Examination of Witnesses (Questions 160
WEDNESDAY 6 FEBRUARY 2002
160. So do we!
(Dr Count) Let us take some examples. The Government
now wants the industry to make massive capital investments, and
over the last decade its main objective has been fragmenting the
industry. You do not make £5-10 billion of investment with
small companies. It does not happen. If you look what has happened
on Europe, what you have is large companies, strong companies,
who can access capital markets more cheaply than smaller companies
can. We have a dilemma: on the one hand the coal industry, on
the other hand the environmental objectives. We live within that.
It is not for us to set the rules. It comes down to political
will and a political framework in setting the rules. It is not
for us to set the rules of the market. We are happy to respond
and we are innovative in that response. Can we just mention the
161. Yes. I was going to come on to that in
a moment. Could I just press you a little more? In your judgement
would you say that with this Government the political will is
(Dr Count) That is a difficult thing for me to say.
I have now shut down all investment in co-generation plant. Government
has an objective for us to build co-generation plant. It has now
been talking for months and months on what support it is going
to do. We have to wait for that but ultimately it seems to take
a long time to come to fruition of those issues. It does not seem
to me to be rocket science in what needs to happen. We live within
those constraints. Having worked nearly 30 years on this, yes,
we are still talking about it and now perhaps is the time for
Mrs Clark: Master of tact!
162. Obviously over the last 30 years it has
gone from science fiction to reality. There have been huge technical
advances to make it commercially viable. In your PIU statement
you said very boldly, "Offshore wind alone could readily
fulfil the UK's average annual electricity demand", and,
"The UK has the largest wind resource in Europe". You
also say that the projects have short lead times and can be on
line in less 12 months. Yet in your objective for 2020 you still
only have renewables in totality as having 24 per cent versus
nuclear which is still at 18 per cent, although nuclear generation
will largely, without new generators, be finished by 2025, I think
it is commonly accepted. That seems extraordinary. I accept that
there is a slow lag but, given this very bold statement about
the potential, given the quick lead times, why are we still at
24 per cent of all renewables?
(Dr Count) Because one is a technical resource. If
all of the UK's production were supplied under a Renewable Obligation
Scheme then we would have to experience some 40 per cent increase
in power prices. Is that an acceptable position for the economy?
That is not for me to judge but ultimately our judgement is what
will be economically exploited will be much less than the technical
capability. That is an issue for wider economic and political
163. On the economics, the comparison with nuclear
power, it is generally accepted that nuclear power costs five
times gas electricity on an even playing field. Where do renewables
sit alongside nuclear energy?
(Dr Count) That is not a judgement we have done because
we are not a nuclear generator.
164. What would you say?
(Dr Count) I do not know. You would have to ask British
Energy on the economics. What I can say is that clearly if you
judge against gas fired combined cycle generation, and we see
sustainable sources as gas at sustainable economic prices, albeit
gas has risen somewhat over the last year or two but is still
at an economic level, then renewables are much more costly, so
we would see a continuing large gas component of it. I think you
will have to interrogate British Energy on what the economics
of nuclear are. We know the economics of the conventional side.
165. For political reasons obviously there will
be a diversity of supply and there is concern that in the longer
term we could be dependent on gas coming from politically unstable
parts of the world with North Sea gas likely to dry up within
five to seven years, certainly by 2020, so very different geo-politics
there. We cannot be totally dependent on gas. There has to be
(Dr Count) I would only point out that we have always
had about ten years of gas supply and just when the next year
comes new gas reserves are found. There is a huge intercontinental
pipeline system now for gas, so you are not dependent on one source.
Fields are now opened up as technology advances. We use the same
argument for renewables, that technology advances, but let us
not forget that gas field technology advances mean that smaller
fields which were less economic are now very economical. I do
not think it is apparent that gas does not have a considerable
longevity in terms of its ability to produce. Let us not say there
is one solution. There is a mix of solutions and our submission
recognises that for diversity you do not want all one technology,
you do not want all one fuel and you do not want to eliminate
one technology or one fuel particularly. That is our judgement,
that the mix of renewables is what we think will economically
be exploited. Other people may have different views.
166. You mentioned briefly CHP and clearly it
is not classic renewable technology, but it has got significant
potential energy savings and associated carbon savings. The Government
has set targets for doubling CHP capacity by 2010. Where do you
think the main potential is at the moment for CHP? Is it just
large companies, big industrial users, that could draw benefit
(Dr Count) The primary market is large CHP. When Mr
Thomas asked about technologies I should have mentioned that small
CHP may well have a role in that and therefore at the domestic
level I do not rule out micro CHP. I know that some of the major
companies are developing that; BG for one I am aware of. From
Innogy's focus it would primarily be at the large end. We would
see a retail end perhaps developing as well.
167. But you have decided as an organisation
to stop investment in developing CHP generally?
(Dr Count) Yes.
168. Why have you taken that decision if you
see it as a future technology? What drove you to that decision?
What impact does it have on your broader business?
(Dr Count) In the current market environment there
would not be a sensible return. To put that capital on the ground
would not lead to a sensible equity return to our shareholders.
That is simple.
169. What about the CHP Obligation? What is
your position on that? If that was brought in how could it be
(Dr Count) If it was an Obligation which commanded
a premium price then we would reconsider our investment strategy
on that. CHP is a small part of overall Innogy business and there
is a market growth opportunity out there but broadly speaking
it needs some incentivisation. The renewable certificates have
been given primarily, as we have discussed, to wind and therefore
the majority will be wind incentivisation. In my view, if the
objective is carbon reduction then I believe CHP merits some support
because it is more cost efficient at reducing carbon compared
to offshore wind.
170. Four or five times?
(Dr Count) Yes.
171. What about other European experiences?
Is there a different perspective in other European countries on
this or indeed worldwide? Any good practice examples?
(Dr Count) It is always difficult to speak on Europe
because ultimately they are not open markets across Europe. We
would like to see them more liberal. There is still considerable
development on the industrial side of CHP, but again it is something
on which, since we are not investors in those countries, I do
not think I could claim to be an expert. You would have to see
whether they have particular incentive structures that make them
172. Ofgem have suggested that the fall in CHP
output has been due to the rise in the price of gas. Is that a
(Dr Senior) Over the last 18 months or so gas prices
have risen almost 50 per cent. Power prices in the same period
have fallen by around 20-30 per cent. The combination on something
that converts gas to power is fairly devastating, as Brian has
mentioned. It is both. We look at the difference between gas and
power. It is as simple as that. It does not matter from an economic
point of view whether it is gas prices that have risen or power
prices that have fallen. Over the last 18 months both have happened.
(Dr Count) So the answer is unequivocally yes.
173. Do you think there is an opportunity for
a sector approach here? You talk about big business. Is it more
sector based? Do you think particular parts of the economy ought
to be trying to assist in taking a lead? You seemed to indicate
in your response that it is very much a broad brush here and we
need to incentivise generally.
(Dr Count) I think ultimately my view is that sustainability
should be an integral part of energy policy or industrial policy.
To segment it and say that we will have a segment that deals with
the sustainability and another sector that deals with something
else is a less good model in my view. We have a number of segments.
If we can try and bring them together in a more integrated manner
I think there is a real opportunity for business to embrace that.
The consumer I think will find that an attractive proposition.
Ultimately I would say from the Government side, let us look at
the objective; let us look at the outputs you want to achieve
and leave us to worry about the inputs and processes and so be
clear on the objectives rather than say, "I will back technology
winners". Technologies will have these habits of coming through
when the incentives arrive.
174. You said just now that sustainability should
be an integral part. Given the way in which new guidance has now
been issued to the regulator how adequate do you think the powers
of the regulator are, particularly compared to previous powers
of regulators? I am thinking particularly perhaps of Mrs Spottiswoode
when she did that job previously.
(Mr Bowden) I think it is generally accepted that
the primary duty of the electricity energy regulator at Ofgem
is to promote competition and we have seen significant impacts
of that duty being exercised in the fragmentation of the whole
structure of our industry. The secondary duties, as I think they
are in legislation, are social and environmental. We see the social
duty coming through and we have a number of initiatives, some
that are simply complying with obligations upon us and others
just commercial choices. We see commercial opportunity in partnership
with the laudable policy to reduce and hopefully eliminate the
fuel poor. I think it would be fair to say that on the environmental
side we see less of the exercise of that secondary duty from Ofgem
and inevitably see a good deal more from the explicit environmental
agencies. It is not always clear to us that there has been joined-up
thinking in the approach and we sometimes find ourselves in something
of a difficulty with an apparent ambiguity or conflict between
perhaps the social and competition policies brought about by the
primary legislation on the electricity energy side and perhaps
conflicts on the environmental side.
175. Are you saying that you would put a tick
in the box in terms of competition, a tick in the box in terms
of social responsibility, but that when it comes to environmental
issues you cannot square the circle? What would you suggest if
that is what you are saying?
(Mr Bowden) We respond to the policy initiatives that
are set primarily by legislation and then implemented by gentlemen
like Callum McCarthy and his equivalent in the other agencies.
I do not think we have a particular view as to what is right and
what is wrong. We operate within the framework that is laid down.
176. But Dr Count said just now that sustainability
should be an integral part of everything. I am asking you whether
or not the way that Ofgem is interpreting the guidance, which
is a secondary requirement and not in primary legislation, is
sufficient when it comes to squaring the circle environmentally
with respect to sustainability?
(Dr Count) I do not think we have frameworks that
integrate it. We believe that the purest framework would be an
emission trading world where carbon had a price or carbon reduction
was imposed across in the industrial landscape and industry traded
between themselves to find that. The regulator would not have
to segment environment or competition. He would just make sure
that competitive elements prevailed in order to meet those common
objectives. When I talk about an integrated approach, if you could
get an emissions traded world that would suddenly integrate demand
side management, production management and reduce carbon. It would
certainly meet that objective. It may stimulate more co-generation
than wind power; so be it. That may be the right outcome.
177. By that would you be saying that you would
be advocating a carbon tax?
(Dr Count) I think a carbon tax is an inefficient
mechanism. There is a cost of producing carbon and we will all
do our best to try and avoid reproducing carbon. Somehow there
is a cost to the consumer in reducing carbon. You cannot avoid
that. Taxation is a blunt instrument.
178. I am not quite sure how you would put the
carbon element into your ideal proposal.
(Dr Count) Let us try and make it simple. You could
say to the industry, not the power industry, "We will reduce
our total carbon emissions by 20 per cent"those are
the rules of the gameor, "We will have carbon targets.
We will put sensible targets in. Industry: you go away and find
the best ways of doing it." If that means that we can do
it more efficiently in the automotive industry then that is where
we should do it and we buy carbon certificates from the automotive
industry. If the power industry can do more and the automotive
industry less, then they buy from us. What you will find is a
very efficient development of technologies by market mechanisms
to reduce that carbon. If that is the output you want that is
a very integrated world.
179. Do you think you would get agreement between
these various independent parties like the motor car industry
and the energy industry?
(Dr Count) If they work out they are winners they
win; if they work out they are losers they will lose. Ultimately
if you are seeking agreement from a structure that creates winners
and losers you will never get agreement. What you have to do is
decide what you want to do and do it. My view is that you will
progressively move to an emissions trading world.