Unrevised

Members present

Earl of Selborne (Chairman)

Lord Broers (co-opted)

Lord Dixon-Smith

Lord Hennessy of Nympsfield

Baroness Hilton of Eggardon

Lord O’Neill of Clackmannan

Lord Patel

Lord Peston

Lord Rees of Ludlow

Viscount Ridley

Lord Wade of Chorlton

Lord Willis of Knaresborough

Lord Winston

________________

Examination of Witness

Professor Dieter Helm CBE, University of Oxford.

Q44 The Chairman: Welcome, Professor Helm, we are grateful to you for joining us. We are being recorded and webcast, so perhaps you would like to just give your name for the record. If you wish to make an opening statement in any shape or form, please do so.

Professor Helm: Thank you, chairman. My name is Professor Dieter Helm. I am professor of energy policy at the University of Oxford. I will just make one very short opening remark and then answer as many of your questions as I possibly can. It is a quite extraordinary state of affairs for a major industrialised economy to find itself even debating whether there is a possibility that the margins may not be sufficient in electricity to guarantee supply, particularly in a context in which electricity is increasingly important to the economy, and where information technology and so on depend absolutely crucially on a continuous supply. That context is not just unfortunate from a security supply point of view. If it was achieving carbon objectives and producing low prices, there might be some consolation, but the wholesale price in Britain is twice that of northern Europe. On the CO2 front, we have been switching from gas to burn as much coal as possible, and our emissions are actually rising on a production basis while, of course, on a carbon consumption basis, which is the basis that matters for decarbonisation, they continue to rise. For a major industrial economy to fail on one of the three objectives is a serious problem but to fail on security, on competitiveness and price and on decarbonisation is a sad state of affairs. It is even sadder in the context in which the problem is not, fundamentally, particularly difficult—it is ultimately about having enough power stations and enough wires to supply to the needs of the population. It is a problem that has been with us for a century. Many other countries solve these problems. It is, as I say, rather sad that we have got to this particular point.

The Chairman: Thank you. We will listen with interest to some of the further answers you are going to give us.

Lord O’Neill of Clackmannan: I suppose I should start my question, Professor Helm, with “nevertheless”. You have mentioned en passant the question of resilience and we have had repeated assurances—although I am not sure if they are reassuring—from National Grid as to, let us say, the next two years suggesting that we, with a wee bit of luck, will get through. I am paraphrasing that. Perhaps you could give us your slightly more detailed concerns about how resilient you think the next two years of British power supplies will be and how accurate you feel the National Grid assessment is?

Professor Helm: The first point to make is that there is always a price at which supply will equal demand.

Lord O’Neill of Clackmannan: Provided there is sufficient generating capacity.

Professor Helm: No, if there is deficient capacity in the sense that it looks like we need more, if the price goes high enough, then supply will equal demand. So when you talk about resilience, it is not just about physical resilience. It is physical resilience at a price that is reasonable for people to pay. For example, supposing the capacity margin went to nought, the price would rocket up as it did in California and people would turn themselves off. That is how it works. So when you talk about resilience it is very important to separate out whether you physically think that there may be something wrong with the wires or whether you think that the price at which you wish to supply the power from the power stations is one that you want people to bear.

If you look at the current situation, of course there is enough capacity to meet demand if you do what is necessary to do that. To the best of my knowledge of National Grid in particular, but also from experience across much of the economy, people are pretty good in a crisis. There is enough kit lying around that could be brought back in time. I always use the analogy of the Spitfires: if enemy aircraft are coming over the top and you have to get the planes in the air, if you really have to do it, then you do it and it can be achieved. It is amazing what you can get out of existing kit if you need to. In the context here we have interconnectors and we have, bizarrely, modern mothballed gas stations while we are running very old—extremely old in some cases—polluting coal stations at almost base load on our system. So the kit is there. If the will is there to do it—I think the expertise and capacity of the grid is up to it—they will manage to make supply equal demand. The question is how much higher the price will go as a result and how long Britain can carry on having such high wholesale prices with all the consequences there are for British industry and consumers.

Q45 Lord Broers: What novel risks to resilience do you think will emerge over the medium term and how can such risks be mitigated?

Professor Helm: In many of these areas it is extremely tempting to predict the future: to know how it is going to work out and then plan, or have some kind of scheme, to deal with each and every thing you predict. The important thing to say about the medium term, and about any policy designed to address energy resilience as well as the other objectives, is that it is uncertain and that you should plan for the uncertainty as part of your policy.

If we look across the frame, the first effect is already with us, which is that the commodity super-cycle is over: gas prices in Europe this year have halved, coal prices are falling and the oil price is down to $80. As we witnessed in the 1980s, the preparedness for the consequences of the way in which the system operates when prices change substantially is not what it might be. People have not thought through the consequences yet of fossil fuel abundance and potentially—I say potentially—low prices. We have a policy which the Secretary of State repeatedly reminds us is based on the idea that gas prices are rising and volatile. Well, they are falling and we do not want to protect customers from having the benefit of the volatile falling prices in their bills. It would be a bit like going to the petrol station and saying, “Thank you very much for having a policy that protects me from getting a lower petrol price today. I am glad I do not have volatility of paying 127 rather than 135 per litre”.

The first big story is about whether your system is robust against very different fossil fuel price projections, including ones very different from the Government’s, and about how the system will operate. The second thing is about the networks. The question about the networks is really dependent in large measure on what is going to happen with intermittent renewable supplies. If we are to build lots and lots more offshore and onshore wind farms, then you need a much more robust and resilient grid than if you are going to build some substantive base load power stations. The resilience issues for having sets of nuclear power stations, or gas stations, are completely different from the resilience issues of having intermittent power round the system. Should we worry, in resilience, about fuel supplies? No, I do not think so. The world is awash with gas. Unconventional gas is popping up all over the place. Qatar no longer has to export its gas to America. America is 25% of the world economy and is no longer importing. There are plenty of supplies around: lots more being discovered in the Mediterranean areas, plenty of supplies in North Africa and new fields being found in the North Sea and so on.

The one medium-term “risk” that I would pay much less attention to—but clearly the Government thinks they should pay much more attention to—is whether or not we will get enough supplies of fossil fuels. We have enough fossil fuels in the world to fry the planet many times over. If only we had to worry about security of supply on fossil fuels, maybe we might do something about climate change, but that is not one of our problems.

Lord Broers: You are suggesting that, before we tackle this particular question, there are things that we do in the UK that are making things more expensive inherently, such as inefficiencies. Your analogy about the petrol station is a good one. With petrol, we seem to have a ratchet that only goes one way. It is coming down a bit now but never as much as perhaps it should.

Professor Helm: The prices and efficiencies in the system you get depend on how good you are at achieving the objectives you set yourself. If the objectives are to decarbonise, then you might think we would choose the cheapest way of decarbonising. Well, in the last few years, what we have done is switch from gas to coal on a large scale—Germany has done even more, by the way, switching to having 45% of its electricity generated from coal—whereas if you really quickly want to reduce emissions you switch from coal to gas. Gas has half the emissions of coal. It is not the long-term solution but that is what you do. We have done the opposite.

Then, thinking about the technologies that might actually address climate change, it is very hard to see how offshore wind, for example, could do that. It adds an enormous amount of cost. It is three times the wholesale price, which is twice the north European wholesale price at the moment, and it is very questionable how much the costs come down. That is before the network costs are added in as well. If you want to end up with expensive electricity, and not make much progress towards your carbon objective, my suggestion is to switch from gas to coal and build lots of offshore wind farms. But if you actually want to address your agenda, then you want to do something different.

On security of supply, if you want a secure supply system but if you add capacity to your system that reduces the security of supply because it is intermittent, you have a price to pay. You can chose to pay that price but you cannot be surprised at the outcome in terms of the cost to the grid if that is what you set yourself doing. In one sense, this is about the simplicity of energy policy, but what makes it very difficult is that you have to be very clear of what precisely what you want to do. Once you have sorted out the questions you want an answer to, such as reducing the carbon production and consumption in this country and increasing the security of supply, then certain consequences follow. But what we have is a host of particular interventions loosely associated with some broad almost slogans as to what the objectives are, without specifying what those objectives are and what the relationship between the policy and the objectives is. That is where I would start, but that is why it is so expensive.

Lord Broers: So government policy is quite wrong in all of this?

Professor Helm: We have a policy that has been unfolding for some time. I call it the Miliband-Huhne-Davey policy, because it is very consistent through that period, and it is based ultimately on some assumptions that I do not think have any part in energy policy. Those assumptions are, first, that fossil fuel prices are going to go up. Early on in the Miliband-Huhne period, talk was of doubling the fossil fuel prices. If you think that is true, know that to be a fact or are pretty certain it is going to happen—if you are all-seeing—then of course you can design a correct energy policy because by 2020 the current renewables will all be economic. The poor Americans will be stuck with all this expensive fossil fuel and we, the Brits, will have relatively cheaper power. For instance, you could imagine petrochemical industries not leaving Europe and going to the United States but trying to go to Aberdeen to get near some of the relatively cheaper offshore wind, if you know that the prices are going to double. That is an outcome of the market, not a policy assumption to make. Your bet could turn out to be correct, but if it turns out to be dramatically wrong—fossil fuel prices are falling, not rising, for oil, gas and coal—then you are going to have lots of technologies that are going to be “out of the market” for some considerable period to come. We will have to subsidise those technologies right through the 2020s and beyond, unless—from a policy perspective—the prices suddenly rocket up and make these economic. In terms of this knowledge that politicians have about the winners, we have been there so many times before in the history of energy policy. It usually turns out badly and it has done this time.

Q46 Viscount Ridley: There is another aspect of energy security, which is the political risk of getting energy from other countries. You have made the point that gas is probably not suffering a very high risk of that at the moment because there are so many parts of the world we could get it from. At the moment about 40% of the coal we burn in this country comes from Russia. Are we not much more exposed to political risk in coal than in gas?

Professor Helm: I had rather hoped that autarky went out of fashion as a trade policy sometime in the 17th or 18th century. If you look at the markets in oil, gas and coal globally, it is perfectly sensible to have a view about short-term interruptions—there can be fires at terminals, there can be short-term political issues et cetera—and to have stocks. That is why we have a strategic oil stock and I have always been in favour of some form of strategic gas stock. On the coal side it is less obvious, although we did discover during the miners’ strike that you can stock a hell of a lot of coal at power stations.

To just take fuel, is there any serious chance that we are going to face an oil embargo any time soon, like we did during the Yom Kippur War in the 1970s? No. There are more plentiful sources of oil supply around the world; it is a fungible market. As for gas, the world is awash with gas. People do not seem to have fully taken on board the fact that the United States—nearly 25% of the world economy—has stopped importing gas. All that stuff built in Qatar and elsewhere was built with a large US market in mind, and that supply is now on the world market. Indeed, we have so much gas that the world could absorb the shutdown of the entire Japanese nuclear industry and prices would not go up very much. So there is plenty of gas, and there is plenty of gas from lots of sources. The Norwegians have been complaining for years about how the Europeans are not buying enough gas and using enough gas from their source of supply. There is plenty of LNG around the place and, as I say, if markets were worried about gas supply, how do you explain the fact that the gas price has fallen by half in Europe since the Russians occupied Ukraine?

On coal, it is all over the place—disastrously from a climate change perspective. In this commodity super-cycle the big mining companies have been developing new mines and new resources on an enormous scale. Even the Germans have been doing it by opening new lignite coal mines to burn the coal in their so-called green Energiewende system. So there is plenty of coal all over the place and no risk about supply. That is the one risk I would not spend my time worrying about right now. Should we have some security of supply in form of storage and stocks? Yes, that is sensible, but it is not a problem that is likely tomorrow morning to wake us up in the dark.

Q47 Lord Wade of Chorlton: I agree with your analysis completely, I think you are hitting the nail on the head. But I want to put the following point to you. If you had a straightforward supply and demand, in other words the cost was the cost of the raw materials and the cost of delivery, and the customer could then choose the best price, that would be fine; but suddenly we have these green issues thrown into the pot. There is not just one green issue, because we have created this structure of decarbonisation that has so many different elements in it and so many different groups wanting to do it this way or that way. The Government have ended up trying to please not just the customer but all these varied green groups so that they all vote for the Government that is in power at the time.

How do we solve that? To me, that is the basic issue of the whole shooting match. If this is what we have to do—and I am not even persuaded that it is—then what is the simple route for resolving what the right and proper single-entity way is to deal with carbon that everybody, including the Government, could agree on? Then we can find the most competitive and sensible way to do it.

Professor Helm: If I have indicated that markets can solve these problems on their own, that is not my intention. There are clearly market failures here that will not be taken into account by competitive firms or companies, and that requires intervention. Our objectives drive that intervention. So if you want security of supply, you have to fix the quantity and make sure there is a capacity margin. That is a clear intervention. If you want to decarbonise, you have to make sure that investment and plant operation follows a decarbonisation path. Those are the two things you need to do.

So the question is what the simplest and most efficient route, and therefore the lowest-cost route, is for doing that. What I have proposed for some time is that there should indeed be capacity auctions, but just capacity auctions not three or four different sorts of capacity auctions for each different kind of technology. You simply say, “This is the quantity that is required” and you auction it on a rolling basis. Within that framework, you want that new capacity that comes on the system to be going in the direction of decarbonisation. There are two ways of doing that. The simplest and most straightforward way is just to have a carbon price: let the carbon price go to whatever levels necessary to achieve the target and then people will bid capacity that takes that into account into the capacity market.

Of course, politicians do not like that because we might have to confront people with the pollution they cause in their consumption every day of items that embed carbon. So instead you pay £150 per megawatt hour for offshore wind or £160 plus the network cost. If you add that together that is a phenomenally high carbon price. You pay a much lower carbon price in respect of the coal, which is where you would want the carbon price to bear. So it is not that we do not have carbon prices, it is just that politicians would rather them be embedded in picking particular winners and supporting particular technologies, so you do not see that is the carbon price.

If that is what you want to do and if you are not prepared to have a carbon price to confront people with the consequences of their actions, then a second best is to say, having had your capacity auction, “We need a gigawatt in 2025 bid, anyone can bid”. You then have a second stage of the auction and say, “I have looked at our carbon budget programme as put forward by the climate change committee and, you know what, actually we will have a second bid, which has to be purely low carbon this time”. So you have a two stage auction if you are not prepared to have a carbon price. QED.

There are of course many lobbies out there that will be offended by that idea; after all they are getting the subsidies. This is a huge rent collecting activity for lobby groups, vested interest et cetera, each trying to get the Government to pick what they think is the particular winner that they represent. They are very good at it, and so they should be. It is like the National Farmers Union campaigning for farming subsidies. These groups are very professional in the way they go about it. We have learnt that picking winners is such a bad idea because the Government are very easily captured by vested interests. This is a capture process in which you need a political scientist to explain how you end up with the result you get. It is much more consistent with capture than it is with any rational economic supply curve of the technologies.

Q48 Lord Peston: Dieter, you will lose your licence to practise economics if you do not follow the normal economics line of telling us a tale of woe about fossil fuels. Going back to Stanley Jevons and so on, economists specialise in saying it is all going to run out and our successors are going to all be much poorer et cetera. In your article in the Oxford Review, you emphasise the fact that we are awash with fossil fuels and ought to recognise that—which, let me add, I am sure is completely right. That means that you are not telling us a tale of woe, but I just warn you that there are others around who will insist on a tale of woe. I now know why that is, from your point that there is money in telling a story that it is all going to be terrible.

I want to look at the capacity market and ask what your view is of that. But before that, when I first started in this field of the economics of choice of investment in generating stations, the key variable that we always looked at, quite erroneously as it turned out, was the discount rate. You have not mentioned the discount rate. Do you think, in terms of the decision-making process, that it really does not matter what the discount rate is, because we are talking about building capacity that will last a very long time?

Professor Helm: No, it is extremely important. On your point about peak oil et cetera, I would hate to disappoint you by not saying something gloomy but I—

Lord Peston: No, you do not disappoint me, I am delighted, but I am unusual in that.

Professor Helm: But I just want to be clear. The fact is that we have, as I said earlier, enough fossil fuels to fry this planet many times over.

Lord Peston: It is like a widow’s cruse: the more we use the more we find.

Professor Helm: There are good reasons why reserves keep going up rather than going down. But from a climate change point of view it would be easy and helpful from a particular perspective if peak oil was true and we were running out of the stuff, and we had no option but to decarbonise because otherwise the lights were really going to go out. Unfortunately, that is not true. We have abundant fossil fuels and we are not running out. These technologies that need very high fossil fuel prices to be economic are going to find themselves probably—although not certainly—out of the market for a long time to come in the same way as some of the oil and gas producers from Russia to the Middle East are going to find their budgets pretty well strapped compared with the plans for what they would have spent the money on had they had it.

On the discount rate, the heart of the capacity market issue relies on two separate things. First, it is that you want the electricity system to have more capacity than the mean expected demand. That is the point. You want excess capacity. That is why we are talking about 4% being inadequate. I am not sure who knows the right answer, as it will never turn out that way, but 15% to 20% seems to me a much better place to be from an economic perspective of the economy as a whole risk. So you have to give people money to deliver something that will depress the market price. Putting it the other way around, one of the reasons why the price is high and likely to rise with these tight margins is that there is no excess capacity in the market.

Secondly, people who invest in this market need to think about the potentially stranded costs among their sunk and fixed costs. If you build something for the long term, how do you know you are going to still make money further out? The answer is that you do not, and if technical change is fantastically fast—which I think it is and we might come on to that in a moment; by 2030 we may be talking about completely different kinds of technologies—then the question is whether you really want to commit yourself to the long term. From society’s point of view, if you face stranded assets sooner rather than later, you would want to use a higher discount rate rather than a lower discount rate.

This comes to the heart of picking winners. There is not much discussion about what the time dimension is of the winners the Government think they are picking. So if you ask, “What do we need now?”, the answer is that technology is as given today and what we need is, to be blunt, some pretty substantive power stations brought on to the system pretty fast. There is only one technology that could do that quite quickly, which is gas. You can get a gas station up in a matter of years, and there is virtually nothing else base load you can get up that quickly. It is just a fact of life. But further out, do you really want to commit beyond 2030 when next-generation solar, electric cars and all sorts of other things may be on the system? That is more difficult.

Should we as a society commit to the sunk cost? If we offer long-term capacity contracts over a long period of time, we are socialising the potential stranded cost that is there. That is not a bad thing to do, and it is not wrong for people who build long-term technologies to expect us to do that if they want us to deliver those, but it is an open question about whether it is a good idea. That goes to the heart of the discount rate, which I think is extremely important in the capacity auctions.

Q49 Lord Peston: Could you just expand on another thing? The whole point about technological advance is that it is unpredictable. If you could predict the new technology, then essentially it would not be the new technology, it would be already to hand. How are we to handle that?

Professor Helm: That is a very important point and it is too easy to go to the two-corner solution, which is, “We are uncertain, therefore, we should not do anything” or, “We are so certain we know it is A, B, C, D and E”. If you look at what you might do in this space—this is about R&D essentially—there are certain strands of technology where you do not know which one is going to be a winner but you know a potentially quite fruitful strand for which research money ought to be devoted.

I will just sketch them out, because you want to know what ones are relevant to the problem you face. It is pretty clear that none of the existing generation technologies are going to make much difference to climate change. Professor Dave MacKay’s numbers illustrate this, but you do not have enough shallow water and land to cover it with enough windmills to make any significant difference to global warming at all. Whatever its other purposes, it is not going to do that. Current rooftop solar is not going to do that either. In nuclear, we are going to lose 100 reactors worldwide before we gain 100 reactors, so it is not going to expand its market share for quite a long time to come, even if there are new builds in lots of places in the world. There are also lots of questions about nuclear.

So you are left with solar, geothermal, next-generation nuclear and gravity—hydro in some form or other. If you pick those off, you would be foolish not to think that the solar territory is quite pregnant with possibilities. I say pregnant with possibilities—we do not know the answer but we do know about new materials like graphene, we know of new developments around solar film and we know things about opening up the light spectrum look promising. Remember you are spending £100 billion on subsidies for other stuff. You do not have £1 billion for subsidising these sorts of areas, so £200 million on solar or getting beyond the £60-something million we devoted to commercialising graphene might be a much better option than spending billions on offshore wind farms. The second area is storage. Energy storage seems pregnant with lots of possibilities and it is very important because the electrification of transport gives us a possibility of leaving the oil in the ground eventually and not needing it. There are huge diverging strands of research in storage, but we might want to pursue that. Then finally, there is IT. If you look at many of our infrastructures, it is as if IT was never invented. We have not worked out how to optimise railway systems. If we go down the great western line, much of it is not digitalised in a sensible fashion. If you look in the electricity world, we are passive on demand not active. We are passive with regard to systems, not active. This must be a fruitful area to start thinking about smart meters and so on in that framework.

So those are some of the areas you might go in. As I say, we are spending £60 million or maybe £80 million on commercialising graphene, which is this amazing material, but we have billions to spend on offshore wind. I am only suggesting just a marginal rebalance but the efficiency gain, and the potential for British industry and for climate change, lie in those territories, not in endlessly building more offshore wind farms and expensive technologies like that, which cannot solve climate change.

The Chairman: You have given us three areas where it might be profitable to look in the future. Some would call these picking winners: solar, storage and IT.

Professor Helm: I said areas, not particular technologies.

The Chairman: Are the Government not entitled to do the same?

Professor Helm: The Government are perfectly entitled to—I would thoroughly encourage them—to support R&D. That is not the same as giving a particular feed-in tariff to a particular chosen technology. I have been extremely careful in my answer, first, to be clear that it is not about two extremes and, secondly, to be very clear there is a distinction between spending money on research and spending money on particular technologies. I talked about areas of research and I would like to point out the cost-benefit difference. We are talking about relatively small sums of money with potentially substantive gains, as opposed to talking about very large sums of money with very little gain.

It seems to me that no civilised Government would not want to have an R&D programme, and if you are going to have an R&D programme, there is a sense that you have to spend money in some areas rather than others. I have only highlighted three general areas within which an enormous amount of research is going on, which looks to be pretty exciting. But the truth about R&D is most of it is wasted. That is what R&D is about: pursuing dead ends, things going wrong et cetera. But we are not committed to the sunk cost, for decades to come, of the fact we may have spent £60 million on commercialising a particular aspect of graphene that does not work out. These are distinct problems and it is easy for those who support particular subsidies for particular technologies to say, “Well, since you are in favour of R&D you must be in favour of picking winners, therefore, why can we not pick these particular winners?”. The difference again is the winners have large economic rents attached to them. Of course there are rents attached to research areas—there is money for research and people do want to get it—but it is on a different scale and it is a different kind of problem to the one that is in the FITs and the current capacity contracts.

Q50 Lord Willis of Knaresborough: I wonder if I could just bring you back to one small point. This particular inquiry is into the resilience of electricity infrastructure and we, to be fair to politicians, have to make some short-term decisions in terms of resilience. The short-term decision that has been made is that you need roughly 4% capacity over demand, for which there is a particular price to pay. Our witnesses so far have said that in the short term they have questioned whether that can go forward with the mechanisms that National Grid has put in place and whether that is sustainable. But in terms of cost, you mentioned a resilience of somewhere in the region of 15% to 20%. Is the cost of that, of pouring money into mothballed equipment, not going to be huge in terms of the cost on the consumer? I just did not follow your logic in that.

Professor Helm: If you run a system at a 4% or 2% margin the price will be higher. Everyone will pay a higher electricity price because the price needed to bring the market into equilibrium is higher, because the stuff is scarce. If you have a capacity margin that is higher, the sort that any reasonable electricity system around the world would think of as being sensible given the risks, the prices will be lower. That is why people will not produce or not bring excess capacity onto a system without an incentive because it deflates the market price. So you have to do a quite careful calculation before you jump to the conclusion that increasing the capacity margin leads to an increase in consumer prices. The best way to have high and volatile consumer prices is not to have a capacity margin.

Lord Willis of Knaresborough: Why would the Government not do that? They have an election next year and there is a huge attraction in offering better prices to customers.

Professor Helm: It is not my fault that this problem has been going on for a decade and Governments have done nothing about it. They have only now got around to starting capacity auctions seriously for the period beyond 2018 and have almost an emergency on their hands—perhaps not really an emergency, but a very tight situation. That is not my fault. That is the position they have got into. If you really want to think through how complacent politicians have been, remember that the British economy is now about 20% to 25% smaller than you would reasonably have predicted it was going to be now back in about 2005 or 2006. Most people would not have predicted that the economy would shrink 6% and grow at 0% for a period of time. They planned it to grow at 2% to 3%. If the British economy was, at the end of the last investment cycle—you have to go back into the middle of the last decade to plan out investment—25% larger now, you would not be discussing resilience you would be discussing a serious full-on crisis. We got lucky in one respect. We have crashed the economy—not deliberately, but the consequence of that is to buy us 10 years of time, in which we have not addressed the problem. It is not difficult.

You do need a capacity market; you do need that component. Some people have been arguing for a very long time to put that in place. It is better late than never but you cannot get that to solve the problem for the next two years. What you have to do for the next two years is rely on National Grid to do a very professional job and bring the capacity that is mothballed and sitting around on to the system so that can be used. There is enough capacity and this can be done, and to the best of my knowledge National Grid is extremely professional at doing that. There will be a cost and a price: if you do things in a hurry short term, you are bound to have additional costs. But this does not detract from the point that you want never to be in this situation again. You want to get to a situation where you have a comfortable margin. Any reasonable, large-scale economy like the British economy, with its reliance on electricity, is vastly better off in a world in which it is quite content and has a bit of fat in its capacity margin so it does not have to worry about these kind of problems, which play down on the aggregate price in the market. To run around saying, “Thank God we only have 4%, at least we are not spending money on mothballed power stations” is not a state of affairs that we want to get into. It is not hard. Is the right answer 15%? I do not know. It is certainly north of 10% and it is probably less than 20%. But who knows whether the British economy will be 25% bigger in 10 years’ time, the same size or smaller. So the error is very big. You just want to be risk averse, because it is asymmetric risk. If you are too short and the prices rise, everyone suffers. If you have too much, the cost is socialised across the whole economy, and who cares too much about that. It would be nice to be in that situation.

Q51 Lord Rees of Ludlow: I want to go back to the issue of R&D. Clearly it needs to be greatly increased and I agree very much with your three areas. One would like to see R&D in the energy area worldwide come up closer to medical research in terms of level of expenditure. But the question is how we do this. It should be a global effort, when much of it is pretty competitive. What could we in the UK do to maximise the rate of increase in R&D? To what extent should we promote a national effort? To what extent could we do this through the international bodies? I wonder if you could say a bit about that.

Professor Helm: Climate change is a global problem and much of invention is a public good. Clearly, if someone in the world could come up with answers in these technological areas, we would all be better off because we would all benefit from less global warming.

In terms of how to do this, I am personally averse to Gosplans of R&D. You need to let quite a lot of flowers bloom. Graphene was discovered in Manchester; I think early aspects of 3D printing were discovered in Bath. It is not necessarily the case that you need some global Manhattan project to achieve this outcome but, on the other hand, if people are going to come up with next-generation solar, and solar films that can be applied, or if they are going to get forward in opening up the light spectrum and so on, shared endeavour is important.

I have been very modest in a sense of limiting my comments on this to say that in terms of importance R&D versus, say, offshore wind is to me a no-brainer. We have an enormous sum spent on something that cannot solve a problem—although it may have some uses in particular locations—and virtually nothing spent on something that we absolutely rely on. My starting point is that existing technologies cannot solve this problem. In terms of how to do the detail of that, that is way beyond my expertise and, with respect, you probably know vastly more about that than I do.

Lord Rees of Ludlow: But the one thing you do know is that a public good like this is undersupplied by the market, so the Government have to take some initiative. The question is what the UK Government could do, perhaps through international fora, to increase the level so that we get more quickly to these technologies that we all benefit from.

Professor Helm: I am normally averse to the idea that the solution to problems is public expenditure, but we could certainly spend quite a lot more on R&D and we could do that through our existing institutions by increasing the amount available to our core universities and so on to take these things forward. But also we could contribute to international R&D and there are lots of different ways of doing that. One is to encourage co-ordination between countries. Sometimes that is very difficult but, for example, R&D co-ordination between China and the UK will be increased by the development of the Hinkley plant and there are many other areas in solar and elsewhere where we might want to do that, for example with the United States. The answer many people try to advance here is that we need some kind of international R&D institution. There was the plan for the European MIT, there have been lots of statements about international new Manhattan projects. I am personally very sceptical about those and I think they take a long time to get going.

Lord Rees of Ludlow: Obviously one area where this has happened already is in fusion, which is long term. The ITER project is huge and many are ambivalent about that. But would you agree with me that if we are spending, say, $2 billion a year worldwide a year on fusion, and we calibrate things against that, we should be spending much larger sums worldwide on other areas of energy, although in those other areas there is no need to have a single grand project as there has been proved to be in fusion?

Professor Helm: If you follow and agree with the steps in my argument—that is a big if—the first step is the existing technologies cannot solve the problem. Therefore, you need new technologies.

Lord Rees of Ludlow: I think we agree with that.

Professor Helm: If you take the next step, which is to say that climate change is a really serious problem with potentially very high costs associated with it, then the cost benefit of devoting resources to those things that could help you mitigate and then solve that problem seems to me to be pretty overwhelming. What is the right answer? In R&D how would you know what the right exact amount of money to spend is? You would not. But what you do know is that if you take together all the contributions in the North Sea and the networks versus a few hundred million, absolutely maximum, is an order of magnitude mistake that provoked me to write a book about the subject some time ago. That is what needs to be addressed.

Lord Rees of Ludlow: Do you think the cutback in nuclear R&D is a mistake?

Professor Helm: It is not for an economist to go around and say, “You should spend a lot more on nuclear and a lot less in another area”. We are open to all the kind of lobby interests and so on in these areas. But if you accept that the R&D process is very wasteful, in the sense that most of it will not succeed, and you identify what kind of technologies you would need to have to crack the climate change problem in terms of these three dimensions of generation, storage, and the IT and active side of demand management, then you would want to spread your money across those areas. I think it should be a much bigger pot relative to spending on existing technologies and subsidising those. Experts like yourself will know much more about the details of the science; it is not for economists to opine on that, but there is a good argument from the evidence that you would want to encourage quite a lot of lines of inquiry rather than concentrate on just one or two.

Lord Rees of Ludlow: Yes, especially the three areas you mentioned.

Q52 Viscount Ridley: How important is energy density? In other words, in deciding what areas can and cannot solve the problem, I think you are saying that one of the big problems for wind is that it is a very low-density energy—1.5 watts per square metre or whatever it is. What we have done is move towards more and more dense energy systems. In agriculture it is called sustainable intensification, the idea that we use a smaller footprint to produce the same amount of energy. It is clear that fossil fuels have a high energy density, that nuclear has an even higher one and that things like wind and hydro are pretty low ones. In between, solar is the question mark, in terms of whether it can get to a high enough energy density to make a difference. Do you think that is an important metric or not?

Professor Helm: It is one of the metrics to take into account. What an economist would say is that you should get the prices right for the things you want and then the market can sort these things out. I have one slightly sceptical remark on that front. Supposing you were to have a technological breakthrough, as some people talk about in the solar space, and suppose it turned out to be really incredibly cheap to apply solar film to virtually anything on a very decentralised basis; supposing that was possible in a decade or two, then the decentralisation that would result in such a world—particularly if you had localised storage—would be such that density would not be a serious problem in the way it is if you have a centralised electricity grid system. This comes back to the central point I tried to stress: we do not know, but you have to at least have in your mind the possibility that the assumption that we have made, that we need a centralised large power-station-based system, may just not turn out to be the case, just like it may not turn out to be the case that the oil and gas price is going to double, as our previous Secretaries of State were so certain it would. So we do not know in that frame and, therefore, that is one consideration but not the only one. I have one final rider about trying to run main electricity systems, basically pretty centralised ones, off onshore and offshore wind. David MacKay’s book demonstrates wonderfully—and I am amazed that people in DECC either did not read it or understand it when he was chief scientific adviser—that it is sufficiently low density that it cannot provide a solution to the problem of climate change. That is why you have to move on. You can make wind turbines more effective, you can get much better at harvesting loads, but the fundamentals there point against it being a way of solving global warming and global climate change.

The Chairman: I understood that you were hoping to be able to leave us before 12.30 pm, you have just achieved that by two minute. I am sorry as I know we could have gone on a lot longer. There were indeed members of the Committee who were trying to catch my eye, and I apologise to them for not having been able to call them. Thank you for your robust and very clear evidence. I will read it again with great interest and of course you will, as you know, get a written record that you will be invited to correct for inaccuracies. Thank you very much for joining us today.