Examination of Witnesses (Questions 500-519)|
TUESDAY 4 DECEMBER 2001
500. So you are developing the long-term auction
as we speak?
(Mr McCarthy) Yes.
501. One other issue that also concerns us is
the consultation on the gas balancing. I have your consultation
document and I have finally got all the observations too and obviously
one of the concerns is that you may have been trying to deal with
one problem but you are creating an expense and a cost offshore.
Is that something you take into account?
(Mr McCarthy) Yes.
502. Do you accept that one of the best things
we could do for our security of supply is to maximise the exploitation
of our own gas before we have to start importing?
(Mr McCarthy) I am all in favour of that. Our concern
about gas balancing, which is balancing within a day over a 24
hour period, is that one of the things that Ofgem is more concerned
about than most people who discuss security of supply is just
the on the day balancing within the gas network and between the
gas and the electricity network.
503. I do not want to drag the Committee down
into too much detail on one aspect but I want to try to tease
out how you look at the wider implications because if in the end
you deal with your daily problem and produce a slightly better
market to your satisfaction onshore, but the consequence is that
an operator decides that the investment needed offshore to put
the meters in or to meet your needs onshore means that there is
no point operating that field, that closes down that field and
the potential to maximise the exploitation of that production
leading, obviously, to less security because we have to start
to go into the European market sooner. Is that not a concern that
you have to put in to the other side of the equation?
(Mr McCarthy) It is certainly a concern that we have
had in coming forward with the proposals and amending the proposals
in the light of comments that we have received that we should
take full account of the costs involved, not simply onshore in
GB but also offshore. One of the things that we have been much
concerned to do is to try and establish accurate estimates of
both the physical costs of metering and the costs of making contractual
changes if the original gas balancing proposals had remained unchanged,
which incidentally they were not.
504. On the Better Regulations Task Force recommendation
that economic regulators should look at costs and benefits, is
that something that you would welcome?
(Mr McCarthy) We always try to look at costs and benefits.
We always try and establish a clear rationale for what we are
doing. We will undoubtedly work to do that more explicitly and
more clearly. I actually have, in a rather "techie"
way, a reservation about what is normally called cost benefit
analysis because I think most people who use the phrase do not
necessarily understand the full implications of it.
505. Obviously people might get slightly cheaper
gas bills but if the Chancellor does not get the tax revenue from
the North Sea they will have to pay for that through higher tax
bills in the long run and perhaps if they knew that they would
not be so pleased with their cheaper gas.
(Mr McCarthy) There are some bits of the computation
which are probably beyond us.
506. Just on this question of balancing, you
mentioned the Netherlands as a supplier but am I not right in
saying that the Netherlands themselves are importers of gas and
they use Norwegian and Russian gas for balancing themselves? This
is a slightly different issue but this question of balancing is
an issue for a number of countries, not least the Netherlands,
if I can put it that way. Is that not a problem as well? You mentioned
the Netherlands, I was surprised about their significance as a
potential supplier given that they themselves import.
(Mr McCarthy) I think you find that all the Benelux
countries, because of their geographical position, are a hub for
both gas and electricity but the Netherlands' reserves are very
(Mr Neilson) They are net exporters as well.
(Mr McCarthy) They have got very large reserves.
(Mr Neilson) The Netherlands are net exporters. The
figures here are that they consume 40 billion cubic metres a year
and they produce 57 billion cubic metres a year.
507. But they do use some foreign gas?
(Mr Neilson) I am sure they do, yes.
508. I just want to be clear.
(Mr Neilson) They have got very substantial reserves,
1.77 trillion cubic feet.
509. Could we have a quick look at paragraph
ten in your memorandum. This is in the section talking about whether
there is a conflict between security of supply and environmental
policy. In paragraph ten you make a fairly bold point that you
think "effective competition and economic regulation save
resources, have favourable environmental effects and lower prices
to consumers." I can see the last one of those, if you have
got effective competition then the prices will come down, but
obviously one of the points that has often been made about that
is that could actually be a disincentive to environmental conservation
rather than an incentive to it. What would your view be on that?
(Mr McCarthy) I think it is important to recognise
those places where there is congruence between economic efficiency
and the environment. One of the things that has happened in the
decade since privatisation and as we have introduced effective
competition into the generating sector is there have been very
significant improvements in the efficiency of generating plant.
That must be good for the environment in the sense that it means
less gas is burnt for every electron that is produced, less steam
is produced and so on. I completely agree that there is some elasticity
of demand for electricity and gas and as those prices fall there
will be greater consumption. I do not think it is to the benefit
of the environment that there should remain substantial monopoly
rents, which was the previous position. Ofgem has the responsibility
of balancing various things in terms of the price controls we
do for the monopoly networks, which I think we have done competently.
It is open for the Government to take opposing action if it believes
that the price has fallen below some socially desirable point,
but it should not be for Ofgem.
510. In terms of, if you like, the application
of the price mechanism on the consumer, whether that consumer
be industrial or domestic, I am just trying to understand what
you are saying. Are you saying that you think it is legitimate
to try and use price to encourage particular forms of behaviour
amongst end users but it is not for you to say that, or are you
saying you do not think that is a good way of doing it anyway?
(Mr McCarthy) I think that is a perfectly proper decision
(Mr McCarthy) But it should not be for a group of
appointed members of an authority to make that decision because
it is a central political decision.
512. In the case of generated electricity it
is estimated that about nine per cent is lost in transmission
and distribution. I just wonder how that can be reduced and what
amount can be reduced and what would the cost be of that? I just
wonder what contribution Ofgem has made on transmission pricing
and what savings that can make?
(Mr McCarthy) We believe that one of the things that
is wrong, and has long been acknowledged to be wrong, particularly
in relation to electricity, has been the absence of effective
locational signals. If you look at Britain it is an incontrovertible
fact that we have our generation and our demand located a long
way from each other and one of the things that Ofgem is trying
to do is to develop better locational signals to encourage the
co-location, or closer co-location, of demand and generation.
This is something that we are pressing forward with. I am afraid
I do not have to hand the benefits that would be got from that
but, if I may, I will give a note to the Committee.
513. That is fine. Excellent. What do you think
the impact of the Government's new Energy Efficiency Commitment
(Mr McCarthy) Because they are spending more money
than was there under the previous regime I would expect it to
be more effective. There is an interesting balance in terms of
the objectives of energy efficiency in terms of if you wish to
see, if I can put it simplistically, carbon, you would try to
attack particularly rather heavy consumers, and if you are concerned
about fuel poverty you will help people attack the problem in
relation to places where the probability of saving in terms of
carbon is relatively reduced but the benefits in terms of much
greater comfort for people who live in very miserable conditions
is very considerable. There is a difficult balance for DEFRA,
which is now responsible for this, between those two objectives,
just as there was a difficult balance for Ofgem when we were responsible
514. Do you think that we have got the balance
(Mr McCarthy) I hope they will and I think they are
515. Could I ask Mr Neilson?
(Mr Neilson) The objective of the new DEFRA scheme,
which is a tripling of the previous energy efficiency standards
of performance, is to save 400,000 tonnes of carbon each year
which compares with 150 million tonnes which the UK produces overall.
The target overall is to produce in the three years of the scheme
62 terawatt hours of fuel weighted energy benefit.
That is a very big energy saving. Some of that will be taken in
savings in improved comfort, some of it will be taken in lower
fuel bills, and half the savings have to be achieved in priority
households which are households who receive a range of benefits.
516. On this question about transmission, one
of the features of the UK is that the area where the greatest
opportunities are for wind and wave power are in Scotland, which
even within Scotland is not located too close to the centres of
population, maybe because people in Scotland do not like living
in places that are windy and wet. Notwithstanding that aspect
of it, it is agreed that NETA has created some problems for renewables
and you envisage bringing in `Jock Neta', or BETA, in the sense
of creating a UK wide market. Do you envisage problems being created
for the incorporation of the wind and wave capabilities that would
be available in Scotland in the new BETA system that you are hoping
(Mr McCarthy) In one respect I think that if we have
a nationwide transmission system, which is what we want to do,
there will be benefits because, apart from anything else, it will
give us means, it will give signals to encourage people to invest
to eliminate some of the constraints that exist which are important
constraints on the Scottish/English interconnector and elsewhere
in the North of England. I do not think that it is the introduction
of the arrangements that we propose that will cause problems but
it is a fact that we have too much generation in the north at
the moment and if we add to generation there it is less effective
than adding to generation in other places in Britain. That is
just a fact of geography and where the economic demand is.
517. Do you see the prospect of there being
any hope of great improvement in the performance of transformers,
which I am led to believe are really the points in the system
from which electricity is lost? It is not the wires, it is the
transformers. Apparently it is something to do with the laws of
physics but certainly I am not equipped to wander down that particular
cul-de-sac today. Do you anticipate there being a capability for
change and making that more efficient? Maybe you could incorporate
that in the written reply you give us on this issue.
(Mr McCarthy) If I may, Chairman, I will do that rather
than hazard an answer. It is complicated.
518. For both of us, yes.
(Mr McCarthy) I would say, Chairman, that I think
one of the most important changes is the prospect of actually
getting storage of electricity as an effective and economic event.
One of the things that is interesting is that for the first time
ever there are proposals coming forward in this country for investment
on a significant scale in storage which if that comes about will
actually revolutionise the position of renewables.
519. Your memorandum to us speaks of the benefits
of competitive markets and effective regulation. Of course, the
regulation that you seek to implement is principally intended
to ensure that those competitive markets and the benefits that
flow from them are not distorted. In so far as that implies trying
to prevent dominance and abuse of a dominant position, why is
it not also the case that you might look forward to the future
and see a position where a particular source of fuel supply, that
is gas, would be effectively in a dominant position even if not
in the hands of one dominant supplier, and therefore lead to a
distortion of competitive markets? Why do you not see that contradiction
beginning to emerge between your two objectives?
(Mr McCarthy) Because the evidence at the moment and
the evidence over any timescale where I think it would be reasonable
for Ofgem to take action does not justify that action. At the
moment we have a more balanced supply, greater diversity, in our
energy than has occurred at any time in British history.
2 Note by witness: This target will be achieved over
the lifetime of the measures which are installed during the three
years of the Commitment. Back