nuclear is less for anything else. So it really depends when and Q184 Chair: So what will the date be? by how much Government sets a budget for beyond Gordon Edge: For Hinkley C they said it was 2023. 2020. As things stand even though the Hinkley project Now, if the project does not start within the window is meant to start in 2023 it still has to be accounted around that date then the contract is automatically for within the budget that leads up to 2020 because at started and the clock starts ticking, in this case 35 the moment we cannot assume that Treasury will years, in the renewables case 15 years. So how long allow any growth in that budget after 2020 and that window is, is going to be a key parameter in the therefore you sterilise, and my back of the envelope risks involved in the construction. says about £1 billion a year, round number, from that cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

£7.6 billion that Government has set aside up to 2020 put in a levy control framework and it has to count per year to pay for low carbon generation. against public expenditure. When confronted with the scale that Germany, in particular, is using it differently Q190 Dr Whitehead: Forgive me, that £7.6 billion UK politicians have tended to say to their equivalents includes accumulation from previous years. in Germany, “But how come there are different rules Gordon Edge: Absolutely. It is in that year the support that are being made for Germany that do not apply to is allowed. us?” and the answer that they get is, “Because Britain, by and large, just will not take yes for an answer.” Q191 Dr Whitehead: So sterilising £1 billion is The question, can we do this without it counting sterilising all the new entrances and— against public expenditure is an unequivocal, yes. It Gordon Edge: It could do if they fail to set further does not have to come within a levy control budget beyond that. framework and it can be entirely a self-financing mechanism within the energy sector accounting. Q192 Chair: That is a function of the definition of That was the original intention in the 2008 Act that subsidy to cover both renewables and nuclear in order, we put through, which then got hijacked into a fixed presumably, to make the case for both from the budget framework in the settlement in 2010 about Government’s perspective? public expenditure and we have not escaped from that. Gordon Edge: It caps the amount that Government On Gordon’s points about this, we will continue to see is going to pay out for low carbon generation as a that whole transformation agenda locked into a fixed whole, yes. budget with a diminishing slice of those resources Keith Parker: My understanding of Hinkley Point C, being available for genuine energy transformation. because it falls outside the current levy control framework, is not coming out of that— Q194 Chair: Okay. I presume that is a matter for us Gordon Edge: I have had it from the Treasury’s to take up with the Treasury Minister. Just before we mouth myself that they will not do that until such time leave nuclear can I just ask Mr Parker one quick as they increase the budget post 2020 and there is no question in terms of subsidy? In the instance, for guarantee they are going to do that. example, construction costs of new nuclear carry take longer to build than what is anticipated, and that is Q193 Mark Lazarowicz: That is obviously a point covered by Government guarantee, if the costs do we can pursue with a Minister in a future session. overrun will that be something that we will be That is just one plant at Hinkley C. If there are more required to pay back or will it be received by the then presumably there will be other effects on the total companies concerned as a grant? In that circumstance, available for low carbon energies. will that then count as a subsidy? Keith Parker: EDF have made it clear, and this came Gordon Edge: I think it would become increasingly out in the press conference on Monday, they will take untenable for Government to say that comes out of the construction risk entirely. the £7.6 billion in 2020 when we are talking about target commissioning dates that will be 2025, 2027. It starts looking increasingly ridiculous so there will Q195 Chair: The Government will not? become a point where the cognitive dissidence in this Keith Parker: No, the developer takes the breaks and they have to say, “Okay, we will be construction risk. The interest— increasing the budget beyond 2020. We won’t tell you by how much now but just work on that assumption.” Q196 Chair: Even if it overruns? They will have to have, eventually, if they are signing Keith Parker: Yes. loads more deals that far in advance. One thing I would say though is this is an indication Q197 Chair: There is no Government finance to that Government is taking a much longer term view cover that? of the nuclear side than it is for renewables. We are Keith Parker: There is an infrastructure guarantee that being given some foresight at 2020 but they are is available to EDF, which would be available— signing deals for nuclear for 2023 and potentially beyond. So we think that is a bit of a mismatch in Q198 Chair: So is that part of the subsidy? terms of commitment to the different sectors and one Keith Parker: It would be available if the investors that we would like to see much more commitment to were to default on the debt financed at— our sectors beyond 2020 in order to have parity. Alan Simpson: Can I just say this is a uniquely British Q199 Chair: Would you count that as a subsidy? approach to the way we are trying to delivery energy Keith Parker: Again I go back to the point that the transformation? Since leaving Parliament I have taken infrastructure guarantee is available across various groups, including politicians, to look at what technologies and going back to the definition of “no is happening in Germany in terms of their energy public subsidy for nuclear” it was unless support transformation programme. When the Treasury measures are available across technologies. So response document recognises that pretty much yesterday, for example, there was infrastructure everywhere else in Europe has moved towards a feed- guarantees announced for a range of renewable in in tariff framework, which does not count as a technology. Drax has received an infrastructure subsidy. It does not count against public expenditure guarantee for the transformation of that station to and that there is a European court ruling that supports biofuels. So within that definition that the Government that and yet the UK Treasury insists that it has to be has set down, no, I would not regard it as a subsidy. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson

Q200 Chair: Does anybody else wish to comment? means there is a roadblock to stopping the market Gordon Edge: I would, in the same way that I would transformation that we need towards a low carbon regard the CfD as a subsidy. It is a form of support market and that is because of this incoherence and we need to be clear about that. I think it is an between the amount of subsidies that go into entirely justified support and one that uses the renewables and fossil fuels. Government’s balance sheet in order to bring down Alan Simpson: I agree with Emma, and I would just costs and I think that is entirely good but it is also the say that in addition to the three points that you listed case that Hinkley C will be taking about a quarter of I would add a fourth, which is, do they deliver an the entire budget for this programme, which may be a open sustainable and accountable energy market? The little strong weighting for one project. difficulty is that what we have at the moment is that they fail most of those tests. That there are much Q201 Chair: So it is the scale of it that you would better ways of doing things and some of our European have a concern about? partners are very good at leading the way on that. I Gordon Edge: I think it is disproportionate to put that know in my submission I pointed out that Germany, level of the budget into one project. over the last 20 years, has delivered an average of Chair: We must move on. 27% GDP growth and a 24% reduction in greenhouse Alan Simpson: I might just like to look at the Drax gas emissions. They are also delivering 400 deal because within the sector there are some concerns megawatts of energy savings per month in their about just how much of an underwriting Drax has approach as to how to raise the energy efficiency of been given and what rate of return they are making their build environments and that is really pro-poor at on this in order to, firstly continue to burn coal at a a time when people’s energy bills are running away large scale and not in an abated way and, secondly beyond their pockets. So it is not that those principles also to use biofuels at a greater scale than the UK are wrong, it is just that we have got some really lousy produces so that the environmental impact of this is mechanisms for pursuing them. somewhat open to question. Gordon Edge: I would certainly support the idea that Chair: We must move on there is a fourth leg, which is dealing in market failures, particularly environmental. Coming back to Q202 Peter Aldous: At the outset I will just declare the point about supporting industries, I think one of an interest; I do have interests in family farms where the problems we have is that misalignment between renewable energy policy is being pursued. the environmental market failure support and the Traditionally there are three justifications put forward industrial strategies. We are finding a mismatch for energy subsidies, to protect and support infant between what DECC is trying to do through EMR industries, to come forward with pro-poor policies and and in 2020 for offshore wind and the very welcome to protect industry from foreign competition. In your offshore wind industrial strategy that was led by BIS opinion, which should carry any weight? I might just and DECC were involved. We do not feel that they add to that and say, perhaps, that the situation does are working together along the same lines and we change over time. would very much welcome that those two were made David Odling: Maybe I can come in here? We have more coherent. no difficult with infant technologies getting support. David Odling: Just to add, if I may, on the question Just about all forms of new technology in some way on pro-poor. That is social policy, which obviously is or another have benefitted and that is fine. Of course a central part of Government’s activity and certainly the question is, when does that support run out and we see it as more aligned towards social policy to deal when do they have to stand on their own two feet? with those specific groups of people. Our view is very simple, as soon as possible and quite a lot of it, of course, comes out of academia and that Q203 Peter Aldous: So that should be funded out of kind of thing so inevitably has a hefty part of public general taxation? money behind it in any event but some of it is industry David Odling: It is at the moment and to encourage sponsored as well so there is a bit of both in there. energy efficiency in the homes that are ill served, Beyond that we believe in market pricing, and particularly if they are heated by electricity, which is listening to all the evidence that has just gone through far and away the most expensive form of heating there over the last 20 minutes, in some sense it is is at the moment, which is what should be done. It is astonishing to my ears because the price of our a social policy in our view. products are determined in the market and we live by the risks of those. We think technologies need to stand Q204 Peter Aldous: Where subsidies are used to on their own feet as quickly as reasonably possible. support infant industries and new technologies, and Emma Hughes: I think from our point of view we are you did touch upon this, Mr Odling, how long should not against subsidies per se. What we are against is they last? You said as soon as possible. Does anyone harmful subsidies. Subsidies have a useful role to play else have any views on that? as a tool to transform a market and that is where I Alan Simpson: Again, for me the most useful think subsidies can be really useful. I think as well template and where most of the learning has been what would be called the pro-poor subsidies also have done on this is in Germany. They have a different some use and I think better targeted consumer matrix for different technologies. They have a built-in subsidies could be useful for alleviating the very real presumption about the rate of efficiency gain per year problem of fuel poverty. The problem at the moment and they have a target of installations that they would is that we have incoherent subsidy system, which then say, “If you exceed the three gigawatts of cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Environmental Audit Committee: Evidence Ev 45

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson renewables per year then the degression rate increases Chair: Who wants to go? by 3% per gigawatt,” and they have a regular Alan Simpson: I think pretty much the entirety of our independent review process so that in terms of existing energy sector has, as its fuel source base, runaway success of the growth of maturity of that been over-subsidised for overlong. In terms of new technology, which can be accounted for within the technologies I think that we have yet to really take process. seriously the national grid assessment of four or five Other elements of the new technologies will not years ago where they said that if we are serious about mature at the same rate or on the same scale so that biomethane from waste we could deliver up to 49% the review process has a longer tail to it. Maybe for of our domestic gas needs by 2020 but it would be on those who play golf that is where having a set of golf a much more decentralised production and distribution clubs rather than a single one makes sense but the key basis than we currently have. for me is that they have set very ambitious targets The experiments in Newcastle in relation to and the expectation of degression rates combined with geothermal—we have only begun to paddle in those, regular independent reviews, which can be as regular and I suspect that is one of the technologies with a as quarterly. longer tail to it. We also have not looked at other David Odling: Can I just come in there? This idea transformational issues, for instance, citizens having that Germany is the paragon of all virtues I just find the right to reduce their energy bills by socialising the slightly difficult to swallow. Certainly from our ownership of the local grid, because we have done a industrial contacts both here in Germany and in lot on energy production but not on the distribution. Poland there are all sorts of shortcomings that I hear In large parts of the United States now, and other parts about, not least the total cost of what is being done, of Europe, people are looking at decentralised so I just think there is a little bit of a twist in the generation and decentralised distribution and selling balance here. themselves non-consumption in a market that has traditionally only ever understood more consumption. Q205 Chair: Sure, when we are talking about costs So those are the spaces that I think, as a society, we we are trying to understand what the costs are on a really have not begun to examine properly. level playing field, are we not, which is why we are Emma Hughes: You won’t be surprised to hear that I trying to get to the heart of what does or does not think the oil and gas industry have been subsidised far amount to a subsidy? too long. In 2009 at the G20 the governments David Odling: Indeed. There are some very big committed to phasing out fossil fuel subsidies and numbers in Germany on that front and it is affecting there has yet to be any clear decisive action to show not just Germany but it is affecting its neighbouring that happening and that is supposed to happen by states as well. You talk to the Poles and they are not 2020. The IEA called dirty energy subsidies, “The at all happy some of the time. I am just trying to appendicitis of the global energy system that must be shift this— removed for a healthy energy economy”, and there needs to be urgent action for that to happen. Q206 Chair: Sure, but given that this a Select Committee that looks in a cross-cutting way across different Government Departments, on this issue Q209 Peter Aldous: Mr Odling, do you want to about ensuring the supply of energy, the issue about come back? securing energy efficiency, there is also the issue David Odling: Yes. I think we have to be careful. I about the carbon limits, and the real issue is how to understand perfectly where you are quoting from but use the subsidy for a good purpose that will balance you are talking worldwide there. I am assuming we all of these three things. are talking about the United Kingdom. David Odling: I understand and agree with that entirely, and we address that in our economic report. Q210 Chair: We are talking about the United Kingdom but clearly our policies do have an Q207 Chair: Other European companies may have a implication for wider international policies. I think different understanding of how much carbon may be sometimes it is very difficult to separate out what is consumed for example, which would put a completely international, national and local but please do go different slant on it. ahead with your comments. David Odling: Yes, I was just trying to get away from David Odling: Yes, subsidies in some countries are this view that Germany is perfection. very widespread for fuels. It is no secret that some Chair: I am sure if you want to give evidence on— fuels are extremely cheap in some parts of the world David Odling: I don’t believe it is. That was the point but not here. Western Europe or the EU generally is I was making. not a place that offers the fat subsidies that are being Chair: Perhaps we will leave that there. Mr Aldous, referred to, but some parts of the world, yes they are. have you finished? Some countries, of course, are finding them unsustainable, the Indians for example, the Q208 Peter Aldous: No, I have a couple more Indonesians, so yes, but that does not apply here. questions. Do the panel think there are any Emma Hughes: Just to come back to that and talk technologies that have been subsidised too long or, specifically about the UK the OECD found that the turning the question around the other way, are there UK Government support for the fossil fuel industry technologies that have not been subsidised long had increased by £500 million to £4.3 billion between enough? 2010 and 2011 and this does not include some of the cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:22] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

Ev 46 Environmental Audit Committee: Evidence

23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson indirect subsidies that we spoke about in our it is the fact that some so-and-so a million years or so submissions. ago scrunched Europe and it is the geology that stuffs Chair: We are going to have to draw our questions— us. In the States we have big flat tectonic plates and lots of space and no one gives a stuff about releases. Q211 Peter Aldous: I have one quite important We can get it out cheaply. In Europe we cannot and it question. There is one technology we have not spoken has an 85% depletion rate in two years and without about today, shale gas. Could you perhaps view that subsidy it is a nightmare to try to get your money as an infant industry in this country and on that basis back.” That is even before you get to this scale of could you provide it with subsidies? Over to you, drilling that would have to take place in the UK and ladies and gentlemen. the transport movements and the discharges on land David Odling: I will start if you like. from the fracking fluids and the uncontrolled releases. Chair: We need quick answers because— It not an answer to anyone’s energy crisis and it will David Odling: It is clearly an industry that, in this only make the crisis worse. country, is in its very early stages so we don’t yet know whether it can work economically and so on. It Q213 Dr Offord: That was— has to be done satisfactorily from an environmental Chair: Okay. Caroline, we will let you ask your point of view, which we have to take as a given. We question. will not know for some time until we have drilled Caroline Lucas: Yes, it is a question of platform some wells and discovered the data of what is going essentially. You say that the support that the UK on down there. The only way we are going to learn is export finance provides for energy projects abroad to drill wells and the more wells we drill the more should be considered as a subsidy and I wondered if data we will get, the more we will be able to you could tell us what the basis is for that. understand what the genuine possibilities are but I Emma Hughes: Yes, sure. So the UK offer billions of don’t think anybody is looking for a subsidy per se. pounds of public money every year as both credit lines In other words they are not looking to have their costs and insurance for UK companies who are exporting helped in one way or another. They are paying for the overseas and this includes guarantees for fossil fuel costs themselves, which is what this industry does. projects. We reference in our submission a range of Emma Hughes: Shale gas should not qualify for a these projects including £1 billion credit line for ultra subsidy both because it is unsustainable; it is a high deep drilling by Brazil’s state company, Petrobas. If carbon technology but also because it is unlikely to you look at both OECD and IEA definitions of what substantially transform the energy market. If that is they include as a subsidy, export credit guarantees what we are looking for subsidies to do shale gas is would clearly be included and categorised as this. not a technology that is going to do that. Just Guarantee is a very specific type of subsidy and there yesterday the Government’s former chief adviser, Sir are methodologies available to estimate the size and David King, said that the UK would need 3,000 shale the value of guarantees as subsidies. wells per year to make a real difference to energy Another point is that the UK have not implemented supply. This raises serious doubts about the the coalition agreement not to use export finance to technology’s ability to transform the energy market support dirty fossil fuels. This has been shown both because that just will not be publicly acceptable. by the loans for deep sea drilling to Petrobas but also Chair: We may return to this in a moment. I am just to coalmining in Russia. very conscious I need to bring Caroline Lucas in before 4 o’clock. Q214 Chair: Thank you. Does anyone else want to Caroline Lucas: Don’t worry, it is music to my ears. comment on that? Chair: All right, so who wants to comment on that David Odling: It is interesting that according to the response? evidence submitted by the UKEF they are a net contributor to the Treasury, so you could say they are Q212 Peter Aldous: I think it would be a mistake to investing public money to make money for the public assume that shale gas here would have the same sort purse. I think the second point perhaps worth saying, of transformational impact that it has done in the certainly as far as exports of oil and gas, goods and States and certainly it would be a mistake to divert us services are concerned from this country where we away from the direction of travel that we have already have a substantial business amounting to about £7 embarked on, towards low carbon energy mix on the billion per year, in most international trade if you are assumption that shale gas is going to change involved in projects you will not get export orders everything. unless there is some form of guarantee offered. It just Alan Simpson: On this Keith and I are absolutely at will not happen. It is not something that is new. It is one, shale gas is not sustainable. It is not economic. not something that we are uniquely subject to. It is It is not going to reduce people’s energy bills, and if something that all countries are involved in. So this is my reading of things is correct I am not sure that not just a fossil fuel question, this is a much wider politicians will find themselves electable on a pro- international trade question. shale platform. Gordon Edge: In some ways I would echo that in that The key thing that I would direct the Committee’s we, in the wind industry, see it from the other side in attention to is that earlier this year Exxon ended their that the export credit agencies of particularly Denmark trial drillings in Poland. Their chief geologist basically and Germany, UKF and Hermes, play a very big part turned around to a conference in Berlin and said, in financing wind projects around the world and “Look, the problem here is not politics, it is not cost, indeed in the UK on the basis of products of their cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG04 Source: /MILES/PKU/INPUT/029662/029662_o004_MP CORRECTED TRANSCRIPT 23 OCTOBER 2013 PM.xml

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23 October 2013 Gordon Edge, Keith Parker, David Odling, Emma Hughes and Alan Simpson countries’ industries being used in those projects. So Emma Hughes: Just to come back on that I think that I do not think there is anything evil about export credit is exactly right. It is not delivering the transformation guarantees and finance but you can use it for particular that we need. There are very good reasons that the technologies over others. coalition committed to not using export credit to Keith Parker: We support the principle of having continue financing fossil fuel projects. I think also to export credit available. One of the ambitions that the comment on her submission, another big problem with Government has in relation to the new nuclear export credit is the lack of assessment of projects that programme is that it will help to revive the UK’s they are guaranteeing. UKEF have only conducted nuclear supply chain and give it opportunities to work impact assessments on six of the 26 loans for energy in overseas markets where nuclear is also being projects that they list in their submission and this developed. I think the availability of credit would be includes a lack of assessment on both environmental important in enabling that to happen. and human rights issues. The reason for this is Alan Simpson: I just think that the question is, what because the OECD common approach is, which do you get out of it? For me the real value of this UKEF reference in their submission, “This does not inquiry from the Committee is that it allows a proper require any impact assessment if the support is a focus, which never happened in the entirety of my project bond rather than an export credit, if the loan time in Parliament, on where the UK wants to be in is for less than two years or if the loan is for less than 10 years’ time and 20 years’ time. That is the period SDR 10 million.” So what this means is that many of when energy markets will be transformed on the same the projects are not being properly assessed and that scale that telecommunications have been transformed. is why many of the problems that we reference with The question is whether the current mechanisms allow the loans that they have given, in our submission, us to be players in that or laggards. occur.

Q215 Chair: Do we have any further questions? Q216 Chair: Who would you say would have the Caroline Lucas: Only to say that, it is not exactly a responsibility for doing that assessment? question sorry, but I think this brings us back kind of Emma Hughes: I think that the UK Government has full circle, does it not, in the sense that we are talking the responsibility to make sure that those loans are less about the mechanisms and more about the properly being assessed. In particular I would put that objectives of the mechanisms? I was only going to in the remit of BIS. quickly ask if there were time, but maybe there is not, Chair: With BIS? to ask Emma Hughes about her views of the Emma Hughes: Yes. submission from the UK Export Finance Organisation Chair: Anyone wish to add anything at all? In that because just from my quick scanning they are case I think we have come full circle. I think we have completely upfront about what they are giving the covered a lot of ground from five very expert money for, is things like oil and gas exploration in witnesses. So I thank you all very much indeed and Brazil, Nigeria, petrochemicals in Saudi Arabia and we shall continue with our inquiry. I am sure you will the question then comes back to what extent is that read our recommendations with some interest so thank delivering the transformation in our energy system, I you all very much indeed. guess that we have been saying that we want? cobber Pack: U PL: COE1 [SE] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 48 Environmental Audit Committee: Evidence

Wednesday 30 October 2013

Members present: Joan Whalley (Chair)

Peter Aldous Mark Lazarowicz Neil Carmichael Caroline Lucas Martin Caton Dr Matthew Offord Katy Clark Mr Mark Spencer Zac Goldsmith 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 Union. We have other international obligations but we welcome to the combination of witnesses that we have also have to ensure a securer energy supply for our before us. I particularly thank you, Minister, for people in the United Kingdom, which means more coming along with your colleagues and officers from home grown energy, and we have to make sure that other Departments. We have been looking at the we keep the bills affordable. So we have to do all whole issue of subsidy over the last few months. For three things at the same time. those of us who were in Prime Minister’s question time earlier, the debate is very much a current and Q219 Chair: So do you have any idea how much timely one. money you would be shaving off energy bills as a Can I start by trying to understand where the result of the process that has started? Could you give Government is now in respect of the way the debate us some idea of the timetable for the process as well? about energy and energy prices is linked to the green Michael Fallon: So far as the amount is concerned regulations and where we are, given the Prime we have not set a target of what we have to get off Minister’s announcement that we need to roll back bills. I have simply drawn your attention to the very some of the green regulations and charges that are steep increases that we have seen and any responsible putting up bills, and the fact that now there is going Government obviously wants to see what it can do to to be a review? I wonder if, first of all, Minister, you keep those in check or to mitigate them. So there is could perhaps give some clarification about the review not a specific target but certainly we want to bring that is under way and where we stand on this. help, not least, to those who need it most and we have Michael Fallon: Thank you very much and thank you a number of schemes for doing that. We want to make for the invitation this afternoon. Yes, I am very happy sure they are working properly. to clarify this. As a Coalition Government we are constantly watching to see how we can reduce the So far as the time scale is concerned we are looking pressure on the budgets of hardworking families. You very hard at all this at this moment and the Secretary will recall that we, much earlier, froze council tax. of State hopes to make his annual energy statement to You will recall that we continue to freeze fuel duty Parliament very shortly and there may be some detail and given the recent increases in wholesale prices and there. Of course we then have in front of us the next the quite dramatic increases we have seen from some fiscal event, which is the autumn statement. suppliers I think it is only right that we look, too, at the total fuel bills being paid by our constituents, so Q220 Chair: Could you set out for the Committee we are looking very hard at that. It is not simply a the proportion of the bills that relate to the green question of the so-called green regulations, which I agenda in terms of the information that was provided think you referred to them to as. We are looking at by the Climate Change Committee? these bills across the board to ensure that there is Michael Fallon: The total is around 9%. I can read sufficient competition in this market to ensure that out the actual figures if somebody has them to hand. network costs are no higher than they need to be and Yes, the total is around 9%, which is taking that where there are additional levies imposed on top Government policies in the round, both energy of the bill these are as fair and as reasonable as policies and— necessary. Chair: Is that what relates to the gas bills? Is it the 9% that relates to the gas bills? Q218 Chair: So where does that leave the greenest Michael Fallon: No, to the overall fuel bill, the dual Government ever agenda? fuel bill, and that is made up of 5% contributing Michael Fallon: The what? towards energy efficiency and helping the very Chair: The greenest Government ever agenda. poorest households and 4% going towards supporting Michael Fallon: We have green obligations, of home grown low carbon sources of energy. You might course. We have legal obligations to the European classify both of those as green. cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Q221 Chair: How do you square that with the Government and that involves a number of statements that we have had from the Deputy Prime Government Departments including my own. Minister suggesting that the review that you are about Chair: Okay. So I take there is no response from the to undertake may result in the money being moved officials on that. over to Her Majesty’s Treasury? How is this going to be funded, the green incentives that are needed for the Q227 Dr Whitehead: On the most recently declared decarbonisation agenda? average dual fuel bill, I think it was suggested last Michael Fallon: We have not come to any week that £112 of that bill would be made up of what conclusions. We are looking very hard at each of these are generally regarded as green or energy efficiency individual components but we certainly have not come levies or incentives, such as eco renewable to conclusions. Now, one option being canvassed, and obligations, carbon floor price, FITs, warm home not just by the Deputy Prime Minister, I have seen it discounts and smart meter rollout. Some of those are canvassed more widely, is that you move some of what you might call underwriting subsidies in the these levies over towards general taxation but that is perhaps more straightforward sense, for example on only one option. renewable energy through the renewables obligation. Others, such as carbon floor price, are essentially a Q222 Chair: Okay. Has that been discussed inside tax that goes straight to Treasury. Others are assistance the Treasury? for energy efficiency or indeed for fuel poverty or Michael Fallon: If I may, I do not think we ought to elderly people’s warm homes. draw individual officials into this. I am here to answer In terms of the review that is being undertaken do you for the Government as a whole. We are looking at have any preference for those that might be at the each of these levies and all the various options forefront of the review that would be more likely to associated with them. be reviewed in terms of the policy commitments that the Government has? On the basis of that, what would Q223 Chair: I just think it would be very helpful to you see are the main questions to be asked about how hear from the official in the Treasury how this process those changes might be successfully completed, for of cost cutting on the green agenda is being taken up example, bearing in mind that carbon floor price is in at the stage when the review is being planned. the Red Book over the next three or four years with a very steep rising cost per tonne? Have you made any Michael Fallon: I hope you will not mind if I resist calculation as to how that might be replaced in the that because I am here to speak for the Government Red Book for future Treasury management purposes? as a whole. Michael Fallon: Well, we are looking at all these things now and I am not taking any particular one of Q224 Chair: May I ask what the officials from the them as a preference or priority. The point really is other Departments are here to speak for, if they are three-fold. They are now 9% of the bill. You might not able to speak? regard that as very little but of course the dual bill has Michael Fallon: I gather you wanted some specialist increased, wholesale prices have increased, so it is evidence on the taxation of North Sea oil and you now a sizeable element, £112, as you have pointed wanted some specialist evidence on the treatment of out, of the bill so that is a large sum. subsidies in relation to UK export finance. Secondly, of course, it is a sum that is forecast to increase. These levies, as you know, better than Q225 Chair: We are concerned about subsidies as a anybody, Dr Whitehead, are due to increase over the whole, so clearly if there is going to be a change to next two or three years and grow even more. Thirdly, the bills, if they are not going to be met through the I think it would not be right to exempt these green consumer by the energy companies then the question levies from the other pressures that we are exerting on arises, as indeed the Deputy Minister said, as to how the retailers and on the transmission and network this extra expenditure for the green commitments that costs. It would not be right to say, “You cannot have been given—and we have signed up to legally possibly look at these.” So we are looking at all of as part of the Climate Change Acts—is going to be them. Now, adjusting any of them is not easy. found from alternative sources. That is what I had Adjusting any of them has implications. Adjusting the rather hoped that maybe the official from the Treasury carbon price floor has implications for the Revenue could help with. and indeed others have implications across the levy Michael Fallon: I think that is premature. We have control framework and so on. So there is no easy win not reached any conclusions. here but I do not think we can start by taking any one of them completely off the table. We have to have a Q226 Chair: With all respect I am not asking for good hard look at each of them. conclusions. I am asking for the process whereby these are going to be discussed jointly and with Q228 Dr Whitehead: Indeed. I was not suggesting DEFRA involved but also with DECC and with the that, nor do I gather from what has been suggested so Treasury because there are serious issues, are there far about a review, any will be taken off the table. I not, if we are not going to be able to meet the green was concerned to find out what the particular commitments? principles of an investigation might look like in terms Michael Fallon: These are serious issues but they are of what is at the centre of the table and what is discussed collectively within the normal process of towards the edge of the table, particularly in terms of cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley the knock-on consequences of certain moves on Q231 Chair: You would. Can you then clarify certain levies as opposed to others. I wonder whether whether the review that the Prime Minister has set up at this stage any such principles have been drawn up, will come before or after the Government’s response or whether there is a very general review under way. to the Fourth Carbon Budget Review? As far as Treasury is concerned, for example, I would Michael Fallon: As I indicated we are looking hard have thought that, if certain levies are being moved at these things at the moment. We will have the annual into general taxation, which would be a substantial energy statement to Parliament by the Energy cost to Treasury, or certain levies are being taken off, Secretary, I hope, later this week. The next fiscal event which would be a substantial cost to Treasury because after that is the autumn statement and I cannot go into of the lack of income coming in, it would be centrally any further detail on the timetable other than that. involved in, perhaps, discussing with DECC what the consequences of that might be, for example, in terms Q232 Chair: But does that not leave an awful of whether DECC might make up the difference from amount of uncertainty about the current situation? its own budget or whether Treasury would take it out Michael Fallon: No, I do not accept that. The autumn of more general funds. Therefore, I thought that might statement is on 4 December, which is only five weeks concentrate the discussion on how those levy changes away, and we are seeing more and more investor might be spearheaded. I wonder whether you have had certainty now as we put the legislation in place. We any such thoughts and whether you have had any have published a lot of the draft secondary legislation discussion with the Treasury along those lines. with a big consultation document about four weeks Michael Fallon: If only DECC had the kind of budget ago. The draft strike prices are out there and the test that might help to sustain the kind of changes that are is, is there interest in the FID enabling process, the being discussed. We do not in DECC. We have a tiny investments that come forward between the ROCs and budget and the vast majority goes on nuclear the new contracts for difference? Yes, there is. decommissioning costs. The difficulty with laying down any sort of Q233 Zac Goldsmith: You have described this 9% overarching principles for the review is all of these figure. More than half relates to energy efficiency, are slightly different, some of them are over time which is about reducing the cost of living. The periods, some of them apply to the most vulnerable remaining 4%, I am guessing, is largely non- and nobody would want to see that kind of support negotiable in the sense that at least part of the 4% is withdrawn for the people we really want to help the made up of many contractual obligations the most. Others of them are much more general and have Government already has in relation to the feed-in tariff applications to industry and, of course, to the Revenue and so on. So the question would be, is there not a as well. So it is quite difficult to lay down a general chance, a risk, the Prime Minister and the Leader of principle for the review. All I can say, I am afraid, and the Opposition are inflating or exaggerating the I keep repeating this, is that we are looking very hard opportunities of reducing people’s bills in the context at all of them. of these green measures and should they not be looking elsewhere? Q229 Chair: I will bring in Zac Goldsmith but just Michael Fallon: Some of these items are relatively small. I think you are right to point that out, although before I do, is there not a danger that the whole they are scheduled to increase over the next two or commitment the Government has to the agreed agenda three years. So I think it is worth looking at them. But and to decarbonisation targets is just going to unravel that is not all we are doing, we are looking very hard as a result of the Prime Minister’s review? at the wholesale costs of energy and how that is being Michael Fallon: No, I do not accept that. We have passed through into prices. That was the subject of legislation almost through Parliament now, in its final intense scrutiny in another committee yesterday. We stages in the other place. We have a significant degree are looking very hard at the transmission costs. We of interest after publishing the draft strike prices from are looking too at the network distribution costs. We the low carbon and renewables industry. A healthy are looking at all the pieces that go together to make number of applications have now been submitted up this bill. I simply do not think it would be right to under the FID enabling process and last week we isolate this 9% and say we could not look hard at that finally signed heads of terms with EDF to have a new as well. generation low carbon nuclear plant built, so I do not think there is any danger— Q234 Zac Goldsmith: Would you not accept that Chair: We will move on to nuclear in a moment. there is at least a risk? From the point of view of Michael Fallon: There is no danger to our agenda people looking in at Parliament, politics, and this and I think I am right in saying in the last quarter discussion that we are all having in relation to energy renewables contributed some 15% of our electricity. bills, it does appear that the big six energy companies have managed to completely set the agenda so that all Q230 Chair: You would accept that the parts of the of us are looking at what is, in real terms, a less bill that are there to encourage investment in green significant part of the bill—the green measures, much commitments is as a result of the need to get the of which are non-negotiable, because these are deals energy companies themselves to reduce the amount of that have already been done—as opposed to looking carbon that they use. at the structures and the mechanics that have led to Michael Fallon: Certainly. these enormous monopolies being able to engage in cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley what many people regard to be bullying behaviour. It Michael Fallon: We are looking at all of these various seems to be that we have allowed them to set the levies. We have not come to any conclusions. It is at agenda and both the Prime Minister and the Leader of a very early stage. Certainly, in the negotiations with the Opposition have just rolled over and engaged on EDF that was not a matter that I am aware was the narrative set by those energy companies. You discussed at any time. would agree there is risk of that, would you not? Michael Fallon: I do not think they should be allowed Q239 Martin Caton: During this inquiry one thing to get away with that. I agree with you. They should we have looked at is the extent that subsidies have not be allowed to get away with that. The spotlight been used to help those in fuel poverty. In July Ed that is now being placed on the big six is encouraging Davey said that the Government was changing the people to dig deeper into their costs, whether they are definition of fuel poverty. Has this resulted in you passing through these wholesale costs in the way that thinking of ways of making energy cheaper for they say they are. You will know the Energy Secretary poorer households? has written to each of them demanding much greater Michael Fallon: Yes. I think the new definition—and transparency in the way that they discharge their we have taken the power to do this now in the Energy various obligations, like the ECO. I expect the Bill—will be helpful in enabling us to focus on who regulator, too, to be asking tougher questions of the is in need of most help rather than the household big six. itself, which might be very drafty and poorly energy The current interest in the big six and the dramatic efficient but might well belong to somebody price increases they have announced has also focused reasonably wealthy. I think we have a more sensible attention on the issue of competition and has, perhaps, definition now. Without necessarily changing the highlighted what many of our constituents might not amount spent it will make sure it is better targeted. 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, Q240 Martin Caton: The current definition talks simplification of tariffs and ease of switching. I expect about how much disposable income goes on energy the Secretary of State to say more about that in his bills. That appears to fit with the Prime Minister’s annual energy statement. current review to reduce bills, doesn’t it? Michael Fallon: I am sorry I am not with you there. Q235 Dr Whitehead: On the question of the recent Let me just check the definition. agreement that was reached on nuclear power with Martin Caton: I understand the definition to be how EDF, was there any discussion at that point of the much disposable income goes on energy bills. I am effects that removing or reviewing the carbon floor just suggesting that fits quite neatly with the Prime price might have on the several billion pounds a year Minister’s current review with the aim of reducing that EDF receive, because of their particular portfolio bills. of generation, as effectively a subsidy, through the fact Michael Fallon: No. The new definition allows us to that while their existing nuclear power is traded with understand much better what the actual depth of fuel gas as a market maker they do not pay the carbon poverty is in a particular household rather than simply floor price? Therefore, they make £12-£13 a kilowatt the extent of it. It will give us, rather than a fluctuating hour through that mechanism. If the carbon floor price population of people moving above and below the were to be reviewed they would lose a fortune and line, a much more stable population that we can really that might be a bit of a problem in terms of how they focus our attention on. So I think it is a much more might see their arrangement to build a new nuclear useful way of looking at it. power station. Have you discussed that with them? Michael Fallon: No. I am not aware of linkage like Q241 Martin Caton: All right, which leads me on to that. what I next wanted to talk about. According to the OECD and IMF the 5% reduced rate of VAT on Q236 Chair: Who would have been the person to energy bills is a subsidy, albeit not very well focused have discussed that with them? on the poor, which is what you were implying just Michael Fallon: Well, you are alleging it has been then. Is the Treasury looking at replacing that subsidy discussed. I am saying to you I am not aware it was with better targeted fiscal measures? discussed. It certainly was not discussed at any Michael Fallon: Well, I do not accept that it is a negotiation I was a party to. subsidy. VAT, by definition, is a tax, so it cannot be a subsidy. It increases the cost of— Q237 Dr Whitehead: Would it be your intention to Martin Caton: The OECD and the IMF beg to differ discuss that in the context of this review that is being with you. undertaken, depending what is on the— Michael Fallon: I do not agree with the OECD and Michael Fallon: No. You are making a very early the IMF on that. By definition a tax increases the cost assumption that we are going to adjust the carbon to consumers, it cannot be a subsidy. price floor. Q242 Martin Caton: All other VAT is 20% and on Q238 Dr Whitehead: Presumably if it is on the table energy it is 5%. VAT on energy in Europe is at that then someone ought to know what the consequences 20% rate. So we are different and it effectively of it being on the table are? reduces the price for British consumers. The problem cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 52 Environmental Audit Committee: Evidence

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley is it reduces the price for all British consumers not Michael Fallon: We have taken power in the Energy just the fuel poor that you want to target better. Bill to change the target to make it better identify a Michael Fallon: Member states make their decisions more stable population of those who are in greatest about the level of VAT they apply. You are not quite need. We certainly do not want, as we look at these— right on that. Other countries do have lower rates for if you want a principle behind this review—to weaken certain types of fuel but this was not a reduction from the position of the most vulnerable, those who need 20% to 5%. You will recall that purchase tax itself— the most help with their bills and who need the most sorry, you will not recall, it was before your time. I help in terms of improving their energy efficiency. am so sorry. Purchase tax, the origin of VAT, did not That is not the point of the review. apply to fuel. Purchase tax applied to things that were regarded as luxuries rather than essentials so we never Q246 Chair: Given what the Deputy Prime Minister had tax applied to fuel of this kind. It was the said about the likelihood of the Treasury having to Government in 1994, I forget what Government, fund more, and given that it was going to be taken which decided to end zero rating and move up to 8% away from individual bills, does that mean, as far as and that then was reduced in 1997 to 5%. So we never the support for those in fuel poverty is concerned— had VAT at 20% so I cannot accept it is any kind one of the first things that the Government did was to of subsidy. end the Warm Front Scheme and get rid of the taxpayer funded subsidy for those in fuel poverty— Q243 Martin Caton: Okay. It really doesn’t matter. that the Government may be looking at a taxpayer Effectively it means energy prices are cheaper for funded scheme to deal with fuel poverty? consumers in this country. Michael Fallon: The Warm Front Scheme, and you You are probably aware that some academics have may not know, was not working very well. Our suggested that if you were quite ambitious in tackling Affordable Warmth Scheme is working far better and VAT, even though it is politically sensitive—we do is helping more households. But the aim of this review appreciate that—then you could far better target more is not to weaken the position of those who need the resources to the very worst off. Is that even being most help. We have not yet taken any decision about considered and is not the Prime Minister’s review an whether any of these particular levies should be opportunity to go for more ambitious thinking to moved across to general taxation. That is only one ensure that those people do benefit? option that one Minister referred to. Michael Fallon: I saw that submitted in evidence to Chair: The Deputy Prime Minister? you but I am afraid I can’t agree with it. Increasing Michael Fallon: Indeed. 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 Q247 Caroline Lucas: I wanted to move to nuclear all poorer households harder and I don’t think that is and we had the famous Coalition agreement that there the answer. would be no public subsidy for nuclear. Do you accept that you have used a bit of a sleight of hand by Q244 Martin Caton: If you are looking at the same redefining that original commitment because no public piece of evidence that I am talking about, the whole subsidy means no public subsidy, presumably, and yet point was the extra VAT income was then provided to what we are now told it means is no subsidy unless it help those very poor and they would be the only ones is being made in a similar way to other energy that were better off as a result of the change. All I am sources? suggesting is that we should be thinking outside the Michael Fallon: That is what was said to Parliament box and that the Prime Minister’s review gives us an back in October 2010. There would be no levy or opportunity to do that. direct payment or market support for new nuclear that Michael Fallon: It does give us the opportunity to was not available in a similar way to any other low think very widely and to think outside the box but I carbon type of new technology. am afraid, Mr Caton, it is not one of the things that we are considering at the moment. I think it would be Q248 Caroline Lucas: I am an English graduate and too complicated. Even if you raised all this extra one thing that really annoys me is when people money by imposing it as an extra tax on people who redefine words. A subsidy does not cease to be a might not be very poor but are not that well off, I subsidy just because it is offered to more than one don’t think you would be able to target the help any source, does it? It is still a subsidy whether or not you more efficiently than the schemes that we have at the offer it just to nuclear or to nuclear and a range of moment so we are not considering that. other low carbon sources. It is still a subsidy Martin Caton: At least we have identified one option relatively speaking. you are not considering. Thank you. Michael Fallon: I do not define it as a subsidy. If you Michael Fallon: You have. are trying to get somebody else to put up £16 billion worth of money to build a nuclear station and to Q245 Chair: Just before we leave fuel poverty, the accept all of the construction risk in doing it, you Government has obviously removed the commitment obviously have to offer them some degree of reserved to remove fuel poverty by 2016. What weight will the access to the grid at the beginning of the operating Government be giving to those in fuel poverty as part life of the asset when they start supplying electricity of this review? to it. So there is a support mechanism for nuclear just cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley as there is for off-shore wind or on-shore wind or announced the heads of term. I think it gave the exact biomass or anything else. amount that had to be paid right from the start of the operation of the asset. Q249 Caroline Lucas: Exactly. I do not have any problem in saying that renewables are subsidised. I Q252 Caroline Lucas: Because it is also capped of would be happy to say renewables are subsidised and course. Even if you can’t give me that figure, and I I think we can justify that because renewables are would be delighted if you can— going to be subsidised for a relatively short time and Michael Fallon: We will get you the figure. they are a new technology. If we can all agree that Caroline Lucas: It is also the case that there is a cap. renewables are subsidised could we then also, please, Beyond that you accept that the taxpayer would have all agree that nuclear is subsidised and we can to pick up the rest. So that does not feel very fair in disagree as to whether or not it is a good thing or a terms of a difference that is being made for nuclear. bad thing, but I just would like the Government, on It is not the same for renewables. record, to accept that nuclear is subsidised. Michael Fallon: What we have said in a statement to Michael Fallon: I am going to disappoint you Parliament is the support mechanism for nuclear has slightly. to be made available in a similar way for other low Caroline Lucas: I thought you might. carbon technologies. Of course they do not have Michael Fallon: These are support mechanisms. I nuclear waste to deal with. So to that extent nuclear think it is important that support mechanism should is slightly different. All of these new technologies are be open and transparent. They should be, as far as slightly different, one from the other. They all come possible, market based and competitive. They should with different associated costs, whether you are be available to all, and I think you and I agree, high talking about insurance or waste or whatever. cost new forms of low carbon technology that cannot be supported by the market. They should be time Q253 Caroline Lucas: Nuclear is hardly a new limited, I think you and I agree on that, and where technology. You would agree with me about that. possible they should degress in terms of price support. Finally, they should be good value for money for the Michael Fallon: I would not entirely. This is the third taxpayer. They should be underpinned by a robust generation nuclear technology. I think it is new in that impact assessment and evaluated afterwards by sense and those are the terms that we will be thorough monitoring and so on but I would not call presenting the support mechanism to the Commission them subsidies. These are market based support for state aid clearance. This is a new form of nuclear. mechanisms designed to facilitate the earlier introduction of high cost low carbon technologies that Q254 Caroline Lucas: Firstly, I think it is a second the market would not otherwise have been able to generation but, secondly the very fact that you have finance as quickly as we need them. 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 Q250 Caroline Lucas: Okay. We will not agree on to do it. that but maybe we could agree on one thing, you said Michael Fallon: A great deal of the support that subsidies should be open and transparent. mechanisms that we are designing as part of Michael Fallon: Yes. electricity market reform have to go through clearance Caroline Lucas: If we were looking at the subsidies procedures in Brussels, which is true of the capacity around dealing with the nuclear waste, in other words market, it is true of some of the other terms that we decommissioning, then in what way is that open and are offering. I do not think nuclear is particularly transparent? There is a rather wonderful phrase you exceptional in that. The Commission, itself, will want said in response to a parliamentary question where to scrutinise the terms of this particular deal to make you said, “Nuclear should pay their full share of waste sure that the support mechanism is thoroughly fair management and disposal costs.” What is a full share? and justified. A share, how much is the share? Is it 40%, 50%? Michael Fallon: This is the first time we have ever Q255 Caroline Lucas: In terms of other hidden had a nuclear station built where we have made the subsidies—I know you are still getting me the figure developer build in a waste decommissioning cost right for the full share and the cap—there is the issue of from the start. liability as well, because the Government now has increased its overall support of liability or the overall Q251 Caroline Lucas: That is a different question, requirement of nuclear to pay its liability up to £1.2 with respect. You were saying that subsidies should billion. Again, if you look at something like the costs be open and transparent. of Fukushima, we are talking about orders of Michael Fallon: Yes. magnitude higher than that. So, again, would you not Caroline Lucas: One of the subsidies is the fact that see that as being a subsidy to nuclear, the fact that nuclear will not be giving its full amount towards the uniquely among technologies there is nothing similar waste, there is going to be a full share. So, in the about it? Uniquely to nuclear we have the risk of an interests of openness and transparency, can you tell us extraordinarily high amount of money that the what a full share is? What percentage of it, is it? taxpayer could have to find. Michael Fallon: I do not have the exact figure. We Michael Fallon: Again we have been completely did specify the decision at the time when we open and transparent about that. The current limit on cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 54 Environmental Audit Committee: Evidence

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley nuclear liability is £140 million. We have increased it more competitive. It will be beating nuclear on strike in this instance to £1,200 million, £1.2 billion. price alone by 2018. That is five years before even Caroline Lucas: I appreciate that and I said that Hinkley C is due to be completed. If you looked at myself. My question though is, do you accept that in solar versus nuclear the idea that somehow those CfDs the event of a serious accident we will be looking at are being offered in a similar fashion does not add up. having to pay an awful lot more than that and that Michael Fallon: Let me deal, first of all, with this would be uniquely the case in nuclear in terms of the issue of contract length. We are offering the support amount of extra money we would need to be paying price for 35 years out of the potential operating life of and, therefore, another form of subsidy is going to around 60 years. The support being offered to off- nuclear that is not going to wind farms or solar shore wind, for example, is for 15 years under panels? contracts for difference for a turbine that might only Michael Fallon: Financial cover for unlimited last for 20 years. It is a much greater proportion of liability is simply not available on the commercial the operating life of the asset than it is for nuclear. So market either for nuclear or indeed for buildings in the I think what we are offering for nuclear is a pretty City of London insuring themselves against terrorism. good deal and I know you do not agree with that. There are certain sorts of cover. On the issue of the definition I would slightly take Caroline Lucas: We are not comparing like with like, issue with you. I think the evidence you have had as though, are we? a committee shows it is very difficult to come to an Michael Fallon: There are certain forms of cover that agreed definition of the word “subsidy”. I do not think simply are not commercially available. What we have this is a difficulty that DECC is causing you. I have done is significantly increase the liability limit but noticed that there is not quite agreement out there on beyond that the State has to step in and of course the how you define a subsidy in the way that you would developer will be charged a fee for that. like to do so.

Q256 Caroline Lucas: It is very convenient to make Q258 Caroline Lucas: I would just make the point a comparison outside of the energy question and talk that in terms of your saying that wind, for example, is about buildings in London. But if we are looking at getting a good deal and nuclear is paying a reasonable the support that the Government is giving to the amount, I think there is a confusion in terms of what energy sector in particular then I do not understand the working life of some of these renewable sources why you can’t accept that the support that you are are because often it is about 60% of the working life having to give to nuclear is qualitatively different of nuclear or 60% of the working life of a renewable from the support you are giving to the other energy source and that is somehow similar. There is a lot of sources because, uniquely, nuclear cannot find feedback that suggests that what you are comparing commercially available insurance on the market. when it comes to the renewables is their so-called Michael Fallon: Clearly there are quantitative warranted life, in other words the life that they are differences. We are dealing with much larger amounts insured for, which does not mean their overall life. A when it comes to liability. We are dealing with a much car might have a warranty for five years, it does not longer construction period. We are dealing with a mean on year six it stops working and so just because much longer lifetime of the operating asset. These wind turbine or solar panels have a certain warranted stations will run for 55Ð60 years and quantitatively life does not mean that that is a significant way of this is of a different order of magnitude to say the judging their life. largest wind farm that might have a life of only 20 Michael Fallon: We will see. As I understand it after years. That is why the previous Secretary of State was 15 to 20 years there is quite a lot of the turbine that very careful to use the word “similar”. It cannot be may need replacing but there you are. It is very exactly the same kind of support as is available to important though to get on the table that the strike biomass, wave power or tidal. These are different price that is being offered for nuclear is only for a technologies. proportion of its operating life. It is not for the whole operating life. Q257 Caroline Lucas: It just seems to me that your Caroline Lucas: I think we are just disagreeing about Department has an extraordinary elasticity in its the length of operating life. definitions. First of all around subsidy, we have now Chair: Moving on. stretched the meaning of subsidy to mean something much broader than most people would understand of Q259 Caroline Lucas: Sorry. Very quickly, could the word subsidy. I fear we are in danger now of doing you give a figure that would have represented a exactly the same when it comes to the word “similar” subsidy in your mind in the Hinkley case? If 35 years because what we have been talking about for the last at £92 is not a subsidy what would have been? 10 minutes is a range of ways that nuclear is Michael Fallon: What would be a subsidy? extremely dissimilar from other energy sources. You Caroline Lucas: Yes, what amount of money for the can see that not only in the sweeteners that I have just strike price? What could you ever have said was a been describing but also if you compare the actual subsidy? length of the contract that is offered under CfDs, the Michael Fallon: That is not how we started the 35 years that nuclear gets, the much smaller amount negotiation. We think this is a reasonable strike price that, for example, solar would get and yet figures from taking into account a whole range of factors, the the solar industry itself show that it is going to be far extent that all of the construction risk, all of the cost cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley of it—if the build time is beyond schedule, if the costs Q263 Zac Goldsmith: It is not possible that the rise—is borne by EDF and its consortium. These are taxpayer will have to pay for any of the clean-up of considerable costs involved that have to be raised in the new generation nuclear power plants? It will all the market. I think it is a reasonable price given those be paid for by the industry. Is that an absolute? two factors and there are many others as well. Patrick Erwin: The intent is a funded Caroline Lucas: The last question before the end— decommissioning programme that covers the cost of Chair: Just before your last question, Zac and then decommissioning in its entirety. Alan Whitehead. Chair: It is very difficult to hear. Patrick Erwin: Sorry. The funded decommissioning Q260 Zac Goldsmith: I just wanted to press a point programme is designed to cover the entire cost of that Caroline Lucas made in relation to the waste. I decommissioning the reactor and dealing with the do not know whether you are still looking for the waste. figures or whether you are going to come back to us Michael Fallon: So there was a misunderstanding later with those figures. there about the word “fair”. Michael Fallon: Either. Chair: I would urge you to use the microphone so we Zac Goldsmith: It would be useful to know what all can hear very clearly in future. percentage of the anticipated waste bill is going to be picked up by the taxpayer, what percentage would be Q264 Dr Whitehead: A 35 year contract at £89 left for the industry itself and what that means in terms strike price, possibly rising to £92.5 if no more of the actual bill. How much are we likely to be nuclear power stations are built is an interesting paying to clear up? inversion in terms of how much you get for not doing Secondly, I am struggling with the definition of something, as opposed to how much you get for doing subsidy as well. I can’t understand how it is possible, something but perhaps we will pass that one by. if one of the inevitable consequences of nuclear power Is that going to be regulated by means of a varied is nuclear waste, that a chunk of that bill is going to investment instrument as set out in the Energy Bill? be picked up by the taxpayer. That is an externality Michael Fallon: The answer to that is yes. that the industry ought to be internalising by now. It is a mature industry. Q265 Dr Whitehead: The varied investment I am interested to know how you can possibly instrument in the legislation enables variations to take maintain that that is not a subsidy—it just seems to place in that agreement if an agreement to do it is be, by any definition, by any understanding of the entered into at the time that the investment instrument definition of a subsidy. The taxpayer will be picking is signed but only has to be reported after the variation up a cost that the companies, themselves, ought to be has taken place. Has any such agreement been reached taking on board. as far as the strike price is concerned? Michael Fallon: I think we ought to get back to you Michael Fallon: No. We have not signed an on the exact figure because this is the same question investment contract with EDF. that I have been asked as to exactly what the share is. Dr Whitehead: No. I mean has any agreement to do that been agreed, i.e. an investment instrument that Q261 Zac Goldsmith: You do maintain that that is will have those provisions within it? not a subsidy? That if the taxpayer picks up the waste Michael Fallon: No, we have agreed heads of terms. bill or a proportion of it that is not a subsidy. We have agreed the basis on which an investment Michael Fallon: Mr Erwin may have found the figure. contract will be signed but that has to await passage Chair: Are you allowed to speak? of the legislation to Royal Assent and it also has to Patrick Erwin: I think there is a misunderstanding. wait approval from the Commission in Brussels. So When we talk about a fair share of decommissioning we are not at the point of signing an investment costs, we are talking about total decommissioning contract. We have already given an indication as to costs across the portfolio of nuclear assets in the UK. the circumstances in which the contract could be Most of the nuclear waste, most the nuclear bars come varied and the number of events you will probably from the historical research programme and the early look at, like curtailment and change of the law risk reactors in the 1950s and 1960s. In terms of new and risks to changes of business rates and so on. plants, the intention is that the decommissioning arrangements will completely fund all the waste that Q266 Dr Whitehead: Bearing in mind that the varied is created by that plant—so its proportion, its fair investment instrument does not require anyone to say share of the costs of, for example, a deep geological what the terms of the variation were when the disposal facility and there are mechanisms by which variation was agreed other than report at the point of that funded decommissioning programme goes up and variation that that agreement has been implemented, down to make sure that it covers the full waste are you able to say, today, the strike price that has liability over the lifetime of the plant and that is not been announced is really going to be the strike price 35 years. It is the lifetime of the plant. over the entire term of the contract or will there be a different strike price depending on the varied Q262 Zac Goldsmith: After the plant is instrument? decommissioned as well or not? Michael Fallon: No. It is the agreement between Patrick Erwin: Lifetime of the plant in terms of ourselves and EDF and its partners, this will be the operation and decommissioning. strike price, but we have set out in the agreement the cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 56 Environmental Audit Committee: Evidence

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley circumstances that it can vary up or down. Not least Michael Fallon: On the timetable, yes. I am not if there is a gain on a construction, we are going to responsible for the NAO’s timetable. I am not quite share half of the gain. If there is pain on the clear what that is. construction, it slips behind budget by a couple of years, they have to take all of that. Q270 Chair: Would you expect that review to have been completed before you finally sign off any of Q267 Chair: Can I just interrupt you there and just these arrangements that have just been referred to by ask for clarification on that because my understanding Dr Whitehead? is that if there is a delay with the construction those Michael Fallon: I really do not know their timetable costs could be met by the taxpayer? for doing this. We are not likely to sign an investment Michael Fallon: No. If there is a delay in the contract for this project before next summer. I am not construction that is a matter for the developer. The sure how long an NAO review normally takes; developer has to take all of the pain involved in that. perhaps somebody can help us on that. If construction is delayed for something completely Patrick Erwin: My understanding is the NAO review out of the developer’s control, supposing we had, God is about to start and is likely to be carried on in forbid, the return of a malevolent or anti-nuclear parallel but report probably afterwards. If that is Government that suddenly decided to halt different we will come back to you. construction that is not something that can be laid at I should say this is probably the most transparent the door of the development. There are a range of approach we have ever taken to this kind of contract. circumstances that are outside the control of the It is much more transparent than say a PFI contract or developer. anything like that. We are really trying to do it as openly and transparently as we can within the confines Q268 Dr Whitehead: What I was trying to clarify is of trying to do a commercial deal. if there is a delay in construction or a number of other factors then within a varied investment contract Q271 Caroline Lucas: Just the very last bit on arrangements can be made within the terms of the nuclear. I do just want to come back to what Mr Erwin contract to vary the subsequent strike price, for said earlier because I think there has been a bit of example, over a period to reflect that delay or those confusion, and I apologise if it is partly from me, but circumstances. Indeed some of them were set out in there were two things we were talking about in terms the Secretary of State’s statement. Are you able to say of whether or not the taxpayer would have any that other than those things that have been set out in responsibility, one was on decommissioning and the the Secretary of State’s statement nothing would be in other was on waste management. I think, Mr Erwin, a varied contract that would enable that price to be you have clarified that on the decommissioning there varied if circumstances arose that were not in what is no risk of the taxpayer having to step in and fund the Secretary of State had said in his statement about any of that because the nuclear plants themselves, the the circumstances that could lead to a variation? nuclear companies, have said that they will do that. Michael Fallon: That is our intention. On the waste management there is a cap and, therefore, I just want acknowledgement on that and Q269 Chair: Just before I come back to Caroline acceptance from you that that is the case. Indeed, I Lucas, can I ask for clarification because I understand have some text in front of me again from an answer that the National Audit Office is intending to look at from a parliamentary question that says, “The waste the arrangements? I am not quite sure the stage the contract will, at the outset, set a cap on the level of negotiations have reached. Is it your intention that this waste transfer price. The cap will be set at a level that NAO review will be completed prior to any reflects the Government’s current analysis of risk and finalisation of the agreements? On the uncertainties uncertainty. The Government accepts that in setting a that Dr Whitehead has just referred to, would you cap, the residual risk that actual cost might exceed the expect that all of those would be scrutinised with full cap is being borne by the Government.” So that being transparency by the NAO before any final decision is the case can we agree that that is a subsidy? reached? Parliament has not had an opportunity to Patrick Erwin: We are charging for that cap so we look at the detail of all of this because it has been are taking a risk fee for that cap. subject to commercial confidentiality. Caroline Lucas: Yes, but it is not the full amount. To Michael Fallon: I understand that and this came up the extent that— during the passage of the Energy Bill. They went at Patrick Erwin: The fact that we are providing, if you some length into this to try to reassure Parliament like, that insurance, that is costed into the exactly what we would make available and published decommissioning process. It is not a certainty; we are to Parliament and how we would define what was insuring them against that cap. being withheld from Parliament for reasons of commercial sensitivity. There was an argument in the Q272 Caroline Lucas: Yes, you are insuring them committee or at report stage about this and I think we against that cap but if the cost of waste disposal accepted an amendment making this clearer. It may exceeded the cap the difference between the amount well have been Dr Whitehead’s amendment. they were insured for and the full cost would still be Chair: Given that the NAO is now going to be paid by the taxpayer, would it not? looking at this, which is a change— Patrick Erwin: That is a very small risk and— cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Environmental Audit Committee: Evidence Ev 57

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Caroline Lucas: I do not care how big the risk is. I Q276 Dr Whitehead: You mentioned a little while care about the principle of whether or not it is a ago that an instrument that is available to more than subsidy. one form of generation, which involved money being Chair: Is it or is it not? collected to provide underwriting for those forms of Patrick Erwin: We would not describe it as a subsidy. generation, would not be a subsidy provided it was We describe it as a— available to more than one form of generation. How Caroline Lucas: A what, sorry? do capacity payments fit into that definition? Patrick Erwin: It is an agreement we have made on Michael Fallon: Capacity payments are a form of commercial terms and charged a fee for. ensuring that we have some kind of reserve when the system is at its tightest. This is not a support Q273 Caroline Lucas: Maybe I am just missing mechanism for any one technology. This is ensuring something here, but surely we have just established that there is sufficient supply four years out. We are that the Government has accepted that in setting a cap, designing the first auction next year to be run for the residual risk that actual costs might exceed the cap delivery in 2018 to make sure in the medium term that is being borne by the Government. The Government there is sufficient supply. I do not think you can in this case means the taxpayer. It means us. directly compare it to the strike prices that we are Patrick Erwin: Yes, but we are not providing that putting out for the various technologies. service for free, we are charging a fee for it. Caroline Lucas: No, you are charging for it but there Q277 Dr Whitehead: You can only get it if you are will still be an amount of money to be paid over and a gas fired power station, can’t you? above that were this cap to be exceeded, surely? Michael Fallon: I think we have set out the various Patrick Erwin: That is the nature of such a product. definitions of which technologies apply for it. I do not Caroline Lucas: Quite. It is a subsidy. think that is quite right that it is only gas. Michael Fallon: It is an insurance policy. Dr Whitehead: Coal? Chair: Sorry, what was that, insurance— Michael Fallon: Coal under certain circumstances Michael Fallon: It is an insurance policy. yes. Chair: An insurance policy. Dr Whitehead: Abated. Michael Fallon: Yes. They pay us for that. Michael Fallon: Sorry? Dr Whitehead: Abated. Q274 Chair: Right, I think that is perhaps as far as Michael Fallon: If it is abated, yes. we are going to get to on when is a subsidy an Dr Whitehead: But there will not be any abated coal insurance policy. in 2018. Just before we finally move on from nuclear, in terms Michael Fallon: That is not a matter for me. of state aid and discussions that you have been having in Europe, have you been leading in terms of Q278 Dr Whitehead: In practice only gas fired discussions in the European Union from a point of power stations can access capacity payments. view of making the same arguments about this not Michael Fallon: I am not sure that is right. There may being a subsidy and therefore not subject to state aid? well be other technologies that could apply. Michael Fallon: Yes, we have pre-notified the likely Chair: I am sorry, I really cannot hear if you could terms of this agreement, the shape of this agreement, speak up. and we formally notified it, I think, to the Commission Patrick Erwin: The generation not receiving the RO on the day of the announcement to Parliament. It is or CfDs will be able to bid into this. something we have been discussing with state aid officials from DG Comp over the last few months and Q279 Dr Whitehead: What might they be? we are not the only nuclear member state. There are Patrick Erwin: That will be gas. It will be coal plants. around a dozen other member states that have the Dr Whitehead: We have agreed there are not any of benefit of nuclear power so I hope this will proceed them. smoothly through the approval process. Patrick Erwin: No, abated and unabated. Dr Whitehead: Unabated? Q275 Chair: Given that you think it will proceed Patrick Erwin: Indeed, and they will have to compete. smoothly through the approval process, does that The point here is that we are buying very different mean that the Commission has already expressed a things here. With capacity payments we are not— view to you as to what they see as a definition of subsidy? Q280 Dr Whitehead: But will they not be closed Michael Fallon: No. I must be very clear on this. The down under the large plant directive? Commission has not expressed any view at all. We Patrick Erwin: Some will be, yes, and with the pre-notify the likely terms and then we formally notify current price floor without capacity payment many the project as a whole and it is then for the might not be economic but with the capacity payment Commission and its lawyers and advisers to come to we allow ourselves the ability to keep generation of a view on it and that is almost a quasi-judicial process various kinds on the system. so they have not expressed any view. Dr Whitehead: Forgive me but coal fired power Chair: We have a fair amount of ground still to cover. stations under the large plant directive that cannot We will move on to capacity payments. adhere to that will be closed down by 2017. cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 58 Environmental Audit Committee: Evidence

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Patrick Erwin: Variously depending on various Dr Offord: Why doesn’t your Department consider aspects. field allowances for North Sea gas and oil operations as subsidies? Q281 Dr Whitehead: There will not be any abated Michael Fallon: North Sea oil is taxed at a far higher coal fired power stations. Biomass might have access rate than most commercial activity. Overall they are to CfDs and therefore would not be eligible for paying some, as you know, 81% on the older fields, capacity payments. Nuclear, we just heard, would 62% on the new fields and even with the allowances have CfDs and would not be eligible for capacity they are still paying 30%, whereas corporation tax for payments so what is left? every other form of commercial activity this year is Patrick Erwin: There is demand side response. 23% and falling to 21% and 20% in the next couple of Michael Fallon: Storage. years. North Sea oil is still much more heavily taxed. Dr Whitehead: Yes. Taken out of the auction as a separate part of it? It is not in the auction the first time Q285 Dr Offord: I understood, particularly from round. For the capacity auction only gas fired power your submission to this inquiry, that you seem to stations will actually take part in it, is that not right? suggest that field allowances should not be regarded Michael Fallon: No, I don’t think that is right. as subsidies because they increase the volume of oil Patrick Erwin: No, some unabated coal plant will be and gas extracted by what you would consider as eligible. Not all coal plant will come off the system in uncommercial fields and making them viable. this decade. Michael Fallon: If they are paying a tax higher than Michael Fallon: But if the answer you are looking other businesses are paying it cannot be a subsidy. It for is will a majority of it be gas, yes, of course gas cannot be both a subsidy and a tax, can it? will play a very large part. Dr Whitehead: The overwhelming majority. Q286 Dr Offord: No. Okay, on your logic Michael Fallon: We will see. particularly would you not also regard feed-in tariffs Dr Whitehead: About 99%. as the same? Michael Fallon: Gas will certainly play a very big Michael Fallon: As what, sorry? part in the capacity market. That is the answer you are Dr Offord: Feed-in tariffs. looking for. Michael Fallon: As what? Dr Offord: As the same as North Sea oil and gas operations. Q282 Dr Whitehead: In what way therefore is that not a subsidy? Michael Fallon: No, no, no. There are allowances for a whole range of industrial and commercial activities. Michael Fallon: It is an insurance premium to make There are first year allowances that apply to a whole sure there is reserve capacity to call on when the number of things, to energy saving investments, to system is at its tightest and I think it is a very sensible water efficient investments, to gas refuelling and so thing. A number of other countries are looking at it. on, and you will recall the Chancellor increased the Dr Whitehead: I am not disputing whether it is a very annual investment allowance for two years from sensible thing or not, I am just questioning whether it £25,000 to £250,00 for almost any form of industrial is a subsidy, or whether it is an underwriting of fossil activity. I do not think there is anything particularly fuel generation. special about industrial allowances but the tax that Michael Fallon: No. North Sea pays is greater than any other industrial activity so I do not think that can be a subsidy. Q283 Dr Whitehead: The way the capacity Dr Offord: Okay, I am happy to leave it there. mechanism works is through an auction, you gain a sum of money for being ready to provide capacity Q287 Martin Caton: As I understand it, this is true and demonstrating that you are ready to do so. So the of other countries that have oil and gas resources, all readiness to do so is underwritten and one kind of of which use taxation, because those oil and gas plant overwhelmingly gets that underwriting. Does resources are regarded as the property of the state and that not look a bit like a subsidy? in fact use that taxation mechanism to charge for those Michael Fallon: No, as you will find if you fail to resources. That is why it is a higher level of taxation deliver it. It is an insurance premium we are paying because it is the price for the product. as a country to make sure there is sufficient energy Michael Fallon: You have heard what I have said. capacity. There is a reserve there available when the Chair: You do not wish to comment further on that? system is at its tightest. I think that is prudent. Martin Caton: I have heard what other people have Dr Whitehead: Maybe so but that is not my question. said as well. Michael Fallon: That is my answer. Chair: I think that is as far as we can go with this. I Q288 Peter Aldous: At the outset I will just draw will move on to Dr Offord. attention to the register of Members’ interests—I have interests in farmland where renewable energy schemes Q284 Dr Offord: Why doesn’t the Department count are being pursued. Minister, the Government provide field allowances for North Sea oil and gas operations different subsidy regimes for different types of as subsidies? renewable technologies. How is it worked out in each Michael Fallon: I am sorry, I missed the first part. case how long those subsidy regimes should last? cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Environmental Audit Committee: Evidence Ev 59

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Michael Fallon: We have set out the main features of Environment Agency if they want to drill or explore, the contract for difference. You will be aware of that and to have authorisation from the Health and Safety and it is a 15 year term. We have then set out for the Executive and finally a consent from my Department, next five years, taking us up to 2019, which is the key decision in that whole process is they have to budgeting for the whole of the next Parliament, how have planning permission locally. That has to be the levy control framework will operate for each of obtained from the minerals authority, in most cases the different technologies. We have done that in the county council. The community at that stage has consultation with the different industries and we have the ability to decide whether the application is published those in draft. We have been consulting on appropriate for their area. Obviously there are various them all summer. That consultation has just closed and factors they will want to take into account. we are now assessing the final strike price we should fix, I hope, before Christmas. Q292 Zac Goldsmith: You do not anticipate situations where fracking takes place in communities Q289 Peter Aldous: Have you identified any where a clear majority oppose fracking in that area? particular renewable technologies that might not Michael Fallon: If the local authority is opposed to it longer need subsidies as they get established and get then it will not be granted planning permission. That more competitive? is first and foremost a decision for them. Michael Fallon: It is looking that way with solar. The costs are coming down all the time. It is becoming Q293 Chair: Did you say exactly the same regime? cheaper and cheaper so we might have to ask why Michael Fallon: It is not exactly the same regime. there should be any kind of supported strike price for Chair: What would be the difference? it after the current levy control framework period. Michael Fallon: We are not formally requiring the Almost all of them, with the exception of biomass and developers to pre-consult but they have already agreed energy from waste, show the prices degressing over to do that—they would be pretty silly not to—and the period of the levy control framework. They are all they are already doing it. They are already involving coming down and that was one of the principles I have the community long before they submit a planning set out in my definition of a support mechanism at the application and I do not think we have put that yet beginning. Where possible the prices should degress formally into the guidance. There may be one or two and should be time limited. minor differences like this. The answer is to consult the community early, to provide as much information Q290 Peter Aldous: On fracking in the States, it is a as possible to reassure people as to exactly what the well tried technology. Is there a need in this country, environmental impacts are likely to be and that the do you think, for there to be a special tax treatment site they are choosing is the most appropriate in that for it? area for getting down to the shale that they want to Michael Fallon: It is new to this country. I think it extract. compares much more readily with offshore exploration for oil and gas so the Chancellor is now Q294 Caroline Lucas: Just on that, I thought that I consulting on a similar form of field allowance. remembered that the planning guidance to local Again, that would not bring it down below the tax authorities is that they cannot base their decision on rates paid by the rest of British industry. views of climate change or other energy sources that they might prefer to see rather than fracking. When Q291 Zac Goldsmith: A small add on to that you say that it will only go ahead if it has local question. I understand that there will be moves by the authority support, is that not a bit disingenuous? Government to make it easier for communities that do Michael Fallon: No, it is for the planning authority not want wind turbines to prevent that from to decide whether to grant the application. happening, and probably rightly so. Will the same Caroline Lucas: But the grounds on which it does apply to potential fracking installations in that are very constrained in the case of fracking. They communities and, if not, why not? cannot decide that they do not want it on the grounds Michael Fallon: We have said for wind turbines we that they think it is going to be a threat to climate are now requiring developers to consult with change. communities in advance before even putting in a Michael Fallon: No, what we have said for planning application. We have asked the planning renewables, for onshore wind, and that will apply I inspectors to attach more weight to factors that are think also to drilling for shale, is that they cannot important for local communities, like the visual allow environmental or energy policy considerations impact and whether or not there are already existing to trump their local decision. They must take the wind turbines in the same locality. We have certainly application into account on its merits and look at the tilted the balance, if you like, to ensure that wind merits of the case. They cannot simply be told by the turbines are only sited where they are appropriate and developers, “The country needs more renewables so where they are supported by the local community. you have to pass my application”. When it comes to hosting shale, the principle element of the decision is again, of course, local. Although Q295 Caroline Lucas: Can they decide that they do there is a licence from my Department for the not want to pass the application because they think company, a licence bloc in which they are operating, that fracking is going to pose an unacceptable threat and although they have to have permits from the in terms of climate change? cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

Ev 60 Environmental Audit Committee: Evidence

30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley

Michael Fallon: No, they have to look at it on its Michael Fallon: We are going over ground we have merits. It has to be balanced. already, I think, trodden on quite heavily. This is a Caroline Lucas: That is the point. Please can we just support mechanism, a market based support have a straight answer on this? mechanism that involves a strike rate that has been Michael Fallon: I am giving you a straight answer. made available for the very early stage of the Caroline Lucas: It is not a straight answer. introduction of a new technology. Michael Fallon: It is. Caroline Lucas: I need you to confirm my Q300 Dr Whitehead: Sure, yes, and that is identical understanding, which is that if a council’s primary to the renewables obligation really, is it not? reason for not wanting the fracking site to go ahead is Michael Fallon: It is similar. The contracts are because it is concerned about the impact on climate different from renewable obligations. change it is not allowed to use that as a ground for Dr Whitehead: Yes, I accept the difference in the way opposing that planning application. they work but they work with renewables in exactly Michael Fallon: It could not use it as the sole the same way in as much as they provide an ground, no. underwriting which degresses over a period of time and may then disappear. Q296 Caroline Lucas: Your earlier answer to my Michael Fallon: There are some important colleague is not entirely true because you said it differences. They begin earlier in the process, for would not go ahead if local authorities did not want it example. They can be negotiated at the point at which to. It could indeed go ahead even if local authorities you obtain planning permission and consent to latch did not want it to if the reason the local authority did on to the grid rather than at the point of not want it to was because of the risk of climate commissioning. There are important differences change. between the contract for difference and the old Michael Fallon: It is for the local authority to renewables. determine the planning application. Caroline Lucas: Under certain criteria. Q301 Dr Whitehead: Yes, but the renewables Michael Fallon: They have to make the decision. obligation essentially is an underwriting that degresses over a period of time and then maybe disappears. Q297 Chair: It is the grounds on which they reach Indeed as I recall, that went before the EU that decision that matters, is it not? Commission and competition directorate and was Michael Fallon: Yes, and I am saying it has to be agreed to be a subsidy, but was given away leave on balanced just as they cannot be forced by the the grounds that it was degressing and therefore would developer to accept an application on the grounds that lead to the introduction of new technology that might it aids the Government’s national energy objectives, ultimately be beneficial. Therefore, no action was nor can they turn it down on the grounds that they taken by the EU at the time of RO coming in on the have their own energy policy. grounds that it was a subsidy, even though it was agreed that it was. At the moment that same Q298 Caroline Lucas: No, but the point was you Competition Commission will be looking at CfDs as responded to my colleague by saying that the fracking far as nuclear is concerned, which of course are now will not go ahead if the local authority does not want jumbled in with CfDs for renewables, on the grounds it to. All I want you to acknowledge is that that is not that it might conceivably be state aid. Indeed we the full case. It depends why the local authority does visited Brussels a little while ago and we talked to not want it. If the reasons that the local authority does some Competition Commissioners who said that that not want it happen to fall within the terms with which was exactly what they were going to be looking at they are allowed to object, fine, but because of the nuclear on the grounds of. If those Commissioners at way in which the planning guidance has been drawn that point suggested that indeed CfDs for nuclear did up, if their principal and sole reason is that climate look like a subsidy, wouldn’t that undermine the CfDs change is the biggest threat that we face and fracking for renewables in terms of anything that had is going to simply exacerbate it, we do not want it, previously been agreed about those being a subsidy they cannot refuse it on those grounds. but would have away leave because they were Michael Fallon: If that is the sole reason, no, they introducing a new technology that would come to cannot. maturity? Chair: Okay, we have clarification on that. Dr Michael Fallon: If you are asking me would there be Whitehead wanted to come in. a read across from an unfavourable decision on the Hinkley notification to the rest of strike prices I am Q299 Dr Whitehead: On an answer you provided to not sure about that and I have not speculated on that. my colleague a moment ago you agreed that the I am not sure there would be an immediate read across subsidy for renewable energy through CfDs, because but we are not expecting an unfavourable decision. it was degressing over a period of time, would come We should be arguing the case. to an end at a certain point, but it was a subsidy. Michael Fallon: No, it is a strike price. That is what Q302 Dr Whitehead: I appreciate obviously one is degressing over time. would not go into all this very detailed work while Dr Whitehead: Sorry, so there is no subsidy for expecting an unfavourable decision from the EU renewables either? Competition Commissioners. Bearing in mind that cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley they have already looked at something that looks DfID to an assessment of the fossil fuel subsidies remarkably like CfDs and have said it is a subsidy— available within those developing countries that are but they have certain derogations from it on the receiving the assistance? grounds that it is a subsidy that may bring about an Michael Fallon: No. overall benefit on the grounds of the maturity of that Mark Lazarowicz: Not assistance from the UK, new technology—is that not a worry that you might assistance within their own policy framework. have in terms of how the Commission might then look Michael Fallon: No, I understand the question and let at the immediate successor to the RO in its application me say first of all we have a very strong presumption to both nuclear and renewables over a period? They in the aid we give against investing in coal fired power might say both are subsidies or they might not see stations in developing countries. Now you do have to either as subsidies. look at this on a case by case basis. Some of the very Michael Fallon: I think we are able to show the poorest countries do want to continue with coal and I Commission that most of the strike prices do degress don’t think it is possible to have an absolute blanket over time. They do facilitate the arrival of a refusal to help under those circumstances. On the technology that can stand on its own two feet. Some specific issue of climate finance perhaps I could allow of them degress quite sharply. one of the hitherto silent officials to answer. Chair: I think we must move on to other issues. I will Chair: I was just wondering if they might be given a turn to Mr Lazarowicz. voice. Mr Wheatley, do you wish to comment? Michael Fallon: Their chance to shine. Q303 Mark Lazarowicz: Yes, thank you, Chair. Josceline Wheatley: The Minister has covered the Before we do go on I wonder if I could ask just briefly ground there. There is not a direct correlation between one question which follows up from the answers that our support for climate finance and whether or not a you gave to Caroline Lucas? You understand, country has fossil fuel subsidies or not. Having said Minister, given my constituency, I do not have that, all the programmes that we do support are to intricate detailed knowledge of planning legislation in do with enhancing access for the poor and are based England. When you said that local authorities could exclusively on renewables and other forms of refuse an application for fracking I presume it does non-carbon related energy. We also support World that on the basis that it considers it is out of the Bank programmes, which are to help developing planning guidelines but that refusal can still be countries work out how to deal with the social and appealed to the planning inspectorate like any other economic consequences of coming back from fossil planning application. Is that the case? fuel subsidies. If you like, it is a series of programmes Michael Fallon: Absolutely. that are about carrot to help countries to work out how Mark Lazarowicz: Therefore the local authority does best to remove fossil fuel subsidies rather than stick not have the ultimate say. It will be the subject of in the sense of seeking to condition aid or support in more planning authorities. some way to compel them to do so. Michael Fallon: No, the point I was making to Mr Goldsmith was that in the first instance the main Q305 Mark Lazarowicz: But just to be clear—and I decision is not made by Ministers. It is a matter for accept what you are saying about it is an approach of the minerals authority in each area and it is very carrot rather than stick—do we make an assessment important to put that on record. Both the developers of their policies domestically with regard to fossil fuel and those who oppose the search for shale do have subsidies when we consider whether we agree to give that reassurance that the principal decision is taken in climate finance? It will be odd to have a situation of the first instance by a local authority. giving countries climate finance to reduce emissions when, for all we know, they are pursuing policies that Q304 Mark Lazarowicz: I appreciate that. I wanted are drastically increasing emissions. Surely we need to clarify the position of the RO for potential appeal to have some linkage in our decision making process and refusal and we have now had that clarification. there. My principal questions relate to issues concerning Chair: The Minister or Mr Wheatley? DfID and also UK Export Finance. I do not know Josceline Wheatley: We make the assessment on the whether you want to answer it yourself, Minister, or merits of the proposal for support and whether or not to refer to your officials as we go along. In relation that meets the country’s own stated objectives to first of all to DfID, early in our inquiry we heard about decarbonise or seek a lower carbon, more climate the sometimes significant level of fossil fuel subsidies resilient pathway. We do not, as I have said, make a that applied in developing countries and the concern linkage in any specific way to whether or not that obviously therefore rises that on the one hand we as country has fossil fuel subsidies. the UK will be providing climate finance to reduce emissions to certain developing countries while at the Q306 Mark Lazarowicz: This is not just a same time those developing countries may be theoretical question because the evidence that we have pursuing policies that promote fossil fuel use rather suggests that there were some countries, which we than reduce it. Is there any linkage in the decisions were significantly supporting with climate finance, you make about climate finance to assessment— which did have substantial programmes of fossil fuel Michael Fallon: About what? subsidies. It does seem there should at least be an Mark Lazarowicz: Is there any linkage to the assessment. We should know what we are doing in a decisions we make about climate finance through domestic fossil fuel subsidy policy when we are cobber Pack: U PL: COE1 [E] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley making decisions about climate finance. Is that not a Q308 Mark Lazarowicz: Does that mean UK Export reasonable suggestion that we should at least Finance can refuse to support projects that would be investigate and assess that wider energy framework in regarded as supporting dirty fossil fuel production and that country? Isn’t that reasonable? is that what you do? Josceline Wheatley: As I say when applications are David Godfrey: If it failed to meet international made for support through our bilateral programmes standards as implemented by the World Bank, yes. and those we support through the World Bank then, yes, we do look at the programme as a whole to see Q309 Zac Goldsmith: Just very quickly on the whether or not that makes sense and whether or not it innovative green technologies that Export Credits has is indicative of a country making a serious attempt to been supporting the export of, can you give us a rough move towards a lower carbon, more climate resilient idea or even a better than a rough idea of how many development pathway. There is not, however, any such projects have received support from the explicit benchmark or algorithm that takes into Government? What sort of percentage of the overall account the fossil fuel subsidies or the extent of those support package has been geared towards green which then conditions whether or not we provide technologies? Are there any obvious examples of that support. success? Michael Fallon: We can get you that. Q307 Mark Lazarowicz: Okay, I understand the David Godfrey: I would say it is low at this point in position. Can I ask then about UK Export Finance, time. The Department has been very involved through which is obviously a different departmental the fora that exist in international ECAs on a responsibility? May I quote briefly from the Coalition multilateral basis attempting to improve the credit that Agreement? It made a commitment and I quote, “We can be given to renewables and green energy will ensure the ECGD”, as it then was, “becomes a programmes, for instance extending credit and terms, champion for British companies that develop and but within the UK the take up of such availabilities, export innovative green technologies around the world such programmes has been very low. instead of supporting dirty fossil fuel production.” That seems a little unclear whether that means all Q310 Zac Goldsmith: Yes, early on in the Coalition fossil fuel production is dirty or just that some fossil Government’s life I asked the same question and there fuel production is dirty and we do not support it. That were not any examples at all—this is probably six is quite important to what I am going to ask. months into the new Government—of innovative UK Export Finance’s submission to the committee green technologies that have been supported through gave us a list of what energy projects are supported this agency. It would be really interesting to know, and without going through the list in detail it is pretty maybe in due course, what projects have been clear the vast majority of the projects are ones for supported, how much support they are getting and if fossil fuel energy technologies. At first sight I can not a lot, as you have just implied, why do you think only see a hydroelectric plant that presumably could that is? Are we struggling to find them? Are they not be regarded as a low carbon technology. I may have coming forward or is there no open for business sign missed one or two but I think the general position is at the Department? clear. How far is that commitment given in the David Godfrey: It is certainly not that there is no open Coalition Agreement being put into practice in the for business sign at the Department. We work very policies and support given by UK Export Finance? closely with the Renewables Association. As I say we Michael Fallon: The policy has to be constrained in have been instrumental in trying to push the end by the law. The Export Investment Guarantees multinationals for better terms for green projects. I Act of 1991 does not allow UK Export Finance to think to some extent it is the state of the UK industry. discriminate in this kind of support between different It is where they are exporting to in terms of not classes or types of export. That is the legal position. requiring state support to do that. I think there are a It would therefore be unlawful for the Secretary of whole range of reasons why UK Export Finance has State simply to declare a blanket ban on certain types not provided a large amount of support to the industry, of investment. We are constrained there. I think the but I can assure you it is not because we are in any objective is the right one but we are constrained by way discriminating. As the Minister said, our statute the existing legislation. requires us to be even-handed in the support that we David Godfrey: Could I perhaps just add that we are, give and we certainly participate in fora that would of course, governed and guided by the OECD promulgate those types of projects. Common Approaches for looking at projects and have Zac Goldsmith: Thank you. to identify and define those projects in terms of their environmental, social, human rights impact. Those are Q311 Mark Lazarowicz: If I can come back there, categorised A, high impact; B, medium and C, and as Mr Goldsmith’s question has helpfully allowed me to part of that we would have to look at obviously the open up the attachment to the equity evidence, which environmental impact that such a project would have. was in quite small print. I just noticed, for example, If it failed to meet those standards we would not be just above the support for a hydro electric power allowed or enabled to proceed with that programme. station, which was supported to the tune of £38,000, Those environmental assessments are public, we can see support for a petrochemical complex in particularly in the case of projects that are identified Saudi Arabia where the support was £375 million. It as category A, both before and after decision. does suggest that while we might have an open mind cobber Pack: U PL: COE1 [O] Processed: [28-11-2013 11:23] Job: 029662 Unit: PG05 Source: /MILES/PKU/INPUT/029662/029662_o005_MPCORRECTED TRANSCRIPT 30.10.2013.xml

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30 October 2013 Rt Hon Michael Fallon MP, Patrick Erwin, David Godfrey, Helen Dickinson and Josceline Wheatley to different technologies there is not much, as Mr European and international obligations. There are Goldsmith said, innovative green finance being three priorities there but if you ask me to rank them supported by UK Export Finance. Perhaps when you the first, of course, is absolutely security of supply. provide the additional evidence, Minister, you could highlight those projects which you regard as Q314 Chair: Could I just finally ask how DfID are supporting that objective of giving support to taking forward the ongoing discussions in respect of innovative green finance. That would be helpful. the outcomes from Rio+20 and how that links in to Michael Fallon: We will certainly do that and we will policies at home and the agreements that were made update the position which I hope is improving. I think at Rio? you have heard some of the reasons why it may not Michael Fallon: Sure. Who would like to take that? have improved as much as you would have liked. Josceline Wheatley: We support the UN Secretary General’s SE for All undertaking, which was reflected Q312 Chair: We are almost at the end. In view of in the high level panel outcome, which in turn is going the Government’s support for the G20 in 2009 and to be considered by the open working group. So there similarly last year’s Rio+20 declaration, just how the is a good deal of discussion internationally still to be Government can support the outcomes of those when had about how that outcome will be reflected and what the Treasury and the DECC submission to our the energy commitments will be. The Department is committee tells us that the Government does not now and will remain actively engaged in that process consider that any of its energy policies are harmful. up to the conclusion of it in 2015. More details on Isn’t there an inconsistency there? that I am afraid I would have to come back to you Michael Fallon: No, we certainly support the G20 in writing. commitment to rationalise and phase out those Chair: It might be helpful if you were to perhaps subsidies to fossil fuel in countries that are inefficient provide that in writing from DfID. The issue for our and simply encourage wasteful consumption. We see Committee is whether the UK needs to take action to clear benefits to the British economy from that eliminate fossil fuel subsidies at home. It is within happening for our own domestic energy security and that context of how we take forward the sustainable for our own budgetary stability it helps us too. development goals, which are now part of the Millennium development goals, following the high Q313 Chair: Does that trump everything, the level panel at the UN. Unless any of my colleagues security and the economy? have any further questions—I do not think that they Michael Fallon: Security of energy supply trumps have, you will be pleased to know—I must bring the almost everything I can think of. The most important session to a close. We will be looking at this whole duty as an Energy Minister is to make sure that our issue of what we thought was subsidy but appears to constituents’ lights stay on and they do have access to be support mechanisms and insurance premiums in the power that they need. That is important. Secondly, that order. Can I thank you and colleagues from other it is important they do so with bills that are affordable Departments for attending our sessions? Thank you and, thirdly, of course, we are committed to meet our very much indeed. cobber Pack: U PL: CWE1 [SE] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Written evidence

Written evidence commissioned by the Committee from Dr William Blyth, Oxford Energy Associates Acknowledgements This report has benefited from inputs and suggestions from a number of colleagues, and the author would like to thank in particular Antony Froggatt, Doug Koplow, Richard Tol, Morgan Bazilian, and Ulrik Stridbaek. Any outstanding errors and omissions remain the author’s.

ENERGY SUBSIDIES IN THE UK 1. Background This report provides an overview of energy subsidies in the UK, starting with an overview of the basic economics, then identifying the scale of subsidies in the UK, and finally comparing the UK position with other countries. The scope of the report is limited to a review of published sources, and it is not possible to say that such an approach captures all subsidies. Although a considerable amount of information has been published, such efforts nevertheless feel somewhat piecemeal. Some subsidies are hidden and hard to quantify, so the figures identified here probably represent a lower limit. For example, cross-subsidies relating to payments for electricity system balancing and maintaining security of supply in the face of risks of unexpected outages for different plant would ideally be included, but they are notoriously difficult to quantify and allocate, and are beyond the scope of this report. In other cases, the definition of subsidies is very dependent on the particulars of a country’s tax base, making international comparisons difficult. Ideally, a thorough study on energy subsidies would track, for each branch of the energy system, total income arising through energy taxes, and net off all public payments made for infrastructure, services (including regulatory functions, system balancing etc.) as well as the direct subsidies provided through price support mechanisms. At an economy-wide level, simple generic comparisons can be made on this basis. Tax revenues from energy in the UK amount to around £28 billion annually, the vast majority (97%) of which comes from road fuel taxes. Tax income for transport of around £27 billion considerably outweighs the total government transport budget of around £20 billion1. Road transport fuel has long been used to provide net revenues to treasury. Outside of the transport sector, the other energy sectors on the other hand are much more lightly taxed (as shown in Figure 5). The consumer tax base for energy products in the UK generates revenues (excluding VAT and carbon taxes) of around £1 billion (Figure 5). This compares with subsidies identified in this report totalling around £10 billion, which is around 0.8% of the market value of energy (~£120 billion excluding road transport fuel). Even considering that this is a lower bound estimate, in aggregate, energy subsidies and taxes are therefore rather low compared to market value. Nevertheless, they form an important part of the revenue stream for many different types of energy investment, and for this reason, subsidies have an important strategic influence on the development and choice of energy technology used in the UK.

1.1 Subsidies from First Principles Subsidies have become synonymous with bad economic practice because of the distortionary effects they have on producer and consumer behaviour. This leads to a working assumption in policy-making that subsidies generally reduce economic efficiency, and that removal of subsidies should therefore lead to an overall welfare gain, albeit with winners and losers along the way. The creation of winners and losers means that there are often strong interests on all sides about the appropriateness and scale of different types of subsidy. This section attempts to take out some of the heat and inject some light into the debate by exploring the underpinnings of these basic assumptions in more detail in order to clarify the theoretical basis from which different points of view are argued. It will be shown that there are indeed unresolved theoretical issues over which reasonable people might reasonably disagree. Energy subsidies are part of a country’s adaptation to uncertain and dynamic futures, and decisions will need to be based as much on political judgment as on “hard” economic evidence.

1.1.1 Perfect markets as a benchmark for assessing subsidies Subsidies are usually measured in terms of the deviation they create in terms of the prices and quantities of goods exchanged from the “ideal” equilibrium market price. In order to understand why, it is worth revisiting some basic economic principles. Arguments in favour of free markets usually proceeds along two different routes (Sander 2009). The first is the libertarian defence of the principle of free markets which argues that letting people engage in voluntary exchanges respects their freedom. As Amartya Sen compellingly points out in his review of the role of markets 1 http://www.ukpublicspending.co.uk cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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in economic development, “To be generically against markets would be almost as odd as being generically against conversations between people…”(Sen 2001). Sen’s argument is that free exchange between people is part of the natural order of the human experience, and therefore in general is a desirable mechanism to promote, although he recognises that there are many instances where the power balance between people is such that exchange is not truly free, and protections need to be put in place.

The second main defence of free markets is made in terms of economic efficiency. In 1906, Vilfredo Pareto showed that social welfare is maximised by an allocation of resources that meets with unanimous approval. A Pareto efficient allocation means that it is impossible to reassign resources so as to make any individual better off without making at least one other individual worse off. (Arrow and Debreu 1954) then showed that a competitive market economy would lead to an equilibrium position which would satisfy this condition of optimal social welfare (the so-called first fundamental theorem of welfare economics). The Arrow-Debreu proof requires perfect and complete markets in all transactions in order for the optimal equilibrium position to be reached.

Pareto efficiency does not however guarantee political desirability. There are many different possible equilibrium positions in which individuals are allocated a different level of initial wealth, but which could still be considered overall welfare maximising. This leads to the second fundamental theorem of welfare economics, which states that any of these efficient equilibrium solutions can be achieved by a perfect market as long as it is accompanied by a (politically decided) lump-sum redistribution of resources.

This is the basis of the rather convenient general claim of economics to be able to separate issues of efficiency (ie maximising overall social welfare, the typical domain of economists) from issues of equity (ie the distribution of wealth, the typical domain of politicians).

Based on the idea that perfect markets achieve maximum social welfare, it then follows simply that any distortion of these markets (including taxes, subsidies etc.) must therefore reduce social welfare, incurring an overall cost to society. This viewpoint reaches its peak in the Chicago school and the economic outlook of Milton Friedman. The rationale for these beliefs rests on the assertion that the real world comes sufficiently close to the idealised world enshrined in the first fundamental theorem that its tenets can be applied to real- world policy making. Whilst most economists would recognise that although the markets may not be optimally efficient, government interventions are not either, and politicised interventions will often have unintended consequences, making unambiguous social welfare improvements difficult to achieve. However, as we will see in the next section, there are opponents of this school who question the applicability of the two fundamental theorems to the real world.

1.1.2 Critique of perfect market assumptions

The history of the two fundamental theorems of welfare economics is not as solid as one might suppose (Blaug 2007). The assumption of perfect market conditions is a severe constraint on the applicability of the first theorem. Meanwhile the applicability of the second theorem is severely limited by the fact that it is practically impossible to achieve perfect lump-sum transfers that do not influence marginal behaviour of producers and consumers (calling into question the ability to separate issues of efficiency and equity).

In quantitative terms, the most significant challenge to the perfect market view is given by the general theory of second best (Lipsey and Lancaster 1956). This shows that although social welfare is maximised under perfect market conditions, if there are some market imperfections already in the system that cannot be addressed, there is no guarantee that “correcting” other market imperfections will necessarily improve efficiency or welfare. Lipsey demonstrates with a simple example of a market with three commodities. It is assumed that one commodity has a tax imposed that cannot be removed, and a second commodity has no tax imposed. The socially optimal tax on the third commodity ranges from positive (tax), zero, or negative (subsidy) depending on the degree to which the commodities act as substitutes or complements2 for each other.

The general theory of second best does not contradict the first fundamental theorem of welfare economics, but it does potentially limit the latter’s applicability to real-world policy decisions, depending on one’s view of the degree to which market imperfections in the real world prevail. Many economic theorists and practitioners still work on the assumption that the perfect market assumption is good enough that the first fundamental theorem still applies to real-world situations.

However, there are also many reasons to suppose that market imperfections are ubiquitous in the real world, and that assumptions of general equilibrium may be a poor guide to policy decisions. As Lipsey noted in a later paper (Lipsey 2007), many real-world sources of economic imperfection prevail which are not created by policy: 1. Markets are rarely competitive enough to make prices equal to marginal costs. Pricing is often influenced by other factors such as economies of scale, barriers to entry of new firms, and product differentiation (eg brand value). 2 Substitutes can be used in place of each other, whereas complements require the other commodity to be in place before it can be consumed. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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2. When products are differentiated, fixed costs such as establishing distribution networks, product development costs and marketing costs create non-convexities that break the requirement of general equilibrium. 3. There are many cases of missing markets, where commodity exchanges required to achieve general equilibrium are not available, and many markets (eg labour markets) often deviate from perfect market assumptions due to incomplete and asymmetric information. 4. Externalities (both positive and negative) are associated with many economic activities, and it is often hard to create compensating market mechanisms to internalise these costs or benefits. In addition to these “static” market imperfections, there is also the question of how economies should respond to dynamically changing and uncertain future conditions. Equilibrium economics assumes that conditions can be optimised in terms of economic efficiency given knowledge of all current and future states of the input variables. In practice, the future is uncertain, and firms undertake innovation activities in order to adapt to these uncertain changes. It has been argued (Blaug 2007) that even if one were to take the first fundamental theorem as a valid guideline for achieving static efficiency, there is no theoretical basis to suppose that achieving static efficiency will guarantee achievement of dynamic efficiency. Whilst competitive pressures can no-doubt help to channel such innovation in socially useful ways, the conditions for innovation to respond to dynamic and uncertain futures are generally far from those usually considered under static equilibrium. Indeed, Schumpeter’s conception of “creative destruction” (Schumpeter 1942) is a determinedly non-equilibrium view of how competition leads to dynamic progress. Indeed, a branch of operations research (Abernathy 1979, Adler, Benner et al. 2009) has grown up around a micro-economics view of how this might play out at the firm level. This suggests that firms may experience a tension between aiming for static efficiency (optimising processes based on historical learning about what has worked in the past), vs. a focus on learning and innovation to respond to new challenges in the future.

1.1.3 Consequences for policy decision-making on subsidies The upshot of the theoretical literature is not that markets are an inappropriate model. On the contrary, in Lipsey’s (2007) words there is a “long line of appreciative theorising running from Adam Smith to Milton Friedman and Thomas Schelling and many others…” behind the key propositions that: “(1) the market system coordinates economic activity better than any known alternative—not optimally, just better, and 2) markets do this relatively efficiently by producing prices that are influenced (but not solely determined) by relative scarcities” In other words, the market model still provides a very important benchmark, but this should not be used as the basis for a dogmatic rejection of interventions that seek either to redress some of the more obvious failings, or to help build in robustness to dynamic pressures. Lipsey recommends basing “advice on a combination of formal models, appreciative theorising, empirical knowledge, and a large dose of judgement”. In the case of energy subsidies, arguments in favour of some intervention include: 1. Infant industries. In cases where new technologies are being introduced which are not yet competitive with mainstream technologies, but could be expected to be so in the future, there is a dynamic efficiency argument for creating protected niche markets to allow these to develop appropriate economies of scale and learning by doing cost reductions in the supply chains for these industries. These arguments are typically used in connection with subsidies for renewable energy, and to some extent are again being invoked in the case of third generation nuclear energy. In practice, infant industry arguments are often used inappropriately as a lobbying tool by industry players who wish to carve out a specific subsidy that will benefit them. In general, the infant industry argument can only be justified for a certain length of time before those industries should be expected to stand on their own feet. In the long run, subsidy-dependence is likely to breed inefficiency and lack of competitiveness. 2. Pro-poor policies. Some sections of society may simply be too poor to access the supposedly “free” market, or they may not be able to afford sufficient fuel to maintain a basic level of energy services. In these circumstances, subsidies are often introduced to reduce prices for reasons of equity and to promote overall economic development or standards of living across the whole population. Such subsidies are perhaps the most prevalent stated reason for subsidies on fossil fuels at the global level. On the other hand, there is evidence that many of these subsidies are not well targeted towards poorer consumers, but actually create proportionally higher benefits for richer sections of society. 3. Protection from foreign competition. Subsidies to protect domestic industry from foreign competition have been rife throughout the history of economic development, but are coming increasingly under control as a result of free trade agreements such as WTO and the EU single market. Nevertheless, protection of jobs is still an important political driver for subsidies in contexts where there is a perception that foreign competitors in some way have an unfair advantage. This is particularly relevant in dynamic contexts (such as emerging economies are experiencing) or where such subsidies are taken as a precaution against explicit anti-competitive behaviour by external trade partners. However, in a long-run equilibrium context, such domestic subsidies will tend to lead to higher cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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domestic prices for the protected goods, leading to inefficiencies that leave the country worse of in terms of jobs and the economy. The common factor behind all these arguments for subsidies is that they are very context-specific, and they usually relate to a situation that is temporary or dynamic by nature. Whilst the general theory of second best suggests that it is difficult, or perhaps even impossible to judge what exact conditions are required to achieve a social optimum in terms of static efficiency across the whole economy, there are grounds for considering positive interventions based on more parochial considerations of costs and benefits in relation to potential “corrections” of dynamic effects in the particular sector being considered. In general, subsidies introduced to address these temporary conditions should therefore be designed with a sunset clause. This allows them to be phased out in line with the timescale over which the dynamic effects are expected to be addressed in order to avoid fostering inefficient subsidy-dependence. though there are many examples of provisions with sunsets being continually extended, and legacy subsidies that do not get debated. Super-majorities for overturning sunset clauses is one way around this. If the factors that the subsidies are intended to correct for are not expected to be temporary by nature, then subsidies are unlikely to be a suitable response. For example, if a foreign supply of cheap energy becomes available (and is expected to remain available over a long period of time), then it is likely to be more efficient for a country to adapt to this new situation rather than trying to protect domestic sources for long periods of time. Clearly however, adaptation also raises its own set of costs that need to be factored into this consideration.

1.1.4 Source of economic inefficiencies of subsidies Putting aside for the moment concerns raised by the general theory of second best, it is useful to review the theoretical basis for how subsidies introduce economic inefficiency and loss compared to a perfect market context, because this often provides the basis for most major studies of energy subsidies. In order to calculate the total economic cost of a subsidy, the cost to government of paying the subsidy needs to be weighed against the economic benefits that accrue to producers and consumers. This is illustrated in Figure 1. The effect of a subsidy is not only to change prices, but also the quantity of goods exchanged. This is because of the elasticity of demand, whereby consumers will tend to increase demand if prices reduce. Subsidies paid to a producer will in general alter market prices leading to benefits to both consumers and producers, although the total costs of the subsidy outweigh these total economic benefits. Based on the area of the triangle DWL in the final diagram, the total economic loss (or deadweight loss DWL) is approximately QS where S is the size of the per unit subsidy. The size of the overall economic loss is therefore strongly dependent on the slope (elasticity) of the demand curve. It should be noted that very similar considerations apply to taxes (since subsidies are effectively just a negative tax). Taxes also result in a deadweight loss to the economy (although an exception is where fees termed as “taxes” are really user fees to recover the government cost of goods or services linked to a specific fuel: the absence of such fees would actually constitute a subsidy). In principle, subsidies are no more inefficient than taxes, except insofar as they need to be funded, and may therefore have budget implications for overall tax burden. This simple graphical representation needs to be treated with care, as it assumes that the initial equilibrium point is somehow optimal. In practice, there may be various externalities that are not included in such a representation. For example, in considering the quantity of fuel purchased in the context of fuel poverty, the free market equilibrium point may well represent a sub-optimal consumption level, leading for example to health problems for elderly consumers not able to heat their houses sufficiently in winter. In such cases, the optimal level of consumption may indeed be higher than the simple crossing point of supply and demand curves would indicate. This is not to say that subsidising energy (especially for all consumers) is necessarily the most appropriate measure to take, only to point out that simple analyses of equilibrium points in the market need to be considered carefully to see what may be missing. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Figure 1 SUBSIDIES ALTER BOTH PRICES AND QUANTITIES LEADING TO DEADWEIGHT LOSS 1. In a ‘free’ market, supply and demand balance at

an equilibrium price Pe and quanty Qe the crossing point of the supply and demand curves. 2. If a subsidy is given to suppliers, they are willing to supply any given quanty at a lower price, since they will recoup the producon costs via the subsidy. This leads to a downward shi in the supply curve indicated by the dashed line. 3. Supply and demand now reach a new equilibrium

at a lower price to the consumer Pc who as a result will tend to consume a greater amount of the good increasing the quanty by ΔQ. Price Demand Supply Size of subsidy (per unit) 4. The supplier receives price Ps which is the price the Ps consumer pays (Pc) plus the size of the subsidy. Size of subsidy Pe 5. Both consumers and suppliers therefore benefit (per unit) P from the subsidy, since the consumers pay a lower c price, whilst the suppliers receive an increased price. ΔQ

Qe Quanty

6. The total benefit (£) to consumers of the lower price is the change in price (£/unit) mulplied by the quanty (number of units). This is the consumer surplus shaded in red. Likewise, the benefit to producers is the producer surplus shaded in blue. 7. In theory, the benefit of the subsidy is always shared between producers and consumers, irrespecve of who the subsidy is paid to.

8. The total cost of the subsidy to government is the size of the subsidy mulplied by the total quanty of the good supplied (yellow rectangle). 9. The yellow rectangle is larger than the producer and consumer surpluses. This means that the cost to government is higher than the overall economic benefits. The difference is the triangle marked DWL known as deadweight loss. This measures the overall efficiency losses arising from subsidies in comparison with the ‘free’ market equilibrium. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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1.1.5 Types of subsidy Subsidies can come in many different forms. Direct subsidies are the easiest to measure as they usually provide some form of direct payment either to the producer or consumer of a particular good in order to influence the price and/or quantity of goods exchanged. Examples of direct energy subsidies include feed-in tariffs for renewable energy, where additional payments are made to suppliers over-and-above the payments they receive from consumers for the electricity provided. Another example is where governments set energy prices for consumers below the cost of supply, usually implying the need to compensate producers for associated losses through some other budgetary mechanism. This is the source of the majority of energy subsidies measured in non-OECD countries. However, the net can be cast much more widely than these direct subsidies. What constitutes an economic approach to defining a subsidy is itself the subject of much debate among economists and those responsible for measuring subsidies. As noted by (Donohue 2008): “Broadly speaking, subsidies can be seen in one of two ways: subsidies are given by governments or subsidies are given by society. Almost all subsidy definitions available in the literature could be seen as generally conforming to one of these perspectives on subsidies. … An economic approach might be to define subsidies as transfers that distort the allocation of economic resources which would be a society- wide approach to defining subsidies. A more government-oriented approach might be to define subsidies simply as financial payments from governments to firms or consumers. … The distinction between subsidies derived from government action, versus social subsidies, is profound, and includes many possibilities for refinement.” Because of its remit, the definition of subsidies used in the WTO is fairly focused on the more direct government-oriented approach. Article 1 of the WTO’s Agreement on Subsidies and Countervailing Measures defines a subsidy as involving a financial contribution by a government or any public body within the territory of a Member … or price support in the sense of Article XVI of GATT 1994 that confers a benefit. Among the financial contributions covered by the definition are: (i) direct transfers of funds (eg grants, loans, and equity infusion), potential direct transfers of funds or liabilities (eg loan guarantees); (ii) the foregoing or non-collection of government revenue that would otherwise be due (eg fiscal incentives such as tax credits); and (iii) goods or services (other than general infrastructure) provided by a government in kind, or goods purchased from companies in a way that confers a benefit to that company (eg, by paying a price that is higher than the market price). The definition also covers situations in which a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments. However, energy economists concerned about the wider set of economic distortions in the energy sector often cast the net wider than this and would also include other types of regulation that influence market prices and quantities. For example, the OECD’s definition used in its “producer support estimate” (PSE) indicator also includes all forms of market price support involving transfers between consumers and producers created as a result of policy such as government interventions on tariffs. The OECD’s “consumer support estimate” (CSE) includes any additional policy-induced transfers that affect consumption. The OECD’s framework is discussed in more detail in the following section. Another issue to consider is the treatment of externalities (ie costs which are incurred in other parts of the economy that are not directly party to the transaction between producers and consumers). In the energy sector, the most obvious example includes environmental impacts of energy use. Most local pollutants are coming under a regime of increasingly stringent controls, so that it is reasonable to say that these external costs have largely been internalised. One of the problems of internalising the climate change externality is the difficulty of estimating the scale of the damage, and therefore identifying a suitable level for the carbon price. Carbon emissions in principle are internalised through the EU-ETS for the sectors covered, although there are concerns that the carbon price is inadequate. The UK government has taken the position that carbon prices ought to follow a trajectory in line with the costs of meeting a long-term carbon reduction trajectory appropriate to staying within a 2 degree warming limit. This has led to a long-term carbon price forecast which was used to inform its carbon price floor which applies to UK emitters covered by the EU-ETS. This guarantees that carbon prices for UK power generators will not fall below a level that the UK deems is a reasonable approximation of the external costs of carbon emissions. The imposition of carbon prices acts to correct a market failure, so carbon prices should be considered as a correction to suboptimal prevailing market price signal. In that sense, the absence of a carbon price in energy markets constitutes a subsidy since in a market without carbon prices, polluters are not paying their full production costs. Whilst this is the most intellectually robust way to consider externalities, it is clearly politically sensitive, as the attempt by the EU to impose EU-ETS carbon prices on external airlines has shown cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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(despite the rock-bottom carbon prices). Political constraints are largest for commodity producers competing with parties outside of the jurisdiction of the policy. However, potential solutions (eg, pooling airline carbon fees to finance upgrades within the industry rather than disbursing to national treasuries) may be one way around the conflicts. Multi-lateral agreements would also work in principle, but are struggling to make progress in practice. A class of subsidy which is alluded to in the WTO definition, but which are difficult to measure is the provision of various forms of guarantee by government on behalf of private companies making investments in the energy sector. These guarantees can take a number of forms, loan guarantees for upfront capital investment, or guarantees associated with long-term liabilities such as nuclear waste or long-term CO2 storage. In cases where there is partial or full government ownership of the energy companies, such guarantees are implicit, and even harder to measure. Rates of return on capital may be much lower than commercial rates, and difficult to identify in financial reports. Such guarantees transfer risk from private companies to public tax-payers. These risks may or may not materialise as real costs to the economy, but nevertheless, the transfer of risk to the public domain allows companies to borrow at lower costs of capital than would be the case if the risks were fully costed within the boundaries of the loan decision, and should therefore strictly be counted as a subsidy. Methods for quantifying the financial magnitude of such risk transfers are discussed in (Lucas 2010)).

1.2 Methodologies Used in Major International Studies of Subsidies This section reviews some of the different methodologies used to measure subsidies in major international studies.

1.2.1 Price-Gap Approach The most widely used method to measure subsidies is the “price-gap” approach, developed in detail by the (IEA 1999) in their landmark publication on energy subsidies. This approach follows the same logic as that portrayed in Figure 1. The first step is to measure the price gap based on the difference between end-use prices to consumers, and a reference price that is taken to be the “efficient” price that would prevail in the absence of subsidies. The second step is to calculate the impact of the price gap on consumption, based on estimates of the elasticity of demand. This quantity effect is then used (as described previously) to estimate the scale of welfare losses associated with the subsidy. Conceptually, the price gap approach is straight-forward, but a number of complexities arise in calculating both the consumer and reference prices. As noted in (IEA 1999), methodological issues arising in the calculation of consumer prices include: — Appropriate currency units (local, international at market rates, international at purchasing power parity). — Inclusion of energy-specific taxes, fees, levies and surcharges, as well as all rebates and reductions requires detailed data. — Appropriate treatment of general taxes such as VAT. — Accounting for situations where there is a physical constraint to the supply of energy, so that consumption levels are only partially influenced by price. The reference price indicates the opportunity cost of consumption of one unit of energy, its true economic value. It corresponds either to the border price for internationally traded energy products or to the costs of production for non-traded ones, both adjusted for transport and distribution costs. For some energy goods, especially those that are internationally traded, the reference price is fairly easy to identify. Even where these markets vary regionally, there are relatively well-established traded prices in most parts of the world for oil, gas and coal, and the border prices (for both energy exporters and importers) is the relevant reference point against which the prices of domestic energy consumption can be compared. Nevertheless, care is required to take account of all internal transportation costs and to ensure that adjustments are made to account for differences for example in fuel quality between domestic sources and international markets. Treatment of VAT needs careful handling, since it is often a general part of a country’s tax structure, so could be considered a “normal” cost which should be included in the reference price. This would allow tax exemptions to show up as subsidies in the price gap calculation. On the other hand, the electricity sector often bears no general taxation, since it is an intermediate energy transformation process rather than a final consumer, so the IEA methodology treats zero VAT rates as the normal reference point. To date, the IEA methodology has also excluded environmental externalities from their calculations of subsidies on the basis that carbon pricing is not (yet) “normal” practice within its member countries, although they recognise that in principle carbon prices etc. should at least theoretically be part of the reference price. The limitations of the price gap approach are summed up by the IEA as follows: “The price-gap approach captures the effects of subsidies on economic efficiency to the extent that they lower the end-use price of the good in question. Other forms of subsidies, especially those, like import tariffs, which are designed to support domestic production, would raise final consumption prices. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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When more than one subsidy applies to the same good, a frequent occurrence, the price gap measures only the net price effect of all the different subsidies together. In reality, however, the effects on economic efficiency of coincident subsidies are not netted out, but add up. For instance, the combined application of a subsidy to capital costs and an import tariff might well leave end-use prices close to the reference price. In this case, the price-gap approach would yield little or no insight, but double efficiency losses do occur. So work based on price differentials cannot measure all efficiency losses associated with government policies. Trade effects, the reduction of imports or the additional availability of exportable fuels, are particularly affected by this analytical limitation. Depending on the specific forms of the subsidies, their removal might have much greater impacts than simply closing or narrowing the price-gap. Removing a capital subsidy and an import tariff might change prices little, but it would have very strong trade implications. Depending on the form in which the subsidies are administered, taxes can also offset their impact on prices, at least to some degree. For example, if subsidies lead to lower capital costs for power generation, a tax on electricity would offset the increased consumption due to lower prices. Energy taxes, however, would not offset the efficiency losses induced by an inefficient factor mix, such as a bias towards capital- intensive forms of energy production bolstered by a capital cost subsidy.”

1.2.2 OECD “Effective Rate of Assistance” Approach One of the key limitations of the price gap approach is that it does not adequately address support to energy producers (Koplow 2009). The OECD calculates subsidies using a more bottom-up assessment of the scale of government budget transfers involved to energy consumers and producers arising from the major subsidies identified. This requires in-depth analysis of the policy framework for each individual energy sector. Table 1.1 shows the potential range of different types of subsidy that need to be considered under such an approach, using the coal industry as an example (IEA, OPEC et al. 2010).

Table 1.1 OECD CATEGORISATION OF SUBSIDIES WITH EXAMPLES (OECD 2012) Consumer Support Producer Support

Unit cost of Household or Output Enterprise Cost of Costs of consumption enterprise returns income intermediate production income inputs factors

Direct Unit Government Output bounty Operating Input-price Capital grant transfer of subsidy subsidized or deficiency grant subsidy linked to lifeline payment acquisition funds electricity of land rate Transfer of Price- Means-tested Government Third-party Provision of Assumption risk to triggered cold-weather buffer stock liability security (e.g. of subsidy grant limit for military occupational government producers protection health and m

s of supply lines) accident i

n liabilities

a Tax revenue VAT or excise Tax deduction Production Reduced rate Reduction in Investment h tax related to tax credit of income tax excise tax tax credit c foregone concession energy on input e on fuel purchases that M

exceed given r share of e

f income s Under-pricing Under-pricing Under-pricing

n Other

a government of of of r access to a a government access to T revenue natural good or service government foregone resource land harvested by or natural final consumer resources Induced Regulated Mandated Import tariff or Monopoly Monopsony Land-use transfers price; lifeline export subsidy concession concession; control cross subsidy electricity export rate restriction

The OECD method involves making a producer support estimate (PSE), a consumer support estimate (CSE), and general services support estimate (GSSE) that support both consumers and producers. Producer support estimate (PSE). Support provided to producers by governments may be delivered through a wide range of mechanisms: increasing the output price (Market Price Support); providing cash directly (a cheque from the government); reducing the riskiness of investing in fixed capital (eg, loan guarantee; investment insurance); foregoing a payment that would otherwise be due to the government (eg, a tax concession) or reimbursing a tax or charge (eg, as for fuel taxes in some countries); reducing the price of an input (eg, electricity for mining) or of a value-adding factor (eg, a wage subsidy); providing a service in kind cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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(eg, police protection of a pipeline) for free or at a price less than the producer would pay on the open market; investing in knowledge-creating activities (eg, research and development; education and training of specialists). Consumer support estimate (CSE) includes price transfers to or from consumers. The normal case, especially in countries that are net exporters of fossil fuels, is that transfers are made to consumers through administered pricing. These transfers may exist alongside other subsidies in cash or in kind (including vouchers) linked to the consumption of a particular energy product. When consumers pay more than the reference price for a fuel, such as because of an import tariff, market transfers can be considered the inverse of transfers associated with market price support for the production of commodities that are consumed domestically; these are called price transfers from consumers. Sometimes, when domestic prices are above international prices, budgetary transfers may be provided to first consumers of energy products where these are provided specifically to offset the higher prices resulting from market price support. General services support estimate (GSSE). Unlike the PSE and CSE, GSSE transfers do not directly affect producer revenue or expenditure by consumers, although they may affect production or consumption of energy products in the longer term. This includes for example, research and development, inspection services, infrastructure specific to the energy sector being considered, and marketing & promotion. The OECD method then involves quantifying the budget transfers associated with each source of subsidy in each of these three categories, and then summing them up together. Care is needed to avoid double counting, so that any transfers made from producers to consumers as a result of producer support measures passed through to consumers is netted off the calculation. See (OECD 2010) for a detailed review of the methodology.

1.2.3 World Bank The World Bank recently undertook a review of energy subsidies globally (WorldBank 2010), with a focus on consumer subsidies for fossil fuels in developing countries. The study is not aimed so much at quantifying subsidies as understanding their role in different country contexts, and identifying conditions under which subsidy reform might be possible and effective. The Bank notes that such subsidies are often regressive, with the benefits flowing mostly to richer sections of society. Key findings of the review are: — Gasoline, diesel, and LPG subsidies are weakly targeted to the poor, particularly in low income countries. — Kerosene subsidies may be targeted to the poor through their direct effects, but the leakage to better off households, commercial establishments, and the transport sector arising from the ease of adulterating diesel fuel with kerosene means that the subsidies’ pro poor benefits may be limited. — Electricity subsidies resulting from excessive losses or failure to collect bills do not have economic justification and should be actively reduced. — Electricity subsidies through generalized under-pricing are likely to be regressive, and much better targeting may be achieved through a careful design of the tariff structure. Volume differentiated tariffs appear to perform much better in this respect than increasing block tariffs. — Subsidies to connection charges for electricity can be designed to be strongly progressive, but their substantial cost per household requires an investigation into the lowest cost method of supply as well as comparative assessment of other options to help the poor. — Cross subsidies for tariffs and for connection charges between different classes of users can be an important instrument, but are of limited use where overall connection rates are very low. — Social safety nets can provide a more effective way of reaching the poor while controlling public expenditure. However, they require a strong administration. — Because energy subsidies can result in a large fiscal burden, all subsidy schemes should consider the inclusion of natural phase-out provisions. This can help to reduce the expectation of a permanent subsidy that can be very difficult to combat at the time a government feels the need to reduce the fiscal burden. However, some subsidy schemes may be designed to be permanent, such as cross subsidies between different groups of consumers (such as urban households cross-subsidizing rural households for whom costs of electricity supply can be markedly higher). — Transparency is important. Proper accounting and public awareness of which groups benefit from subsidies, by how much, and the cost is essential to evaluate g through sector as the main beneficialy of subsidies [Figure 5]ch of counting lower VAT on energy as a subsidy, identifies the overnment policies. — Subsidies to support a switch from fossil fuels to renewable energy need to be carefully planned and to consider the inclusion of natural phase out provisions.

1.2.4 IMF The IMF has also recently completed a major study of energy subsidies (IMF 2013) across both advanced economies and developing countries. Whilst the study recognises the importance of both consumer and producer subsidies, the evaluation of subsidies focusses mainly on consumer subsidies for fossil fuels. However, unlike the World Bank study, the IMF study considers post-tax subsidies—eg tax breaks such as reduced cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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VAT—consistent with the definitions used by the OECD. Whilst pre-tax subsidies are mostly focussed in developing countries (especially oil-producing states in the Middle-East and North Africa), post-tax subsidies are more widespread in advanced economies. Remarkably, the IMF also introduces another strand to their analysis by including in their definition of subsidies the lack of taxes to address the externalities. They include environmental damages, as well as estimates of transport externalities, but probably the most significant element is the inclusion of a $25/tCO2 benchmark for CO2 emissions from fossil fuels to cover climate change damages. Using this basis of accounting transforms the focus of the energy subsidy debate. Since most countries do not tax carbon at this level (if at all), the combination of counting tax breaks as well as under-pricing of externalities swings the total level of energy subsidies from being dominated by developing country producers (as suggested by IEA price-gap approach) to being dominated by the major energy users. On the IMF’s accounting basis, of the global total, pre-tax subsidies account for about one-quarter, and tax subsidies account for about three-quarters (see Figure 2). The advanced economies account for about 40 percent of the global total. The top three subsidizers across the world, in absolute terms, are the United States ($502 billion), China ($279 billion), and Russia ($116 billion). The study also undertook 22 case studies to assess experiences of energy subsidy reform (IMF 2013). The case studies show that subsidy reform requires careful handling. The case studies show examples of both successful and unsuccessful episodes of subsidy reform over the past two decades in a wide range of country contexts, but focussing mainly on developing and emerging economies.

Figure 2

IMF ESTIMATES OF GLOBAL ENERGY SUBSIDIES INCLUDING TAX ADJUSTMENTS AND UNDER-PRICING OF EXTERNALITIES

0 500 1000 1500 2000

World Total subsidy, billions Sub-Saharan Africa U.S. dollars MENA Pre-tax subsidy LAC Externalities VAT E.D.Asia CEE-CIS Advanced World Sub-Saharan Africa MENA Percent of GDP LAC E.D.Asia CEE-CIS Advanced

World government revenues Sub-Saharan Africa

MENA Percent of LAC E.D.Asia CEE-CIS Advanced

0 5 10 15 20 25 30 35 40 cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Total post-tax subsidies 1 $1.90 billion Percent of total subsidies

S.S. Africa

Petroleum products Adv. $879 billion MENA

Coal LAC $539 billion Natural gas $299 billion Electricity $179 billion

E.D. Asia CEE-CIS

The IMF study also gives a country-level breakdown of these subsidies, and the countries classified as “advanced” in the IMF analysis is shown in Figure 3. According to the IMF definition, the UK falls into the lower half of the distribution, with energy subsidies totalling around 0.45% of GDP.

Figure 3

SUBSIDY LEVELS IN “ADVANCED” ECONOMIES AS DEFINED IN IMF STUDY 4

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% 1.5 gas 1 electricity

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o d o p e a a u s u i r n a g t t e m t t r l v I y a l e e m r r g n u g a M r b S a p p K s s a r i o J e r r n S o

e e w c n F n g I C A T o l e e G e z u I F E i e e m C d N Z t o n B S

S h P i A K R i R e

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G t K

t x w S k h w i d e g e u a c n e S n N v e L t N i z U o o l n C H S U

However, it should be noted that these figures focus mainly on consumer subsidies, and underestimate producer subsidies. In particular, subsidies for nuclear energy and renewable energy are not included explicitly in these figures. These are addressed further in Sections 2 and 3.

1.2.5 Global Subsidies Initiative

The Global Subsidies Initiative of the International Institute for Sustainable Development has been working for a number of years towards increasing the level of transparency over the definition and measurement of subsidies, and has produced a manual aimed at promoting best practice in this regard (GSI 2010). The study goes beyond energy subsidies, looking at the environmental impact of all subsidies including the natural resources, minerals and agricultural sectors.

One issue the GSI has focussed on quite strongly is the underestimates that occur when only consumer support measures and price-gap approaches are used. As noted above, these approaches tends to suggest that subsidies are a developing country issue, whereas including producer support measures tends to show a much greater spread globally, but they require considerably more in-depth analysis in order to evaluate the extent of subsidies. To date, the GSI has produced the following quantitative studies in the area of producer subsides focussing particularly on upstream oil and gas sectors: cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— Government support for upstream oil and gas in Norway (GSI 2012). The study identified nine subsidies that are offered to the oil and gas sector, totalling around $4 billion per year in 2009, although these are expected to be declining over time. By far the largest component of subsidy is provided via a faster rate of capital depreciation for tax purposes compared to other industries in Norway. — Tax and Royalty-related subsidies to oil extraction in high cost fields: Brazil, Canada, Mexico, UK and US (GSI 2010). Given the importance of high-cost fields in setting global oil prices, the role of subsidies here has considerable international importance. The report indicates that all five countries considered provide some preferential treatment to smaller marginal fields, though quantification of these was not possible. — Government support for upstream oil in three Canadian provinces (GSI 2010). This report identifies annual subsidies in the region of $2.8 billion, approximately $2 billion of which were allocated to Alberta, and evenly split between Federal and State sources. Most of the subsidies identified seek to increase exploration and development activity, (59% of total subsidies $1.68 billion). These subsidies typically reduce capital expenditures through accelerated write-offs, tax credits, royalty reductions or allowances. Subsidies to support exploration, drilling, operations and research and technology comprised the remaining share of subsidies in about equal proportion. — Government support for upstream oil and gas in Indonesia (GSI 2010). For the areas that could be quantified, subsidies totalled around $1.8 billion annually, the largest component (86%) of which arises from the Domestic Market Obligation which obliges producers to sell a certain share of their production to the government-owned oil company Pertamina at below market rates. Given the involvement of the state at various levels in the industry, the total level of subsidies is likely to be significantly higher. The report identifies several areas where subsidies potentially exist, but could not be quantified without further research.

2. Extent of Energy Subsidies in the UK 2.1 Energy Mix in the UK—Historical and Future Trends The energy mix in the UK and beyond is in a state of transition due to multiple drivers including technological developments in oil & gas sector, environmental constraints on carbon and other emissions, energy security concerns including international reactions to the Fukushima disaster. The UK mix has shifted dramatically since the early 1970s from being dominated by coal and oil, to having a much larger share of gas. There are many different projections of the fuel mix going forward, but all of them show that further change in the UK is inevitable. Figure 4 shows DECC’s projections with a continued decline in coal use, and expanded contribution from renewable sources. The share of a fuel in the energy mix is an important element in determining the overall size of subsidies paid to each energy source.

Figure 4 PRIMARY ENERGY MIX IN THE UK 250

200 Electricity (not imports)

Nuclear

150 Renewables and waste

Natural Gas Mtoe 100 Oil

Coal and other solids

50

0 1970 1980 1990 2000 2010 2020 2030 Source: DECC, Digest of UK Energy Statistics and Updated Energy Projections, October 2012 cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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In terms of downstream energy consumption, analysis of the tax base shows that like many countries, the UK raises the great majority of its energy taxes from transport fuels (OECD 2013) as shown. The shaded bars in the figure correspond to total tax revenue, excluding ad valorum taxes such as VAT. The most intellectually robust way to assess whether or not such taxes represent net revenues or net subsidies would be to take gross revenues, and subtract the degree of government expenditure for example on infrastructure or other services required to support that energy service. Such detailed assessments are beyond the scope of this study, and tend also to be excluded from assessments such as those carried out by the OECD, which takes each country’s tax code as a “norm” from which to assess subsidies.

Figure 5 THE CONSUMER TAX BASE FOR ENERGY PRODUCTS IN THE UK (EXCLUDES VAT)

2.2 Fossil Fuel Subsidies The UK has progressively reduced subsidies to fossil fuels over the past 30 years in line with EU and OECD guidelines. There are no end-user price controls, with all prices being set by the market. The following analysis is based on the recent OECD calculations of energy subsidies for its member countries (OECD 2012).

Producer support The main type of producer subsidy remaining in the UK is in the oil and gas sector and relates to tax allowances to partially offset the petroleum revenue tax (PRT). The PRT is the main tax levied at 50% of gross profits on oil and gas production in the UK. All oil and gas producing countries levy some kind of tax or royalties on production which is how they gain value from the resources being extracted. There is no common international standard for the rate of such taxes and levies, the level is set by each country. The standard PRT therefore defines the “normal” baseline tax rate for oil production in the UK. Various allowances which partially offset the PRT are available to companies which act as subsidies. These include a new-field allowance that was introduced in 2009 for small, ultrahigh-pressure and high-temperature oil fields, and ultra-heavy oil fields. As noted in Section 1.2.5, such subsidies for high-cost fields are not uncommon (GSI 2010). This allowance was subsequently extended by the government to cover remote deep- water gas fields (March 2010), very deep fields with sizeable reserves (March 2012), and certain large shallow- water gas fields (July 2012). Other measures to support certain types of production include Promote licences, which allow small and start-up companies to obtain a production license first and secure the necessary operating capacity and financial resources later through reduced rent for the first two years. These PRT allowances added up to £159m in 2011 for oil, and £121m for gas. The OECD considers that in the context of the UK tax system design, the ability of oil and gas companies to write off exploration and production expenditures immediately does not constitute a subsidy. Producer support for coal-mining sector has been removed since 2006, with only inherited liabilities relating to previous public ownership estimated by the OECD at a level of £4m in 2011. This includes management of abandoned mines and treatment of mine-water discharges. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Looking ahead, shale gas is a potentially important new area of energy resource development in the UK. HM Treasury is currently consulting with industry on a fair tax regime for this new development (DECC 2012). The definition of a “fair” tax in this context will have to take into account whether special tax treatment is required for the sector given its different pattern of capital investment and other differences compared to conventional oil and gas fields. Given the normative nature of subsidies in the energy sector, a decision on whether or not any special treatment given to shale gas vis-à-vis conventional sources would have to take into account similar considerations. In the US which has the greatest experience of shale gas development, emerging subsidy issues include the adequacy of bonds used by oil and gas producing states to assure funding for reclamation of drilling sites, cover regulatory costs and offset public infrastructure costs. Road damage from use of heavy trucks on secondary roads, and payments for cleanup of fracking water are also emerging as costs which will need to be accounted for.

Consumer support By far the largest subsidy for fossil fuels in the UK relates to the lower VAT rate of 5% for domestic energy supplies (compared to 20% for the economy as a whole). Since VAT is a general economy-wide tax, any reduction from the general national rate is considered by the OECD to be a subsidy. Domestic energy supplies have always been taxed at a lower rate in the UK, since being raised from zero to 5% in 1994, but this practice is unusual, as most countries tax energy at the prevailing rate of VAT (see Section 3.1). In 2011, this tax was worth £81m for coal, £380m for oil and £3,510m for gas. There are very few measures other than tax exemptions or reductions that support energy consumption in the United Kingdom. Schemes such as winter fuel payments for the elderly or cold-weather payments do not depend on the price of fuels and are provided in-cash to eligible households. Most of the remaining measures target consumption technologies such as low-carbon vehicles and hydrogen refuelling equipment rather than energy use per se. Discounts to the climate change levy CCL (an end-user energy tax) are offered for eligible energy intensive users in return for committing to a climate change agreement to reduce energy consumption (see Section 2.6.2).

Missing Data The OECD study points to a number of areas where data was not available to calculate subsidy levels for fossil fuels. These include: Ring-Fence The Ring-Fence Expenditure Supplement (RFES) was introduced in January 2006 to Expenditure replace the former Exploration Expenditure Supplement (EES). In its current version, it Supplement provides oil and natural-gas companies with a yearly 10% increase in the value of unclaimed deductions for expenses related to exploration and appraisal for a period of up to six years. Field Allowance This new allowance was first introduced in 2009 and later extended to encourage the development of small or technically-challenging fields. Before 2012, qualifying fields had to be small in size, feature ultra-high pressure or temperature, possess ultra-heavy oil reserves, or be remote deep-water gas fields. In 2012, it was then announced that new field allowances would also be extended to very deep fields with sizeable reserves, and large shallow-water gas fields. This extension is expected to generate revenue losses of about GBP 20 million per year (HM Treasury, 2012). The field allowance provides companies with a partial exemption from the Supplementary Charge. Relief is calculated at the level of the field but is provided at the company-level. Unclaimed allowances can be carried forward. Mineral The Mineral Extraction Allowance (MEA) was introduced in 1986 to provide mining Extraction companies (including coal, oil, and natural-gas producers) with faster rates of Allowance depreciation for qualifying capitalised expenditures. The latter include the acquisition of mineral rights or deposits and expenditures connected to access to the reserves. Prescribed rates vary with the type of expenditure to which the provision applies. Analysis of this provision is, however, complicated by the interaction of the MEA with the general tax regime that applies to oil and gas extraction. These caveats do not apply to coal though. Although this provision applies to the mining sector as a whole, data from the OECD’s STAN database indicate that mining of fossil fuels accounts for nearly 90% of total gross output for the mining and quarrying sector (as defined in the standard ISIC Rev.3 sector classification). Abandonment This provision allows capital expenditures connected to the abandonment of fields and Costs mines to be deducted in full in the year in which they are incurred. Deductions are coupled with a carry-back provision which makes it possible for companies to use losses arising from decommissioning costs against profits earned in earlier years. This may therefore result in tax refunds. Although this provision applies to the mining sector as a whole, data from the OECD’s STAN database indicate that mining of fossil fuels accounts for nearly 90% of total gross output for the mining and quarrying sector (as defined in the standard ISIC Rev.3 sector classification). cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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2.3 Nuclear Subsidies Nuclear plants provided 62.7 TWh or 17.8% of the UK’s electricity in 2011 (down from a maximum of 26.9% in 1997), coming from ten nuclear power stations with a combined capacity of 11 gigawatts (GW). The largest nuclear operator is EDF Energy, a wholly owned subsidiary of Electricité de France (EDF), which purchased British Energy Group plc in January 2009. It runs eight nuclear power stations, seven of which are advanced gas-cooled reactors (AGRs) and the remaining one is a pressurised water reactor (PWR) at Sizewell B. Two plants operated by Magnox Ltd. run Magnox gas-cooled reactors. The Nuclear Decommissioning Authority (NDA) owns several closed Magnox stations. The UK reactor fleet is comparatively old. Up to 7.4 GW of existing nuclear capacity were scheduled for closure by 2019. However, the AGR reactors are being awarded life extensions, which is likely to delay closure, currently for around 7 years. The other reactor is the 1200 MW PWR at Sizewell B whose scheduled lifetime is to 2035 (IEA 2012).

2.3.1 Historical liabilities The NDA has responsibility for radioactive waste management and decommissioning, and for nuclear legacy sites. It is a non-departmental public body created in 2005 that employs about 200 people. NDA owns former nuclear sites and the associated civil nuclear liabilities and assets of the public sector, including all the former sites and reactors of British Nuclear Fuels Limited (BNFL) and the UK Atomic Energy Authority (UKAEA). Its responsibilities include decommissioning and clean-up of these installations and sites, as well as the implementation of the UK nuclear waste policy. It is currently working on an annual budget of around £3 billion, of which £2.3 billion comes from the UK government, and the remainder from commercial operations. Total public liabilities for NDA’s sites on a total discounted lifetime cost basis are around £50 billion. As shown in the breakdown in Table 2.1, by far the largest of these is £32 billion for Sellafield (net of remaining operating revenues). However, as pointed out by the National Audit Office (NAO 2012), these cost estimates, although improving, are still quite uncertain. They note: “The [NDA’s] undiscounted provision for the lifetime cost of the clean-up of Sellafield up to 2120 increased from £46.6 billion as at March 2009 (in 2011Ð12 prices) to £67.5 billion as at March 2012. The [NDA] expects that the lifetime cost will continue to rise, as uncertainties in the lifetime plan are addressed, then plateau, and finally decline as Sellafield Limited manages the decommissioning process better.” Some of the financing of the NDA comes from the Nuclear Liabilities Investment Portfolio (NLIP), a fund of about £4 billion that was separately identified in BNFL’s accounts before privatisation, but which stayed in public hands. Arguably therefore, some of NDA’s budget comes from the industry rather than from government, but in the bigger scheme of things, this is only sufficient to pay for two years or less of NDA’s expenditure, so for the large part NDA can be considered to be publicly funded (Thomas 2004). cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Table 2.1 PUBLIC LIABILITIES FOR RETIRED NUCLEAR PLANT3 2011Ð12 Estimated Discounted Lifetime Plan (£m) Total Operations Decomm & Costs** Net Clean-up Running Commercial Running Government Costs* Cost Revenue Cost Funding Site Licence D = (B- Company Site A B C C) E = (A+D) Magnox Limited Magnox Support 690 0 690 Berkeley 659 0 659 Bradwell 506 0 506 Chapelcross 749 0 749 Dungeness A 647 0 647 Hinkley Point A 699 0 699 Hunterston A 667 0 667 Oldbury 1,008 0 1,008 Sizewell A 778 0 778 Trawsfynydd 611 0 611 Wylfa 1,045 80 80 1,125 Research Sites Harwell and Restoration Winfrith Limited 1,122 0 1,122 Dounreay Site Dounreay Restoration Limited 1,904 0 1,904 Sellafield Sellafield (including Limited Calder Hall and Windscale) 36,601 3,571 8,040 -4,469 32,132 Capenhurst 647 0 647 LLWR Limited LLWR 253 533 598 -65 188 Springfields Springfields Fuels Limited 384 0 384 Sub-Total 48,970 4,184 8,638 -4,454 44,516 Electricity Sales 90 246 -156 -156 Geological Disposal Facility 3,840 3,840 NDA Central Liabilities & Group 83 1,447 1,550 -103 -20 Total 59,893 5,721 10,434 -4,713 48,180

2.3.2 Waste and decommissioning for future plant Waste liabilities for future plant are even more uncertain than historical liabilities. The government’s position is that any new nuclear plant must cover the costs of future waste and decommissioning out of their current operating costs without any public subsidy. This requires companies to put aside funds each year which can accumulate over the operating lifetime of the plant to pay for these back-end costs. However, long term disposal options will not start to become operational until after 2050, and until then, costs remain speculative. The problem with costs being so uncertain is that it creates a barrier to investment because of the potential for liabilities to be higher than originally expected. In order to help companies manage this risk, the government therefore has proposed to introduce a fixed payment mechanism, the so-called “waste transfer price” (DECC 2011): “In order to provide Operators with certainty over the maximum amount they will be expected to pay for waste disposal the Government will, at the outset, set a Cap on the level of the Waste Transfer Price. The Cap will be set at a level where the Government has a very high level of confidence that the actual cost will not exceed the Cap. However the Government accepts that, in setting a Cap, the residual risk that the actual cost might exceed the Cap is being borne by the Government. Therefore the Government will charge an appropriate Risk Fee for this risk transfer. Hence for clarity, the Waste Transfer Price will include two separate risk allowances: — The Risk Premium is the premium over and above expected costs that will be included in the Waste Transfer Price to reflect the risk being assumed by the Government, when the Waste Transfer Price is set at the end of the Deferral Period, that actual costs might be higher than the Waste Transfer Price. 3 Source: NDA available at http://www.nda.gov.uk/sites/financials/index.cfm accessed March 2013 cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— The Risk Fee is an additional element included in the Waste Transfer Price to reflect the small residual risk being assumed by the Government, when the Cap is set at the outset, that actual costs might be higher than the Cap.” The offer by government of a cap on liabilities could be considered a subsidy because it acts like an insurance policy. On the other hand, the government is aiming to charge for this transfer of risk via the risk fee, which in principle cancels out the subsidy. It is very hard to determine an appropriate “market price” for this risk, since it would be almost impossible to obtain an insurance against such open-ended risks. As an illustration of the potential scale of subsidy, DECC have published an indicative waste disposal liability based on cost estimates for the disposal of intermediate level waste of £14.5k/m3. Based on this estimate, the illustrative cap would be £48.4k/m3. However, estimates of the NDA’s true marginal cost for waste disposal is put at £67/m3 which suggests a significant risk that future liabilities may end up being transferred to the public purse. Estimates of the potential total value (undiscounted) of this subsidy have been estimated at between £400m to £1,500m depending on the lifetime of the nuclear plant between 40Ð60 years (Greenpeace 2011). The Birmingham Policy Commission (Birmingham 2012) puts the waste transfer fee price cap into context, estimating that it is worth at most 1.5Ð2% of the revenue from sales of electricity, and quotes DECC estimates that the likelihood of the cap being exceeded is less than 1%. The true scale of these risks come down to an assessment of how realistic these estimates of these liabilities are. In principle, the government could try to sell a portion of the ultimate liability on the secondary market to reality test pricing assumptions against market value, although the liquidity of such markets is likely to be questionable.

2.3.3 General operating conditions for new nuclear Despite Ministerial announcements as recently as October 2010 that there would be no public subsidies for new nuclear plant, it is apparent that several subsidies will in fact be in place, some explicit, some implicit, driven in large part by the rapid escalation in the estimates of capital costs for building new nuclear plant (for estimates of how costs have changed over the past 10 years, see (Schneider, Froggatt et al. 2012). The most transparent will be the price support for producers under the feed-in tariff to be introduced as part of recent electricity market reforms. The tariff is still being negotiated between the government and EdF, for planned new build at Hinkley Point in Somerset. The price that the company receives for its electricity will be fixed by a contract for difference, which requires consumers to top up payments over and above the market price up to the agreed level. Once the strike price has been announced for Hinkley Point, the extent of the subsidy will become more apparent. These arrangements constitute a subsidy not only because of the raised price compared to market levels, but also because long-term fixed price contracts with reliable counterparties allow companies to borrow money at lower interest rates—a particularly important factor for capital intensive projects like nuclear plant. The duration of the contracts is therefore very important element of the subsidy, and is also still under negotiation, but there has been some speculation that contract periods of up to 40 years are being discussed4. It is likely that in the early years of operation, this market price support will constitute a substantial subsidy compared to the cost of the cheapest alternative (ie gas-fired plant), but in the long run, the subsidy element is not so clear. Given a 40 year time horizon, gas prices are extremely uncertain, and nuclear may turn out to be cheaper, especially taking into account the costs of removing CO2 from gas-fired generation. On the other hand, nuclear will be competing with renewable energy sources, for which costs have been coming down rapidly over recent years. From a strategic energy security perspective, governments may consider that these macro-economic uncertainties are beyond the scope of private companies to cope with via normal market mechanisms. Other types of subsidy are less transparent. The nuclear industry operates in a somewhat protected commercial environment because of the fact that each plant is too big to fail. This means that it is necessary for national governments to underwrite most of the commercial risks of nuclear power, as evidenced by the way the UK government had to bail out British Energy in 2005 at a cost of about £5 billion. This demonstrates the general point that, ultimately, national governments have no choice but to underwrite the commercial risks of nuclear power. The state aid for the rescue and restructuring of British Energy and BNFL were allowed by the EC in 2004 and 2006 respectively5. In November 2009, British Energy was sold to EDF Energy for £12 billion, the proceeds of which were put into the nuclear liabilities fund. An issue for the government to manage is how to accrue sufficient interest on these funds to cover future liabilities given the current low return on secure investments such as treasury bonds. A related issue is how government funds should be accounted for when considering the cost of capital for infrastructure projects such as waste disposal. One line of argument suggests that government cost of capital is an inappropriate measure of the real costs, since it tends to mask the effects of risk (Lucas 2012).

4 http://www.guardian.co.uk/environment/2013/feb/18/nuclear-power-ministers-reactor 5 The case reference documents are in the state aid register: http://ec.europa.eu/competition/state_aid/register/ cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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The same goes for limits to company liabilities associated with major incidents such as nuclear accidents, terrorist threats and so on. Despite the low probabilities of such events occurring (at least on a plant-by-plant basis), the excessively high level of the maximum liability incurred means that companies are unable to obtain private insurance against such risks6. The value of such implicit subsidies are very difficult to assess. Estimates depend crucially on assessments of the likelihood of such events occurring. This tends to be a very subjective issue, and difficult to obtain impartial analysis. Despite the difficulty of quantifying these implicit subsidies, it is clear that without them, private investment in new nuclear power plant would not go ahead. The UK government intends to increase the cap on liabilities to €1.2 billion from its present level of £140 million as part of its implementation of an international treaty on nuclear third party liability—the Paris and Brussels Conventions, to which the UK and most of the other EU countries are signatories (DECC 2012). This increases substantially the range of low-level incidents that companies will have to cover themselves. It is clearly substantially short of a full-scale disaster of the order of magnitude of Fukushima, for which the clean- up costs alone have been estimated at €175 billion, not including the wider economic damages incurred (EnergyFair 2012). Significantly higher liabilities in the private sector are not unprecedented (eg BP has allocated $41 billion to settle claims resulting from the Gulf of Mexico disaster). Such large sums are probably beyond the ability of relatively smaller utility companies to handle, but the fact remains that there is an incentive for companies to understate their ability to secure private insurance for such risks in order to gain government protection, and ways should be sought for these risks to be internalised as far as possible within the general costs of production.

2.4 Renewables 2.4.1 Current subsidy arrangements Renewables Obligation The main subsidy to large-scale renewable energy sources in the UK is currently the Renewable Obligation (RO) scheme which requires suppliers to provide a certain proportion of their electricity from approved renewable sources. Generators of renewable energy are issued with a renewable obligation certificate (ROC) for each MWh of power generated. Some sources of renewable energy are credited with more than one ROC per MWh, and some less in order to balance out investment incentives with respect to technology costs7. For example, onshore wind receives 0.9 ROCs per MWh, whilst offshore wind receives 2 ROCs per MWh (falling to 1.5 from 2014Ð15 onwards). These certificates are tradable. Suppliers buy sufficient ROCs to be compliant with their obligations. This creates a market for ROCs, so that their price is a transparent observable value. Any suppliers who do not hold enough ROCs pay a “buy-out” price. These penalty fees are paid into a central fund, out of which is taken the administration costs of the scheme, and the remainder is redistributed back to suppliers in proportion to their degrees of compliance with the RO. This recycling of the buy-out fund effectively increases the value of holding ROCs, and adds to their market price. The value of holding excess ROCs is zero, since they cannot be banked for use in future periods, so to stop the market price of ROCs falling to zero, the government sets the RO at a level above what is expected to be delivered, so as to achieve “headroom”, ensuring a positive payment into the buy-out fund. The current obligation level for suppliers for April 2012 to 31 March 2013 is 0.158 ROCs for each MWh they supply to customers in England and Wales. The obligation level for April 2013 to 31 March 2014 is 0.206 ROCs for each MWh supplied. This figure is calculated by DECC8 based on the list of potential new build expected to generate in 2013Ð14 sourced from the Renewable Energy Planning Database (REPD), the National Grid’s Transmission Entry Capacity (TEC) Report, Ofgem’s preliminary ROC Register, and, the UK Wind Energy Database. ROCs (millions) Potential ROCs from existing stations 39.7 Potential ROCs for new build 16.2 Total expected ROCs 55.9 Total (with 10% headroom) 61.5

Suppliers can pass on the costs of purchasing ROCs to their customers. The market price is currently around £42 per ROC (and has traded in a fairly narrow band between £40Ð50 over the duration of the market as shown in Figure 5). This puts the total value of the RO subsidy at (55.9m x £42) at around £2.4 billion for 2013Ð14. In addition to receiving the ROC price, renewable generators also receive payments for generating levy exemption certificates (LECs). The value of a LEC is tied to the charge made on energy users under the climate change levy (CCL). Electricity is currently subject to the CCL at a rate of £5.09/MWh, which 6 See discussion in Der Spiegel http://www.spiegel.de/wirtschaft/soziales/0,1518,761826,00.html#ref=nldt or here for an English translation: http://tinyurl.com/d7yz48k 7 https://www.gov.uk/calculating-renewable-obligation-certificates-rocs 8 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65530/6527-calculating-renewables-obligation- 2013Ð14.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

Ev 82 Environmental Audit Committee: Evidence

effectively sets the traded price of LECs. For the last full year for which data is available (2010/11), the number of LECs issued was 29.8m. This puts the value of this subsidy at £152m.

Figure 5 MARKET (AUCTION) PRICE FOR ROCS HAVE BEEN QUITE STABLE OVER THE PAST 3 YEARS £60.00

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NFFO Prior to the introduction of the renewable obligation, market support for renewables was via the non-fossil fuel obligation (NFFO). These were long term contracts priced by auction giving a fixed price per kWh for different bands of renewable technology. Based on the volumes and prevailing auction prices of the NFFO, the value of these remaining contracts are shown in Table 2.2, totalling around £400m. However, unlike ROCs, these payments are not additional to the value of the electricity, but instead they include the value of electricity generated. For NFFO 4 and NFFO 5 rounds, the fixed payments made under the long-term contracts is actually less than the wholesale price of electricity. Therefore, these contracts no longer act as a subsidy for the NFFO generators. NFFO generators are not eligible for producing LECs.

Table 2.2 VALUE OF CONTRACTS REMAINING UNDER NFFO ARRANGEMENTS Total Total value of Approx. contracted NFFO market value Approx. capacity Average price payments of electricity value of period (MW) 06/07 (p/kWh) (£m) (£m) subsidy (£m) NFFO 3 01 Apr 1995Ð28 Aug 2013 627 6.15 128 99 29 NFFO 4 01 May 1997Ð30 Dec 2016 843 4.51 132 138 -6 NFFO 5 01 Dec 1998Ð29 Nov 2018 1177 3.40 137 195 -58 TOTAL 2,647 396 432 -36

Feed-in Tariffs For small-scale renewables, the RO system has been deemed too complex, so to provide a simpler and more certain revenue stream, a feed-in tariff (FiT) was introduced for plant installed up to 5MW. This provides a fixed additional revenue stream over and above the value of electricity generated for each kWh of electricity generated. By far the largest beneficiary of the scheme since it was first introduced in 2010 has been rooftop solar PV, accounting for about 90% of installed capacity under the scheme (Ofgem 2012). The tariff for April 2010—March 2011 was set to 41.3 p/kWh for systems up to 4kW retrofitted to rooftops. Tariffs are fixed in real terms for 25 years, adjusted for inflation annually at RPI. In addition, householders receive an additional tariff for any exported electricity, acting as an incentive to run the household efficiently. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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The tariff was due to remain unchanged for the first two years, and then drop by 8% to 37.8p/kWh in the third year (UK 2010). In fact, demand for the tariff was so strong, that government decided to drop the tariff rate much more quickly to 21p/kWh for schemes after March 2012. The latest arrangements for setting solar PV tariffs require Ofgem to set quarterly tariff rates which can be adjusted to take account of the volume of uptake of the subsidy (UK 2012). The tariffs for other renewable technologies are set annually by Ofgem. The latest rates for small scale rooftop solar are as follows9:

Table 2.3 CHANGE IN TARIFF RATES FOR ROOFTOP SOLAR PV <4KW10 FIT Year 1 2010Ð11 (for Mar May projects up to 2012— Aug 2012— Nov 2012— Feb 2013— 2013—Jul Mar 2012) Aug 2012 Nov 2012 Feb 2013 May 2013 2013 FiT p/kWh 45.40 21.00 16.00 15.44 15.44 15.44 Export tariff p/ kWh 3.2 3.2 4.5 4.5 4.64 4.64

Total subsidy payments made under the FiT scheme are summarised in Figure 6. The amount of installed capacity dropped significantly in 2012 Q2 compared to previous periods after the tariff was reduced, but have picked up again since then. The total payments made under the scheme are cumulative, since any new projects add to the payments made against capacity that has already been installed in previous periods. Total annual payments in 2012 will therefore amount to more than £500m for the FiT scheme.

Figure 6 PAYMENTS MADE UNDER THE FIT TO DATE11 500 200 450 180 400 160 350 140 300 120 250 100 MW installed per Q 200 80 150 60 Quarterly Payments (£m) 100 40 Quarterly Fit payments (£m) Capacity installed per Q (MW) 50 20 0 0 2010 Q2 2010 Q3 2010 Q4 Q1 2011 Q2 2011 Q3 2011 Q4 2011 2012 Q1 2012 Q2 2012 Q3

2.4.2 Future Investments—implications of electricity market reform As a result of the recent energy market reforms, all support for renewables will now be moved to a feed-in tariff support mechanism. The arrangement for small (<5MW) systems remains as before. Large-scale renewable projects that would previously have been supported under the RO will instead receive a fixed price based on a contract-for-difference (CfD) payment mechanism which tops up payments to generators over and above the amount they receive for selling electricity at market rates. The tariff rates will vary according to the type of technology. The tariffs to be received for renewables have not been yet been finalised, but it seems likely that they will be broadly comparable with the support levels received under the previous RO scheme. An indication of the total value of the subsidy is provided by the levy control framework, which sets a total limit on the value of payments that can be made via “levy-funded” spending (ie increases to consumer energy bills to pay for low carbon energy sources). This is currently £2.35 billion, rising to £3.56 billion by FY 2014/15 (DECC 2011), and in the pre-budget report in November 2012, it was agreed to set the figure for 2020 at £7.6 billion per 9 From http://www.ofgem.gov.uk/Sustainability/Environment/fits/tariff-tables/Pages/index.aspx 10 Properties with an energy performance rated D or below receive a lower tariff. Developers installing solar PV on more than 25 properties also receive a lower tariff. 11 Data from http://www.ofgem.gov.uk/Sustainability/Environment/fits/Newsletter/Pages/Newsletter.aspx cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

Ev 84 Environmental Audit Committee: Evidence

year12. Figure 7 indicates that the limit on levy spending specified in the levy control framework provides some headroom compared to spending to date and projected spending over the next year on FiTs and ROCs, the two main sources of levy spending. The projected rise to 2020 appears sufficient to allow for a continuation of the expansion of renewable energy at its current rate.

Figure 7 VALUE OF CURRENT SUBSIDIES TO RENEWABLES AND THE SPENDING CONSTRAINT UNDER THE LEVY CONTROL FRAMEWORK OUT TO 2020 8,000

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2.5 Electricity VAT rates for electricity for domestic use is charged at a reduced rate of 5%. This acts as a subsidy compared with the general rate of VAT of 20%, leading to a higher than optimal rate of electricity usage. Because this applies to final use, it does not distort the choice of fuel used in the generation of electricity, since generators receive the ex-VAT value. The ex-VAT value of electricity sold to the domestic sector is approximately £14.8 billion per year. The value of a 15% discount on VAT is therefore of the order of £2.2 billion per year. Some of the distortions created by this subsidy are offset by a reduction in the VAT rate for energy saving equipment as listed below13.

Table 2.4 REDUCED VAT RATES ON ENERGY SAVING GOODS The installed goods VAT rate Air source heat pumps 5% Boilers—wood fuelled 5% Central heating and hot water controls 5% Draught stripping 5% Ground source heat pumps 5% Insulation 5% Micro combined heat and power units 5% Solar panels 5% Water and wind turbines 5%

Nevertheless, the lower rate of VAT for electricity and gas are a significant distortion to the tax code. Removing such subsidies is however difficult. As noted in a set of case studies on environmentally harmful subsidies in the EU (Valsecchi, ten Brink et al. 2009):

12 Press release: https://www.gov.uk/government/news/government-agreement-on-energy-policy-sends-clear-durable-signal-to- investors 13 http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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“The traditional argument to tax “necessities” at a reduced VAT rate (or not to tax them at all) is that low- income households tend to spend a relatively large part of their income on these goods and services, so that taxing them at the standard rate would have a regressive distributional impact. In reality however, only a small part of the subsidy reaches the intended recipients (low-income households). High-income households receive most of the benefits, as the income elasticity of demand for energy is positive. The original social motive for the subsidy has largely disappeared, as the share of energy in household expenditure has decreased dramatically, also among low-income households. A more cost effective alternative would be to provide direct income support or tax relief for low-income households. There have been previous attempts to remove this subsidy including an attempt in 1995 which failed because of the expected distributional impact. In particular the fact that it would hit elderly people the hardest, led to the abandonment of the proposed increase of VAT to the standard level. A possible compensation measure that could be used to palliate the impact of removal would be to reinforce existing schemes to assist low-income households with investments in energy saving.”

2.6 General 2.6.1 Government funded energy R&D The UK spends about £7.5 per capita per year on energy-related R&D (IEA 2012), which is approximately equal to the median amount for IEA countries. R&D expenditure has increased rapidly in recent years following a period of decline over the previous decade. Total expenditure in the UK including R&D and demonstration projects in 2010 was over £500m, representing a very significant increase (76%) increase since 2009. The figure for 2011 dropped back to around £300m, but the trend over the past 5 years is still significantly higher than over the previous decade. The breakdown of expenditure between different energy sources is shown in Figure 8.

Figure 8 UK GOVERNMENT ENERGY R&D EXPENDITURES 600 OTHER CROSS-CUTTING TECHS/RESEARCH

500 OTHER POWER AND STORAGE TECHNOLOGIES 400 HYDROGEN AND FUEL CELLS 300 NUCLEAR £m (nominal)

200 RENEWABLE ENERGY SOURCES

100 FOSSIL FUELS

ENERGY EFFICIENCY 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Research on energy efficiency and renewables in particular have increased rapidly, with nuclear energy and carbon capture and storage for fossil fuels also having experienced a resurgence over recent years.

2.6.2 Climate Change Levy Exemptions and Discounts The climate change levy is a tax applied to business energy users (including industrial, public, commercial and agricultural users). It applies to electricity, gas and solid fuels for heating, lighting and process use. The purpose of the tax is to work towards the principle that the polluter pays for the climate change externalities of the energy use, and because the tax is applied rather generically across the economy, exemptions from the CCL should therefore be considered a subsidy. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

Ev 86 Environmental Audit Committee: Evidence

Exemptions from the climate change levy are available for: — Small businesses (eg <1000 kWh per month) — Supply from good-quality CHP schemes — Supply of electricity from renewables — Inputs for own-use electricity generation — Non-fuel use (eg chemical feed-stocks) In addition, a discount of 65% is available to energy-intensive users who sign up to a climate change agreement (CCA) to meet an energy reduction target. Based on the author’s estimate, and assuming that CCAs cover a large proportion of industrial energy consumption, the discount is worth around £500m in avoided tax. In some sense, this could be seen as a subsidy, since these companies face a lower tax rate than the norm for business in the UK. On the other hand, DECC estimates that the energy savings achieved under the CCAs are at least as great if not greater than the energy savings that would have occurred if the companies involved were subject to the full energy costs associated with the CCL. Therefore, tying the CCL discounts to CCAs actually reduces energy demand rather than increasing energy demand as would normally be the case for a straight subsidy. If a definition of subsidies is used which only counts situations where there is a resulting increase in energy consumption, then CCL discounts tied to CCA energy reductions would not be considered a source of subsidy.

2.6.3 Enhanced Capital Allowances The Enhanced Capital Allowance (ECA) scheme enables businesses to claim a 100% first year capital allowance on investments in certain energy saving equipment, against the taxable profits of the period of investment. Capital allowances enable businesses to write off the capital cost of purchasing new plant or machinery (eg boilers, motors), against their taxable profits. The general rate of capital allowances is 18% a year on a reducing balance basis, so 100% capital allowance in one year represents a considerable benefit in terms of 1st year cash flow, and also reduces overall tax payments. It is estimated that the cost to treasury of the ECA tax breaks is round about £100m per year14.

2.7 Summary of UK Subsidies The values assigned to different forms of subsidy are, as described in the introduction section, dependent on a definition of what constitutes “normal” taxation practice, which is not necessarily comparable across fuel types. Table 2.5 pulls together the various estimates made in the text should therefore be used with caution. Nevertheless, it is useful to see where the estimates of significant levels of subsidy lie, and where there are still significant gaps in the data that is readily available.

14 Personal communication with Carbon Trust. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Table 2.5 SUMMARY OF UK ENERGY SUBSIDIES Primary Energy Demand15 Annual Value Energy type (GWh) of Subsidy £m Source of subsidy Comments Oil 975,792 159 PRT Producer support 380 VAT Consumer support Gas 906,489 121 PRT Producer support 3,510 VAT Consumer support Oil & Gas ? Additional Producer support exemptions from charges and accelerated tax allowances Coal 385,174 4 Mining liabilities Producer support 81 VAT 5% Consumer support Nuclear (incl 68,980 ~2300 Gov’t input to NDA roducer support historical annual budget liabilities) ? Possible increases in budget required to deal with legacy waste Current 34,409 2400 ROCs Producer support Renewables 152 LECs 500 FiTs Electricity 364,897 2200 VAT reduction Consumer support Energy R&D 300 All sectors General services CCL discounts 500 For energy intensive Consumer support industry (but offset by CCAs) ECAs 100 For en. efficiency Consumer support

3. International Comparison 3.1 Fossil Fuels The most thorough assessment of fossil fuel subsidies in comparable countries to the UK is provided in the OECD report “Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels” (OECD 2012). The data is provided in local currency units, and has been converted here to US$ for comparison. However, a health warning is required when making these comparisons between countries. As noted in the introduction to this report, subsidies are defined in comparison to the particular tax regime, measuring deviations from whatever is deemed “normal” in that country. Since the tax regimes vary considerably, there is no single consistent measure for subsidies in this case that ensures that they are being compared on a like- for-like basis. The OECD caveat to these figures reads: “Tax expenditures for any given country are measured with reference to a benchmark tax treatment that is generally specific to that country. Consequently, the estimates … are not necessarily comparable with estimates for other countries. In addition, because of the potential interaction between them, the summation of individual measures for a specific country may be problematic.” With that caveat in mind, the figures are presented here in two ways. Firstly, in total expenditure terms as presented in the OECD report but converted to a common currency unit. Secondly, the total subsidy levels are divided through by the total primary energy supply of each fuel type in that country in order to adjust for the size of the country when making the comparison. Subsidies are distinguished between Producer Support measures, Consumer Support measures and General Services. Data is not shown here for all the countries covered in the OECD report, but the focus is on larger countries, and those that are more comparable with the UK.

15 Figures for fossil fuels relate to total primary energy demand in the UK in 2011. For nuclear, renewables and electricity, the figures relate to total production in 2011. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Figure 9 TOTAL SUBSIDY LEVELS FOR FOSSIL FUELS (US$M) Producer Consumer General 12000 Coal 10000

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AUS AU BE CAN CZ DE FR GER IT JP NL NO PO SP UK US cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Producer Consumer General 12000 Gas 10000

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AUS AU BE CAN CZ DE FR GER IT JP NL NO PO SP UK US

In common with many other OECD countries, UK subsidies for coal are small by international standards. Coal subsidies mostly take the form of producer support measures in countries that still have significant levels of production (Germany, Poland, Spain, US), although not all producer countries have such subsidies (eg Australia). In general, there is a declining profile over time for these subsidies as they are gradually phased out, and as a result of a declining share for coal in most countries. In the oil sector, producer support measures are a smaller fraction of total subsidies, and concentrated mostly in Australia, Canada and US. In most countries, oil subsidies are provided to consumers, and take the form of various tax credits, exemptions, refunds and discounts for specific end-use of oil products. These are too diverse to list in detail here, but a full explanation of the subsidies defined for each country is provided in the OECD report. For gas, producer support is limited mainly to Canada and the US, and relatively little subsidies of any sort in most OECD countries. The UK has a relatively high level of subsidy for gas which is mostly the VAT tax break for domestic consumers. The UK is unusual in Europe in this respect in providing a sales-tax break for natural gas, although In the US, state-level exemptions of energy from sales taxes levied on other goods and services are common. In order to adjust these subsidy comparisons for the size of the country, the figures are compared with the total primary energy consumption of each fuel in the relevant year. The charts are shown in Figure 10 in units of US$/MWh. It should be noted that under this measure, the subsidy expenditure is divided by the total fuel use for the country concerned. This will tend to underestimate the value of the producer subsidies to individual companies for the particular applications for which they apply. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Figure 10 SUBSIDY PER UNIT OF PRIMARY ENERGY SUPPLY IN EACH COUNTRY Producer Consumer General 25

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AUS AU BE CAN CZ DE FR GER IT JP NL NO PO SP UK US

Producer Consumer General 25

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Producer Consumer General 25

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AUS AU BE CAN CZ DE FR GER IT JP NL NO PO SP UK US

Relative to its overall consumption levels for each fuel, the UK appears to have low subsidies by international standards for coal and oil. For gas, UK subsidies are relatively high by international standards, but other countries such as Austria (tax break for energy intensive users), Czech Republic (energy tax exemptions) and Canada and Norway (producer support) also have a relatively higher degree of subsidy under this measure. Nevertheless, in general, subsidies across most OECD countries are lower for gas than they are for coal and oil.

3.2 Renewables In principle, renewable energy subsidies focus on explicit price support mechanisms which should be more transparent to trace than subsidies for other fuel sources. In practice, there is quite a complex pattern of different support rates for different sizes and vintages of plant, and the legislation in each country tends to change frequently. As a result, there seems to be little literature available providing a like-for-like comparison of subsidies between countries. Two data sources have been used to construct a comparison, the EU energy portal (Portal) and a study for the European Renewable Energies Federation (Fouquet 2012). Some countries’ schemes are based on a feed-in tariff that represents the total payment to renewable generators per MWh produced. Other schemes are based on a “premium” over and above the wholesale electricity price. In these cases, an estimate has to be made of the market price for electricity in order to reach the total payment to make a like-for-like comparison. The UK situation is similar to the premium tariff in the sense that renewable generators receive income from electricity plus an additional amount for the renewable energy certificates (ROCs + LECs) shows values that are inclusive of electricity prices, and therefore do not represent the subsidy, but rather the subsidy + market value. Because of the difficulty of comparing across countries, a relatively smaller sample is presented here. In some cases, there appears to be a discrepancy between the different data sources, leading to a range of estimates—these cases are noted with an asterisk. In other cases, the range relates to different tariffs applying to different sizes of plant, or for different vintages (ie year of installation). For example, in the UK case the ranges apply to different tariff rates applied to different dates of installation as described in the notes below the charts. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Figure 11 RANGES OF SUBSIDIES FOR RENEWABLES IN SELECTED EU COUNTRIES 350 Onshore Wind

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50

0 Italy UK+ France Spain+ Austria* Germany* Denmark+ Netherlands

350 Offshore Wind

300

250

200

€/MWh 150

100

50

0 Italy Spain+ UK+(1) France* Germany Denmark*+ Netherlands cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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700 Solar PV

600

500

400

€/MWh 300

200

100

0 Italy Spain^ Austria France UK+(2) Germany Denmark+ Netherlands*

350 Biomass 300

250

200

€/MWh 150

100

50

0 Italy Spain Austria France UK+(3) Germany Denmark+ Netherlands

NOTES: * Range due to differences between sources. + Support based on a premium: these figures include an estimate of wholesale market price received. Tariff suspended. ^ (1) Lower limit is the reduced banding rate for offshore wind of 1.5 ROC per MWh. Upper limit is current rate of 2 ROC per MWh. (2) Lower limit is the current PV tariff, upper limit is the rate that existed for projects up to Mar 2012. (3) Lower limit is for biomass co-firing, upper limit is for dedicated energy crops or biomass with CHP. Onshore wind tariffs lie within a relatively narrow band (with the exception of Italy), reflecting the mature state of the technology. The UK lies at the upper end of this range, but is broadly comparable with other European countries. By comparison, offshore wind tariffs vary considerably. The lowest figures appear to be for Denmark, based on data from the EREF report which constitutes the lower bound of the range. On the other hand, the tariff rate arrived at by auction for the recent Anholt offshore wind farm was around €140/ cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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MWh, which is comparable with the lower end of the UK range (€134/MWh) which applies to the lower banding rate for projects built after 2014. In general, it therefore appears that under current RO banding arrangements, the price for offshore wind including subsidies and market prices is either comparable or relatively low compared to other major European countries. Solar tariffs also vary considerably between countries, and generally have a wide range even for individual countries. This largely represents the fact that tariffs are under frequent review, and are generally coming down quite quickly. Many countries have a degression rate for subsidy levels, and these are often tied to the rate of uptake (notably in Germany). This means that different plant will receive very different rates depending on when it was installed. The range for the UK represents the difference between the current (lower) rates and the higher rates that pertained prior to March 2012. Broadly speaking, the new lower rates in the UK lie at the lower end of the range of European tariff levels, whereas the rates prior to March 2012 were at the upper end. Support levels for Biomass in the UK are broadly comparable to those in the rest of Europe, although direct comparison is more complex than this chart would suggest because the wide range of applications of biomass and different sources of biomass tend to attract different rates, and there is no harmonisation of these categories across different countries.

3.3 Nuclear International comparisons of national-level nuclear subsidies for new plant are difficult to obtain, partly because nuclear subsidies are more obscure, and partly because of the scarcity of new build operations. The new plant at Flamanville in France is being undertaken by EdF, a majority state-owned company, so cost overruns presumably are picked up ultimately by the state, and therefore constitute a subsidy, but independent figures are difficult to obtain. The Olkiluoto 3 plant in Finland is being built under market conditions, but it is not yet clear who will ultimately pick up the tab for cost overruns. Estimates of funding arrangements for decommissioning and waste are available through EU comparisons of state aid, although it is not clear that such comparisons are truly on a like-for-like basis. The EU is involved in nuclear support at the national level in a number of ways, some direct, some indirect. In terms of direct support, during the accession negotiations, the Lithuanian, Slovakian and Bulgarian Governments committed themselves as part of their Accession Treaties to close their Soviet-design reactors. This was a central issue in the negotiations with all three countries, and an important part of the whole package of rights and responsibilities. To help them meet this commitment, substantial Community assistance in addition to that provided under the former PHARE programme were agreed. The overall financial support for the three programmes totals some € 2.5 billion. This covered the support for Bulgaria until 2009 and covers Lithuania and Slovakia until 2013. The EU is also involved more indirectly through its influence on state aid decisions made by Member States. The significant liabilities for decommissioning and waste disposal built up during the lifetime of a nuclear reactor are supposed to be covered by the EU’s Polluter Pays Principle. To comply with this principle, plant operators should build up a supply of finance to cover these liabilities over the productive life of the plant. This principle is only partially complied with across the EU. The European Commission has recently (March 2013) released a staff working paper which sets out the level of support provided by Member States to fund nuclear decommissioning activities (EU 2013), from which data is summarised in Table 3.1. Member State governments are involved in these decommissioning funds in a number of different ways. Most directly, where nuclear power plants are under public ownership, the government will be directly responsible for the decommissioning and waste costs. Often these liabilities will be met out of current budgets rather than building up ring-fenced reserves. In other cases, governments have made commitments to meet some of the liabilities on behalf of the companies that own the plant. In Germany, the financial provisions for decommissioning are provided by the owners of the plant, conforming to the polluter pays principle. Nevertheless, the tax treatment of these funds does constitute a subsidy, although not a state aid, a decision arising from a test in the European courts. With €30 billion of decommissioning funds set aside, the German government is forgoing income tax revenues on the order of €4.5 billion16. This estimate is confirmed by a DIW study (Diekmann and Horn 2007) which valued this subsidy at €5.6 billion.

16 Based on an assumed application of Germany’s flat rate corporate tax level of 15%. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Table 3.1 COMPARISON OF NUCLEAR DECOMMISSIONING COST ESTIMATES ACROSS THE EU Total estimated Provisions decommissioning accumulated by end % of required % of operational costs 2009 funds accumulated lifetime expired [€ million] [€ million]

Belgium 3,453 2,002 64% 63% Bulgaria Special case Czech Republic 1,280 251 20% 46% Germany 11,672 2,529 22% 100% Denmark 98 98 100% 100% Finland 519 506 97% 62% France 77,048 36,781 48% various Hungary 4,030 116 3% 51% Lithuania 2,400 153 0% 100% Netherlands Confidential Romania 598 13 2% 28% Sweden 8,548 4,459 52% 63% Slovenia 1,155 145 13% 68% Slovakia 1,955 931 48% 62% UK 42,405 83%

For a review of energy subsidies to the nuclear industry (past and present) in the US, see (UCS 2011). This quantifies subsidies for investor-owned utilities (IOUs) and publicly-owned utilities (POUs), suggesting that for existing plant, legacy subsidies amount to around 140% of market prices, whilst ongoing cost subsidies amount to between 13Ð100% of market prices. For new plant the study concludes that subsidies amount to between 70Ð200% of market price (Figure 11).

Figure 11 ESTIMATES OF SUBSIDY LEVELS FOR NUCLEAR PLANT IN THE US ¢/KWH (SOURCE: (UCS 2011)

A) Existing plant cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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B) New plant

3.4 European-level Support for Energy The EU’s influence on energy issues has increased in recent years and culminated with the adoption of the Treaty of Lisbon and within that the inclusion of energy as an area of joint competence between the EU and Member States. The total value of energy consumption in the EU is around €1.2 trillion per year. The EU has both a direct and indirect impact on this price through its legislation. However, the financial implications of these impacts are relatively small, compared to total energy expenditure. Of the two, the direct impacts of EU legislation is around 1% of the total expenditure, whereas the indirect affect is around 5%. Direct Impact: The EU institutions can make available finance, either in the form of loans or grants, for the development and piloting of new energy technologies or for energy infrastructure, in particular for the gas and electricity grids, transport infrastructure and the energy efficiency of infrastructure in general. The types of projects being funded by the EU are dependent on a number of factors, for example the sector specific support mechanisms for nuclear and to a lesser extent coal exist as a direct result of the establishment of the EURATOM and Coal and Steel Treaties, over fifty years ago. However, a larger share of the finance is determined by current policies, in particular as the EU strives to meet the 20:20:20 targets. Indirect Impact: The EU, through it legislation or rulings, also has an indirect impact on the subsidies and support schemes in Member States. This is most financially significant in the area of State Aid rulings, which determine the extent to which Member States can assist their industries, and in setting the framework for the use of market mechanisms such as feed in tariffs for renewable energy. Feed in tariffs do not require direct public financial support, but will often lead to additional financial assistance for a technology or technologies from within the market. Figure 12 shows the degree to which the EU institutions have control and/or influence on energy subsidies and ultimately energy pricing within the borders of the European Union. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Figure 12 INFLUENCE OF EU INSTITUTIONS ON ENERGY SUBSIDIES IN EUROPE Member State Support (Indirect EU influence) coal

nuclear

environmental Indirect subsidies renewables Key Total EU Grant market value Loan Consumption (€) of EU-ETS allowances R&D Market State aid

Direct subsidies EIB Loans

coal road

Framework Programmes gas rail oil sea Trans European Networks nuclear renewables air all non-nuclear energy nuclear transport Structural Funds Recovery Plan Energy Intelligent Europe road EU Treaty networks networks Total rail ECSC Coal offshore wind renewables urban transport Euratom Safeguards Nuclear coal CCS energy efficiency ports, inland waterways multimode transport Euratom loans Nuclear other other airports

There are a number of mechanisms in which the EU directly funds, either through loans or grants, the development of the energy sector within and outside the EU. However, there is no single process which decides the engagement of the EU institutions. This creates both a complexity and potentially a lack of consistency in the projects and infrastructure funded. The main loans are granted through the European Investment Bank which, in terms of the volumes of finance that it disperses, is the largest International Financial Institution in the world (see Figure 13)

Figure 13 EUROPEAN INVESTMENT BANK ENERGY LENDING 2006Ð2009 (€ MILLION) Oil Financial 626 Vehicles Hydro 1060 1688 LNG Wind 886 1935 Solar Geothermal Gas 819 316 Pipelines biomass 4220 13,6 General Renewables 2066 Incineration Nuclear 52 700

Gas 3165 Electric Grids 6981 Coal CHP 1368 760

Source: EIB 201017 17 EIB (2010): Projects financed data-base, accessed June 2010 http://www.eib.org/projects/loans/index.htm cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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More recently, EIB has consolidated lending around renewable energy, and gas and electricity infrastructure projects. In 2012, there were no loans to coal plant, and one loan for the expansion of uranium enrichment facilities in Almelo, Netherlands (Figure 14).

Figure 14

EIB LENDING IN 201318 (€m) Electricity 1885 infrastructure 1860

R&D / strategy 434

Nuclear Gas 75 1928

The other major direct area of influence is the EU’s structural funds, which through the European Fund for Regional Development (EFRD), the European Social Fund (ESF) and the Cohesion Fund can make available over €300 billion to promote growth and jobs leading to the convergence for the least-developed Member States and regions. In the energy sector this includes financial assistance to meet EU objectives, such as energy efficiency targets, but also the greater integration of the energy networks, though the trans European energy and transport networks programmes. The EU also seeks to directly influence the development and deployment of new technologies, through its long established research programme or through demonstration funding, such as in the European Recovery or the Energy Intelligent Europe Plans.

Figure 15

EXPENDITURE ON ENERGY INFRASTRUCTURE 2000Ð6 IN THE EUROPEAN REGIONAL DEVELOPMENT FUND (€ MILLION) 900

800 772.64

700 580.93 600

500

400 354.52

300 190 200

100

0

Energy-Unallocated Electricity, gas, oil Renewables Energy Efficiency, and solid fuels co-generation

Source: European Commission 200219 18 EIB (2013): Projects financed data-base, accessed Mar 2013 http://www.eib.org/projects/loans/index.htm 19 European Commission (2002): Staff Working Paper Inventory Of Public Aid Granted To Different Energy Sources. , December 2002, page 121. It must be noted that the figure used for renewables is less than that quoted in the same report on page 50, which estimates the renewables expenditure during this period to be €487 million. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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The Structural and Cohesion Funds are used widely in the EU to harmonise the economic and social conditions in different regions. Europe’s poorer regions receive most of the support, but all European regions are eligible for funding under the policy’s various funds and programmes. The Structural Funds are made up of the European Regional Development Fund (ERDF) and the European Social Fund (ESF). Together with the Common Agricultural Policy, the Structural Funds and the Cohesion Fund make up the great bulk of EU funding, and the majority of total EU spending. New objectives have been defined for the current programmes, which run from 1 January 2007 to 31 December 2013. The overall budget for this period is €347 billion: €201 billion for the European Regional Development Fund, €76 billion for the European Social Fund, and €70 billion for the Cohesion Fund.

In July 2004 the European Commission adopted its legislative proposals on the reform of the cohesion policy for the budgetary period, 2007Ð13. Within this and through the Cohesion Fund, a specific budget for investment in both energy efficiency and renewable energy was established.20 The anticipated budgets are seen below and show how much the shift has taken place to support the development of renewable energy and energy efficiency.

Table 3.2 summarises the major direct expenditure by the EU for energy, including transport issues. As can be seen transport expenditure dominates the major EU sources of funding, the structural funds and the loans from the EIB. The transport sector receives eight times more funding from structural funds than energy and three times more from the EIB. The transport sector in fact receives nearly one quarter of all structural funds.

Table 3.2

SUMMARY OF DIRECT EU INFLUENCE ON ENERGY EXPENDITURE AND PRICING (SOURCE: EUROPEAN COMMISSION21) Type of Total Annual Technology support Programme Dates (€million) (€million) Grants Energy Structural and Networks Grant Cohesion funds 2007Ð13 675 112 Structural and Renewables Grant Cohesion funds 2007Ð13 4,761 793 Structural and Energy Efficiency Grant Cohesion funds 2007Ð13 4,272 712 Structural and Other Grant Cohesion funds 2007Ð13 1,101 183

Transport Structural and Road Grant Cohesion funds 2007Ð13 41,000 5,850 Structural and Rail Grant Cohesion funds 2007Ð13 23,600 3,370 Structural and Urban transport Grant Cohesion funds 2007Ð13 8,100 1,160 Ports and inland Structural and waterways Grant Cohesion funds 2007Ð13 4,100 590 Structural and Multi-mode transport Grant Cohesion funds 2007Ð13 3,300 470 Structural and Airports Grant Cohesion funds 2007Ð13 1,900 270

Networks Grant Recovery Plan 2009Ð11 2,365 1,182 Offshore Wind Grant Recovery Plan 2009Ð11 565 282 Coal—CCS Grant Recovery Plan 2009Ð11 1,050 525

1952— Coal Grant ECSC 2002 13,000 260 2003Ð06 60 15 Energy Intelligent Energy Efficiency Grant Europe 2008 10 10 Renewables Grant EIE 2008 11 11 Transport Grant EIE 2008 13 13 20 European Commission (2007): Cohesion policy: the 2007 watershed: Inforegio, Fact Sheet 2004: European Union Regional Policy. 21 European Commission (2007): Cohesion Policy 2007Ð13: Energy, DG Employment, Social Affairs and Equal Opportunity, DG Regional Policy. http://ec.europa.eu/regional_policy/themes/statistics/2007_energy.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Type of Total Annual Technology support Programme Dates (€million) (€million) Framework Programmes Nuclear R&D 4Ð7 1994Ð2013 8,701 457 Framework All non-nuclear Programmes energy R&D 4Ð7 1994Ð2013 5,959 313 Framework Programme Transport R&D 7 2007Ð14 4,100 585

Loans ENERGY Gas Loan EIB 2006Ð09 6,981 1,745 Oil Loan EIB 2006Ð09 626 156 Renewables Loan EIB 2006Ð09 6,837 1,709 Nuclear Loan EIB 2006Ð09 886 221 Coal Loan EIB 2006Ð09 1,060 265 Nuclear Loan Euratom loans 1977Ð2009 3,420 N/A TRANSPORT Road Loan EIB 2006Ð09 21,416 5,354 Rail Loan EIB 2006Ð09 11,576 2,894 Sea Loan EIB 2006Ð09 4,509 1,127 Air Loan EIB 2006Ð09 5,782 1,145

3.5 Energy R&D A comparison of government R&D expenditure on energy is provided by (IEA 2012). As noted in Section 2.6.1, funding for energy research in the UK increased dramatically between the mid-2000’s and 2010. indicates a similar trend (though not so extreme) in many IEA countries as interest in energy issues and concerns over energy security and the rise in energy prices rose over this period. R&D expenditure in the UK shifted from being amongst the lowest of IEA countries (measure relative to GDP), to being the median level of expenditure.

Figure 16

GOVERNMENT R&D BUDGETS ACROSS IEA COUNTRIES per 1 000 units of GDP 0.9 2005-07 average 0.8 0.7 2010 0.6 0.5 0.4 0.3 0.2 0.1 0 Italy Spain Korea Japan Greece Norway Canada Sweden Portugal Hungary Australia Denmark Germany Switzerland New Zealand United States Czech Republic United Kingdom Slovak Republic

References Measuring and Managing Federal Financial Risk, University of Chicago Press. Abernathy, W. J. (1979). “The productivity dilemma.” Business Horizons 22(6): 86Ð87. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Adler, P. S., M. Benner, D. Brunner, J. MacDuffie, E. Osono, B. Staats, H. Takeuchi, M. Tushman and S. Winter (2009). “Perspectives on the Productivity Dilemma.” Journal of Operations Management 27(2): 99Ð113. Arrow, K. J. and G. Debreu (1954). “Existence of an Equilibrium for a Competitive Economy.” Econometrica 22: 265Ð290. Birmingham (2012). THE FUTURE OF NUCLEAR ENERGY IN THE UK Birmingham Policy Commission, University of Birmingham. Blaug, M. (2007). “The Fundamental Theorems of Modern Welfare Economics, Historically Contemplated.” History of Political Economy 39(2): 185Ð207. DECC (2011). Control Framework for DECC Levy-Funded Spending: Questions and Answers. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48244/3290-control-fwork-decc- levyfunded-spending.pdf. DECC (2011). Waste Transfer Pricing Methodology for the disposal of higher activity waste from new nuclear power stations, Department of Energy and Climate Change. DECC (2012). Gas Generation Strategy, UK Department of Energy and Climate Change. DECC (2012). Nuclear third party liabilities to be increased sevenfold. Diekmann, J. and M. Horn (2007). Fachgespräch zur Bestandsaufnahme und methodischen Bewertung vorliegender Ansätze zur Quantifizierung der Förderung erneuerbarer Energien im Vergleich zur Förderung der Atomenergie in Deutschland Available online at: http://www.erneuerbare-energien.de/inhalt/39617 Available online at: http://www.erneuerbare-energien.de/inhalt/39617, Auftrag des BMU. Donohue, M. (2008). Environmentally Harmful Subsidies in the Transport Sector. Paris, OECD. OECD Document No. ENV/EPOC/WPNEP/T. EnergyFair (2012). Nuclear Subsidies. www.energyfair.org.uk. EU (2013). Commission Staff Working Document: EU Decommissioning Funding Data. Brussels. SWD(2013) 59 final. Fouquet, D. (2012). Prices for Renewable Energies in Europe: Report 2011Ð2012 European Renewable Energies Federation. Greenpeace (2011). Subsidy Assessment of Waste Transfer Pricing for Disposal of Spent Fuel from New Nuclear Power Stations GSI (2010). Fossil Fuels—At What Cost? Government Support for Upstream Oil Activities in Three Canadian Provinces: Alberta, Saskatchewan, and Newfoundland and Labrador. Geneva, Switzerland, International Institute of Sustainable Development. GSI (2010). Fossil Fuels—At What Cost? Government Support for Upstream Oil and Gas Activities in Indonesia. Geneva, Switzerland, International Institute for Sustainable Development. GSI (2010). Subsidy Estimation: A survey of current practice Geneva Switzerland, International Institute for Sustainable Development. GSI (2010). Tax and Royalty-Related Subsidies to Oil Extraction from High-Cost Fields: A Study of Brazil, Canada, Mexico, United Kingdom and the United States. Geneva, Switzerland, International Institute for Sustainable Development. GSI (2012). Fossil Fuels—At What Cost? Government Support for Upstream Oil and Gas Activities in Norway. Geneva, Switzerland, International Institute of Sustainable Development. IEA (1999). World Energy Outlook: Looking at Energy Subsidies, getting the prices right. Paris, International Energy Agency. IEA (2012). Energy Policies of IEA Countries: The United Kingdom 2012 Review. Paris, International Energy Agency. IEA, OPEC, OECD and W. BANK (2010). ANALYSIS OF THE SCOPE OF ENERGY SUBSIDIES AND SUGGESTIONS FOR THE G-20 INITIATIVE Joint Report Prepared for submission to the G-20 Summit Meeting Toronto (Canada) IMF (2013). Case studies on energy subsidy reform: Lessons and implications. http://www.imf.org/external/np/ pp/eng/2013/012813a.pdf, International Monetary Fund. IMF (2013). Energy Subsidy Reform: Lessons and Implications. http://www.imf.org/external/np/pp/eng/2013/ 012813.pdf, International Monetary Fund. Koplow, D. (2009). Measuring energy subsidies using the price-gap approach: what does it leave out?, International Institute for Sustainable Development. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Lipsey, R. G. (2007). “Reflections on the general theory of second best at its golden jubilee.” International Tax and Public Finance 14(4): 349Ð349. Lipsey, R. G. and K. Lancaster (1956). “The General Theory of Second Best.” The Review of Economic Studies 24(1): 11Ð32. Lucas, D. (2010). Measuring and Managing Federal Financial Risk, University of Chicago Press. Lucas, D. (2012). “Valuation of Government Policies and Projects.” Annual Review of Financial Economics 4: 39Ð58. NAO (2012). Managing risk reduction at Sellafield: REPORT BY THE COMPTROLLER AND AUDITOR GENERAL, National Audit Office. OECD (2010). Measuring Support to Energy. OECD (2012). Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013. Paris, OECD Publishing OECD (2013). Taxing Energy Use: A Graphical Analysis. Ofgem (2012). Feed-in Tariff Quarterly Report. Issue 10. Portal, E. “Europe’s Energy Portal.” Retrieved 27 March 2013, 2013. Sander, M., J. (2009). Justice. London, Penquin Books. Schneider, M., A. Froggatt and J. Hazemann (2012 ). World Nuclear Status Report. Paris, London. Schumpeter, J. (1942). Capitalism, Socialism and Democracy. New York, Harper & Row. Sen, A. (2001). Development as Freedom. Oxford, Oxford University Press. Thomas, S. (2004). The UK Nuclear Decommissioning Authority, Public Services International Research Unit UCS (2011). NUCLEAR POWER: Still Not Viable without Subsidies Union of Concerned Scientists. UK (2010). The Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010 No. 678. UK (2012). The Feed-in Tariffs (Specified Maximum Capacity and Functions) (Amendment No. 2) Order 2012 No. 1393. http://www.legislation.gov.uk/uksi/2012/1393/pdfs/uksi_20121393_en.pdf, UK Government Statutory Instruments. Valsecchi, C., P. ten Brink, S. Bassi, S. Withana, M. Lewis, A. Best, F. Oosterhuis, C. Dias Soares, H. Rogers- Ganter and T. Kaphengst (2009). Environmentally Harmful Subsidies: Identification and Assessment Final report for the European Commission’s DG Environment, November 2009 WorldBank (2010). Subsidies in the Energy Sector: An Overview Background Paper for the World Bank Group Energy Sector Strategy. Washington, World Bank. 17 April 2013

Written evidence submitted by the Nuclear Industry Association 1. The Nuclear Industry Association (NIA) welcomes this opportunity to respond to the Environmental Audit Committee’s inquiry. 2. NIA is the trade association and information and representative body for the civil nuclear industry in the UK. It represents around 270 companies operating in all aspects of the nuclear fuel cycle, including the current and prospective operators of the nuclear power stations, the international designers and vendors of nuclear power stations, and those engaged in decommissioning, waste management and nuclear liabilities management. Members also include nuclear equipment suppliers, engineering and construction firms, nuclear research organisations, and legal, financial and consultancy companies. 3. As the trade association for the nuclear industry the NIA does not have the expertise to provide detailed responses to the five specific questions posed by the Committee, which are essentially a matter for Government. We would however like to make some higher level points relating to the financing of new nuclear plants. 4. As the Oxford Energy Associates (OEA) report to the Committee emphasises the energy subsidies issue is complex. There are diverse views on how they should be defined, and both wider and narrower parameters have been used. In the UK the Government’s approach has been to use a narrower definition for subsidies to the electricity industry, which has had the benefit of providing a clear picture of specific support measures including their impact on the energy economy. 5. Against this background, and our reading of the OEA report, we believe the Government’s Electricity Market Reform proposals are not a key issue for the Committee. We would regard their provisions—including cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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the CfD arrangements and the carbon floor price—not as subsidies but as enablers to facilitate the UK’s wider energy policy. 6. The UK’s current nuclear power stations have been making a major contribution to the UK’s energy supplies over many years, operating in a competitive market and without subsidy. However, with much of our nuclear and coal fired capacity closing over the next few years, the UK needs credible plans to replace that capacity and to decarbonise the power sector if it is to meet its energy security and climate change targets. The EMR proposals are designed to provide investors with the certainty they need to proceed with the low carbon plant—both nuclear, renewables and potentially CCS—needed to achieve this. 7. Whilst nuclear and low carbon generation generally have lower operating costs than fossil generation, their higher up front capital costs mean they are difficult to finance in the current market. The EMR proposals are therefore addressing a market failure. Without such action the UK would be locked into a high carbon energy scenario. 8. In this context the Oxford Energy Associates report comments that subsidies have become synonymous with bad economic practice, and are generally assumed to reduce economic efficiency. The EMR proposals will not have this effect. In the case of nuclear the introduction of new plant will provide long term price stability for consumers, protecting them from high or volatile fossil fuel prices. The Government view is that electricity bills after the implementation of EMR are expected on average to be lower than they would have been in the period up to 2030. Moreover the Climate Change Committee recently concluded that delaying investment in low carbon technologies to the 2030s would be likely to drive up costs—by up to £100 billion in some scenarios. 9. To sum up, the EMR proposals are carefully designed to create a level playing field for all low carbon generation technologies at minimum cost to consumers. The NIA believes this will not only help the UK meet its energy security and carbon reduction objectives, but will also protect the consumer from long term price increases. 10. Finally, in relation to the UK’s historic liabilities, we would note that the Nuclear Decommissioning Authority was set up in 2005 to decommission and clean-up these sites. Whilst the cost of this work is being funded from the NDA’s commercial operations and the UK Government, we would suggest this should properly be regarded not as a subsidy but the cost of dealing with a public sector liability from the historic nuclear research and development and public sector operation of the Magnox power station fleet. 13 June 2013

Written evidence submitted by RenewableUK

1. Government needs to reassess how energy subsidies are defined and make sure that subsidies for all energy technologies that take place throughout their life-cycle are reported transparently.

2. Further consultation is needed on how to implement this process but also to clearly define subsidies and how these will we measured. This is particularly important for subsidies that are complex or difficult to monetise.

3. Despite efforts of the Government to reduce the environmental subsidies to fossil technologies through the Carbon Floor Price and Climate Change Levy, these are only small steps in the right direction and support for Renewable Energy Technologies remains justified, In fact, they appear to be the most cost effective approach to meet decarbonisation objectives.

4. In order to avoid conflicting policies and therefore a possibly inefficient use of public finance, Government needs to ensure that industrial policies are aligned with industry subsidies while making sure that these policies do not contradict each other. Subsidies to the fossil fuel industry are therefore counterproductive to our decarbonisation efforts.

Introduction 5. RenewableUK is the UK’s leading trade association in the field of renewable energy, representing over 650 companies in the wind, wave and tidal stream sectors. Together, these technologies will provide the bulk of the renewable electricity we will need to meet targets in 2020 and through to 2050, and should be the motors of new industrial growth, providing thousands of new jobs and significant export revenue. 6. We believe that the technologies that we represent are, to varying degrees, still developing industries but all offer large-scale, cost-effective low carbon options for the longer term. 7. For the time being, subsidies therefore remain essential, however our members are determined to reduce costs to a point where, in a market underpinned by a strong carbon price, no subsidy is required. However, it is important to understand that the varying technologies will achieve this on different time horizons. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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8. This time horizon is directly correlated to Government policy, from subsidies to the long term certitude that accompany these. The recent CCC report22 highlights the “clear benefit in committing to invest in low- carbon generation over the next two decades”.

Renewable Energy 9. The technologies that RenewableUK champions could need a total of about £50 billion of additional, so far uncommitted investment up to 2020. The result of this and previous investment would be approximately 13GW of onshore wind, 18GW of offshore wind and 200MW of marine renewables, in total generating about 25% of this country’s power. We would also have world-leading industries in offshore wind and marine, which would be starting to earn significant export revenues from about 2020 onwards. 10. Direct support for these technologies is necessary to secure this investment, which is vital to stimulate our economy at this challenging time. This support is justified due to the explicit and implicit support that other technologies have received or continue to receive, and in order to promote new energy technology options. 11. The greatest challenge faced in securing this financing is risk mitigation. Direct support in the form of the Renewables Obligation has provided us with exactly this. Onshore wind is now a mainstream generation technology, with costs approaching those of new-entrant gas generation. Now that some scale is being achieved in Offshore Wind, we believe that we are on the way down the learning curve and RenewableUK is working hard with its members on cost reduction strategies to accelerate this process.

Whether the Government has identified the extent of energy subsidies, and measured them 12. The challenge of defining and identifying subsidies is complex and requires careful consideration. We believe that only informed policy decisions will yield the sustainable future that we need, and thus we need transparent and clear reporting for all subsidies, for all technologies/energy sources and at all levels (extraction, production, transmission and consumer). 13. These subsidies should be reported online in an easily and freely accessible forum, and reporting should be a carried out using a common metric. It is important that all Government activity and policy that provides competitive advantage to one technology over another be identified, even if the impact is difficult to quantify. For instance, Government guarantees can represent a risk to the public, yet the quantification of such risks is complex, with no clear standard in existence. Such measures may be justified or classed as not harmful, but it is important that they be reported alongside direct subsidy in order to give a complete picture of support that is given. Definition of the reporting system should be subject to further public consultation. 14. Failure to achieve such transparency on all subsidies creates an unfair burden on renewable technologies for which subsidies are direct and transparent. This also has the benefit of allowing clear international comparisons of “true” technology costs, and thus helping to expose and eliminate distortions in cross-border trade.

How well any identification of subsidies by the Government matches up to best practice methodologies in how energy subsidies are defined and scoped 15. The current Government definition of a “subsidy” (in the context of electricity) appears to be a “levy, direct payment or market support for electricity supplied”. This fails to account for a number of subsidies that exist, particularly in fuel extraction and is ambiguous on what implicit subsidies are measured, if at all, and how this is done. 16. In our view, in the energy industry, a subsidy is either the use of public money, regulation or institutional frameworks to protect or promote a specific industrial sector or technology. The definition of a subsidy should cover the whole life-cycle of a technology and its fuel from production all the way to end-use and waste disposal. This should also include soft measures, such as guarantees provided by Government in order to reduce investor risk. Implicit subsidies such as public health and environmental externalities should also be included, though valuing such externalities can be challenging. 17. Consideration must also be given to understanding historical subsidies for fossil fuel and nuclear power. This is an important part of a decision maker’s tool kit, as it would provide further clarity on the cost of bringing new technologies to market. 18. A more complex indirect subsidy that has not yet been properly identified and costed is institutional rigidity. The current regulatory framework in the energy industry favours traditional generation technologies over innovative and renewable technologies, through history and familiarity. While this situation will slowly change as these new technologies become mainstream, industry codes and practices still impose inappropriate barriers that can add to cost. Even if these cannot be quantified, acknowledging their existence will facilitate the process of resolving these issues. 22 “Next steps on Electricity Market Reform—securing the benefits of low-carbon investment”, Committee on Climate Change, May 2013 http://www.theccc.org.uk/wp-content/uploads/2013/05/1720_EMR_report_web.pdf cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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19. Early research and development is the only area where we believe technology specific accounting of subsidies is not helpful. Strict categorisation of innovative technologies, including disruptive technologies, is restrictive. Early R&D needs flexibility to explore multiple pathways at all times and will inevitably lead to some failures which cannot be allocated to any specific technology. Support of R&D is essential and should be encouraged as widely as possible.

Externalities—Carbon costs 20. RenewableUK considers that externalities, or market failures, should be priced. In the absence of pricing this constitutes a subsidy. As such we are supportive of the Carbon Floor Price and Climate Change Levy which are reflections of the polluter pays principle and are steps towards removing legacy subsidies to the fossil fuel industry. 21. In principle, this is an example of how the Government has successfully identified and started to amend a market distorting subsidy, however, the definition of the “right price” for carbon is contentious. While in theory it should be decoupled from economic drivers, becoming a sole reflection of the cost to the environment and society of carbon emissions, in practice this is a complex issue for which we do not yet have a practicable solution. A price which is sufficiently high and stable enough to stimulate investment in low-carbon alternatives will likely have to serve as a proxy for the true external cost of carbon emissions.

Reduced VAT 22. As long as the VAT tax break is a blanket tax break across all technologies, and thus does not confer a competitive advantage to any, RenewableUK is agnostic to how the Government deals with this.

The scale of subsidies in the UK, including comparison with other countries 23. After review of the evidence, RenewableUK generally agrees with the comparisons made, although more detail needs to be provided. For example, how each country deals with the cost of grid reinforcement or the specific use of a technology, such as roof mounted PV or large scale PV, can have a distorting impact on needed level of public money invested. Unlike the UK’s support system for Offshore Wind, under Germany’s feed-in-tariff generators do not pay grid use-of-system costs. Other variables such as the duration of support also change. 24. With that caveat, we feel that international comparison is a useful benchmark to assess the appropriateness of the level of subsidies in the UK. Currently these seem to indicate that our levels of support for Renewable Energies are within the range of support in comparative countries, which gives a level on confidence that the UK is providing an appropriate level. However we must caution that technology specific support must take account of local circumstances, whether these are environmental, economic, social and regulatory. 25. In the context of a competitive investment market, and once local circumstances have been accounted for, we must be careful about reducing levels of subsidies in the UK below our European counterparts. This is particularly true with technologies that are in the early stages of development and for which it is in our economy’s interest to attract the supply chains for these industries. Subsidies should therefore be in line with our industrial strategies. For instance, the opportunity to secure a large part of the offshore wind farm manufacturing and service industry should prompt “higher than average” subsidy. 26. In this context, it is worth highlighting the recent study from the CCC which demonstrates the benefits of having long term ambitious targets as a further driver for the development of technology supply chains in the UK, not just subsidies.23 Again, this should be looked at through the lens of our industrial strategy.

Whether the Government has any plans or targets to reduce or eliminate “harmful” subsidies 27. The clear definition of Government support is essential to identify “harmful” subsidies. In our opinion these are subsidies that are harmful to the environment, do not work towards the long term sustainability of the UK and harm the poor. In the energy sector this means that subsidies need to be directed to technologies that will decarbonise our electricity sector at the least cost to consumers, whilst maintaining security of supply. In the energy industry, we cannot decouple the concept of a “harmful” subsidy from the technology that subsidy is aimed at. 28. The “On Picking Winners” report from Imperial College London24 clearly highlights that: — Disruptive innovation to the energy generation stock cannot be achieved through stepped increases in carbon pricing alone. 23 “Next steps on Electricity Market Reform—securing the benefits of low-carbon investment”, Committee on Climate Change, May 2013 http://www.theccc.org.uk/wp-content/uploads/2013/05/1720_EMR_report_web.pdf 24 “On Picking Winners”, Imperial College London, Oct 2012 http://assets.wwf.org.uk/downloads/on_picking_winners_oct_2012.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— Direct subsidies are necessary to foster this shift, and in-fact, appear to be a more cost effective solution as it attracts investment with a lower cost of capital (ie lower risk premium). Additionally, action now helps foster growth and associated cost reductions. — This rule no longer stands true if, and only if, the carbon price is put to a realistic level (the target seems to suggest this would be around £74/tCO2) immediately with long term certainty that this will not be removed or reduced. This would appear to be politically impossible, given that it is likely to be painted as a regressive tax, and undesirable (transition period needed, carbon leakage without global agreement, etc.). 29. Currently it is not obvious that Government is working towards the common goal of removing harmful subsidies. Under the premise of “Security of Supply”, subsidies to the fossil fuel sector are the highest especially when we take stock of the un-priced externalities and rigidity of institutional frameworks. Continued subsidies to these industries are difficult to reverse, however, this should be a medium term goal with clear targets for 2020. New subsidies that will lead to legacy investments in fossil fuel extraction and use must be avoided at all costs. 30. The UK gas market is coupled to the global gas market and subject to WTO rules. Domestic production of gas will therefore have limited impact on the price paid by UK consumers, which will be dependent on the global demand/supply balance. Subsidy to this sector is thus unlikely to provide significant security of supply and economic benefits to UK. Additionally, the timeline for the development of this industry in the UK creates very limited additional industrial opportunities for UK businesses; we have missed the boat. 31. Further support to the fossil fuel industry therefore demonstrates limited economic benefits, limited decarbonisation benefits and limited security of supply benefits. Additionally, further investment in shale gas would require subsequent infrastructure investment creating lock-in that seriously threatens our current investments in low-carbon and renewable technologies. 32. Finally, in a systems context, the “golden age of gas” is likely to lead to an international “dash for gas”. This will lead to a global boom in demand for gas, with a consequent risk of an “overshoot”. If growth of demand outstrips supply, in a competitive market this will prompt higher fuel prices. We believe that countries locked-in to gas generation will be exposed to increasingly volatile and high prices.

Progress in reducing such harmful subsidies, and how current energy policies and DECC’s “Energy Pathways” for the mix of energy sources will influence the magnitude of any subsidies 33. Progress in the removal of harmful environmental subsidies is a slow and painful process. The Carbon Floor Price and Climate Change Levy are indications of the build-up of momentum in this area which we welcome, however it is obvious that there is a lot of division on these matters which is threatening the long term political support for these initiatives. 34. As the deployment of renewable technologies increases confidence that these technologies can provide us with a secure and economically viable energy supply, the removal of subsidies to harmful industries will become more acceptable. We are confident that a correct (high) carbon price in the future is achievable, however until such a point is reached, direct subsidies to many renewable technologies will remain necessary and indeed desirable. 35. It is also worth noting that subsidies for Renewable Technologies could potentially become harmful if these where pursued indefinitely and did not change to reflect the dynamics of the market. This is exactly what happened with feed-in-tariff for roof mounted PV systems in 2010 that did not reflect the dramatic fall in the cost of PV resulting in excessively large pay-outs to owner/developers. This is a clear policy failure that has tarnished the generally well developed support policies for Renewable Technologies. Regular RO band reviews and the planed CfD strike price reviews are essential in guaranteeing that the industry does not benefit unduly from public support. 36. Our members are also committed to the purpose of the long term Government support strategy, cost reduction. RenewableUK works closely with its members to foster opportunities for cost reduction and the report of the Offshore Wind Cost Reduction Task Force25 highlights the industry’s commitment to achieving Government’s £100/MWh cost target by 2020; providing that the support system is not weakened. The long term goal is to reduce costs to a point where, in a market underpinned by a strong carbon price, no subsidy is required.

Conclusion 37. RenewableUK and our membership will strongly welcome and support any Government initiative that seeks to provide transparency on the level of subsidies received by all energy technologies and their fuel sources. We feel very strongly that subsidies to renewable technologies are the clearest and most transparent in the whole energy sector and that this should not be the exception but the rule. Only by achieving full 25 Offshore Wind Cost Reduction Task Force Report, RenewableUK, June 2012 http://www.renewableuk.com/en/publications/reports.cfm/Offshore-Wind-Cost-Reduction-Task-Force-Report cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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transparency throughout the energy sector’s whole life-cycle will policy makers and the public be empowered to make informed decisions.

38. The investment horizon in the energy sector spans decades, creating lock-in, and therefore the definition of “harmful” subsidies cannot be decoupled from our long term decarbonisation targets to 2050. Doing so would be counterproductive and therefore against the public interest. A consistent strategy for the fossil fuel industry would therefore only focus on assisting it to transition towards renewable technologies.

39. Finally, subsidies should also be in line with our industrial strategies in order to maximise the benefits to our economy and job creation potential. As such their level also needs to be defined within the global context. For solar PV or Onshore Wind, the relocation of manufacturing jobs from abroad to the UK will be hard to achieve. This does not warrant “above normal” subsidy levels, however, as leader in the newer Offshore Wind Industry, which has a growing supply chain, there is real potential for a large UK based supply chain to develop, providing consequent export opportunities, which warrants “above normal” subsidy levels. 14 June 2013

Written evidence submitted by Oil & Gas UK

Introduction

Oil & Gas UK is the leading representative body for the UK offshore oil and gas industry. It is a not-for- profit organisation, established in April 2007 but with a pedigree stretching back over 40 years.

Membership, which currently exceeds 350, is open to all companies active in the UK continental shelf, from super majors to large contractor businesses and from independent oil companies to SMEs working in the supply chain.

Our aim is to strengthen the long-term health of the offshore oil and gas industry in the UK by working closely with companies across the sector, governments and all other stakeholders to address the issues that affect our member’s businesses.

Oil & Gas UK welcomes the opportunity to respond to the Environmental Audit Commission’s call for evidence in relation to the inquiry “Energy subsidies in the UK”.

As part of our submission, we have also responded to the written evidence commissioned by the Committee from Dr William Blyth of Oxford Energy Associates entitled “Energy Subsidies in the UK”.

Summary — Oil & Gas UK strongly advocates that the Committee adopts an approach which explores the balance between the taxation collected from individual energy sectors against the amount of value that is transferred from the taxpayer back to these particular elements of the energy sector. — Subsidies are methods of value transfer, from the taxpayer to an individual economic sector, to the extent that that sector benefits a net gain from the taxpayer relative to the tax contribution. — Allowances which reduce taxation rates to incentivise activity, and that remain set at such a rate that the effected sector remains a net contributor to the public purse, do not constitute a subsidy. — Tax allowances that are available for a small number of oil and gas related activities never bring the overall tax rate to a point lower than that which is applied to businesses generally—and never to a point whereby the sector is a net benefactor from the UK taxpayer.

Establishing a Definition of “Subsidy”

Central to the Environmental Audit Committee’s inquiry, and perhaps the most challenging aspect, will be defining what does and what does not constitute a subsidy. The issue of definition has been the subject of substantial recent debate and, as reflected in Dr Blyth’s paper, is an area of significant complexity.

However, in the context of the Committee’s inquiry, Oil & Gas UK strongly recommends that this interpretation excludes benefits from general public spending (eg, the employment of state educated staff or use of infrastructure such as the road network) which are available and exploited, to a greater or lesser extent, by all businesses operating in the UK.

Oil & Gas UK strongly advocates that the Committee adopts an approach which explores the balance between levels of taxation collected from individual energy sectors against the amount of value that is transferred from the taxpayer back to these particular elements of the energy sector. It is our belief that to approach this inquiry in this way will allow the Committee to most reasonably, accurately and meaningfully assess the degree by which some areas of the energy sector are subsidised. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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What is a subsidy? Subsidies are methods of value transfer, from the taxpayer to an individual economic sector, to the extent that that sector benefits a net gain from the taxpayer relative to the tax contribution. This can be achieved either through direct value transfer of capital or by indirect means where the burden of taxation is outweighed by Government spend, or regulation is artificially lessened, on a sector as a whole.

What is not a subsidy? Allowances which reduce taxation rates to incentivise activity, and that remain set at such a rate that the effected sector remains a net contributor to the public purse, do not constitute a subsidy. This is particularly true when an allowance is used to incentivise activity which leads to an increase in the tax revenue generated destined for the Exchequer. In this regard our views are aligned with comments recently made by the Secretary of State for Energy, the Rt. Hon Edward Davey MP, during the recent press launch of Sir Ian Wood’s review into “the economic benefits of offshore oil and gas production”, when he said: “Let’s be absolutely clear, the Treasury only agrees to allowances [for the oil and gas sector] if it knows it is going to benefit from the overall tax take going up as a result. I think an important part of the dialogue has been to ensure that fields that wouldn’t have been recovered or wouldn’t have improved their recovery rates, those have now come on and actually the taxpayers are net beneficiaries.” In the case of the offshore oil and gas sector, where the starting point for tax rates is very high in comparison with those imposed on other sectors, the tax allowances that are available for a small number of activities never bring the overall tax rate to a point lower than that which is applied in the UK to business generally— and never to a point whereby the sector is a net benefactor from the taxpayer. If this argument was to be applied to, for example, income tax rates, the logical conclusion would be to describe those paying the basic rate of income tax as being subsidised.

Why reliefs in the UK’s oil and gas tax regime do not constitute a subsidy As discussed above, there is often a tendency to assume that any tax allowances which lessens the burden of tax for particular activities (especially when these activities are sector specific, rather than, for example, general research and development) constitutes a subsidy. However, Oil & Gas UK would like to take this opportunity to draw the Committee’s attention to the special tax regime which operates for hydrocarbon extraction in the UK, which we have outlined below.

The theory of taxing mineral extraction The taxation of mineral extraction differs from the corporate taxation regime applied to most other sectors. Reflecting the uniqueness of this activity and in acknowledging that reserves are national assets, the offshore oil and gas industry is subjected to “economic rent”. The taxation of economic rent is characterised by higher than normal tax rates, reliefs for capital investment and the isolation of these activities from any other commercial operations in which companies may be engaged. By putting these tax rates into isolation, also known as “ring-fencing”, it restricts the opportunity for companies to offset losses arising from non-mineral extraction activities in order to reduce taxable profits from the oil and gas production business, making tax avoidance activities extraordinarily difficult. Indeed, HMRC themselves treat the sector as a whole as low risk due to the strength of the tax code in this area.

The UK oil and gas fiscal regime In the UK, businesses involved in oil and gas production are subject to three different taxes on their profits (alongside other indirect liabilities such as VAT, NICs etc.). These taxes are outlined below: — Ring fence corporation tax (RFCT)—levied on a company’s total taxable profits, computed in the same way as normal corporation tax, but for the offshore sector, the rate is 30% (7% higher than the current “main” corporation tax of 23%) — Supplementary charge (SC)—levied on a company’s total taxable profits, computed in a similar way to normal corporation tax, but finance costs are not deductible. The current supplementary charge rate is 32%. — Petroleum Revenue Tax (PRT)—levied on the adjusted profits for the field, rather than the company. Only fields which received their original production consent before March 1993 are liable to PRT and it is only paid by the most profitable, productive fields in the UK. The current PRT rate is 50%. In practice, this means that the marginal tax rate applied to fields which are subject to PRT is 81% (50% + (50% * (30% + 32%)) on all production income. The tax rate applied to fields not paying PRT is 62% (30% + 32%). cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Oil Allowance To encourage the recovery of technically or commercially challenging assets that would otherwise remain undeveloped, some fields which received their original production consent before March 1993 are granted an “Oil Allowance”. This provides fields that would usually be liable to PRT a certain allocation of hydrocarbons that can be recovered before PRT is payable. Whilst the profits from production covered by Oil Allowance is not taxable to PRT, it still bears RFCT and SC at the usual rate of 62% (30% + 32%).

Field Allowance A number of new fields which meet certain physical criteria benefit from a “Field Allowance”. This allows a certain amount of production income that can be generated by the field to be free of the Supplementary Charge. Field Allowances cannot be used to reduce a company’s liability to RFCT. Field Allowances have been designed to reduce the marginal rate of tax for companies who want to develop small or technically challenging fields which are less profitable. Without this incentive the fields would remain commercially unviable and, as a result, remain undeveloped. Even if a field’s total production income was covered by a Field Allowance, a company would remain liable for RFCT, charged at a higher rate than the rate that corporation tax is applied to businesses generally. Thus, ensuring that development of these small and/or difficult fields takes place, aggregate tax revenues from the sector will be increased in due course.

“Energy Subsidies in the UK”—Dr William Blyth Oil & Gas UK also wanted to take the opportunity to respond to the report commissioned by the Committee and written by Dr William Blyth.

UKCS tax regime We read Dr Blyth’s report with great interest. We felt it would be helpful to clarify some of the detail explored in the sections relating to the UK’s oil and gas sector and in particular to highlight omissions relating to the tax regime that is applied to this industry. Dr Blyth’s report fails to acknowledge that companies which recover oil and gas from the region of waters surrounding the United Kingdom, otherwise known as the UK Continental Shelf (UKCS) are subject to three different taxes, as discussed above. As a result, there are factual errors in some of Dr Blyth assertions which suggest that one of the taxes paid across the UKCS, ie the Supplementary Charge, levied at 32% on all upstream profits, has been omitted.

“Baseline” tax rates We dispute, in the strongest possible terms, the assertion given in the report that: “The standard PRT therefore defines the “normal” baseline tax rate for oil production in the UK.”26 We disagree that the top rate of tax should be considered the baseline against which other tax rates are measured and with the view that allowances applied to this rate should be considered to be subsidies. As we have discussed above, even if the most generous tax allowances are applied, the overall value transfer remains to the net benefit of the Exchequer and exceeds the tax rates applied to any other business sector operating in the UK. Indeed, as PRT is only payable on fields which received their original production consent before March 1993 this definition of the “baseline” at PRT is further flawed.

Allowances against PRT Dr Blyth then claims that: “Various allowances which partially offset the PRT are available to companies which act as subsidies. These include a new-field allowance that was introduced in 2009 for small, ultrahigh-pressure and high-temperature oil fields, and ultra-heavy oil fields.”27 Field Allowances are not a relief against PRT, but against the Supplementary Charge. As we explore above, allowances are necessary in the context of taxing natural resources to ensure that marginal fields are sufficiently commercially viable to be developed. Indeed, elsewhere in his report Dr Blyth acknowledges that such measures for high-cost fields are not uncommon in tax regimes for oil and gas producing countries.

Promote Licenses Dr Blyth’s paper also asserts that the licensing regime imposed on the oil and gas sector should be considered a subsidy, stating that: 26 Dr William Blyth, Energy Subsidies in the UK, page 20. 27 ibid cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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“Other measures to support certain types of production include Promote licences, which allow small and start-up companies to obtain a production license first and secure the necessary operating capacity and financial resources later through reduced rent for the first two years.”28 Oil & Gas UK considers it strange that an area of the oil and gas licensing regime, administered through DECC, is deemed to have a fiscal benefit and therefore is considered, by Dr Blyth at least, to represent a subsidy. In actual fact the Promote licenses are a way of encouraging more diverse range of companies to operate in the UKCS, with reduced licensing fees, but for shorter term license periods. There are no negative fiscal consequences of the licensing regime a company is operating under. The use of Promote Licenses is intended to boost activity by encouraging the development of smaller, economically and technically challenging prospects. They are designed to maximise the recovery of remaining oil and gas resources and reflect that barrels left in the ground earn the Treasury zero tax revenues. Further, the development of challenging assets creates jobs, promotes skills development, benefits the UK’s significant the supply chain industry and inspires technological innovations—all of which contribute economically through domestic activity in the UK and globally as exports. This was recently acknowledged in the UK Oil and Gas Industrial Strategy produced by the Department for Business, Innovation and Skills, which stated: “…through the recent extensions to the field allowance regime, the Government has demonstrated it is committed to a fiscal regime that encourages investment and innovation in the UKCS, whilst ensuring a fair return for taxpayers.”29 The Strategy goes on to assert that: “…changes to field allowances for new fields…have seen a number of major developments proceed... Since introducing the brownfield allowance, uptake has been strong. Significant field life extension has been realised.”30

Conclusion Oil & Gas UK is encouraged by the Environmental Audit Committee’s inquiry and feel that the debate surrounding how to define what is and what is not a subsidy, and how subsidies are applied, is one that would benefit from greater clarity. We are confident that the Committee will find our evidence of relevance to this inquiry and would welcome the opportunity to provide further information should the Committee feel that it would be beneficial. 17 June 2013

Written evidence submitted by the Department of Energy and Climate Change and HM Treasury Introduction 1. This is the Government’s evidence to the Environmental Audit Committee inquiry into energy subsidies, covering UK government support for energy, following a call for evidence on 24 April 2013. This evidence is a joint response from the Department of Energy and Climate Change (DECC) and HM Treasury (HMT).

Background 2. Currently there is no universally accepted definition of a subsidy. The Organisation for Economic Co- operation and Development (OECD) describes it as an “elusive concept”.31 The spectrum of what could be included in a definition is extremely broad. The narrowest possible definition of subsidy refers to direct budgetary payments by a governmental body to producers or consumers.32 The widest definitions extend to most or all areas of government activity, encompassing the time government officials act for or on behalf of a particular group or industry. 3. Neither extreme would provide the basis for sensible engagement on how, and to what extent the Government incentivises a particular sector to deliver Government objectives. 4. The International Energy Agency (IEA), OECD, the World Trade Organisation (WTO) and others have all undertaken work to look at subsidies, and have endeavoured to provide definitions. However, these definitions have been proposed for specific purposes and studies. 28 Dr William Blyth, Energy Subsidies in the UK, page 20 29 Department for Business, Innovation and Skills’ UK Oil and Gas Industrial Strategy, page 29 30 Department for Business, Innovation and Skills’ UK Oil and Gas Industrial Strategy, page 30 31 Overview of key methods used to identify and quantify environmentally harmful Subsidies with a focus on the energy sector page 14 32 ibid page 6 cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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5. The Government has worked with international organisations on a number of these studies into subsidies. Agreeing working definitions of subsidies has been important to progress these areas of inquiry which seek to provide recommendations and advice for governments to reduce the incentives for fossil fuels and encourage low-carbon alternatives. 6. The Government looks at the support it provides more generally, allowing it to consider development, deployment and management of a clear and coherent package of support to enable the Government to deliver its energy objectives. 7. The UK faces a huge investment challenge to ensure security of supply, and keep energy bills affordable while meeting targets for economy-wide decarbonisation. To meet our energy objectives, the Government needs to diversify the mix of energy, increasing and accelerating the use of low-carbon energy in the UK. 8. The Government’s policy therefore is to incentivise the energy industry to bring forward investment where there is a market failure that would act as a barrier to do so in the absence of those incentives. For example, while new mechanisms were introduced to enable renewable generation to compete in the market this left exposure to power price risk. For investors in technologies such as offshore wind, which face substantial initial investments but very low running costs, this can be problematic. Additionally, support available for low-carbon generation was not considered within a long-term funding envelope, meaning that investors have not had certainty and consumers have not been protected. 9. The Government has taken decisive action to address these issues and provide a sustainable, long-term basis for investment in electricity. It is determined to ensure that electricity supplies are secure, produce fewer emissions, and above all are affordable for consumers. It has: — introduced legislation to provide new support for low-carbon electricity generation through Contracts for Difference (CfDs) which will provide investors in technologies such as wind for the first time with stable, predictable revenues and protect them from the risks associated with wholesale volatility; — implemented the levy control framework and set a long-term funding envelope for support available for investment in low-carbon generation, to up to £7.6 billion (in 2012 prices) in 2020Ð21; this provides unprecedented certainty, stretching well beyond existing spending plans; — created incentives for low-carbon investment further by implementing the Carbon Price Floor; — invested in low-carbon infrastructure projects through the Green Investment Bank (GIB) which seeks to leverage additional private finance through its lending and aims to multiply the £3 billion lent through its original capitalisation; and — recognised the need to accelerate delivery of schemes in the shorter term. Therefore the Government is using the strength of its balance sheet to provide the £40 billion UK Guarantees facility for infrastructure projects.33 10. Energy taxes on businesses are designed to support wider energy policy in addition to raising revenue and cover both upstream and downstream activities. The main taxes are the oil and gas tax regime, the Carbon Price Floor (CPF), the Climate Change Levy (CCL) and the Carbon Reduction Commitment (CRC), all of which have different objectives. In the case of oil and gas the Government has introduced field allowances for more challenging categories of field that are economic, but commercially marginal at the high rate of tax. Such fields are relieved of tax of 32% for a certain portion of their income—but they still pay ring fence corporation tax at 30% for this portion, higher than the mainstream corporation tax rate. Field allowances do not reduce the cost of oil to consumers; rather increase what is extracted from the UK continental shelf. 11. In the case of the CPF, EU emissions trading scheme, CCL and CRC, the Government does provide support for certain industries or sectors which would be disproportionately impacted or as a transition measure to prevent carbon leakage. It is important the Government provides this kind of support to ensure our tax system remains competitive whilst managing the transition to a low-carbon economy. 12. The Government is open and transparent about where, how, and to what extent it provides support to incentivise the energy sector to help deliver the Government’s objectives, regardless of what that support is called. 13. The Government does not consider that any of its energy policies are “harmful”. Furthermore, energy policy (as with other Government policy) is subject to an initial impact assessment and subsequent monitoring, evaluation and review. This ensures that the Government can provide confidence and certainty while ensuring that the policy advances the Government’s objectives in a coherent way that provides best value for money. It also ensures that detrimental consequences can be quickly and effectively addressed.

33 Details and conditions are on the .gov website: https://www.gov.uk/government/news/government-uses-fiscal-credibility-to- unveil-new-infrastructure-investment-and-exports-plan cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Extent and Measurement of Support for Energy in the UK Overall budget control 14. As confirmed in the UK Renewable Energy Roadmap Update 201234 and in Electricity Market Reform: Delivering UK Investment published on 27 June 2013,35 the amount of market support to be available for low-carbon electricity investment (under the LCF) up to 2020Ð21 has now been agreed. This will be set at up to £7.6 billion (real 2011Ð12 prices) in 2020, and will help diversify the UK’s energy mix by increasing the amount of electricity coming from renewables from 11% today to around 30% by 2020, as well as supporting new nuclear power and carbon capture and storage.36

Departmental spending limits 15. Non-levy funded support must be provided from within agreed departmental spending limits as set by HM Treasury. Government Departments providing support to the energy sector follow government-wide guidelines on project and financial management, with projects subject to monitoring to ensure spending delivers value for money for taxpayers, and to prevent overspending.

The Levy Control Framework 16. The LCF places limits on the aggregate amount levied from consumers by energy suppliers to implement Government policy. In effect, it specifies the budget available to levy-funded policies and helps protect energy consumers from excessive levies on their energy bills. 17. Table 1 shows the annual caps to levies raised for electricity policy agreed under the LCF as announced on 27 June 2013. These caps are upper limits on the levies raised to fund electricity policies such as the Renewables Obligation (RO), Feed-in Tariffs (FITs) and CfDs, but would apply equally to any future levy- funded electricity policy. 18. These caps do not apply to non-electricity policies that are levy-funded, such as the Warm Home Discount.

Table 1 UPPER LIMITS TO ELECTRICITY POLICY LEVIES UNDER THE LEVY CONTROL FRAMEWORK 2015Ð16 2016Ð17 2017Ð18 2018Ð19 2019Ð20 2020Ð21 £ billion (2011/12 prices) 4.30 4.90 5.60 6.45 7.00 7.60

Impact on energy Bills 19. The Government is committed to being open and transparent about the impacts of energy and climate change policies on households and businesses. In March 2013, the Government published the Estimated Impacts of Energy and Climate Change Policies on Energy Prices and Bills 2012.37 This document assesses the impact of energy and climate change policies on gas and electricity prices and bills and updates analysis published in November 2011.38 It shows that the cost of energy and climate change policies account for around nine% of household energy bills in 2013.

Support for Low-Carbon Energy Renewables Obligation 20. The RO is currently the main financial mechanism by which the Government incentivises the deployment of large-scale renewable electricity generation in the UK. 21. The RO places an obligation on UK electricity suppliers to source a specified proportion of electricity they supply to customers from renewable sources, or pay a penalty.39 This proportion is set each year and has increased annually since the RO was introduced in 2002. The size of the Obligation in 2013Ð14 is 61.5 million Renewables Obligation Certificates (ROCs) with the suppliers Obligation for England and Wales set at 0.206 ROCs per megawatt hour (MWh) of electricity supplied. 22. Ofgem issue ROCs to renewable electricity generators for every MWh of eligible renewable electricity they generate. Generators sell their ROCs to suppliers or traders which allows them to receive a premium in addition to the price of their electricity. Suppliers present ROCs to Ofgem to demonstrate their compliance 34 UK Renewable Energy Roadmap Update 2012 35 Electricity Market Reform: Delivering UK Investment, Annex A 36 UK Renewable Energy Roadmap Update 2012, page 4 37 See Annex E for web address 38 Estimated impacts of energy and climate change policies on energy prices and bills 39 The RO works on the basis of three complementary Obligations—one covering England and Wales, and one each for Scotland and Northern Ireland. Scotland and Northern Ireland may set their own bands, and there are some minor differences in support levels between the three Obligations to reflect national circumstances. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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with the Obligation. Suppliers failing to present enough ROCs to meet their obligation in full have to pay a penalty known as the buy-out price. This is set at £42.02 per ROC for 2013Ð14 (linked to RPI) and provides a floor price for a ROC. 23. In April 2009 the RO was moved from a mechanism which offered a single level of support for all renewable technologies to one where support levels vary by technology according to a number of factors, including their costs and level of deployment. 24. The Government has stated that the RO will close in 2037. DECC intend to close the scheme to new generation in March 2017 and this will be put in secondary legislation. A generating station accredited under the RO will continue to receive its full lifetime of support (20 years) until the scheme closes in 2037. Introduction of Electricity Market Reform and CfDs will provide support for large-scale renewable electricity generation beyond 2017.40 25. While it is for suppliers to decide whether to pass the cost of ROCs to consumers through their electricity bills, the Government assumes that they do for cost control purposes. The total cost that can be levied on consumers is controlled within agreed limits by the LCF.

Table 2 THE BUDGET FOR THE RO UNDER THE LEVY CONTROL FRAMEWORK WITHIN THE SPENDING REVIEW PERIOD Year 11Ð12 12Ð13 13Ð14 14Ð15 Levy Budget (£ million)* 1,750 2,156 2,556 3,114 *2011/12 prices, discounted 26. The total RO annual support costs are expected to rise from around £1.4 billion in 2011Ð12 to up to £3.5 billion at the peak in 2016Ð17 (undiscounted , 2011Ð12 prices).41

Contracts for Difference 27. CfDs support low-carbon generation by ensuring that generators will receive a fixed price level for the electricity they produce known as the “strike price”.42 Generators will receive revenue from selling their electricity into the market as usual. However, when the market reference price is below the strike price they will also receive a top-up payment from suppliers for the additional amount. Importantly, if the reference price is above the strike price, the generator must pay back the difference. 28. The CfD was identified as the support mechanism for low-carbon generation as it offered the best balance of results across the four key criteria chosen: cost-effectiveness, coherence with the rest of the Electricity Market Reform package, durability and practicality.43 29. CfDs for renewables will initially be awarded on a first come first served basis before moving to allocation rounds. This will support a move to a more competitive allocation and price-setting system later in the decade. The allocation and price-setting processes for carbon capture and storage (CCS) and nuclear projects that will apply after the final investment decision (FID) enabling window and outside the CCS Commercialisation competitions is being developed. The Government expects to publish further information in the summer. The level of support for different renewables technologies will be set administratively in the first instance. 30. The Government’s ultimate aim is to move to a technology-neutral competitive process as soon as reasonably practicable. Realistically as technologies are at different stages of development this ultimate technology neutral process is likely to be preceded by a technology differentiated competitive process. This technology differentiated process may be introduced as early as 2017. The Government’s ambition is to move to the next phase, in which there will be technology-neutral auctions, in the 2020s before ultimately reaching a phase where there is no longer a need to issue CfDs due to the existence of a competitive market which delivers low-carbon electricity without the need for Government support.

Value of CfDs 31. While it is for suppliers to decide how to pass the cost of the CfD on to consumers through their electricity bills, the Government assumes that they will do so for budgetary and cost control purposes. The total cost that can be levied on consumers through the CfD is therefore controlled within agreed limits by the LCF. 40 During the transition period between the introduction of CfDs in 2014 and RO closure in 2017, operators will have a one-off choice of scheme between the RO and CfDs for support for new generating stations and for new additional capacity of over 5 MW. 41 See also the Final Impact Assessment on proposals for the levels of banded support under the renewables Obligation for the period 2013Ð17 and the Renewables Obligation Order 2012. July 2012. 42 Electricity Market Reform: Delivering UK Investment. 43 Further information is available in the EMR impact assessment. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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32. The budget for the CfD under the LCF within the Spending Review period is still to be determined, and as a cap has been set for total spend, will depend on spending on the RO and small scale FITs.

Feed-in Tariffs scheme 33. The FITs scheme was introduced on 1 April 2010, under powers in the Energy Act 2008 to encourage deployment of small-scale, low-carbon electricity generation. The technologies supported under FITs are: solar photo voltaic (PV), wind, hydro, anaerobic digestion and micro (less than 2kW) combined heat and power. FITs provide a fixed payment to these small scale generators (per MWh produced). 34. DECC has just completed the first Comprehensive Review of the scheme. This sought to improve value for money and reduce tariffs in light of falling costs. The reforms introduced a system called degression which reduces tariffs over time to ensure the scheme delivers increased value for money. 35. Funding for FITs is delivered through a levy on electricity bills and controlled within agreed limits by the LCF. Suppliers are at liberty to determine how to pass through the cost of the scheme to their consumers.

Value of FITs Table 3 FEED-IN TARIFFS SPEND, £ MILLION, 2011Ð12 PRICES, UNDISCOUNTED44 2011Ð 2012Ð 2013Ð 2014Ð 2015Ð 2016Ð 2017Ð 2018Ð 2019Ð 2020Ð FinancialYear 12 13 14 15 16 17 18 19 20 21 Total 155 477 596 729 849 955 1051 1,126 1,179 1,224

Heat Renewable Heat Incentive 36. The purpose of the Renewable Heat Incentive (RHI) scheme is to encourage and support heat users to move away from using fossil fuels for heating and to contribute to the UK’s renewable energy and emissions reduction targets by making it more financially appealing to install renewable heating systems. 37. Renewable heat technologies are currently more expensive than traditional, fossil-fuelled technologies. The RHI provides financial support in the form of a payment per unit (kilowatt hour) of heat produced. 38. The Government launched the non-domestic RHI in November 2011. The scheme provides tariff-based financial support to commercial, industrial, public, not-for-profit and community generators of renewable heat for a 20-year period. The Government consulted on its proposals for the domestic RHI last autumn, and is intending to introduce the scheme in spring 2014. 39. The RHI Scheme is subject to a degression-based mechanism which is designed to respond quickly to emerging budget risks (for example, from unexpectedly high levels of deployment) by decreasing tariffs gradually over time; whilst also enabling continued growth towards the heat portion of the 2020 renewables targets.45

Costs 40. The RHI is funded directly from Government spending and has been assigned annual budgets for the four years of this Spending Review period.

Table 4 RHI ANNUAL BUDGETS FOR THE 2011Ð12 TO 14Ð15 SPENDING REVIEW PERIOD46 Financial year 2011Ð12 2012Ð13 2013Ð14 2014Ð15 Total Budget (£m) 56 133 251 424 864

41. This includes budget for the Renewable Heat Premium Payment (RHPP) in 2011Ð12 and a spend of up to £25 million for the second phase of the RHPP (expected to be spent primarily in 2012Ð13 but with flexibility for some spend in 2013Ð14). 42. The recently agreed Spending Review settlement for 2015Ð16 is £430 million, which allows the RHI spend to significantly increase from levels currently being observed.47 44 Modelling from FITs Comprehensive Review Government Responses. 45 “The UK is legally committed to delivering 15% of its energy demand from renewable sources by 2020 contributing to our energy security and decarbonisation objectives.” UK Renewable Energy Roadmap Update 2012, paragraph 1.1. 46 The Renewable Heat Incentive: consultation on interim cost control. 47 As of 30 April DECC estimates that expenditure committed to the RHI from applications received to date is just under £50m for the next 12 months. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Renewable Heat Premium Payment

43. The RHPP scheme was introduced to provide a one-off payment for householders to install renewable heating systems as a short term measure before the introduction of the domestic RHI.

44. The scheme provides vouchers which can be redeemed against the cost of installing renewable heating technologies, and is mainly targeted at those living off the gas grid, where most money on bills and carbon can be saved.

Fuel Poverty and Energy Efficiency

Addressing fuel poverty

45. Government is committed to doing all that is reasonably practicable to end fuel poverty in England by 2016, and to helping low income and vulnerable households heat their homes more affordably. The support provided comprises: — The Warm Front scheme provided help to low income vulnerable households to improve the thermal efficiency of their homes. It is expected that around 35,000 households will be assisted from applications received in 2012Ð13.48 — The Warm Home Discount scheme provides rebates on electricity bills to a range of low income and vulnerable customers. Around £283 million is expected to have been spent by suppliers providing rebates and other support in 2012Ð13.49 — The Energy Company Obligation runs alongside the Green Deal (see paragraph 47 below) providing support to low income and vulnerable households to improve the thermal efficiency of their homes. The Affordable Warmth and Carbon Saving Communities Obligations together should generate expenditure in home thermal efficiency improvements worth around £540 million and supporting around 230,000 households per year. — The Department for Work and Pensions (DWP) automatic Cold Weather Payments are targeted at the elderly, disabled and those with young children. During the 2012Ð13 Cold Weather Payment season,50 5.8 million payments (worth £25 a week) were made to 3,290,800 recipients at a cost of over £146.1 million. DWP also offer automatic annual Winter Fuel Payments of £200 for households with someone who has reached women’s state pension age and is under 80 and £300 for households with someone aged 80 or over. In winter 2011Ð1251 it helped over 12.6 million older people in over 9 million households with their fuel bills at an estimated cost of £2.1 billion.

Energy efficiency and energy demand reduction

46. The Government has also introduced measures designed to improve energy efficiency and reduce energy demand: — The Green Deal lets consumers pay for some of the cost of energy-saving property improvements, like insulation, over time through savings on their energy bills. Repayments will be no more than what a typical household should save in energy costs52. — Smart Meters: The roll-out of smart gas and electricity meters is expected to deliver significant economic benefits, placing consumers in control of their energy use, and more widely to improve the consumer experience and engagement with the energy market.53 — Businesses can benefit from 100% first-year capital allowances for energy saving-technologies,54 commonly called enhanced capital allowances or ECAs, which were introduced in 2001 to help the UK meet its target for reducing greenhouse gases.55 These allowances reduce the effective cost of the machinery for the investor. They do not, however, significantly affect the unit price paid for energy consumed. 48 The scheme closed to new applications on 19 January 2013, at which time the Energy Company Obligation was already operational. 49 Final spending will be confirmed in Ofgem’s annual report in October 2013. 50 1st November 2012 to 31st March 2013. 51 The latest period for which figures are available. 52 For further information, see the Green Deal impact assessment and the Green Deal consultation. 53 Energy suppliers are obliged, through conditions in their licences, to take all reasonable steps to install smart gas and electricity meters for their customers by the end of 2020. Energy suppliers will continue to be responsible for the costs of metering, as they are today. Similarly, under current arrangements consumers pay for the cost of their metering and meter maintenance through their energy bills, and this will be the same for smart metering. 54 Eligible equipment, and the criteria they have to meet, is published in an “Energy Technology List”. The criteria are reviewed annually by DECC. 55 The Government aims to reduce the UK’s greenhouse gas emissions by at least 80% (from the 1990 baseline) by 2050 (https://www.gov.uk/government/policies/reducing-the-uk-s-greenhouse-gas-emissions-by-80-by-2050). cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Low-carbon Capital Investment and Research & Development Carbon capture and storage 47. The Government is also supporting CCS, which will allow the use of existing fossil fuel supplies more cleanly by capturing carbon dioxide from fossil fuel power stations (or large industrial sources), transporting it via pipelines and then storing it safely offshore in deep underground structures. 48. Through its CCS Commercialisation Programme, the Government hopes to support up to two CCS projects with the funding available. These projects have potential to support large supply chains with significant UK content, through the capital support the Government is providing, as well as the further approximately £1.9 billion being invested by the winning projects themselves. 49. The Government has allocated £1billion of capital support through its CCS Commercialisation Programme, although the final level of support for each project will be confirmed depending on the outcome of the on-going competition. 50. This support is provided in the form of capital funding by the Government.

Research and Development Funding for CCS 51. The UK has a four-year (2011Ð2015) £125 million cross-Government CCS research, development and innovation programme. Funding comes from the DECC, the Technology Strategy Board, the Energy Technologies Institute and the Research Councils. 52. CCS research, development and innovation will play an important role in reducing the costs of CCS. This is necessary to help bridge the gap to commercial scale demonstration, enable wider scale deployment, as well as developing the supply chain to maintain the industry.

Funding for research and development 53. The Government provides support for research and development, covering early stage research to pre- commercial deployment with over £1 billion committed over the current Spending Review period. 54. The funding is distributed through a number of organisations. The key sources of funding are detailed in Annex D. 55. In addition, businesses in low-carbon sectors are encouraged to apply for grants and/or loans from the £2.4 billion Regional Growth Fund (RGF) and the £125 million Advanced Manufacturing Supply Chain Initiative (AMSCI).

Carbon Pricing Energy intensive industry compensation 56. HM Treasury’s 2011 Autumn Statement announced a £250 million package of measures to help electricity intensive industries adjust to the low-carbon transformation while remaining competitive.56 It included: — £40 million to increase the rate of CCA relief for electricity to 90%; — £110 million to provide compensation for the indirect costs of EU ETS; and — £100 million to provide compensation for the indirect costs of the CPF. 57. The 2013 Budget announced that the Government will continue to provide support to energy-intensive industries to compensate for the indirect cost of the CPF in 2015Ð16. Further details will be announced at the next spending round. However, support is intended to be transitional while other countries catch up in pricing the costs of carbon emissions.

Climate Change Agreements 58. CCAs allow eligible energy-intensive businesses to receive up to a 65% discount from the CCL57 in return for meeting energy efficiency or carbon-saving targets. The discount for electricity will increase to 90% from April 2013. 59. Currently, 51 industrial sectors participate in CCAs which cover some 9,900 facilities or sites,58 and in 2011Ð12, CCL discount awarded by the scheme was £165 million.59 Budget 2011 announced that the scheme would be extended for all currently eligible sectors until 2023.60 56 2011 Autumn Statement, paragraphs 1.105. 57 Climate Change Levy—introduction. 58 Climate Change Agreements Scheme (Environment Agency Website). 59 http://www.hmrc.gov.uk/statistics/expenditures/table1Ð5.pdf 60 Budget 2011, page 33. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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European Union Emissions Trading System (EU ETS) Free Allowances and Commercial Support 60. Although auctioning is the default method for allocating emission allowances to companies participating in the EU ETS in Phase III (2013Ð2020), industry will continue to receive a share of allowances for free until 2027 under the revised EU ETS Directive. This is a transitional measure for industrial installations to lessen the risk of a “shock” introduction to the carbon price signal. In 2013 those sectors not deemed to be at significant risk of carbon leakage will receive free allowances to cover emissions from 80% of their benchmarked baseline output, decreasing linearly each year to 30% in 2020 and 0% in 2027. 61. In addition, Directive 2003/87/EC sets out two mechanisms to address the risk of carbon leakage:61 — sectors deemed at significant risk of carbon leakage will receive 100% of their EU allowances need for free (based on their average production (eg in tonnes of product) over a baseline period), up to a product benchmark based on the average of the 10% most efficient installations in the EU (termed free allocation); and — from January 2013, Member States may choose to compensate sectors at risk of carbon leakage as a result of indirect costs (ie through EU ETS related increases in electricity prices), based on revisions to the State Aid guidelines.

Table 5 LEVELS OF SUPPORT UNDER THE EU ETS FOR UK INDUSTRY Measure Value of mechanism Number of installations Free allocation on a declining trajectory for Around £210 million* Around 430 installations** sectors not deemed to be at significant risk of carbon leakage. Free allocation on a non-declining trajectory Around £4 billion* Around 400 installations** for sectors deemed to be at significant risk of carbon leakage. Compensation for those sectors at significant £110 million† 15 sectors‡ risk of indirect carbon leakage due to the EU ETS. *Based on the UK’s draft National Implementation Measures (NIMs), DECC’s short-term traded carbon values published in October 2012 and expressed in real 2012 prices. ** Based on current draft of the UK’s National Implementation Measures (NIMs). †Over January 2013—March 2015 ‡No. of companies will be known in July 2013, once the scheme is operational

Carbon Price Floor and Climate Change Levy 62. Putting a price on carbon emissions is at the heart of the Government’s strategy for enabling the UK to reduce emissions over the long term. The CPF firmly establishes the “polluter pays principle”. Liability will be directly linked to the environmental damage caused by different types of fossil fuel-based electricity generation. 63. The Carbon Price Support (CPS) rates announced in Budget 2013, of £18.08, are in-line with the previously announced price CPF. It is important to maintain the commitment to this floor to provide the certainty that investors need to invest now in our ageing electricity infrastructure. 64. Similarly, the CCL encourages businesses to reduce their energy consumption. The CCL is a tax on energy supplies (electricity, natural gas, liquid petroleum gas and coal) to UK business and the public sector. 65. Supplies of electricity from renewable sources (eg wind, hydro, wave, waste) are exempt from the CCL. Renewable electricity is exempt from the CCL via a system of levy exemption certificates. These ensure that the amount of renewable electricity supplied to businesses matches up with the amount of renewable electricity generated. 66. Electricity produced from renewable sources is exempt in support of the CCL’s objective, which is to encourage energy efficiency and reduce emissions of carbon dioxide from the energy used by business and the public sector.

Combined Heat and Power 67. Combined Heat and Power (CHP) captures and utilises the heat that is a by-product of the electricity generation process and can be more efficient and reduce carbon emissions by up to 30% compared to separate generation of heat and power, via a boiler and power station, using the same fuel. 61 Carbon leakage is the prospect of an increase in global greenhouse gas emissions when a company shifts production outside a country because they cannot pass on the cost increases induced by climate change policies to their customers without significant loss of market share. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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68. Input fuels used to generate “good quality” heat in fossil fuel CHP plants are exempt under the CPF. This reflects the fact that heat generation will not ordinarily be subject to the CPF. Small scale generators, of 2 MW capacity and less, will also be excluded from the CPF. Taken together, this puts CHP electricity generation on a level playing field with alternatives. Fossil fuel CHP remains incentivised through the tax system, as fuel used in “good quality” CHP is exempt from CCL, unlike separate boilers producing heat which will still be liable to the CCL.62

Capacity Market 69. The Government is legislating through the Energy Bill to introduce a Capacity Market to ensure that we can maintain reliable electricity supplies. The first capacity auction will be run in 2014, for delivery in 2018Ð19, subject to state aid approval.63 70. A Capacity Market works by providing upfront payments to all providers of capacity (including generation and demand side, and with some exceptions, for example plant receiving the a CfD), in return for which they must commit to be delivering energy when needed or face financial penalties. Capacity agreements will be allocated through a competitive auction, four years ahead of delivery. The costs of the upfront capacity payments will fall to energy suppliers (and therefore consumers), but the Capacity Market will have a dampening effect on wholesale electricity prices that will largely offset the upfront costs. 71. Consumers already pay the costs of capacity through the wholesale electricity price; the Capacity Market simply means that the costs of capacity are instead made through a separate revenue stream. The costs of the Capacity Market are not included in the agreed £7.6 billion LCF. However, the costs of the Capacity Market will be included within updated LCF totals for purposes of reporting to Parliament. The level of support provided will depend on the clearing price of the auction and the amount of capacity contracted, but as noted above, the net cost to consumers is expected to be lower than the gross cost of the auction as the Capacity Market will result in lower wholesale prices than would have otherwise been the case.

Other Support Support for energy used in transport Renewable Transport Fuel Obligation 72. The Renewable Transport Fuel Obligation (RTFO) requires transport fuel suppliers to supply biofuel in proportion to fossil fuel. Typically more expensive than the displaced fossil fuel the obligation represents a cash transfer from fuel suppliers to biofuel producers and their supply chains (eg farmers, waste cooking oil collectors) rather than direct government support. RTFO costs are assumed to be passed through to end fuel consumers. 73. Some NGOs (and others) consider biofuel support harmful on grounds of environmental sustainability, social sustainability and food price impacts. 74. The total cost to suppliers subject to the obligation is estimated to be £387 million in 2013Ð14. However, the RTFO value is determined by the market reflecting biofuel and fossil fuel prices at any given point in time.

Low Emission Vehicles 75. The Office for Low Emission Vehicles is a cross Government, industry endorsed, team combining policy and funding streams to support the early market for electric and other ultra-low emission vehicles (ULEVs). 76. Buyers of ULEVs are able to benefit from a consumer incentive grant if purchasing an eligible new vehicle. This is worth 25% up to £5,000 towards the value of a car and 20% up to £8,000 towards the value of a van. Grants are also available for the installation of recharging points in homes, stations and the public sector estate. 77. Whilst these measures are Government funded they are not classified as support for energy, rather they support the cost of the vehicles powered by the energy, not the electricity on which they run.

National Concessionary Fuel Scheme 78. Under the 1994 Coal Industry Act HMG inherited responsibility for certain employee related benefits stemming from the nationalised coal period (1947Ð1994). Amongst these is the National Concessionary Fuel Scheme whereby certain former employees of British Coal are entitled to either the supply of solid fuel (coal) or cash in lieu. 79. The entitlement to receive concessionary coal is linked to the beneficiaries original contract of employment and DECC is not able to vary that arrangement on a unilateral basis. Any change has to be with 62 Renewable CHP is one of the technologies eligible for support under the Renewables Obligation or the Renewable Heat Incentive. Government consulted on a CHP specific RHI tariff in 2012 to replace the additional support for renewable CHP (over power-only plant) currently in the RO banding. A Government response is pending. 63 Electricity Market Reform: Capacity Market proposals. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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the consent of the individual concerned. Any wholesale change to the coal services would require legislation and would give rise to human rights implications. Currently DECC has no plans to seek such a legislative change. 80. The majority of the beneficiaries are now in receipt of cash in lieu (around 57,000 currently) but DECC still supplies coal to around 11,000 former employees or their widows. The fuel element of the service is estimated to cost DECC around £16.5 million in 2013Ð14 and the cash in lieu arrangements around £35 million. The amounts of coal supplied are all set out within agreements negotiated between the former British Coal and the mining trade unions. 81. This scheme directly reduces the price paid by a specific group of consumers for energy they receive under specified circumstances.

International comparisons 82. The energy challenge in each country is different. Governments must choose the appropriate support mechanisms, and support them to the appropriate levels depending on their respective energy needs. The UK has an ambitious target to halve emissions from 1990 levels by 2027.64 By comparison, Japan has a 30% target between 2003 and 2030 and Sweden a 20% target between 2008 and 2020. 83. In addition, the UK has a legally binding target to produce 15% of its energy needs from renewables by 2020. Whilst this target is lower than those for other European countries it is nonetheless very ambitious. The UK must secure a factor of ten increase in renewable energy over the period, compared with an average factor of two increase across Europe—all while increasing demand means additional deployment is needed just to “stand still”. 84. State Aid guidelines on compensation for those sectors at significant risk of indirect carbon leakage due to the EU ETS were adopted by the European Commission in late 2012. Compensation is voluntary. Only one Member State other than the UK has announced a compensation scheme so far—Germany has €500 million per year. The approach for free allocation is harmonised across all EU member States. 85. It is extremely difficult to directly compare the support for renewable energy between different European countries as regulatory issues, taxation, base load cost of energy and many others factors can all play a role. According to the Status Review of Renewable and Energy Efficiency Support Schemes in Europe conducted by the Council of European Energy regulators, in 2011, the UK had a low level of subsidy per MWh when compared to other member states.65 86. Most European and OECD countries have some form of Feed-in Tariff. Spend varies widely, Germany and other well established schemes have spent many billions on support over the past decade. Other countries are only now starting to offer this type of support (notably China). 87. The Global Carbon Capture and Storage Institute (GCCSi) estimate that worldwide up to $40 billion has been committed by Governments to support CCS projects. Governments around the world have provided different levels of financial incentives to support the deployment of CCS. It is difficult to directly compare support levels, as projects in different countries face different market conditions and regulatory and policy frameworks. In addition to direct financial support in the forms of grants, subsidies can be in other forms. For example, in the US, federal and state support for CCS have included investment tax credits and loan guarantees to help offset the higher capital and operating costs of CCS projects. 88. Estimates of levels of funding specifically for carbon capture and storage R&D in other countries are not easily available. However, there is information on publication rankings (a good measure of research activity) and specific initiatives in other countries. 89. A Capacity Market is a type of “capacity mechanism”. Capacity mechanisms are a common feature of liberalised energy markets, and indeed when the England and Wales electricity market was first liberalised there was a capacity mechanism in place. France is developing a Capacity Market similar to the one we are legislating for, and there are similar mechanisms already operating in a number of worldwide markets, including in the US and Europe.

Annexes Annex A REDUCED (5%) VAT RATE ON DOMESTIC HEATING AND POWER 90. A reduced rate of VAT applies to domestic and small business heating fuel and electricity. This is a tax, not a subsidy, and increases the price above the world-market prices. Non-fossil fuel heating would also be covered under the 5% VAT rate. 64 The Government will review the fourth Carbon Budget, covering the years 2023Ð2027, in 2014. If at that point our domestic commitments place us on a different emissions trajectory than the ETS trajectory agreed by the EU, we will, as appropriate, revise up our budget to align it with the actual EU trajectory. 65 Status Review of Renewable and Energy Efficiency Support Schemes in Europe. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Annex B NUCLEAR POWER 91. The UK Government believes that nuclear energy has a vital role to play in the energy mix and is committed to removing unnecessary obstacles to investment in new nuclear power. 92. The Office for Nuclear Development (OND) is part of the Energy Markets and Infrastructure (EMI) group within DECC, and has a key role in helping to ensure that the UK has access to clean, safe, and secure supplies of competitively priced energy.

New Nuclear Power 93. It is the Government’s policy that there will be no public subsidy for new nuclear power, as defined in a written statement made to Parliament in October 2010,66 and in a debate in Parliament in February 2013.67 This means that new nuclear will receive no levy, direct payment or market support for electricity supplied or capacity provided, unless similar support is also made available more widely to other types of generation. 94. New nuclear power will benefit from any general measures that are in place or may be introduced as part of wider reform of the electricity market to encourage investment in low-carbon generation. This is about creating a level playing field for all forms of generation, not subsidising nuclear. 95. It will be for private sector energy companies to construct, operate and decommission nuclear power stations. It will be for the Government and the independent regulators to ensure appropriate levels of safety, security and environmental regulation.

Nuclear Waste and Decommissioning Legacy waste and decommissioning 96. In terms of financing the legacy waste and decommissioning of old and existing nuclear power stations and facilities, the UK policy operates under cover of and in accordance with European Commission decisions on the restructuring of British Energy (BE) and Nuclear Decommissioning Authority (NDA)/British Nuclear Fuel Limited (BNFL). 97. Responsibility for decommissioning, cleaning up and dealing with the waste from the public sector, civil nuclear legacy sites has been given to the NDA, created in 2005. The NDA’s mission is fully funded by the public sector, through a mixture of direct grant and commercial income from the few facilities in the estate that are still operational. This will decline over time as the remaining operational nuclear plants close and enter decommissioning. Closure of the operational commercial plants was one of the conditions attached to state aid approval, with which we remain in compliance. 98. The European Commission approved the grant of state aid to the restructuring of British Energy plc (BE) in October 2004 (decision 2005/407/EC) on the basis that it was satisfied that the new structure of British Energy would ensure that aid was exclusively used for the decommissioning of BE’s nuclear power plants and the discharge of its nuclear liabilities, for example for radioactive waste and spent fuel. Under restructuring agreements scrutinised by the Commission at the time of its original decision, the Nuclear Liabilities Fund (NLF)—a company limited by shares and owned by an independent trust—was made responsible for meeting those decommissioning costs. 99. In January 2009, BE was purchased by EDF. At the time of sale, the UK Government committed to ensuring through the sale process that the conditions for State Aid imposed by the Commission on BE at the time of restructuring would continue to be met. Accordingly, EDF are subject to the BE restructuring agreements. As a consequence EDF must submit their decommissioning plans and any applications for NLF payments to the UK’s NDA for prior approval. In providing their approval, the NDA are charged with ensuring that EDF’s plans and applications meet the terms of the restructuring agreements including that such funding is directed only to that work deemed qualifying under those agreements. 100. The NLF’s liabilities as stated in the 2011Ð12 DECC accounts are £5.1 billion whilst its assets are £8.7 billion. The liabilities are extremely long-dated, stretching more than 100 years into the future on current plans. And there are a number of uncertainties regarding decommissioning costs, including the applied discount rate, station lifetimes, regulatory changes, inflation and the rate of investment return. Given these uncertainties it is very difficult to predict whether the fund will be sufficient to cover the liabilities. If they do not, the Government has undertaken to meet any shortfall. 101. Any money paid out by the NLF to EDS conform to the conditions imposed by the Commission at the time of British Energy’s restructuring in October 2004, and does not constitute a subsidy or state aid. Neither is the Government’s undertaking to meet any NLF shortfall, should that be necessary. As is the case with NLF 66 https://www.gov.uk/government/news/written-ministerial-statement-on-energy-policy-the-rt-hon-chris-huhne-mp-18-october- 2010 67 Hansard, 7 Feb 2013 : Debate from Column 485, http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm130207/ debtext/130207Ð0003.htm cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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payments to EDF, the Government would only meet costs that fall within the conditions imposed by the Commission at the time of British Energy’s restructuring in October 2004.

Decommissioning and waste from new nuclear power stations 102. Geological disposal is the way in which higher activity radioactive waste will be managed in the long term. The Government expects to dispose of spent fuel and intermediate level waste (ILW) from new nuclear power stations in the same geological disposal facility that will be constructed for the disposal of legacy waste. 103. Before construction of a new nuclear power station begins the Government expects to enter into a contract with the operator regarding the terms on which the Government will take title to and liability for the operator’s waste. This “Waste Transfer Contract” will in particular set out how the price that will be charged for this waste transfer will be determined (the “Waste Transfer Price”). 104. In December 2011 the Government published details of how the Waste Transfer Price is to be determined. This stated that the Government’s objective is to ensure the safe disposal of ILW and spent fuel from new nuclear power stations without cost to the taxpayer and to facilitate investment through providing cost certainty. 105. This arrangement involves the transfer of liabilities and risks from the operator to Government, but the waste transfer pricing methodology sets out how this will be done in a way that does not involve any subsidy to new nuclear power. As set out in the written Ministerial Statement of October 2010, the Government does not consider that taking title to radioactive waste, including spent fuel, for a fixed price is a subsidy to new nuclear power, provided that the price properly reflects any financial risks or liabilities assumed by the state.

Limitation of Liabilities 106. The UK is a Contracting Party to the Paris Convention on nuclear third party liability and the Brussels Supplementary Convention. The Conventions establish an internationally agreed framework for compensating victims in the event of a nuclear accident and are implemented in the UK by the Nuclear Installations Act 1965. This regime seeks to ensure access to adequate and fair compensation for victims by requiring operators to take on more onerous obligations than they would under the ordinary law, so that they are bound to pay compensation irrespective of whether they are at fault and are required to put in place insurance or other financial security to cover their liabilities. This is consistent with the no public subsidy policy. 107. As part of the regime, a limit is set on operator third party nuclear liability. Government believes this is justifiable in the public interest and is the right way of ensuring that risk is appropriately managed, and that, overall, any potential cost or risk to the Government can be justified by the corresponding benefits of the Paris/ Brussels regime. The UK currently limits operators’ liability at £140 million per incident but this will rise to €1.2 billion once we have implemented the revisions that were made to the Conventions. The UK is also bound, with other Brussels signatory states, to contribute to a fund that will compensate victims both in the UK and other convention countries should a serious nuclear incident happen. 108. Government is working with other parties to the Paris/Brussels regime to amend and update the existing scheme and published a consultation on the changes in 2011. These amendments impose a more stringent regime for operators than the current one. As mentioned in the summary of responses to the consultation,68 Government has always acknowledged that a catastrophic accident at a nuclear plant could far exceed the ability of the operator to pay and that Government, as with other natural or man-made disasters, may have to step in. The most effective way of guarding against large accidents is to have a robust regulatory regime to ensure the risk of a significant incident is kept extremely small. In so doing, the nuclear industry is already paying to protect society for a very low probability but high consequence accident through meeting the exacting regulatory requirements.

Annex C OIL AND GAS FISCAL REGIME 109. The tax regime which applies to exploration for, and production of, oil and gas in the UK and on the UK Continental Shelf (UKCS) currently comprises three elements: — Ring fence corporation tax—this is calculated in the same way as standard corporation tax, but the ring fence prevents taxable profits from oil and gas extraction being reduced by losses from other activities or by excessive interest payments. The current rate of tax on ring fence profits, which is set separately from the rate of mainstream corporation tax, is 30%. — Supplementary charge—this is an additional charge, currently at a rate of 32% on a company’s ring fence profits (increased from 20% from March 2011). — Petroleum revenue tax (PRT)—this is a field based tax charged on profits arising from oil and gas production from individual oil and gas fields which were given development consent before March 1993. The current rate of PRT is 50%. PRT is deductible as an expense in computing profits chargeable to ring fence corporation tax and supplementary charge. 68 https://www.gov.uk/government/consultations/compensating-victims-of-nuclear-accidents cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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110. Oil and gas produced in the UK is therefore subject to a tax on profits of 62% for new fields and 81% for older fields. This ensures the taxpayer benefits from highly profitable fields. The Government has introduced field allowances for more challenging categories of field that are economic, but commercially marginal at the high rate of tax. Such fields are relieved of tax at 32% for a certain portion of their income—but they still pay ring fence corporation tax at 30% for this portion, higher than the mainstream corporation tax rate. Field allowances do not reduce the cost of oil to consumers. 111. International organisations such as the International Energy Agency (IEA), Organisation for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF) use a variety of different methodologies to assess support to fossil fuels. The IMF and IEA use versions of a methodology known as the price gap approach, which, similar to the EU definition, compares prices to world market prices. The OECD uses broad measures of Producer and Consumer Support Estimates (PSE & CSE), based on metrics used by the OECD in other sectors, such as agriculture. These measures take account of where lower rates of tax are applied than elsewhere in the economy and so give different results to assessing purely whether fossil fuels are subsidised. 112. For the purposes of G20 work on inefficient fossil fuel subsidies, the UK, along with other EU G20 members, defines a fossil fuel subsidy as any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies. 113. This oil and gas fiscal regime policy ensures the Government maximises the economic production of oil and gas in the UK, without giving undue support to otherwise uneconomic production. For that reason, field allowances cannot be seen as a subsidy. 114. Any profits from shale gas production would be subject to the same ring fence regime, and would have a marginal 62% tax rate. Given that the industry is at an early stage of development, the Government has announced that it will introduce a shale gas allowance to help unlock investment. This allowance will operate in a similar way to existing field allowances—relieving a portion of a company’s income from the supplementary charge. Companies will continue to pay ring fence corporation tax on this portion. The use of allowances to encourage investment in the North Sea has demonstrated the effectiveness of a targeted allowance in stimulating investment and production that would not otherwise have gone ahead.69 115. The Government will publish a consultation document on proposals for the shale gas allowance to ensure that the final structure is appropriately targeted while maintaining a fair return for the Exchequer.

Annex D RESEARCH AND DEVELOPMENT FUNDING Research councils 116. The Engineering and Physical Sciences Research Council (EPSRC) is the main UK Government agency for funding research and training in engineering and the physical sciences and leads the Research Councils UK Energy programme, worth over £500 million over the period 2011Ð15, bringing strategy to UK energy research in support of Government targets.

Technology Strategy Board 117. The Technology Strategy Board (TSB) tackles barriers to early stage technology development, and supports business-led innovation. It works across business, academia and government—supporting innovative projects, reducing risk, creating partnerships, and promoting collaboration, knowledge exchange and open innovation.70 It has a budget of around £1 billion over four years, which includes over £200 million of Government funding over the current spending review period for low-carbon innovation. 118. In addition to sponsoring the Energy Technology Institute, some examples of TSB investments between 2007 and 2012: — £25.5 million in offshore renewables, including co-funding of £5.5 million from Scottish Enterprise, Natural Environment Research Council and Regional Development Agencies (RDAs) with a commitment to invest a further £10 million core funding per annum to the Offshore Renewables Catapult centre; — £29.5 million in fuel cells and hydrogen, including £7 million co-funding from DECC; — £19.5 million in carbon abatement technologies, including £9 million from DECC and RDAs; — £17 million in civil nuclear, including £8million from the Nuclear Decommissioning Authority, DECC and EPSRC; and — £11.9 million in grid balancing, management and infrastructure and £6 million in oil and gas.71 69 https://www.gov.uk/government/news/government-action-to-stimulate-shale-gas-investment 70 https://www.innovateuk.org/our-strategy 71 https://www.innovateuk.org/energy;jsessionid=C26C4293A0FBB9CE038F294E0329B9AF.3 cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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DECC innovation funding 119. DECC has made up to £150 million of funding available to cover the 2010 Spending Review period. The spending focus has been on those technologies and programmes where there are clear market failures and where intervention will have greatest impact on meeting our climate change and energy objectives. 120. Funding decisions are subject to the Technology Innovation Needs Assessments (TINAs). TINAs aim to identify and value the main innovation needs of specific low-carbon technology families to inform the prioritisation of public sector investment in low-carbon innovation.72 121. The TINAs apply a consistent methodology across a diverse range of technologies, and a comparison of relative values across the different TINAs is as important as the examination of absolute values within each TINA. Once priority areas for funding have been decided, suitable projects are selected. They include projects to reduce the cost of offshore wind, marine innovation, work to reduce the costs of next generation of CCS, work on energy storage, energy efficiency and work on future nuclear R&D. Each project that is funded has an evaluation plan in order to see how much it did achieve against its original aims and to learn lessons that can be used or shared.

Energy Technologies Institute 122. The Energy Technologies Institute (ETI) will receive up to £120 million of public funding and up to £120 million of private funding over the 2011Ð15 Spending Review period. 123. The ETI’s goals are to accelerate the development, demonstration and eventual commercial deployment of a focused portfolio of energy technologies, which will increase energy efficiency, reduce greenhouse gas emissions and help achieve energy and climate change goals.73

Waste & Resources Action Programme (WRAP) 124. WRAP’s Business Plan 2011Ð15 promotes “working in partnership towards a world without waste”. WRAP’s focus is now on preventing waste being created in the first place. However, where waste is unavoidable, WRAPs expertise can help make sure the material is recycled to maximum value, or used to create energy.

Ofgem—Low-carbon Networks Fund 125. As part of the electricity distribution price control arrangements that run from 1 April 2010 to 31 March 2015, Ofgem established the Low-carbon Networks (LCN) Fund. The LCN Fund allows up to £500 million support to projects sponsored by the distribution network operators (DNOs) to try out new technology, operating and commercial arrangements. The objective of the projects is to help all DNOs understand what they need to do to provide security of supply at value for money as Great Britain (GB) moves to a low-carbon economy. 126. Projects awarded funding involve the DNOs partnering with suppliers, generators, technology providers and other parties to explore how networks can facilitate the take up of low-carbon and energy saving initiatives such as electric vehicles, heat pumps, micro and local generation and demand side management, as well as investigating the opportunities that smart meter roll out provide to network companies. As such the Fund should also provide valuable learning for the wider energy industry and other parties.

OLEV (DfT) 127. Ultra-low emission vehicle technology is developing fast. The Government is committed to accelerating the pace of change in this area and contributes to the funding of a range of innovative research and development activities. The Office for Low Emission Vehicles (OLEV) is focused on identifying and supporting emerging technologies in the field of ultra-low emission vehicles.74 128. The Government’s programme of research and development for low-carbon vehicle technologies is delivered through the Technology Strategy Board’s Low-Carbon Vehicles Innovation Platform (LCVIP). This platform was launched in 2007 and is funded by the Department for Transport, Department for Business, Innovation and Skills, the TSB and the EPSRC.

Reviewing funding of Research and Development 129. The Low-carbon Innovation Co-ordination Group (LCICG) was re-invigorated following DECC’s leadership of a pan Government review of the innovation landscape and improving its delivery. It brings together the UK’s major public-sector funding and delivery bodies that are supporting low-carbon innovation in the UK. The Group aims to maximise the impact of UK public sector funding for low-carbon technology, in order to: — deliver affordable, secure, sustainable energy for the UK; 72 More detail available at: https://www.gov.uk/innovation-funding-for-low-carbon-technologies-opportunities-for-bidders 73 http://eti.co.uk/index.php/technology_strategy 74 https://www.gov.uk/ultra-low-emission-vehicle-research-and-development cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— deliver UK economic growth; and — develop the UK’s capabilities, knowledge and skills.

130. It is developing a common evidence base, using the TINA work done for DECC and is developing a joint strategy to ensure focus on those areas where of most impact, and to ensure strong coordination of members work.

Annex E

URLS FOR DOCUMENTS REFERENCED IN THIS EVIDENCE

To note—URLs were correct on 27 June 2013 Document Title/Reference URL Overview of key methods used to identify http://www.oecd.org/env/outreach/EAP(2012)2_NP_ and quantify environmentally harmful Subsidies%20report_ENG.pdf Subsidies with a focus on the energy sector UK Renewable Energy Roadmap Update https://www.gov.uk/government/uploads/system/uploads/ 2012 attachment_data/file/80246/11Ð02Ð13_UK_Renewable_Energy_ Roadmap_Update_FINAL_DRAFT.pdf Investing in Britain’s Future https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/209279/PU1524_IUK_new_template.pdf Electricity Market Reform: Delivering UK https://www.gov.uk/government/publications/electricity-market- Investment reform-delivering-uk-investment Estimated impacts of energy and climate https://www.gov.uk/government/uploads/system/uploads/ change policies on energy prices and bills attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_ 2012. Report_Final.pdf Estimated impacts of energy and climate https://www.gov.uk/government/publications/assessment-of-the- change policies on energy prices and bills impact-of-energy-and-climate-change-policies-on-prices-and-bills Final Impact Assessment on proposals for https://www.gov.uk/government/uploads/system/uploads/ the levels of banded support under the attachment_data/file/66181/Renewables_Obligation_ renewables Obligation for the period consultation_-_impact_assessment.pdf 2013Ð17 and the Renewables Obligation Order 2012 EMR Impact Assessment https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/42637/1042-ia-electricity-market-reform.pdf UK Renewable Energy Roadmap Update https://www.gov.uk/government/uploads/system/uploads/ 2012 attachment_data/file/80246/11Ð02Ð13_UK_Renewable_Energy_ Roadmap_Update_FINAL_DRAFT.pdf The Renewable Heat Incentive: https://www.gov.uk/government/uploads/system/uploads/ consultation on interim cost control attachment_data/file/42906/4729-rhi-consultation-interim-cost- control.pdf 2011 Autumn Statement http://webarchive.nationalarchives.gov.uk/20130129110402/ http://www.hm-treasury.gov.uk/as2011_documents.htm Climate Change Levy—introduction http://customs.hmrc.gov.uk/channelsPortalWebApp/ channelsPortalWebApp.portal?_nfpb=true&_pageLabel= pageExcise_InfoGuides&propertyType=document&id=HMCE_ CL_001174 Climate Change Agreements Scheme http://www.environment-agency.gov.uk/business/topics/pollution/ (Environment Agency Website) 136236.aspx Budget 2011 http://webarchive.nationalarchives.gov.uk/20130129110402/ http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf Electricity Market Reform: Capacity https://www.gov.uk/government/publications/electricity-market- Market proposals reform-capacity-market-proposals Status Review of Renewable and Energy http://www.energy-regulators.eu/portal/page/portal/EER_HOME/ Efficiency Support Schemes in Europe EER_PUBLICATIONS/CEER_PAPERS/Electricity/Tab2/C12 -SDE-33Ð03_RES%20SR_3-Dec-2012_Rev19-Feb-2013.pdf Green Deal Impact Assessment https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/43000/3603-green-deal-eco-ia.pdf Green Deal Consultation https://www.gov.uk/government/consultations/the-green-deal- and-energy-company-obligation Budget 2013 https://www.gov.uk/government/publications/budget-2013- documents

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Supplementary written evidence submitted by Professor Paul Ekins Effect of Modeled Environmental Taxation on Household Bills (Re Q110 asked by Caroline Lucas MP) Increasing the rate of VAT to 20%: For an average dual-fuel bill of £1,000, the bill would increase by £150. For an average dual-fuel bill of £1,500, the bill would increase by £225. Extending the carbon floor price to the household use of gas: Dividing the tax revenue equally between 25 million households, average increase in bills would be around £75. Extending the carbon floor price to all transport fuels: Dividing the tax revenue equally between the (roughly) 70% of UK households that own cars, average increase in bills would be £150. So, effect of “large carbon tax with no transport” on household bills would be around £300 p.a. for a household with a dual-fuel bill of £1,500. So, effect of “large carbon tax with transport” on household bills would be around £450 p.a. for an average car-owning household with a dual-fuel bill of £1,500.

Effect of Modeled Environmental Taxation on Carbon Eemission (Re Q98 asked by Joan Walley MP) This was not calculated by the research, but may be roughly calculated as follows: If the taxes cause an increase in household bills of 20%, and if the short-term price elasticity of energy demand is -0.2, then the taxes might be expected to cause an immediate reduction in household energy emissions of 4%. This might be expected to rise to up to 12% in the long term (more than five–10 years).

Effects of Modeled Environmental Taxation on Different Types of Household (Re Q109 asked by Mark Spencer MP) In the evidence given a number of different household compositions that were differentiated in the modeling were cited. In addition to these, the modeling also differentiated between households on the basis of: receipt of Universal Credit; tenure; sex and age of household representative person; number of adults and children; category of dwelling (type of building); gas supply (see JRF1 Report, Box 3, p.45).

References The evidence derived from two reports produced with funding from the Joseph Rowntree Foundation (JRF): JRF1: Browne, J, Dresner, S, Ekins, P, Hamilton, I, Preston, I and White, V 2013 “Designing carbon taxation to protect low-income households”, March, JRF, York, http://www.jrf.org.uk/sites/files/jrf/ carbon-taxation-income-summary.pdf JRF2: Ekins, P and Lockwood, M 2011 “Tackling fuel poverty during the transition to a low- carbon economy”, October, JRF, York, http://www.jrf.org.uk/publications/tackling-fuel-poverty-low- carbon-economy 15 July 2013

Written evidence submitted by Alan Simpson 1. Summary of Conclusions and Recommendations 1.1 The overarching conclusion of this submission is that Britain gets poor value from the elaborate web of energy market subsidies it operates; subsidising the past rather than the future, old technologies rather than new, the unsustainable rather than the sustainable, and a closed cartel in preference to a more open energy democracy. The current subsidy framework acts as a roadblock to market transformation, rather than a pathway to it. 1.2 Energy market subsidies should be measured against their ability to transform rather than maintain. All energy market subsidies (including tax exemptions and credits) are market distorting. This is neither a vice nor a virtue. What matters is their contribution to market transformation. 1.3 Subsidies should be treated as transitional mechanisms rather than permanent support; addressing market defects and moving the energy market from its current structure towards the energy systems that will replace it. 1.4 Transformational subsidy policies should therefore cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— be targeted towards new technologies rather than established ones; — have built-in “degression” rates, offering diminishing rates of support, towards full market viability, — prioritise renewable over non-renewable energy systems; — require all technologies to cover their own environmental clean-up costs; — be consistent with government carbon reduction targets; — maintain social cohesion and resilience; and — deliver a more open, democratic and sustainable UK energy system. 1.5 The current UK approach to energy market subsidies does not constitute any such market transformation strategy.

2. Background 2.1 The issue of energy market subsidies is certainly political, but it is not ideological. Every government on the planet uses energy market subsidies. Parties of all political hues are locked into energy market subsidies. Even the most ardent champions of deregulated, competitive markets like to make exemptions for their own chosen dependencies. 2.2 Confusion only arises when less-than-honest distinctions are drawn between visible and concealed subsidies; between the use of public spending (of taxes raised) and revenues forgone (in exemptions/credits/ accelerated capital depreciation rates, etc). Whatever strategies are pursued, the public ultimately pays. The critical questions revolve around whether the public (society/the planet) gains or loses from the chosen intervention strategies. 2.3 To take a balanced view of the way in which current subsidies impact on overall UK energy policy, the Committee needs to examine energy market subsidies in their broadest context; including both visible and less visible support mechanisms, and incorporating a wider appraisal of their economic and environmental impact; something the Treasury appears constitutionally unable to do.

3 Methodologies 3.1 To be fair to government, there is no international consensus about what constitutes an energy subsidy, let alone any meaningful distinction between what is market distorting and what is market transforming. 3.2 International attempts—by the Institute for Sustainable Development (2010), the World Bank (2010), the OECD (2012), and the IMF (2013)—to evaluate the impact and trade-distorting effects of different subsidy regimes all flounder upon the lack of an agreed view on how direct and indirect subsidies should be judged, let alone measured. 3.3 The OECD study did, however, set out a useful framework (below) of the conventional elements that constitute consumer and producer subsidies. Although limited by a narrow concept of energy (separated from its broader impact on the economy and the environment), it does at least recognise the complexity of both producer and consumer subsidies that are wrapped into existing market support mechanisms— 3.4 The value of this table [OECD (2010) Measuring Support to Energy, in Oxford Energy Associates submission, Table 1.1 [not reproduced here] ]is that it acknowledges that energy market subsidies run far wider than just “price support” measures going directly to the public (ie as Winter Fuel Payments or reduced VAT rates on fuel). 3.5 Parliament has just voted to create a separate welfare state for new nuclear power, guaranteeing it a market and price for the next 35Ð40 years. It will be a subsidy (in all probability to a single monopoly supplier) that exceeds all other energy subsidies. It also comes on top of the annual taxpayer contribution of £2.3 billion for nuclear waste disposal, the £5 billion bailout of British Energy in 2005, and government underwriting of insurance liabilities (in excess of £1.2 billion) for any nuclear accident. These are barely recognised in the current “subsidy” debate. 3.6 Whilst Japan is beginning to calculate the full depth and duration of such costs, no similar comparison is being made with the long term costs and consequences of existing UK nuclear subsidies. Contracts for Difference (CfDs) and New Investment Instruments, in the current Energy Bill, will add further subsidies to the only energy sector on a spiralling “construction cost” curve. 3.7 Whilst the Stern Report made a stab at evaluation of environmental damage, its greater message was about the urgent need to address the market failure (of increasing carbon emissions) in existing UK energy policies and subsidy regimes. It was a message Britain quickly chose to ignore. 3.8 Some of the new incentives the Treasury seems determined to offer to the extraction of “unconventional” gas deposits (Fracking) would turn Stern’s alarm bells into sirens. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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4 Current Breakdown of UK Energy Subsidies 4.1 The Committee has already been given a reasonable outline of current UK energy market subsidies by Oxford Energy Associates [Oxford Energy Associates submission, Table 2.5 [not reproduced here] ]. 4.2 Even though this breakdown does not address the full OECD checklist of intervention measures, it is clear that the Government puts over £15 billion of annual subsidies into its energy sector, over 80% of which go to old, dirty, non-renewable energy sources. The Committee might like to consider the adequacy of the current subsidy framework against the following criteria: (a) Does it promote innovation and lower energy production costs? The only parts of the energy market with rapidly falling unit costs of production are in the renewables sector (particularly solar). There is no evidence of UK subsidies to non-renewable energy delivering lower energy-production costs. The recent fall in global coal prices has had little to do with UK support mechanisms. It derived mainly from US prices being (temporarily) driven down by cheap gas, and from a European race to use up coal quotas before the 2016 Large Combustion Plant Directive comes into effect. (b) Does it reduce dependency on taxpayer support? Again, with the exception of renewables, most of today’s intervention mechanisms invite long-term (and often increasing) public subsidy. There is, for example, evidence that despite huge existing gas subsidies, power companies are already preparing to “game” the market for further support. In October 2012, Ofgem’s “Electricity Capacity Assessment” noted that: “Some of the most difficult issues to form a firm view on are whether new gas fired generation will be built over the next four years, whether gas power stations (CCGTs) that have been taken out of operation (“mothballed”) will return, and how interconnectors will flow at times of peak demand.” (Ofgem, Electricity Capacity Assessment, 2012, p8) (i) Energy companies claim that mothballing of existing plant (and of new planning permits) has been necessary because gas prices are too low (?!). Many suspect that, in an artificially constructed UK “supply crisis” in 2014Ð15, utilities will seek new government subsidies to bring this plant back into operation. The channel for doing so will be payments under the Capacity Mechanism of the Energy Bill. (ii) DECC’s own Impact Assessment calculated that the Capacity Mechanism would cost£2.5 billion a year in standby contracts. Experience in the USA is that some 70% of these contracts went to fossil fuel generators, with only 3% going to measures that looked at demand reduction rather than increased consumption. (iii) Additional inducements to fossil fuel generators would be a classic example of parliament again being “suckered” into over-generous subsidy payments to corporate energy interests. Tougher regulatory requirements, a Strategic Reserve provision, (or the prospect of prison sentences) might be more effective ways of “keeping the lights on”. (c) Has it reduced carbon emissions in the energy sector? The energy efficiency and Climate Change Agreement measures in the table (above) have certainly helped reduce UK carbon emissions, as has the support given to renewable energies: (i) Though not recognised in the table, the former Warm Front programme directly helped reduce carbon emissions from large parts of the UK housing stock. (ii) The nuclear waste subsidy is a legacy issue not a carbon reduction one. And fossil fuel subsidies all unambiguously promote carbon emissions. (iii) In carbon reduction terms, the UK subsidy framework looks to be largely regressive. 140 Change in %

GDP 120 +27%

100 GHG -24%

80 GDP per capits (1991 = 100)

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(iv) The Committee may wish to compare UK performance with the record of greenhouse gas emissions reductions in Germany over the last decade - (d) Have the UK subsidies produced a more open and competitive energy market? No. UK energy market concentration has increased over the last decade. (e) Is there a consistent approach to environmental “clean up” obligations? No. Nuclear receives a massive annual subsidy for its waste management. It also receives insurance support and long term price guarantees given to no other energy source. It is unclear whether the government will subsidise decommissioning costs relating to North Sea oil wells. No such subsidies are offered to renewables. (f) Does the subsidy framework promote innovation and market transformation? Tomorrow’s energy “systems” will be smarter, more integrated and more decentralised than the one we have today. They will also be based on using less energy rather than more. UK subsidies have concentrated on increasing energy production/consumption rather than reducing the need for it. (i) The only genuinely transformative element in the subsidy framework is to be found in the Feed-in-Tariff (FITs) payments for renewable energy. This is also the main area in which genuine innovation and competition has been taking place. It says a lot about the UK that it is also the one aspect of the energy market in which the government actively constrains growth. (ii) Whilst other EU states are seeing renewables deployment at rates of over 5GW p.a.—and with innovation rates and unit cost reductions on the same scale—the UK has opted for a fixed budget, low growth approach, missing out on most of the innovation gains being enjoyed elsewhere. (iii) It is worth noting that the UK opted to structure FITs in a way that forces it to be counted as a public subsidy. The European Court previously ruled that FITs can operate as a free-standing element within energy sector accounting ... with no public subsidy whatsoever. The effect of this is to allow renewables to play a much bigger role in market transformation across the EU than is allowed in the UK. (iv) This is a good example of UK subsidies being used to limit transformational change rather than drive it.

5 Redressing the Balance

5.1 All subsidy measures are market distorting or transforming. That is their purpose.

5.2 The most worrying aspect of UK energy market subsidies is just how regressive they are. Whilst high carbon, non-renewable energy sources absorb the bulk of subsidies (often uncapped), demand reduction measures are to be driven by loans. Moreover, the subsidy framework reinforces market concentration rather than dilutes it.

5.3 The UK does not have an open, competitive energy market. The “market” is, in effect, an energy cartel, dominated by the Big 6 power companies, regulated around short-term price considerations, and underpinned by an elaborate (and expensive) system of corporate welfare. All attempts to broaden the ownership of energy production or distribution are fiercely resisted by the same interests. UK energy market subsidies underpin this closed energy cartel.

5.4 Yet, if you were to believe the press coverage, the UK debate about energy market subsidies is whether taxpayers/bill-payers will sink beneath an “unaffordable” burden of annual (£0.5 billion) Feed-in-Tariff payments for renewable energy.

5.5 None of this works in Britain’s long term interests. If the Committee is to set itself a benchmark for progressive recommendations arising from this Inquiry, then clarity, transparency, sustainability and consistency will be a far more valuable elements than “continuity”, in a UK approach to energy market interventions.

5.6 It isn’t just that throwing subsidies at fossil fuel, non-renewable energy sources is expensive, inefficient and climate damaging. These are yesterdays energy sources, reliant on yesterday’s energy thinking. It is a world only losers will try to live in. This is why the a shift into transformational subsidies (outlined in para 1.4) is the key to a more secure UK energy future. 14 June 2013 cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Written evidence submitted by Platform Summary 1. Any discussion of fossil fuel subsidies in the UK context should recognise that the majority of subsidies are off-budget—that is, transfers to energy producers and consumers that do not appear in national accounts as government expenditure. 2. The government should widen its definition of energy subsidies to fit with that given by the International Energy Agency, which describes subsidies as “any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by consumers.” 3. Platform has identified three main types of off-budget subsidy that need to be quantified and curtailed: Export Credit, Diplomatic and Military. 4. To effectively tackle our dependence on fossil fuels, it is crucial to bring to light and end the existing, wide-ranging government subsidies for fossil fuel companies, whether direct or off-budget.

Background 1. Platform is a London-based research organisation that has monitored the social, economic, environmental and human rights impacts of the British oil and gas industry for over fifteen years. Our work is regularly published and cited by governments, academia, media and corporations. We are consulted for expertise by human rights defenders, parliamentarians and journalists. We have in-depth knowledge on British oil companies operating in Nigeria, Iraq, the Caspian and North Africa.

Factual Information 1. This committee is interested in the scale of energy subsidies in the UK and whether the government has plans to reduce “harmful” subsidies. 2. Currently the government is heavily supporting fossil fuels with energy subsidies and is increasing rather than decreasing this support. The IMF state that current energy subsidies “distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources”.75 3. The government is offering tax discounts for new fossil fuel exploration (from the North Sea and, further in the future, Shale Gas). 4. New research by Friends of the Earth revelled that the UK oil and gas industry received tax breaks worth £1.952 billion over five years during the financial year 2012Ð13.76 5. In addition there are several types of “off-budget” subsidy provided by the British state that provide significant support for fossil fuel companies.

Defining Subsidies 1. This paper also discusses the first and second questions of the inquiry (1) whether the Government has identified the extent of energy subsidies, and measured them and (ii) how well any identification of subsidies by the Government matches up to best practice methodologies in how energy subsidies are defined and scoped. 2. The International Energy Agency (IEA) defines subsidies as “any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by consumers.”77 3. The OECD also offer a broad definition of a subsidy: “Governments support energy production in a number of ways, including by: intervening in markets in a way that affects costs or prices; transferring funds to recipients directly; assuming part of their risk; selectively reducing, rebating or removing the taxes they would otherwise have to pay; and undercharging for the use of government-supplied goods or assets…the scope of ‘support’ is deliberately … broader than some conceptions of subsidy.”78 4. The IMF states that “although energy subsidies do not always appear on the budget, they must ultimately be paid b someone.”79 5. However, the UK government only identifies and measures direct energy subsidies rather than considering the other services provided for free by the UK state to British oil companies. The majority of fossil fuel 75 http://www.imf.org/external/np/pp/eng/2013/012813.pdf 76 Friends of The Earth Fossil fuel subsidies additional information, David Powell 77 IEA, Economic Analysis Division, “Carrots and Sticks: Taxing and Subsidising Energy”, 17/1/06 http://www.iea.org/papers/ 2006/oil_subsidies.pdf 78 OECD, An OECD-wide inventory of support to fossil-fuel production or use, 2012 http://www.oecd.org/site/tadffss/ PolicyBrief2013.pdf 79 http://www.imf.org/external/np/pp/eng/2013/012813.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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subsidies are off-budget—that is, transfers to energy producers and consumers that do not appear in national accounts as government expenditure. 6. Platform has identified three main types of off-budget subsidy that need to be quantified and curtailed: 7. Export credit. The UK government underwrites (takes on the financial risk of) overseas oil and gas projects through UK Export Finance. In June 2012, the UKEF submitted a proposal to the Azeri State Oil Company to underwrite a new oil & gas refining and petrochemicals complex.80 8. Diplomatic. The FCO maintained a consulate in Basra largely to support UK oil companies, with three diplomats on staff and a £6.5 million budget. High-profile UK political figures appear on request of oil companies for deal signing, such as Huhne attending the signing ceremony during BPs first attempt to broker a deal with Rosneft. 9. Military. The UK Government spent £12 million on military aid to Nigeria, at least in part due to Shell’s lobbying effort.81

Export Credit Subsidies 1. UK Export Finance (UKEF), previously known as the Export Credits Guarantee Department (ECGD), offers billions of pounds of public money every year as credit lines and insurance for UK companies exporting overseas. 2. This subsidy has been provided to oil and gas companies, despite Coalition commitments to end “investment in dirty fossil-fuel energy production”. 3. ECGD, and now UKEF’s, decision-making has been controversial. Crucial information regarding dangerous impacts is repeatedly—and sometimes consciously—ignored. 4. Offers for credit lines for particular projects are often made first, with the various potential UK exporters only identified later. 5. UKEF has no climate change policy for its projects, nor does it have an emissions reduction target. To this day, UKEF continues to provide financial support to some of the most controversial fossil fuel projects. Particularly problematic subsidies provided by the ECGD/UKEF include: 6. KBR—Bonny LNG—Nigeria. UKEF decided to finance a UK subsidiary of Halliburton, despite specific allegations of the company’s corruption in relation to the Bonny LNG project being common knowledge. After international investigations started into the bribery, minutes of meetings between UKEF and Halliburton show UKEF failing to ask Halliburton for crucial details of the allegations, telling the company that it did not wish to “delve into the finer details” of the consortium’s arrangements. The Halliburton subsidiary eventually plead guilty in both the USA and UK.82 7. Shell—Sakhalin II—Russia. Shell’s drilling, pipelines and LNG plant in Arctic conditions on the Sakhalin Island in Russia threatened indigenous populations and highly endangered populations of whales. Nonetheless, UKEF gave a secret but legally-binding commitment to support the project in March 2004 worth £1 billion, before an adequate EIA had been completed and before UKEF’s own assessments were complete.83 The application to UKEF was only withdrawn because of a judicial review over its illegality. 8. BP—Baku-Tbilisi-Ceyhan Pipeline—Azerbaijan/Georgia/Turkey. UKEF chose to support this project to the tune of at least £81.7 million, despite a multitude of reported and documented infringements on citizens’ rights. There were over a hundred violations of World Bank standards,84 emergency powers were invoked to acquire land in Turkey, and the UK government itself ruled that BP had violated international rules by failing to investigate complaints of intimidation by state security forces in Turkey.85 9. Petrobras—ultra-deep drilling—Atlantic Ocean. In 2011Ð12, UKEF agreed a $1 billion credit line to support Brazil’s state-owned oil company Petrobras conduct ultra-deep drilling in the pre-salt oil deposits in the Atlantic Ocean.86 This drilling is more complicated and dangerous than the deep Gulf of Mexico waters where BP’s Deepwater Horizon disaster took place. 10. Other fossil fuel subsidies provided by the UKEF in the last two years include: £65 million for a petrochemical plant in Saudi Arabia, £22 million to a Norwegian offshore oil contractor, £6 million for a petrochemical plant in Azerbaijan and £6 million for a gas plant in Nigeria.87 80 http://platformlondon.org/2012/06/25/rbs-ecgd-offer-billions-in-public-money-to-expand-caspian-fossil-fuel-infrastructure 81 http://platformlondon.org/wp-content/uploads/2012/07/MoD-Military-training-Amunwa-Response-22.pdf 82 The Next Gulf: Rowell, Marriott, Stockman, Constable and Robinson Ltd. 2005 chapter 6. 83 http://www.thecornerhouse.org.uk/resource/wwf-files-court-proceedings-against-government-department 84 http://www.baku.org.uk/eia_review.htm 85 http://www.thecornerhouse.org.uk/resource/bp-violating-human-rights-rules-says-uk-government 86 http://www.ukexportfinance.gov.uk/assets/ecgd/files/publications/plans-and-reports/ann-reps/uk-export-finance-annual-report- and-accounts-2011Ð12.pdf 87 http://www.ukexportfinance.gov.uk/assets/ecgd/files/publications/plans-and-reports/ann-reps/uk-export-finance-annual-report- and-accounts-2011Ð12.pdf cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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11. Lisa Nandy MP, chair of a parliamentary inquiry into UKEF said: “It is a cause of real concern that, despite the coalition commitment to end all export finance for dirty fossil fuels, particularly the risky Atlantic oil drilling, UKEF still funds so many fossil-fuel-related projects and has so far failed to support a single green energy project.”

Diplomatic Subsidies 1. The British government supports the interests of oil companies operating overseas through various departments including the Department for International Development, the Foreign and Commonwealth Office (FCO), the Department for Business, Innovation & Skills and UK Trade & Investment (UKTI). 2. It is David Cameron’s stated policy that diplomats should prioritise promoting “UK-based” business interests88 and, alongside arms companies, fossil fuels receive the largest share of this support. 3. Day-to-day phone calls and intelligence gathering on behalf of BP and Shell are a key activity of UK embassies abroad, involving commercial attachés, secretaries for energy and ambassadors. 4. These costs add up—until October 2012, the FCO was maintaining a consulate with three diplomats in Basra largely to meet the needs and demands of BP and Shell. At over £2 million per diplomat per year, the £6.5 million annual budget was significant.89 5. Ongoing lobbying is backed up by high-profile ministerial handshakes and official trade missions. 6. Close state backing for oil companies is exerted especially when oil companies are forcing their way into new countries—whether that is Tony Blair’s support for BP and Shell in breaking into Libya in the 2000s, the heavy lobbying on behalf of Western oil interests in occupied Iraq after the invasion, or during the same companies’ entry into newly independent states of the Former Soviet Union in the 1990s. Other examples of diplomatic support include: 7. A meeting in February 2013 between the UK Prime Minister, David Cameron and Nigeria’s President Goodluck Jonathan. In this meeting they discussed “how to ensure the Nigerian Petroleum Bill encouraged maximum investment from other countries in Nigeria’s energy sector.”90 8. Eighteen months of meetings between Anne Pringle, British ambassador in Moscow, and BP as the company was making its first attempt to broker a deal with Russian oil company Rosneft. This culminated in Chris Huhne, Energy Secretary, attending the signing ceremony which was later ruled to breach a shareholder agreement.91 9. Foreign Secretary William Hague lobbying “strongly” on behalf of Tullow oil over a dispute over the company’s £175 million unpaid tax bill.92 10. These are just some examples but they point to a system of continuous, systematic diplomatic support for a handful of fossil fuel companies.

Military Subsidies 1. The UK Government provides fossil fuel companies with military subsidies to secure key overseas oil and gas infrastructure and transport routes. 2. For example, figures released under the Freedom of Information Act show that the UK spent close to £12 million in military aid in Nigeria since it revived ties with the regime in 2001. Spending has risen consistently over the last decade.93 3. The UK has established a permanent naval facility in Lagos to train the Nigerian military to secure the Delta’s oil fields in British loaned boats.94 4. Such subsidies are often brought about as a result of corporate lobbying. For example, UK Government documents from 2006 reveal that Shell lobbied the UK and US Governments to increase military aid to secure their oil fields in the Niger Delta.95 Military aid was subsequently increased over the next four years.96 5. Similarly, the provision of UK frigates to the NATO and EU flotillas patrolling the waters off Somalia enforces the passage of tankers through the Gulf of Aden. In 2010, Jan Kopernicki, President of the British 88 BBC News, David Cameron focuses on foreign trade policy, published 22.07.2010 http://www.bbc.co.uk/news/uk-politics- 10722283 89 Petroleum Economist, Update: ExxonMobil “to quit West Qurna-1”, 18.10.2012, http://www.petroleum-economist.com/Article/ 3105120/UPDATE-ExxonMobil-to-quit-West-Qurna-1.html 90 http://www.number10.gov.uk/news/statement-on-president-goodluck-jonathan-meeting-with-prime-minister/ 91 http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8410043/Foreign-Office-backed-BP-in-Rosneft-talks.html 92 http://www.telegraph.co.uk/news/politics/william-hague/8314345/William-Hague-lobbied-strongly-for-oil-companies-run-by- Tory-donors.html 93 http://platformlondon.org/wp-content/uploads/2012/07/MoD-Military-training-Amunwa-Response-22.pdf 94 http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/121101w0001.htm#12110126000244 95 http://platformlondon.org/wp-content/uploads/2012/07/0475-Redacted-note-of-meeting-23-Feb-2004Ð1-BA-rcd-Sept-13.pdf 96 http://platformlondon.org/wp-content/uploads/2012/07/MoD-Military-training-Amunwa-Response-22.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Chamber of Shipping and also Vice-President of Shell’s shipping arm, was lobbying hard for the UK to increase Navy spending and bring forward the acquisition of a new generation of warships, to support the private oil tankers moving through this “vital strategic artery”.97 6. The UK government does not appear to have made any demands for accountability in the Nigerian armed forces in return for military aid.98 Instead the UK has frequently turned a blind eye to Nigeria’s excessive use of force. 7. For example, on 1 December 2010, Government forces reportedly attacked a town in Delta State called Ayakoromo because there may have been a militant camp near or in the town. The number of dead is still disputed. One report claims that 100 were killed, mostly children, the elderly and women. The Red Cross says that it was barred from entering after the raids. There has been no official inquiry into the tragedy.99 8. Though Nigerian troops have failed to resolve the Delta conflict, the UK actively supported the militarisation of the area and the wider Gulf of Guinea.

Recommendations 1. When measuring the extent of fossil fuel subsidies it is critical that the government include and address off-budget subsidies rather than only looking at direct subsidies like tax breaks. 2. In particular export credit, diplomatic, military support should be included in definitions of fossil fuel subsidies. It is only by including these areas that a meaningful assessment of fossil fuel subsides can be made. 3. The government should offer a quantitative and qualitative assessment of these subsides and the results of this analysis should be publicly available. 4. Having established the level of fossil fuel subsidies, measures should be taken to rapidly reduce them. 5. The money saved from curtailing fossil fuel subsidies should instead be used to support the development of sustainable, renewable and safe energy technologies. 13 June 2013

Written evidence submitted by UK Export Finance Role of UKEF 1. UKEF (formally the Export Credits Guarantee Department) is the United Kingdom’s official Export Credit Agency. Its principal statutory100 purpose is to support exports. It does so mainly by providing insurance to exporters and guarantees to banks (in respect of export credit loans they make available to finance exports) that protect them against the risk of overseas buyers/borrowers not paying UK exporters, or repaying loans to banks, in respect of supplies made. In consequence, there is a risk transfer from the private to the public sector whereby the Exchequer ie the taxpayer, assumes contingent financial liabilities; if and when claims are made against the insurance policies and guarantees that are issued, caused by the buyer/borrower defaulting on payment, the Exchequer must provide cash resources to meet those liabilities. 2. In fulfilling its role, UKEF complements the private market: it does not compete against it and, therefore, acts an insurer, guarantor and lender101 of last resort. As a consequence, it is asked to support exports that the private market will not support. Thus, UKEF responds to demand but does not seek to create it. UKEF can support the export of goods and services from all industrial and service sectors; it does not discriminate the provision of its support between different sectors which would otherwise be contrary to its Act.

UKEF’s Operating Policies 3. UKEF must operate under the consent of HM Treasury which requires it to meet minimum credit risk standards, price to risk, recover its operating costs and achieve particular financial objectives. 4. UKEF also operates under international agreements that regulate the activities of Export Credit Agencies. These include: (i) the World Trade Organisation (WTO)—the Agreement on Subsidies and Countervailing Measures (ASCM) which prohibits governments from providing export credit guarantees or insurance programmes at premium rates which are inadequate to cover the long term operating costs and losses of their programmes; 97 Combating Somali Piracy: The EU’s Naval Operation Atalanta, House of Lords Select Committee on European Union, April 2010 98 http://www.hrw.org/sites/default/files/related_material/nigeria_2012.pdf 99 http://www.thisdaylive.com/articles/ayakoromo-attack-the-truth-and-fiction/72425 100 The Export and Investments Guarantee Act 1991 as amended. 101 UKEF is introducing a direct lending scheme in September 2013. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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(ii) the Organisation for Economic Co-operation and Development (OECD) which has established a gentleman’s agreement102—the OECD Arrangement on Officially Supported Export Credit (the OECD Arrangement)103—to help create a level playing field in the provision of export credits and prevent trade distortions and minimise export subsidies. The OECD Arrangement establishes the most generous export credit terms and conditions that may be supported; it places limitations on the terms and conditions of officially supported export credits eg minimum interest rates, risk fees and maximum loan repayment terms. (iii) The EU—the EU Medium and Long Term Harmonisation Directive which incorporates the OECD Arrangement and the Short Term Communication which regulates the provision of credit insurance by the governments of Member States for exports supplied to EU and OECD markets on short terms of credit ie up to 2 years.

Financial Performance 5. Over the past decade and longer, UKEF has met all the financial objectives set for it by HM Treasury. It has been a net contributor of funds to the Exchequer, partly because of the low incidence of claims against issued insurance policies and guarantees, over that period. UKEF publicly discloses its financial performance through the publication of its Annual Report and Accounts104. 6. It should be noted that until March 2011 UKEF operated a Fixed Rate Export Finance Scheme (FREF)105. The FREF scheme enabled export credit loans to be made to overseas borrowers at fixed rates of interest (the rate was informed by prevailing OECD rules). However, as such loans were funded by the banks at floating rates of interest, it was necessary to establish interest equalisation arrangements so that when floating rates (plus a margin payable to the banks) exceeded the fixed rates, the banks received a subvention (subsidy) from the Exchequer equal to the difference between the two rates. Conversely, when floating rates (plus a margin payable to the banks) were below the fixed rates, the banks paid the difference to the Exchequer. In practice, floating rates generally exceeded fixed rates, resulting in significant cash outflows from the Exchequer. The level of subvention peaked in the 1980s and declined substantially by the 2000s as the OECD reformed its rules on minimum interest rates, UKEF sought to limit exposure to interest rate movements through purchasing interest rate swaps and by tightening the terms of the FREF scheme.

Environmental, Social and Human Rights (ESHR) 7. UKEF adheres to the OECD Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (OECD Common Approaches). This agreement establishes the basis upon which member Export Credit Agencies should address the potential ESHR impacts of the projects (to which exports are being supplied) they are asked to support. It requires projects to meet international standards, principally those of the World Bank Group ie the World Bank Safeguard Policies and the International Finance Corporation (IFC) Performance Standards. Projects UKEF has supported which fell within the ambit of the OECD Common Approaches and required ESHR review have been benchmarked against the IFC Performance Standards.

Coalition Government Commitment 8. The Coalition Government included in its programme for government106 the following commitment: “we will ensure that UK Trade and Investment and the Export Credits Guarantee Department become champions for British companies that develop and export innovative green technologies round the world, instead of supporting dirty fossil-fuel production”. The Secretary of State for Business, Innovation and Skills explained in a Ministerial Statement in July 2012 how the Government would implement the commitment. The statement is reproduced at Appendix A.

Energy Exports Supported 9. At Appendix B is a list of “energy” exports/projects supported107 by UKEF over the past 5 years. The list includes exports supported under UKEF’s Short-Term products108 and those supported by way of export credit loans guaranteed by UKEF including the ESHR categorisation of those which fell within the ambit of the OECD Common Approaches. 102 Incorporated into EU law. 103 Sometimes known at “The OECD Consensus”. 104 See https://www.gov.uk/government/organisations/uk-export-finance/series/uk-export-finance-annual-reports-and-accounts 105 Following a Public Consultation the FREF scheme was closed that year—see webarchive.nationalarchives.gov.uk/ 20130302040301/http://ukexportfinance.gov.uk/Consultations 106 “The Coalition: our programme for Government”. 107 Energy exports/projects has been widely interpreted to include exports directly or indirectly related to energy extraction, production, generation and distribution. UKEF publishes details of exports supported in its Annual Report and Accounts. 108 The Short-Term products were introduced in 2011 following a decision to support exports sold on short terms of credit, usually up to 1 year, where exporters could not obtain support from the private market (UKEF had privatised its support for this class of exports in 1991). Such exports/products fall outside the scope of the OECD Common Approaches. cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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APPENDIX A WRITTEN MINISTERIAL STATEMENT Dr Vince Cable, The Secretary of State for Business, Innovation and Skills, Department for Business, Innovation and Skills UKTI and ECGD Support for Green Technologies 17 July 2012 The 2010 Coalition Programme for Government contained a commitment that: “We will ensure that UK Trade and Investment and the Export Credits Guarantee Department become champions for British companies that develop and export innovative green technologies round the world, instead of supporting investment in dirty fossil-fuel production.” UKTI set out in its strategy “Britain Open for Business” how it would promote low carbon exports; this includes a Green Export Campaign that aims to build the UK’s reputation in the green and low carbon sector and to promote this capability overseas. UKTI is embedding this campaign into trade work in all markets where there is a clear opportunity to do so. The Export Credits Guarantee Department (ECGD), operating as UK Export Finance, has been engaging with companies and trade bodies based in the UK which are involved in the development and export of green technology exports. The purpose has been to ensure companies are aware of the support that is available to them from ECGD if they require credit insurance, export working capital finance, contract bond support or if their buyers require export credit loan finance. Through engagement with overseas project sponsors ECGD has also promoted the availability of export credit finance to help to influence them to purchase supplies from companies based in the UK. This work by UKTI and ECGD is intended to assist UK exporters of low carbon technologies and support them in taking advantage of international opportunities. As to support for dirty fossil-fuel energy production, “dirty” should be taken as referring to projects which produce pollution in excess of international environmental standards. The standards which ECGD applies are those set out by the OECD in the OECD Council Recommendation on Common Approaches on Officially Supported Export Credits and Environmental and Social Due Diligence and are usually those of the World Bank Group. ECGD will normally refuse support for exports to projects that do not meet those standards. The UK will seek to promote the strengthening of the relevant World Bank Group international standards to include limits on emissions of greenhouse gases. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

Environmental Audit Committee: Evidence Ev 135 facilities refurbishment APPENDIX B WithheldIndustry Corp Energy Design of refuel rigOAO £182,875.00 1 Withheld for reasons of commercial confidentiality. CountryAzerbaijanBangladesh Market/Exporter/Investor Johnson Matthey Plc Withheld Buyer Azerbaijan Methanol Company Catalysts for Methanol Plant Project/Goods and Services Case Impact £5,951,324.00 Liability BrazilChinaChinaEgyptGermany VariousGhana Clyde Union HoldingsIndia LtdItaly Clyde Union HoldingsItaly Ltd Pinnacle Re-Tec LtdKorea, Viper Subsea Republic LLP ofNigeria BESNigeria (Europe) Ltd Chinese SensonicsNigeria Nuclear Ltd EnergyNorway Rolls-Royce Power Jiansu Int’lPhilippines Jintung Ltd Surfactant Clyde Corp UnionRussian Holdings Federation Ltd Stansted Petrobras FluidRussian Power Pumps Pumps Federation Ltd and and Gentec spares spares Ministry EnergyRussian of Plc Federation Electricity Gentec and Rolls-Royce Energy Power Plc Eng’g Cameron Ltd Gentec GmbH Joy EnergyRussian Mining Ltd Federation Ltd ABN Perry GAIL Amro Slingsby Joy (India) BankSaudi Systems Mining Ltd Arabia Ltd Ltd Ghana Boiler Grid feedSierra Co pump Leone Ltd cartridges Saipem Energy Joy ServicesSlovakia Mining SpA Ltd Korea RosettiSouth Electric Marino Gazprom Africa Power SpA CorpTanzania Spare parts for Fluor pumps Oil Ltd Oil and and & gas other gas exploration DOF Tower Dawnus UK distribution and Subsea Power Centrifugal Sierra exporters Vibration connection production AS Utilities monitoring compressor Leone plates Ltd Transmission equipment Ltd Coronation line Power and & substation Gas High Green BNP Ltd Fuels Rolls-Royce Paribas/Deutsche Ltd Power Bank Gas Eng’g boosters Ltd N/A Siberian Coal Saudi Energy Gas-capture Gas-capture Kayan Co Power Diak Power Petrochemical Southern Plant Technical Plant Co Kuzgbass Export Coal Ltd Co Kayan Petrochemical £73,200.00 £5,834,632.00 Siberian £920,720,894.00 Complex Steam Coal Compressor Energy Remote Station Co £122,130.00 London Operated Mining Mining Vehicles Mining Equipment Co PPC Equipment N/A Ltd £95,758.00 Energy Compressed natural gas delivery system Mining High Equipment Tanzania £43,630.00 Medium Electric Medium Supply £4,714,537.00 Co Ltd Iron ore mine Hydro £54,519.00 electric High power station £9,579,960.00 Gas £7,992,882.00 Power £13,541,179.00 Project £375,128,077.00 Gas turbine £330,255,780.00 £6,002,010.00 Mozal Aluminium Smelter £18,892,768.00 £139,744.00 £8,742,166.00 £4,808,863.00 £38,388.00 £53,627,280.00 Medium £4,614,959.00 £38,266,004.00 £15,285,959.00 £29,908,795.00 1 3 September 2013 cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Written evidence submitted by the Overseas Development Institute 1. Summary and Recommendations 1.1 The Government should include both international and domestic initiatives in its review and measurement of energy subsidies. This should include support provided directly by UK departments (DFID, DECC, DEFRA, CDC, and UKEF), through development finance institutions, and other intermediaries. 1.2 As there is currently no single Government department responsible for reviewing and reporting energy subsidies, the Environmental Audit Committee (EAC) should identify a single department or inter-departmental committee to lead in measurement and reporting of UK domestic and international subsidies. 1.3 As a first step the Government should apply the framework suggested to this inquiry by Alan Simpson109 to all current development finance support to energy projects: — Does it promote innovation and lower energy production costs? — Does it reduce dependency on taxpayer support? — Has it reduced carbon emissions in the energy sector? — Does it produce a more open and competitive energy market? — Is there a consistent approach to environmental “clean up” obligations? — Does it promote innovation and market transformation? 1.4 Under its commitment to supporting low-carbon growth and adaptation in developing countries, the Government should seek to identify and quantify “harmful” subsidies provided in the form of development finance. This includes support to fossil fuel energy projects. 1.5 In the context of G20 commitments on phasing out inefficient subsidies, there have been calls to set up an international body on fossil fuel subsidies110. The UK has the opportunity to lead by example in tracking its own subsidies, and to call for international cooperation in defining, monitoring and tracking inefficient or high carbon subsidies. 1.6 Where “harmful” or inefficient subsidies are identified these should be rationalized, and resources used to promote low carbon energy development both in the UK and internationally. This can include supporting developing countries with subsidy review and reform.111 1.7 As subsidies have a significant impact on private investment in low carbon energy, this inquiry and its resulting actions should inform the Committee’s parallel inquiry on Green Finance.112 1.8 As subsidies are a significant and growing element of UK development cooperation, this inquiry and its resulting actions should be linked to the current inquiry by the International Development Committee on the Future of UK Development Cooperation.113

2. Overseas Development Institute—Background 2.1 The Overseas Development Institute (ODI) is a leading independent think tank on international development and humanitarian issues. Our mission is to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement of sustainable livelihoods. We do this by combining high-quality applied research, practical policy advice and policy-focused dissemination and debate. We work with partners in the public and private sectors, in both developing and developed countries.

(i) Has the Government identified the extent of energy subsidies and measured them? 3. The Government has not considered potential subsidies that may be involved in the energy projects and programs that it supports in developing countries. In turn, these potential subsidies do not appear to have been quantified. 3.1 The International Monetary Fund (IMF)114 uses the following definition for energy subsidies: Energy subsidies comprise both consumer and producer subsidies. Consumer subsidies arise when the prices paid by consumers, including both firms (intermediate consumption) and households (final consumption), are below a benchmark price, while producer subsidies arise when prices received by suppliers are above this benchmark. 3.2 Development finance and other international support to energy projects in developing countries, impacts both prices paid by consumers and revenues received by suppliers in those countries. 109 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1048 110 http://www.iisd.org/gsi/sites/default/files/g20lib_oilchange_2012_phasingoutffs.pdf 111 http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8335.pdf 112 http://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/inquiries/ parliament-2010/green-finance/ 113 http://www.parliament.uk/business/committees/committees-a-z/commons-select/international-development-committee/news/ new-inquiry-the-future-of-uk-development-/ 114 http://www.imf.org/external/np/pp/eng/2013/012813.pdf cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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3.3 The submission to this inquiry by HM Treasury and the Department for Energy and Climate Change (DECC)115, did not include any reference to the UK’s support to energy projects in developing countries. I understand that the Department for International Development and UK Export Finance are to provide separate submissions. 3.4 Though not considered explicitly within the inquiry’s questions, or in the report prepared for this inquiry by Oxford Energy Associates116, the role of development finance in energy subsidies was raised: 3.4.1 by Zac Goldsmith during the oral evidence117 provided by William Blyth; 3.4.2 during the oral evidence118 that I provided along with Peter Wooders of the Global Subsidies Initiative (GSI) and Charles Perry of SecondNature; and 3.4.3 by Platform in its written submission119.

(ii) How well does the Government match up to best practice methodologies in how energy subsidies are defined and scoped? 4. As it applies to development finance, the Government does not appear to match up to best practice methodologies in how energy subsidies are defined and scoped. 4.1 As noted, the submission by HM Treasury and the Department for Energy and Climate Change (DECC) to this inquiry120, did not include the UK’s support for energy projects in developing countries. 4.2 However, the Department for International Development (DFID), the Department for Energy and Climate Change (DECC), the Department for Environment, Food and Rural Affairs (DEFRA), UK Export Finance (UKEF), and CDC (the UK’s development finance institution) currently provide financial and technical support for energy sector activities in developing countries. 4.3 These Government departments (and investors of UK tax revenues) provide support to energy projects either directly or through Development Finance Institutions (DFIs). There is a need to strengthen reporting systems, to allow a better understanding of whether this support results in 121 “harmful” or “inefficient” subsidies. 4.4 Estimates of fossil fuel support from International Financial Institutions (IFIs) and National Development Banks (NDBs) range from $15 to $150 billion annually.122 4.5 Export Credit Agencies (ECAs) are bilateral organisations that provide financial services to support the overseas trade and investment activities of private domestic companies. While exact figures on ECA support for fossil-fuel projects are difficult to obtain, ECA financing often dwarfs official development assistance and, historically, a large portion of projects have been fossil-fuel related. International estimates of fossil fuel support from ECA’s ranges from $50 to $100 billion annually.123 As with IFIs, it is unlikely that all of this financing actually qualifies as a subsidy, but again, lack of disclosure prevents a more thorough analysis.124 4.6 An ODI review of Oil Change International’s “Shift the Subsidies” database identified that between 2008 and 2011 the majority of IFI125 energy project support was to fossil fuel projects. Over 75% of energy project support from IFIs to India, South Africa, Saudi Arabia, Indonesia, Brazil, Thailand, Kazakhstan, Egypt, Venezuela, Uzbekistan, Algeria, and Nigeria was to fossil fuel projects. These are 12 of the top developing country emitters.

(iii) What is the scale of subsidies in the UK, including comparison with other countries? 5. The UK provides significant support to energy projects in developing countries through IFIs and UKEF. Additional research would be required to compare this support to that provided by other countries. 5.1 A basic analysis by ODI of UK finance126 to energy projects through IFIs127 identified more than USD 3 billion (or GBP 2 billion) in support between 2008 and 2011. Support to fossil fuel projects128 through IFIs was twice as large as support for clean energy projects129.130 115 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1114 116 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/700 117 http://www.publications.parliament.uk/pa/cm201213/cmselect/cmenvaud/c1089-i/c108901.htm 118 http://www.publications.parliament.uk/pa/cm201314/cmselect/cmenvaud/c61-i/c6101.htm 119 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1038 120 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1114 121 http://www.odi.org.uk/publications/6760-uks-private-climate-finance-support-mobilising-private-sector-engagement-climate- compatible-development 122 http://www.boell.org/downloads/LowHangingfruit.pdf 123 http://www.boell.org/downloads/LowHangingfruit.pdf 124 http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8335.pdf 125 Including the WB Group, AfDB, ADB, IADB, and EBRD. 126 Based on capital subscriptions 127 Including the WB Group, AfDB, ADB, IADB, and EBRD. 128 Fossil fuel projects include: Oil, Oil & Gas, Natural Gas, Coal, and T&D Fossil 129 Clean energy projects include: Solar, Wind, Demand Side EE, Geothermal, RE General, T&D-Efficiency, T&D-Clean, Policy Loan-Clean, Hydro Small, Efficiency General, and Clean-Financing. 130 http://shiftthesubsidies.org/ cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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5.2 An initial review by ODI of UKEF support indicates a wide range of support to energy projects, and energy intensive industries and sectors in developing countries: In June 2013—UK Export Finance announced that it will guarantee $700 million of finance for UK exports to a petrochemical facility in Saudi Arabia.131 In November 2011 -UK Export Finance is guaranteeing a $1 billion line of credit for Petroleo Brasileiro Sociedade Anonima (Petrobras) to finance UK exports for Petrobras’ investment programme. The line of credit is to expand Petrobras’ oil exploration and production facilities off the east coast of Brazil.132 2011Ð12 UKEF133 issued guarantees for civil aerospace business amounting to £1,832 million (out of £2.3 billion), generating premium of £65.6 million and supporting the delivery of 132 aircraft in total. The aircraft were delivered to 32 airlines and operating lessors. Where the aircraft were fitted with aero-engines supplied by Rolls-Royce, ECGD support exceeded 30% of the financing cost of the aircraft. The most important markets for UKEF were Azerbaijan, Bahrain, Brazil, Dubai, New Zealand, Norway, Russia and Saudi Arabia. The export contracts supported were for a diverse range of sectors including mining, flight simulators, packaging, wall coverings, petrochemical engineering, logistics, automotive supplies, clean air equipment, cardboard packaging plant, buses, natural gas delivery systems, remote operating vehicles, plasma furnaces, air traffic control equipment, construction, automated tolling, telecommunications, defence vehicles, training services, industrial catalysts, water treatment plant, steel manufacture and processing and pipe manufacturing. 5.3 Information on support by CDC134 and other Government departments for energy projects is not disclosed in a transparent manner (even taking into considerations of commercial confidentiality).

(iv) and (v)—Does the Government have any plans or targets to reduce or eliminate “harmful” subsidies; and what has been the progress in reducing such harmful subsidies? 6. The Government currently states that it does not provide “harmful” subsidies. Therefore it is impossible to assess if the Government has plans or targets to reduce or eliminate “harmful” subsidies; nor its progress in reducing such “harmful” subsidies. However, the Government has a commitment to supporting low-carbon growth and adaptation in developing countries, under which the Government should seek to identify and eliminate “harmful” subsidies provided in the form of development finance. This includes support to fossil fuel energy projects. 6.1 The submission by HM Treasury and the Department for Energy and Climate Change (DECC) to this inquiry135, states that the UK does not have any “harmful” energy policies, but does not address the broader question of “harmful” subsidies: The Government does not consider that any of its energy policies are “harmful”. Furthermore, energy policy (as with other Government policy) is subject to an initial impact assessment and subsequent monitoring, evaluation and review. This ensures that the Government can provide confidence and certainty while ensuring that the policy advances the Government’s objectives in a coherent way that provides best value for money. It also ensures that detrimental consequences can be quickly and effectively addressed. 6.2 The HM Treasury/DECC submission to this inquiry136 defines fossil fuel subsidies as follows: For the purposes of G20 work on inefficient fossil fuel subsidies, the UK, along with other EU G20 members, defines a fossil fuel subsidy as any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies. 6.3 The UK’s 2012 submission137 to the G-20 on the Commitment to Rationalize and Phase Out Inefficient Fossil Fuel Subsidies states that the “UK has no inefficient fossil subsidies”. 6.4 However, a basic review by ODI of IMF data138 on energy subsidies in the G20 countries indicated that the UK ranked 14th (out of 20) in terms of the scale of its support for fossil fuels (including petroleum products, natural gas, and coal). This was equivalent to almost USD 11 billion (GBP 7 billion) in 2011. The IMF does not indicate if these subsidies are inefficient or “harmful”, however, its calculations of UK energy subsidies takes into account inadequate pricing of externalities, including carbon. 6.5 While the Government does not have targets to track or reduce “harmful” subsidies either provided through Official Development Assistance (ODA) or other forms of development finance, international support 131 https://www.gov.uk/government/news/massive-boost-to-british-industry-in-biggest-ever-petrochemical-project 132 https://www.gov.uk/government/news/business-gets-1-billion-uk-government-support-for-exports-to-brazil 133 https://www.gov.uk/government/publications/annual-report-and-accounts-2011-to-2012—7 134 http://www.odi.org.uk/publications/6760-uks-private-climate-finance-support-mobilising-private-sector-engagement-climate- compatible-development 135 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1114 136 http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidencePdf/1114 137 http://www.g20mexico.org/images/stories/canalfinan/deliverables/energy_markets/Fossil_Fuel_Subsidies.pdf 138 http://www.imf.org/external/np/pp/eng/2013/012813.pdf cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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for high carbon technologies and approaches may not be consistent with the Government’s clear objective to support low carbon climate resilient development.139

From HM Treasury’s Spending Round 2013: The Government will maintain its effort on urgent action to tackle climate change by supporting low- carbon growth and adaptation in developing countries. The UK’s pool of money for climate change projects in developing countries will be increased to £969 million, funded by DFID, the Department of Energy and Climate Change (DECC) and the Department for Environment, Food and Rural Affairs (DEFRA). The Government remains committed to supporting those people across the world whose economies are most in need of development. This is in the UK’s national interest. Tackling global issues such as economic development, effective governance, climate change, conflict and fragile states provides good value for money. 13 September 2013

Written evidence submitted by the Department for International Development

Introduction

1. This is the Government’s evidence to the Environmental Audit Committee inquiry into Energy Subsidies in the UK. The Committee has asked for information on DFID’s approach to fossil fuel subsidies and energy programmes overseas. It also includes an update on the coverage of these issues in the Committee’s June 2011 report on Overseas Aid.

Fossil Fuel Subsidies

2. The Government recognises the potentially negative impact that fossil fuel subsidies can have on the most vulnerable in a country, as well as the impacts on energy use and government incomes. The Government also recognises the political and social issues associated with attempting to remove fossil fuel subsidies. We support recent work being undertaken by the World Bank, the IMF and others to consider appropriate methods to provide greater support to country governments around fossil fuel subsidy reform, and to put in place appropriate safety nets so that the poorest and most vulnerable people are not disproportionately affected.

3. For example, through the Arab Partnership Economic Facility (APEF) DFID is funding a range of programmes, including: — Via the World Bank MENA multi-donor trust fund, knowledge-sharing between Middle East and North African countries and others that have reformed subsidies, on how to move towards reforming subsidies in a sustainable manner. This also involves specific advisory services to Egypt on reforming subsidies and the use of smart cards for improved subsidy targeting. — Through the World Bank, technical assistance in Egypt aiming to build capacity around fuel subsidy reform, as well as identifying the poverty impacts of reform and concrete measures that could be implemented to allow the energy sector to remain financially viable. — Through the World Bank in Tunisia, strengthening capacity to implement reforms to social protection—including fuel subsidies—and improve targeting to the most vulnerable in society.

4. The government also supports discussions at the G20 to rationalise and phase out inefficient fossil fuel subsidies that encourage wasteful consumption over the medium term, while providing targeted support for the poorest.

5. The Government does not differentiate its aid to countries based on their level of fossil fuel subsidies. Instead, through the International Climate Fund DFID and DECC have a range of programmes aimed at reducing demand for and dependence on fossil fuels through the development of cost effective on- and off- grid renewable energy production and improved energy efficiency, thus helping to foster more sustainable and equitable economic growth. Examples include: — GetFit, Uganda—providing top up grants and policy risk guarantees for small scale hydropower, bagasse (sugar and rice residue to energy) and solar power. The UK is providing up to £20 million and will demonstrate how an effective regulatory regime and cost-reflective tariffs can bring in investment in renewables. With other donors, this will result in at least 15 new power plants being built by 2015/16, increasing Uganda’s power supply by 30% and enabling it to put its twice-as- costly emergency heavy fuel oil plants on standby, saving the Ugandan government electricity bill c. $2.6bn over 15 years. 139 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209036/spending-round-2013-complete.pdf cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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— Green Africa Power (GAP)—providing a long term debt-equity instrument via the Private Infrastructure Development Group (PIDG) for larger renewable power plants. The UK will invest £98 million to demonstrate the long-term viability of renewable energy in Africa to attract private developers and investors and to encourage future projects. It will deliver c. 270MW of new renewable energy generation capacity.

6. The UK (DFID and DECC) has also provided £385m to the Clean Technology Fund (CTF) from the Environmental Trust Fund (ETF) and £225m from the International Climate Fund (ICF) since 2009 to bring about scaled-up increases in investment in renewable energy generation, energy efficiency and low carbon transport in developing countries.

7. The CTF comprises a portfolio of over 100 projects. While many of these projects are in the design phase, 33 projects have been approved and, as a whole with other project funding, are expected to deliver reduced CO2 emissions of 594 MTCO2e over their lifetime; secure $19.2bn in co-financing from governments, MDBs, and the private sector; deliver 6.4GW of additional installed renewable energy capacity (from 13 projects); and deliver annual energy savings of 4,492 GWh (from 3 projects).

8. DFID also supports the equitable and transparent development of extractives industries to ensure the greatest benefit for host countries. DFID programmes aim to support economic development and transparent and equitable access to the market, but do not subsidise prices. Examples include: — Extractives Sector Support programme in Afghanistan—which aims to support the Afghan Government to develop its natural resources for the benefit of the Afghan people. — Extractives Industries Transparency Initiative (EITI) Support Programme—which aims to promote transparency of payments from oil, gas and mining companies to host country governments.

UK Government Approach to Investment in Coal-Fired Power Stations in Developing Countries

9. The Government has a strong presumption against investing in coal-fired power stations in developing countries given that their emissions contribute significantly to climate change, and have a negative impact on local air quality. However, our position has been to recognise that for the poorest countries—where there is no viable alternative—it is possible that coal may be appropriate. We would need to consider these on a case-by- case basis, and at present there are no specific proposals being put forward for new coal-fired power stations in such countries. We continue to keep this position under review.

The World Bank’s Energy Portfolio and Approach to Energy Lending

10. The World Bank has not invested in greenfield coal projects since 2010, when it contributed to the financing of the Medupi plant in South Africa. Over the last five years it has only invested $106m in coal power station retrofits or upgrades. Over the past five years (2009Ð2013), the World Bank invested $3,481m in fossil fuel projects, $9,569m in renewable energy projects and a further $6,391m on energy efficiency.

11. The World Bank’s approach to energy lending is now guided by its “Toward a Sustainable Energy Future for All: Directions for the World Bank Group’s Energy Sector” document. This document was approved by the Board in July 2013. Its approach is aligned with the UN Secretary General’s Sustainable Energy for All initiative, looking to support increased access to energy, renewable energy generation and rates of energy efficiency. With regard to coal lending it states: “The WBG will provide financial support for greenfield coal power generation projects only in rare circumstances. Considerations such as meeting basic energy needs in countries with no feasible alternatives to coal and a lack of financing for coal power would define such rare cases. The “Criteria for Screening Coal Projects under the Strategic Framework for Development and Climate Change” will apply to all greenfield coal power projects undertaken in such exceptional circumstances.”

12. DFID’s current engagement with the World Bank on its energy lending has two main components to it. These are: (a) On-going dialogue and sharing of views with the World Bank’s energy anchor to give them sight of our intentions and to influence its future energy lending away from fossil fuels and towards renewable energy. (b) Support to the Energy Sector Management Assistance Programme (ESMAP), which helps contribute to the development of World Bank energy practices through its research and think-tank functions. DFID is currently providing ESMAP with £20 million funding over 4 years.

13. The UK’s delegation in Washington takes a keen interest in projects that come to the board that have a climate change element or are relevant to climate change more broadly. Through our Executive Directors, DFID is also engaged with the other multilateral development banks regarding their evolving energy strategies, providing input as appropriate. cobber Pack: U PL: CWE1 [O] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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Approach to Access to Energy in Poor Countries 14. DFID supports the expansion of energy access in energy poor countries through a series of multilateral and bilateral programmes which increase generation, transmission, distribution, fuel and appliance access. These programmes address a range of barriers and include leveraged support to capital investments, capacity development and policy reform. The majority of our relevant support in this area is delivered through the ICF with relevant programmes including the Results-Based Financing (RBF) for Low Carbon Energy Access project which aims to provide energy access to 2.5 million consumers in predominantly low income countries via incentivised investments in off-grid energy products and services, including solar lighting and clean cook- stoves. 15. DFID’s programmes targeting energy access and the increased supply of reliable and affordable on-grid energy focus exclusively on renewable energy and energy efficiency technologies. Through our contributions to the Energy Sector Management Assistance Programme (ESMAP) at the World Bank we are supporting enhanced mapping of renewable energy potential to support expansion of renewable energy sectors. Through our support to the Scaling-Up Renewable Energy Programme (SREP), one of the Climate Investment Funds (CIFs), we are directly supporting the scale up of renewable energy in predominantly low income energy poor countries, with almost 800MW of new renewable energy capacity approved through countries’ Investment Plans. 16. DFID also provides support to small local initiatives managed by civil society organisations both through direct support to NGOs via the Programme Partnership Agreements (PPA), as well as funding to specific programmes managed by, or with the participation of, civil society organisations. For example, international NGO, Practical Action supported community-based energy access to 220,000 people in the last financial year under its PPA with DFID. DFID India’s support to the national NGO TERI has delivered local access to energy via solar lighting and improved cookstoves to 300,000 people in the past 2 years. 17. The UK is supportive of the UN Secretary General’s Sustainable Energy for All (SE4ALL) initiative which has proposed 3 global targets for 2030: — universal energy access (including electricity access and clean cooking); — a doubling of renewable energy; and — a doubling of the rate of improvement in energy efficiency. 18. DFID has provided financial support to the initiative, which has enabled the target indicators for SE4ALL to be defined, and the establishment of the Global Tracking Framework to track progress against each of the targets. The SE4ALL targets were incorporated in the High Level Panel Report on the Post-2015 development agenda which the Prime Minister co-chaired. DFID does not have an internal target for the UK contribution to this goal, if it were to be adopted. We do track our impact on this issue through the DFID Results Framework indicator on the number of people with improved access to clean energy as a result of DFID funding. The DFID Annual Report and Accounts 2012Ð13 shows that as at the end of 2012/13, DFID programmes had provided off-grid access to clean energy for over 1.1 million people. 13 September 2013

Further written evidence submitted by Renewable UK Background The 2010 Spending Reviewi set the LCF cap for the current spending round, rising to £2.6bn in 2015: 2010Ð11 2011Ð12 2012Ð13 2013Ð14 2014Ð15 £0.70bn £1.10bn £1.50bn £2.00bn £2.60bn

The December 2012 Levy Control Framework settlement approved expansion of the LCF spending envelope from £2.6bn at the end of this period to £7.6bn in 2020 (real 2012 prices) ‘specifically for electricity policies in order to inform decisions on Electricity Market Reform and to provide investors in the sector with greater certainty on future levels of Support’. An annualised breakdown of the LCF budget was publishedii in July 2012 alongside the draft Electricity Market Reform Delivery Plan, set out in the table below. The figures are specifically for electricity policies and include budgets for the Feed-in Tariff policy and legacy spending on the Renewables Obligation. 2015Ð16 2016Ð17 2017Ð18 2018Ð19 2019Ð20 2020Ð21 £4.30bn £4.90bn £5.60bn £6.45bn £7.00bn £7.60bn

Of the £7.6bn, £3.5bn is expected be absorbed by legacy spending from the Renewables Obligation and £1.2bn by the small-scale Feed-In Tariffiii, leaving only about £3bn to support new low carbon developments through the Contract for Difference (CfD). The Government has not committed to increasing the Levy cap post 2020Ð21. Without such indications from Government, all developers of renewable and low carbon energy must cobber Pack: U PL: CWE1 [E] Processed: [28-11-2013 14:53] Job: 029662 Unit: PG06

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operate under the assumption that the £7.6bn is a finite limit and allocation of CfDs that start after 2020Ð21 will need to be accounted for within that cap. Given the zero-sum nature of this game, post-2020 allocation will prevent deployment of projects before that time, unless Government makes an early move to set an increased budget for the period after 2020.

Accounting for New Nuclear On the 21 of October 2013 DECC announcediv that it had reached agreement with EDF on the CfD terms for Hinkley Point C. The strike price agreed with EDF is £92.50/MWh, reducing to £89.50 should the company move forward with its investment in new reactors at its Sizewell site. While it was announced that the CfD length would be 35 years, the rest of the key CfD terms are not expected to be published until 2014. While Hinkley Point will commission in 2023, outside of the current LCF period, in the absence of any Government undertaking on post 2021 uplift in the LCF, developers must operate on the assumption that whatever sums are envisaged to be paid under the Hinkley CfD will be ring-fenced within the £7.6bn 2015Ð21 Levy cap. While it is difficult to estimate the precise level of Levy funding that will be required to meet the Hinkley Point CfD obligations without knowing the key terms of the contract or the wholesale electricity price in 2023 and beyond, we believe a figure in the region of £1bn/year or approximately one third of the CfD budget allowance, is a reasonable estimate at this stage.

Long Term Delivery of Renewable Energy RenewableUK is confident that there is sufficient wind project capacity being developed that can be brought forward by 2020 to ensure that our renewable targets for that date are met. We are also confident that an LCF limit of £7.6bn would allow enough of that capacity to access support. However, if significant amounts of this budget are ‘sterilised’ by having to be earmarked for projects delivering after 2020, the ability of the renewable industry to meet these and other objectives is threatened. In particular, there may be insufficient room within the LCF envelope to deliver enough offshore wind capacity to ensure that a robust supply chain is established and cost reduction objectives are met, squandering the first mover advantage that the UK currently holds in this technology, squandering the first mover advantage that the UK currently holds in this technology. It may be possible to account for both the CfD for Hinkley Point C and achieve the UK’s 2020 ambitions for renewable energy. However, without undertakings from Government to increase the LCF post 2020, should further CfD terms be agreed for new nuclear plant coming online in the mid to late 2020s, the ability of the LCF to enable development at scale of renewables be severely undermined. It would be advantageous for Government to commit early to increasing the LCF budget post-2020, and making clear that the Hinkley Point C CfD and any further nuclear plant would be financed from that budgetary increase. Moreover, we note that the financial commitment to deploying new nuclear plant—not only at Hinkley but also potentially at other sites—outside of the current LCF period is not a commitment that has been extended to renewable generators. While renewable deployment is underpinned by 2020 renewable energy targets, there is a distinct lack of a strong policy driver for further significant deployment of renewables. Indeed, the Government is opposing European Commission proposals to extend renewable energy targets to 2030 and has deferred setting a 2030 decarbonisation target until after the next election—both of which would enhance industry confidence in the post 2020 UK renewables market.

References i HMT, Spending Review https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/ 203826/Spending_review_2010.pdf ii DECC, LCF Update https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223654/ emr_consultation_annex_d.pdf iii FoI request 12/1550, https://www.gov.uk/government/publications/12Ð1550-levy-control-framework- spending-estimates iv https://www.gov.uk/government/news/initial-agreement-reached-on-new-nuclear-power-station-at-hinkley 28 October 2013

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