Examination of Witnesses (Questions 480-499)
MR CALLUM MCCARTHY, MR JOHN NEILSON, MR NICK SIMPSON AND MR JOHN SCOTT
TUESDAY 30 APRIL 2002
480. I will come on to another point that you made in a minute. Again, still on the background to this, when the initial proposal was launched in 1998, the DTI failed to carry out any environmental appraisals as far as we are aware. Do you think if we had done that the result would have been any different?
(Mr McCarthy) I think you will find that there was in October 1999 an environmental impact statement from the Department of Trade and Industry and that statement
481. Forgive me. The question was, when the proposals were launched in 1998 there had not been an environmental appraisal carried out prior to that, so that is 18 months post-dated.
(Mr McCarthy) No, there was not one done in 1998. There was one done in 1999 and that one in 1999 said that "on balance the net effect of electricity price falls and the creation of a level playing field through the new trading arrangements will reduce the market value of renewables generation and the incentives to invest in new CHP".
482. You are saying that an appraisal was carried out post facto. The point that we wanted to concentrate on is that there was not one undertaken before that, and we think that is perhaps something to do with where we are today. You are now conducting an analysis of NETA and its operation over the first year. When Brian Wilson appeared before us last week he clearly was placing a lot of reliance on this analysis that you are undertaking. Are there terms of reference for this analysis or review, if you want to call it that, being published?
(Mr McCarthy) No, because I confess that I do not think we have yet drawn up terms of reference.
483. Whereabouts exactly are you in terms of the timing of that whole process? The reason I ask is that the Minister was making great play of this when he appeared before us and gave the impression that things were a bit further advanced. From the horse's mouth, if I can put it like that, where exactly are you on it?
(Mr McCarthy) We conducted two analyses very early on in NETA. One was for the first two months of NETA and its effect on smaller generators, and the second was in the first three months of NETA and its overall effect. We are preparing to repeat the review of NETA's first year with a view to publishing it in June or JulyI suspect it will be Julyand that will undoubtedly cover, among other things, the effect of NETA, and the changes that have been made to NETA in its first year in relation to smaller generators.
484. And that is coming out in July?
(Mr McCarthy) Yes.
485. Could any of this have been anticipated, Mr McCarthy? You say you have made changes which will help the renewable operators, because you clearly therefore recognise that they have the disadvantage, as the independent operators have said, of being all right with hindsight, which I fully accept. Could any of this have been pointed out before NETA was set up?
(Mr McCarthy) I think, Chairman, you have to recognise that NETA was a huge change in behaviour. There has been a large learning curve of the market participants, as well as those people responsible for running the system.
486. I think you accept that this was pointed out before.
(Mr McCarthy) For example, Ofgem always wanted to reduce the period between gate closure and real time to as short a period as possible, and the reason why it was set initially at three and a half hours was that the system operator said that they were not confident without experience of the system that they could make it run on a shorter period than three and a half hours. I think it is very encouraging that so quickly we have been able to move from three and a half hours to one hour. One of the things that we deliberately designed into the NETA process was a corporate governance that made it possible to make changes to NETA in a way that it was always impossible to make changes to the Pool. We recognised that it would be necessary to make changes and have designed in a process to facilitate those.
487. The PIU report recommended that Ofgem and the DTI should develop transitional arrangements to be ready to be implemented in January 2003 in case the current measures are unsuccessful in helping small generators. Coming back to what we were told recently, the current measures are not being particularly successful. Are you taking any action in response to the PIU recommendation as part of your review?
(Mr McCarthy) Since I believe the PIU Review failed to identify what they thought those transitional measures would be, I find it rather difficult to follow their advice other than to make the changes which we are making at the moment and will continue to make.
488. I have listened carefully to what you said, but it does strike me, if I may say so, that there is a degree of buck passing going on here. The PIU makes some recommendations that you should look at things differently. You say to me that they did not make any specific recommendations. The Minister comes here and gives evidence and says, "There are problems with NETA, Ofgem is looking at all of this and I am sure that Ofgem are going to come up with a solution." You come here today and say, "That is not our job. We are a regulator. Political decisions have to be taken by elected representatives", so from the perspective of sitting around this table, every time we ask someone a question about this, they say, "Go and talk to someone else".
(Mr McCarthy) If I may say so, in so far as we have responsibilities, and we have certain responsibilities under NETA, we are discharging those to the best of our ability and have made very significant changes already. We expect further changes to be made and will respond to other proposals within the framework of NETA. In so far as there are things that we can do, we are undoubtedly doing them.
489. Do there need to be legislative changes to your remit?
(Mr McCarthy) If Parliament wishes us to do things differently from those things that we can do under our existing legislation they should certainly change the statutes.
490. I am asking you as the man who runs Ofgem if there need to be changes.
(Mr McCarthy) I believe that the Authority can discharge its duties perfectly reasonably under the existing powers. If we are asked to do different things we will discharge them in a different way.
491. Can I move on to talk about consolidation, banding together with smaller generators to participate in the market mechanisms of NETA? You state in your memorandum to us that consolidation services are of significant assistance to smaller and intermittent generators. Have you got any evidence for that assumption?
(Mr McCarthy) Yes. I think the evidence that I would give is that if you look at the problem of, for example, wind generators, where the reliability of any wind farm can be relatively low, by grouping them together it is quite clear that you can improve the overall reliability of the system and if you do that, for example, for five wind farms, you significantly improve the reliability over one. If you do that on a different scale you can improve that as well.
492. Can you tell us how many companies are currently participating in that arrangement?
(Mr Simpson) It seems that there is some misunderstanding of what consolidation is.
493. Explain it to me.
(Mr Simpson) The main point here is that almost all small generators are making use of a consolidation service. They are doing that because their imbalance exposure is part of a larger portfolio. For instance, if you take a wind farm like Bears Down, which is near Newquay, it has an output of something like nine or ten megawatts rated. That one wind farm is part of National Wind Power's portfolio and National Wind Power is part of the Innogy portfolio. As a fraction of their imbalance, which is a single imbalance on Innogy, Bears Down wind farm is a mere one-thousandth of their capacity, so already there is that consolidation service being offered at Bears Down. That is true of all smaller generators except for a very few. The question really is about how much money are they receiving for these services and that is where the debate goes.
494. Go into the debate then.
(Mr Simpson) The debate is about the relationship between the suppliers that can take their energy and the small generators who are selling their energy. Part of the outcome of the Consolidation Working Group recognised that this is quite a specialised market between a smaller generator and the suppliers that are able to offer to buy that energy. It needs further investigation as to what is going on in that relationship between supplier and seller.
495. You talked about a Consolidation Working Group report, and the CHP and many other signatories have publicly dissociated themselves from the conclusions of that report and they have argued in essence that the report failed to reflect the majority view on various wider issues relating to smaller generators that NETA were not properly examining. Was the report biased?
(Mr Simpson) The report sought to fairly put the views of the many participants of the group. While smaller generators had a number of people on the group, it was not really about majorities or minorities. There were a lot of specialists, from Elexon and from NGC and various others STET operators and consolidators and various people like that. It was not a report that was putting a view that something should be done or not be done and all of those views were expressed. What the Consolidation Working Group was doing was saying, "These are the actions that are being taken", and reporting on them, "and these are the issues that need further work". One of the issues that I have alluded to is the investigation as to whether you need to look at that relationship in the quite specialised market of smaller generators selling to a group of suppliers and whether that is competitive, or whether we need to unbundle the embedded benefits from the tradeable energy.
496. So you deny that you are steering a course here, that you are biased in your perspective? You are suggesting that the group is actually taking a balanced view?
(Mr Simpson) Yes.
497. Going back to the question of the environment and NETA, you have under the Act to carry out its functions with regard to the effect on the environment. That is a secondary duty but it is none the less clear. We asked you whether you had carried out any monitoring of the consequences of NETA on the environment. You said you had not in the memorandum which we received from you. Indeed, you did not say you had not. You denied any responsibility for doing that, and yet you have a responsibility to have due regard to the effect on the environment of your actions.
(Mr McCarthy) We do not carry out a series of environmental audits on the effect of the energy industry on emissions, on SOX, NOX or carbon emissions, because we regard that as being the responsibility of the Environment Agency. We do work closely with the Environment Agency and use their work.
498. So that in your view is fulfilling your responsibilities to have due regard to the effect on the environment?
(Mr McCarthy) We believe that we do fulfil our responsibility, yes.
499. In that way? Simply by calling on the work the Environment Agency does?
(Mr McCarthy) Yes, in terms of actually doing the measurement.