Environmental Audit Committee
Oral evidence: Accelerating the transition from fossil fuels and securing energy supplies, HC 109
Wednesday 8 June 2022
Ordered by the House of Commons to be published on 8 June 2022.
Members present: Philip Dunne (Chair); Barry Gardiner; Caroline Lucas; Cherilyn Mackrory; Jerome Mayhew; Anna McMorrin; Dr Matthew Offord; Claudia Webbe.
Questions 1 - 108
Witnesses
I: Michael Lewis, Chief Executive Officer, E.ON UK; Lisa Fischer, Programme Leader, E3G; and Paul Spence, Director of Strategy and Corporate Affairs, EDF Energy.
II: Silje Ask Lundberg, Senior Campaigner, Oil Change International; Dr Steve Pye, Associate Professor in Energy Systems, UCL Energy Institute; and Will Webster, Energy Policy Manager, Offshore Energies UK.
Written evidence from witnesses:
E3G (Third Generation Environmentalism)
UCL Energy Institute and UCL Institute for Sustainable Resources
Witnesses: Michael Lewis, Lisa Fischer and Paul Spence.
Q1 Chair: Welcome to the Environmental Audit Committee for the opening session of our new inquiry into accelerating the transition from fossil fuels and securing energy supplies. This has taken on an increased topicality for our deliberations, which is relatively unusual for this Committee. Therefore, we are particularly pleased to be joined today by two groups of experts on the subject. I will ask our first panel to introduce themselves.
Michael Lewis: Good afternoon, Chair. I am Chief Executive of E.ON UK. We are the largest electricity supplier in the UK.
Lisa Fischer: Good afternoon. I head up the programme on climate neutral energy systems at E3G. We are an independent climate change think tank.
Paul Spence: I am Director of Strategy and Corporate Affairs for EDF’s UK operations. We are the largest producer and seller of low carbon electricity in the UK.
Q2 Chair: Thank you all very much for joining us. I will ask the first question. In the context of the Russian invasion of the Ukraine and the impact that that has had on soaring energy costs around the world, how do you see this impacting on British energy customers, both domestic and commercial? In particular, how much worse is the pricing pressure compared to what was happening as a result of the accelerating economy and supply chain challenges post the pandemic?
Michael Lewis: Clearly the Ukraine war has accentuated what was already a very difficult price environment, but a lot of that was driven by speculation about what was happening in Ukraine and lower flows of Russian gas over the last six months of last year. The effect in the short term is pretty devastating on customers. We have seen an enormous increase in the price cap in April to £1,971, unprecedented, a 54% increase. I have never seen anything like it in my 30 years in the energy industry. It will likely go up again. I think the latest forecast is £2,860.
Our big concern was that without significant Government intervention that could be catastrophic for customers. We are already seeing more and more customers falling into late payment and we had predicted that up to 40% of customers could go into fuel poverty and a 50% increase in our debt was predicted. However, with the Government’s very welcome intervention, we expect those effects to be severely mitigated. We called for a very big intervention and it was indeed a very big intervention and we were pleased to see in particular the focus on lower income customers.
I think that the question beyond that is what additional support we need to give customers, because the price will not suddenly fall back to where it was pre the Ukraine invasion next year. It will probably come down somewhat but will still be relatively high. Our plea to the Government has always been to push hard on energy efficiency because that is the proven way, the only silver bullet for this crisis, that will reduce prices, reduce energy consumption and contribute to net zero sustainably. The next phase of tackling this has to be a massive ramp up in measures to deal with energy efficiency.
Q3 Chair: We have done a lot of work on energy efficiency. In the domestic sphere there are 19 million homes that are not energy efficient and that will take probably 20 to 30 years to get right. That is not a silver bullet that will have any impact this year.
Michael Lewis: Well, you can do some things very quickly. Through the ECO scheme, for instance, we have done about 1.5 million measures over the last few years. They have a tangible effect and a very quick effect. Obviously you will not decarbonise and make energy efficient or bring every home up to EPC C in the next six months. It will take many decades but we have to start now and importantly we have to send a signal to the supply chain that it is worth training up the people, it is worth investing in the workforce and the skills and all that entails.
One of the problems we have had in energy efficiency has been stop-start and that breeds a lack of confidence in the companies engaged in this work and it means that the supply chain does not gear up to deal with the massive challenge ahead. I think that it is important that we start now with increasing ECO and with ECO+. By the way, there are still some problems around ECO. We have not yet passed the legislation we need for ECO4 and I appeal to the Government that they do that as soon as possible. In June we will run out of the mandate for ECO3, so we need that done as quickly as possible, and we call for ECO+, which would not just be for fuel poor customers but for all customers, a combination of government money and private money and would only cover insulation, where you could do measures very quickly. I think that there is a lot we can do in the short term but you are right, longer term is where the problem is solved.
Q4 Chair: I will come back for some context on the point you were making about late payment. You said that you anticipated 40% of your customers getting into late payment.
Michael Lewis: It was fuel poverty. We expected our debt book to grow by 50%.
Chair: What proportion would you normally have involved in late payment and what proportion do you have now?
Michael Lewis: We would normally expect around one in eight customers to be in arrears in some way and we expect that to increase by about 50% or, correction, we would have expected that to have increased without the Government intervention. Now it remains to be seen how customers respond but we probably will see an uptick in debt, because it does not mitigate the full price increase, but we have not yet run the full model to predict exactly where we will end up in October.
Q5 Chair: What proportion of a domestic customer’s bill relates to the six-month winter period, the colder period versus the summer period?
Michael Lewis: Sorry, I am not sure I understand the question.
Chair: If you are turning on the heating you will use a lot more energy than if you are not turning on the heating.
Michael Lewis: The vast majority of the bill is incurred in that period from October through to March.
Chair: What proportion?
Michael Lewis: I don’t know off the top of my head but I can provide that.
Q6 Chair: Do most of your customers pay an even amount through the year per month?
Michael Lewis: Yes.
Chair: So it doesn’t actually affect them in that respect.
Michael Lewis: Our direct debits intend to equalise the monthly payment so that you are at zero by year end and the tariff also reflects that for prepayment customers.
Q7 Chair: Thank you very much, Michael. I will turn to Paul to ask the same question about the impact of the increased prices on your customers.
Paul Spence: Michael said a lot of what I would say about the impact we have seen. To give a few specifics, a year ago we were worried about the trajectory we were seeing in bills and at that stage we were in a situation where we reckoned that our vulnerable customers were spending about £1 in £12 of their income. We are now in a situation where they are spending £1 in £6 of their income on their energy bill. Like E.ON, we were very worried about the affordability of that situation, for the very poor but also for those who had been just about managing and were facing a very different situation in their ability to pay their energy bills and the level of arrears. We have seen an increase of about 40% in calls from our customers already concerned about their ability to pay.
You asked about the direct debit. That tends to smooth payment for those who are paying on credit. Customers who are on prepayment meters are already seeing the impact of the higher prices because they have to go and top up their cards or make a payment.
Q8 Chair: What proportion of your customers are on prepayment?
Paul Spence: It is of the order of 15% of customers. In the past most customers would have topped up about £5, £10, £20 and we are seeing now a behaviour we have not seen before, which is people topping up £2.66 or £1.33, what they can afford, and that is not lasting them as long as they have been used to. We are seeing already signs of financial strain in that group and changes in behaviour. We need and are investing in measures to deal with the calls that are coming in, extra call centre staff, a new programme of helping customers who are facing those strains to make sure that they are on the right tariff, that they are also taking the right measures, that they are accessing the right benefits and, in the extreme cases, that we are putting them in touch with either our trust fund or other sources of potential support. We are seeing that stress coming for real in the residential sector.
Michael did not mention the business sector, which is the other piece where we are also seeing very real strain from more of our customers already struggling to access tariffs. We are seeing some of our competitors not wanting to sell energy in the business market or not wanting to sell to particular segments and, therefore, customers are coming to us and saying, “What can you do?” In some cases there is not a lot we can do unless they have the money to avoid us taking on very big non-payment risks in that sector. It is a real strain across all of the sectors. The Government have acted, as Michael said, on the residential sector. Perhaps they need to look at what they can do to help businesses that have been and will be under increasing strain.
Q9 Chair: What proportion of your energy supply comes from North Sea sources?
Paul Spence: We don’t think about it as the original place. We buy gas on the wholesale market from wherever it is supplied and so we buy essentially whatever the UK mix is. I will write to the Committee with the exact numbers but it is of the order of 40%.
Q10 Chair: The reason I ask that question is that the Government obviously announced the energy profits levy and the corresponding investment allowance and I am interested to know what impact that is likely to have on EDF and E.ON, if any.
Paul Spence: Clearly we are in a situation where we are predominantly a producer of electricity and we want people to move away from using fossil fuels to heat their homes and to cook and all those things, but that is not going to happen immediately. Therefore, we need to source gas from somewhere, whether that is from the North Sea, pipeline from Norway or continental Europe, or from the Middle East via liquefied natural gas. We will continue to access that gas. The price has responded to the crisis that we are seeing at the moment and that is the big problem that we are facing. It is not a problem of molecules; it is a problem of pounds.
Q11 Chair: Essentially the essence of this inquiry is the role of North Sea fossil fuels in energy usage in the UK. I will come to you in a second, Lisa, because I am conscious that we have not had a question to you and we need to get on to others. Michael, do you have a view about the North Sea?
Michael Lewis: The number I recall is 48% is UK gas from the North Sea but, as Paul said, we buy all our gas on the wholesale market. We do not produce any gas, so any upstream gas levy or tax will not have any direct effect on us.
Q12 Chair: Did you say 48% is for the North Sea as a whole or for E.ON’s use of gas?
Michael Lewis: No, we buy gas on the wholesale market, regardless of whether it comes from—
Q13 Chair: What proportion of your energy supply comes from gas?
Michael Lewis: In terawatt hours it is about 50%. That is not necessarily particularly helpful. We have about 5 million customers who are gas customers as well as electricity customers.
Q14 Chair: Okay, thank you. Lisa, I am going to bring you in now before moving to others. Could you give us your perspective of the energy security strategy and to what extent will it help to provide clean and affordable energy in the future?
Lisa Fischer: The energy security for us reflects an approach to energy security that is more a 20th century approach to energy security. It is focusing on the supply side. It is very focused on largescale projects with very long delivery timescales and quite high delivery risks. We have seen not the equivalent focus—and I think that has been mentioned by others before—on energy efficiency and the demand side. Since the start of the invasion or the crisis we have invested I think £37 billion is the Government figure, basically mainly to stand still, to support vulnerable customers, which is really important, but it is not to permanently lift them out of energy poverty. On the choices about energy efficiency, we are seeing that households band D or below are currently incurring an inefficiency penalty, basically, of £900 on average per year.
Referring to the energy profits levy and the investment allowance coming alongside, the money from the investment allowance could have been used to insulate 2 million households and as such help permanently lift these households out of energy poverty. In that context, we have seen a few measures on energy efficiency in the energy security strategy like the VAT cut, but that really pales if you compare that to measures taken to support the oil and gas industry.
It is also important to note that when it comes to North Sea oil and gas, as has already been mentioned it is a global market, so adding UK production to the market does not affect the price directly in the UK. The price will not change by marginal UK volumes. Projects take at least three years to implement. The UK-based energy is oil-weighted and while we also have an issue on the oil side, gas is the most imminent issue on the consumer side. Even when it comes to oil, most of the oil resources are exported, about 70% of the oil resources are exported due to refinery technologies.
Finally I want to say on the security strategy that it falls behind what we have seen other countries doing. To pick out two examples, we have seen Germany bring forward its renewables target to a 100% renewables target. It has stocked up its loan facility of the public investment bank KfW, for energy efficiency by €4.5 billion and it has set out a target for annual heat pump sales and brought forward a target for phasing out new boilers. We have also seen earlier this week the US use its Defense Production Act to scale up heat pump manufacturing, support energy efficiency measures and renewables, among other things, but just to give you a comparison.
Chair: Thank you very much indeed.
Q15 Dr Matthew Offord: I heard a statistic recently that said that if people just turned down their central heating by a degree or something that would assist in the price of gas and it would also help people in the fight back against Russia over its invasion of Ukraine. How realistic is that? Would our energy security increase if the amount of fuel that people used reduced, or was that just a Daily Mail kind of theory? Perhaps the two energy company representatives might answer.
Michael Lewis: My own view is that anything that reduces our energy consumption for the same economic utility is a good thing, such as turning down the boiler flow temperature, which does not actually impact the temperature in the home. It is the temperature of the water that flows through the radiators. If you have lower flow temperatures so that the boiler condenses it makes it more efficient and reduces energy consumption by 10% to 15%. That is without doubt a good thing because it reduces consumption of gas, CO2 emissions, bills and our reliance on gas imports. Yes, it is good and that is at the root of why we think energy efficiency in general is a good thing because it has all of those effects. As well as reducing bills immediately in the here and now, it is good for our long-term reduction of gas consumption and getting off the international gas price and for driving to net zero.
Q16 Dr Matthew Offord: Would you say that there is more to be done in the the Government’s energy security strategy? Do the Government have it right?
Michael Lewis: As Lisa said, the key thing that was missing from our perspective is that this was basically an energy supply strategy. It was not an energy security strategy because a key element has to be on the demand side: how do we make sure that we systematically reduce consumption over the next 20 years? If you could move all the 19 million homes that are energy efficient up to EPC C you could save around 130 terawatt hours. That is six Hinkley Points, six nuclear power plants that you would not have to build. I know it is gas, electricity. It is not necessarily directly compatible, the point being that is just as important as building new energy supply.
But much of what the Government have produced is good. We are fully supportive of the enhanced offshore wind target, 50 gigawatts. We would like to see a harder push on onshore wind—45 gigawatts should be delivered. We would like to see a massive expansion in solar and in particular rooftop solar PV. For new build houses it is a no-brainer, it should be done immediately, but also incentives to retrofit. All of those things need to be done and are all part of the solution.
Paul Spence: I completely agree with Mike’s points. We need to be doing all of these things. I think that there was a missed opportunity. We have seen a heat and building strategy from the Government that started to talk about energy efficiency. There was an opportunity to go further and faster as part of the security strategy and, as Mike said, there was also an opportunity to do more with onshore generation from wind as another technology that is one of the lowest cost ways of doing it. The Government are doing a number of the things right but we need to do all of the things that we are talking about at a pace that we have not achieved anything like in the past. We are talking in some areas 10 times the pace we have been going, in other areas five times the pace we have been going, and that is true across energy efficiency, electrification of the transport network, the rollout of heat pumps, the rate of expansion that we need to go through if we are to have an affordable and resilient supply. It is a national response and we need that sense of urgency across all of the components.
Q17 Dr Matthew Offord: It seems a very logical point to reduce the amount of energy used rather than continually constructing facilities that produce more. What can the Government do about energy efficiency within the home? What mechanisms can they use?
Paul Spence: Like E.ON, we are very committed to delivering energy efficiency. We would like to think of ourselves as one of the leaders in the operation of the ECO schemes that we have had as an industry to install measures predominantly in the homes of those who are fuel poor or vulnerable. We would like that to be expanded into a scheme for more of those households that can pay a contribution towards their energy efficiency actions. We would like a mix of self-funded but also with subsidy or grant to support that and we think that the Government have an opportunity to do that. As Mike said, that would help have a supply chain that believes that things will continue and that will help grow our national capability.
The Government can also help with some of the training of the tens and hundreds of thousands of people we will need to install all these measures. We have a big skills shortage and a real challenge on that. The Government can be out there advocating everything from the small measures, the things like turn down the temperature of the water that your boiler is producing all the way through to the big measures of making sure that your house is EPC C or better.
Q18 Dr Matthew Offord: I was hoping to lead you down the route of the energy company obligation, of which I understand EDF is a big supporter. Where could the ECO be expanded?
Paul Spence: As I say, I think that can be expanded from the supported sector. It is already being expanded. We would like to see the legislation for the ECO4 scheme come through very quickly. That scheme will be expanded in a number of measures already but it is not enough to do it just on that grouping. We need to move into the ECO+ scheme for those houses that can pay some contribution as well.
Q19 Dr Matthew Offord: Do you have anything to add, Mr Lewis?
Michael Lewis: Only to fully agree with the ECO and ECO+ points. We are absolutely committed to the ECO scheme. We think it is a very effective, very efficient scheme. I will add, though, that if you really want to tackle this, the vast majority of those 19 million homes are in the able-to-pay sector. They are not people who need a public subsidy. The problem is accessing the finance up front. Certainly the energy efficiency measures are net present value positive for the investor, so they save money over time. It is access to the finance up front.
Our view is that this requires Government intervention to push the mortgage market to deliver this. We have a £275 billion a year mortgage market. If you could tap into just 3% of that you could upgrade every home in the country to what we call the future energy home standard. We would advocate a system whereby when you buy a house—and by the way there are about 20,000 houses transacted every week, which is roughly how many we need to upgrade by 2030—you would have an energy audit that says, “These are the things that you have to do to take your home to the best possible energy efficiency standard you can and to electrify it wherever possible”. You then present that to your mortgage provider and they should provide the finance to do it. Once you have done that you may get some financial incentives from Government, maybe stamp duty or council tax incentives. You create a virtuous circle of investment through the mortgage market because that is where you are going to tackle it.
We fully support ECO, the green home grants local authority scheme. All of them are very effective but they are tackling the social housing and fuel poverty customers. We need a scheme that tackles the able-to-pay market.
Dr Matthew Offord: I recently put down a written question along those lines and the answer from the Treasury was not very helpful.
Michael Lewis: If you tap into the mortgage market it is private capital. It does not involve the Treasury. The Government will have to lay down some standards and make sure those standards are met and put the framework in place, but it does not require public money, or at least not a huge amount of public money.
Q20 Dr Matthew Offord: Ms Fischer, what kind of behaviour changes do you perceive to be a mechanism for achieving reducing the demand for oil and gas?
Lisa Fischer: We have already talked a lot about reducing flow temperature. I would call it one of the measures to buy us time to do more on energy efficiency. That is certainly something we should be doing but it cannot replace longer-term action on bringing up insulation standards of homes. I think it is important for behaviour changes that the advice that is given to people is transparent, standardised, independent, things like a free appointment for energy saving advice or a standardised mechanism that people refer to for purchasing a home should be available to every citizen, to have a trusted person they can talk to about behaviour change.
Behaviour change is not only on the consumer, it is obviously the whole ecosystem of installers and advisers to individuals who have been trained to do gas boilers and trained to be advising based on their knowledge base and skill and based on what they sell, of course. I think we need to start incentivising them, branching out and broadening their advice here. It is important to align the whole supply around that, so set the standards along the supply chain. Behaviour change is not just what is happening in the household. It is cultural changes within companies.
I want to add, because we often talk about the demand side of energy efficiency, that it is very much also about digitisation. Neither this Government nor hardly any European government I know of have a strategy for digitising the energy system at the speed and scale required. I am bringing that up now because it requires pretty strong cultural change as well in system operators along the chain and also at home. Behaviour change goes beyond just turning down your heating. It is within institutions, education standards and along the supply chain.
Q21 Barry Gardiner: Mr Lewis, maybe you live in a world of perfectly rational beings in possession of full data and information, or at least that is how it sounded when you said as long as we tap into the 3% mortgage market we could solve the energy efficiency problem. You rightly spoke about the Government needing to subsidise in some way, I think “to incentivise” was the word you used. Do there not also need to be clearer penalties so that perhaps there is a cut-off point beyond which those incentives are no longer available? Otherwise we will not get action here because people delay, they put off, they don’t have all the facts.
Michael Lewis: Absolutely. To clarify, our view is that this requirement should be when a house is purchased. The reason for that is because that is when you would naturally invest, you put in a new kitchen or redecorate it. That is the perfect time to do things like home insulation or heat pumps because you will have some disruption. We installed around 700 heat pumps last year. One of the big disincentives is that upheaval, “Oh, my god, what are they going to do to my carpets and floorboards?” and so on. We think it would be a big help if you can take that out.
But, yes, absolutely it should be when you buy the house you have a certain date by which you have to complete the work. If you do it, you get the incentive, if you don’t, you don’t. In the end there has to be an element of carrot and stick but it has to be driven by an overall framework of getting the entire UK housing stock up to the highest level of energy efficiency, converting them to heat pumps and installing localised generation, solar PV.
Q22 Barry Gardiner: Do you believe that we have the skills available to do it at the moment or do we have a dearth of skills?
Michael Lewis: No, we don’t. We are way off the pace on skills. We know that about 27% of the current workforce will retire by 2030. This is Energy and Utilities Skills Partnership data. We need to retrain 21%. If you look at one example of electricians, we expect 80,000 retirements by 2030 but only 28,000 apprenticeship completions if current trends continue. By the way, we are going to electrify the economy with that situation of electricians. That is a massive challenge but it comes back to the point that if you don’t give visibility to the supply chain, people will not invest in training.
Q23 Barry Gardiner: How long does it take to train a gas-certificated installer to become a heat pump-certificated installer?
Michael Lewis: We are going down that journey at the moment. The answer is that it depends on the aptitude of the individual and exactly which element of the heat pump installation they will be doing, because the heat pump is a different beast. We are currently looking at retraining our smart meter workforce. We have ramped that up very rapidly to 2,500, which we trained. We are looking now at can we retrain them to do heat pumps, solar PV and battery, and it very much depends on the individuals but it is probably at least 12 months.
Lisa Fischer: I have two quick points. First on the finance side of things it is important to remember that the UK has an excellent set-up with the UK Investment Bank now that can also be a very supportive pillar for the finance market in standardising schemes and providing the core funding for private finance to crowd around. The other point is that we have spoken to the industry and they reckon that this year they can still do around 300,000 energy efficiency actions. At their peak in 2005 they did 900,000 but again going back to the point that without the visibility on supply chain and training up it is hard to do. But just to say that there are things that can be done this year.
Q24 Chair: My question is on the ECO4 delay and the implementing legislation. I think it was due to have come in in April, two months ago. First, is it secondary legislation and, therefore, potentially could be done quite quickly and, secondly, is that interrupting the supply chain? Is there a hiatus and people are not working on installations as they should be doing?
Michael Lewis: To be honest, I don’t know if it is secondary or primary legislation. I don’t know if my colleagues know.
Chair: We will ask the question.
Michael Lewis: We are still working under the ECO3 framework, which will expire in June. As long as the legislation is passed before then we should be okay, but there will definitely be a hiatus if it is not passed before the summer recess and then there could be a delay. We need it ASAP, basically.
Q25 Cherilyn Mackrory: Ms Fischer, E3G has been quite critical of whether the Government have got the right mix on the supply side of new technologies, low carbon technologies to replace fossil fuels. Do you want to comment on that a bit, please?
Lisa Fischer: I reckon that most people in this room think that renewables should be the backbone of our future energy system. We have an incredible wealth of renewables in the UK from wind, also including solar even though that may not align with the image of the UK, but we are not making good use of that. I think it has already been mentioned that we should be loosening restrictions on onshore wind and solar. We should be supporting supply chain development also for the renewables industry, especially the wind industry, and the massive pressure at the moment but also the labour workforce. On offshore wind a big question mark at the moment that is putting pressure is the co-operation with the EU. It is a massive export market for UK offshore wind but the trading arrangements and the interconnections need to be clear.
All in all, what we have seen since the Russian invasion is the emphasis. There has been action on renewables but the emphasis has not been on renewables given the sort of no regret where we want to go and that is saving people’s bills. I want to also emphasise that it is not only about building renewables. It is also about using them efficiently. That means that we need storage, especially long-term storage. The UK is fairly good at driving innovation but there is no strategy for building it out. If we have the target of a net zero power system by 2035 we need a plan for long-term storage, networks interconnection in particular, and I have already mentioned that. I have also already mentioned, but it is a very important point, the digitally-enabled, consumer-focused market where we need a much better strategy. There are also social questions attached to that. Of course we all want smart demand response but not everyone can afford that. We absolutely need to think those issues through early on to have an efficient renewables-based system.
Q26 Cherilyn Mackrory: Have you done any analysis on the UK domestic network grid capacity to handle more particularly offshore wind but onshore wind as well and all the renewables really?
Lisa Fischer: Our focus has been on offshore wind, so if it is okay I will focus on that, in particular the North Sea basin and all the countries around and the fact that a strategic development of grid connection and hybrid interconnection would save costs. I have not written down the numbers but I will send that afterwards. We can tell that if we have an approach where we jointly plan the basin and some core hybrid interconnections we save enormously, in the scale of billions, rather than having a line-by-line or radial approach. That is very important. I know that basis is working on some of those elements but it is very much from a UK-only perspective.
Q27 Cherilyn Mackrory: Thank you. Mr Spence, what is the quickest and cheapest form of renewable energy for you to supply?
Paul Spence: The starting answer to that is not using it in the first place. Energy efficiency is the quickest and the cheapest. Beyond that, we have a pipeline of ready to go onshore wind projects that we believe offer a great component, particularly in Scotland and Wales. One of the constraints that they face is having the right network infrastructure in place to produce that and then move it to where our customers are. Then we would also talk about solar. I agree with Lisa about storage to support the operation of the grid day to day. We have an affiliate called Pivot Power who are installing large grid support batteries in a number of locations, which will play an important part in the system alongside, I hope, the batteries that we will have in our electric vehicles.
I would also argue that we need some nuclear, more than we have at the moment. Our existing stations are closing and we need to get on with completing Hinkley Point and then deciding on the next nuclear projects, I hope at Sizewell but on beyond that as well. It is all part of a short-term solution but also a long-term one, putting in place things that maybe we should have been doing 20 years ago, which would leave us in a very different position today.
Q28 Cherilyn Mackrory: If we can take onshore wind and solar particularly—let’s take a local level to start with—what barriers are you facing that we could do something about?
Paul Spence: The biggest first constraint is the ability to have the grid connection agreement for those projects. In some cases we are talking about a decade before the grid is confidently able to say that we will be able to export the power from a new project. Why is it taking them so long? That is partly about the buildout of their infrastructure and partly about their planning approvals. With our pipeline we will need to get planning support for those and to get the planning support it would be very helpful to have a greater emphasis in the planning decisions being given to net zero. The Environment Agency, the planning authorities and Ofgem as the regulator having a duty to give consideration to net zero would be a very helpful step to accelerate delivery.
Q29 Cherilyn Mackrory: It is an interesting question, certainly in rural areas like mine where we are trying to up food production at the moment and also there is a push for biodiversity net gain. It is about what we do with that land and the conflicts we are now facing. Would there be scope for having a scheme where if you put up a wind turbine or solar you get money off your bills? Is that something you would support?
Paul Spence: I think it is something that is worth exploring. We would have to ask the questions about the equity of who does that apply to and where and when does that apply for people who are already hosting nationally required infrastructure. Does it just start from today or does it go backwards? There are a lot of complex fairness questions associated with that sort of incentive. The broader point is if a community is going to face the disruption of construction and the impact, the other side is that there should be a case for them to have some of the benefit of the economic activity and hosting that infrastructure. I would like to think that we do that with some of our big projects and I think we can do a bit more of that with some of the smaller solar and renewable wind projects.
Q30 Cherilyn Mackrory: Do you think that there is anything that you have not already mentioned that the national Government can do to remove any barriers?
Paul Spence: We talked in some of the previous answers about skills. The national Government can do things to help with development of skills and the training infrastructure to help build the people that we need. Lisa talked about the smarter energy system of the future where we all have more understanding and real-time control over the energy that we are using. That involves all of us having smart meters in our houses and at the moment we are about halfway there. I think that the national Government will have a role to play in moving from, “Well, have one if you want but maybe not if you don’t” towards providing more incentives for more people to put their hands up and have a smart meter installed to enable this future that we are talking about.
Q31 Cherilyn Mackrory: Lisa do you want to expand on that a little bit and maybe talk about any other new approaches that we are not doing already that could help accelerate?
Lisa Fischer: There are examples in Europe that we can look at in local revenue sharing from renewables projects. I am happy to share some of those. I am not sure that there is much else to add. I think that absolutely we need a strategy for digital energy and I also want to point to some of the undertakings from Ofgem based around net zero market design, which I think are critically important. It is important we keep the focus on net zero, that shift, that we need to start joining up the dots between the energy system and the digital system, including when it comes to regulation.
Q32 Anna McMorrin: The energy security strategy is very heavily reliant on new nuclear and it also takes the premise that the UK can only secure the baseload that it needs by relying on nuclear power. I will start by asking Paul Spence. You are constructing Hinkley Point. Can you tell me if this the is best way to secure low carbon energy?
Paul Spence: When we look at the evolution of the future system and we think about what that system needs to be to make sure that we have reliable power when our customers need it, our models of the future system, which I think are backed up by the models that people like the system operator and independent organisations and the Government do, are a mix that incudes a component of nuclear. As Lisa said, a predominantly renewable system but with a component of always-there nuclear is a lower cost, more reliable system of the order of, in total, £5 billion a year less cost in a system where nuclear is part of the mix.
Q33 Anna McMorrin: How can this be the reliance on baseload that is needed when in fact it takes a number of years—I think the proposal in the energy security strategy is eight new sites over a number of years. With the strike prices that have been agreed, how can you reconcile the fact that this will be a cheaper, more affordable way?
Paul Spence: If I can take you back to 2013, which was when the strike price for Hinkley Point C was agreed with the Government, at that stage the average strike prices for the other low carbon generation was 25% to 30% above the strike price of Hinkley Point. It was £115 to £120 per unit of electricity as opposed to the £92.50 for Hinkley Point. There has been fantastic progress in the other technologies as we have built more projects and their costs have come down. So far we have only one nuclear project. I expect that the cost of the next and the one after that will come down and we are seeing that already between building the first unit and the second unit at Hinkley Point. The cost will come down. As one illustration, if we had taken the decision earlier on Hinkley Point and had completed the project now, it would be paying back to consumers of the order of—
Q34 Anna McMorrin: When did you start the construction?
Paul Spence: We started in 2016. That is when the final investment decision was taken, Barry, 2016.
Barry Gardiner: I am sorry, Chair, I can’t let him get away with that. When was construction started?
Anna McMorrin: The strike price was agreed at 2016?
Paul Spence: No, the strike price was agreed—
Barry Gardiner: The final investment decision, but the construction of Hinkley began long before that. Please, when were you putting in the base concrete?
Paul Spence: The first nuclear concrete was in 2018.
Barry Gardiner: You are answering a different question to the one that I asked and you know it, Paul.
Paul Spence: There was some preparatory work on the site that was done before 2016 at our risk but the real construction activity started in 2016.
Q35 Anna McMorrin: How long do you predict that the two that are proposed for Hinkley Point will be in operation? When will it first start generating electricity?
Paul Spence: We recently gave an update in the wake of the pandemic and the progress that we have made on the project so far. We are projecting that we will go live for the first unit in June 2027.
Q36 Anna McMorrin: June 2027 and not until then will you be producing the first megawatt of electricity?
Paul Spence: Originally when we started in 2016 we said December 2025 would be the production date, so we have seen an impact.
Q37 Anna McMorrin: What do you predict the strike price to be at?
Paul Spence: Today I don’t know. The price is £92.50 indexed for inflation, so it will be whatever inflation has taken the price to in 2027.
Q38 Anna McMorrin: Yet you have offshore wind agreed at £40 per megawatt strike price.
Paul Spence: You are right and I think it is fantastic that there are—
Anna McMorrin: Yet you are taking all of this time with the energy security strategy heavily reliant on new nuclear, which as we know will take—how long would you predict that those eight sites will take? The Government have set it out as a certain amount per year but with reliance on the baseload?
Paul Spence: The Government have set out an aim for 24 gigawatts by 2035, I think it is but I would need to confirm that. Actually, it is 2050, apologies for that. That would have nuclear playing a role of about 20% to 25% in our energy mix.
Anna McMorrin: At quite some expense.
Paul Spence: Yes, with a cheaper total system than a system that was using other mixes with known technologies. That is because it will be producing 24/7, 365 days a year.
Q39 Anna McMorrin: For example, we have heard evidence from the UK Marine Energy Council that tidal stream energy is entirely predictable and can be deployed quickly and built quickly. I will turn to Lisa to comment on alternatives of being reliant on the baseload where we know that nuclear energy will take a long time and be incredibly expensive.
Lisa Fischer: If we are looking for solutions that can deliver affordability and deliver in the short term, thinking about switching away from that supply side-focused baseload terminology, which again I think is a bit of a 20th century view of the energy system, to one where we are looking at a multipoint energy system where you have your supply and you have your demand that is active and activated is really what you are looking at. You are using your consumers, your sector integration with electrical vehicles, batteries on the move, basically, to provide that stability throughout the day. Then the challenge you have left is the long-term storage, which is not the challenge that is answered by nuclear, the long-term fluctuation.
Michael Lewis: Can I add to that? I completely agree with what Lisa said. We are looking at fundamental change in the system from in the past smart, flexible generation for dumb, inflexible customers to smart, flexible customers and dumb, inflexible generation. That is the shift and that is what the digital role will play. The information is so important because customer demand will have to flex up and down, not just supply as it has been mainly in the past. I think there is an answer and the comparator I think you are looking for is what is the cost of green hydrogen versus nuclear. If you can build enough offshore wind, onshore wind and solar to generate enough hydrogen from electrolysis and then either use that directly in heating or use it in a converted CCGT, which is the levelised cost of energy of that in 2050 versus nuclear, that is the comparator—
Q40 Anna McMorrin: What do you say that the Government should prioritise in ensuring that that baseload is there for the future and making sure that cost is taken into account as well as the length of time that it will take? We need to get this shift happening sooner rather than later.
Michael Lewis: The honest answer is that we don’t know from today’s perspective, so we should hedge our bets for the time being. My own view, for what it is worth, is probably green hydrogen will come down in cost very significantly when we adopt it at scale. The Government have that as part of their energy security strategy. There is a plan for 10 gigawatts of hydrogen, half of which is green. Once we roll that out at scale—and a number of countries are doing it—I suspect that the cost will come down. I am not pro or anti nuclear; I am technology agnostic. We need a way of either storing renewables seasonally long term, which is probably green hydrogen, or of having baseload power in the absence of the ability to store. To be honest, if you don’t have an ability to store renewables, you will be throwing a lot away, so you need to develop that somehow.
Q41 Anna McMorrin: Do you think that the investment of £1.7 billion of direct government funding to enable that one nuclear project is valid or would that be best routed somewhere else?
Michael Lewis: Are we talking about Hinkley Point here?
Anna McMorrin: Yes.
Michael Lewis: Well, that is already done, so what I am saying when—
Anna McMorrin: The commitment to funding is not.
Michael Lewis: Well, Hinkley is. Are we talking about Sizewell or the next one?
Anna McMorrin: The next one. There are two.
Michael Lewis: The next one. I think we should look at what is the potential lifetime cost of a new nuclear plant versus the equivalent firm power from renewable electricity converted to green hydrogen and burning in a CCGT. That is the comparison you need to make.
Q42 Anna McMorrin: Can you be confident that that is what the UK Government are actually doing?
Michael Lewis: I don’t know at the moment but that is the comparison I would make.
Chair: I think that is very helpful and it is a question we can put to the Minister. I don’t think it is terribly fruitful to go back over the history of Hinkley Point because the no-nuclear decision was taken under successive Governments, including Labour and the coalition, until they made a decision in 2012 to proceed. It then took four years of haggling over planning and so on before the work began. I think that is not where we are now. Decisions have been taken to roll out in the future and I think the point you have just made, Michael, is a very good response to Anna’s question, which we will pick up with the Minister.
Q43 Caroline Lucas: Continuing for 30 seconds with nuclear, to point out that the CEO of the National Grid, Steve Halliday, back in 2015 said that the idea of large power stations and the baseload is outdated and there are certainly alternatives out there. One point we have not mentioned about nuclear, because we don’t have ways of storing it, is that you have the perverse situation now that when you have a lot of nuclear baseload you have to turn renewables off because you can’t turn nuclear up and down easily, so it is renewables that don’t come on to the system then. I think that is something that needs more attention in the debate than it gets.
If I could come to Lisa Fischer, I want to ask you about the Government’s North Sea transition deal. As you know, it will allow new oil and gas extraction to go ahead in the UK continental shelf if it can pass its compatibility test. I want to ask your view of the deal and of the test itself. How rigorous is it and how helpful is it in trying to keep us on track for staying below 1.5o?
Lisa Fischer: I have mentioned it before but also to say that this deal was agreed last year and the context has fundamentally changed again with the crisis we are seeing. If energy affordability is a concern and fast action, more oil and gas is not the answer because it takes at least three years to build and because prices are global. I just wanted to reiterate that, given that is the context for this inquiry.
The deal is flawed for essentially two big reasons. One is the climate incompatibility. The UCL has looked at oil and gas reserves globally and concluded that 60% of existing oil and gas reserves must remain unextracted to stay on track for 1.5o, which is a goal the UK Government have subscribed to. In consequence, that means that no further UK resources can be extracted if we want to stay within those limits of the Paris agreement. The North Sea transition deal does not put any limits on that. It looks at part of the emissions of the sector. It does not reverse the maximising economic recovery policy. It is still part of the mandate of the North Sea Transition Authority.
Moreover, the targets that exist lack ambition. I think the targets are 50% reduction of upstream emissions by 2030. The Climate Change Committee said 68% would be required to be anywhere near to a compatible trajectory. The targets set in the short term, until I think 2027, allow emissions to increase above business as usual, so they don’t even set us on to a declining trajectory. In that context I want to highlight, and we see that play out strongly right now on the international scene, it undermines the UK’s leverage abroad as the legacy of the COP presidency. Other governments taking decisions over oil and gas reductions look at what the UK is doing and see that the UK is not moving forward with actions in line with the Paris agreement. It is also not in line with other Government objectives such as the integrated review that identified climate change as a national security objective. That is the climate point.
The other point that is worth making is the governance of the deal. There is absolutely insufficient scrutiny. There is very limited accountability of the companies. The targets are voluntary. The working groups that are monitoring on progress of the targets are led by the industry itself. There is no obligation for individual producers to meet those targets. Going a little bit broader than that, the fact that the North Sea Transition Authority, a public body, a regulator, continues to license for new oil and gas when we know that demand globally but also in the UK will reduce significantly as a result of climate action, builds in or bakes in a massive stranded asset risk to the UK economy. The UK is the most exposed because it is not one of the cheapest producers so it is very exposed to any price fluctuation and reduction in demand. Carbon Tracker has analysed that investor risk is globally at US$500 billion stranded-asset risk if we look at climate action. Again, the UK is among the most exposed here.
What we need to see with this deal is a strongly improved accountability. We need independent monitoring and verification. We need mandatory targets and those targets need to be in line with the CCC recommendations. They also need to go just beyond just electrifying platforms but looking at overall volumes of production. Important to us is that the mandate of the North Sea Transition Authority, which is at the moment conflicting between net zero and maximising economic recovery, needs to be looked at again. Even if you want to, no regulator can regulate efficiently in that context if you have two completely opposing mandates and that is one we definitely need to look at.
Q44 Caroline Lucas: Thank you, that is very comprehensive. In the light of that, Michael Lewis, do you believe that there is a risk that the energy security strategy and the new investment tax allowance for oil and gas projects could lead to investment in assets that ultimately could become stranded?
Michael Lewis: Yes.
Caroline Lucas: Would you like to elaborate further?
Michael Lewis: Lisa has said it all. There is a risk. If you are not the cheapest producer and you invest in assets that take three years to come into production, you could end up with stranded assets, absolutely.
Q45 Caroline Lucas: Thank you, Paul, would you like to say anything?
Paul Spence: I have nothing to add.
Caroline Lucas: Lisa has already anticipated my final question, so I am done.
Chair: Barry, did you want a quick follow-up?
Q46 Barry Gardiner: Very quickly, thank you, Chair. The point is, surely, that it may be a stranded asset technically because you do not need that and you cannot produce from it, but something like a nuclear power station, because it has an agreed strike price, will go on into the future at that exceptionally high price per megawatt hour. Surely that has to be taken into the equation here. We are talking about going down a route that would take a long time to deliver. You said, Ms Fischer, that three years was a long time. Try 2011 until 2028 before it produces. That is what we are talking about here, 17 years to get producing the first electricity from the first spade in the ground and then at a price that is simply not competitive with anything else. Yet, the bill payer, guaranteed by the Government, will be paying that £92.50 per megawatt hour. Therefore, stranded asset it is not. It is still there, it is still producing but the people who are paying the price for it are the bill payers.
Chair: Lisa, did you want comment on that?
Lisa Fischer: I want to add that the perspective on who carries the risk of that is important. It also applies to oil and gas where the cost of decommissioning is carried by the taxpayer. Obviously we have ongoing subsidies and we have investments in blue hydrogen. Some speculative investment and redundancies are needed in every system but we already know that the price of green hydrogen will be—it is already in the current crisis lower than blue hydrogen. Therefore, we are supporting this industry, we are supporting it with the investment announced. The decommissioning cost, the clean-up bill, is going to be carried by the taxpayer. Some of those dynamics that you outlined for nuclear are in a different setup but are also playing out on oil and gas.
Q47 Chair: Thank you. Paul, is there anything that you would like to add on that?
Paul Spence: No. I am very pleased to write to the Committee with the analysis that was behind the decision on Hinkley and I would argue is behind the future nuclear as well in different scenarios, the majority of which are not the world of a stranded asset.
Barry Gardiner: If I may, Chair, I want to say that I agree. The deal with Hinkley has been done and we cannot undo it. I have always said that we should not try to. It is a contract and your investors have made their decision and we bought into it. However, I do not think that it is a good precedent for the future.
Chair: Thank you, Barry. We will have this debate around the Committee table after the panel. Thank you very much for that. To conclude this pane, thank you Michael Lewis, Lisa Fischer and Paul Spence for joining us today. We will have a brief hiatus while we swap panels.
Witnesses: Silje Ask Lundberg, Dr Steve Pye and Will Webster.
Q48 Chair: Welcome back to our second panel. I would like to invite our panellists to briefly introduce themselves, starting with Dr Steve Pye from UCL.
Dr Pye: Good afternoon. I am an associate professor at University College London and the Deputy Director of the Energy Institute at UCL.
Chair: Thank you. Welcome to Silje Lundberg from Oil Change International. Can you explain what that is?
Silje Ask Lundberg: Thank you. I am a senior campaigner with Oil Change International. We are a research advocacy and communications organisation that works for a managed and just decline of oil and gas and I am based on Oslo.
Chair: Thank you very much for coming to join us today. Will Webster, welcome to you from Offshore Energies.
Will Webster: I am from Offshore Energies UK and we represent offshore energy companies, including oil and gas companies.
Q49 Chair: Thank you. You were sitting in on the last panel and will have had a flavour of the questions that we asked the energy producers. This panel is more focused on what is happening in the North Sea in particular. Following the Russian invasion of Ukraine, we have learnt from evidence in the House of Commons Library that Russia accounts for 20% of diesel consumed in the UK. Is there any evidence that we will be able to wean ourselves off Russian diesel quickly? Steve, are you in a position to respond to that?
Dr Pye: I can go first. Certainly the energy security strategy needs to look at a whole range of options to reduce this tight market that we are in for our import dependency and so forth. It comes back down to a load of different options around what was said in the previous panel on energy demand reduction and looking for alternatives across the transport system. That, of course, will take time. It was interesting to see the International Energy Agency come out with its 10-point plan for thinking about quick measures that we can put in place that reduce our demand within four months, where we can have a material effect in reducing our reliance.
Back to the earlier panel where there was a discussion about energy efficiency and it taking some time to come through in dealing with this crisis that we are in and the affordability issues, there are measures that we can take fairly quickly that we can see reducing our reliance on energy. To say very quickly about some work that we have been doing at CREDS, which is the Centre for Research into Energy Demand Solutions. We did a recent study and concluded that we could reduce our energy demand by 52% by 2050, based on a whole range of measures, including energy efficiency, but a whole range of other energy demand reduction measures in industry, transport and buildings.
Q50 Chair: Thank you. Will, you will have heard the debate before about how long it takes to bring nuclear capacity on stream. How long does it take to bring a gas field on stream? We understand that there are five fields that have already come on stream this year and another eight before the year end. How long have they been in germination?
Will Webster: It varies to some degree. There are several projects that are coming on stream in the short, medium and long term. The NSTA has talked about 32 oil and gas projects that are ready to come on stream if the regulatory approvals can be accelerated. We are talking about a period of up to five years.
On how quickly the adjustment is needed, we see ourselves as very much part of the European markets for gas and also crude and refined products. Our refineries in the UK are not set up to make diesel. They make more petrol than diesel. It is more those on the continent that are doing that, Rotterdam and so on. We have quite regular meetings with our counterparties in the Netherlands, Germany and so on. They feel very exposed to the current situation. Probably the country the most exposed is Germany. It uses 100 BCM of gas every year. We use about 80 BCM in the UK. It imports over 50% of that, most of it from Russia. When we talk to them they are saying to us, “Please continue with your investments in gas particularly, also in oil to feed our refinery capacity so we don’t have to get diesel from Russia”.
That is very much the discussions that we are having with our European counterparties and with our Norwegian colleagues as well. Norway is obviously a large exporter of gas to the rest of Europe. We are still a significant importer and the figure quoted earlier was correct. We only produce 40% of the gas we use in the UK. The less we produce, the more that we need from elsewhere around the world, LNG, countries like Russia and the OPEC countries.
Q51 Chair: How important is the North Sea to our own domestic consumption? The 40% figure that you have just used is gas from the North Sea. What about oil?
Will Webster: Oil is quite a lot higher. It is around 80% or so. Oil is an international market because oil is used for so many different things. It is not just made into fuels, there are also several different types of fuels. It is also made into all of the petrochemicals and polymers that we need for lots of manufacturing industries. There is an international trade in oil as well, but if you look at net-net we have about 80% or 90% from indigenous production if you are just looking at crude.
Q52 Chair: If we do not invest in any more extraction production capacity in the North Sea, when will our existing reserves of oil and gas run out?
Will Webster: That goes a bit to the point that we made earlier. Even if we invest in our oil and gas assets, we are looking at a decline over the period. When we put together the North Sea transition deal, looking at how we would invest both in oil and gas and new technologies, we are not looking to increase production. Therefore, even with the investment that we have planned, it will still fall at about 5% a year. The way that we have set it up is that it declines in parallel with our demand so that we end up in 2050 with both demand and supply being around 25% or 30% of what it is today.
However, to do that you still need to invest in exploration, appraisal and production. If we do not, we are going to be in a situation, particularly on gas by 2030, where there will not be much left to speak of at all and we will be almost 100% reliant on imports. Oil is a bit different but it will still decline. If you do not invest, it declines at about 7% a year just from natural decommissioning.
Q53 Chair: Can you assess what proportion of our electricity generation by 2030 will still be from gas?
Will Webster: It has declined because renewables have been a pretty big success story. They have gone to about 30% of electricity. It is important not to mix up electricity and energy, because we have other energy sources. Renewables are making great strides. Gas is now about 40% of electricity generation. You would expect that to continue to fall. By 2030 you might be looking at 20% or 25% but the issue is that that is the most valuable bit of the electricity generated. There is a different price of electricity for every hour of the year—8,760 prices. The times when you need gas are when the prices and the value of that electricity are much higher. That is what gas gives you in the system and you cannot even connect the renewables if you do not have a way of balancing the system. At the moment that is gas, in the future it might be other things.
Q54 Chair: Thank you. I will come to you in a moment, Silje. Steve, what we are trying to assess in this inquiry is how important the North Sea is to meeting our Paris 1.5o target. Do you have a way of thinking about that that can help us to get our heads around this? A shortcut way of saying it is can we afford to continue to exploit new oil and gas resources in the North Sea and meet our 1.5o target?
Dr Pye: The first thing to say is that the 1.5o target is a global target so we need to be thinking about the implications of our additional extraction and production in the context of the global situation. It is difficult to look at it from a UK-only perspective but that is what we need to do.
To reflect on some of the research that we have done at UCL, we published a paper in Nature, which was mentioned in the previous session, that said 60% of oil and gas reserves—that is the economically feasible part of the resource—needs to stay in the ground, 90% for coal. We subsequently looked at what that meant for the UK and that saw a 6% to 7% decline in oil and gas production in the UK that would be needed.
Q55 Chair: Over what period? Is that per annum, did you say?
Dr Pye: That is year-on-year reductions. Based on that, we concluded that there was not a prospect for new licensing of blocks in the North Sea going forward because it would not be compatible with a 1.5o target. There is a lot of evidence now coming out. There was an IISD report that came out today that showed that globally we cannot go for new licensing of fields and blocks. That aligns with what the IEA said in its net zero strategy too.
Therefore, from a UK perspective we have this evidence that says that we need to reduce our levels of extraction. There are other factors that we might also want to consider. It was touched on in the previous session, the idea of climate leadership. We do not want to be investing in other countries extracting oil and gas but we are continuing to do that at home.
There is also the equity dimension. We do not have a strong dependency on oil and gas and we have capability to transition away and we have been a huge historical beneficiary of oil and gas tax receipts; £350 billion was the number that I saw. The scientific imperative is under a 1.5o target but there are these other factors that we need to layer in on climate leadership equity and also energy security. New extraction is not going to help with the affordability question.
Q56 Chair: I do not quite understand what you mean by not having a dependency. We have just heard that 20% to 25% of our electricity will be generated from gas in 2030.
Dr Pye: Sorry, I should clarify. We do not have an economic dependency relative to other countries that are very, very reliant. It is a very small fraction of the economy.
Q57 Chair: How do you see us being able to keep the lights on and generating the energy if we are not investing? It means that we are going to have to import it during this transition period rather than generate it ourselves if we are currently using 40% of gas and 80% of oil.
Dr Pye: Of course there will need to be some investment. We need to manage this decline. The question is do we expand and move into new areas of exploration and so forth. That is where the question is at.
Q58 Chair: Do you mean in new technologies other than oil and gas or do you mean within oil and gas?
Dr Pye: There is a difference between investing in those fields that are already producing, to manage that decline. Then there is the issue of expanding out into new fields and new blocks in the North Sea, which I do not think is compatible with 1.5o.
Q59 Chair: I am going to bring you in in a second, Silje. Do you want to comment on that, Will?
Will Webster: As I have explained, the new investment does not mean that we are growing the oil and gas sector. It is just, as was said, that we are managing the decline. We are dependent on oil and gas in the sense that it is 70% of our primary energy consumption still. Although it has gone down in electricity and gone on to things like renewables, if you are thinking about heating, vehicles and so on, it is still 70%. Particularly on things like heavy industry and heavy freight, there are not the alternatives yet to oil and gas. We will probably go to hydrogen for some of those.
Q60 Chair: Do you agree with Steve’s comment that we do not need to explore new licence areas?
Will Webster: We do need to explore new licence areas. The ones that we will look at are adjacent to the areas that we already have, things like in the southern North Sea, the central North Sea, west of Shetlands. Those are the areas where the investment needs to go.
One of the other problems with cutting back too quickly is that there is a domino effect in the sense that the infrastructure that is there in the North Sea is getting paid for by fewer and fewer resources and then you get quite a quick falling over of the whole offshore system. That was one of the reasons that the OGA was set up back in 2015 in the Infrastructure Act. It was to manage the North Sea better in the sense of where the investment goes, which infrastructure you need and also to get decisions taken quickly. Some of these data points around investments taking 20 or so years are pre-OGA.
The NSTA, as it now is, is set up there to manage how investment happens. It is also now set up to basically arm-twist us as the industry to reduce emissions. The comment that there is no governance of the North Sea transition deal, for example, is completely false, because the strategy, which is legally binding, that was adopted and presented to Parliament in 2021 puts strong requirements on the NSTA to oversee what we do on emissions, carbon capture and storage and hydrogen. They have made no secret of the fact that they will be using those powers quite rigorously.
Q61 Chair: Silje, would you like to give us your perspective on how new licences are compatible with climate change?
Silje Ask Lundberg: The short answer is that they are not. New licences are not compatible if the UK Government and the UK Parliament want to stand by the goals in the Paris agreement to be below 1.5o temperature rise. There is no room for new licences, there is no room for new infrastructure projects. Even with the war in Ukraine and with Russia’s invasion, one of the things that we need to take into consideration is when the EEA came with its 10-point plan on how the EU could get off Russian gas and cut oil dependency, nowhere does it stand there that we now need more investments in new oil and gas infrastructure. The EEA still stands by its statement from its net zero report that if we are to reach the 1.5o target there is no room for new investments in new oil and gas infrastructure. There is no fine print in that that says that this is except for the UK so that the UK should in some way be allowed to continue to have new licensing rounds.
One of the issues with the North Sea transition deal and how that is set up is that it is basically a business-as-usual strategy for the oil and gas sector. The goals that are set there are lower than the ones that the CCC recommended but also the goals that are set in the North Sea transition deal are in no way binding, which is also the problem. Also, the trajectory that you have in the North Sea transition deal and how the emissions can be from the oil and gas production only, the production because it is only scope 1 and 2 allows for an increase in emissions during the next five years, when it should be a lowering of emissions from production of oil and gas that should be the goal.
Of course, it in no way mentions scope 3. It is only the emissions from production of oil and gas but not the biggest emissions that we know, which are the emissions that we are facing when the oil and gas is burned. If we look at how big the emissions are that we are talking about, from scope 1 and 2 it is roughly around 10%. That is Shell’s own estimate. Therefore, 90% of its emissions are not accounted for in the North Sea transition deal. Instead it is used more as the lightning also in the energy security strategy when it comes to the North Sea oil and gas, where the wording is that we are going to continue new licensing rounds and also that gas is somewhat of a transition fuel and that to have new licensing rounds is an energy security benefit.
Q62 Chair: We are going to come on to scope 3 benefits in a second. In doing your analysis, which is very much focused on emissions and I can understand that, do you take any interest in where the energy comes from if we are not getting it down to—as we transition down to reducing percentages from the North Sea that we just heard about from Will, we will have to import it unless renewables or nuclear are on stream. Do you have a view about North Sea versus imported fossil fuels?
Silje Ask Lundberg: Yes. In our mind and how we assess this, that is not an argument to continue, even though the UK might still have some need for oil and gas before you have totally transformed it. If that were the case, you should set export bans if that is the thing but none of you are discussing that. To have that as what is being used to continuing new production I would say is going down the wrong road.
Q63 Chair: I am not sure that I follow the logic behind that. Is that because you think that imported fossil fuels emit less than the North Sea because of the way it is produced?
Silje Ask Lundberg: That is also the case. It depends on where you import it from. If we look at only the North Sea, the emissions per produced unit in the UK are a lot higher than in Norway, for example. If we use data from Rystad we see that the emissions also from produced barrels in the UK North Sea is higher than the global average. In the latest report from the International Association of Oil & Gas Producers, using numbers from 2019, you also have producing regions such as South America and the Middle East that have lower emissions per produced unit than you have in the UK North Sea. But the biggest problem is still the emissions that you have when you are using the oil and gas and that is not accounted for in any of these emission numbers.
The fact still remains that we need to get off fossil fuels. The UK has a responsibility and a fair share also in equity in how the nation has developed. Then it is a question of who should lead that transition away from fossil fuels. Should it be countries like the UK or should we leave that to someone else because the UK wants to continue its oil and gas industry?
Q64 Jerome Mayhew: Before I get on to the meat of my questions, which is a focus on the North Sea—Steve, I am going to start with you—can we put this in a global perspective and look at demand? You said something quite interesting and I want to clarify what it was. Did you suggest that the UK could reduce demand for energy by 50% by 2050?
Dr Pye: Yes.
Q65 Jerome Mayhew: By extension, presumably you could say that to economies in the developed markets.
Dr Pye: Yes, to some extent. The IPCC just published its “Working Group 3 Report” under Assessment 6. It also came up with similar numbers based on work that it had done that 40% to 70% was achievable in reducing energy itself.
Jerome Mayhew: That is where you have got roughly the 50%.
Dr Pye: That is based on our own analysis, yes.
Q66 Jerome Mayhew: The United Kingdom but the same would be true of France, Germany, Spain, Russia, Europe, North America, is that right, roughly?
Dr Pye: Potentially yes, in that ballpark. I suspect that a similar analysis would show similar types of numbers.
Q67 Jerome Mayhew: The problem is, however, that emerging markets are going to have an increased demand for energy—I am being agnostic as to what kind of energy, just joules—between now and 2050 that is going to swamp any savings that the developed market can achieve. The reason I say that is that it was reading a report by JPMorgan that came out in April, which was its global energy outlook. It suggests, from its modelling, that rather than us saving energy between now and 2030, there will be a 60-exajoule shortfall in global energy because of the huge growth in demand for energy from emerging markets. Do you challenge that or do you think that that sounds about right?
Dr Pye: I am not sure on the specific figures.
Jerome Mayhew: It is 80 exajoules, I think. Anyway, 20% of global energy demand is going to be unmet.
Dr Pye: Inevitably in the emerging markets there is a lot of pent-up demand in the emerging markets that will come through in the next 30 years. What we need to do is help in facilitating that to be delivered in a clean way. A lot of our modelling is trying to work out how that can be delivered.
Q68 Jerome Mayhew: Of course you are right. Unfortunately, JPMorgan modelled that as well and looked at the availability of supply for renewables—things like the availability of lithium, the availability of metals to build wind turbines. Its conclusion, which was difficult for me to read and I just read it this morning, was that we are going to be unable to supply that demand for global energy between now and 2030, even with oil and gas.
My real concern is that you then come back to the equity argument, which is that we are all patting ourselves on the back saying whether or not we get to 1.5o in our own emissions in the UK. But if we constrain the development of oil and gas in the UK and elsewhere, the real equity damage is the 300 million people worldwide who are currently using cow dung for their entire energy needs and the 700 million who have intermittent energy supply at all. That is why I am worried about the global impact of what we are saying about how we develop the North Sea, which in itself is only a very small part of the global energy base. Could you expand on that?
Dr Pye: Sure. I will come back to the paper I mentioned before that we published last year. That looked at what the 1.5o target meant for the whole energy system, the whole transition, plus what it meant for oil and gas producers and coal producers. We do see some divergence across different regions. While the US and the UK, for reasons whereby their domestic market moves quicker in lowering demand for oil and gas, there is an uptick in other regions. For example, gas in China increases for a little while. It peaks in 2030 and then comes down. That is the same with other regions such as sub-Saharan Africa. We see these differences across regions but we still come back to the fact that we think, based on the hundreds of modelling analyses that have been done and published recently by the IPCC, that there is still a way to transition, staying within a 1.5o carbon budget, and providing energy to those that need it, taking account of the fact that many of these regions will grow going forward.
Q69 Jerome Mayhew: When JPMorgan suggests that the unmet energy need will be so extreme that it will lead to widespread social unrest across these emerging market areas, you sound more reassuring in your modelling. It did not sound very reassuring to me when I read it this morning.
Dr Pye: There will be critical challenges in this transition ahead. One of the ones you touched on is critical materials. Clearly that will cause some pinch points and change the geopolitics of energy as well. But I still think that with the rates of innovation that we have seen in clean technology over the last 10 years and the opportunities in other areas of clean technology, this can be achieved. There will be difficulties, no doubt, and there will be problems in different regions specific to their own circumstances, but we have to try, right?
Q70 Jerome Mayhew: We certainly do. I hope it is not a fingers-crossed approach. Will, can you come back on that?
Will Webster: Thanks. We have had about a year to reflect on the IEA’s net zero scenario, which was a comprehensive piece of work. Quite a lot of it from our perspective we could certainly agree with on the need to expand investment into things like largescale renewables, carbon capture and storage and hydrogen. We always have in our head, and I have in my head, a picture of where is the answer. It is about 50% or 60% renewables, 20% for things like CCS and hydrogen and 20% something else. I would question whether a 50% reduction in energy demand is achievable by 2050 but maybe it is.
The big problem with it is that it is a scenario. It is a piece of modelling and it takes a very aggregated approach to energy supply globally. You have to think as if you could jump right now from 2022 to 2050. We are going to have to go through a dynamic process here. While we are going through that process, we have to try to ensure that people’s energy needs are met. That will require maintaining the existing infrastructure, probably in parallel, during that time. Even our gas networks here in the UK will probably go to a big heat-pump sharing in domestic heating, but you cannot say, “Everyone else, wait until you have your heat pump”. You are going to have to be served with gas during that time.
That is the bit that we find a bit questionable in the IEA analysis. The other bit that we find questionable is that you can just say that it is a global energy system and we do not care where we get the energy supply from and all energy supply is equally secure. I am afraid we have been testing that in the last few months and finding it to be false. Energy security is an element of national security and a lot of that is the benefit of having your energy at the right end of the pipeline and not the wrong end of it from a physical security perspective.
Q71 Jerome Mayhew: The advantages of using domestically sourced oil and gas over imports?
Will Webster: It is lower emissions. There were a couple of sentences in the IEA report on that as well but I will not go into them. The economic benefits of having your local resources are also very clear. It is 1% to 1.5% of the economy still, bigger in certain regions. If you are talking about the east coast all the way to Aberdeen, Teesside, Humberside right down to East Anglia, Norwich, it is a big employer in the UK and the tax revenues that have come and are still coming from the oil and gas sector are pretty helpful. It is £287 per household and that is sitting there for the Government to do things, probably more once the windfall tax has been implemented. It is sitting there to do things for energy efficiency or whatever they want. There are some clear economic benefits as well as our belief that continuing production is compatible with our targets under the Climate Change Act.
Q72 Jerome Mayhew: It certainly helps the balance of payments, does it not? Steve, there seems to be some conflict in the evidence that we have received as to whether or not UK production of oil and gas is, relatively speaking, lower emission or higher emission. What is your view? If it is a lower emission, would there be a net global reduction in emissions in increased production took place in the UK if it were to displace overseas production? I know that is a big “if”. What is your view?
Dr Pye: On the carbon intensity of production of oil and gas in the UK, it is clear that the gas produced in the UK is cleaner from an upstream perspective than LNG that is imported, due to the huge energy needed to liquefy the natural gas to remove the impurities and so forth. Oil is more contentious. As a colleague here was saying, there is different data that suggests that oil carbon intensity is worse in the UK than the global average. Certainly from the US and Norway that we import from their carbon intensity is much lower. That is important to say.
It is a mixed picture and the data is very difficult because lots of these carbon-intensity metrics are based on different assumptions. Some of them cover all of the lifecycle analysis steps and others do not. Others use different global-warning potentials for methane and so forth.
Q73 Jerome Mayhew: I am very conscious that I have taken up far too much time already, but to give it the sense of proportion, what proportion of oil and gas emissions are from the upstream production process itself? Are you able to give a rough figure?
Dr Pye: For the UK’s inventory?
Jerome Mayhew: Yes, the UK’s production.
Dr Pye: It is something like 20 million tonnes of CO2 out of 320 tonnes. Something like that.
Q74 Jerome Mayhew: Thank you. I am going to move on now to talk about the climate compatibility checkpoint. Silje, how robust do you think this checkpoint is? Are you a fan, do you think that it is a good idea, have we done a great job and can we give up now?
Silje Ask Lundberg: We still do not know exactly how it will look because it is not done yet. From what we can see so far and from the documents that have been out there, I would not say that I would be super happy about it, no. There is still a lot of work to be done there. It is worrying that the UK Government do not properly scrutinise the 30 offshore oil and gas projects that are seeking development consent between now and 2025, so you should also have new development as part of the compatibility checkpoint.
There are several things that are lacking from the drafts that we have seen so far when it comes to a climate compatibility checkpoint. You do not have a consideration of the global nature of oil and gas markets, the climate impact of opening new fields through increasingly global consumption or a systematic comparison of how new fields might align with upstream emission targets. The way that we are seeing the design of the checkpoint is that it should be expanded to include all future developments as well. That trajectory needs to be based on equity.
Q75 Jerome Mayhew: If I can summarise that, you are saying not 10 out of 10 and they should take into account new developments. You have previously mentioned that scope 3 emissions should be part of it as well?
Silje Ask Lundberg: Yes.
Q76 Jerome Mayhew: Will, you are representing the industry here. Has the industry as a whole made any assessment of scope 3 emissions that would be produced from the new developments that we have been talking about?
Will Webster: We have done a piece of research on this that we will let the Committee have. It is going to be published as well and we have asked an external consultant to do that for us. The question we have asked is if production is lower than it otherwise would be, what then happens in the rest of the global market. The conclusions basically are that the output that we do not have here is displaced by some other producer. If we are talking about who are the big-swing producers in global markets, for oil it is the OPEC countries and the US and for gas it is Russia and general LNG. That is what leads us to our belief that it is better to produce oil and gas here, because the scope 3 emissions do not really change if you are just displacing one aspect of production with another.
That is not all good news, because we accept that higher production here does not necessarily move prices. When we are talking about the benefits of producing domestic oil and gas, that does not tend to affect the prices that much, so the price ends up the same, the amount of oil and gas being consumed in the global economy remains roughly the same and you are just talking about what you are displacing between the two. That conclusion for us, though, is that it is very demonstrable that gas produced here is better, I think that probably most people would accept that because the amount of emissions associated with liquefying and regasifying, for example, are pretty high. If you are also transporting gas across very long pipelines, there is a methane escape from that. That is before you start talking about the methane emissions from production.
We think that we have one of the best methane emissions in the world in Europe, Norway as well, much lower than any other oil and gas production, particularly with the US when you are talking about unconventional gas. Some of the existing resources that people talk about are unconventional fields in the US. They can be turned on and off and that is why they are the swing producer but the methane emissions from that process are pretty high.
The final thing on all of this is that because we are covered by the UK emission trading scheme, which used to be the EU ETS, the monitoring, reporting and verification of emissions from any large emitting activity, including the oil and gas sector, are better than anywhere else in the world. Most of the figures from other countries to some degree are based on estimates whereas ours are based on actual verified data.
Q77 Jerome Mayhew: It sounds to me as though the industry is not afraid of scope 3 emissions being included within the community chest.
Will Webster: We would put it more the other way, that it does not make much sense to think about it in the number being any different, so we do not see it as relevant to the compatibility check in that sense. We have looked at that and analysed and think that largely you are just displacing someone else so the scope 3 is the scope 3 from what you are combusting.
Q78 Caroline Lucas: I want to come to the North Sea Transition Authority and to put a question first to Dr Pye. The authority, as we have discussed earlier, has a twin mandate to secure the maximum value of economic recoverable petroleum and at the same time the net zero objective as well. In your view, are those two different objectives compatible?
Dr Pye: I would say that they are not. They conflict somewhat. Coming back to the discussion on scope 3 emissions, it is an important one. It is interesting that most of the oil companies around the world are being pressured to take on board scope 3 emission targets, yet with the way that things are being set up for the North Sea with the UK oversight, it is only scope 1 and 2 that matter. It is interesting that in the Dutch case against Shell, where the court said that Shell had to reduce its emissions by 2030 by 45% to include scope 3 emissions, it took account of the fact that scope 3 emissions do matter. The production that you do in your country can have implications on price and there is not necessarily perfect substitution by other producers to pick that production up.
There is empirical evidence that suggests—obviously there is a lot of uncertainty and it depends on the price in the market, it depends how big a producer you are—that if you cut production you will have an impact on price and you can impact on consumption more broadly. Coming back to the scope 3 issue is really important and that is why I do not think that maximising recovery sits very well with the net zero target.
Q79 Caroline Lucas: Thank you very much. Mr Webster, could I clarify something that you said to the Chair in response to one of his questions earlier? You said that companies were legally bound by the NSTD. The North Sea Transition Authority has legal responsibility to oversee the deal, but as I read it in front of me, companies are explicitly exempted from being legally bound by it. Could you clarify what you said earlier to the Chair, because it sounded as if you were saying that the companies were bound by all of the different elements of that deal?
Will Webster: The deal is an agreement between the industry and Government. It is like a sector deal. There are asks and offers in it. It is not a legal document in itself, if that is what you mean, but the North Sea Transition Authority’s new strategy is a legally binding document and it is binding on them and on the licensees.
Parts of the new strategy cover the areas that are also in the North Sea transition deal. There is a phrase that says reducing emissions as far as reasonable in the circumstances. There will be a discussion between the North Sea Transition Authority and licensees about what that means. There is a bit in the new strategy about making assets available for carbon capture and storage as well, which will be quite an important means of also reducing scope 3 emissions. The deal is not a legally binding document, correct, but the strategy is and the strategy is the thing that has the NSTA’s new responsibilities around supporting the Secretary of State to achieve net zero.
There will be some judgments to be made. Remember also that MER is maximising economic recovery. The economic bit of that now includes what the Government think is the social cost of carbon emissions. The equation is somewhat changed by the inclusion of economic and where we are now with carbon pricing, so that will have some impact on what is approved, particularly for things like flaring and venting consents, and that is already happening.
Q80 Caroline Lucas: I would argue as well that the whole concept of the MER is complicated further by the fact that we are already giving huge numbers of subsidies to the sector, so what is economically recoverable is an interesting discussion, but maybe that is a discussion for another moment. Could you tell us who produced the first draft of the North Sea transition deal?
Will Webster: We did that in co-operation with our members. We put together what we thought—what we tried to do in the deal is to say, “We’re oil and gas companies and there is no escape from that. We want to support the transition to net zero, so what can we offer as the sector?” We are used to operating in an offshore environment, which is what has been going on for the last 50 years, so we thought that the things that we could add value to are in offshore electrification, developing networks. We have industries investing in offshore wind.
Q81 Caroline Lucas: If I may, sorry, because we have a short time, what I wanted to get to is the fact that, as I understand it, a freedom of information request has revealed that this North Sea transition deal, which one might have thought would have been essentially something that the Government owned and signed off, was fundamentally written by the industry. That rings some alarm bells.
Will Webster: We gave them a submission about what we thought we could offer.
Caroline Lucas: If you compare the submission to the document that the Government then produced, they are pretty much identical in many areas.
Will Webster: I would not say that. We made a submission; that is clear. There was quite a long period of discussion and negotiation around what was committed to as part of that. Quite a lot of this was done in public. We adopted the emissions targets quite a long while before that and we did that before there was even any discussion about the North Sea transition deal. The other things that are in there relating to trying to get carbon capture and storage going and hydrogen and so on, that was a discussion that was already going on in government circles. We kind of wrote it in response to, first, what we had already said independently and, secondly, the policy development that was going on at the time, so I would not read anything too much into that.
Q82 Caroline Lucas: I put it to you that one could certainly imagine a Government writing a draft that is then consulted upon by industry, but to have industry write the document in the first place raises some alarm bells.
However, can I come back to the whole issue about the way in which the industry plays its role in overseeing the North Sea transition deal? In particular, as I understand it, although what was obviously Oil & Gas UK has rebranded to be this new body, I am right, am I not, in saying that those members who are representing renewable energy companies do not have the same powers within the decision-making body of the industry as the oil and gas companies do?
Will Webster: Increasingly there will not be that distinction, because we have about 400 members. We have the main operators, the names that you have heard of and other oil and gas production companies, and then we have about 300 or 400 supply chain and contract members. They are all represented on our board. Most of our board members are involved somehow or other in offshore renewables, whether that is as an investor or a contractor. One of our board members is from Subsea 7, which has just got the contract for the Seagreen wind farm, for example. Therefore, when we are taking decisions in the board, we make sure that we have a diverse amount of members involved in that.
Q83 Caroline Lucas: Thank you. I am right, though, am I not, in saying that associate members shall not be entitled to receive notice of, vote at nor bring any business before any general meeting of the association? Therefore, if renewable energy companies are associate members and associate members are not able to vote at any general meeting of the association—
Will Webster: We have members on the board who are full members who are involved in renewables, several of them.
Q84 Caroline Lucas: If it was a renewable company on its own that was not also doing oil and gas it would not have a vote. Can I clarify whether that is the case?
Will Webster: We are still in a bit of a transition on all of this.
Caroline Lucas: That is a yes or no answer. Do they have a vote? They all know that and I am sure you know that, so if you could tell us, that would be marvellous.
Will Webster: Renewable companies that are not associate members would have a vote. If they wanted to join as a full member, they can have a vote.
Q85 Caroline Lucas: Can we just cut through the crap here? If a company is not doing oil and gas but is purely renewable, can they vote?
Will Webster: Yes, if they join as a full member and get accepted on to the board.
Q86 Caroline Lucas: Are they allowed to join as a full member?
Will Webster: Yes, they can.
Caroline Lucas: The information I have here says that they can only be associate members. That is useful to know.
Will Webster: We changed our articles of association recently.
Q87 Caroline Lucas: That sounds very wise. Silje, could you tell us your views about the governance of the North Sea transition deal and is it sufficiently independent from industry in your view?
Silje Ask Lundberg: No, I would not say that it is. Of course we have different deals in the UK and different countries where the industry plays a part, but seeing how this whole agreement came about shows that it is not. Also the fact that the goals that are set in the North Sea transition deal allow for an increase in emission compared to business as usual. Compared to status quo you still allow for an increase during the next five years. That points out that this is not a very solid agreement.
Will Webster: I do not quite know where that comes from, because the target is a reduction of 10% by 2025 and we are well ahead of that.
Q88 Caroline Lucas: The Committee on Climate Change has explicitly said that the target that is being driven through the North Sea transition deal is inadequate, so I do not think that is beneficial.
Will Webster: We are actually going to be quite a long way ahead of our target when the numbers come out.
Caroline Lucas: But it is the wrong target.
Will Webster: When we produce our report in September, that is what you will see. They are the targets that we signed up to. We will try to go faster than that.
Q89 Caroline Lucas: Is that not a problem? This is a serious point here and it goes back to why I am concerned that the deal was essentially written by the industry. It may indeed be the target that you have signed up to and has been agreed but it is not compatible with plenty of other targets that the Government have agreed to, including our commitments underneath the Paris agreement.
Will Webster: What we want to do is we have set a target, we will try to go faster. We have the North Sea Transition Authority all over us on this, so there will be an ongoing dialogue around how quickly licensees will reduce emissions. That is part of what we have now built into the regime.
Q90 Caroline Lucas: Steve, can I come back to you for a second? Can you shed any light on the fact that there is surely here, is there not, a big discrepancy between the targets that the North Sea transition deal is aiming for and what we are legally bound to be aiming for underneath our climate change objectives, the Committee on Climate Change, Paris objectives and so forth?
Dr Pye: On the upstream emissions, yes, that is the case. In the Climate Change Committee’s response to the climate compatibility checkpoint, it made it very clear that it would want to see increased ambition to the 68% reduction by 2030 that it was suggesting.
Caroline Lucas: Thank you very much.
Chair: Thank you, Caroline. I know that you have to go shortly.
Q91 Barry Gardiner: Can we remind ourselves that the Paris agreement target of 1.5o—this is slightly correcting you, Ms Lundberg—is not that we should get to 1.5o, it is that we should have a 50% chance of getting to 1.5o is our outer limit.
Dr Pye, we have often talked about lies, damned lies and statistics. I want to ask you about lies, damned lies and semantics. When the Business Secretary says that he is minded to change the definition of green in the green taxonomy so that natural gas is classed as green, would you say that he is colour blind or do you think that he is using semantics to change the meaning of the word? To what extent should further investments in gas production be classed as green?
Dr Pye: Gas or fossil gas is a fossil fuel. It is definitely not green. There is a lot of evidence out there. It is cleaner than coal when it is combusted but there has been increasing recognition of the methane emissions associated with the supply chains of fossil gas, which of course is subject to a huge amount of uncertainty, but we are seeing in different parts of the world large leakage rates, lots of new evidence coming online, satellite imagery that shows us where these hotspots are. There is a lot of discussion about what those leakage rates are. If you get up to 4% or 5% leakage rates—I am not saying that is typical of the UK, by the way—fossil gas or natural gas loses the carbon benefit over coal to a large extent. Yes, I would disagree with it being included in any green taxonomy.
Q92 Barry Gardiner: Given that the Government are only at this moment reported to be considering classing fossil gas as green, do you think it would be helpful, a sensible thing in its recommendations, for this Committee to recommend that the Government do not change the taxonomy?
Dr Pye: Yes.
Q93 Barry Gardiner: Mr Webster, the Tyndall Centre report on phaseout pathways says the UK should reduce extraction by 74% by 2034. You said that you would see a decline of 5% a year but the UCL research that Dr Pye, I think, has done, says that oil and gas should be declining at an annual rate of 6% and 7% respectively. Why do you disagree with Dr Pye’s research?
Will Webster: On the amount of production?
Barry Gardiner: The amount of production. You made the point earlier that as certain facilities tail off their production you need to have the new exploration licences to balance that out but there would still be a net reduction of 5%. According to Dr Pye’s research, 5% is not adequate. I think you disagree.
Will Webster: It goes back a bit to the discussion about scope 3 and the IEA report and so on. If we have a reduction in output of that nature, we will become increasingly dependent on imports. I have talked a bit about where those imports would come from and the kind of regulatory regime that is in place. We have the strongest regulatory regime over our oil and gas production. We have production paying for emission certificates for its scope 1 emissions. We have a commitment by the industry via the North Sea transition deal to support CCUS and hydrogen, which every assessment of the future energy system says will be needed. We have signed up to all of that as part of the North Sea transition deal. We are trying to get to that by 2035 and we have successfully invested in CCUS so we will be capturing 50 million tonnes a year and supporting the industry.
Q94 Barry Gardiner: I understand that and accept that. I want to challenge you, pick you up, on the point that you made just a moment ago and that was that it goes back to scope 3 emissions and where that is coming from. In a sense that is a counsel of despair, the counsel of despair that my colleague Mr Mayhew was putting forward, that globally we have this huge demand coming down the line towards us and I suppose the logic of that position—I don’t want to put words in my colleague’s mouth—is that we may as well be part of feeding that demand. That seems to be your argument, that if that demand is there somebody will feed it so it may as well be us because, of course, what we produce is not predicated only to be consumed in the UK, it goes on to the global market, doesn’t it?
Will Webster: Yes, it does. What I offer to the counsel of despair is that a lot of the solutions will come through new technologies. We need to set up carbon capture and storage for that reason because we will not be able to meet the expanded needs of both our own economy and developing economies without being able to support them through that and we will have to do that quite quickly. That is why, if you look at any of the NDCs that come from across the world, south-east Asia and so on, some of which countries already have higher emissions than we have, they will need to be able to deploy CCUS to take advantage of what energy resources they have and meet their emission targets.
We are trying to show what is feasible and what we can do as an example from a developed country to one that will have to increase its energy consumption. We think that alongside renewables and so on, we can develop an industry where we will continue to produce a bit, continue to invest in CCUS and still reduce emissions and that shows an example to other countries.
Q95 Barry Gardiner: I am slightly confused here. You seem to be making the case that we need to pump more oil and gas out and most of it, 70% of what is there, is oil, isn’t it, which rather nullifies the argument around gas that we focused on? You seem to be making the argument that we need to pump it out so that the CCUS is available for all the stuff that everybody else is producing.
Will Webster: No, I am not making that argument. We have to continue—
Barry Gardiner: They are separate, aren’t they?
Will Webster: They are separate, yes. We need to produce our own resources to meet our needs and give ourselves the physical energy security that has been demonstrated that countries need to maintain the economic benefit of having oil and gas. At the same time, we as an industry are committed to facilitating carbon capture and storage here in the UK.
Barry Gardiner: I am not denying that.
Will Webster: We can use it to help other countries around the world to do it.
Barry Gardiner: We will talk about that; we will come on to the just transition in a minute. I do not want to cloud—
Will Webster: They are two separate arguments, though. I would agree with that.
Barry Gardiner: They are. They are separate arguments and I do not want to cloud one with the other.
Will Webster: No, one does not imply the other. One of the problems with CCUS is that it has been seen as an extension of the oil and gas industry, which it is not.
Q96 Barry Gardiner: So let's go back to the fundamental question. Why do you disagree with Dr Pye's research? He says that it has to be a 6% and 7% decline in oil and gas respectively. You say it is 5% for both.
Will Webster: Yes. It goes back to the question of if we are not producing our own we are importing it from other countries.
Q97 Barry Gardiner: No, sorry; that is not true, is it, because it goes on to the international market?
Will Webster: It does, but our net imports would be much higher and if we took that line across the EU, those countries like the UK and Norway that are reliant on other EU member states will be in trouble and the European energy economy will also be in difficulties.
Q98 Barry Gardiner: So it comes back to an economic argument?
Will Webster: It comes back to the economic impact of unilateralism.
Q99 Barry Gardiner: Denmark, for example, has stopped all future licences for oil and gas and has set a 2050 end date for all production. You compare the rest of Europe. There is an example, I would say, of leadership being set. Is Denmark destroying the rest of the European economy by doing that?
Will Webster: Denmark is still doing small fields and infill drilling. It is not comparing apples with pears because Denmark is a country of 5 million people and from an energy perspective, it is basically an extension of the Norwegian economy so it is a little bit different. Denmark does not have the same demands.
Denmark has done one thing that is very intelligent though, which is to invest in biomethane, using that to replace gas, and around renewables heavily. Denmark is ahead of the game on investment but is still winding down. It will not stop activity tomorrow but is in the process of winding down the oil and gas industry while still producing oil and gas and still will be right out to 2050.
Q100 Barry Gardiner: Would you also, as Denmark has, care to hazard an end date for production?
Will Webster: It is difficult. Where we might be in 2050 is probably using gas in decarbonised form. I cannot imagine that we will be using unabated gas in 2050. If we are still producing gas, we will probably be using it in the form of hydrogen, one way or another. As we heard earlier, long-term energy storage is pretty difficult without hydrogen unless some other technology comes along; it is 20-odd years away. Gas is what we have now. Hydrogen is the option for long-term storage. We will still need that by 2050.
Thinking about oil, we have not made much of an impact on demand yet. Let's be realistic. Oil will be needed potentially for long-distance freight unless we can also use hydrogen for that and you have marine and aviation emissions and the big one that everybody always forgets is feedstock for polymers and petrochemicals. We will need a heck of a lot of those for building the energy transition—cement, steel, polymers, all big emitters—and a lot of the things we are talking about are made out of oil, even batteries, like the graphite that is used.
That is why I think we should not just say that we are going to stop by date X. Another thing we will find with energy transition, and this came out in the previous discussion, is that if you do not keep open all the technology options, you run out of something with one of them, whether it is lithium, land or electricians. You have to keep all these things open.
Barry Gardiner: In the interests of time I need to stop you because we are agreed that there is a role for the industry in a just transition.
Will Webster: Okay.
Barry Gardiner: You have outlined it very well and I do not want to probe further but I do want to get on to talking about other aspects of the just transition.
Chair: Your last question, if we can Barry. As you say, we are running out of time.
Q101 Barry Gardiner: In that case, I will ask Ms Lundberg what recommendations you believe it would be sensible for this Committee to make to ensure a smooth and socially just transition for workers in the oil and gas industry, with specific reference to the fact that at the moment any worker who wants to upskill and transition from oil production into CCUS, for example, as Mr Webster has ably outlined, would be asked to pay their own costs of retraining. That may be one aspect that you might care to incorporate in your list of recommendations.
Silje Ask Lundberg: I suggest that you have a completely new look at the North Sea transition deal to ensure that you have a just transition within that deal, because you do not have that today. Today you do not offer any support or introduce new policies to make sure that workers from the oil and gas industries can be a part of the transformation. A lot of good work has been done on this by civil society groups in the UK with the offshore passport, but make sure that the training is not going to be paid for by the workers. That is a huge obstacle to any sort of transformation or transition of today’s workforce. To have to go through training constantly and train for the same thing and pay from their own pockets is a huge problem, so I hope that is something that the Committee will look at.
Q102 Barry Gardiner: Thank you. Dr Pye, you spoke about leadership and equity. How can we show leadership as a country and ensure that equity concerns are incorporated in the just transition so that it is not only just within the UK but just globally?
Dr Pye: You picked up on a very good example with Denmark and the launch of the Beyond Oil & Gas Alliance at COP 26, which was extremely well publicised and created a lot of excitement. That would be a fantastic vehicle for the UK to join to show climate leadership, to leverage its influence with other countries that have seen it very much as an oil and gas producer over the years and to show that change.
I come back to an earlier point. The recent G7 communique that came out, I think last week, talked about stopping investment in fossil fuels abroad. It seems to me that we should be doing that domestically too. Something like BOGA—Beyond Oil & Gas Alliance—would be an excellent vehicle for that.
Q103 Claudia Webbe: I want to move on to the financial support that the fossil fuel industry gets. We know that the Government support the fossil fuel industries through tax breaks, subsidies, tax reliefs and so on. How much financial support does the fossil fuel industry currently benefit from?
Silje Ask Lundberg: We have not done the new calculations after the change in the tax scheme last week. I think we have a number for the current support coming through the subsidies and I think it is in our written submission as well. It is quite high. I cannot seem to find it right now but we are talking about multiple billions of US dollars. It is a huge support today. If we look at taxation in the UK and compare it to other countries, before the introduction of the windfall tax it was around 40%. Now it will be roughly 65% after the introduction of the windfall tax but it is still less than the global average of 70%. Before the introduction of the windfall tax, the UK had the lowest taxation of any regime on offshore. It is no longer the lowest but it is still below the global average on taxation.
I read through some of the submissions that came into this inquiry on taxes where it looks as if you want to prop up how much taxation means for the UK economy today, you sum it up over several years but if you look at how much it is from year to year, UK taxation is very low because you also have so many allowances. If we compare it to a country such as Norway, the net worth that the Norwegian state will take from its oil and gas industry in 2022 is the same amount that the UK has had in taxes for the last 16 years. It shows that this is an industry that is not paying its burden today and you need harder taxation on that industry than you have had in the past, also after the introduction of the windfall tax.
Q104 Claudia Webbe: Can you explain the range and variety of tax subsidies and support, including things like decommissioning, for example?
Silje Ask Lundberg: I believe decommissioning is not something that the oil companies in the UK will end up paying for but will be tax deductible and also you have different definitions on taxes. The thing with the UK is that you do not use the same definitions and joint methodology when it comes to subsidies as a lot of other respectable institutions. It is claimed that you have no way of subsidising the UK oil and gas industry and instead you have investment allowances or other types of deductions and then you try to calculate it so that it is not part of the subsidies when in fact it is.
Q105 Claudia Webbe: In your submission, you have indicated that the estimate of the UK's fossil fuel subsidies is around US$14.8 billion. Does that ring a bell?
Silje Ask Lundberg: Yes.
Q106 Claudia Webbe: That is a quite significant amount. Mr Webster, why should the UK taxpayer cover the risk and decommissioning costs of oil and gas assets?
Will Webster: Looking at the overall regime for any industry and the tax and subsidy mechanisms, the reference point that I always take—although I know we are not in the EU any more but bear with me—is the Directorate-General for Competition which has some quite robust criteria about whether something is a subsidy or state aid. There is a couple of key things in it—whether the measure is selective and whether the measure conveys a benefit on the industry—and there are other things about whether it distorts trade between member states.
From our perspective, we have a regime that is now at 65%, so it is a way higher tax rate than any other industry. I fail to see how that conveys any kind of benefit on the sector, and we have investment allowances but if you are taxing anything at 65%, you probably have to give something back that encourages investment. The problem with the new regime under the windfall tax is that those allowances are not massively helpful in the sense that if you are investing now and looking over a period of 15 or 20 years, the tax rate is in place until 2025, it is said. Then there is a sunset clause, but you do not know what the tax regime will be after 2026 so the allowance that you get does not help you all that much in the sense of going to your commercial director and asking if you can invest in this particular asset. If you look at any oil and gas regime across the world, ours is more penal than the rest of the economy.
Then you have a choice about how much skin government has in the game. That is a political choice. Norway has much higher rates of tax but you can write off a lot of expenditure against the tax rates and the government have a bigger stake in the risk of any investment but also in the profits. The situation in the UK, which is quite unique compared to most other regimes, is that the commercial operators take all the price risk. As prices go up and down, from time to time we are in periods where the industry makes a loss, as it did a couple of years ago, which is why tax receipts were not very high in that period. It comes down a bit to how you set up the tax regime in the first place. Maybe you can blame Harold Wilson because that is the approach that has been taken over the years.
We will soon have paid 400 billion in tax cumulatively over the period. We will be paying 7.8 billion next year according to OBR forecasts. We think the regime that we had is better for the Government as well because it is more stable and we think that cumulatively, that will yield more revenue than the road that the Government have chosen to go down. We are trying to deal with that. The damage has been done on the windfall tax. We are looking forward but we are now in a very unstable situation, which is not very investment friendly so we will be trying to discuss with Treasury what happens next to some degree.
I am afraid to say on decommissioning costs that when we go back to the criteria, that is not a selective measure at all. Every single other sector can deduct costs of doing business against profits when working out how much tax to pay. The only difference in the oil and gas sector is that the Government want to do that after the event, not during. Most businesses make a provision in their annual accounts for the decommissioning they will have to face. The Government do not want us to do that because they want the tax money up front but later on the costs are offset so it is not a subsidy at all. I contend that it does not meet any criteria about whether something is subsidised. You have to look at the regime as a whole to see what stake the Government are taking in the sector, what risks you are asking investors to take and then look at whether that is a more favourable regime than the rest of the economy. It clearly is not in that we are now facing a marginal tax rate of 65% and the rest of the economy is facing 25%.
We are happy to pay the additional taxes—under the old regime we were, anyway—because that is part of the deal in oil and gas investment. We have now moved to a regime that is a lot less stable, not very predictable and will probably in the long term not yield as much revenue for the Treasury so we are trying to look forward beyond that a little. That is where we are on the tax subsidy issue.
Q107 Claudia Webbe: I will try to be quick but I want it to be clear on the record that the 65% you speak off, Mr Webster, does not also take into account the additional levy the Government announced in the investment allowance whereby they set a rate of 80%, meaning that for every pound the oil and gas industry get back 91 pence. There is that as well that you speak of and you are not addressing that point. What do you say about that? I know the Chair wants to finish. My colleague Barry Gardiner had one question—
Chair: I am sorry but I am not going to let Barry Gardiner come in again. He has come in enough and we must let Will Webster answer your question, Claudia.
Will Webster: You have to spend the money to get that allowance so it is not something you are given for free. It will be a bit differential, depending on the company. Some will not be able to benefit from that at all if they do not have something coming up. If you go to your commercial directors and say you will get 91 pence back they will ask what will happen over the next 15 years in tax and you will not be able to give them a very good answer. There will be some offsetting but it will vary depending on the companies concerned.
Q108 Claudia Webbe: Let me end on this. Silje, do you believe that the investment allowance announced by the Chancellor should be given only to those companies that will choose to invest in clean energies?
Silje Ask Lundberg: Yes. It should not be given to companies investing in oil and gas.
Also a quick comment on what was said about Norway. The Norwegian tax system was also changed recently so that some of the risks that the state would previously have taken in exploration and deductions that were possible then are no longer allowed. The idea with the Norwegian tax system is that an investment that is profitable before tax is also going to be profitable after tax but you still have a 78% taxation of the oil and gas industry. I do not see any oil companies running away from the Norwegian continental shelf for that reason. Taxation in the UK should be turned up and the windfall tax should be a permanent one and not just one that will disappear in 2025.
Claudia Webbe: Thank you. I am sorry that I did not bring in Dr Pye.
Chair: Thank you, Claudia, for being concise. I would like to conclude our panel by thanking Steve Pye, Silje Lundberg—and I gather you have come from Norway to join us today so we are very grateful to you for doing that—and Will Webster. Thank you all very much indeed. That concludes our session.