Energy and Climate Change Committee
Oral evidence: Investor Confidence in the UK Energy Sector, HC 542 Tuesday 20 October 2015
Ordered by the House of Commons to be published on 20 October 2015.
Members present: Mr Angus Brendan MacNeil (Chair), Mr Alistair Carmichael, Glyn Davies, James Heappey, Matthew Pennycook, Dr Daniel Poulter, Antoinette Sandbach, Julian Sturdy
Questions 1 - 65
Witnesses: Andrea Leadsom MP, Minister of State, Department of Energy and Climate Change, Ben Golding, Deputy Director, Head of Strategy and Finance Team, Home Energy, Dr Stephanie Hurst, Head of MI Strategy and Programme Management, and Gareth Redmond, Head of Renewables Programme Team, gave evidence.
Q1 Chair: May I welcome you to this inquiry of the Energy and Climate Change Committee’s evidence gathering? I would like to start with a statement reiterating some of the feelings of the Committee and then we will come to the Minister for a statement. The Committee supports the Government’s aims to make sure that the UK has secure, clean and affordable energy supplies. We recognise that significant investment is needed in our energy infrastructure to meet these aims and that robust and effective Government policy will be vital in securing this investment. We are also clear that the impact of Government policies on consumer bills—both in the short and long term—is an important consideration. I want to be clear that our intention is to work in a constructive way with the Department wherever possible, but we have an important role to play in scrutinising the decisions made by the Department.
We were disappointed that DECC decided to make important policy announcements during the summer recess, rather than announcing them in the House, where all Members might have had an opportunity to question Ministers on the reasons for and the potential impact of these decisions. Your Department’s approach sadly suggests a lack of respect for the important scrutiny function of not just this Committee, but the whole House of Commons. The decisions have proved to be controversial indeed, and there has been considerable backlash from within the industry and, indeed, international commentators, most recently Jacqueline McGlade, the former head of the European Environment Agency and now Chief Scientist at the UN’s Environment Programme.
As you will know, we have launched a formal inquiry into investor confidence in the UK energy sector. We are still gathering written evidence on this subject, but the Committee was keen to hold a public hearing as soon as possible to question you on the Department’s summer announcements, so I do hope that this morning’s session will allow us to understand the thinking behind the announcements and give you an opportunity, Minister, to explain how DECC is planning to deal with some of the consequences of these decisions. I would also like to say we are live tweeting this session; if anybody wants to join in, the hashtag is #ukenergyinvestment, and that, of course, includes DECC themselves.
Now, I understand you would like to say a few opening words, Minister; you are more than welcome.
Andrea Leadsom: Thank you, Chairman. It is a great pleasure to be here for the first time in this Parliament. You have asked me here to talk mainly about the substance and timing of a number of recent policy announcements from my Department, so I want to make a few points about each.
First, a general point on timing: we would always make every endeavour to make significant policy announcements when Parliament is sitting. However, in the case of each of these announcements, there were considerations around costs and value to the taxpayer that constrained when we were able to make them. In particular, as you will know, Chairman, this is a new Government and we had been in office for a couple of months. There were some very serious implications for bill payers and affordability that needed to be addressed and, because of the way the subsidies currently work, it was not possible to wait until the House was sitting again for reasons of cost.
With respect to the Levy Control Framework, on 22 July, we announced a package of measures to control costs under the LCF: confirming changes to grandfathering provisions for biomass co-firing and conversion plant under the Renewables Obligation; a consultation on controlling spending on support for solar PV electricity generating stations of 5 MW and below within the RO; a consultation on changes to the preliminary accreditation rules under the feed-in tariff scheme; and the decision that the Government would subsequently also consult on further cost-control measures as part of the wider FITs review.
On home energy, Chairman, we announced two things on 23 July: that the Department would not be putting any further public investment into the Green Deal Finance Company; and that there would be no further releases of funding under the Green Deal Home Improvement Fund. On the former, the timing of the announcement was driven by financial considerations. The pace at which the company drew down on our previous investment was governed by the pace of demand. It reached a point in July where we would have had either to invest further, or to see the company reach a point where its liability to purchase Green Deal plans risked exceeding its available funds.
Finally, on investor confidence, the UK remains an attractive place to invest with continued interest from debt and equity markets. It is widely seen to be one of the most stable markets due to its constant risk and return profile, world-class regulation, transparent policy development, strong financial markets and clear property rights for investors. That is backed up by a wealth of statements from investors and from the sector itself. We have, of course, as I have explained, had to go through some quick policy statements to protect bill payers from unnecessarily rising costs, but we hope that the progress of the sector will continue unabated. Thank you.
Q2 Chair: Thank you very much for your statement, Minister. The Secretary of State gave evidence to us on 21 July and, as you said, other announcements were made on 22 and 23 July. You said this was a new Government a couple of months in play, but these announcements were made a couple of days after speaking to us. Was the aim there to avoid parliamentary scrutiny or Committee scrutiny?
Andrea Leadsom: Absolutely not. I can totally assure you of that. It is the case that when this new Government came into office we could immediately see that there were serious problems with, effectively, significant impacts on consumer bills, so we had to take action. We were flat out trying to ensure that we got all the right processes in place for proper consultations, proper decision-making processes and so on, and that was the very first date that we could make those announcements. But what I can tell you is that my Department, right through the summer, has been meeting with stakeholders and businesses in the sector, and talking to users and producers—right across the board—so we have been very busy consulting right across the summer, and there was no attempt whatsoever to try to avoid parliamentary scrutiny.
Q3 Chair: Does the Department recognise, or are you aware of, any loss of investment that might have occurred due to your decisions?
Andrea Leadsom: I think that what we were very conscious of wanting to do was to protect consumer bills. As you will know, the Levy Control Framework was forecast by the Office for Budget Responsibility to be overshooting by £1.5 billion by 2020—the consumer bill impact. What we needed to do was to put in steps—urgent measures—to protect bill payers.
In the Department of Energy and Climate change, as I am sure your Committee members know, we have the energy trilemma: we have to decarbonise; we have to keep the lights on; and we have to keep the bills down. So what we were finding was that the success of deployment—far beyond expectations—meant that we were running the risk of significantly adding to consumer bills, and that was what we needed to address very quickly.
Q4 Chair: You say you wanted to protect consumer bills, but consumers are also employees. What will be the impact on jobs—the number of jobs that have been lost, or will be lost—as a result of your summer announcements? Do you have any estimate of that?
Andrea Leadsom: Essentially, the summer announcements were in the main part consultations. The consultation on the feed-in tariff is still ongoing until 23 October, so it still has a couple of days to run. In fact tomorrow I am meeting members of the solar industry specifically to talk to them, to get feedback from them on exactly the implications. The truth is that a lot of the solar sector and a lot of the renewables sector are very small businesses that are involved in a diverse range of activities, so it is not possible, other than through consultation, to get a complete handle on how many jobs and how much business is entirely dependent on feed-in tariffs. A BIS report suggested that there were around 34,000 people employed in the solar industry, but we do know that a lot of those businesses are multi-purpose and are not involved just with solar. Part of the consultation will be to get a much better handle on the prospects for jobs in the future.
Q5 Chair: Given what has happened, do you think that the Department could have done anything differently or done it better over the past few months?
Andrea Leadsom: I think the consultation with industry has been as open, consistent and fulsome as possible. I also think that the overriding priority of protecting the bill payer from a significant overspend on the budget for renewables subsidies was an urgent priority. The problem, if we had waited and delayed for longer, is that you just eek out the decision making and then run the risk of an even bigger spike in spending, and that was what we were keen to avoid.
Chair: To probe this a bit further I am going to call in Glyn Davies.
Q6 Glyn Davies: Thank you. I would like to ask you one or two questions. The solar feed-in tariffs is a key part of what I want to ask you about, as well as the impact that that is having, or is likely to have—if it goes forward as we expect—on jobs and businesses.
As a general point to start with, the Secretary of State said after the election that she was going to unleash a new solar revolution. That is quite dramatic, but how do the changes that have been made feed in to that and how is she going to deliver on that?
Andrea Leadsom: I think the Secretary of State is exactly right that there is a solar revolution under way. What we have seen over recent years is an enormous deployment of solar. In fact, what I can tell you, Mr Davies, is that in 2013 the predicted range for solar deployment was 6 to 8 GW of generation. Now the deployment rates are standing at 10 to 12 GW, so I think it is true to say that there has been and is under way a solar revolution, which is fantastic news for the UK but, nevertheless, it does have implications for the subsidies that are paid for by all energy consumers.[1]
Q7 Glyn Davies: Yes, I think that is part of what is inspiring much of our concern today. On the impact on jobs and businesses, the biggest is probably the Mark Group going into administration. There is talk of 1,000 jobs, and the company is fairly openly blaming the changes and the uncertainty on that happening, but it goes a bit further than that. In my constituency—this will be the same in most of our constituencies—there are a lot of companies that are dedicated just to solar, certainly in the Machynlleth area, spun out from the Centre for Alternative Technology, and they are not going to survive. I feel it is genuine that they probably will not be able to survive in the short term. What research did the Department make before making the announcement about what was likely to be the impact on jobs and businesses right across the country, not only the big companies but indeed the small ones in communities like mine?
Andrea Leadsom: The idea of the consultation was to set up a proposal. To be very specific, at the moment the subsidy offers a return to the household of around 10% and what the proposal for cuts in subsidies would do, according to the independent study that DECC commissioned prior to putting out the consultation, would be to reduce that investor return to a level of around 4%, and that was what the independent consultant felt was a reasonable return for a domestic household to expect. As I say, this consultation is not yet closed and my Department has been consulting with industry right through the summer months and getting feedback, and it is only once the consultation closes that we are in full possession of the facts. I know for a fact that many businesses want to challenge those numbers, and certainly plenty of people want to challenge the fact that 4% return is sufficient, but it is exactly that—a consultation. It needed to take place to give industry the chance to put in its views, but it also needs to take place because otherwise we will be having a big, negative impact on consumer bills.
Q8 Glyn Davies: We are interested in what work the Department did in assessing what the impact would be before making the decisions. It is a balance between cost and impact on business. What research was carried out to see how many businesses might be affected and how many jobs might be lost? What research was done before coming to those decisions?
Andrea Leadsom: As I say, it is a consultation; they are not decisions. Decisions will be taken following the consultation. As I said in answer to a parliamentary question quite recently, there is no clear data on how many jobs are entirely dependent on the feed-in tariff, so it is not true to say that any business that has some involvement with the solar industry is, therefore, at risk of closure if the feed-in tariff changes. That is just a non sequitur, because a lot of businesses that have involvement in the solar business are also involved with, for example, other renewables, activities, home improvement businesses and so on, so there is no clear data. BIS had put forward figures of around 34,000 people involved in the solar industry, but there is no clear data on how many of those jobs are there only because the feed-in tariff is set at its the level it is. It is only through the consultation that we will have really clear numbers on that.
Q9 Glyn Davies: We have been told by the House authorities this morning that there is a petition to the Petitions Committee, with 23,000 or 24,000 names already on it, about wanting you not to go forward with the proposals in the consultation paper. What notice are you going to take of that? What is your reaction going to be to that uprising of public opinion that is very concerned about the proposals?
Andrea Leadsom: As we all would we take huge account of public opinion. We take enormous account of what businesses are telling us. Genuinely this is a consultation, established with the most honourable of purpose, to protect the consumer bills that were running away with us. The deployment, as I have explained, was expected to be 6 to 8 GW. It is now at 10 to 12 GW—that is today. Let’s be clear about this: this is not any retrospective action on existing subsidies; this is talking about future deployment. What we have done is that we have met and exceeded our expectations for deployment versus what the consumer could be expected to pay for. We were running the risk of significantly losing the balance. That was what we had to urgently put in place but, of course, we will be very carefully listening to what the public and the industry think, and we will be making our response to the consultation as quickly as we can.
Q10 Chair: Before I call in James and Julian, I would like to pop in a short question. Minister, you said there has been engagement with and feedback from industry. Given the reactions to these energy cuts are almost appearing to mirror—not quite in the same way—the trouble the Government is having at the moment with the welfare cuts, how would you describe the reaction from industry in this feedback you have had from it?
Andrea Leadsom: It is incredibly varied. If we are talking about solar—
Chair: What is the main reaction—not the varied reaction but the main reaction—you are getting from industry?
Andrea Leadsom: There isn’t a main reaction. It depends on the industry so, for example, the Committee will be aware that—
Q11 Chair: Are some in the industry happy with this then?
Andrea Leadsom: It depends on the technology. Certainly some of the big energy companies have said they completely accept the early closure of the RO for onshore wind, and they are very interested to know whether there could be a subsidy-free CfD, for example. It is well known that that is something that DECC is now looking at, so they accept that it is possible to do some projects that are subsidy-free. Others in the solar industry have said they completely agree that the subsidy is too high. They do not necessarily think that the proposal in the consultation is high enough, but they agree that it needed to be looked at. I have pages here of comments from investors in the City who are still getting deals away and, for example, notes from brokers saying that DECC’s adjustments are unlikely to immediately result in— Without going into it, there is a whole raft—pages and pages—of feedback from industry and from brokers saying that there is still confidence in the sector and that this is a short-term issue that needs to be got over. Some are even saying that the certainty is much better, because there were plenty in the investment side who could see that this was becoming far too expensive and were concerned about even more draconian reaction. So I think that the investor confidence is absolutely vital, but I do not believe that the feedback is as bad as you are implying.
Chair: I am sure the Minister will share some of those quotes with us.
Q12 James Heappey: Given the growth of the renewables industry in some parts of the country, do you agree that the policy that you are setting is not just energy policy, but industrial policy, too?
Andrea Leadsom: I absolutely do agree and I want to particularly pay tribute. I have had some great trips just recently to the Humber to open a new offshore windfarm and to look at the Siemens new blade turbine factory, which is really transforming a quite significantly deprived part of the country, offering real, decent jobs and growth prospects. We have already seen the enormous amounts of new jobs created in the industry. With Hinkley Point C we expect there to be enormous new jobs—permanent jobs—created by this very successful new commitment from energy policy to a sector that we are coming back into anew, which offers great hope for the future. So, yes, I completely agree with you.
Q13 James Heappey: Given that there is an industrial policy aspect in what you are doing, I will not be so crude as to ask you what is the threshold for job losses that you would accept in relation to the cuts to renewables subsidy, but can you reassure us that it is not a fait accompli, and that if you see compelling evidence of a scale of job losses, particularly if they are concentrated in one region or another, you are able and willing to reconsider?
Andrea Leadsom: What I can absolutely tell you is that my mind is open in terms of the consultation feedback. We do not have a foregone conclusion and we will be looking very carefully at all the feedback that we get. Equally, what I would put to you is that it is vital that industries, over time, stand on their own two feet. I don’t believe that anybody here would advocate an industry that survives only because of a subsidy paid by the bill payer. Ultimately the challenge is at what rate you have that glide path towards subsidy-free. We can argue about what that rate is, but I think we must all agree that we do want to get to a stage where these technologies stand on their own two feet because, quite apart from the fact of the cost to the bill payer, there is also that squeezing out of the newer technologies. For example, we want to see marine and tidal technology. We want to see CCS. We want more offshore wind. So other technologies that still have a way to go get squeezed out if you continue to subsidise an industry that is reaching close to parity.
Q14 Julian Sturdy: Minister, you touched on the fact that solar was getting round about a 10% return under the current system. You are absolutely right to say that was a very good investment. I think the industry is quite clear that that was a good investment and delivering a good result, and I agree entirely that we have to get to a subsidy-free system. When you talk to the solar industry, I think it wants to get to that point, but it is the scale of getting there at the moment, and you could argue that what is on the table in the consultation is a step too far. But in the consultation itself, just coming back to the job situation, what weight is given to job risk within the renewables industry? Is there a weighting given to it in the consultation?
Andrea Leadsom: I can read to you the questions in the consultation—perhaps I will just paraphrase—that sort of say ask what, in the event of this decision, would be the economic impact, and please give your reasons. So, in effect, this is asking very clear questions about if a decision is made to significantly reduce or cut altogether the subsidy, what would be the wider economic impact. Clearly, that is an invitation to give feedback on not just job losses, but profitability, the scope for future activity and so on. We are very interested in that and that will, of course, form a part of our conclusions.
Perhaps I can read to you one quote from Friends of the Earth: “These botched and illegal plans have cast a huge shadow over the solar industry, jeopardising thousands of jobs. Solar payments should fall in line with falling installation costs but the speed of the Government’s proposals threaten to devastate the entire industry”. You might think that was from last week; in fact, it was from December 2011. As I say, the deployment of solar has gone from an expected 6 to 8 GW to now 10 to 12 GW, so I do think that it is very important to keep in mind the balance between what we are achieving and what we are seeing on the ground, which is the superb over-deployment of solar, versus what we are hearing, which is that we are destroying jobs, destroying the sector and so on. I think that that balance is important. We have chosen politically in this Government to be on the side of hard-working families and businesses, and to do everything we can to keep the costs of bills down, and I think that that is an important priority for us.
Q15 Julian Sturdy: To very quickly come back on that. I don’t disagree with what you say, but the issue—Mr Davies touched on this—is that there are a lot of companies in the solar industry—I can name a number in my constituency—that are small, independent businesses that have invested a lot of time and money over the years to build up their business. They might be quite small employers, but taking them altogether around the country, they employ a lot of people. We are not talking about big multi-nationals at risk; we are talking about small individual companies. They are saying that the scale of the cuts could put not only their companies but the people they employ at severe risk. Are you going to drill down into that in this consultation to make sure that there is safety within that?
Andrea Leadsom: Yes, I can absolutely assure you of that. I, too, have small solar companies in my constituency and I have been to see a few of them as well. My local companies are saying that they would argue that there has been a very strong business case for solar almost anywhere as a result of the subsidy, and what in fact cuts will do is to focus the industry on the most fruitful: the areas where there is the greatest irradiation; the areas on perhaps commercial roofs where the electricity generator can be used by the company itself. In other words, what some—not all—of my local companies that I have spoken to are saying is, “Putting pressure on the subsidies forces you to concentrate on the best outcome.” In other words, it is about the greatest generation of renewable electricity, as opposed to just doing the deal because it can make sense financially with a subsidy.
I do think that, as ever, if you make it a bit more difficult, you can end up with a better outcome from a decarbonisation point of view. You can make the nth transaction less profitable and, therefore, if it is not worth doing, it will not get done. But absolutely—coming back to your first point—yes, we will very carefully take account of all the feedback in the round on the economic impact. As the Secretary of State said, we want a solar revolution. We don’t want to put a stop to that; we want that to continue.
Q16 Dr Poulter: Picking up on a couple of the issues that have been raised about SMEs, you mentioned in your remarks that the feedback you had had from larger companies had been broadly positive because they were perhaps not as reliant on subsidies as some of the smaller companies, and that this is also about industrial strategy and economic growth. Are you concerned that there will be a disproportionate effect of reducing subsidies on those smaller and medium-sized companies in the market?
Andrea Leadsom: Again, I think it is essential that we get feedback from the consultation. As I mentioned, I am meeting representatives from the solar industry tomorrow. They will now all be in a position where they are about to or have fed back their consultation responses, so I want to get the opportunity to have an eye-to-eye chat through what they think the strengths and weaknesses are of the proposal. Again, different solar businesses have more or less involvement exclusively with projects that require the feed-in tariff and others have other renewable projects and things that they are doing for householders, so it does vary from company to company. I think it is important to look in the round at the very compelling evidence for continued subsidy versus the very clearly compelling evidence of the need to protect the bill payer.
Q17 Chair: Minister, before I return to Glyn Davies to see if he wants to finish off this section, you mentioned Friends of the Earth and the 2011 cuts. The Minister at the time was Gregory Barker, if you recall. His description of the current cuts, vis-à-vis the cuts he was involved with—he has admitted he was the Minister who made the cuts in 2011—is catastrophic. He admits there have been cuts, but the level and size of these cuts are described by a former DECC Minister as catastrophic. How do you respond to Mr Barker?
Andrea Leadsom: I would say, as I have said all the way through, that this is a consultation. It is in fact still open and anybody who has that view should feed in to it. They still have the opportunity to do that and we will be looking carefully at all the feedback.
Q18 Chair: Is that underplaying the words of Mr Barker?
Andrea Leadsom: It is a consultation. No, I don't think it is underplaying his words. We want to get to a point where industries can continue and be successful without subsidy. Everybody, including the solar industry, says that can happen. There is a very genuine question: when you have already deployed far more than you expected to need in order to be at grid parity with no subsidy, does that mean that you need to extend the timeframe and continue to subsidise, or does it mean that that over-deployment means you should have reached that subsidy-free level sooner. That is the question. Are they in fact able now to continue with a very much lower subsidy or not? That is the point we need to get to. That is the point of the consultation and I am continually reassuring the Committee we will be looking very carefully at the feedback.
Q19 Mr Carmichael: I am not quite sure that I understand your response to Gregory Barker here. You were asked if you thought it was fair comment that he described it as catastrophic and you said, “Well, we are consulting in these things,” and didn’t demur from it. Are you telling the Committee that you are consulting on something that could be catastrophic?
Andrea Leadsom: I am absolutely not agreeing, no. I was asked what I would say to him and I said that I would say, “It is a consultation.” I wasn’t asked if I agree with him. Obviously I don’t agree with him but—
Mr Carmichael: You don’t agree with him?
Andrea Leadsom: I don’t agree with him, but what I absolutely would say is they are not catastrophic cuts. It is a consultation, and the consultation hasn’t even closed yet.
Q20 Matthew Pennycook: I would like, if I may, to take us back to the process by which these announcements were made. The Minister gave the impression that in the months after the election new evidence came to light, or an impression that pressures had to be dealt with arose, which meant that the Secretary of State could not tell this Committee about those announcements. What was known or what new evidence did you discover on 8 May that wasn’t known before the election about the view that subsidies were getting out of control, if that is the line you are taking?
Andrea Leadsom: It is not so much new evidence as just a review on arriving into DECC with the first Conservative-led Energy and Climate Change Department. It was a review of exactly where we were against the various bill payer subsidies, so there was a review of the levy control framework and the components within it, and there was a commitment to meeting our manifesto obligation to close onshore wind subsidies a year early and so on. We were looking at all the factors that you need to consider when you take over a Department for the first time, and what was very clearly coming to light was the fact that the levy control framework had, as things stand, already exceeded with what was known about and that we were at risk of significantly exceeding it unless we took urgent steps to prevent any further excess. In effect, what we were trying to do in the first couple of months was very quickly to balance up all the different technologies because, of course, the feed-in tariff is not just about solar; there are various other technologies that are also a part of that. We had to look very carefully at all the numbers. We needed to look at all the component parts, come up with a proposal for consultations, see it through all of the sign-off processes, make sure it was entirely robust and then announce it just as soon as we could. The timing was urgent because of the fact that if we delayed until Parliament came back, you run the risk of an even further excess over the budget.
Q21 Matthew Pennycook: Given there was continuity in this Department in a sense—this was not a brand new Government; there was continuity in some sense with officials—the pressures would have been known. Do you think it is a failure on the part of the Department not to give investors and companies more early warning of what was going to happen?
Andrea Leadsom: This is a new Government and, looking at the situation on arriving in government, this Government is very much on the side of families and businesses, and keeping costs down. As you know we have set ourselves the economic challenge of turning around our economic situation in every way and we want to support families and businesses. Arriving and discovering that already we were in excess of the agreed cap on cost that could be put on to the consumer was cause for significant alarm.
Q22 Matthew Pennycook: So DECC, prior to the election, had no idea that those pressures existed?
Andrea Leadsom: Of course those facts would have been known. It would have been known that there was risk of over-deployment.
Q23 Matthew Pennycook: Was that told to investors and companies?
Andrea Leadsom: If you look at what investors say, there was a great deal of awareness and some concern that in fact, because of the extent of deployment, there was a risk of the taps being turned off. Investors were observing, “Well, thank goodness it has been done because now we don’t have to live in fear of it”. So there was awareness and, certainly, a number of people in the industry say, “Yes, we did realise that there were a lot of projects coming forward,” but not everybody. That is the truth of it. The numbers are there. The levy control framework is reported on. The Office for Budget Responsibility does its own independent forecasts. The information is there, so you could argue that investors and industry could see that the deployment was exceeding expectations, but it was when this Government came in that we looked at it very carefully and decided we needed to take action to protect bill payers.
Q24 Antoinette Sandbach: In terms of investment into our energy sector overall, rather than just in renewables, National Grid has said that there is a margin of error of approximately 2% or just below. How is the Department encouraging investment in areas other than renewables in the energy sector?
Andrea Leadsom: Energy policy is at a very crucial stage where we are looking very carefully at what we see the need to be over the next several years. Absolutely key is going to be giving investable certainty, so we have to give clarity to businesses with the proviso that we want to see renewables as far as possible standing on their own two feet. There are other technologies that will need support that we want to bring on and, of course, there is the commitment to new nuclear, which is a huge potential but, equally, these are complicated projects, so we need to look at the whole prospects around funding those. There is a lot of work going on in nuclear skills to make sure that we have the workforce and the supply chain to make sure that we get as much as possible of the new Hinkley deal, and subsequent deals after that, and that we keep that in the UK for jobs and growth. There is a lot of work going on to look very importantly at our need for gas. We will continue to need gas for decades to come. It is a significant part of our usage—something like 80% of us use gas for heating and cooking, and it is used in a lot of industrial processes—so we are very keen to support the safe development of shale gas. That is something we have been looking at in some detail over the last few months, and we are very keen to bring that forward as a new home-grown source of gas. Of course, we are taking steps now with the Energy Bill to support the North Sea basin and the oil and gas that is there, through setting up the Oil and Gas Authority and through some of our fiscal work with the Treasury, and of course there are the seismic studies that the Government is paying for to look at under-explored parts of the North Sea. So, our energy policy is all encompassing and we will be making announcements about that just as soon as we can. We are obviously in the middle of a spending review and we are still only a few months into this new Parliament, but that was a very good point to raise, Ms Sandbach. It is absolutely crucial that we get the balance of energy right. As you will be aware, through the capacity market we ensure that our fundamental job of keeping the lights on is managed to an extent that ensures the lights stay on, but that doesn’t involve paying too much for spare capacity that we don’t need. That is really the balancing challenge.
Q25 Antoinette Sandbach: You talked about the three aims or requirements of the Department, which include your climate change obligations, and obviously Professor Jacqui McGlade has made comments about the incentives that are being given to the oil and gas industry in the North Sea, rather than looking at the attractiveness of renewables. How would you say that your investment strategy or your bid to attract investment is doing it in a way that will support our climate change targets and our ambitions for Paris?
Andrea Leadsom: Our overall ambition—our overall mission—is decarbonisation, while keeping the lights on and keeping the bills down. We remain as committed as ever to achieving our legally binding decarbonisation targets. That is absolutely uncontroversial in the Department. Absolutely key to that is a transition away from unabated coal towards gas because gas is the greenest fossil fuel and we are so dependent on it. I am afraid a lot of people forget that that is a big decarbonisation move that is very important.
Q26 Antoinette Sandbach: The specific concerns with the professor were around the subsidy for the fossil fuel industry—oil and gas in the North Sea, as opposed to renewables.
Andrea Leadsom: There isn’t a subsidy for the oil and gas sector. What has simply happened is that the Chancellor chose to remove some of the excess tax rates for the oil and gas sector in order to reflect the fact that, with lower oil prices, it is becoming very much more difficult to maximise the economic recovery from the North Sea, which is something that is in our vital national interest from an energy security point of view. What the Chancellor has done is to improve the fiscal regime to encourage more exploration and to ease the burden of tax, because what we definitely need to do is to see companies continue to explore and invest in the North Sea. That is not the same as subsidies. But just to address that head on it is simply not the case that this Government is moving away from green.
For example, PwC’s Low Carbon Economy Index, which is an annual assessment of economic growth rates and greenhouse gas emissions in the G20 economies, reveals that, while the US, Germany and Brazil have all fallen back, the UK economy has grown greener with Britain the highest riser in the rankings. Over £42 billion has been invested in renewables and nuclear since 2010, and 2014 was a record year, with over £8 billion being invested in UK-based renewable energy. We reached 25.3% of UK electricity generation from renewables from April to June this year, which was the first time that the sector has outperformed coal-fired generation. We trebled our renewable electricity capacity in the last Parliament alone. We are on track to reach our target of 30% of electricity from renewables by 2020. The UK is the No. 1 global leader in offshore wind, with half of all the world’s deployed offshore wind.
What part of that is, “You are trying to destroy the sector”? It just does not make any sense; it is illogical. Because we are trying to protect the balance between the bill payer and the subsidy to certain sectors that are now at or about reaching the ability to stand on their own two feet, we are being completely slated but the record is extremely good. It is one of a new developing sector.
Chair: With respect, Minister, that is an assessment made before any of the cuts and I am sure you would welcome PwC’s opinion after the announcements you have made.
Q27 Dr Poulter: Looking at investor confidence, clearly certain technologies—say, anaerobic digestion, for example—have a slightly longer lead-in period to put projects together, and very often if there is a project that involves the public sector, and some of those anaerobic digestion projects do, that can take not just months but years. I wonder whether, as part of your consultation and the work that is going on, you are going to be looking specifically at how the subsidies relate to different types of technology and potentially the disproportionate impact of removing subsidies to certain areas in the energy market.
Andrea Leadsom: The consultation will look at all aspects of feedback that we get from the industry. Are you asking me whether we will treat all technologies the same? Is that the nub of your question? Because we absolutely will not do that. We do look at biomass versus solar versus onshore wind versus community wind versus rooftop solar versus agricultural solar. We do look differently at different methods of deploying the same technology, as well as looking differently at different technologies. We are not lumping them all together and saying, “Right, you can all stand or fall on your own”. That is not the case. Do I understand you?
Q28 Dr Poulter: It is partially that, but also I suppose there can be a longer lead-in time for putting projects together—going through the planning process, the procurement process or local authorities, for example—when dealing with some of these larger projects that may attract a level of subsidy, sometimes by many years. In terms of maintaining consumer confidence and allowing some of that forward thinking by local authorities to take place when they are looking at longer term issues and waste disposal, I wonder how that is going to be playing into some of your thinking with regards to specific technologies when reviewing the consultation.
Andrea Leadsom: It obviously plays a part. With the feed-in tariff and the technologies there, yes, some take longer than others to come to fruition and that does play a part. Equally, within the tariffs, there are some different rules for different technologies anyway. So, in answer to your question, yes, absolutely we will be taking into account the length of time it takes to bring a project to fruition.
Q29 Julian Sturdy: Minister, I understand the points about the rising costs that you have touched on a couple of times and the way the Department is looking at that, but when you are looking at any company, and it doesn’t have to be an energy company, when they are looking to get financial backing or investment—I know you will completely understand this with your background and from your previous roles—there has to be that long-term plan in place that the financial backers or investors can buy into. So, given the consultation that is under way and whatever its outcome is, do you have the confidence, or could you give us the reassurance, that, after that consultation is finished, there will be that long-term plan that can restart the investment that we need in the sector? Irrelevant of how that consultation goes, what I am getting at is that I and investors want to see that there is that long-term plan in place that we can start working towards again.
Andrea Leadsom: Yes. You are exactly right, Mr Sturdy; my background is in investor certainty and I think that that is absolutely key. With energy the sums can be are enormous. Obviously not with solar installation, necessarily, but once you get on to nuclear projects and power stations, the sums and timelines are enormous. Of course I absolutely understand that to be able to invest, businesses need to be able to look forward to see what the policy is, so I can absolutely assure you that a key part of our policy reset is going to be looking at investable certainty.
Q30 Chair: Minister, there is a feeling about that this Government is, let’s say, miserly when it comes to renewables but profligate when it comes to nuclear. How would you plead on that particular charge?
Andrea Leadsom: I suppose the first thing I would say is that the Government is neither miserly nor profligate, because it is not the Government’s money; it is the taxpayers’ money and the bill payers’ money.
Q31 Chair: So one rule for renewables and one rule for nuclear.
Andrea Leadsom: In answer to that question, I can say to you again that over £42 billion has been invested in renewables since 2010 and that 2014 was a record year, with £8 billion being invested. What we are looking at with new nuclear is an absolutely reliable source of long-term investment in low-carbon energy, so low carbon is key, baseload is key and long term is key. It addresses energy security and decarbonisation, as well as the costs being affordable for consumers. The point is that you look at that combination of factor. Look at the costs, for example, of offshore wind. They are still at around £118 or £119, even though it is travelling in the direction of £100. Then look at the long-term prospects for nuclear: the first one is deploying at around £92.50, which includes the costs of decommissioning, and that gives you that certainty that offshore wind cannot at the moment.
I say again that we have a trilemma: keeping the lights on; keeping the bills down; and decarbonising. Nuclear has the potential to address those. However, let me make one other point, because I know that the Committee is very interested in the jobs and growth aspects of this. We have absolutely focused on what is in it for the UK in terms of these very expensive builds in new nuclear. We expect to get 60% to 75% of the expenditure on these projects to come into the UK supply chain. I have met a number of nuclear providers, ranging from the big—you know, Rolls-Royce—all the way down to SMEs. They are all gearing up to making parts for nuclear reactors. We are gearing up with a nuclear skills college. We are looking at the prospects for jobs and growth. Nuclear is a whole new industrial sector that we should be very excited about for reasons of energy security, keeping the lights on and decarbonising, and also because of the jobs and growth prospects.
Q32 Chair: When it comes to energy security, some in the industry will say that perhaps the same support should be given to gas. We have seen the headlines for Carlton Power’s Trafford plant and the underwriting by Government when other areas came on the capacity market. How does DECC feel about that?
Andrea Leadsom: That is part of the capacity market and what we are looking for, through the capacity market, is for companies to bid to provide guaranteed supply a few years hence, so it is all about guaranteed energy security. We will be doing our second capacity market auction very soon and we do believe, and we are very hopeful, that that will bring forward new gas plants. That is our expectation and if it doesn’t, we may have to tweak the auction to make sure that it can do. But the fact is that energy security is absolutely vital and what that does involve—you are exactly right, Chairman—is that we stimulate new growth of gas, but we are not about trying to subsidise sectors that don’t need subsidy.
Chair: An underwriting is not quite a subsidy, but we will move on.
Q33 Antoinette Sandbach: You spoke about the importance of the UK shale reserves. I think many Committee members are concerned about safety aspects. What role do you see for the industry in making the case in the communities where those reserves are or may be held?
Andrea Leadsom: Safety is absolutely paramount with shale gas and there is no doubt about it that this industry will only take off if it has the best regulation, the greatest scrutiny and the most secure processes. That is exactly what DECC, working with the industry, has been about creating. The industry totally recognises that this needs to be the best in the world, not the average or the reasonably good. Of course, in the UK we have 50 years’ experience of regulating offshore and onshore oil and gas extraction to a great degree of success, so we would argue we have the best regulation in the world. We have absolutely gone round every single process and ensured that we have the most rigorous safety checks. You are exactly right. In order to get this industry off the ground safety has to be the key focus and industry will work together with DECC, with local councils and, frankly, with independent people—geologists who entirely support shale, people who are looking at energy security who entirely support shale, and people who are interested in decarbonisation and entirely support shale gas as being the greenest fossil fuel.
Chair Thank you very much. If we could move on to the next area: impacts on investment decisions and it is back again to Antoinette Sandbach.
Q34 Antoinette Sandbach: You touched on this earlier, but do you think the announcements in relation to renewables are impacting on other sectors of UK energy investment?
Andrea Leadsom: I suppose what I think is that the consultation that we are in now, and the policy reset process, is always going to lead to a period of uncertainty. What we are trying very hard to do is to constrain that to the shortest time possible. We have to protect the bill payer. There is no choice about that. If we just carried on, it would be careless in the extreme. It would be absolutely unfair to the bill payer. What we have to do is to make sure that, as soon as we possibly can, we can come out with complete investable certainty and that is what we are aiming to do.
Q35 Antoinette Sandbach: John Cridland, the director-general of the CBI said: “Today’s investors are more uncertain about the UK’s low-carbon future. From the roll-back of renewables to the mixed messages on energy efficiency, these changes send a worrying signal about the UK as a place for low-carbon investment”. You have effectively in your answer stated, “Yes, I accept that there is uncertainty,” so in the policy reset, what will your aims be in terms of ensuring that there is certainty going forward?
Andrea Leadsom: As I say, what we are working on now within the context of the spending review—much depends on the spending review, as we all know all Departments are requiring tough decisions to make sure that we get our economy back on the straight and narrow—is to look very carefully at each of our policy areas and focus on meeting the energy trilemma: decarbonisation; keeping the lights on; and keeping the bills down. With that in mind, just as soon as we can—I cannot give you a date right now—we will be making policy announcements with the absolute goal of giving certainty to investors.
Q36 Antoinette Sandbach: The Chair asked in terms of the new gas-fired plant, but Forewind Dogger Bank and the carbon capture and storage at Drax with the White Rose Project have all indicated that they are not going ahead in light of recent announcements. Does that not cause concern in the Department about investor confidence in the wider sector?
Andrea Leadsom: No, I think there is a great deal of investor confidence in the sector. There are certain projects that may see their own future differently. To take Drax and White Rose as one example, what Drax said was that it was focusing on its core business and not putting in its share of the investment in White Rose. That is not quite the same as saying it is pulling it because of Government policy. It is saying that it is focusing on its core business. Obviously, not every project that gets consented or considered comes to fruition. That is the world of business; they don’t all happen. But, generally speaking, in terms of energy policy, we do want to see more gas plants come forward as a crucial part of our energy mix. We want to see nuclear projects come forward. It may be that some come forward and then don’t come to fruition, but that is the world of business. What we are trying to do is to work towards a very clear path for businesses to be able to see whether it works for them or not for the future.
Q37 Matthew Pennycook: I want to pick up on that point. You say there is a great deal of confidence in the sector. There is a quote from your party conference where you told a fringe event—ResPublica, I think it was—that very regrettably the announcements had damaged investor confidence. Is that still your position—that they have damaged investor confidence?
Andrea Leadsom: That point at the party conference was very specifically referring to what we were talking about at the time, which was the solar industry. It was being put to me that the solar industry was very upset and unconfident. The point I was just making to Ms Sandbach was about confidence in the energy sector, which is obviously much broader with a very diverse range of energy sources and supplies. As I have said, on the arrival of a new Government, any change in policy, any announcement to consumers and any announcement to consult on changes—particularly when there is likely to be less money available to subsidise in the future than today—is, by definition, going to cause some uncertainty. What we are focused on is providing that long-term clarity just as soon as we can. In this period of time, which is, let’s face it, a few months, while we are trying to reset policy in favour of not damaging consumers and businesses, that policy reset is a very important thing that we are trying to get to just as quickly as we can.
Q38 Chair: Minister, four months ago you told me in the Chamber that you wanted to give us certainty as soon as possible as regards feed-in tariffs, contracts for difference, and islands. Do we have that certainty yet four months later?
Andrea Leadsom: What was the last one?
Chair: Islands.
Andrea Leadsom: Highlands?
Chair: Islands. Islands.
Andrea Leadsom: Islands, the remote islands.
Chair: Areas of land—yes, indeed—surrounded by water.
Andrea Leadsom: It is a language problem, sorry.
Chair: We have tried to solve that in the past, but that is another thing.
Andrea Leadsom: Yes. What I can tell you, Chairman, is we are totally flat out trying to get there. As you will know, I came to Aberdeen and had a great meeting to talk about some of the prospects for the remote highlands and islands and superb projects going on up there. I would love to wave a magic wand and say, “Yes, here we go.” The issue, as you know—as the Committee knows—is that we have the spending review. We are under the cosh in terms of our trying to get the economy back on track. That is our absolute core goal. Within the context of that, what can we do to take forward some of these brilliant projects that we all want to see happen? That is what we are trying to get to right now. I cannot give you the answer, but I can tell you it is not far off.
Chair: We long to see you wield the magic wand.
Q39 Mr Carmichael: Is the position that you are still exploring the islands strike price and that is still with the Commission?
Andrea Leadsom: That is correct, yes.
Q40 Mr Carmichael: Just as a side bar, “remote” is a word that I suspect neither the Chairman nor myself really like to hear in relation to islands. It defines us in relation to where we are. If you are looking from Kirkwall or Stornaway, London is a pretty remote community. It is a difficult place to get to, trust me.
Andrea Leadsom: It is a very fair point.
Mr Carmichael: Anyway, you can bear that in mind for future reference.
Andrea Leadsom: I have to say, though, we were invited for the next meeting to take place on Orkney and everyone except me said, “Oh, no, it is too far to get to.” I was saying, “Yes, fine.”
Q41 Mr Carmichael: Moving on from the points about investor confidence, I want to explore with you concerns about possible retrospectivity. Are you satisfied that the changes that you have announced are not retrospective in their nature?
Andrea Leadsom: Yes, we are.
Q42 Mr Carmichael: Do you agree that it would be damaging to investor confidence if it were seen that there was a possibility of retrospectivity?
Andrea Leadsom: Yes, what we are very keen to do is to enable investor confidence to continue, so we have been very careful to make sure that there isn’t an element of retrospection, and to make sure that all these changes have been fairly consulted on and that we have taken into account the feedback from investors. I don’t think retrospection is an issue.
Q43 Mr Carmichael: What, then, is the purpose of the grace period?
Andrea Leadsom: The grace period is essentially to ensure complete fairness to those who have invested money, who have gone a long way down the track, who have achieved everything that was required bar the actual build or who, through no fault of their own because of delays due to radar approvals, grid connections or other certain measures, but through no fault of their own, have missed the technical cut-off point, so it is about ensuring fairness.
Q44 Mr Carmichael: So, without the grace period, you would be vulnerable to challenge on retrospection?
Andrea Leadsom: No, it would not be retrospection. It would more be the investor certainty point because always, in any business, if I say, “I am going to open a store,” and I buy all of the kit for the store and then I cannot do the deal on the property, well, that is my loss. That would not be a retrospection; that would be a business plan that goes awry. So, no, I don’t think it is the same as retrospection.
Q45 Mr Carmichael: If people had undertaken that initial stage of investment in good faith in the expectation that Government policy would be as it was, you could see that would fit under the heading of retrospection, surely.
Andrea Leadsom: I just don’t see it that way. I definitely don’t see it that way.
Q46 Mr Carmichael: So what is the purpose of the grace period then?
Andrea Leadsom: As I say, to ensure fairness. To ensure that those who have spent money—significant investment—and achieved everything technically to meet the cut-off date but, through reasons beyond their control, haven’t actually made it, are not penalised for reasons beyond their control.
Q47 Mr Carmichael: Have you been the subject of any legal challenges yet on this ground?
Gareth Redmond: We have received a pre-action protocol letter in relation to the changes to pre-accreditation, so obviously there is a conversation between lawyers at the moment about that.
Q48 Mr Carmichael: Have you made a contingency for this, if it’s all about budgets?
Gareth Redmond: There is always a conversation about the level of risk between our Department and the Treasury. The extent to which a contingency is set aside tends to relate to our judgment about the likelihood of successful challenge.
Andrea Leadsom: I think the key thing to say there though, Mr Carmichael, is that—this really goes back to the original point about why did it take until 23 July—precisely because we look at it from every angle, including from all legal aspects, as to whether it is fair and the balance is fair to the bill payer versus the developer and so on, we reach a point: “Yes, we are absolutely sure that this is fair. This is the right balance.” The fact that somebody may challenge it does not mean they will succeed, but what I can assure you is that we have looked at it from all angles and we do believe that the balance is fair.
Q49 Chair: In the interests of clarity, when you say you don’t want any bureaucratic hurdle when things need correcting technically, do you include the section 75s in that? I have heard some in the industry mention section 75s and uncertainty around that?
Andrea Leadsom: There is a list of potential measures that enable you to meet the grace period, even though you have not technically met the cut-off date. I can write to the Committee with exactly what all of those are, if that would be helpful, but I can’t remember every single one of them.
Q50 Chair: That is fair enough and it would be, I think, in the spirit to be including section 75 in that list.
Andrea Leadsom: Yes.
Q51 Matthew Pennycook: I have one follow-up to the previous question. If you accept that the announcements have damaged investor confidence—albeit perhaps not in the sector as a whole; perhaps in particular sectors like solar—that has a financial implication. The risk premium has a financial implication for the country in terms of lost investment. Is the Department doing anything to quantify the financial implications of the delay in certain investor frameworks?
Andrea Leadsom: As I have said, the key to this is to ensure that there is fairness and transparency and a broad consultation, which is still ongoing now. Policy has not changed as things stand today. There is a consultation that closes in a couple of days’ time. Investors will be looking at what the prospects are and what their assessment of that is. You can look at it from the other end of the telescope and say, “What alternative is there if you are faced with a spending envelope”—which all of us as consumers and businesses are paying for—“of £7.6 billion a year by 2020?” The Office for Budget Responsibility is telling you that where things are today, regardless of what deals you might do tomorrow, is looking more like £9.1 billion. The alternatives are not very attractive. You either say, “Right, well, we will just carry on overspending,” with the implications that has for the bill payer, or we get our house in order, put the brakes on and then see where we are. You do need to look at it from both sides of the coin. I entirely accept that, of course, the sector would much prefer to see subsidies continue unabated with, as I mentioned, the notable exception of some investors who were thinking, “Well, this is all getting a bit out of hand. We run the risk of this all suddenly coming to a halt unless some sort of glide path is identified.” I think you do have to balance out those two things. You cannot say, “Keep on paying regardless,” but equally you want, as far as possible, to minimise the investor uncertainty, and that is what we are trying to do.
Chair: Matthew, do you want to lead on the next section?
Q52 Matthew Pennycook: It does link to that in a sense. It would be useful, I think, for the Committee to get an understanding of how DECC tries to gauge investor confidence in the sector. Could you give us perhaps an idea of the wider dialogue—aside, perhaps, from friendly emails from brokers in the City—you have with the sector specifically about investor confidence?
Andrea Leadsom: I was favourably impressed when I came in to the Department to see how much engagement there is. Because of the vital, crucial importance of the energy sector, there is a whole team that looks at issues like the performance of big energy companies because, obviously, if one has a major problem, that gives us a major problem. There is a team that looks at how companies in the sector are doing, and that is what they do all day long—analyse how they are performing. That is a combination of meeting them and talking to them, looking at what the City is saying about how they are performing and so on. There is another team that is very closely aligned to that team that is talking to investors, developers, power generators and renewable operators all day, every day, to look at what they are seeing in terms of the prospects for the future.
There is another team that is looking very closely, obviously, at second guessing the national grid issues, so around the supply and the capacity, what projects are coming forward and what sorts of projects we want to see coming forward. There therefore is a huge amount of engagement. I probably have between three and seven meetings with power generators and investors every day—Monday to Thursday during sitting days—so I do a huge amount of meetings. There are roundtable meetings with the sector when it wants to talk about a particular industry, such as the shale industry. Tomorrow I am meeting the renewables sector. There is a huge amount of engagement and really good mutual understanding.
Q53 Matthew Pennycook: I met a very large Scandinavian energy generator which said that, on the back of these announcements, its credit rating had been downgraded for its UK arm. How does that feed into the process of how you go forward and respond to the consultations?
Andrea Leadsom: It would be worrying if a Scandinavian company’s credit rating depended on the bill payer subsidy of the United Kingdom.
Matthew Pennycook: Its UK arm, yes.
Andrea Leadsom: Cause for concern. Certainly—
Chair: It is the UK arm.
Andrea Leadsom: The UK arm? Right; okay. That obviously is cause for concern but, as I keep saying, what we want to get to is long-term certainty. What we have had is the absolute vital need to reset to avoid further damage. It is not any damage; it is further damage to costs for consumers and businesses. It is all a cycle. We are seeing implications of energy costs for other sectors and it is vital that we keep the bills down. It is not just a zero-sum game. It is not, “Let’s continue to support the sector and it doesn’t matter what the cost is.” What we are trying to do is to get the balance restored and, as fast as we possibly can, we will be providing certainty to investors going forward.
Q54 James Heappey: Minister, have you seen any analysis that shows for each additional megawatt produced, as you get up to the 5 MW threshold, the amount of subsidy taken up? What I am trying to understand is: is 5 MW the right threshold, because it seems to me that they are still relatively large solar parks at that stage? If the threshold was lower—say, 3 MW—would it be possible to reduce the subsidy less for installations below 3 MW and make a significant saving because, anecdotally, I understand that it is the 4 and 5 MW installations that take up the vast majority of the subsidy?
Andrea Leadsom: That is a very good point, which I have heard before; again, it will certainly form part of the consideration of the feedback we get from the consultation. It is a very good point that certainly needs to be taken into account. We have said obviously that with commercial rooftop, community projects, domestic rooftop solar—all those projects where you can see a very clear link between the user and the deployment—there is kind of a benefit to those sorts of projects anyway over just a significant industrial landscape, which gives you all sorts of problems with local communities and so on. I think also the fact that, potentially, one is costing more or taking up more than its fair share is also something that is worth taking into account, but until we have concrete feedback through the consultation, we don’t want to jump to conclusions.
Q55 James Heappey: May I ask you about whether distribution and transmission are also in your sights because it seems that their contribution to driving down bills has been pretty poor over the last couple of decades? They don’t seem to be coming under quite as much pressure as other parts of the energy market.
Andrea Leadsom: That is a very good point and it is certainly something we are very closely looking at now. We are trying, bit by bit, to introduce more competition, but we are conscious of the fact that getting a grid connection can be quite problematic and, of course, the entire grid was built for a bygone age in which multiple grid connections were not required. I think it is a potentially fruitful area and it is certainly something we are looking at closely.
Q56 Antoinette Sandbach: I am glad to hear that, Minister. When you are looking at it, I would ask you to consider the impact on rural communities. You talked about 80% of people using gas, but many in the rural communities cannot access dual fuel deals and are penalised in other ways. When you are looking at connection, will you consider the impact on rural and more mountainous communities, and even island communities?
Andrea Leadsom: Yes. It certainly forms a part of the review, both for gas and for electricity. Yes, it is a very important point.
Chair: Thank you. We are going to move on to the impact on energy efficiency.
Q57 James Heappey: As ever, discussion on energy seems to have focused predominantly on generation and supply. Could you talk us through the developments in Government policy and managing demand: stopping funding the Green Deal Finance Company; and reducing the requirement for new homes to be built to the most energy efficient standards? Is there a danger that the Government is giving up on energy efficiency?
Andrea Leadsom: That could not be further from the truth. On the green deal, the issue there, I think, is well documented. By August 2015, there were 15,000 green deal plans that had been written. That was a tiny percentage of the expected number of plans that would have been written by now—a tiny percentage; less than 10% versus 1 million individual measures through ECO since 2013. ECO has been very much more successful in energy efficiency and fuel poverty measures than the green deal was. We acted with the green deal very specifically to protect the taxpayer because what was happening was that, because the deployment was so low, the taxpayers’ overhead was going towards running a company that wasn’t generating sufficient business. That was very clearly to protect the taxpayer, so it doesn’t say anything about a commitment—or lack of—to energy efficiency. It is merely saying, “This isn’t working, let’s call it a day,” so I think there is a very clear answer to that.
In terms of smart metering, that is something that, as you will know, we want to roll out across the UK by 2020. I believe there are already 1 million homes with smart meters.
Gareth Redmond: Thereabouts.
Andrea Leadsom: Yes, around 1 million homes with smart meters installed. It is absolutely key to our policy that we get people much more closely looking at their own demand and that—over time—we are able to move to a situation where people can see, “If I switch the lights off now it will save me X number of pounds”. We really want to put people more in control over their own energy efficiency. Of course that is linked to switching and we are very keen to see much more switching going on, so that people can get on to better tariffs and keep the costs down that way. But, on pure energy efficiency, we will be bringing forward more proposals, subsequent to the spending review, on how we intend to achieve our goals.
Q58 James Heappey: If energy efficiency is not to be achieved through subsidy, it is to be achieved through incentivisation. What are your preliminary thoughts on how one might incentivise energy efficiency in both the domestic and commercial marketplace?
Andrea Leadsom: There are obviously various policy levers and we are looking at all of those. It is unfortunate timing: I cannot sit here and tell you everything we are thinking because it would run the risk of misleading people into thinking we are going down one route or another. But there are obviously policy levers other than just subsidies. You mentioned yourself that the zero-carbon homes was one regulatory means of forcing energy efficiency measures, but of course that runs counter to the fact that we desperately need more homes built, so what we are trying to do there is to get homes built, rather than putting obstacles in the way of getting homes built potentially, or at least putting costs in the way. There are various policy levers and we are evaluating all possible means—and, particularly, what works—in order to get the most out of our energy efficiency policies.
Q59 Julian Sturdy: Minister, I want to pick you up on something. You touched on the smart meter rollout by 2020. Are you confident that that will be delivered by 2020? Also, there does seem to be some confusion over the type of smart meters?
Andrea Leadsom: Yes, I am confident in the sense that it is on track. We know it is a big ask and we know that some energy companies are making faster progress than others, but the best in class are comfortably on target. So, it is more a case of trying to get the others up to that level of focus. In terms of the smart meter types, I think we need to be very robust in making sure that smart meters installed don’t make it harder to switch, for example, or indeed make it harder for people to manage their own energy efficiency, so we are very focused on that.
Q60 Julian Sturdy: Are you confident that you have that right over the type of smart metres that are being installed?
Andrea Leadsom: Yes.
Q61 Dr Poulter: There are a number of companies that have invested quite a lot of time in getting green deal accreditation. What is your view on some of the changes in policy on investor confidence on the demand side as a result of these changes? Do you think there is any impact on jobs and employment in that area?
Andrea Leadsom: Obviously all green deals that have been signed will continue. This is talking about future green deal plans as opposed to existing ones—those carry on.
In terms of the impact on the sector, our analysis is that those companies that offer this type of thing also tend to offer other products. They don’t tend to be just green deal specific. We think that the impact will be manageable. Do you want to add anything to that?
Ben Golding: Just to give a couple of figures, there are around 180 authorised green deal providers. Of those, probably about 60 or so are active or were active in offering green deal plans but, as the Minister says, over half of those focus much more widely and are not dependent on green deal finance for their core business.
Q62 Dr Poulter: So there are about 30 companies that were specifically set up, you would say, aimed at delivering green deals?
Ben Golding: Even those may well do some other things as well, but it is more central to them, probably.
Q63 Dr Poulter: On that, in terms of the future of the green deal, was there any thought given to reforming the offer of the green deal, rather than taking it completely off the table?
Andrea Leadsom: Yes. Obviously, whenever a policy decision is taken there are different options considered and so, of course, there is always the option to continue to reform or to stop spending money. In fact, where the Green Deal Finance Company is concerned, the decision was taken last December to continue to fund with taxpayers’ money just until after the election to enable a new incoming Government to take a decision on what to do next. So, yes, it certainly was considered—to reform or continue as we are.
Ben Golding: If I could just add to that, to some extent that decision is still available, so it is important to be clear that the decision taken was not to provide further investment into the Green Deal Finance Company. The company is still open for business and still collecting existing loans. The infrastructure that surrounds that and that enables the collection of the Green Deal is still there. There is nothing that prevents investment coming into either the Green Deal Finance Company or, indeed, others using the policy infrastructure.
Q64 Antoinette Sandbach: You said that you removed the zero-carbon building standard in order to ensure that more homes were built. Are you considering working towards imposing an alternative standard, or do you accept that energy inefficient homes, which may need future measures, are the likely consequence of the removal of that policy?
Andrea Leadsom: Obviously, it is highly desirable that homes are as energy efficient as possible and that is completely the case. The issue that we have, as we well know, is that not enough homes are being built, so it is essential that we build more homes. Of course, we want those to be energy efficient and we want to put in place methods by which people can choose to make their homes energy efficient, but in terms of whether you force it and run the risk of adding costs so that it adds to unaffordability or, indeed, to lack of a development coming forward, is where it is a difficult decision to enforce that.
Q65 Chair: A final question, Minister. What is going to happen to the ECO after March 2017?
Andrea Leadsom: That is obviously subject to the spending review. It has been a very successful policy and we will be making announcements on that, just as soon as we can, in line with our other policy announcements.
Chair: Thank you very much, Minister. I hope you will take the views of the Committee into consideration, and the concerns we have expressed this morning and early this afternoon, when your consultations close and when your decisions are finalised.
Our inquiry into investor confidence more widely is still accepting written evidence and I would encourage anybody interested, and those who have listened to your remarks, to send in their views on the back of that. I would add that I would hope that there will be no major announcements in the next couple of days to a week after this Committee meeting.
Is there anything else you would like to say, Minister?
Andrea Leadsom: No, but thank you very much for having me.
Chair: Thank you very much. The date and time of our next Committee meeting will be 9.30 next Tuesday morning.
Oral evidence: Investor Confidence in the UK Energy Sector, HC 542 23