Oral evidence: Sustainability and HM Treasury, HC 181Tuesday 5 July 2016
Oral evidence, 5 July 2016.
Witnesses
Matthew Knight, Business Development Director, Siemens, and Barbara Vest, Director of Generation, Energy UK, gave evidence.
Chair
It is a pleasure to welcome here today Matthew Knight, Business Development Director from Siemens—you are very welcome here—and Barbara Vest, Director of Generation, Energy UK. We are going to begin with a question from Zac.
Zac Goldsmith
Thank you, Chair, and thank you both very much for coming along today. The Treasury deals with lots of different competing interest groups spanning the whole economy. Can you just summarise the business case for investing in the sector that you are here to discuss today?
Barbara Vest
Thank you, and good morning, everyone. The business case is quite simple. We need energy. We have a fleet of generation that is now reaching its end of life. We have a mandate from Government that says it wants coal off the system. Therefore, we need to ensure that there are secure supplies for our public and we are open for business, “Please come here and invest”.
Matthew Knight
I have very little to add to that. In every country energy policy struggles because the nature of energy issues is the investments are long term, they are complicated things, they are very interrelated, and they need a long-term, stable, technocratic approach. Politics is not like that. Politics is short term, simplistic, populist and usually wrong. In any country, the business model has to take account of politics. The UK has a lot of good things going for it: the Climate Change Act, the rule of law, proximity to the City, and all of those other things. The UK should be way out in front in terms of a place to invest in energy. Unfortunately, for a whole host of reasons, we end up being average because we shoot ourselves in the foot from time to time with some of the politics around it.
Chair
Too much politics.
Zac Goldsmith
Yes, that is a very good point. I was going to take you up on that. The business case you say has to take into account the reality of politics, but the same is true the other way round. I suppose the question is: do you believe today’s Treasury understands and accepts the business case that you have just made?
Matthew Knight
There are many talented people in the Treasury and many of them do understand. The perception of the Treasury has a big impact on business confidence. I met with a group of Treasury officials just a couple of weeks ago. They asked me, “What should the Treasury do differently?” I said, “Very little, but just smile while you are doing it”. Paraphrasing what Lord Deben was saying earlier, the perception that the Treasury is there grumbling about decisions taken, looking to claw back money at the first opportunity, really undermines a policy that has been decided on. My understanding of Government is that before the policy got announced the Treasury was signed up to it. There is a role for spending Departments and the Treasury to go on repeating, “Yes, we meant that”.
Zac Goldsmith
If you could try to speak for the sector as a whole—I know you cannot completely do that with authenticity—the perception of hostility from the Treasury, which is there, there is no doubt, you are saying it is not a consequence of policy decisions and positions the Treasury has taken, it is more about the body language? Is that right?
Matthew Knight
I think it is a combination of things. Body language is important.
Chair
Whose body language?
Matthew Knight
Parliament and Government and various commentators. The nature of decisions made in Departments and the Treasury is that the discussion tends to go on in private. However, very publicly Members of the House of Commons and House of Lords, who do not know much about the detail, love to make populist statements in the newspapers.
Zac Goldsmith
Heaven forbid. That does not happen in Parliament.
Matthew Knight
The industry can hear you doing that. In some ways, we ought to have a little more public discussion from the experts in the Department about policy and a little more engagement with industry about policy. We could do with turning the volume down on the chatter from the politically interested but uninformed other areas.
Zac Goldsmith
I fully take on board what you have just said and I do not think anyone would disagree with you. But if you move away from the body language bit and look at the actual policies and actual positions taken by the Treasury, do you think that, collectively, they make the case that the Treasury does understand the importance of and is on board with the decarbonisation agenda? Forget the language and the body language for the moment and look at the actual policies.
Matthew Knight
Let us talk about some specific examples that have perhaps been unfortunate. The Climate Change Levy and the carbon price floor are effectively taxes and viewed by the Treasury as taxes. Their intent was to encourage investment in lower carbon things and discourage investment in higher carbon things, but the nature of the annual budgeting cycle, and the Chancellor or the Treasury’s decision to freeze or to change things, undermines the investment message that was originally behind them. I don’t know whether that is a lack of understanding. I think that may just be a pragmatic political decision given a wider context, but it is unhelpful to investment. There are a number of things that have been created over the years to encourage investment that, for various reasons, are diminished because of the annual budgeting cycle, not least things like the Green Deal and various home efficiency things that are locked in this continuous cycle of, “Are we going to have any funding next year?” They spend six months ramping up to start delivering something and then six months worrying about whether they are going to continue. My colleagues in Germany seem to find policies like that are a bit longer lived. Once they are decided upon, they are given a few years to run rather than perpetually reviewed at every budget.
Barbara Vest
I would add as well that our projects take an awful long time from just thinking about them, getting the funding, right through to delivery. Not really understanding the detail of the Levy Control Framework beyond 2020 is really unhelpful. We have people who are keen to invest, but they need more solid signals about what they are investing in and how long those policies are going to be there One of the things that we did last year was that we undertook a study among many of our members. We extended it to the manufacturers, to distribution networks, and we said, “Can you tell us what the big asks are from within this industry?” One of the big messages was about the changing energy mix, the fact that things are moving from the big transmission down into distributed generation, and so on. All of this needs to be thought through and an investment programme developed for these industries, some of which are very fleet of foot and can move quicker. I know you asked about demand side initiatives. We need a bit more of a joined-up approach to things and what we need is Treasury being open to discussions, DECC being open to discussions, but also including other Departments, like Transport, Housing and so on, so that we can understand where they are all going and what the big vision is. If we get that big vision, then we all know what we are working towards and what we need in place in order to see delivery against those targets.
John Mc Nally
Thank you very much for your honesty there. I think it is becoming quite clear that the uncertainty of policy in this country is harming a lot of investment, which takes me on to your own business here. It was recently reported you put future investment in UK wind power on hold following the UK’s decision to leave the EU. What could the Treasury do to reassure Siemens, in particular, that it is worthwhile to continue investing in the UK?
Matthew Knight
First, the statements that were made by our UK chief executive, Jürgen Maier, were somewhat taken out of context and were actually made before the vote and have been recycled. The point that he was trying to make is we now have a period of uncertainty post the referendum. Uncertainty makes it difficult for business to invest. Our existing investments remain. We remain committed to the UK. It is just that we will need to review potential opportunities to make further investments over the next years as we get more clarity. In terms of what the Treasury could do specifically, I think it is back to the point that was made earlier by the first panel. Treasury has to decide is it involved in the detail of a policy, in which case it has to be shoulder to shoulder with the spending Department and engaged in that. Or if it is at a higher level it has to be genuinely hands off but supportive with, “Here is the money for that”. It is about communication, the Treasury being seen to be supportive and going on to be seen to be supportive. Policy tends to be announced and there it is, and business worries if we do not hear reassurances over a period of time.
John Mc Nally
Carbon capture and storage and PFI were a phenomenal example of a huge investment that was just taken away from them.
Matthew Knight
Yes. Mostly confidence is not made, or sometimes it can be damaged by a single announcement or a single speech. We have certainly seen examples of that. I think confidence is made by consistency and a sense of a clear direction. Ideally, that should build over many years. We have had 26 years now since privatisation during which time the policy of DECC and its predecessors—the policy on, say, electricity—has been to have a market. It has not been to have a market that achieves something in particular. Now, finally, people are recognising that there is no natural market in electricity. It is a made-up thing. It is a set of levers and balances that are created by Government to try to deliver an outcome and the outcome was always kept mysterious. The future for energy policy is to be clear about the outcome and say, “You know what, we will go on pulling the levers and changing things because stuff will happen, but here is the direction of travel”. The industry can help Government by reaching a good consensus view on at least 80% of where we are going and we can argue about the other 20%, rather than leaving it all completely up for grabs.
Barbara Vest
We saw the November 2015 Amber Rudd reset speech as helpful. It gave some direction there. We are still waiting for some of the consultations that we were promised from that to be delivered, but there have been one or two political things in the way that have held up business. That is good. That is something that we can use to move on from and to help the industry with where we are going.
Chair
Can I just come in with a supplementary? Did the CCS decision influence the Siemens’ announcement around the suspension of future investment or to pause it? Also, while we have been meeting, the Governor of the Bank of England has said the risks around Brexit are beginning to crystallise and he has reduced the capital requirements for banks in order to get them to lend to houses and business. What do you think the future holds for your investment portfolio in the UK?
Matthew Knight
We are conflating two separate things there. Siemens has not announced a suspension of investment. We have just reflected; as all other businesses are at the moment, suddenly we are faced with a different set of unanswered questions and that is a different environment for businesses to invest in all kinds of things. On the CCS point, I have some sympathy with the decision. The issue is about the speed with which the decision was made and the lack of notice or debate. My perception, and the perception of many in the industry, is it was a decision that was taken more on financial grounds than as an energy policy thing. In the absence of anything to explain otherwise, our collective belief is that DECC had a finite budget. It had to cut something and the thing that got cut was CCS.
Chair
Why did you say you were sympathetic to that decision?
Matthew Knight
As was said earlier, I think CCS is essential but it is a longer game. Where we had got to over a long period of time was a competition that was focused on fitting CCS to power stations, the largest point source of carbon dioxide. The technology was saying, “We are going to decarbonise something. Where is the biggest source of carbon?” rather than saying, “We are trying to decarbonise the entire economy. Which are the difficult bits to get at that we really need to fix CCS to?” That had drifted over a period of time. I think a reframing of the policy was probably okay but could have been explained, and the suddenness of it was the bit that, if anything, has damaged confidence.
Chair
Are you saying it did not affect your decision and it was the Brexit decision that has affected it?
Matthew Knight
Yes.
Chair
Brexit is the decision that has affected your pause?
Matthew Knight
Yes. If we had not had the Brexit referendum, my views on investor confidence across energy at the moment would be that we were moving back up again. We had bumped along the bottom for a while, but I think we have seen some clear explanation of policy from the DECC Ministers and, to be fair, we have seen Treasury and the Chancellor nod their support to that. I think confidence was starting to rebuild. Brexit is now a different pile of uncertainty that has dropped not just into energy but everything else we do.
Peter Aldous
I want to explore this. DECC says that it works collaboratively with other Departments. Would you agree with that? From the comment that Barbara Vest made on the Secretary of State’s reset speech last year, you probably do feel that there is a co-ordination there at the present time.
Barbara Vest
We deal with lots and lots of different Departments and one of the things that we think was positive was the fact that Amber Rudd and Andrea Leadsom came from a Treasury role into DECC. Therefore, there has to be that joined-up thinking there. That is helpful, but we think that there could be other things to improve on. As I say, if we have, for example, a long-term plan towards electrification, then we need to understand what the calls on that would be from a heat and from an electric vehicle perspective. We need some co-operation there across transport, health and so on, as well.
Peter Aldous
Do you feel perhaps that the relationship between the Treasury and DECC is more driven on the personalities and how Ministers get on rather than having a proper system, a proper relationship institutionally laid down?
Barbara Vest
It is difficult, not being in the Department ourselves, to say what the personalities involved would be, but I would hope that there is a lot of co-operation. We are certainly speaking to Ministers from either Department on exactly the same issues and hearing some similar views.
Matthew Knight
To try to answer that, by observation the relationship between Treasury and DECC has changed with the move from the coalition to a majority Conservative Government. Several things have happened there, but there has been a change of Ministers. Both a benefit and a disadvantage of the coalition was—again, the perception from outside, I don’t know what the reality is—the perception that DECC was regarded as a Liberal Democrat Department and the Treasury a Conservative Department and, therefore, there was a challenge between the two, whereas now it is more harmonious. On the other hand, the need to get policy decisions through the quad under the coalition meant that any announcement for any Government Department anywhere had at least a second coat of looking at before it got made. We have seen a new ministerial team come into DECC, go up a steep learning curve, have to make some announcements on things for various reasons at an early stage, and that spooked investors because the early messages were all negative. They were all what we are going to stop doing. We are now starting to see, “Here is what we are positively going to do” and that is becoming more reassuring.
Peter Aldous
The Aldersgate Group—I am a patron of that organisation—has described the Treasury’s role as being somewhat opaque. Is that something you would agree with?
Matthew Knight
I think, if you are not an insider, yes, it is opaque, but then so is politics. I am lucky enough that I get to spend perhaps half of my time in some way engaged in understanding energy policy and what it means.
Peter Aldous
From an investor’s perspective, is it wrong that you have to be an insider?
Matthew Knight
What I was going to say is I am here representing a much wider supply chain. Our sub-suppliers, and other people involved in the energy industry, cannot afford the investment, the time and effort of getting intimately acquainted with politics and how it works. Unfortunately, most of the supply chain relies on what it reads in the newspapers or turns up at the occasional seminar. There is a need for Government to try to communicate their decisions as well as possible, knowing that they will get twisted by the media, knowing that people do not have the time to hear. There is more of a role to try to communicate the thinking behind decisions rather than just—
Peter Aldous
I think it was the London School of Economics that said there is a need for greater coherence. You would agree with that?
Matthew Knight
Yes.
Chair
Thank you. I wonder if we can go back to the spending review in 2015, which contained a number of decisions that impacted your sector; in particular, the decision that we have already touched on, carbon capture and storage, the Levy Control Framework, the home efficiency scheme to replace the energy company obligation, funding for the Renewable Heat Incentive increasing by not as much as previously planned, DECC’s spending cut that you have already mentioned, and so on. Which of those decisions has had the most significant impact on your business and why, either positive or negative?
Matthew Knight
For me, the cumulative effect is more than any one of those. The perception that developed among many in the industry was that, in some way, the Government had fundamentally changed policy. Maybe that was overdone. Speaking personally—and I know I have discussed this with many others in the industry—one that you did not mention on that list had the greater impact. That was the ending of zero carbon homes. The reason that was significant is because it was a policy that I am sure everybody would agree is completely sensible. It was a policy that I think was brought in six years ago, which various elements of the supply chain had started building the capacity to offsite fabrication and other things. Then six months before it finally came in, having a six-year lead-in time, it got scrapped overnight in a bonfire of regulation. Some regulation is good regulation. I want to reassure you that regulations can be very helpful. A regulation that is widely agreed, everybody is expecting and has had a six-year lead-in, to take that away was probably more damaging than any of the others on the list that you just mentioned.
Chair
We had a lot on that in the last session.
Matthew Knight
It was the combination of those things. It highlights the fact that—
Chair
So the combination is negative?
Matthew Knight
The combination is negative, yes, but it also highlighted that energy is complicated. We know it is complicated; we live in that world. A new Minister turns up in a role and has to go up a learning curve. The best Ministers will take six months to do that. Some never bother. We have to live with that. We have to help Ministers and Government Departments to understand the complexities and the interrelatedness of it and try to help steer a steady ship. There is a role for us in the industry there to be clear about where we agree. If the Solar Trade Association and the Nuclear Industry Association can agree with Energy UK that here is an 80% agreement on the energy mix for 2030, we should be saying that because then it gives less scope for it all to be vague and cloudy. I think it is incumbent on us to be telling you what the future is as much as waiting to hear what politicians will say to us.
Barbara Vest
One of the most interesting things that we have done recently is to invite Ministers in to meet a lot of our members all together. They are hearing a number of different business models, different views being articulated, and what we have had in feedback from those sessions is, “Do you know what, I have met you before and I have met you before, but not all together, and I am hearing different views”. You all have your own drum to beat and your own business model that you want to promote, but when we get a forum where we can share that, that is much better. Perhaps we need to do more of that more generally, not necessarily just get one Minister or one Department in but to get quite a few of them in all together and get the right people in front of them to share those views.
Chair
Can I press you on the CCS stuff? Was that communicated with you in any way or your industry before it was announced?
Barbara Vest
No.
Chair
It was a complete bolt from the blue?
Barbara Vest
In fact, I was at a meeting in the House and Shell was there. They heard it when we heard it and they are part of the process.
Chair
What impact do you think it is going to have on CCS in the UK?
Barbara Vest
What impact? Well, it has been devastating so far. We did expect some delivery. I think we can only say that that is going to go backwards, even though we are now getting support from the Committee on Climate Change to say, “We see this as a fundamental part of the plan going forward. We need to do more work around that”.
Chair
What about the decision not to extend the Levy Control Framework in the spending review? What impact will that have on investment in low carbon technologies?
Barbara Vest
Uncertainty. It is not very good for the industry.
Chair
There is a policy cliff edge after 2020, which you did mention I think, in a previous—
Barbara Vest
Yes. We need to see a more forward view, a more long-term and stable view.
Chair
Did you say that in your meeting with Ministers?
Barbara Vest
Oh, yes.
Chair
Reassuring.
Barbara Vest
Our mantra chant.
Chair
We will wait and see if they have listened to you when they make their next set of decisions, if there are indeed the same Ministers in post.
Barbara Vest
Yes.
Chair
Mr Knight, in the spending review, the Government announced it would increase R&D money for new renewable technologies. When do you think you will see the benefit of this decision and what do you think of that decision?
Matthew Knight
It is always welcome. I think about half of that money is focused particularly on small modular reactors, as I understand it, and other bits on elements of the smart grid, which is part of the portfolio that Siemens does. Can I step back one level and say the transition that our energy system needs to make is unlike many other things that countries have faced before? The need to decarbonise and the need to replace old power stations, there is a finite amount of time to do both of those things. The climate science is some way ahead of the global political consensus, and the political consensus is some way ahead of the action, and the action takes many, many years. We know that we need to decarbonise our economy by the middle of the century. The sets of levers that we are going to use to do that will take maybe two decades to deploy. Let us think of decarbonising domestic heat. We have 23.5 million gas boilers out there. We either have to replace those with something electric, and that means a peak of five times the electricity demand today and that is a huge spend, or we have to put a different gas in the grid, and hydrogen would be the obvious thing there, or we have to try something else. We seem to be paralysed in making a decision between those into not doing anything. Once we have decided which one of those it will still take us 20 years to roll it out. My encouragement is, yes, we need to be researching new technologies for the future, but just at the moment we need to be deploying some stuff. We need to be taking what we already know about now—I am a project manager by background—and we need to plan to throw one away. The nature of politics is no one wants to be accused of having made a wrong decision, but just at this moment we should spend the next five years as a country trying several things because the likely answer is going to be a combination of all of them. We can go on doing PowerPoints and studies for as long as we like, but on the gas one let us try converting the gas grid in Leeds to run on hydrogen. It will take five years to do that but, at the end of it, we will know how practical it is or it is not. We will know how much it costs. If that is the answer for the rest of the country, then we can roll it out over the next 20. Just at the moment we are on the cusp of so many things. Yes, more money for research is great and we also need to deploy some things as well.
Barbara Vest
Can I add on that point as well that is absolutely fundamental going forward? One of the things that we are positive about is the fact that the National Infrastructure Commission has been established. What we would like to see is some sort of taskforce established below that, whereby the Departments can all be represented but industry experts could also be nominated for that commission to go to from time to time, when it is carrying out its various studies, in order to say, “Look, I have this problem. Can you give us some variations on a theme to what you think the solution might be?” If there were industry experts involved in that, we would have some transparency about the dialogue, the direction of travel, and so on. We are trying to create a terms of reference for that group and a business case, which we will be publishing very shortly.
Matthew Knight
Can I build on that by saying what investors need is a consensus view? You can make a consensus view by creating a new body that brings everything together or just by getting the existing bodies to talk to each other. I would support that and the terms of references, but the benefit comes from including DECC, Ofgem, Treasury and academics and industry, and people like National Grid, collectively, to arrive at a clear, “This is our best understanding of the way we are going, so let us all go in that direction”. The National Infrastructure Commission can help with that if it is supporting that. If it is just another voice going in a different direction, it does not help.
Chair
To be continued. Thank you all very much indeed. We are going to move to our third panel. Examination of Witnesses
Witnesses
Estelle Brachlianoff, Senior Executive, Vice-President UK and Ireland, Veolia, Jerry McLaughlin, Director, Economics and Public Affairs, Mineral Products Association, and Dan Cooke, Director of Communications and External Affairs, Viridor, and Chairman of Communications Committee, Chartered Institution of Wastes Management, gave evidence.
Chair
Can I welcome our third panel? We have Estelle Brachlianoff from Veolia—thank you for joining us today—Jerry McLaughlin from the Mineral Products Association, and Dan Cooke from Viridor and the Chartered Institution of Wastes Management. Thank you for being with us here this morning. We are going to start with our first question from Kerry.
Kerry McCarthy
Obviously, the Treasury has a significant role to play in terms of the landfill tax, but that only gets us so far in supporting the waste and recycling centre. Some people would argue that it has got to the limit of what it can do. What other mechanisms do you think the Treasury could use? Do you think it gets the importance of supporting the waste and recycling sector? That is quite a lot for an opening question.
Dan Cooke
If I could have a go at that then, credit where credit is due: the landfill tax was the biggest single driver that has driven recycling and greater resource efficiency in our sector and across the UK over the last 10 years plus, and it has worked very well. As you say, it has probably reached a point where we need further clarity, a further review of what next for the landfill tax. Indeed, we are seeing some obscure behaviour that was not forecast in terms of the export of non-recyclable materials now, because the tax acts as a driver and we did not build enough infrastructure to deal with that in the UK. We are paying other countries to create jobs, investment and their own energy, when we could do that ourselves. Other things—big picture—that Treasury could do at the moment, in terms of drivers, is they could review extended producer responsibility as probably the biggest single idea and step forward that could be taken, creating a direct connection between those who produce waste, as in the packaging industry, other industry, and so on, and our sector, the sector that better manages it. We could help them recycle more and get much greater resource efficiency. One other quick thing that they could look at is the idea of working at scale, economies of scale, resource networks, looking at how they can encourage planning for waste infrastructure at a city regional scale to enable infrastructure to be delivered, not only for local authorities but also businesses who need the essential service and could do much better in terms of resource productivity.
Estelle Brachlianoff
I would add to that first to say credit to the landfill tax. Listening to the previous panel, it is to the credit of this country to have been able to stick to the plan for, what, 15 years or so? Hence all the investment of companies—like mine and yours and many others—to invest in alternatives to landfill in this country. I think it is a great example of success of policies in general terms. I wanted to emphasise that again because I think it is important. It goes with the importance of certainty again. Investment goes with the certainty of the direction of travel and knowing what the Government wants to achieve as an outcome. In terms of recycling as much as anything else, the question is: beyond just achieving in 2020 50% recycling is that really it or is there anything else? We have commissioned a report with Imperial College that says the circular economy could create 175,000 jobs in this country. I think it is a £19 billion a year addition to the GDP, so there is a great potential for getting economic growth and jobs here in this country that goes with recycling and a lot of other stuff. So, is it that? One of the tools that the Treasury can use to drive this small circular economy is, instead of just putting all the burden of more recycling to, say, the local authorities, which are facing austerity measures, to put some part of the burden—let us put it that way, which is a potential as well as a burden—to the producers and manufacturers. Typically, VAT reduction for those who produce products that have some part of recycling, as opposed to virgin material, would be a great help to drive the manufacturing sector in this country towards more circular, which again creates jobs.
Kerry McCarthy
Do you have any indication that the Treasury and/or Defra are interested in pushing forward with the circular economy? Scotland has already come up with their national implementation plan or whatever you want to call it. We have not seen that. Certainly, I have heard the criticism from many quarters that we do not have anything resembling a joined-up waste strategy coming from the UK Government. Do you think they realise the economic potential or do they just see this as unnecessary interference with the way things progress?
Estelle Brachlianoff
My personal opinion is we are probably somewhere in the middle at the moment. The potential is here—I think a lot of people realise that—but there is this common idea usually that we cannot afford it, as if it was either you are green or it is good for the economy but it cannot be both. We have lots of solutions that can be good for both, creating jobs and being good for the UK economy that we can afford. Again, the landfill tax is a good example in some ways. That is the first comment. I would say, in terms of the more negative elements, the absence of a waste strategy in the Defra five-year plan is something that has worried the industry quite a lot. It is a question mark more than anything else, probably.
Kerry McCarthy
There is huge potential but it needs help?
Estelle Brachlianoff
But still to be released.
Jerry McLaughlin
From our perspective, there has been a lot more progress. We are in the aggregates business and about 30% of aggregates supply is from recycled sources. Most of the material that can be used in the sector is peaking now in terms of the recycle availability. The landfill tax has been a significant element of that, but there have been a range of other incentives as well, notably awareness campaigns about the use of these materials, what they can do and what they cannot do. One of the problems we have had with the Treasury approach is that there is no real assessment of the broader issue. There is a tax called the aggregates levy. There are various explanations for it. One is to encourage recycling, but the recycling had already improved by the time the tax came in. When we were having discussions years ago with the Treasury about the aggregates levy, it was not in any holistic sense. It was just on the basis, “We want to introduce another environmental tax. There are a couple of options. Either we do it on pesticides or we do it on aggregates”. It was about the technicalities rather than what we want to do. There is an awful lot one can do without financial measures. Certainly, as I say, in our sector, it has been very successful in terms of maximising the extent. Along with Holland, our market is three times higher in terms of recycling than the average in Europe. It can be done.
Dan Cooke
Can I just add one point to that question? In terms of engagement with Treasury and/or other Government Departments, again credit where it is due: Defra has been talking to the sector about what big ideas or big policy areas the current Government could look at to take things further forward. We have identified extended producer responsibility, further resourcing to address waste crime, for example, and looking at greater consistency in terms of collection systems, greater consistency in working at scale, delivering economies of scale. Is there a connection between those ideas and Treasury? That is far less clear. Defra has encouraged the sector to step forward with ideas for progress and how we can deliver greater resource productivity, greater recycling levels and so on but how far does that dialogue go into Defra? As a sector, we tend to talk to Defra and, indeed, to try to engage with BIS, DECC and others, but it is less clear in terms of direct engagement and, therefore, strategic conversations with Treasury.
Estelle Brachlianoff
Shall I add to that EU comment? Lots of people were hopeful or lobbying or waiting for the EU package about the circular economy, which obviously now will not be the next step for this country. This country will have a specific ambition to be set, so again the question mark is still probably what type of outcome we want to achieve. I would add to that it is probably something about more recycling in an affordable way. That makes business sense, as well as probably a lot more energy from waste plants in some way as a way to produce energy within the energy mix. That is why Defra and DECC working together can be very helpful.
Jo Churchill
I could not agree with you more on that point because, if you add it into things, like public service villages, we should be heating our swimming pools and things off that type of environment but it needs structural planning and an ability to have that interconnectivity. To Estelle mainly, you and a number of local authorities have highlighted the challenge of driving recycling in the context of tight spending settlements, which we certainly know are there. What could the Treasury do to support increases in recycling while maintaining its overarching approach to spending, so being fiscally aware but being encouraging?
Estelle Brachlianoff
Before answering your question, as everybody knows, the reality is tough for local authorities. We know that there are austerity measures on one side, which has the conclusion directly for a lot of them to charge for green waste collection, which was free before. A lot of local authorities have gone through this route. A lot of others have gone through suppressing the specific service of collecting separately food waste, which then ends up being more difficult to achieve better recycling rates. This is typically what we have seen in a lot of places around this country. Again, there is probably a lot to do not only with local authorities to achieve higher recycling rates. That was the point I was trying to make earlier on. If you want to achieve, say, a higher recycling rate in plastics, it is not only the way of collecting more plastic, it is as well the fact of ensuring that in the end all the plastic that is collected in this country finds a usage in another loop of production and manufacturing in this country. Hence an idea of—again, trying to help Treasury—the manufacturing of goods to be manufactured with some recyclable materials in because now it is not technically an issue anymore. Virgin material has the same characteristics as a lot of recyclable materials, like the example you gave for aggregates. There is a lot to do on the two parts of the value chain, from the collection from inhabitants and the local authority through to what we do with it eventually. At the moment, we still have—if I remember the figures well—half of the paper and plastic that is recycled shipped abroad because there is not enough manufacturing capacity for that in the UK at the moment. There is an element of reassuring employment and jobs by trying to drive higher recycling rates in the production cycle again. A VAT reduction for those who have a certain percentage of recyclables that goes into their production as opposed to virgin material would be of great help.
Dan Cooke
Viridor works with over 100 local authorities and, of course, CIWM represents 6,500 members, a great proportion of which are local authority practitioners. Some of the ideas, in terms of practical measures that could be taken, I would agree with; green procurement standards, for example, clear targets. The Welsh Government are showing very clear leadership in terms of not only clear targets for local authorities, which are staged so as to be achievable, but also transition funding. Obviously, the funding of local authorities and the methods of funding for local authorities to ensure that adequate money can be ring-fenced to deliver further progress in recycling, greater energy recovery and so on and, therefore, landfill diversion and greater productivity are some simple things. Again, I come back to, on the bigger scale, this idea of planning and encouraging local authorities to work at regional scale. Rather than an individual local authority, if you can plan for infrastructure along with those targets and transition funding mechanisms, which we have heard described, that is how further progress can be made in terms of raising not only recycling levels but also, as importantly, recovery levels and then the efficiency of that recovery. That is where combined heat and power schemes come in to use the non-recyclable, not only as fuel but to use it efficiently and more efficiently as we go forward.
Jo Churchill
You are basically arguing for economies of scale with a little bit of underpinning planning to it. Devolution may offer you that advantage?
Dan Cooke
Yes, that is one way as well as some of those individual mechanisms like green procurement rules, for example, that will drive behaviours in terms of finding outlets for the materials and using them themselves, so driving greater circularity within not only local authorities but the regions and economies that they represent.
Chair
You talked about the achievement of the 50% recycling rate. Obviously, last year it dipped by 0.7%. Could you say what you think the effect of the withdrawal of support for seven PFI projects in 2010 had on the recycling rate, those projects in Cheshire, Coventry and Warwickshire, Gloucestershire, Leicestershire, Milton Keynes, north London and south London? The Environmental Services Association, which you have just mentioned, Mr Cooke, said that that is the way that you deliver large-scale waste facilities. Since PPP/PFI is now closed, new merchant facilities are unlikely to be delivered without some form of intervention. Conditions for investment are tough and planning and finance is not mapped together. So, if you can look backwards but also forwards, Ms Brachlianoff?
Estelle Brachlianoff
Just a few facts here. We still have between 2 million and 3 million tonnes of waste that is shipped to mainland Europe, because it cannot find a way to produce energy here. De facto, I would call it a fuel that this country does not use, which I think is a pity because there is an opportunity missed here. I see it potentially as a valuable fuel. There is a lot more infrastructure to be built. Not to a massive scale, I would say, but still between 2 million and 3 million tonnes. The signals from Treasury to make it happen, you can imagine the various types of things. Traditionally, you had the PFI credit, which is directly in money, but you can have a varied spectrum through to various incentives. The energy subject that was covered by the previous committee is exactly what we are talking about. I could tell you about the ROC as well as the TRIADs. All the various mechanisms to produce energy in a less carbon intensive way can be of some help. We can have some projects we can fly provided that there is a clear direction of travel in terms of green energy incentives that can help waste to energy plants—including management—to be built. The spending review of spring 2015 was very damaging in terms of all the green energy, even from a west perspective, because it gave the impression that we cannot build on some certainty to invest private money into those types of alternatives. It is more like everybody is waiting to see if the next few months or years will prove to be somewhere more consistent over the long term. Again, it is not only about PFI credit. I think it is about the certainty for investors like us to invest in this country because we know that, if we commit to something in the next five or 10 years, there is something we can count on. It could be subsidies but it could also be various help of some sort, including the energy elements.
Dan Cooke
Again, credit where it is due: the PFI mechanism was very effective in delivering good amounts of infrastructure. Viridor were involved in one of the projects that fell by the wayside, as a result of the very sudden decision not to proceed with that number of projects.
Chair
Which project was it?
Dan Cooke
Cheshire. The disappointing thing was: what is next? The decision to withdraw that PFI funding showed, effectively, that the ambition of Treasury was to achieve the landfill diversion targets, and that was it, rather than showing further ambition as has been shown by other Governments, the Welsh Government, the Scottish Government, in terms of having clearer recycling targets as well as greater efficiency and resource productivity. The big question is what next; what mechanisms can be put in place to replace that? There are opportunities. The circular economy package is not the opportunity that we are looking for, but there is a real opportunity, hopefully for UK leadership, if Treasury can engage with the other Departments in terms of what the UK version of the circular economy package or a waste strategy is. The 25-year environment plan that Government is planning, if that has a robust waste and resources section within it, then that may provide the framework for further investment opportunities. Companies like Viridor, and companies represented by the CIWM members, want to invest in new recycling technology. The current generation of recycling technology is arguably outdated. We need new innovation and further investment. We particularly want to invest in the capacity for energy recovery and much more efficiency in that energy recovery if the framework can be put in place.
Jerry McLaughlin
I was going to add one specific point. In the most energy-intensive part of our sector—which is cement making—about 44% of the energy in thermal terms comes from waste-derived fuels. Half of that is biomass related. The design of measures, such as the Renewable Heat Incentive, can have a big effect on this. At the moment, because of the limitations in the RHI, we are having trouble sourcing these materials. We would like to use a lot more to replace coal. At the moment, the use of these materials is equivalent to half a million tonnes of coal a year, so it is pretty significant. We are very concerned about the limitations as a result of the Renewable Heat Incentive. That is really constraining not only future investment in these facilities but is causing us a lot of concern about future supply, or even the existing level of waste-derived fuels.
Estelle Brachlianoff
I want to add a few figures to that. CIWM and ESA have made a calculation that says that, if we equip the waste that is produced in this country with producing energy, so for the part that cannot be recycled, it is roughly 10% of the green energy mix of this country that can be produced through waste. It will not replace the nuclear tranche of course. It is not of this size. It still is very significant and I think we have to have that in mind. It is not a minor niche something. It has its place into the energy mix of this country. The second thing is there is usually a misconception that energy from waste is against recycling because if you burn then you cannot—or whatever, it is a complication. All the experience we have seen around all countries in Europe is exactly the opposite. They go hand in hand. The Scandinavian countries have a very high energy from waste rate, a very high recycling rate, and an almost down to nothing land filling rate. It is probably a type of model that, in my opinion, would be very suitable for the UK to try to achieve. The reason why I mention that is, if you are wondering why we are talking about both at the same time, they really go hand in hand. Just to one of your points, the RHI is a very important scheme that we all count on. All the energy from waste plants in this country already produces power. They can all be very well connected to heat users as well, so either local big heat consumers or it could be district heating of housing as well. There is a lot of potential for the heat usage, not only for the power element, and RHI is very critical to achieve that.
Kerry McCarthy
I want to go back to what you said: the circular economy package is not the vehicle or whatever to achieve this. Presumably, looking at last Thursday’s vote, you are assuming that we are not tied into that. There is a bit of a degree of uncertainty because we are governed by the rules that are in place, but that is clearly just an EU-wide initiative. The concern would be that, given the role the UK Government played in the circular economy negotiations, where they seemed to be arguing against a target-driven approach, and very much in favour of voluntary measures, do you think there is the political will now to implement something that is equivalent at a UK level? What would be the key drivers that we would want to see? What do we want to see them do to show that they are serious about doing it at a national level now that they are not bound into doing it at an EU level?
Dan Cooke
I would agree, yes. The reason I said it is not going to be the driver is that, because we are in the current period of uncertainty following the decision last week, we have to assume that existing regulation will largely remain in place, but a large degree of the regulatory framework did come from Europe. The circular economy package was being negotiated and we have to assume—or it is our current assumption—that that will not be put in place in the UK. That is where I say there is this opportunity for the UK to show leadership and to make a point to say that, if it thought that was far from perfect in terms of the circular economy package, the hard targets that were put in place, can the UK put in place something that is more pragmatic, that achieves the same level of ambition in terms of greater resource productivity, greater resource efficiency and more recycling? I believe there was a consensus. Certainly Government indicated 65% recycling, or something like that, it was very hard to see how it could be achieved. What is a more practical level of recycling and a complementary level of very efficient energy recovery? How can we also encourage greater circularity in terms of waste reduction in the first place, better patterns of consumption and greater circularity? While it will be a challenge without the targets and the certainty that that framework can bring, the UK has an opportunity—and maybe it is through the 25-year environment plan or something similar—to put forward an alternative that can be practical but can deliver the jobs, the resource productivity and an appropriate level of recycling and recovery without that European framework.
Peter Aldous
Mr McLaughlin, I think you did touch upon the reforms to the RHI and the Treasury’s reluctance to encourage your industry to use lower carbon fuels. How do you feel the Treasury could amend the RHI to encourage your industry to use lower carbon fuels?
Jerry McLaughlin
From our perspective, the essential problem is that the existing RHI only covers indirect firing. For example, if you heat a boiler that then produces hot water, it is liable and it is in scope. In our case, we take fuels and we put them in the kiln with the raw materials. That is direct firing and that is out of scope. We do not understand why it is out of scope, because it is incredibly efficient in terms of the use of the heat and you get a much bigger bang for your buck in terms of carbon reduction per pound spent. It is a bit of a mystery, really. The logic of not extending it to direct firing is contrary to getting the best value for money from the actual initiative itself.
Peter Aldous
When you initially discussed this with DECC, were they sympathetic to the issue you have just outlined?
Jerry McLaughlin
Not really. To be blunt, it is a DECC decision that the Treasury do not seem to be interested enough in to get involved.
Peter Aldous
Do you feel that DECC is second guessing perhaps what the Treasury’s response might be?
Jerry McLaughlin
One of the points that have been put to us is that the current arrangements for the RHI are fairly broad and, as I say, it includes some relatively inefficient activities and excludes some more efficient activities. It has been put to us that perhaps that is because politically it is good to be seen to allow some of the more inefficient processes because then people can see there is some sort of personal benefit from the RHI, whereas if more of the benefit was going to large industries the visibility of the RHI might not be as high, even if the environmental benefit was stronger.
Chair
Are you getting that from DECC or Treasury?
Jerry McLaughlin
DECC.
Chair
Interesting.
Estelle Brachlianoff
Apart from the RHI, there was a signal that was taken very strongly negatively, the Climate Change Levy exemption removed in May 2015, which is another system that goes back again to the previous comments on no warning before the decision was taken and announced, which was quite a big hit as well.
Chair
Some of our witnesses have argued that without PFI the only policy driving waste and recycling is the landfill tax. Do you think that is enough to drive the industry in the long term?
Dan Cooke
There is a question. To say it is the only driver is probably not the case. We do have other drivers, not least coming from big business. Big business recognises that greater resource productivity and greater resource efficiency makes common sense from a business perspective.
Chair
Do you think Treasury understands resource efficiency?
Dan Cooke
I guess the opacity of whether it does or not is the key point. The lack of strategic direction and ambition—that is obvious, certainly to our sector—coming from Treasury in some of the indicators it puts out is probably the nub of the issue. One thing Treasury does understand is what drives business and makes good business sense, certainly from a big business point of view, in terms of leading UK businesses and the opportunities and investment that can bring. One hope is that the Treasury will cotton on to principles of circularity, greater resource productivity and the jobs and investment that that can bring, and will recognise the opportunities for greater resource productivity and putting in place clear strategic drivers to help it in future.
Estelle Brachlianoff
To answer your question, I don’t think the landfill tax alone will help us move into the next step. It has helped us already, quite significantly, to get to where we are, but if we want to go further we will need two other pillars. For me, ideally, it will be three pillars. One is landfill tax. Another one is to help energy from waste to be part of the mix of green energy, with all the various systems you can have to help that. The third one is to have producers and manufacturers incentivised to have to put some recycling materials into their production cycle. With those three pillars, with a clear direction of travel and outcome and one or two incentives, probably not that many, I think we can get to the next step.
Chair
Brilliant. Thank you all very much indeed for being with us this morning. That concludes our session. Thank you. Oral evidence: Sustainability and HM Treasury, HC 181 10