WEDNESDAY 30 OCTOBER 2002

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Members present:

Dr Ian Gibson, in the Chair
Mr Parmjit Dhanda
Mr Mark Hoban
Dr Brian Iddon
Geraldine Smith
Bob Spink
Dr Desmond Turner

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Examination of Witnesses

PROFESSOR MIKE HULME, Executive Director, Tyndall Centre, DR JIM WATSON, Research Fellow, Science Policy Research Unit, University of Sussex and MR ALISTAIR SCOTT, Researcher, Science Policy Research Unit, University of Sussex, examined

Chairman

110. Professor Hulme, nice to see you again. We know that you represent the Tyndall Centre. Dr Scott and Dr Watson, nice to meet you. We are looking forward to this session and we hope that we will gain some information about the well-reputed Tyndall Centre and the work that you are doing. We are very pleased with it. Mike, let me start off by asking right away, the Government policy on energy research and development, what do think might be wrong with it in general?

(Professor Hulme) In general terms, I think that the UK has a great international advantage in that we are seen as being one of the leading countries to promote the notion of a global agreement to control climate change and within the UK that is backed, at the present time, by a strong commitment and determination to meet our Kyoto obligations of reducing emissions by 121/2 per cent and an internal target, of course, of going beyond Kyoto at 2020 of reducing by 20 per cent. Currently there are a number of initiatives and policies in place to attempt to ensure that those two targets are met. It seems to me that that puts the UK in a very strong position internationally. This is also reinforced because we have one or two of the leading international scientific organisations who are researching into climate change, the Hadley Centre in particular. So it seems to me that these advantages that the UK have internationally need to be reinforced and bolstered through improving and extending the range of policies that are going to lead to further reductions in greenhouse gas emissions. I am coming on to answer the question. Part of this comes back, in the end, to how much public money is made available for research into new energy R & D. So that would be my context, if you like, for this question. The context is the UK are regarded internationally as one of the leading advocates for global climate policy and control and the way in which energy R & D is taken forward in this country should be put into that global context. In our submission that we made to your inquiry, we made a number of points and observations about the current state of R & D in the country and I will leave Jim Watson here, from SPRU in Sussex just to rehearse one or two of the key conclusions that we reached in our survey.

(Dr Watson) Thank you. I think one of our main criticisms, if it is a criticism, is not of we are doing too much or too little of a particular technology, or whatever. What I am quite keen not to do, and what we have been keen not to do in our submission, is to talk about pro and anti certain options for reducing greenhouse gases. One of our big key points, as you will see in our submission, is about balance and the fact that one particular option seems to dominate the amount of Government money going into energy R & D, which is nuclear fusion, and has done for a long, long period of time. Of course, nuclear fusion has a great potential in tackling climate change ----

111. We will be asking you about nuclear fusion in particular later on.

(Dr Watson) Okay, I will not make that point. But I think on the balance question, I would question whether it is good to have a particular option like that that dominates things. Then the other point that I would want to emphasise is that R & D is just part of the story and that actually R & D is fine, but then if you leave R & D, it is actually deployment of technologies that we really want to make carbon emission reductions and that is something that has been a bug bear of mine for quite a long time. That is that a lot of Government programmes do some great R & D and perhaps some great demonstration too, but then it stops.

112. You talk in your submission too about too many funders and agencies, poor coordination between them. How would you tackle that problem then? What is the answer to that?

(Dr Watson) We are obviously aware of the moves towards a national energy centre and we would welcome that if it is rather like Tyndall is - I will let Mike pick up on this - a distributed centre. I think there is not a case for a new institution, creating a new institution in a physical sense, but there is certainly a case for coordinating what is there because there is a lot of R & D both publically and privately going on, but it needs much better coordination. Whether that is a case for a natural energy centre, I am not sure. Maybe Mike can talk about that.

(Professor Hulme) We are aware that these proposals are currently under consideration at the moment and the other dimension to such a national centre would be the ability to bring together different research perspectives on the questions of how we actually not just develop new energies, but actually deploy and integrate them into society. That requires clearly very close cooperation between our engineering sciences, between our environmental and social scientists and between our economic and policy analysts. This is just as deep a challenge, if you like, of cross-disciplinary research as indeed the Tyndall Centre is in tackling the bigger question of climate change. So our argument would be that some sort of model along these lines, that could bring together these different research perspectives under one distributed national centre, allowing the best players to participate together, would be certainly appropriate.

113. What about the DTI's role in this? Are they a bit chicken? A bit heartless? What do you think of the DTI in energy R & D?

(Professor Hulme) From my point of view, as Director of the Tyndall Centre, we have a very good relationship with the DTI. The DTI support our activities in the Tyndall Centre.

114. You are not going to tell me the truth then; what you think?

(Professor Hulme) No, I am telling you the truth, Ian. And the truth is that we have a very good relationship with the DTI. They have actually recognised - and I would say that we have not received any core support from other Government departments, but we have received core support from the DTI because they recognised actually that climate change and solutions to climate change, particularly of course this potential for new energy technologies, is something that is going to impact on British business and industry. They wanted, and that is why they have invested in a core post in our centre, to improve the flow of information, the communication between our research and business and industry across the UK. So on that point, I would say that the DTI have recognised the strategic importance of this issue and have supported our activities. Of course, there are other dimensions to DTI in relation to having a management support various emerging energy technologies. Again, I will leave either Alistair or Jim to give a more detailed comment. But again, let me give one example where again the DTI are taking active measures, again in conjunction with the Tyndall Centre, to look at one of these potential new technologies which will help to decarbonise our society, which is carbon sequestration. Basically stripping carbon out of waste flumes and sinking that carbon into geological aquafers. Now there are many different perspectives on that technology and we are researching those. We are doing that partly in conjunction with the DTI. So I give you two positive examples where the DTI is actively engaged with the sort of research that we are doing.

115. So you would not say they were risk averse, in management jargon? They are prepared to go along some research that is in the "blue skies" arena?

(Professor Hulme) I would ask either Alistair or Jim to comment on that.

(Mr Scott) If I can answer this by partly rewinding to your first question which is; what is wrong with Government policy? In our submission we submitted a table, on the penultimate page, which gives an international comparison of UK investments in energy R & D. If you normalise these for populations, it gives you a more meaningful comparison between the UK and its main competitors. Roughly speaking, the United Kingdom is currently spending about one dollar per head on energy R & D. Compare that with Germany, which is spending three and a half dollars per head, the United States, which is spending eight, France, which is spending 11 (admittedly much of it on nuclear fusion - fission) and Japan, which is spending 30 dollars. So these countries are spending fully three and a half, eight, 11 and 30 times roughly what the UK is spending per head on energy R & D. So that gives you some kind of idea of the scale of the difference of the investment that the UK is making compared to our international competitors.

116. But you see the point of my question is to find out where that decision is being made how much to put in. Is it the DTI? Who is it? Government is a strange organism.

(Mr Scott) I do not think that is something that we could easily answer.

117. That is fine, okay. You had your chance.

(Professor Hulme) The example I gave before is about the proposal for a new energy centre, which would be through the science budget. So in that case it would actually be managed in the end by the research councils on behalf of OST.

118. Just a quick one about the Carbon Trust. Tell me about the policies and funding of that, if you have any view on it. Any one of you would do. How it is working out, in your views.

(Dr Watson) I will let them speak for themselves next week.

(Professor Hulme) They are due to come here, is that right, next week?

119. Yes, they are coming next week.

(Professor Hulme) My perception - and I do not speak with any great authority, I mean I have observed from a distance how they have been developing their strategy in the last 12 months. It seems to have been rather slow to actually get off the ground, but my perception is that the primary focus of their investment is going to be through this low carbon innovation programme that has been established which, as I understand it, will attempt to focus on the demonstration part of the chain, if you like, right the way from research to full deployment. My only question about that would be the extent to which there are appropriate organisations, either in the public or private sector, that could actually receive that money and effectively use it for either small scale or large scale demonstration; whether actually the capacity in Britain is there to absorb that hundred million pounds funding stream.

(Mr Scott) If that is seen to be the main UK investment in energy related R, D & D and it is concentrating mainly on the latter D, demonstration, that would seem not to compensate for the comparative lack with our international competitors that I have just spoken about.

Dr Turner

120. If you were holding the purse strings, if you were the DTI, would you be trying to pick winners? Do you think that we are actually playing to our natural strengths probably in the UK in terms of backing different technologies? So which ones, leaving aside fusion, we know your views about fusion, leaving that aside, where would you put the money if you had it?

(Dr Watson) As an adjunct to our fusion point, would be basically fusion has a particular time scale attached to it. It has a particular potential. But there are other options that also have that time scale and potential and they should be funded to the same kind of level. We have suggested sequestration, for example. If you can fund fusion to the tune of £40 million a year, why not carbon sequestration? Ditto hydrogen, in some cases. I am not saying I am an advocate or not of any of those options, but certainly I think there is a case, if you are going to be bold about one of these options, you should certainly be bold about more than one because they are so uncertain and long term.

121. But looking at other technologies which do play to unnatural strengths, like wave, tide, offshore wind, would you be putting more resources into those? And do you think, given more resources, they could beat the time scales attached to fusion?

(Mr Scott) I think they are complex comparisons to make and when trying to decide where to put R & D resources, you need to take into account a range of criteria. There are things like the natural resources that you have just spoken about which the UK is endowed with, but they also relate to the R & D skills that are there in the science base, but also the industrial skills that the UK has for exploiting the science and technology that comes out. So you cannot simply say "Well, we should pick a winner on the basis of one of these things". It has to be an assessment of the UK's capabilities in all of those areas. You will only have successful relationships between research, technology and innovation when all of those factors are present. For example, the UK does very well in exploiting pharmaceuticals based science, which is done in UK universities, and that is because we have a strong pharmaceuticals industry. Whereas in ICTs we do not have a very strong indigenous industry and so a lot of the UK science tends not to be exploited in the UK. So that is the kind of rich analysis that you need to make when deciding on R & D priorities.

122. Would you not say that in terms of marine technologies we do have the industrial base because of our experience in the offshore oil industry? A lot of transferable technology.

(Mr Scott) With respect to photovoltaics, by comparison, Japan has made huge investments in PV, which has been written up and which we refer to in ----

Chairman

123. We went to see it.

(Mr Scott) Right. Very good. We mention that in our submission. The Chief Scientist's review of energy R & D, quite rightly I think, talks about looking to the next generation of PV which is underpinned by organics and polymer science. And that may be one way through. Which again is an area where the UK has science strength but also industrial strength.

Dr Turner

124. What is your feeling about the role of research councils in energy R & D? Do you think that they are giving it adequate priority and does it properly reflect the urgent needs for developing the non-carbon technologies if we are going to achieve our Kyoto targets, let alone any other targets?

(Professor Hulme) I will make an initial comment. Again, from my perspective of actually interacting with three of the research councils that fund the Tyndall Centre, that is the NERC, ESRC and the EPSRC ----

125. Temporarily ignore the fact that you get funding from them.

(Professor Hulme) Yes, okay. But I think again the information that we tabulated in our submission indicates that actually there is relatively little focussed energy R & D that comes through those research councils at the moment. I think that may be partly rectified once we see the final outcome of the 2002 spending review and we refer to this potential new 20 or 30 million programme on sustainable energy, which is certainly very welcome. But certainly up until now it has been relatively limited. The other comment that I would make about the research councils' involvement here would be the importance of again paying due attention to the need to integrate across the research council base. So this is not an issue just for EPSRC. It is not just an issue for NERC. This question has got to be tackled at a cross-council level and that is going to require greater coordination, greater flexibility in the way in which the research councils work together and establish research capacity, fund research capacity within the United Kingdom.

126. Research councils tell us that they propose to do just that, which presumably you are aware of. However, given their track record so far in supporting and stimulating R & D in energy, are you satisfied that they have got it right?

(Professor Hulme) I think there is still some way to go in the structural issues about how the research councils actually coordinate and manage large research programmes that spill across their territorial boundaries, if you like. There is certainly movement to try to make this more effective but, from my experience, I would say that there is still a considerable way to go and one of the things that I am interested to see next spring is the report, I believe, that the RC UK will be publishing, which is laying out exactly how this new umbrella organisation will improve the coordination and communication across the various research councils. I think there is a big opportunity there to make those words that you have referred to actually deliver a new type of cross-council cross-disciplinary research. I think sustainable energy is one of the best exemplars that we could find of why that is going to be needed.

127. You have already referred to the high level of spend on energy R & D in Japan. My impression, having visited there, was the accounting is slightly different, so it may be somewhat over-stated, but nonetheless it is massive compared with us, but it is very narrowly targeted. Do you see that approach working in this country?

(Mr Scott) Again, we are back to the question of picking winners, are we not?

128. But they pick their winners and then they put truck loads of money back into it.

(Mr Scott) I think the UK policy system instinctively shies away from picking winners. I think there is good logic from history, historical evidence, experience in not doing that. But to a certain extent some of the non-carbon energy sources that we are talking about are so broad and generic that we are a very long way from picking winners, from being in danger of picking winners, given our low level of comparative investment in energy R & D. You know the sun is going to shine, the wind is going to blow, wave and tide will come and go. These are all areas where we could very effectively spend some R & D money and certainly a whole lot more than we are spending at the moment. Just to finish that, I think we would not encourage picking winners, and in any case, I do not think the policy system would accept that, so a modest investment, certainly a large increase on what is currently invested in all of these areas, would not go amiss.

129. If this increased investment were available to you, how would you want to see it directed? How would you organise an expansion of the British effort? Would you simply give it to the research councils or would you do something different?

(Professor Hulme) Let me start by making one comment before asking my colleagues to add. One key issue that I think Alistair referred to is the skills base in the UK. Again, from my personal experience within the Tyndall Centre over the last two years is that we have found across our partner institutions difficulty in recruiting suitably skilled and qualified researchers to work, particularly on our energy related projects. This is not a problem that we find in the environmental and social side of our research, but particularly in some of the energy and engineering aspects of the work that we are doing. So that clearly suggests or points to a potential skills shortage in this area. So one of the elements, to answer your question, would be investing to ensure that there was expanded investment, particularly at post-doctoral level, in the relevant technology related disciplines that would contribute to this. But that is only one part of the answer. Maybe Jim or Alistair would have an additional priority.

(Dr Watson) I just wanted to added an adjunct, which is that it is not just about research councils who are concerned with universities. It is about the industrial system as well. One of the most striking things - and I have put together figures over many years since privatisation of utilities, for example - is that the old research centres now no longer exist or are a shadow of their former selves. British Gas in Loughborough is one good case in point. It now employs maybe 400 people. They have had a lot of cuts because of the environment they work in. You have got to create, as well as just putting money somewhere, create the conditions where those companies, whether they be British Gas or electricity companies, are allowed to conduct some more R & D. Not just R & D which is business as usual from this year to the next, but R & D that transforms the energy system in the way that we need it if we are going to attain these low carbon goals. So it is partly spending money, but it is partly about the regulatory rules under which these companies exists and at the moment all the regulatory rules tell them to chop the R & D department and keep two people and a dog to keep their eye on up and coming technologies.

130. Their accounts show they have done just that.

(Dr Watson) Yes.

Mr Dhanda

131. You have partly tackled the skills question already and you talk about your relationship with DTI, which you say is a good one. But what about the relationship with the Education and Skills Department in terms of tackling some of those shortages? Because you must have some idea as to exactly how you are going to do it.

(Professor Hulme) I cannot speak from any personal experience of engagement with the Department of Education and Skills. My experience is again through the research councils and the money that actually comes into universities for post-graduate training, Masters training and indeed for post-doctoral research. I think there, there clearly has been recognised again a significant need to enhance the attractiveness of staying on at university for science and engineering disciplines by increasing stipends, for example, for post-graduate students. So that is one thing. I think the other thing too, in relation again to energy related research in universities, is greater flexibility to get the appropriate, let us say, mathematical engineering or physical science skills working alongside disciplines who actually understand the environmental and social context in which these new technologies are, in the end, going to be accepted or rejected by society. This leads to issues like schemes to have post-graduate students working again on cross-council initiatives. So like an EPSRC and an NERC joint programme for post-graduate research or to have greater investment in what are called "discipline hopping initiatives" to allow an engineer, let us say, to spend 12 months working in a social science department or in an environmental science department to actually allow the richness of this research to come home. I would argue that those sorts of schemes need greater injection of funding.

132. Is there a link, would you say, between the R & D issues that you have already outlined, and you say that you would like to see more of it from the Government effectively, and a shortage of skills in those particular areas? Would you say there is a link between the two?

(Professor Hulme) I would have thought undoubtedly there is a link, yes.

133. Could you elaborate on that?

(Dr Watson) I could with an example. It comes back to your DTI question actually, in that I did a lot of work on cleaner coal technology and the people in DTI said they fought hard to get their budget which at the time and, I think, still is about £4 million a year. But one of their real dilemmas was actually getting more. They really wanted more but actually the person who ran it was saying one of their dilemmas is where do you find enough good projects to spend that money on. So I think you are in one of these classic chicken and egg situations. Of course, doing funding at the post-graduate level would then bring through trained people to then populate, whether it is in academia or industry, to be able to absorb that extra spend, but it is not something you can just do overnight.

134. Is there any confusion as to whether this is a DTI issue or whether it is an Education and Skills issue in your minds?

(Mr Scott) I think it is partly about long term Government policy signals that since the late 80s energy R & D is going to be cut and we are now reaping the rewards of that policy, that researchers in those areas either have not been trained and brought through, or have left the country, or have retooled into another area. So in the same way that you have had that long term signal that has degraded the research base, you need long term Government signals to rebuild that research base, not only within the public sector but also within the private sector, so that international firms make the decision to base their R & D labs in the UK in the sustainable energy area. There is some evidence that firms such as BP are putting facilities elsewhere; in Spain and Germany, for example. So these are issues for long term Government signals. As to whether you can increase your energy R & D capacity quickly, you basically face a make or buy decision. You either make that capacity by training people or retooling them, or indeed investing in areas that are sufficiently generic, and that is part of the attraction of investing in polymers, for example, it is a fairly generic area of science, it has application to other areas as well as sustainable energy. Or you can buy by trying to get capacity back. You can try and attract British researchers back from the States or wherever they have gone. So those are some of your options.

Chairman: We have three more areas we want to trawl in about 15 minutes, so we will try and sharpen it up, if we may. Geraldine, you go first.

Geraldine Smith

135. You have mentioned you are critical of the continued levels of funding for nuclear fusion, but should you not really be arguing for more money for the other technologies for R & D? Is it not that all the money that has already been spent on nuclear fusion, all the billions of pounds in the research, to stop it or to cut it back very heavily now, would that not just be a waste of money for the money that has already been spent? The UK are leaders in research in nuclear fusion. There has been much very good research done, would you not be hampering all that progress and just setting it back to square one if you cut back on the funding?

(Dr Watson) Yes, I guess you would, but the converse is that you continue it in perpetuity despite - even if there is not any evidence that the time horizon is getting any shorter. Fusion has always been 50 years ahead ever since 1951 the US Government started ----

136. It is 30 now.

(Dr Watson) Well, I would probably disagree with that, but we found an article, the US Government spent $17 billion on fusion already. I mean how many more billions do we need to spend? But I go back to my previous point really; which is not that I want to swing an axe through the fusion budget as much as bring other options which are equally likely to do what you are trying to do with fusion, which is have a large scale technology which is non-carbon but you can also do it, you should bring the funding of those technologies up to that level. It is a proportional question as opposed to actually singling that out and saying chop it. I also understand with fusion there is an issue about the politics of the European Union. A lot of our money is spent under the Euratom Treaty and I understand that certain people's leeway to actually make decisions to reduce that funding is quite constrained by the politics of the European Union actually.

137. So tell me, just to make it clear, do you not feel that real progress has been made with research and that things are moving on with nuclear fusion and that those time scales can be cut?

(Dr Watson) I am rather sceptical, I really am. I mean I know there are headlines, probably at least once a year, often I notice in the Observer, and it is usually saying yes, we have got fusion power for a certain amount of time, but they are not moving ahead. There is not this great breakthrough of building a demonstrator which works or whatever. But that may well happen in the future. Again, I would not want to be a person who is saying we should chop it, but all I am saying is that there are other things out there that are equally likely to come through which are just hardly getting any money now.

138. You are actually are saying in your submission that it should be reduced.

(Mr Scott) Proportionately, by increasing the other sources of funding. I do not think we are pursuing a rather instrumental view of science which says that you should only fund that science which produces immediate pay backs for society. That is seen by many scientists as rather a philistine position. There is some science which is good to pursue for its own sake and fusion may come into that bracket. There are some analyses of spin offs from fusion which try to analyse what other spin offs in terms of commercial technology come from fusion and some of those indicate that the UK is getting a pay back of roughly, I think, about £3 million per year from its investment. So that is a one in ten pay back. Now that kind of analysis is useful in assessing the value of the investment in fusion, but I think overall our point is that all of the other types of R & D should be brought up so that the fusion is very much more in proportion, because at the moment it seems to be out of proportion.

Chairman: I will come back to fusion, but I saw your eyebrows go up at the some of the answers. I would like you to get stuck in on those issues.

Mr Hoban

139. I just want to go back to the comment that Mr Scott made in answer to the previous batch of questions. You referred to BP investing overseas in Spain and Germany. Why do you think they are not investing here and what do you think we should be doing to make sure they do invest here and not elsewhere?

(Mr Scott) That is partly about R & D policy but it is partly also about industrial policy. It is about the support for PV programmes in other countries that does not exist here. So this again brings us back to the point that you cannot simply pick off R & D as an area of policy you can pursue in isolation from other areas. If you are serious about climate policy and seeing energy R & D as part of that policy, then you will pursue a range of policies together to try to increase the uptake of non-carbon energy technologies. That is what is happening in Germany, where you see a very large PV programme, and Spain as well, despite the fact that they have a smaller GDP than us, they are pursuing that. Some would say they are sunnier, but nevertheless, PV still has good applications here in the UK, even niche applications that are viable at the moment.

140. So what action do you think the Government needs to be taking to get that sort of holistic approach to using renewable energy?

(Mr Scott) Sending long term signals that it is serious about transitional support for those energy technologies that are not currently viable. There are good examples that we wrote about in our submission. Jim?

(Dr Watson) I would just expand on the BP point that you made really. That they have said publicly quite often that if there was a sufficiently big roof programme for PV, and they think our programme at the moment is not sufficiently big, but if there was, they would build a factory tomorrow in the UK. And that is their way of bringing the cost down and so on. So their argument is a fairly simply one actually. It is not that complex.

141. I presume the point is not just limited to PV and BP?

(Mr Scott) No, it is just an illustration. It is the same for wind power, for example. The UK had leading wind power expertise in the 1980s. It has more or less killed the wind power research programme and the expertise went elsewhere. Why has Denmark got six of the seven largest wind turbine generating firms that are building wind turbine generators? It is because they have had a long term support for that industry in Denmark.

Dr Iddon

142. Can we just come back to fusion? You produced this table which shows that the countries that belong to the International Energy Agency have nearly all reduced their investment on R & D in energy production. Only Japan has increased by plus 47 per cent. The figures for Britain show that the reduction in this ten year time scale, which was 1988 to 1999, is minus 87 per cent for Britain. It is the worst in this table, is it not? But the figures end in 1999. I would be interested in seeing the last three years' figures to bring the table up to date, if you are able to supply those, because my feeling is that the figures have got better since this table was given to us by yourselves. Is your real objection, let us get to the bottom line here, to continuing the investment in the fusion project, which, after all, has gone a long way down the road now, purely monetary, or do you just believe that the thing will never become commercially viable?

(Dr Watson) I just come back to our previous point that it is not a yes or no, it is a proportional question. On the figures point, I am sure there are more recent figures now and I think you are right, you will see a turning of the corner, because it could not go in any other way, to be quite honest, in the UK. If it got any smaller, it would be really quite embarrassing. But it has turned a corner with more injection, for example, into renewable energy R & D. I would not be surprised and certainly if the Committee would like, we would be happy to see if we can update those figures as far as we can.

143. That would be useful. Can I just suggest that maybe the transfer of the responsibility for fusion R & D to the EPSRC may highlight more, which is what you seem to be asking for, more the deficiencies in investment in other forms of new energy production. Do you see that as a good thing?

(Professor Hulme) We certainly draw attention to that point.

(Mr Scott) The majority of the investment in fusion is via Euratom and there seems to be an indication that that is somehow a fixed commitment through the Euratom Treaty. I think I am right in saying that.

(Dr Watson) It is certainly more fixed than if it was just in the gift of the UK Government on its own.

144. The problem, if I may so, is we are committed to the ITAC (?) Project now and to pull out of the ITAC Project would be very difficult for Britain. The US pulled out of it. We are in it, the European countries with Japan, and from what we saw with our visit to Japan, I was quite staggered at the success of the current project, the Juterian (?) Fusion Project, JIF, in Japan. How can we pull out of the ITAC Project now? Never mind the treaty.

(Dr Watson) I think it is in view of those difficulties, particularly those political difficulties, that we would not say let us cut fusion, let us raise the overall budget and get it into a proportionate place.

Bob Spink

145. The international evidence shows that we are highly unlikely to meet our renewable targets that are mooted in the PIU (?) Report. Given that we need to therefore fill the gap with non-carbon sources, do you think we should be going ahead with some fission, improved fission reactor technology research?

(Mr Scott) The Chief Scientific Advisor's inquiry into energy R & D, which fed into the PIU Report, did not mention nuclear fission and we did not mention nuclear fission in our submission.

146. The Chief Scientist has said that he wants to keep the nuclear fission option open and sees it as clearly a stepping stone to help us to meet our quota of targets.

(Mr Scott) I think in terms of commercial viability nuclear fission has not proved to be a particularly good option and ----

147. Do you know what the French are doing on research in nuclear fission reactor technology at the moment?

(Mr Scott) Not in detail.

(Dr Watson) I am sure they are doing quite a lot. They are involved in some ----

148. Almost the whole of their budget.

(Dr Watson) It is, absolutely. If you were to take nuclear out of the French budget, the French budget would be very small.

149. I wanted to come onto private investment in energy and talk about the regulatory aspect of it. What changes in regulation do you think would help to improve private investment in energy research, bearing in mind that BNFL Westinghouse (?) are doing most of the fission research on pebble bed (?) at the moment?

(Dr Watson) I think I could, if I may, expand on the point a little that I made about the networks businesses, for example, in that they are regulated. A lot of this decarbonisation that we see that is necessary hinges on integrating many, many new renewable energy generators, many, many new small power plants, new types of technology like fuel cells and so on, into networks that we have already. Until those companies, or people surrounding those companies, are allowed to do more long term transformational R & D then you might produce all the widgets you like, whether they are renewable, nuclear or whatever, but actually integrating them into this system as a whole is going to be an incredibly tough task. These people, as you have seen by the news about 24/7 today, there is now an inquiry as to why they have not got people's supplies back on after the storms at the weekend.

150. But with respect, I asked you what changes would you like to see in the regulatory system to encourage more private investment in energy research.

(Dr Watson) I would like to see, for example, a regulatory change so they are allowed to do R & D and recover the costs from consumers basically. That is the short answer.

151. What regulatory obstacles do you see to greater public investment in R & D in energy?

(Dr Watson) I do not really see any. I think it is in terms of will and how much money you want to spend. Any regulatory obstacles, I think, would come from the EU and their State Aid Rules, which obviously have to be taken into account every time we spend money on R & D.

Chairman: Thank you very much. I am sorry we have to move along. I know it was a bit sticky at times, but you can see what we are after. We are trying to get some way of moving forward from a very poor position perhaps. I think you agree with that. I just hoped you would tell me what it should be, but maybe that is too simplistic. Thank you very much to all three of you for starting us up today.

PROFESSOR GARY ACRES, Visiting Professor in the Department of Metallurgy and Minerals, University of Birmingham, PROFESSOR TIM JONES, Professor of Chemical Physics and Deputy Director, Imperial College Centre for Electronic Materials and Devices, PROFESSOR GORAN STRBAC, Professor of Electrical Power Engineering, UMIST and PROFESSOR MICHAEL GRAHAM, Professor of Unsteady Aerodynamics, Imperial College, examined

Chairman

152. Thank you very much. I see it says you are all energy technology researchers. That is an encompassing term, but you have been sitting in and you hear the nature of our inquiry. Can I start off; you guys tried to get a lot of public and private funds. How do you get on with it? What successes do you have in accessing public and private funds? I know you have all got something to say, if you could just, each of you perhaps, on that one say something briefly? Perhaps you would start, Michael Graham.

(Professor Graham) Essentially I access public funds and very little from private funds. This is partly because - I should say, I work in wind energy and wave energy and tidal, etc.- I have not been able to identify what has been said, of course, about the wind industry, which is pretty well non-existent now. It has been difficult to identify industrial funding, private funding to come in. I have had a very small amount of it, but the bulk comes from Government funding.

(Professor Strbac) My area of activity is electrical power engineering and in the context of the debate of renewables, I guess I would say that the area of work which I am involved with is about integrating renewable generation into the electricity system. I come from Electrical Energy and Power Systems Group from UMIST which is one of the largest groups in the UK with also, I think, significant international standing. We have been primarily funded by research council, European Union Framework 4, 5 and now hoping to be active in Framework 6, DTI. Also we have got a small number of projects which are directly funded from UK industry, but all the projects which are funded by EPSRC are in collaboration with industry in proportion, I think I would say, I guess about 80 per cent would be public funding and say about 20 per cent would be directly from industry.

153. Which industries?

(Professor Strbac) I work with all, if you like, major parties in research, generating companies ----

154. Anybody that will touch your research, is it?

(Professor Strbac) Yes. That is my industry.

(Professor Acres) My background and interests are in hydrogen and fuel cells. I can speak for both industry and academia in my visiting professor role. I suppose in the context of Johnson Matthey, over a fairly long period, I have had substantial support from DTI, UK Government and in the Birmingham context, particularly with hydrogen technology, they have been quite successful both with the commission, more recently EPSRC. That is not to say that both parties would not have liked to have had more and as the technology progresses, the issue which you raised before, it is one thing to carry out research, it is another one to exploit it. I think if you compare the UK funding with that of Japan in these particular areas, then there is a much greater proportion of the money that Government provides in America and Japan really is targeted at the exploitation than there is in the UK. I think that is one of the weaknesses. But in the context of research, Birmingham, Johnson Matthey have been fairly good.

(Professor Jones) My area of expertise is electronic materials and in the context of this photovoltaics. Sources of funding, I suppose, are a mixed bag. We get Government money through EPSRC, we also get DTI money, but in fact the biggest investment in our group is from industry. It dwarves EPSRC money, it is from BP and it is quite an innovative programme.

155. Everybody in your field feels hard done by, do you think you are relatively hard done by - try and be as objective as you can - compared with other fields of research? Do you have a feel for that at all?

(Professor Graham) Perhaps we can each speak separately, because they are different areas and they differ. But the funding, I find, wind energy is in a particular position because onshore wind is seen as a mature industry and as has already been discussed, unfortunately the manufacturing industry has disappeared from the country. So it is actually very difficult to get research grants for the technology for onshore wind. I have currently got research grants for offshore wind, which is principally a marine problem. Wave energy is at the other extreme. There is a lot of uncertainty about it, but clearly there is no industry as yet. I feel the funding is very fragmented and perhaps reiterating what was said by the previous submission, there is a need for some sort of coherence really in energy funding policy from the Government through the EPSRC, which is where quite a bit of the funding comes from. We get funding from the European Commission which is through these big, fairly short, programmes. But they are very big and they involve - I have coordinated one with about ten partners in it and five countries in wind energy, which was quite successful but very short. I think the UK needs to get a coordinated policy of funding and perhaps influence EPSRC to look that way. I can give some other examples, in that I work on marine technology of the conventional offshore oil platforms, for about 25 years, and there, there was a very successful policy operating which had a marine technology directorate and so on. It started off very well and it basically brought a lot of academics together with industry and I think the worry was always that it becomes a sort of cosy cartel and towards the end people think it is not very efficient, but it certainly got the coherent development of research for answering the North Sea oil problem. I would like to see the same approach taken for renewables.

156. How sensitive is the system to bright new ideas, particularly from younger people in the field?

(Professor Graham) EPSRC always asks now for adventure in research and ticking the boxes if you are refereeing these applications, but it is just one of the items and it is very difficult to - I mean probably the most important is the track record and the scientific quality of what is being looked at. Potentially it is sensitive, but I am not sure that it is really - it is a very doubtful area. Once again, it is the picking winners. You can see all sorts of exciting things, but you worry that there is a big risk associated with them.

(Professor Strbac) Could I just add a few words on this? In our particular case, I think we have been reasonably successful with getting research funds. In fact, there is now a position where we cannot respond to opportunities which are out there simply because we are at the limit of our capacity. That is what, in fact, worries me a lot in the context of actual UK responding on the ground to the climate change challenge and also trying to meet the targets which are being set. Large research groups - and there are only a few of those in UK in a similar area - are really working to their capacity. We have been successful, as I mentioned, in actually getting the research support, but in our field we feel that the research base needs to be rebuilt. The capacity needs to be built. I would agree with previous speakers, arguing for a longer term coordinating policy which would actually enable development of research, get researchers in and then actually see the developments on the ground. Just one example to illustrate how difficult the position is in my particular field is that if you just take the sort of rough numbers as to what we need to do to achieve the 2010 targets (never mind 2020) and obviously wind potentially playing an enormously important role in that area, we need to build about eight gigawatts of new plant. If you take an average number, saying that perhaps one scheme would be about 20 megawatts, we would need to be building on a weekly basis the schemes to get there. We just do not have the capacity to do that. I could perhaps elaborate later on, but I do not want to ----

157. Thank you. Anyone else? Then we will move on to Brian.

(Professor Jones) Answering your question about are we lucky in terms of funding. In my context, industrial funding is substantial and I think we are quite lucky. But in terms of research council funding, it is very hard work. It is very time consuming and very onerous to get relatively small sums of money. In fact, I think the industrial funding we have got is funding a project which really should be funded from research councils because it is actually quite long term research. It is not a short term technology development.

(Professor Acres) I could quote from Rex Harris's (?) submission to yourselves. There are too many Government agencies involved in this area and the picture is confusing. I think, as you are probably aware, to increase the chances of success when you submit a proposal, whether it be to a research council, DTI or a commission, you need a considerable amount of information on what it is they are looking for. So you either have to be a member of one of their advisory committees, which takes up a fair amount of time, or you have to spend a lot of time in Brussels or next door talking to them. In my experience, if you do not do that, your chances of success are remote and you can spend a lot of time and money on preparing proposals. Of course, in the UK at the moment, as you are well aware, you have got three research councils, three or four ministries, the Carbon Trust, the Energy Saving Trust, various development agencies that all this area as an opportunity to create business.

158. Do you get home much?

(Professor Acres) Yes. So it is a challenge and, in my experience, trying to persuade one or other of the ministries to act as a focus for it all, they say "Not us. You are responsible". Not me personally.

Chairman: That is very, very helpful what you have just said. Brian?

Dr Iddon

159. One of you has indicated that you have had EU Framework Programme money. What about the other three of you?

(Professor Jones) We have also had from the previous one.

(Professor Graham) I think I was the one possibly who indicated that. But the EU has been, in my opinion, very good in this respect and the UK perhaps lags the EU a bit.

160. Have you all been quite successful in attracting European Union Programme funding?

(Professor Jones) Yes, but I think again it is incredibly onerous and incredibly bureaucratic.

(Professor Graham) It is a lot of work.

(Professor Jones) It is not worth it really in the grand scheme of things. Certainly in the previous Frameworks. And in fact, the universities would turn round and say it is not worth it because there is no overheads on it. It is actually a loss leader.

161. My next question was going to be; is it the overheads, the lack of overheads, that the EU Framework Programmes do not pay that make your universities discouraged from applying for the EU funding?

(Professor Graham) I think the EU expects a different regime. In the universities in continental Europe they expect better support, if you like, for the infrastructure and they are just putting in what you might call the "top up" money. So they are surprised. But we, of course, look at the EU grants the same way we look at EPSRC or industry or anything else and we have got live off the whole thing. I come from the same college as Tim, and it has been debated in our college whether we should go away from the EU grants but fortunately they have taken the decision that that would be a bad idea. But it shows it is debated. The level of overhead is 20 per cent and it is very small, but ----

162. And you have just had the transparency review which has revealed all that of course.

(Professor Graham) It has. And also the other thing, as Tim said, the level of bureaucracy required for an EU grant, just the way they run things, is incredibly high. So the work is - I mean my judgment is it is easier to get into the sort of train of getting one and being associated with people, but the amount of work you have got to do to put the grant in place is enormous.

163. So assuming that networks, centres of excellence, are important, I think we would all agree with that, would we not, if we can build them, including across international boundaries.

(Professor Graham) Yes.

164. What do you think we ought to be telling the European Union through our members of it, members of the European Union?

(Professor Graham) I think it is a difficult argument, but I think they would say why is the Government not putting in more supporting research so that these guys can go out and get EU contracts and they are financially worth more to them, they are not as bad as they seem. But I guess Government would say this is not the way we run things in this country, we are not prepared to put that money in.

165. Are any of you aware of the changes that have been made in the bidding process for Framework 6 bids?

(Professor Jones) I think it will be better. It is still a bit vague, but it looks more promising, definitely.

(Professor Strbac) I just wanted to add that I sympathise with the level of bureaucracy and so forth, but we need to be able to recognise that Framework 6 will be significantly different to Framework 5 and this is now about really big players. We are trying to get in, but my worry is that the research base in the UK is comparatively smaller than big research labs in Germany and France. We now find it increasingly more difficult, not to compete, but even to cooperate with these big players. We are now working on three proposals with Framework 6 and the size of those are nearly 14 million Euro, 16 million Euro; these are the size of the projects. The players in there, we are fortunate, the place where I come from, because we are relatively well known historically, but actually we are 10 per cent of the size of the groups which are actually dictating where the research is going. My worry is that unless we redevelop this research base sooner rather than later, we might become not irrelevant but with significantly less say within these big consortiums.

166. Okay. I have a feeling that you need help.

(Professor Strbac) Yes.

167. Where do you think that help should come from? Should it come from your own university or a cluster of universities in your region providing a person who has the skills to give you the help, or do you think the Government, through one of the research councils, should positively foster applications to the Framework Programmes among all universities?

(Professor Jones) I think there is a Government body, is there not, that is dealing with it. I cannot remember what it is called. I certainly went to a talk by somebody which represents UK ----

168. But I mean positive action.

(Professor Jones) Yes, they were trying to - it was a positive thing. I do not know how big the scale of that operation is, compared to other countries. I think in some countries it is very substantial. They are really trying to lever money, European Union money.

(Professor Acres) One of the points that the Commission have made in the past is that UK universities, by and large, are preferred partners to these bigger projects in Europe because they deliver what they say they are going to deliver. Also they have a strong science base in many areas. But the Commission have also pointed out that if the UK loses that science base, its position in Europe will be that much weaker. My experience of sitting on both sides of the fence is that, to some extent, as the UK research councils tend to move more and more to applied areas, they are almost competing with Europe. And Europe, as I understand it, Framework 6, is going more and more to the exploitation of rather than just the researching. I think one of the things to look very closely at is whether we are making the best use of Commission funding in the context of our university interest, or whether we are getting too close to competing with them and losing the strength.

Dr Iddon: Thank you. I think there are some strong messages there. Most grateful.

Bob Spink

169. Could I just say that with climate change our future is in your hands, so I would like to thank each of you individually for what you are doing. We rely on you. So we are very aware of that and if we are aggressively trying to get answers, it is because of the shortness of time, you understand that, I am sure. Academically and technologically I am sure the problems are very great. We understand them. I know that the political problems are also great. Could you tell me in which sectors of the industry you have been most successful in attracting industrial collaborators?

(Professor Jones) My own collaboration in photovoltaics. That has been a substantial collaboration with UK industry.

170. That surprised me because we are far behind other countries, particularly Japan and Germany. Why would that be? Is it because of you as an individual going to the market place and seducing them, or is it some other factor?

(Professor Jones) It is because they want to develop a disruptive technology and not just modify an existing technology.

(Professor Acres) I speak specifically in the hydrogen fuel cell area. Until fairly recently that has been something that the UK and Europe has been fairly low key.

171. I thought Johnson Matthey had been doing ----

(Professor Acres) That is slightly different because they have global interests and they have been pretty active for 30 years or more. What we found recently is that those industries, from the oil industries to chemicals and materials industry, are now picking up the message that there is something important happening in this area and maybe we ought to be involved. And wearing both the Johnson Matthey and the Birmingham hat, what we are now finding is that people are coming to us and saying "Can we work with you?" And that is not just industry; we are also finding the GLA, the Advantage West Midlands, the Welsh Development Agency and, of course, Scotland in the context of renewable energy. They are all coming now and saying "Can we talk to you? Can we join with you?"

172. What is driving this? A commercial opportunity or just an awareness of climate change?

(Professor Acres) The perceived - well, because it is driven by climate change and people looking at whether we are going to meet the 2010 or whatever and some people are saying we are not unless we do this, and then they look at transport and things, do something in transport. So that I believe is driving it and it is creating a considerable amount of interest in this area. Almost to the point where we cannot cope with it.

173. How are UMIST faring?

(Professor Strbac) In the area of climate change, we have been involved in a relatively small number of directly funded projects and I would perhaps single out a very successful collaboration which is still going on with Regenesys, which is a fuel cell based storage technology. We have been working on problems associated with quantifying the value of the storage, in particular relating to enabling larger amounts of renewable generation to be connected to the UK power system.

(Professor Graham) I had support from Howdens (?) in Scotland and while they were supporting me they pulled out of wind energy, pulled out of the whole area. More recently I also had support from the Wind Energy Group who again, while they were just about to support me, were bought by a Danish company which is their position now. They were effectively the two players in the UK. Since then, through EC funded projects, I have worked in collaboration, it is very sad to say, with Danish companies, with Bonus (?). The wave energy and tidal energy, of course, are not in a position where there is any industry as yet.

174. Could one of you just say, do you think that industrial collaboration actually helps you to pick up public money to help you?

(Professor Graham) Yes, it absolutely does.

(Professor Strbac) Fundamentally important.

175. And of course the existence of public money in your programmes will enable you also to attract industrial collaboration. It is chicken and egg, is it not?

(Professor Strbac) Yes.

176. What problems have you encountered in getting your ideas to the market place, commercialising your ideas? Or are you not that far down your research yet?

(Professor Acres) With a sort of industry perspective, until very recently, as I said before, there is a lot more interest from overseas than there is from the UK, but it appears to be changing. There is a lot interest from venture capitalists in the City now in investing in fairly long term ideas. But of course you need to have a base to do that. You have almost got to have the concepts of a new product, or even a new business, to get industry and, not least of all, the venture capitalists involved. So you are back to the research, the funding for the research effort for the ideas to start the whole thing off, otherwise they have got no prospect.

Dr Turner

177. There is a general picture of shrinking investment in R & D by the energy industry in the UK. What is your view of the current situation, not only on the level of research, amount of research they are doing, but are they investing it in the right areas? It is obviously something of a curate's egg, but has anyone got any views?

(Professor Acres) I think what has happened is that investing in what I might describe as the traditional energy areas, and that includes transport, more particularly stationary power generation, tailed off for one reason or another. The technology got mature. Then, of course, established industry, picking up new areas like, dare I mention it, fuel cells, they take a bit of time to realise that that is an area that may be is for their medium to long term. If I mention Rolls Royce, for instance, that is something you may know, they have had an extensive fuel cell programme because they see a fuel cell as an energy producing device. But other companies, who some of us expected to get involved in this area early on, have almost taken the role "Well, when you want to place an order for this or that, come to us". Well, of course, you do not get to that point very fast. So it is a balance between the traditional industries maturing and the newer energy industries, like renewables, starting to take hold. And catalysing that change, I think is one of the jobs for Government.

178. It does not sound impressively hopeful at the moment.

(Professor Graham) I have a comment from the area I work in and it may not be uniformity, I think, comments about this, but I feel that certainly in the wind energy industry, although it is the one that you could say has developed most actually in the UK, it is also the industrial partners saw it as very risky. I think all of renewables is seen, from one viewpoint or another, even PV for example, whether there is going to be a market in the UK or not, extremely risky and basically without some of form of Government stimulation, which has been so successful in Denmark - Denmark had a really first class programme of developing wind energy. They have got less resource than we have, considerably less resource, and yet we have no industry now. But the industry has got to feel there is some sort of security of stimulation of a programme that is going to go over the years. I think in this country now, probably we would have stimulated the industry correctly, but of course we lost it before we could do anything about it.

179. Can I ask Professor Strbac specifically about distribution. For one reason, our resource does not match the grid infrastructure and I note that the grid companies spend virtually nothing on R & D. So can you tell us, Professor Strbac, how you feel about R & D, both in addressing the mismatch and problems of power losses etc. between offshore energy resources and the consumer? And what you feel that the distributors need to do to facilitate the greater development of imbedded, distributed sources of generation?

(Professor Strbac) Could I just start with restating the fact that the industry was privatised in 1990 and that there is no doubt that over the last ten to 12 years that the industry has been under tremendous pressure in terms of reducing costs and the focus on short term has been very obvious. And the difficulties in supporting research have been very obvious in that context. We can elaborate on that, but regarding the future development, we would like to see the UK meeting the Government targets, both 2010 and 2030 regarding the PIU Report, and that really requires strategic thinking. It is very difficult to see how industry, which is allowed only to invest in areas where they are in breach of security standards, how we can look at the overall picture in a global holistic way when we need to have a view of significantly longer term rather than next price control, which is what the companies are generally concerned about, which is, at most, five years. As you rightly pointed out, with the resources being present in the North of England and in Scotland, primarily offshore wind, which is obviously an enormously significant resource, I have been working over the summer on quantifying the costs of meeting Government targets to the industry. And one of the scenarios would require significant - if we are to benefit from offshore wind, particularly North of England, Scotland, a major reinforcement of UK GB transmission system would be required. Without that vision, it is very difficult to see how - if the regulation continues to be focussed only on short term and primarily focussed on economics, not having a strong sustainability angle to it, I find it difficult to see how we would develop the UK infrastructure in a meaningful way, in an optimal way, to be able to benefit from these resources. I am encouraged to see that there are some changes in regulation now. There is significant emphasis on innovation. It seems that OFGEN is becoming more committed towards allowing companies to spend on R & D. We work with a certain national grid company, who owns and operates Transmission Network of England and Wales with Scottish Power, Scottish and Southern, with a number of distribution companies, but the funds they have got available for long term research are pretty limited and they are shrinking constantly. We see that happen on the ground. So we would very much welcome some sort of coordinated approach where the sustainability agenda is clearly present within the regulation so that companies are actually allowed to do research and maybe, you know, fail in - not fail in terms of mismanaging the funds, but research is a speculative area and you may not get always positive answers from that research.

180. So is it fair to say then that the present structure, if you can call it that, of our energy markets is putting tremendous barriers in the place of developing renewable energy?

(Professor Strbac) Yes.

(Professor Acres) You have an example not far from here, which you might be aware of; Woking, which is incorporated distributed or embedded energy system, not only distributing electricity on a private wire system, but also heat and heat for its chilling air conditioning. The gentleman that initiated it all is not the most popular person in the country because he had to get around some of the regulations that you are implying exist. But it is there and even to the Americans that is a major project that they have come over and looked at and the rest of it. So if you got the right person who is prepared to sort of bend the rules and what have you, you can do it in the UK. He claims a CO₂ reduction of 50 per cent because, of course, you are using the heat and the electricity. So I think some people believe - and of course a lot technology involved in doing it if you are going to have security of supply. So you cannot just do it. But a lot of people believe that that is the direction in which embedded electricity, let us say, but embedded energy is in fact going. And we have an example down the road of it.

181. Yes, we saw examples in Japan of zero energy houses with roofs that were selling back to the distributing company their surplus energy during the day. Am I right in thinking that that is just not possible at the present time in this country because of the market?

(Professor Strbac) Can I comment on that? I would like to mention Distributed Generation Coordinating Group which represents a joint effort of DTI and OFGEN to really facilitate deployment of embedded generation sources on the UK system. There is, as we speak, a tremendous amount of work going on in the area of trying to remove all the barriers associated with connecting of distributed generation with connection issues, market issues and so forth. I am reasonably confident that we would, in the not too distant future, I am talking about, I guess one or two years, have the commercial framework in place which would enable development and connection of these renewable sources should they appear. One of the difficulties which I would like to mention is the shortage of skilled manpower to deliver that and it is now very clear that even if this industry will find it difficult just to continue business as usual, never mind the challenges which we have got in front of us over the next eight years, as I mentioned this anecdotal example of building on a weekly basis a connecting new plant. We just have no resource to facilitate that. Again, I would like to see if we can possibly develop or state clearly some strategic goals and get support for both research in that area and also developing skills to enable this technology to actually be implemented on the ground and obviously the research outputs to materialised with the industry.

Chairman: Thank you very much. We will have to move on, I am afraid. It is getting on. We could talk all night, I am sure. Thank you very much for taking time and coming to give us your advice. You will see the report in the end and I am quite sure you will recognise some of things you said, but there will be other ideas by the time of the report. Thank you very much indeed.

Examination of Witnesses

MR DERRICK FARTHING, Director of Power Technology, Powergen and MR BRIAN COUNT, Chief Executive Officer, Innogy, examined

Chairman

182. We have the generating companies too, please. Mr Derrick Farthing and Mr Brian Count. Thank you very much for your patience and sitting through it all. Last but not least, of course, of great importance and we look forward to your advice. Let me start off by just asking a quite simple one. The regulatory and market dissenters in this country, to conduct R & D, what do you consider they are, briefly?

(Mr Farthing) You referred to us as a generating company. Today we are a generating, distribution and retail company. I am actually the Director of Power Technology, which is part of the Powergen Generations business and therefore I can represent Generation and the approach to science and technology for Generation within Powergen. Obviously today we have to have a commercially focussed and scientific approach. So Power Technology has that commercial and scientific focus. We are a strategic business unit within Powergen. We have to be sustainable. We have to pay our way. So we look for every possibility in terms of how we might become and continue to be a sustainable business. We look for such things as tax credits ----

183. You just put electricity prices up, do you not?

(Mr Farthing) Well, in the regulated - the deregulated market, the electricity prices actually reflect short run marginal price for electricity. They do not reflect medium and long term needs for the industry. What we are seeing today is that the market is very much based on short term financials. None of these things are actually conducive to an environment where you would expect to see lots of research and development. So what we find ourselves doing is taking what we see is a very scarce resource available to do research and development and placing it where we think we will get the maximum delivery for every buck that we spend.

(Mr Count) From our perspective, I think the market rules clearly have been set by Government and the Regulator. The market rules, since privatisation, has been to deliver secure supplies to the consumer in a competitive framework.

184. That does not cover this weekend, I take it, for some companies.

(Mr Count) That is for the distributors, but ultimately, having been a member of the nationalised industry we had the same thing - poles do blow down in gales. So I sympathise and I think they are doing a stunning job in getting supplies back on line. But ultimately this industry has invested. It may not have invested in British technology, but it has put a lot investment on the ground. A huge amount of money has been spent in this industry over the past decade. I think it is very important to separate energy policy from technology and industrial policy. Our remit at the moment is to buy what is best available technology on the world markets. My company has invested a lot of money in a technology storage business, some hundred million pounds. We have invested in a new high efficiency development on a small turbine. Ultimately we will invest in that as long as the market is there. If you come to carbon, why are people not investing in carbon? Because we do not understand where the value is. If the Government sets the rules that there is a value for carbon, investment will surely come in.

Dr Turner

185. I take it you gentlemen are both familiar with the German Renewable Energy Act. If we had some arrangement of that nature which guarantees renewable energy prices, what effect do you think it would have on stimulating exploitation of renewables in Britain?

(Mr Farthing) I think we do have something similar in the renewable obligation certificate ----

186. But that is not as sharp though.

(Mr Farthing) It is not as good, I have to admit, and I think those in Germany would say it was not as good. But what I was about to say is; it gives a good lead. The situation with ROCs gives a good lead in terms of the way we might go. It does actually incentivise. You asked earlier about - you said the simple question, Dr Gibson, but I guess it was the opening, a not so simple question, but it does actually incentivise developers to invest in renewable technology. Powergen actually has just bought the remaining share in Powergen Renewables and it paid £57 million to do that. That is a very significant sum. That demonstrates the commitment to renewable technology, as part of its Generation portfolio. That is very much because Renewable Obligation Certificates give a degree of financial uncertainty. It is not a hundred per cent financial certainty. We would like to see rather longer term guarantees associated with ROCs, but nevertheless it is a good start and it is in line probably with Brian's earlier point as well.

(Mr Count) Clearly if you stimulate and the investor is convinced that Government is not going to tinker and take it away, you will get that investment. The question is; should Government be choosing technology winners, because they have a poor history at it, or should they create a framework where business chooses technology winners? So yes, you can say certain technologies get certain support. Is that the best thing for the consumer or could you turn it round and say let us go to something like a carbon traded world, if you want a sustainable world, and let us produce carbon at the lowest possible cost? Renewable credit scheme is stimulated. We will probably be the first to build an offshore wind farm off North Hoyle. I now have my Board commitment for that to move ahead. However, if I look at the Renewable Credit Scheme, the consumer is paying around £300 per ton for carbon removal, yet co-generation removes carbon at something like £50 a ton. Now, as a consumer, I think I would buy into sustainability, but I am not sure I would buy into supporting toys or a particular lobby group. So I think that is the issue at stake.

Dr Iddon

187. Could you both tell me how much you invest in R & D and give it a sort of measure as a percentage of turnover or whatever? What profits ----

(Mr Farthing) Can I describe the answer in two parts? One, in the financial that you directly asked for, I would like to give some other examples of what we do, which I believe is very material but is not, as it were, entirely deduced to simply to describe as a budget. The science and technology business for Powergen, Power Technology, has a £20 million income. That, as it were, gives you the sort of size of the business. I have looked at this very closely, if you could define how much of that is absolutely pure R & D, it is actually only about £3 million. Most of the rest of it is applying the know how that we have and marketing it internally within Powergen and actually we market about 50 per cent of our income around the UK and around the world. So that kind of scales it in terms of budget size. But what you also find is that we contribute in lots of ways. We contribute on an ad hoc basis when we are asked by Government, of course, but we contribute to work that the DTI does. There are four documents here. These are just examples. I would be happy to leave these with the Clerk at the end. It actually says DTI at the bottom of the document, but believe me, my team produced everything that you see here and we are proud to say that.

Chairman

188. Did they pay you for it?

(Mr Farthing) We were. We were indeed. Not everything that we do for the Government we actually receive any payment for. Sometimes we believe it is nevertheless in our interests to do that. So we contribute to workshops and so on without any payment. In that particular case we received payment. I mention that as well as the budget because I think we are leveraging our knowledge. I think we are focussing on what we believe are the important things. We are leveraging it in a businesslike way. Also I work with colleagues elsewhere in Powergen and they may say "Where should I best spend these scarce resources?" and myself and my team will advise on that. It could be a decision between more or less marine tidal wave research and development versus more wind or hydro or fuel sales or whatever. So we are very proactive with the people that we have. We have actually have a member of our team who has just joined a DTI mission to the US, one member of a ten man team. Again, we believe that is the right thing to do. It is a kind of corporate citizenship, as it were.

(Mr Count) Ours is around £40 million, which is between one and two per cent of turnover.

Dr Iddon

189. Could I ask you both what ratio of carbon to non-carbon R & D you are investing in? I know it is a difficult question.

(Mr Farthing) It is actually very difficult to pin it down absolutely precisely. If you say absolutely non-carbon it is something round the 20 per cent mark of the totals that I gave you, because actually our belief is that a fully non-carbon future is clearly an excellent goal, but to get there you need to take stepping stones. And we are as much looking at stepping stone technologies as we are the actual final item. An example of that would be home combined heat and power, using perhaps Stirling engines or that type of technology. It is not actually your pure fuel cell, but it is certainly a stepping stone along the way to a fuel cell. It is certainly very carbon friendly. We are doing work in developing that as a commercial proposition. I suspect that probably Brian's team ----

(Mr Count) I think most of the research could be judged that it is certainly adding to environmental improvements because one of the big risks out there is an environmental risk and that risk manifests itself as additional cost burden, particularly on the coal technologies. Therefore our major expenditure is on improving performance of power plant but our biggest tranche is in the Regenesys Storage Scheme, where we are building a utility scale version here and in the United States. That is storing electricity. Does it come from non-carbon production in the first place? It should take more efficient production and displace less efficient production. So I would say definitely it is about carbon reduction. But ultimately, is it carbon free? Probably not, but that is not the issue. It is carbon reducing.

190. How is privatisation and liberalisation of the energy markets affected your investment in R & D? Has it gone down because the competition has increased as a result of that?

(Mr Count) I think it has certainly gone down from the CEGB and early National Power days in my case, but ultimately I think there has been more focus. What is indeed the issue for us and the structure of the market is what should the electricity consumer pay for and what should the taxpayer pay for and what should industry at large, the plant supply industries, invest in development? Previously I think it was very muddled. If you looked at the CEGB, we developed many ranges of steam technology and very few, almost nothing of that, is now world competitive. What has happened in this decade is that people have bought gas turbines, the one technology that has had little stimulus from sort of regulated bodies because the suppliers themselves have done it and now it is a globally consistent technology. So therefore we have bought global technology that you can buy anywhere in the world and you get the same recipe.

(Mr Farthing) Can I, as it were, complement that point. To do with using gas turbines as an example, the market in the past actually there was sufficient value to support development projects. We have one called Cotham Development Centre which is a very large industrial gas turbine plant built as a test bed, but actually it is equally a commercial operation. So there is collaboration between the manufacturer and the operator to build a test bed machine and as it comes out of its early development phase, it becomes a commercial generating set. That, you would say, is obviously the idea of putting together all that science and technology and at the end of it you have got a useful commercial enterprise. But we could not do it in today's market. That is a simple fact. You simply could not do it. It is is not because of any kind of latent reluctance. All of us, all of our companies, need investors to invest, investment banks or other forms of investor. Investors will not invest unless they see the return.

(Mr Count) I would add to that, neither should we and I think we must be clear who should do this. Our industry and my competence is buying technology, operating it and efficiently delivering a product to a market which I retail in as well. I think there is a legitimate saying that I am not good at manufacturing equipment. That is not my core skill. There are companies that are set up to be global manufacturers and there are three big power supply companies, if you look at consolidation that is happening on wind power. It is a big, heavy capital intensive business. So I do not believe the electricity companies are set up to be developers of technologies or manufacturers of technologies. Ultimately our Regenesys technology will not be core. It will have to be taken away into a much more manufacturing environment. So I think it would be wrong to say that we are the best people to develop and manufacture technology.

191. I quoted this figure of minus 87 per cent reduction in investment in R & D earlier. In a ten year period when Japan is the only one increasing, admittedly, in that league of nations that the table produced, they invested plus 47 per cent. Now I put it to you, somebody has to invest in R & D to produce the new technologies. Who should that be and what involvement should the Government have?

(Mr Count) Government clearly has a key role in investing. Three questions when technology development comes up; does it work? And that is very early stages of research and development. Clearly very high risk. I think certainly a remit of Government and I think we under-utilise our universities. Secondly, does it have a market? Again, a remit for Government because let us understand the environment in which this technology - there is no point in developing a technology that has no value. And then, can you actually bring it to market, which is the big chunk of money. That is when it gets very expensive. I think there needs to be much more cooperation of industry and Government. But who should build it, clearly plant suppliers should be incentivised to develop new technologies because we are very willing buyers of that. If they have a competitive edge, I am going to buy more technology from that supplier than the other supplier because that will give me competitive advantage in my market. So Government clearly has a key role.

(Mr Farthing) We do not quite do things in exactly the same way. I think perhaps one difference is our view of research and development in technology is that the value of it to Powergen is to ensure that we are appropriately positioned in the future to continue to be a thriving business. If we understand the trends and we understand which are likely to be the winners, we are probably going to place the bets in the best place for that future. So you cannot be looking back. You have always got to be looking ahead at what will be the winning technologies in future. That incentivises us to continue to invest those millions that we spoke about earlier.

Dr Turner

192. Do you think R & D investment is key to competitiveness?

(Mr Farthing) We see it as an activity that our company must do and it is a question of not so much the pure budget. It is actually how you spend those pounds and how carefully you spend those pounds.

(Mr Count) I would say that we spend pounds as well. Is that true R & D or is that just being a very educated buyer out there? I think the test is; will our pounds lead to new technologies or will our pounds lead to being an informed buyer? Clearly we must be an informed buyer. I happen to have bought two technologies through from the past, from ten years ago, and they kept meeting their benchmarks. Would I develop another Regenesys technology? Unlikely in the environment. Should the ABBs of this world, the GEs, the Siemens, the Ulstons (?) be developing it? Yes.

Bob Spink

193. I would like to address my questions to Brian, if I may. Your web site says that you are interested in offshore wind. What other new energy technologies are you pursuing?

(Mr Count) We are investing in offshore wind simply because the ROCs incentivise that to give a commercial return, the renewable credits that the Government support system has put in place. We have an alignment with Solar Century on our retail business that if there are situations where the retail solution is best with a solar technology, then we are able to offer it. But fundamentally, we are very open to buy what technology is available in the renewables or any other environment in order to meet our requirements to give the consumer cleaner, more sustainable electricity, subject to the market conditions that are imposed on us.

Chairman: I will suspend the hearing now so you can relax and draw breath. We will be back shortly.

The Committee suspended from 18.05 pm to 18.10 pm for a division in the House

Chairman: Des, will you just take the question and R & D activities for Powergen?

Dr Turner

194. Yes, certainly. You have made clear that Innogy's philosophy is to wait for other people to mature the technologies and then you may buy them off the shelf. Do you take any part in the maturing process? Do you, for instance, collaborate with demonstrator programmes, commercial prototypes and so on?

(Mr Count) Yes. Obviously Regenesys has demonstrated that we were the first to buy 9F technology from GE. So that is gas turbine technology, leading edge. So yes, we do see competitive advantages. We do not wait until it is off the shelf, because then everyone else can get hold of it. I think the point I am making is that my role is to bring them - there is partnership needed between the industry to bring the technology to market and put it on the ground on a large scale. That is where the big money is spent; hundreds of millions of pounds. So we quite often will have to pioneer and take a technology risk in the foreseeable future as we move into larger wind turbines offshore to make them economic. Somebody has got to do that. We, of course, will evaluate the technical risks and the benefits, but we have a major part to play.

195. You say that you see your role as the educated customer, do you not think that, perhaps like your competitor - are you competitors? I am never quite sure - your competitors Powergen, that in order to promote that competitive edge it is useful to have a certain amount of in-house R & D that informs yourself.

(Mr Count) Yes. We have that. I suppose I was distinguishing that my in-house R & D will not ultimately produce a product, a new technology, into the market really. But yes, it will have knowledge of all the technologies. We are always looking at technical technology development in our existing plant in order to burn different fuels, in order to get better efficiency, in order to get better combustion. All of those things, of course, are core to us. But if you are asking will this industry bring out the new carbon reduced technology of the future, I do not think so.

196. Are you prepared to fund development projects in academic institutions, for instance?

(Mr Count) One of your last speakers said UMIST - we do fund that and again we do have relationships with the academic institutions and we fund quite a bit of work in that area.

Bob Spink

197. Powergen. You are taking on TXU. Are you taking on their R & D operation in the UK?

(Mr Farthing) We expect to take over retail and Generation assets and, as it happens, Power Technology, I did mention, we market our services into the external UK market. The TXU power stations are already fully committed customers of Power Technology. So we already have them as customers for a range of technical services. So we would expect, naturally enough, that that would continue.

198. You are interested in wind, in combined heat and power, biomass, hydro, do you buy these technologies as mature technologies or are you interested in developing these at all?

(Mr Farthing) Our approach, I think, is subtly different. I think we go further upstream. We are working with 12 different universities at the moment and that works - often we provide the industrial input, the focus, the project management. Often, I think, what we enable the university to do is to present a well-presented proposal for funding by collaborating with ourselves. It is often that kind of help that I think they find most valuable. I could name all of the universities, but right now we have got two projects that I could mention; Nottingham and Imperial are the two universities. Power Technology happens to be near Nottingham but there is no real connection there. Perhaps because it is geographically close we get on well with Nottingham, but we get on well with 11 other universities. You might say "Why on earth would you do that?" There is a kind of vested interest. I have heard previous witnesses say to you something about a skills shortage and what we see happening, if we want to recruit somebody with energy industry know-how, often we find that there are any number of graduates, but there are not the right graduates that actually have the knowledge that we need. We either take industrial placements and any help with industrial placements would be gratefully received. They are actually a cost to us as a business. We see it is a strategic thing to do because from those industrial placement students, in effect, it is part of our recruitment plan. Some of those guys and girls might become future employees from the knowledge that they gain through that industrial placement. So that is one aspect. But actually collaborating with universities on collaborative projects is in our financial interest as well because for us that is geared income. So that is another approach that we make to this.

Dr Iddon

199. Can I ask if you actually fund those university projects that you have mentioned and, if so, to what sort of extent?

(Mr Farthing) I do not actually have the figures for that in front of me. The answer is, we do in part. In some cases in part, often what we actually do is to provide a resource which, in the world of consultancy, would of course be a cost. We provide a resource.

Chairman

200. It would be really helpful to see, from the many inquiries we have, the interaction between industry and universities. If you could provide those figures in some detail it would helpful.

(Mr Farthing) Yes, we will submit a paper on that interaction.

Bob Spink

201. Can I just ask you about the role of your technology centre at Ratcliffe in proving your competitive position through research and development?

(Mr Farthing) I think there is existing technologies where, given existing technologies, we can use the know-how to give ourselves a competitive edge. There is emerging technology and there is keeping a watch on developments such as fuel cell developments, which are not really commercially there yet. They are a couple of years away. So in today's technology some of things we have developed actually enable today's operator to operate his power station more cost effectively and more efficiently. Some of the devices that we develop, as a laboratory experiment, we have turned into a commercial device and it aids the operator to operate more efficiently. The cleverest example I can think of is we use neuronet (?) technology to actually operate a boiler more environmentally effectively than a simple operating system. And neuronet can maybe take a fortnight to learn how to run the boiler and then, after that, its learning power is so multi-dimensional it can operate the boiler to the best possible environmental effect. That is an example of something that we developed which is actually used in different power stations in the UK and the US and now in Australia. So there is an example of working with current technology. Emerging technologies, things like home heat and power. We see that as a mass market opportunity in the future and as such we want to be well placed to deliver that to the mass market and therefore we need to understand it very well.

202. The message I was getting from Innogy earlier - if you will forgive me, Brian - was that you felt that the Government regimes were forcing you into a position where you had to sweat the existing plant and leave development to other people. The feeling I am getting from Powergen is that they are much more open-minded on this and free thinking, looking forward. Would you like to comment on that?

(Mr Count) Yes, I think probably we have a slightly different line. I think this country is very good at taking ideas to a point where we have done laboratory testing and we think it works. The issue then is who takes it - and let us look at Regenesys technology where we have had to pump a hundred million and probably we will have to pump as much in again to take it from that lab thing to reality in the marketplace.

203. So we fall down at the market.

(Mr Count) I think we fall down on that.

204. I think we all agree with you.

(Mr Count) I think ultimately yes, there is a part to play, but I do have commercial pressures. There is a level of risk that I am prepared to take, there is a level of risk that I cannot be prepared to take when it involves hundreds of millions of pounds. I would only decide have we got any examples where this industry has been able, over the last decade, to put money in what I would say is the first of a kind on the ground in the world stage. I cannot think of one.

(Mr Farthing) But there is an opportunity.

(Mr Count) Yes, and I think there is issues in if the market structure should allow this and you talked about grid operators. Why should grid operators do it? All that happens is that they get it smart, the Regulator takes it away the next time. It is not really great incentives to have it. So yes, there is a fundamental structure that by developing these technologies there is a risk, there is a cost associated with it, and one has got to address who is paying because it very difficult to convince our shareholders that they should take that risk.

Dr Turner

205. What impact has the new R & D tax credit for large companies had on you? Is it going to stimulate you to do more R & D?

(Mr Count) Can I say that we should do a note on this because ultimately we are investing some 30 million a year on Regenesys, which is a novel technology, world leading. Now as yet we have not yet figured out whether all of that expenditure on putting plant on the ground here and one in the United States qualifies. If it does not qualify, I will come back to you and say that is a problem, because we are taking that development risk. So we will come back to you on that. If it does qualify, then I would say it has a huge stimulus on the development side of the business.

206. I think that is important. And Powergen?

(Mr Farthing) Not too dissimilar response. I think without just saying an outright no to the question, I think so far we have seen little benefit. However, anything which is introduced which ultimately does lead to an incentive has to be a good thing in the environment that we are in. Our view at the moment is that we have not seen any benefit because the rules surrounding what can and cannot be claimed as such a tax credit, first of all, are not terribly clear and, secondly, they do not appear to favour the kind of things that we are doing. And yet, from the description that I have given you, I think you would agree the kind of things we are doing are appropriate. We believe they are appropriate. So in theory it is a good idea, but so far, in practice, it has not been a terribly good benefit.

Dr Turner: I think the best thing, Chairman, is that we need a note from both companies on this because this could be quite a potent factor.

Chairman

207. We need to follow this up. Could you offer us that, please?

(Mr Count) Yes, we will.

(Mr Farthing) Yes, we will. And may I respectfully suggest that you may have looked at some other countries and how they approach this and how they structure those ----

Dr Turner

208. I was just going to ask you about Japan, where energy research in industry is heavily subsidised. Would you welcome such a situation in Britain?

(Mr Farthing) I do not understand the situation in Japan, I must admit. But I do understand something of it in America and I think it is somewhat similar. I think the answer is a simple yes. Yes please.

(Mr Count) I may take a slightly different line. I think that we should be clear on policy here. What is the energy consumer paying for and what is the taxpayer paying for? I have no problem with development of technology if we want to ----

Dr Iddon

209. Are they not the same?

(Mr Count) They are not entirely the same, but they come through different routes and there may be different politics in the way in which one or other is sourced and collected. But ultimately if you want a competitive market based industry, then I think I worry that we get confused with subsidy and what gets passed through to the consumer. I think openness in that is very clear. If the Energy White Paper wants a centralised planned energy economy, then you can do it. But I think that is an issue rightly for Government and the White Paper on Energy Policy.

Dr Turner

210. What do you think of the DTI's R & D support schemes to encourage industrial involvement in research? Are they working? Do you think they could more? And if so, what?

(Mr Count) Can I take a good example? I think DTI has been quite good in terms of helping us as much as they can with Regenesys, but it is small. The US Department of Energy is putting $200 million into fuel cells and Regenesys competitors. We are lucky if we get a million pounds. The second issue is we got offers from Europe, but the condition of that was all the intellectual property was shared. Having invested a lot of money, the intellectual property is what I want to make some money out of. So I think there is a huge difference in philosophy here. So I can compare, I think they are being as helpful as possible, but if we are going to compete - I do not know Japan as well as I know the United States - we have either got to play on the big stage and create some real winners in the industry, or we might as well - just spending enough to fail is not that great.

211. So do I gather that you are not planning to bid for funds from the EU's Framework?

(Mr Count) Not on Regenesys, no. We will not give our intellectual property away because otherwise all our value to date is destroyed.

212. Do you have the same inhibition?

(Mr Farthing) We actually submitted expressions of interest for Framework 6 on basically carbon reduction work and, again, if you wish I could submit a paper that lists those expressions of interest. We have done that. We would have done that anyway as a UK based company, but with our German colleagues in Ayon (?) we have actually submitted joint papers as well.

213. So you are less worried about the IPR problems? You are less worried about losing control of IPR?

(Mr Farthing) I think we feel we have a handle on IPR. It is a concern, that is true, but I think ultimately we have come to the conclusion that it is better to be a part of something bigger and get the bigger benefit. The other question about the DTI, I think it is right for the DTI to cover a range of technical options when it comes to sponsorship of R & D. There is no one single answer here. A range of answers will take us through the continuum of improving the carbon position of the country. But if the DTI was to think big, my suggestion would be that carbon capture sequestration demonstration plant that was big enough to actually prove an industrial scale process is, I believe, the most effective way of reducing carbon given today's energy infrastructure. It is very cost effective as well as being, as it were, technically effective. I think it is cost effective. But no one company would be able to resource the investment needed to build an industrial scale demonstration plant. If we were to do that, during the dash for gas days the UK actually moved into the lead on carbon reduction across the globe. Since the dash for gas, we are clearly falling back a little. I think earlier witnesses would agree with that. I think if we were to look at carbon capture sequestration positively and put some money in - I guess I am suggesting Government money - to support a demonstration plant, we could move back into the front position because we have the North Sea absolutely there on the doorstep and it is possible to inject the carbon dioxide into North Sea oil wells. It has a further benefit to oil companies in that it allows further oil recovery. But it is immediate disposal of CO₂. And it does retrofit. It has a potential retrofit into an existing industry. It is not a completely new installation. It is a retrofit on the exhaust of an existing installation.

214. Pity you cannot do a car size one.

(Mr Farthing) We have actually done work on transport. Transport is a very big energy consumer and in the days of fuel cells, 30 years in the future, we could have cars that we park in the garage and they supply the electricity for the house.

215. No, I was think carbon sequestrations on people's exhausts.

(Mr Farthing) Oh, right.

Chairman: Can I say thank you very much for your patience and giving us your thoughts and ideas. It has been very helpful and when the report comes out, hopefully it will make a mark on the policy of the Government. Thank you for sharing that and we look forward to your submissions. Thank you very much. My apologies for the break and intermission.