Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 101 - 119)




  101. Welcome to all three of you. Thank you for coming along this afternoon. Thank you also for your memorandum. I know we asked you for an update and it was even more substantial than we envisaged. Thank you very much for that; we are very grateful to you. Can I just clear up one point. I am not exactly sure how big Innogy is in the UK market. Secondly, is there anything you would like to add, however briefly, to your memorandum, as we would like to hear it first of all and then go on to the questions.

  (Dr Count) I will deal with that point, Chairman. I assume the memorandum is broadly read. I will just introduce the team. I am Brian Count, Chief Executive of Innogy. Brian Senior to my right is Director of Trading and Asset Management so he deals with the need for interface, and Mike Bowden on my left is the Company Secretary. Just to put Innogy into perspective; we are the largest supplier at the retail end of electricity and have a leading presence in both the domestic sector, small businesses and the large business users. We are the second largest gas supplier at the retail end, obviously some way behind Centrica/British Gas. We produce around ten per cent of the country's electricity from our power stations. That means we are a very substantial player in the electricity market. We also are market leaders in renewable energy production. We have approximately a 30 per cent share of the wind energy market in the United Kingdom. We operate 15 wind farms here in the United Kingdom with a capacity of just under 160 megawatts. We also have eight hydro-electricity stations. Two per cent of our generating power already comes from renewables. Also on the renewables side we have secured a site for our first offshore wind farm off the coast of North Wales and we are proceeding with consent on that. We operate over ten per cent of the country's combined heat and power plant, so we are very strong in both the retail and the production of electricity and the production from renewable sources. I think at that, Chairman, I will leave it open for questions.

  Chairman: Thank you very much. Those are very diverse interests. Mr Gerrard?

Mr Gerrard

  102. You are a very diverse company and perhaps more diverse than quite a lot of people in the field. If the market had just been left to itself, if everything had been driven by market forces, without for instance the Renewables Obligation or the Emissions Trading Scheme, would we have seen that diversity or would we have seen generators holding nothing but combined cycle gas turbine stations?
  (Dr Count) If the market had been left to itself without any support for renewable schemes, then renewables schemes would not have been built. Wind power previously was built under the Non-Fossil Fuel Obligation which did give premium prices against the market. Co-generation was built without too much support, but now the market conditions even demand that that needs some support. No, without any support, renewables would not be built.

  103. If we look at some other European countries—Denmark, Germany, Austria—they seem to have got on considerably better than we have in developing renewables. They are all countries where there is a rather less liberal, less open market than the UK. Why do you think they have been more successful?
  (Dr Count) I would disagree that they have been more successful. They have developed more renewables but that just needs a decisive framework put in place in order to stimulate it. I believe very, very firmly in a market-based solution with an overlay. If our objective is to reduce carbon and we price carbon appropriately, then I believe the renewables will be developed, and carbon free technology will be developed at the research end, the development end and the investment end. If you look at places across Europe such as Holland and Italy, they are now doing exactly as we are doing and putting in obligations to supply so much of their output from renewable sources, but clearly in all of those countries they have had to pay a premium price for that development.

  104. How is that premium paid? Is it in the price that consumers have paid or has it been through support that has been given to develop the renewables?
  (Dr Count) I am not an expert on those European markets. Clearly my understanding is that ultimately the consumer has paid.

  105. You are not just a renewables generator. Very obviously you have got considerable coal and gas generation capacity which is still there. Do you think that there are significant costs associated with coal generation, and perhaps to some extent gas, in terms of pollution that have not been adequately accounted for in the past?
  (Dr Count) I think it is undoubtedly the case that there must be an environmental cost. However, I think it is right and proper that we would say that the Government and the regulatory framework determines what cost that is, puts that cost into the equation in some form or another, and then allows the industry to decide which technologies to develop and pursue taking that cost fully into account. One could argue that the renewables scheme that is being proposed, where renewable sources such as wind power will command a three pence per kilowatt hour premium, is an attempt at costing that effect and saying that carbon reduction technologies do merit a premium price. We do not have a difficulty with that and would support that overlay in the mechanism. I agree there is a cost. It is not for us to judge what that cost should be.

  106. Do you think that cost has been adequately accounted for in the past or not?
  (Dr Count) Clearly there has not been carbon costing in the market-place so I do not think it has been fully reflected. There is a lot of science that needs to go behind that. Our view is that there should be a carbon cost overlaid from the natural market and you can have those two market structures and that will stimulate reduction in carbon production.

Mr Thomas

  107. I wondered if Mr Gerrard had asked you about government in the sense of the market particularly with the Renewables Obligation and now Emissions Trading, whether you can tell us if you felt any pressure at all from the point of view of any government policies regarding energy efficiency? Do you feel that affects the market at all?
  (Dr Count) We have not felt pressured per se because we are one player in the market, but if you take the broader issue, do I believe we should have some uniform structure that relates the end use to the production, I agree with that entirely. I think I come back to the view that the purest way of doing it is probably an emissions trading market. I think that would be a sensible pressure to take place, both from the retail end and the production end. We have probably got a lot of concentration on the production end and probably less attention on the end users.

  108. Have you identified any gaps at that retail end in a sense which you would suggest might be something we could be looking at as a Committee when we look at the European experience later on in the investigation that at the moment is missing from what the Government is trying to do in terms of energy efficiency and fuel poverty as well, another key strategy, and how this may affect the way you relate to some sort of carbon trading system?
  (Dr Count) Already there are energy saving measures and obligations on us that clearly we are happy to enact. I think what I would only say is that we seem to have mechanisms at the demand end and a different mechanism at the production end, and obviously from an investment point of view at the broader end, if I look at the consumer I would say that sits at the centre of this issue of sustainability. I believe the consumer is very keen on seeing carbon reduction. I think the consumer would like to see it at minimum cost.

  109. Government as well.
  (Dr Count) Government as well. I think it is right for the nation. I think when you look at these (and we have got these initiatives at both ends) we need to ask how can we marry them up into making sure that the allocation of the resources gets directed where the best return is and the best value for the consumer. I would only argue that it is not self-evident that that is necessarily the case on the current structures.

  110. Can I finally ask you one specific question. There is currently going through this Parliament a Home Energy Conservation Bill. Have you looked at that as a company as to if that were to go through and be passed how that would affect your work?
  (Dr Count) I would expect my retail division to have but I could not answer questions in detail on that myself. I know that my retail division will look at all of those issues. If you want any view we can come back to you on that issue.

Mr Francois

  111. There are an increasing number of policy instruments in the energy area. As a company is that a problem for you? Do you think there is a need to rationalise the number of policy instruments? If there is, have you any thoughts about that?
  (Dr Count) The answer is yes and I will let Mike have some air time now.
  (Mr Bowden) Our view is that a broad framework set by the relevant agencies gives the overall rules within which companies can operate and optimise as they see fit. I will give you an example where we feel that perhaps over-complexity of regulation is working against the overall objective of the agency concerned. We are clearly interested in sulphur regulation insofar as it impacts on our generation fleet, our power station fleet. I was learning yesterday that if one looks at the issue of sulphur regulation, there are for non-FGD power plants ten quite separate levels of control rising to 14 for a company with FGD as part of their coal-powered plants.


  112. FGD is?
  (Mr Bowden) Flue Gas Desulphurisation. It is a process at the back end of the power station that cleans up emissions. One can make a case for each and every one of those in the abstract and we will do our level best to comply with each and every one of them but we feel that overall it would be better for there to be a choice made as to what would be the key measures that would make the difference, and we suggest that that would lead to a more efficient market in which the players could operate. That is just but one example. There are others where we understand and support the general thrust of regulation but feel perhaps there are rather too many measures, sometimes overlapping and conflicting, that we have to weave our way in and out of, and that can be difficult.
  (Dr Count) If I could add just a short point to that. The over-burdensome nature of the processes and conditions here make it unduly complicated to make things happen. If it is overly complicated it will not happen and the cost of weaving—


  113. When you say "it will not happen", what do you mean by that?
  (Dr Count) If there are too many complicated processes and initiatives to go to energy efficiency then it acts as a barrier because it is so complicated to find one's way through it and, ultimately, it will not get as good an investment pattern as it perhaps deserves.

  114. So it would deter investment?
  (Dr Count) It would deter investment. Clearly the other point I would make on investment is if we are going to make sustainability work we need something in this country of the order of £5 to £10 billion of investment over the next decade. If an investor such as us believes that there is going to be changes of rules, because there is a plethora of rules, then we risk stranding the assets. We think very much that political risk is the biggest barrier to long-term investment in the industry.

Mr Francois

  115. You have given us one specific example there which I think is helpful. Could I ask you to address specifically the new electricity trading arrangement for a moment. Last week the CHPA pointed out to us that the Government in the letter commissioning the NETA process stated that the outcome was to provide encouragement for renewables and CHP. That was a fundamental aim of the concept. Do you accept that it has not done that and NETA is working directly against the intent of the Renewables Obligation because of the way it has been designed?
  (Dr Count) I will let Brian Senior take that one.
  (Dr Senior) Basically we see the changes that NETA has brought about as fundamentally beneficial. In other words, NETA is performing much more as a commodities market, liquidity has gone up, people are able to manage their risk much better in the market generally. Where we see some distortions which we believe disadvantage CHP specifically, and also wind, is in the way that the market values uncertain generation and, on the other side, uncertain uptake arrangements as well. There are two specific examples which we might mention. One is that we currently operate in the very short time scales of the balancing market, the three and a half hours to real time part of the market, what is in effect a penal system designed to drive people to balance the amount of generation that they contract on the one side and the amount of uptake on the other side. If you are out of balance then you pay one of two prices. The difference between those two prices is typically about two pence per kilowatt hour. It is a large number. That particularly hits the CHP and wind because they, by their very nature, have uncertain generation, wind, because the wind is blowing or not blowing, and CHP because your first duty is to your on-site customer (whether it be steam or electricity arrangements) and what you are effectively doing is selling surplus into the market. That £20 per megawatt hour difference then gets put into a pot and redistributed pro rata with the amount of megawatt hours that people generate so the people who tend to benefit from that dual cash out arrangement are the people who are baseload generators in the wholesale market, not CHP and wind renewables. That is one specific area. The second one that is probably one worth mentioning is the fact that the market operates as competitive market-place where people can buy and sell freely in an open market until three and a half hours before real time. There is no reason, in our view, why that cannot be shortened to around an hour and possibly shorter than that, which allows people who have uncertain generation to get much closer before they are into this balancing mechanism and it allows the market to find consolidation and other arrangements which work much more effectively close to real time. Those are the two things that we particularly see as disadvantaging CHP renewables in NETA. Generally NETA is working as a market but in the specifics of the balancing market there are things that we think could be improved.

  116. In your submission one of the improvements that you highlighted was a single cash-out price. How do you respond to the argument that the DTI would make that this would fundamentally undermine the commerical initiatives within the system in the first place?
  (Dr Senior) I think we would suggest that the principle we are aiming to work to is that the market reflects actual costs. So the way that the dual cash-out currently works introduces, effectively, a penalty and a surplus of funds because the system is not out of balance in one way or the other way, it is not simultaneously out of balance in both ways. So individual participants are bearing costs that the system is not bearing. That is what creates a surplus. To our minds, if it were an efficient market that surplus would not exist. The costs are not being incurred by the system. They are being taken off individual participants and reallocated post the event to participants according to megawatt hours generated or supplied. That does not indicate to us an efficient market. That indicates some kind of subsidy in some form or a dislocation of the market.

Mr Barker

  117. One of the problems you have is lack of technological advance in electricity storage, but in your submission to the PIU you do highlight this and, reading between the lines, you seemed to indicate that where there was not a clear time line that in years to come there would be far more work done on electricity storage to the benefit of those who supply electricity, and that is of particular interest to renewables. Can I have your thoughts on where that technology is going and when it is going to start to impact the market, given that in your PIU document you are talking about a 20-year timescale?
  (Dr Count) In the last decade we have developed a storage technology known as Regenesys. That storage technology is being put into full-scale application at the moment. We are building a 15 megawatt plant that will service people 30,000 people at Little Barford near St Neots. That is next to one of our gas plants. That project is expected to commission in the second half of this year. First of all, this is a chemical based storage system that is here and now and we have made a commercial sale to Tennessee Valley Authority and that project is running some nine months behind. Clearly, over the coming years we intend to develop it. It will take some time to make a major impact but it will increasingly make an impact in our view over this decade. We also know that at the smaller scale end the Japanese are developing similar technology with slightly different base chemicals.

  118. You have got 30,000 people in St Neots. Where do you think you will be in ten years' time? 30,000 today is a drop in the ocean.
  (Dr Count) I think we will be making significant inroads into the market. I am not trying to hedge the question but you are asking me for a profit forecast. Ultimately, could it make substantial progress towards helping renewables? Yes, in that timescale and, indeed, it is known that we are talking to the Danes on assisting them with storage. They are interested in the development in order to support their wind power programme and it will make a material difference to how you can take unreliable power, which is of low value, and make it much more reliable and more highly valued. Assuming that our technology goes to plan, and we have every evidence that it is going to plan, in the next decade it will make a material impact on how you can turn unreliable power sources into a reliable power system.

Mr Francois

  119. You have got another subsidiary, Concert Energy, that is dealing in the field of consolidation. Do you see any real signs that consolidation in a technical sense will ever become a practical option?
  (Dr Senior) We have within Concert consolidation services around 60 sites now, so we have invested heavily in consolidation services to people. Consolidation is the process of putting into the balancing market a number of uncertain generators and then taking the benefits of the randomness of their generation. We believe that is an important risk management service that we can offer and others can offer into the market. Will it increase? Yes. The only concerns we have, apart from the issues I mentioned before about the fact we cannot do any consolidation post three and a half hours out, are about the potential for real changes and things that mean the investment we have made in consolidation services are effectively rendered useless. We currently have a major consolidation programme underway over 60 sites. Generally it is working well. We are seeing the costs of balancing reducing for our customers by about 50 per cent from our consolidation services. That is the scale of the benefits that we and others are seeing.

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