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Economic Affairs Committee

Corrected oral evidence: UK energy supply and investment

Tuesday 5 April 2022

3 pm

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Members present: Lord Livingston of Parkhead (The Chair); Viscount Chandos; Lord Fox; Lord King of Lothbury; Baroness Kramer; Lord Monks; Baroness Noakes; Lord Rooker; Lord Skidelsky; Lord Stern of Brentford.

Evidence Session No. 13              Hybrid Proceeding              Questions 161 - 166

 

Witness

I: Lord Turner of Ecchinswell, Chair, Energy Transitions Commission.

 

USE OF THE TRANSCRIPT

  1. This is an uncorrected transcript of evidence taken in public and webcast on www.parliamentlive.tv.
  2. Any public use of, or reference to, the contents should make clear that neither Members nor witnesses have had the opportunity to correct the record. If in doubt as to the propriety of using the transcript, please contact the Clerk of the Committee.
  3. Members and witnesses are asked to send corrections to the Clerk of the Committee within 14 days of receipt.

17

 

Examination of Witness

Lord Turner of Ecchinswell.

Q161       The Chair: Good afternoon and welcome to the Economic Affairs Committee. As our first witness, I am delighted to welcome Lord Adair Turner. Lord Turner, you are very well known to most people on the panel, but perhaps you could give a very brief introduction for anyone who is not aware of the full panoply of your background.

Lord Turner of Ecchinswell: I am sure you do not want the full panoply, but there are three relevant points. I was actually a member of the committee from 2007 to 2008, before I had to go off and deal with a little thing called the global financial crisis, along with Lord King. I am now the chair of the Energy Transitions Commission, which is a global coalition looking at the technologies and policies that get us to zero carbon across the world. Our focus on that is global; it is on China and India as much as Europe or the UK. I was also the first chair of the UK Climate Change Committee, from 2008 to 2012. Those are the most relevant factors.

The Chair: Thank you very much and welcome back to the committee.

Lord Turner of Ecchinswell: Thank you.

The Chair: Looking at the transition to net zero, people are very clear where we wish to end up, but what do you see as the main barriers to an orderly transition in getting there?

Lord Turner of Ecchinswell: It is very important to realise that, in the transition to net zero, although there are several relevant technologies, including bioenergy and carbon capture and storage, one thing absolutely dominates: electrifying as much of the economy as possible and building an entirely zero-carbon electricity system. It is vital to realise how much bigger that electricity system will be, even in rich, developed countries.

Across the world, by 2050, if we are to have a zero-carbon global economy, we will probably have to consume three or four time—and in places such as Africa, 15 or 20 timesas much electricity as today. Even in rich, developed economies, such as Europe, the UK and the US, we may consume two to two and a half times as much electricity as we do today.

We know the technologies that will enable us to build that massively bigger and green electricity system. They are primarily renewables. They should involve extending the existing life of nuclear for as long as possible. I have just been in Sweden, where they are talking about extending their nuclear lives to 80 years. It may include a role for new nuclear, but renewables will be at the absolute core of it.

What are the most important barriers to doing that fast enough? They are not the economics any longer. They are everything to do with the pace at which we plan and permit new generation, new transmission and new distribution. We face a challenge; we have a clear majority of people in favour of strong action on climate change, but some of the same people then do not want a transmission line bringing Scotland’s huge supplies of wind down to the south of England or northern Germany’s supplies of wind down to Bavaria.

We need clarity and honesty on these issues. Take, for instance, onshore wind. It is undoubtedly the cheapest generation option. Some people object to it aesthetically, and some do notI am personally in the latter camp. But whatever position you have, we need honesty. We could go forward with onshore electricity wind; it is definitely the cheapest way for the UK to produce electricity now. We could say, “No, we don’t want to do that for aesthetic reasons”, but, if we do that, we will impose a cost cut penalty. Offshore will be more expensive than onshore. The most likely judgment today is that nuclear, although it is absolutely possible, will be significantly more expensive than either offshore or onshore. You have to either say yes to onshore or say, “No, I’m going to do other technologies and accept that they are more expensive” or “I didn’t believe in these targets in the first place”. We just need honesty in this debate.

I would like to stress that, within this debate, transmission and distribution are very important, as well as generation. About 60% of all the investment we need to do to build a zero-carbon electricity system is in the generation, but 40%—so it is a big figure—is in the transmission and distribution. That, to me, is the biggest thing.

In the UK, there is one particularly important one, which is slightly different from that, which is residential heat. I am fairly confident that, as long as the broad structure and strategy of policy is right—auctions for offshore wind, and clear plans out of Ofgem for agreeing transmission investment—the private sector will do the rest, and infrastructure investors will build big offshore wind plants in the North Sea.

The challenge in residential heat is that it is not a small number of professional investors trying to make a rate of return. It is 25 million separate householders who, on average, will have to spend, some time between now and 2050, maybe £15,000 each on insulation, heat pumps or both, or on some new category of zero-carbon heat. We therefore need a clear plan to enable them to do that, recognising that these are not people who spend their evenings looking at a spreadsheet and working out the NPV of alternative sources and actions. They are going to be constrained by lack of information about who to go to and who to trust, or whether there are small businesses that can do this.

Broadly speaking, the biggest challenge globally, and the main barrier to an orderly transition, is barriers to us building the electricity system fast enough. In high-latitude countries with large winter heating peaks, and in particular in countries such as the UK, which has one of the worst insulated housing stocks in the world, the residential heat challenge also should be a particular area of focus.

The Chair: You said within that that you thought there was enough money available, so I am going to take it that that is not the problem. Taking your point about the residential heat market, and indeed doing anything in residential homes, do you think there is something that the Government could or should do regarding changing a capital cost into a different form or effectively coming up with schemes that go into the bill? How can government help in this process, particularly with the capital cost but more generally with the whole context of changing residential heat?

Lord Turner of Ecchinswell: Yes, there is more that government can do, and that is the biggest missing bit in the UK strategy to get to net zero. We really need a clear strategy from the Government.

One has to face the distributional issues relating to residential heat, which do not arise when you are talking about decarbonising global shipping or decarbonising steel production. The Treasury net-zero report suggested about £8,000 to £10,000 per household. My own suspicion is that that was a bit on the light side. Let us say it is £10,000 to £15,000 per household. There is a category of householdhigher-income, high-wealth peoplewhich should be—

The Chair: For the avoidance of doubt, that £8,000 to £10,000 is for new boilers and heat pumps.

Lord Turner of Ecchinswell: It is for new boilers and—here is the big problem—it is very much an average. It will be much more for some houses and much less for others. You have a very different distributional aspect, both in respect of income and how much people are dependent on energy costs and in cost of capital. Rich people who have significant amounts of money sitting in the bank have an opportunity cost of capital at the moment of about 1% or 1.5%, because that is all their bank account is paying them. Poorer people have marginal costs of capital that are 15%, 20% or higher, because to pay for it they would have to borrow money at an expensive rate.

We need a clear strategy that involves, for higher-income people, sticks, such as variations in taxation regimes, straight regulations or requirements. At the bottom, we will have to put government money into subsidising it for maybe the bottom third of the population. In the middle, there is a big role for thinking through easy forms of low-cost capital. I would like to see the major mortgage providersperhaps with a little help or a guarantee from the Government—making it clear that if somebody has a mortgage and it is below, say, an 80% LTV against the current value, they can very easily and smoothly add to that mortgage, at the relative low rates that mortgages charge, in order to afford improvements.

At the top, it should be able to fix itself. At the bottom, it will need straight subsidies and an element of redistribution to get us through this. There is a broad swathe in the middle where well-designed products are needed that make it easy for people to borrow at a relatively low rate of pay and to invest in things that typically will, over time, pay back.

It is also crucial to get the development of the supply side here. If you try to buy a heat pump at the moment—and I am going through this—it is not straightforward to simply look up who you are going to get as your supplier. Do you trust them? Do you know that they know what they are doing? Once you have got through that and got someone, there is an extraordinary waiting list in this area, even more maybe than in other areas of the economy, because we do not have the supply of the plumbers and electricians who are trained up to heat pumps.

That is why you need a clear sense of a government strategy that is looking at the financing, the encouragement and how we are going to provide strong enough signals, with certainty, so that small businesses will think that this is a good business to get into and that the training and support will come behind that. If we get it right, it is a major job creation opportunity. The Climate Change Committee, in the chapter in its Sixth Carbon Budget report that deals with the employment and cost consequences, suggests that this could create another 200,000 jobs over the next 10 years. These are exactly the sorts of skilled manual craft jobs that we should want to create as many of as possible. This is a lost opportunity, and one where the Government need to get their skates on.

Lord Stern of Brentford: Thank you very much for coming, Adair. For transparency, I am a member of the Energy Transitions Commissionnot as active a member as I should be, or as the chair would wish, but I am very enthusiastic about what it does. For the record of this committee, it is the most careful, data-driven analysis of the transition that is available anywhere in the world. Developing countries are very much involved, as well as the big energy firms, underlining the database from which Lord Turner is speaking.

Again for transparency, I chair SYSTEMIQ, and Lord Turner is a leading figure in the work of SYSTEMIQ.

If the Chair will permit me, I have one short follow-up question. Would you say that the gap between onshore and offshore wind cost is a lot smaller than the gap between offshore wind cost and nuclear?

Lord Turner of Ecchinswell: That is probably the case today, and it may get narrower still. Offshore wind is an area where I would anticipate with some degree of confidence that we will see further significant cost reductions as we go to bigger and bigger turbines offshore, as we are able to exploit deep offshore ocean beds through floating, and as we take the turbines out to places where the wind blows the vast majority of the hours per year and, therefore, where the capacity factors increase.

If you look at the broad figures, the Hinkley Point contract for difference was struck at £93 per megawatt hour in 2012 money—it is this slightly strange currency in which we count UK CfDs. The auctions in, I think, autumn 2020 on offshore wind came in at £39 per megawatt hour. To offshore wind, you have to add the cost of balancing it by batteries or hydrogen et cetera, which you do not have to do for nuclear. But even once you have added that, offshore wind is looking pretty cheap relative to nuclear.

The argument on nuclear that people make—and we should be completely open-minded about it—is that a next generation in which we do several units of nuclear should bring that price down. That is the test we ought to have. We ought to be willing to strike CfDs with nuclear at lower prices than that £93 for Hinkley Point. But if they are not significantly lower, it will probably be better to do offshore wind, and storage and flexibility backup.

Lord Stern of Brentford: Presumably, the offshore wind costs are falling pretty rapidly also.

Lord Turner of Ecchinswell: The offshore wind costs have come down dramatically. They were the extraordinary surprise of the period between 2014 and 2020. They came down far faster than we anticipated when I was at the Climate Change Committee. I think that that is going to be a trend across the world; we are going to see more and more offshore wind development and that is going to drive the technologies, not only of the turbines themselves but of the business system that works out how to install and transport them in a very cost-efficient fashion.

Essentially, in all these businesses, it is about the scale at which we are operating, and we are learning this again and again. As economists, we know about the theory of economy of scale and learning curve effects, but, in a sense, we have been continually surprised by how powerful they are.

Q162       Lord Stern of Brentford: That is very good. This is not a question but an observation. The electricity you generate goes up at a third power of the windspeed. That is physics; it is not economics, but it affects the economics.

The question I have been assigned, which I am very happy to ask, although I am not happy that we have to ask it, is on the energy security strategy in response to the war in Ukraine. What do you see as the priorities in the short and medium term, from the perspective of trying to reach net zero but particularly from the point of view of energy security, in response to the position we are now in?

Lord Turner of Ecchinswell: The UK is less directly exposed in terms of the physical percentage of our gas or oil that comes from Russia, which is why we have found it easier to sign up to an oil embargo than other countriesalthough I see an increasing number of leaders round Europe, including President Macron, now calling for an oil embargo. The UK is clearly exposed to the price consequences of what is happening in Ukraine, in both the gas and the electricity markets.

You have to divide the response into, first, what Europe and the UK can do in the next year and, in particular, ahead of next winter. At the moment, we are probably all beginning to switch off our gas central heating and will switch it back on again in October, so there is bit of leeway. The real crunch will happen next winter. We have to distinguish between that and what one can do, say, in two years, five years or eight years, out to 2030. A number of very useful documents have been published on this; for instance the IEAInternational Energy Agency—10-point plan and the EU plan. There are also ones by Bruegel, a think tank. There is a whole series of them. They are all pretty good and end up with roughly similar figures that the facts take you to.

Over the first year, you are constrained in some things you can do. You can slightly accelerate renewable energy development, particularly in relation to rooftop solar, but you cannot build entirely new offshore wind projects. You can accelerate insulation a bit. Even if you wanted to, you probably could not accelerate people moving to electric vehicles because, again, if you try to buy an electric vehicle now you will be in a long queue already. All the electric vehicles that are going to be bought are already being produced; there is a pace at which they can respond.

What is Europe’s plan and what do we need to think about? At the European level, one of the biggest things going on is a debate about replacing Russian gas with LNG. There is surplus regasification capacity in Europe. It is not straightforward because a lot of it is in Spain, which is not well connected to the rest of the European grid. Some of it is in the UK, and I believe that National Grid is doing work on whether it can run the pipes backwards from the normal direction and run it into Europe, bringing in LNG and putting it through that way. Broadly speaking, across Europe, we should use the existing LNG capacity to the limit.

It is not an issue for the UK, but across Europe, if you have existing nuclear you should definitely keep it. In this circumstance it is mad to close down existing nuclear, whatever you think about new nuclear. We probably can and will run our bioenergy plants—Drax—pretty much flat out. The key issue there is whether they are sustainable.

We may, sadly, in parts of Europe, inevitably run coal plants a bit more this year because gas is more expensive. Certainly Germany will run it more. In response to European plans to reduce gas demand by 50% to 60% within a year, there is a danger that the response of President Putin will be to say, “If you are going to do that, I will cut it off completely”. We have to accept that, sometimes, sadly, there are trade-offs between absolute energy security and what you want to do for the climate. Fortunately, they are, broadly, short term.

In the short term, we should also have a plan B for demand reduction. Both the IEA and the EU have set out that you could persuade European consumersit also applies for the UKto turn down their thermostats by one degree. There is also a more technical thing they could do, which is to change the flow temperature out of the boiler; that does not change the end temperature in the room but changes whether you get up to that quickly, with very hot water, or more slowly, with warm water. Both these can make non-trivial differences to gas consumption, while having almost no impact on people’s comfort. I certainly hope that we have a plan B for at least strong consumer communication and encouragement for people to do that. As I say, it is not so important over the next few months, as we head into summer, but we need a Plan B for next winter.

On the oil side, frankly, if you want to reduce the import of Russian oil in the short term, you cannot rapidly have more EVs and you cannot rapidly change the way you produce your plastics. The biggest single lever is probably a speed limit of 60 miles per hour or something, which is of course what we did back in the 1970s, when we faced the post Yom Kippur War structures. If your aim is to send at least one less penny to President Putin, driving a bit slower is probably a good thing to do. That is the short term and it is constrained.

When you get to the two-year to eight-year period, at the ETC we are dividing what we should do into definitely not, definitely yes and tricky trade-offs. What are the definitely nots? We should not be abandoning our plans to completely get rid of coal from the system. We should not be doing major new oil and gas developments, because, by the time they come on stream, we could have replaced them with other technologies in any case. Those are the two major definitely nots. We should also not abandon our climate change targets.

What are our definitely yeses over the two to eight-year period? We should accelerate as rapidly as possible renewable energy deployment. We should keep existing going, and life extend it as much as you possibly can. We should probably run the bioenergy more and get ahead with the bioenergy plus CCS, which Drax is planning to do, provided you have tight controls on the sustainability of the bioresource. We should accelerate insulation and heat pumps, and accelerate the process towards EVs.

The tricky bit in the middle is whether we should build more LNG infrastructure. Using the existing LNG infrastructure across Europe to maximum effect to import alternative sources from Russian gas in the short term is a no-brainer. It is a more open issue as to whether you build new LNG infrastructure, which would take three or four years. The trouble is that you are locking in an asset, a fact in the ground, that you may not want in 10 years’ time.

You are also in danger of producing increased methane emissions. One of the crucial insights of climate science over the last five years is how important methane emissions are in comparison with CO2 emissions. According to the IPCC in its Working Group I reportthe science report, last Julymethane has actually been responsible for about 40% of global warming up until now and CO2 about 60%.

Unfortunately, it is not the case that American methane production is lower leakage than Russian methane production. Some people put it higher; some people put it lower. It looks roughly the same, probably, on average. The LNG process of liquefaction, transport and gasification actually adds leakage. There is a danger that part of replacing piped gas from Russia with LNG gas from America could produce more methane emissions.

What does that mean? Extra LNG infrastructure is a genuinely difficult tradeoff. One thing you can say to try to square that circle is that we should be doing it only if we can get clear promises from the US Administration that they are really enforcing tighter limits on methane emissions leaks in the US; that is part of the US strategy, on which it announced quite a lot at COP 26 in Glasgow. We should also be exploring whether, if we build new LNG infrastructure, we can do it in a way that could subsequently change to be a hydrogen infrastructure.

Indeed, this is a general theme in relation to storage and gas turbines. We will need storage for a gas and we will need gas turbines in which you burn a gas in future. But we should be in a transition over time, in which that gas starts as being methane and ends up as being hydrogen. The LNG infrastructure is a genuinely difficult trade-off, but there may be ways to square that circle and achieve the best balance between energy security and the climate change agenda.

Lord Rooker: Your plan B, demand reduction, is one way of getting the public involved. The public have not been affected, to a large extent, by what you have said, whether it is reducing the speed on the motorways or chopping the wasteful late-night advertising off, as happened in 1974. If I remember right, that was the time I fought my first general election, and the television went off at 10 pm. It lasted for about two months. In trying to involve the public, and make them feel as though they are making a contribution and starting to connect with climate change, how do the Government get across that point when we are not in the emergency we were during the three-day week?

Lord Turner of Ecchinswell: Yes, the three-day week. Probably many of us around this table remember doing homework by candles, and we bore the younger generation as to how tough life was.

The Chair: We might remember using it as an excuse as to why we had not done our homework.

Lord Turner of Ecchinswell: There was a three-day week. There was, at least in the US, a longer period of speed limits. That is when the US introduced the 55 miles per hour speed limit to try to reduce US reliance on imported gas from Saudi and others, which it maintained throughout the 1970s.

You raise an interesting point. How do we engage the public? We should be trying to do so. There is a huge level of sympathy and support for Ukraine. Lots of people are making charitable donations, whether it be to support humanitarian relief or, indeed, to go to the website where you can directly give money to the Ukrainian army, which is also an option. A lot of people are doing that, and are going on demos and waving the Ukrainian flag.

I know this Government are always worried about the nanny state et cetera. Let us be clear: on thermostats, there is no possibility of a nanny state. We are not going to go and regulate that. On speed limits, you could enforce it. On thermostats, it is different. We should be encouraging people by saying that, in this environment, turning down your thermostatif it is done by lots of other people in the UK and in Europeis denying some revenue to Putin’s war machine. I think that at least some people would respond.

It is also about public information that makes people realise, in the face of these enormous and terrifying increases in their own energy bills, that there are technical things they can do. For instance, a lot of people have the flow rate of the temperature of the water coming out of their boilers set too high, and it is simply heating the room too quickly; they could get there a little later with a lower flow rate. So we do not need to go into full nanny state mode.

In the three-day week, we had curtailment. The electricity was not available. I do not think we want to get into that either, in relation to electricity or gas. We should be encouraging people to take actions that could be beneficial for their personal budgets in this very tight situation, and beneficial for UK and European security of supply, and therefore to the disadvantage of the revenue stream that Putin is receiving. The Government should show a lead, albeit that it may be in an entirely voluntary fashion.

Q163       Lord Skidelsky: It is good to see you. The background to my question is the comment by António Guterres, which I read in the Times today, on the IPCC report. He said that world leaders have been lying through their teeth in their pledges on climate changewhich does not of course apply to our leaders, only to other leaders, naturally. I wanted to come back to your point about the residential heating challenge. One has to solve two problems. One of them, as you already mentioned, is the capital investment problem, and the other is the intermittency problem. How do you solve the second and what may be the connection between the two, if there is one?

Lord Turner of Ecchinswell: Broadly speaking, across the world, you can divide the renewable intermittency or unpredictability problem into three challenges. There is predictable diurnal, day to night; you have solar by day but you still want to run heating or air conditioning by night. There is predictable seasonal; we have more wind and solar available in the summer than we need but we may be short in the winter. By far the biggest is unpredictable seasonal. It exactly relates to the point you are making about residential heat.

How do we deal with the situation that we get sometimes in the UK and in north-west Europe of a blocking anticyclone over the North Sea, where we simultaneously have a low wind supply and a high heating demand? With heat pumps, you get a little bit of a wrinkleonly when it is really cold—in that their efficiency declines a bit with the temperature. That is an overstated problem. As I said, I have just been in Sweden. Swedish people have air source heat pumps that are doing quite well in the middle of winter, so there are ways around that problem, but it makes it a bit worse.

Looking at the forecasts of how variable our total electricity demand could be, we see that if we electrify residential heat, it becomes much more variable. It is not just that we go from maybe 300 terawatt hours to 600 or 650 terawatt hours. We have a very strong winter peak and an unpredictable element within that.

By the way, across the whole of the world, the key issue in electricity systems is no longer how you produce a cheap kilowatt hour of electricity. The cheapest way to produce a kilowatt hour of electricity in north-west Europe is wind; the cheapest way to produce a kilowatt hour of electricity in India is solar—end of story. That game is won. Everything is about how you balance the system and deal with the intermittency.

How do we deal with it in north-west Europe, where the key problem is the seasonal, not the diurnal? The diurnal is relatively straightforward. You use batteries; batteries will deal with the diurnal balance. It is almost certain that hydrogen will play a major role. I would recommend that you have a look at the very detailed analysis done by SSE—Scottish and Southern Energy—which it published just before COP 26 in Glasgow. It is a detailed analysis of demand variability, different fleets of offshore wind, onshore wind et cetera, and then how you balance the system.

There is a major role for hydrogen; probably, in large part, when we have surplus wind and solaror surplus nuclear, if we are running nuclear through in summerwe would make large amounts of hydrogen, store it and then take it back to electricity, almost certainly not via fuel cells but via burning it in gas turbines. That creates a good transition path; you can retrofit gas turbines to burn methane or hydrogen, or you can make sure that any new gas turbines being installed now are made in a way that they can definitely burn gas. We should see hydrogen as a major part of the balance story and we should be planning a transition.

There is a possibility that we might continue to burn methane and add carbon capture and storage. We should be open-minded as to whether this is the solution. One is seeking what is called dispatchable plantplant that you can simply switch on. It is highly likely that, by the time the UK gets to 2050, it will have a large suite of gas turbines sitting around, running only 1,000 hours a year, but when you run the numbers the capital cost of that is a surprisingly trivial part of the total cost of running the system. The uncertainty is the balance between gas plus carbon capture and storage and hydrogen, but there is a fairly clear vision.

There are some other things you should definitely do. For several-day storage, there are technologies such as compressed air, liquid air and what are called flow batteries. They are at an earlier stage, and they are well worth while supporting by innovation funding, to help them through the hurdles. Pump storage hydro should also be used as much as possible.

The final thing is interconnect. A renewable system will balance better the more that you interconnect, so there should be strong interconnects to Scandinavia. We should also be open-minded about the possibility of intercontinental interconnects. A major project is being proposed by a group called Xlinks, for large solar and wind developments in Morocco and to run a 3,500 kilometre undersea cable from Morocco to the UK. It may surprise you to know that the economics of that can work. People are also talking about Australia to Singapore.

Essentially, undersea cabling, as against overland cabling, is surprisingly cheap, because you no longer have the land acquisition or the planning debates and arguments before you get going. We should be developing a vision of those interconnects, whether they be to north Africa, or to Iceland’s geothermal, with Iceland then connecting to Newfoundland to combine with other grids. Broadly speaking, the wind is blowing and the sun is shining somewhere in the world, even if it is not shining in your bit. More interconnect is good and should be part of what we are planning for.

Lord Skidelsky: The bottom line is that, in our part of the world, we should be planning not for diurnal but for seasonal. What assumptions about climate are being built into that, because we are also told that we are likely to have more extreme climate events?

Lord Turner of Ecchinswell: That is right. There was an interesting development last year, which we and others are casting our eye over. Before we got to the Ukraine crisis, the drivers of the gas price that had already occurred were multifactor, all the way across the world, and were just coincidental. One was that, not just in a particular point of the year but on average across the year, there was lower wind resource in north-west Europe than in previous years. This alerted people to the fact that there might be variations or trends.

The best insight from the Meteorological Office is that it is very unlikely that a warmer climate is, on average, less windy. Indeed, it is probably in the other direction. In the simplest terms, a warmer climate is a more energetic climate; there is more energy in the different parts of the system and therefore it tends to generate, on average, more rain events, more precipitation events, more evaporation and more wind. However, it might be more variable, and we need to look at whether greater variability in future means that we will need even more storage than we think we need.

There is probably a bit of an offset to it technologically. It used to be the case that, when you got very extreme weather events, beyond a certain windspeed you had to turn your turbines down, so you were throwing away a resource. We are getting better and better at running turbines—the Japanese are working out how to run turbines even in typhoon-style windspeeds. We and the meteorologists are pretty confident that, on average, when we get to the 2050s, we will have at least as much, and maybe more, aggregate wind resource as we have at the moment. But we will need to keep monitoring the science to see whether it implies that it might be a bit more variable, and that therefore the scale of both the storage and the interconnect required to make the system balance may be even bigger than what we thought.

Q164       Lord Monks: Hi, Adair. We await the Government’s statement, perhaps next week, on energy. It will be interesting to see just how many of your very fertile, imaginative ideas make it into their proposals.

One of the issues that you, as a regulator in the past, will know about is to what extent green finance initiatives would be effective in sparking the orderly transition. What would you recommend the Government to do specifically in that area? Is there a role for regulation, as far as disclosure and stress testing are concerned?

Lord Turner of Ecchinswell: We have headed in a good direction over the last several years, with Mark Carney playing a major role, along with Mike Bloomberg, first in the Task Force on Climate-Related Financial Disclosures and then on the very strong encouragement, still on a voluntary basis, which led to the GFANZ announcement in Glasgow of a significant number of asset managers, banks and other finance institutions making commitments to net zero.

When many of them make the commitment to net zero, the next question they ask is what exactly that means. It is not straightforward. Given that you cannot get to net zero tomorrow, and given that you might want to finance, for instance, a steel mill that currently produces a hell of a lot of CO2 but you want to prefer the ones that are on a journey to no CO2, it is quite a complicated thing to operationalise commitments to net zero, making that differentiation.

We have financial institutions within our own membership of the ETC, but we also deal with lots of other companies that are trying to turn net-zero commitments into real action. That is equally in relation to red line negatives, the things that they will not do, such as financing new coal plants or new oil mines; the things that they definitely would prefer to do, such as renewable energy and new technologies; and the difficult issues, where it is about working out how you finance a transition in sectors that will take time to get there.

We have got to take quite a major step forward. The issue to think about is the progress from voluntary to compulsory, and I think we should head down the compulsory route. Broadly speaking, we should head down the securities regulators of the world—the FCA in the UK, the SEC in the US et ceterataking those commitments to net zero and making them compulsory. The crucial thing then is to really work on the details of how you audit it. When somebody says that their strategy is net-zero compliantthis could be either a company outside the financial sector or financial companies financing the real economythe next step is a lot of work.

We are engaged in this through something called the Mission Possible Partnership, which focuses on the really hard to abate sectors of the economy: steel, cement, shipping and aviation. We are working on what is good in those sectors. What is a good strategy? What can you expect? How fast can you expect a shipping or aviation company to proceed? We are engaged in developing that and then feeding it back to the GFANZ initiative. But that will have to feed into the standards for how auditors look at what companies are doing and opine on whether their statements that their strategy is net-zero compliant mean that they are actually net-zero compliant. We have made a lot of progress, but the detail is now in how you operationalise it and audit it.

Broadly speaking, provided that we get the financial sector making commitments to net zero, and provided that the other aspects of policy are in a good place—carbon pricing and a clear sense of a strategy for the transmission network—as I said earlier, I do not anticipate that we will have difficulty with the scale of the financial flow required in developed countries. That could be for Maersk to buy new zero-carbon ships or for ArcelorMittal to invest in zero-carbon steel production or offshore wind developments in the North Sea. That is in the developed countries.

We also need to pay a lot of attention to the parts of the world where the cost of capital is much higher. Alongside the considerable progress that we are making on beginning to motivate big flows of finance in the developed world, we need to switch our attention to whether you want a decarbonisation of Africa. In Africa’s case, let us be clear: its CO2 emissions are trivial today. It is about how it skips a generation and becomes prosperous without getting there. That is where the cost of capital issues is crucial. We need a very strong focus on the role of developed countries, through the development banks of the world, in financing developing countries.

Lord King of Lothbury: To go back to the question of compulsion, the rationale for net zero is for the economy as a whole. It is really for the world as a whole, but for a moment let us just take it for the economy as a whole. Why therefore would you want every individual company to go to net zero? Would it not be more efficient for some to go further and others to go not all the way to net zero, with a carbon tax ensuring that the effective price of carbon was the same throughout the economy? It seems to me that you are going down the path of saying that everyone has to get to net zero, which is not an efficient allocation.

Lord Turner of Ecchinswell: It depends on what you mean by net. The net covers the purchase of offsets from other sectors of the economy, which we are going to come to.

Philosophically, however, I would strike a balance. This is what, for instance, the Science Based Targets initiative does. We have found that, as long as you say to sectors, “You have a completely open choice: there will be a future carbon price and you might be a hard-to-abate sector, so why do you not just plan on buying some offsets from another sector at a future date?”, you do not get the focus on the technologies that can drive the decarbonisation of that sector.

We have to accept that the range of technological availabilities and the future cost of decarbonisation are endogenous to the level of ambition that companies set. When they set stretching targets, they find possibilities that did not exist.

Broadly speaking, within our Mission Possible Partnership work and the Science Based Targets work, we are saying that in almost all sectors of the economy you should be aiming to get about 90% of reductions as real reductions in your own gross emissions. That is allowing for the fact that, while some sectors of the economy cannot get to absolute net zero, the optimal solution might be limiting it to that last 5% to 10%, with some variation according to the sectors of the economy and how easy it is to get there.

As economists, we could take the purist point of view: there is an externality, we set a price and the free market gets there. But there is a balance between having a carbon price, which is essential, using that carbon price to make sure that we have some search for the lowest-cost solution across sectors, and accepting that, when you set strong gross emission reduction targets for all sectors, you end up achieving technological progress that you had no idea was possible.

For instance, five years ago, I thought that the steel sector was really hard to decarbonise. I thought that it would be almost entirely decarbonised by adding carbon capture and storage to existing coking coal blast furnaces and that it might have to also buy offsets from other sectors. I have just come back from Sweden, and I am sorry I did not bring with me my lovely little 100 grams of hydrogen direct reduction steel. The pace at which this new technology has come into play over the last five years is stunning. It tells us that endogenous technological change is a hugely powerful factor in the economy.

Q165       Baroness Kramer: My question arises from a chart that we have from Liebreich Associates, showing how global fossil fuel investment has declined markedly since 2014 but without the commensurate increase in funding for low-carbon alternatives. That is not to say that there has not been more output, but that is because low-carbon technologies have become more efficient. How do we manage the transition process so that we do not have sudden cliff edges and crises?

Lord Turner of Ecchinswell: That is a true issue. I do not know which particular things Michael Liebreich showed you, but IEA figures suggest that fossil fuel investment is down from $700 billion a year to $300 billion or $400 billion a year within the last five years or so. That partly reflects a lot of fossil fuel companies beginning to doubt the future of fossil fuels and to think that there is going to be a period beyond which oil demand will fall. Therefore, they do not want to be stuck in a stranded asset. However, it is clearly vital that, as we cut that, we are investing enough in the new alternative technologies.

This is an area where free market co-ordination does not necessarily get us there. The total of all the actions that people are taking can produce a suboptimal and somewhat chaotic result. It is one where you need an element of strategic plan, not in the sense of getting the state to be the actual implementer but some sort of vision of how rapidly you expect oil and gas to come down, for instance, in the UK and how rapidly you expect electricity and zero-carbon electricity to go up.

We have not been going fast enough, as we need to do. But by the way, some other countries are far worse than we are in the pace at which they are developing zero-carbon alternatives. One of the ones that is absolutely tragic is Germany, which 10 years ago was ahead of the path to decarbonising its electricity, having subsidised the earlier and most expensive bits of renewables. By managing to commit to phasing out nuclear before end of useful life, it ended up burning more coal and becoming more dependent on Russian gas. This was a problem hiding in plain sight from the moment Germany did it.

We need from Governments a sense of how rapidly we see the balance changing. That is why I started by saying that what you have to keep coming back to is this: the single biggest strategic thing we have to do is build a much bigger green electricity system. Once that is in place, the market will deal with a lot of things. If the shipping companies of the world know that in each of the major ports of the world somebody has thought about how you are going to make green hydrogen and green ammonia, and where the green hydrogen has come from in terms of zero-carbon electricity, you can leave it to the shipping companies of the world to buy the ships. That is the essence. We need an element of plan here.

Baroness Kramer: Could I press you very quickly? Are we at risk that, if this descends into chaos, we will end up with extraordinarily high prices of energy for consumers and the associated political backlash?

Lord Turner of Ecchinswell: I do not think that we are at risk of something worse; I think we are right in the middle of it. It is bad, and it is probably as bad as it gets. We need a clear strategy to pull out of it as fast as possible by the sets of mechanisms that I described earlier.

It is interesting. How do you get co-ordination? Europe made a decision two or three years ago to take the bet on buying LNG, which it thought would be cheaper than Russian piped gas, and increased its reliance on LNG. It then got surprised by the fact that Chinese LNG demand was going up very strongly because the Chinese are trying to crunch down on coal, for local air quality reasons. That was a knowable fact. Does not the market respond to these knowable facts? Lord King and I dealt with the inefficiencies of the financial market in 2008. Markets are good, but they are not perfect.

Q166       Lord Rooker: We have covered this area. The question was about whether market frameworks could help encourage investment in carbon capture and storage. I put it to you that that is short term. Overall, from what you have said, it looks like gas is going to be a backup, if we really go for renewables. Therefore, why would anybody invest in carbon capture and storage if gas is a backup at the end to just switch on and off?

Lord Turner of Ecchinswell: That is a great question. We are about to produce a report on carbon capture, use and storage across the world. Our working title is “The Role of Carbon Capture and Storage: Small But Vital”. It is small as well as vital. From the order of magnitude of 40 gigatonnes of CO2 emissions today in the energy, buildings, industry and transport sections, to get to net zero, we see the last four to six coming from carbon capture and storage. The real heavy lifting of 35 out of 40 is coming from other technologies.

This is, by the way, a change from 10 years ago. If you had asked me when I was first chair of the Climate Change Committee back in 2008and I think we put it in our reportshow we decarbonise an electricity system, I would have said that you would be crazy not to back three technologies: renewables, nuclear, and carbon capture and storage. Many of us believed then that you would not be able to take the renewables share to beyond, say, 50% of total electricity demand. People saw a significant role for carbon capture and storage, either at the back end of coal plants or on gas plants.

What has occurred is very significant falls in the cost of renewables and of green hydrogen production. When the facts change, you should change your mind. Most optimal visions of power systems now see variable renewables going to as much as 70% to 80% of the system.

The role of CCS in the power system is now much less than it was before. The role of CCS is now much less than I used to think in steel. It may well still play a role, but certainly we think that coking coal demand could fall 85% or 90% by 2050. By the way, if you have not looked at that, it raises some questions about the Cumbria coking coal mine. If it has not already been killed off, I think it should be.

There is less of a role for CCS in the power sector and there is probably less of a role in steel. There are some sectors where we cannot decarbonise without it at the moment. I do not know how to get the cement sector to zero carbon without carbon capture and storage.

It may have a role in the power sector on gas when it is backup. The question you have asked is a good one. Suppose you had gas plants you were going to run only for 500 hours a year, and you were going to run them with methane, it might be then very expensive to add the capital for CCS. You might say that that is so small an amount of emissions that maybe some offsets elsewhere would be a better way to do it.

It is also true that in the production of hydrogen there are two main routes: blue hydrogen, which is steam methane reforming plus CCS, and green hydrogen from electrolysis. The balance of belief has shifted in favour of green hydrogen.

We see carbon capture and storage as small but still vital. We need Drax’s role—this relates to the issue of offsets or negative emissions—of combining CCS with a bioenergy input to generate negative remissions. We may need direct air capture plus carbon capture and storage to get negative emissions mid-century, because we may not be able to get all the way to net zero within the system itself. We need it for cement.

For all these reasons, there should be government support for the technology. It seems like a smaller role than it was 10 years ago, which then of course creates a bit of a problem in markets. If it has got smaller, people do not see the major opportunity there. Our challenge is to make sure that it does develop on the scale required for the limited set of sectors where it is required.

The Chair: Lord Turner, thank you very much for your very full and knowledgeable answers. They are very much appreciated by the committee. It is nice to see you again.