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Our work on Combined Heat and Power: Reported in Hansard
House of Commons Environmental Audit Committee: 'Budget 2004 and Energy: Tenth Report of Session 2003-04' (HC490)
Record of oral evidence presented to the Environmental Audit Committee of the House of Commons on Wednesday 12 May 2004. [Witnesses included John Healey, a Member of the House and Financial Secretary.]
Q191 Gregory Barker: Minister, combined heat and power: a very, very sorry picture is emerging there. Installed capacity has risen from just under 4,000 MW in 1997 to 4,700 on the latest figures I have. What is even more worrying is that most of that growth was in the late Nineties and CHP capacity has actually declined in the last two years, although the Government has a target of 10,000 MW of electricity by 2010 generated by CHP. Not only has capacity actually declined in the last two years, but investment in further capacity has actually collapsed. Would you agree that the Government is way off beam now with its CHP target, and can you give us a clue as to what the Treasury is actually doing to rectify the collapse in investment?
John Healey: Yes. Mr Barker, I am not quite sure of the source of your data, but it may be helpful, Mr Chairman, to make sure the Committee shares the analysis that has recently been done by Cambridge Econometrics, which essentially has analysed the CHP strategy that we have in place.
Q192 Gregory Barker: DTI 2003.
John Healey: In that case, I will, if the Committee wishes, make sure that you have the details of the recent study that has been done by Cambridge Econometrics. This is an analysis of the CHP strategy that we have in place. It suggests that, as things stand, it will deliver savings of 8,100 MW per year by 2010. That does not take into account the introduction of the EU Emissions Trading Scheme in 2005, which is likely to add another 400 MW. So the assessment of the capacity to deliver of the strategy we have in place already is actually around double the figures that you suggest there, Mr Barker.
Q193 Gregory Barker: You are saying you will easily surpass the 10,000 MW?
John Healey: No. There is a difference still between 10,000 and 8,500.
Q194 Gregory Barker: You are going to reach 8,500, or an additional 8,500? We already have something around 4,000.
John Healey: The target, as you rightly say, that the Government has set is to see through CHP a saving of 10,000 MW per year by 2010. In terms of what we already have in place under the CHP strategy, if you take a mid point of the range, because there is obviously a degree of uncertainty in this sort of modelling, Cambridge Econometrics suggest that we have already in place elements within the strategy that would deliver just over 8,000 MW, 8,100 MW. If you add then something just under 500, round about 400 MW, that they estimate will come from the EU Emissions Trading Scheme, we still have a gap potentially as we look towards 2010 in hitting that CHP target, but it is not a gap of around 6,000 MW as your figures suggest.
Q195 Gregory Barker: So you are still under-shooting. Just so we are clear on the figures, because my figures only go to 2002, the current situation is that it has not changed; we are still at around 4,700 MW of current capacity in CHP. Is that correct?
John Healey: My principal concern in this field is whether or not we have in place the full range of what we need.
Q196 Gregory Barker: Strategies are possibilities.
John Healey: No, they are not, because what has been assessed is what is already committed to and is in place as part of the CHP strategy. This is not what notionally we might achieve if we did other things, because it does not take into account the introduction of new measures that we could bring in, some of which we know will come in, such as the EU ETS in 2005. All I am saying is that the picture may not be as bleak as your figures suggest, and if I can share the latest work with the Committee, the Committee can make a judgment based on the full range of information.
Q197 Gregory Barker: My question was: am I correct in assuming that the current capacity is 4,700?
Mr O'Sullivan: Can I just add to that? My understanding is that it has increased slightly. Obviously, when we provide the study, that gives the figures. Part of that is to do with some of the fiscal incentives we already have in place for combined heat and power that are starting to come through.
Q198 Gregory Barker: We are still less than halfway to the target as things stand, with existing, in-situ capacity.
Mr O'Sullivan: I think there has been an improvement over 2002, but we can provide the figures in the study.
Q199 Gregory Barker: But it is a small increment, ie probably around 5,000.
John Healey: We will provide the figures, but of course, your interest, like ours, is in 2010 and whether we will hit the target. We are sitting here in the early months of 2004.
Q200 Gregory Barker: Moving on to the issue of strategies, will you support the amendment to the Energy Bill exempting CHP from the Renewables Obligation, as indeed Powergen, Innogy, Scottish and Southern Energy all support?
John Healey: No. The Government's approach to this will be to ask the Commons to consider removing the amendment that the Lords made on this during the passage of the Energy Bill through the upper House.
Q201 Gregory Barker: Why?
John Healey: The main concern is this: that the amendment that was passed would take CHP out of the base of the Renewables Obligation. It would therefore give CHP an advantage over other forms of generation. It would reduce the amount of renewables capacity delivered by the Renewables Obligation, but we will revisit this issue as part of the review that we already have in train and planned of the Renewables Obligation and the operation of that in 2005-06.
Q202 Gregory Barker: Given that your strategy, by your own admission, is not going to meet the 10,000 target, would it not make sense to be flexible at this point? The figures that we have been supplied with - and perhaps you would comment on them - show that the cost of RO exemption would be in the region of £66 million. If renewables meet their target, 2.5 million tonnes of carbon will be saved. If CHP meets its target up to 1.5 million tonnes of carbon will be saved. That is 1.5 million tonnes of carbon for just £66 million. Perhaps you would like to comment on the economics of it, which seem compelling.
John Healey: Mr O'Sullivan may want to comment on the figures. I understand the case that you and others make from the narrow perspective of CHP. As I am trying to explain, the Government's approach to this takes into account the wider operation and future of the Renewables Obligation and the wider concerns about the energy market. It is not solely focused on CHP.
Q203 Mr Francois: You mentioned, Minister, a report by Cambridge Econometrics that basically says you are going to hit the target.
John Healey: No. I think I made that clear. The analysis by Cambridge Econometrics, if you take the mid range of the estimates they make, suggests that we have in the strategy already in place, the measures we have already confirmed or have put in place, plus the introduction in 2005 of the EU ETS, the measures that will deliver 8,500 MW. That is still short of the 10,000 target for 2010.
Q204 Mr Francois: So they are suggesting that you are pretty close to the target but will just undershoot.
John Healey: That is a better description.
Q205 Mr Francois: Who commissioned that report?
John Healey: Government.
Q206 Mr Francois: So you paid for a report that says you are just about going to deliver but not quite.
John Healey: Yes, but we went to Cambridge Econometrics because they are a respected, expert and independent academic outfit, and I do not know if by that you are suggesting that somehow they are compromised or have not done an objective job, because I think that is quite a serious suggestion to make.
Q207 Mr Francois: No, I am not suggesting that at all.
John Healey: We commissioned it because we are interested in an external, independent, academic assessment of whether or not we are on track and, if we are not, how far short we may be for the 2010 target.
Q208 Mr Francois: Minister, I am sure they are a fine and upstanding organisation, but it is important to have on the record who paid for the report. Part of the reason for that is because you have referred to the Renewables Obligation itself, ten per cent of our energy generated from renewables by 2010. This Committee looked into that whole issue in considerable detail last year, and we produced a report which was then debated in a fairly lively debate on the floor of the House. The Committee concluded that you are nowhere near it, and do not have a strategy for getting anywhere near it. So there are a number of examples where the Government keeps coming up with these very ambitious targets, that are always going to be achieved or nearly achieved just a few years away, yet when you look at them in detail, you find that actually, there is not really a strategy in place. Why do you keep doing this?
John Healey: I do not accept the contention that there is not a strategy in place. Once your fellow Members of the Committee have a chance to study the latest analysis by Cambridge Econometrics, you may take a judgment on how robust that is, but we are dealing, as this Committee will understand better than anyone else in Parliament, with very long-term challenges with climate change. That is why the targets and the time frames that we have set, in many ways, in historical context, quite unusual for any Government, given the sort of imperatives of the political cycle, are in this case set for 2010. As this Committee knows, the Energy White Paper also set out a trajectory that will take us through to 2020 and 2050, in part, I have to say, in the belief that we need to, and the hope that we can build some sort of cross-party consensus behind the imperative to act on this.
Q209 Mr Francois: It is a cross-party Committee that concluded a year ago that you were absolutely nowhere near it, and there was a cross-party consensus in this Committee on that. How confident are you that you will make up that gap between 8,100 and 10,000 specifically on CHP?
John Healey: I am pretty clear that at some point between now and then we have to do so. To be perfectly blunt, you ask me whether I am confident, sitting here on 12 May 2004, that we will make up that gap, and because I do not have in my back pocket to announce today the specific additional measures which would close that gap, I cannot in all honesty say to you "Of course I am confident." I could be confident more generally, though, that this will remain an important target for government, and as the evidence and experience demonstrates, if we are falling short of the target that we have set, and we need to bring in extra measures in order to close that gap, we will do so. I can give you that degree of assurance.
Mr Francois: It could not be clearer, Minister. Thank you very much.