Examination of Witnesses (Questions 520-531)|
TUESDAY 4 DECEMBER 2001
520. I am not disputing where we are now so
much as where we might be. The issue is if one looks forward,
and I am not quite sure over what timescale you are looking forward,
do you share some of the anticipated concentration upon gas supply
which others have estimated to this Committee, or indeed the European
Commission's documents appear to imply? At what level of reliance
upon gas would it become so dominant that it would give rise to
concerns? Is it 50 per cent, 60 per cent, 70 per cent, 80 per
cent, 90 per cent, or is it only at 99 per cent?
(Mr McCarthy) In a way I think I am very keen not
to address hypothetical situations which are too far in advance,
partly because I think the history of making predictions of when
movements will come towards very high percentages has got a very
poor record. One does not have to go back very far to remember
forecasts of oil prices in the high 70s or $80 a barrel. You do
not have to go very far back, only 20 years, to forecasts which
said that there was no scenario in which gas would be a significant
contributor in 20 years' time. I am also conscious of the fact
that there are already some signs with higher gas prices and lower
coal prices of gas generators being taken out of commission and
previously mothballed coal generators being brought back on. It
is not cowardice on the part of Ofgem but a rather prudent view
that we do not try and take views before there is evidence to
suggest that we have to.
521. We have asked questions specifically relating
to industrial competitiveness and fuel poverty and your view was
that no particular problems would arise if markets were competitive
and regulations effective but in responding to that you drew attention
to the impact of environmental objectives upon those markets.
How far do you think we do have techniques available to us to
accurately estimate and then to internalise the costs of meeting
environmental objectives into the markets for different sources
of fuel supply?
(Mr McCarthy) We have very few opportunities to internalise
those externalities and the estimates that have been made of,
for example, the cost of the Renewables Order is that that will
rise to £780 million annually by 2010. One of the things
that Ofgem has said in our report on smaller generators and NETA
is we think those estimates need to be reworked to take account
of the lower prices that have occurred as a result of making generation
competitive. Ofgem does not make those forecasts, other parts
of Government do.
522. How concerned would you be that if one
goes further down the path of tradeable emissions permits, seeking
to incorporate environmental costs, one arrives at the point where
within the market that you try to regulate, market signals themselves
become obscured by the assumptions that are being made about environmental
costs and, by extension, the obligations or the additional charges
being levied on particular kinds of fuel supply or the relief
that is being offered, so in effect the market becomes more governed
by one's success in negotiating environmental objectives than
by one's success in meeting customer needs of supply?
(Mr McCarthy) I think that depends entirely on the
design of the environmental measure. It is certainly possible
to have some kind of measures that are deeply distortive and anti-
competitive and it is possible to have other environmental measures
which are easily assimilated within the marketplace.
523. And you point towards the tradeable emissions
permits as being an example of the latter?
(Mr McCarthy) Insofar as I know enough about them,
524. That is, not distorting?
(Mr McCarthy) That is, not distorting.
525. But the Climate Change Levy and renewables
obligations, are they not an example of the former?
(Mr McCarthy) I think that there are a number of objections
which can be raised and indeed have been raised to the Climate
Change Levy which include a series of administrative arrangements
which are not necessarily easily reconcilable with market forces.
526. Do you think a carbon tax might have been
a better way of dealing with seeking to reduce emissions with
(Mr McCarthy) I have always, Chairman, tried to avoid
trespassing into the Chancellor of the Exchequer's field and if
I could possibly avoid doing so, I would prefer to do so now.
527. Can I just ask you one other point on this.
There is a sense in which much of the renewables argument is short
term in character in terms of investment, although it might be
long term in the payback. On the other hand, there are other forms
of energy which might well be regarded as medium term in investment
and long term in the environmental impact or whatever. In terms
of the range of incentives which you are trying to provide to
take account of investment, do you take account of the varying
timescales of different forms of generating investment?
(Mr McCarthy) Insofar as we have direct responsibility
for investment, it tends to be confined to the networks where
we do price controls and I think the area there which will be
most relevant to your question will be the work we are doing,
which I regard as important and difficult work, which will take
some time, on embedded or distributed generation because there
getting the right regulatory framework, the right incentives,
the right treatment for this within the distribution network will
have great significance in terms of the investment signals that
528. Do I take it then from what you are saying
there that if we want to see a switch from the generating profile
we have at the present moment to smaller variegated generation
across the UK with perhaps storage facilities, and having it distributed
far more widely than we have at present, this would involve a
considerable shift in investment by National Grid or whoever and
to what extent are you going to be able to influence the investment
of such a process when you do not have responsibility for the
generation through your price controls? You have price controls
on one part, but not on the other, but they both require incentives
(Mr McCarthy) I think our concern in terms of that
shift is to ensure two things. One is that the control of the
system, which is vital for moment-to-moment and day-to-day security
of supply, is capable of dealing with a distributed generated
system and the present much more concentrated one, so that is
one issue. The second is a whole series of regulatory issues associated
with, for example, the deep versus shallow connections, connection
charges, the way in which these changes should be reflected in
the price controls of the distribution network companies and for
529. Do you want to add anything else to that,
(Mr Smith) The only point I was going to make is that
clearly on the gas network, particularly on the distribution networks,
we have had those kind of seismic changes with almost a doubling
of load and RPI-x has delivered the ability for BG and for Transco
actually to make that shift, so I think there is a parallel, if
you like, in the gas networks. I think if the demand is there
for more investment in distribution, the RPI-x framework is quite
well set up actually to allow us to give the companies the money
530. One could argue that one of the features
of the publicly-owned gas system was gold plated and that there
was excess capacity within the system which has now been filled
not because of any, as Mr McCarthy said, planning for it, but
just that the market changed and fortunately the pipes were wide
enough and it was not clearly down to RPI-x.
(Mr McCarthy) I think, Chairman, if you look at our
submission to the PIU, there is quite an interesting map which
does show the extent to which there has been an extension of the
NTS over the years which just shows the extent to which there
has been significant investment post-privatisation and significant
(Mr Smith) I think your analogy works in electricity.
I think, as Callum is saying, if you are looking at gas, the reality
is that there are many more pipes, many more compressors than
there were and much, much more gas flowing and that is as a result
of investment post-privatisation.
Chairman: I think most of us around this table
would argue that if we are trying to get gas for constituents
who currently do not have it, there is not a cat in hell's chance
of them getting it, well, maybe if you are a big cat you can get
it, but certainly the micro-provision hitherto has not been a
happy arrangement and we have not really taken much account of
them, but anyway that is a different matter.
Sir Robert Smith
531. Could you maybe send us more on the developments
of the electricity storage and its potential impact on renewables?
(Mr McCarthy) Certainly.
Chairman: Well, thank you very much. It has
been very helpful and we look forward to getting further evidence
as well. Thank you.