Examination of Witnesses (Questions 1-19)|
WEDNESDAY 30 JANUARY 2002
1. Welcome to our session this afternoon and
thank you very much, indeed, for the memorandum you put in, which
was very interesting, we enjoyed reading it. Before we start the
questioning on that, would you like to add to your memorandum
(Mr Green) There is not an awful lot to add, some
of it will come out in discussion later. Just to introduce myself,
I am the Director of the Combined Heat and Power Association and
Graham Meeks is the Deputy Director. Graham Meeks has been involved
in detail in the working parties with the DTI and Ofgem on NETA,
which is one particular issue we highlighted in our evidence,
he will be in a good position to update us on that. I had hoped
that by now we would be in a position to be able to outline to
you the proposals that Ofgem are putting to the DTI, hopefully
tomorrow, about some of these issues, but at the time of leaving
our office the draft report had not arrived. I am afraid I cannot
bring you completely up to date but there are likely to be further
developments this week which, no doubt, can be brought to your
Chairman: Thank you for that.
2. Good afternoon. The Ofgem Report August 2001
last year said that power exports for CHP had fallen by 61 per
cent and the price of that had fallen by 13 per cent, the price
of sales. Could you say whether that is entirely due to NETA or
is it, perhaps, due to the fact that the price of gas rose in
that period and that it was better for CHP generators to sell
gas directly rather than CHP?
(Mr Green) That tends not to happen with CHP. Most
CHP schemes are developed on industrial sites, urban areas or
in leisure centres or other facilities and they are under contract
to the customer on that site to deliver energy. It is not the
case, as with very large CCGT power stations, where the developer
will sometimes have a choice as to whether or not they put the
gas through the power station to produce electricity or if they
wish to export the gas to Europe to take advantage of the higher
gas prices in Europe, which have been prevailing for a whileCHP
schemes are contracted for their electricity and similar heat
output to the customer. There are two CHP schemes in this building,
Chairman, but for the CHP scheme in this building you would be
without heat, light and power. There are contractual issues that
govern how they run and you have to meet certain performance specifications.
3. Are you saying last year the fall was entirely
due to NETA, are there any other factors involved?
(Mr Green) It is the case that there has been an impact
on gas prices. From the information we have given, both to the
DTI and Ofgem, the significant impact has been the change in the
demand for electricity from CHP schemes as a result of NETA, some
of which comes about because of the fact that CHP schemes are
not very focussed on the customer's needs. Clearly the customer's
needs change from time to time, if you are producing an industrial
product those needs will change, therefore electricity output
will sometimes change and that causes problems for CHP under NETA,
which was designed to reward firm generation, not intermittent
generation. By and large NETA has been the biggest affect. The
other issue that I imagine the Committee will be aware ofI
know the work you have done on the pre-Budget statementis
the other issue we have certainly been working on with the Treasury,
the DTI and DEFRA, that is to make sure that CHP is fully excluded
from the Climate Change Levy. The issues that have affected CHP
in the last year have been, number one, NETA, number two, the
absence of full exemption from the Climate Change Levy and number
three a range of other issues, including the impact of gas prices.
4. Since August have you any update on the figures
in the forms of CHP or are Ofgem's figures still fairly accurate,
would you say?
(Mr Green) We have no formally updated figures. All
we know from informal discussion with our members of the Association
is that their output continues to fall because of the commercial
conditions created by NETA. We do know, just as evidence, that
it is now the case that all of the major developers of CHP in
the United Kingdom have either dispensed with or put their CHP
teams on hold. That has had a knock-on effect to the manufacturing
sector for CHP in the United Kingdom. The evidence is the lack
of activity in the marketplace. As a matter of interest, there
was a meeting of the Parliamentary Environment Group last night
where the British Paper Federation were explaining to Brian Wilson
that their members had to put on hold at least three CHP plant
that was due to go ahead under the negotiated agreements as part
of the Climate Change Levy. They are now having to go back and
enter into discussions with DEFRA about what the implications
of that will be for the exemptions they have under the Climate
Change Levy because of their inability to develop the plant in
the current market circumstances.
5. You state in your memorandum that Innogy
and Powergen have ceased the development of new CHP plant, is
anybody else stepping in here at all? You seem to be in rather
a pessimistic situation if nobody is developing new plant? Do
you see any good prospects in the near future?
(Mr Green) Not in the immediate future. Although,
if the Chancellor is minded in April in the Budget to grant CHP
full exemption for the Climate Change Levy that will lead to some
rebuilding of confidence. I think it is fair to say the industry
is feeling very bruised by the gap between the government's rhetoric
on CHP and its delivery over the past three or four years. I think
it will take a while until the major companies feel confident
to really commit to re-entering the market. If you look at it
from the companies' perspective, particularly the major generators,
the Government has said that renewables are extremely important
and, therefore, they place legal obligations on companies to do
things in relation to renewables, the same with energy efficiency.
For a variety of reasons the same degree of priority has not been
given to CHP despite the existence of the government's CHP target.
6. Can I ask how this is comparing with mainland
(Mr Green) It is a variable picture across Europe,
historically a number of countries have had a very high take-up
of CHP, namely Denmark and the Netherlands. The country which
has been most interesting in the last year is Germany where with
the liberalisation of the energy market in Germany, CHP operators
are very concerned about the impact that will have and the need
for transitional arrangements. The German Parliament just this
week finally concluded the legislation which will provide special
support prices as a transitional arrangement for CHP operators
in Germany. Parliament just passed the relevant legislation this
week, I believe.
7. Just very briefly, taking you back, you mentioned
so far partial exemption for CHP, maybe my memory is playing me
wrong but I seem to recall in either a Budget or a Pre-Budget
statement that the Chancellor of the Exchequer, Gordon Brown,
actually went out of his way to say CHP would be exempted. Is
that, (a) your recollection of events and, (b) if it is what representations
have you made to the Treasury and to the Chancellor to challenge
him on this?
(Mr Green) We strongly supported the statement the
Chancellor made on the floor of the House on 8 November in the
relevant year, where he said unequivocally that CHP and renewables
would be exempt from the Climate Change Levy and we were extremely
pleased by that announcement. The difficulty has always been that
the way in which Customs & Excise have interpreted the Chancellor's
statement as being the Climate Change Levy is applied on export
for licensed suppliers and in the market place most CHP schemes,
in order to export, have to be a licensed supplier.
8. What has he said when you have gone back
to him on his statement in the House of Commons?
(Mr Green) What the Treasury have said and the ministers
in the Department said specifically
9. What has he said?
(Mr Green) In the latest statement he said in the
Chancellor's Pre-Budget Review they are going to be reviewing
the situation, they are mindful of the situation that CHP is in,
they are going to be reviewing the situation and they have set
up an interdepartmental group with DEFRA and the DTI to review
10. At the end of the day he has said one thing
in the House of Commons and another thing has appertained. He
has not been able to square that to you?
(Mr Green) He personally has not. To be fair, his
relevant ministers have attempted to explain the issues, and it
is to do with the way in which the priorities the Government wanted
to give to different forms of sustainable technology, some assistance
in some areas in one way and differences in different areas. What
we have been keen to do is to make sure that the statement he
originally made is the one that is acted on.
11. Finally on that, I trust before the Budgetwhich
we now know is going to be slightly delayedyou will be
going back to him on this, lobbying it and demanding something
definitive, clear and precise about that?
(Mr Green) You can be assured that we will be doing
that. We are meeting Paul Boateng, the Minister, in two weeks'
12. How much manufacturing capacity is there
in the United Kingdom for CHP?
(Mr Green) There are a number of sites that manufacture
CHP in the United Kingdom, the two larger ones are Centrax, which
is a family owned business in the South-West in Newton Abbot,
where up until recently they employed 1,000 people on the development
of the turbine blades and the packaging of CHP schemes. The larger
site is Alsthom, which was originally GEC.
13. Is that in the Midlands?
(Mr Green) That is based in Lincoln. I do not know
what the total employment on the site is because they do more
than just CHP, those committed to CHP schemes in the United Kingdom
and overseas is 1,200 staff.
14. How does that compare with Germany, are
there any comparisons?
(Mr Green) The main manufacturing company in Germany
would be Siemens. I do not know off hand the employment levels
of Siemens of CHP in Germany. I am sure I can find that out.
15. It would be useful to find out how big this
(Mr Green) That is at the gas turbine end of the market,
there are a number of smaller companies in the United Kingdom
who assemble and manufacture small-scale CHP schemes, such as
the one used in this building. There are a number of small companies,
each one employs between 50 and 100 people, there are about four
or five in the United Kingdom.
16. Presumably they are just assemblers?
(Mr Green) There is some manufacturing work, what
they do is they have a basic engine which they re-engineer to
get the efficiencies up and they add on board the on-board electronics.
They are classically high-tech companies that are importing the
electronics on to the engines, and that has been the development
for small-scale CHPs so that systems such as the one in this building
are not run from here, they are run from a plant room 50 miles
17. Do you potentially see a big growth in manufacturing
capacity in this area?
(Mr Green) Potentially, we would hope that. Both in
Centrax and Alsthom they export extensively into mainland Europe.
It is unfortunate that Centrax have had to layoff 25 per cent
of their staff because of the downturn in demand for CHP. I gather
from Alsthom one benefit of gas prices increasing is it has increased
demand in the North Sea and, therefore, those people who were
producing CHP equipment for use in the United Kingdom and Europe
are, by and large, being redeployed to producing offshore turbines
that are used in the North Sea.
18. You said in your memorandum to us, "As
experience of NETA grows there is growing cause to question its
validity as economically efficient or fair means of operating
the electricity network." Are you suggesting that NETA is
absolutely fundamentally flawed? Do you think that there are things
that could be done to make it work or should we be starting again?
(Mr Green) I do not think it would be realistic to
start again because NETA is operating for a vast number of companies
who are mainstream generators in the United Kingdom, they have
done a lot of work to deliver it and it has delivered real benefits
in some sectors. The particular difficulties that small-scale
suppliers and small-scale operators of CHP have, and I am sure
you will hear the same from other colleagues of other technologies,
is that, by and large, NETA was created to take account of large
producers of power. CHP schemes, apart from one or two examples,
are, by and large, not large-scale producers of power, large-scale
producers of electricity, they are small-scale producers on local
industrial sites. The issues, to a certain extent, are to do with
size and what the original intentions were in the design of NETA.
In the original days we were very heartened by the fact that the
Government asked the energy regulator to make sure that one of
the outcomes from the NETA process should be encouragement for
CHP renewables and one of our frustrations is that has never been
fully delivered in the gap between what Ministers were seeking
to get and what resulted. There are specific changes we would
like to see, although increasingly our view is that certainly
at the lower end of the CHP range the most optimum solution would
be to take various forms of sustainable energy and technology,
CHP and wind, out of the NETA process altogether and deal with
them in some other way. A lot of this is about the transaction
cost. A large company has enough staff to have 365 day trading
rooms, 7 days a week, 24 hours a day, they are very, very good
at that and they are doing a very good job. The trouble is that
small players, for example British Sugar and the energy manager
in this building, they do not have the capacity to have that kind
of trading, that is the fundamental problem, it increases the
economic cost. There are concerns about how cost effective the
overall process is because of that.
19. If we were to go down that road of taking
small-scale producers out, where would you draw the line? What
sort of size of scale of production would you look at?
(Mr Green) You would probably look at where the boundaries
fall for licence holding. We have made representations to the
DTI to increase the threshold for licence holding for supply licence.
If that threshold was increased further for generation licences
between 50 and 100 megawatts, if you were to move up towards that,
you might have a cut of about 50 megawatts, that would take a
lot of CHP schemes out of it. Some CHP schemes are very big, they
can cope with this, they can deal with NETA, they have problems
but they are big enough organisations to deal with it. The problem
is those companies which do not have that capacity, which is where
the majority of CHP schemes are, they are not large, they are
much smaller. Setting a threshold through the licensing regime
that removed them may well be, at the end of the day, the easiest