Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 520-531)



  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, I would.

  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 climate change?
  (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 are given.

  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 for investment.
  (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 NGC.

  529. Do you want to add anything else to that, Mr Smith?
  (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 they need.

  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 extension.
  (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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 3 May 2002