Examination of Witnesses (Questions 340-355)|
TUESDAY 20 NOVEMBER 2001
340. If Europe did open up, would there be adverse
consequences to the United Kingdom, such as energy supplies diverted
from the United Kingdom for commercial reasons?
(Mr Porter) If you mean fuel sources such as gas,
that is something that needs to be watched. The more liberal the
market is the lower the risk of that. The problems at the moment
are largely the ones that Dr Miller just mentioned, cross-border
trading and access.
341. You mentioned that NETA does not need any
further adjustments, is there a simple mechanism by which future
infrastructure needs could be taken into account?
(Mr Porter) I doubt whether there is a simple mechanism.
There was a mechanism in the previous trading regime, a capacity
mechanism to send a signal about capacity availability. In NETA
that would not be quite as straightforward, but the concern that
some of our members have is that the present market, although
largely working well, does not have something of the kind that
you mentioned to make it obvious to the parties that new capacity
is needed. You might say that most markets do not have such a
mechanism, I would agree with that. There are concerns that in
the electricity market you, perhaps, should not allow gluts and
shortages to occur quite as readily as you might with apples or
pears. Some of the members of the Association are looking quite
hard at that because it takes time to get a new power station
on the ground should one be needed. The question of how long between
the signal that a power station is needed and the time that the
power station is actually operating is a very good question, it
can take many years to go from a concept to a producing plant.
342. Depending on the fuel too. What sort of
range of forward indicator is needed in that sense?
(Dr Taylor) With regard to, if you like, the life
cycle of a project, a rule of thumb that one of our colleagues
who specialises in smaller renewable projects came up with was
from the identification of a windy hilltop to the first generation
of an aero-generator so that you can get money from it, in round
terms five years. Of that probably about one year is the procurement,
construction and commissioning process. That is quite a long cycle
time to get from concept to operation or contribution to the energy
needs of society. Clearly for larger power stations the larger
CCGTs, the big issue, I think, is whether or not you are into
a local public inquiry, and that, again, can add quite significantly
to the front end time.
343. In terms of the market and the commercial
side your answer, basically it is unlikely to be a simple mechanism,
in an ideal world there should be some kind of mechanism?
(Mr Porter) I think we said in the paper we thought
it was worth looking at that and that is still our position.
(Dr Miller) Can I make a comment on that particular
subject? I think we should remember that both NETA and the pooled
trading arrangements give probably, at best, day ahead signals.
They give very little signals in advance of that. That is like
a lot of other commodity markets. Investors in plant however will
forecast the future and my belief is that electricity is no different
from other commodity markets, where people make investments from
signals they get in terms of the whole economy and historic performance.
The one per cent growth we talked about earlierpeople who
built power stations over the last 10 years have not been based
on signals from the market but based on their forecasts. The successful
generating companies have continued to make those irrespective
of other signals.
344. You may be more optimistic that the market
(Dr Miller) History has said that the market has done
extremely well over the last 10 or 11 years and we see no reason
why it should change going forward. People have not made investment
decisions based on the pool capacity mechanism. They are based
on what they expected the market price to be and the growth of
demand in the country.
345. Can I take you on further to the planning
issue, in your memo to us you raised a number of issues, the implication
of what you are saying is renewable projects have encountered
particular difficulties and you would like to see some enhancement
and inside planning systems for renewable projects to be approved
more quickly or readily. Can you illustrate what sort of things
you think that might have been and why focus on renewables?
(Mr Porter) Starting with the end of your question,
the reason we focussed on renewables was that in that area we
actually did do a study a few years ago and we found that in the
list of obstacles the problem of planning consent came very, very
high. Some of the planning applications have been well known,
well publicised and subject to a great deal of controversy. As
for what might be done, we wonder whether possibly targets might
be considered regionally to give a steer to county councils through
their own land use planning as to how renewables might be treated
and also whether we simply acknowledge that the building of renewable
projects is sometimes controversial and that if the government
is intent on meeting its target for renewables there will be more
of them and, therefore, more controversy, and whether it might
be appropriate for, perhaps, county councils in the development
planning process to be required to put forward a separate plan
for either renewable energy or for energy generally. They do this
for minerals, for example, which can be really controversial,
people do not always take readily to the idea of having a quarry
or a gravel pit, or whatever, near them and some people react
similarly in the case of power stations.
346. Do you think the parallel with minerals
is really an accurate one? With renewable projects there is some
degree of discretion, some choice, should that not be made through
the planning process rather than overriding the planning process?
(Mr Porter) We are not suggesting that it should be
anything other than the democratic process. I have personal experience
of representing minerals' interests in the distant past and I
found some really quite interesting parallels between that and
347. One more, if I may, it does seem to me
that trying to use the structure plan process to pre-empt the
question of whether these projects are going to come forward seems
to me, on the face of it, quite difficult, at the moment. Would
it not be better to respond to projects as they emerge rather
than to try and predict them in advance, structure plans, with
a relatively few exceptions, and try and predict where housing
developments are going to occur and how predictions could be made
about where renewable projects might be. Why use that end of the
process? Why not look at the questions of the legislative framework,
the guidance which is given to planning authorities and how they
address renewable energy policies?
(Mr Porter) Planning guidance plays a part, and it
should. In the dim and distant past I also spent many years working
on the structure plans. I think drawing on that experience it
is true that structure plans do not define precisely where housing
will go. In fact in the office where I worked we had to be extremely
careful not to identify particular areas of land for commercial
reasons. Indeed, when you take this to its logical conclusion
if you were to identify particular areas of land for renewables
it is rather likely that that may have an effect on the price.
It is not simple, but we come back in the end to the difficulty
that the renewables industry has faced, and if the government
is serious about its renewables targets somehow the planning issue
has to be addressed.
348. I take on board the point you make about
the difficulties associated with securing local consent, I understand
in most planning applications 85 per cent go through but with
renewables 85 per cent are rejected. You have mentioned in your
evidence consideration might also be given to steps which enable
local communities to secure direct benefits from energy projects.
Can you outline what you mean by that? Is it the Danish system
you were thinking about?
(Mr Porter) Yes, it was.
349. What are the changes you think are really
needed to the network to ensure more embedded generation projects
are able to come on stream effectively?
(Mr Porter) Can I answer that by, first of all, explaining
how the network is arranged today, it is arranged on the basis
of central production supplying a grid, then distribution down
the lower voltages to homes and businesses. The distribution systems
were not designed, either technically nor in a commercial sense,
to accept large amounts of generation connected to them - they
were the points of the system where the power was actually supplied.
There are one or two things that do need to change. One is the
distribution businesses need somehow to be incentivised to make
the production connected to their systems economically worthwhile
to them, technically they may have to alter some parts of the
physical system. Picking up on what you have asked, Mr Burden,
and what Mrs Lawrence asked earlier this morning, there is also
the issue of how much the perspective generator has to pay to
connect to the system. This can be a huge burden, in fact it can
stop projects in their tracks. At the moment they are likely to
pay under what is known as deep connection, that means that they
pay not only for the obvious cost of connecting where they are
but for the knock-on effects of connecting, which can be quite
considerable and may not be immediately obvious. They pay the
whole bill. This is under review at the moment and the Association
is fully involved in it. Those conducting the review are looking
at the possibility of changing that process to one which is called
shallow connection, where the producer would pay a much smaller
up-front cost and then a charge for using the system and being
connected to it is spread over a longer period of time. That,
on the face of it, looks more attractive but, of course, it does
not deal with the history that we have, it does not deal with
the issue that a neighbouring plant may well have to pay on a
deep charge basis. As many of these things are it is never quite
as straightforward as it sounds. Dr Taylor has been quite involved
in this and he may want to add something.
(Dr Taylor) I would just like to applaud Ofgem, they
are in the midst of consultation exactly to do with this issue
as we speak and they are doing it as a result of the DTI/Ofgem
Working Group that the Minister referred to earlier and report
from that working group. They are doing it ahead of the next price
review round for distribution companies, which is late 2005, which
we think is another good thing, because it means that gives us
an opportunity to make progress on this issue ahead of 2005 and,
therefore, get within a shout of achieving the government's targets
for a new generation. There are issues of a more detailed nature,
some of which David has just alluded to, but the principle is
350. You have alluded to some changes that NETA
would need to set up to allow those things to happen?
(Dr Taylor) It is not quite NETA, it is the connection
and use of systems rather than the trading costs per se,
it related to the totality.
351. Do you think there would need to be any
work or changes, or do these need to be changes on NETA to meet
the objectives of encouraging more renewables and greater take-up
(Mr Porter) There needs to be change of some kind
in order to overcome the difficulties that especially small intermittent
plants face in the trading environment. I do not think our membership
at large would be very pleased to see the NETA trading arrangements
in the round changed radically. They would be keen to see a bit
of stabilisation because they put such an enormous amount of money
into this and a great deal of effort into making NETA work, something
which the industry does not get a lot of credit for, but I think
it really should. On the other hand, they do not want radical
change so early in the lifetime of NETA but they do recognise
that there is an acute difficulty for certain smaller players.
One of your members this morning asked the Minister, I think,
why was this not recognised earlier. It jolly well ought to have
been recognised earlier because this Association and the Combined
Heat and Power Association and others like us were raising this
question years ago when the shape of NETA was described to us.
We knew that there would be difficulties for small players. We
told every Energy Minister that that was the case, we told Ofgem
as well and because the process was so hell bent on getting NETA
into place and keeping the lights on, the problems that we have
described were swept aside as something that could be dealt with
later. They were absolutely obvious to virtually everyone involved
in the generating industry.
352. Now we are at NETA it would have been good
if some of the problems had been recognised or addressed earlier,
but that is now passed and we are now where we are. Are you in
a position where you want to see some changes in order to address
those problems but also you do not want to get involved in radical
change? What I am having difficulty with is what the changes are
that you do want to see that would be effective and that would
not be radical?
(Mr Porter) We have not been specific about that.
Just off the cuff, one is the issue for CHP about the Climate
Change Levy, that might be helpful. There is a consultation paper
out on this from the Department of Trade and Industry and we have
not responded yet. I think it is fair to say that these are quite
difficult issues. It is quite unfortunate that they are having
to be picked up now and they were not dealt with much earlier.
353. One last question, the renewable issue,
you say in your paper that you are in favour in principle of the
renewables obligation, could you, perhaps, just say a little bit
more about the concerns you have about the way you think that
it will work?
(Mr Porter) The Obligation?
(Mr Porter) It is actually something that we put forward
ourselves a long time ago when we could see that the Non-Fossil
Fuel Obligation was a bit time limited and we felt that the renewables
industry had done an amazingly successful job in turning itself
into a purposeful, business-like industry. We also felt that the
time had come when it was not quite so appropriate for the government
to be picking technologies which were going to be winners. That
may have been useful in the early days of NFFO but we believe
that with the market maturing it was better to go for a percentage
obligation, which would not distinguish quite so clearly between
different technologies. We also felt that the way to get the projects
on the ground was to allow that obligation to operate with full
market force. In other words, the obligation would be put on the
supply companies and it would be up to the renewable industry
to deliver what those companies needed. The government has intervened
in that somewhat by actually, in effect, capping the price that
the supply companies have to pay. That is not necessarily a very
good way of getting renewables on to the ground quickly. We felt
when we put this forward that there should not be a price cap.
If there was a shortage of renewable energy the price should reflect
that. As new plant was built it would fall again. That was not
something that the Department of Trade and Industry seemed to
be able to live with.
355. Thank you very much, that has been very
helpful. Perhaps when you have your response to the consultation
document out in the next couple of weeks you would send us a copy
(Mr Porter) We would be pleased to, Chairman. Thank
you very much