Select Committee on Trade and Industry Second Report

List of Conclusions and Recommendations

Gas Network

    (a)  Concerns over bottlenecks in the gas transmission system seem to us to be well-founded. The Government should keep under the review the need for more gas landfall facilities and the advisability of greater diversity in the siting of such facilities. It should consider whether the market alone will provide the necessary incentives for this investment, given the lead-times needed for such construction projects. (Paragraph 28).

    (b)  While we recognise that there are practical and economic factors which hinder the further extension of the natural gas distribution network, it remains a matter of concern to a large number of potential consumers, who consider themselves to be disadvantaged by the restriction on their freedom of choice. The Government should consider whether further encouragement could be given to Transco and the supply companies to address this anomaly. (Paragraph 30).

    (c)  To guard against the unforeseen disruption of external supplies, it would be prudent for the Government, together with the industry, to give serious consideration to the development of strategic gas storage capability. (Paragraph 32).

Electricity network

    (d)  The current design of the electricity grid presents several challenges to the renewable energy and combined heat and power industries. (Paragraph 38).

    (e)   Connection charges represents a serious obstacle for small scale generators which can affect the viability of developments which may otherwise be financially sound. (Paragraph 40).

    (f)  We have highlighted a number of areas where the systems in place for electricity transmission and distribution present technical and economic barriers to the future development of renewable energy and embedded generation. It could be argued that such obstacles will be overcome once the electricity market conditions make it economically viable, but this would ignore the rate at which such capacity must be developed if the Government's targets of reduced reliance on carbon-based energy sources are to be achieved in practice. The Government needs to take a strategic view of what is required and to have a clear idea of what mechanisms it could use to steer the market to provide the necessary infrastructure. (Paragraph 43).

    (g)  The DTI recently announced a feasibility study of proposals to run a submarine cable from North West Scotland down the West coast of Great Britain to provide a transmission system for offshore and other renewable energy generation. This would appear to have great potential to alleviate the problems caused by the North-South transmission bottleneck and would provide a significant boost to the development of renewables such as offshore wind and wavepower. However, there are concerns about the technical feasibility and the cost of such a cable. Given the misgivings that have been expressed we welcome the feasibility study commissioned by the Government. (Paragraph 44).

The Role of the Regulator in Investment

    (h)  We are pleased that Ofgem is reviewing the operation of RPI - x and is aware of the need to devise a formula that will give clearer signals to the market about long-term investment. We also note that, by the time we took oral evidence from them, both NGC and Transco expressed themselves satisfied that their concerns about investment needs would be taken into account. (Paragraph 49).

    (i)  We urge the Department and Ofgem to make it a priority to ensure that companies are given sufficient leeway to invest in maintaining and developing a robust energy infrastructure, and to continue to keep under review all the mechanisms available to ensure that there are no regulatory/fiscal disincentives to such investment. (Paragraph 49).

Diversity of fuel supply

    (j)  We agree with the view that it should not be the role of Government to dictate the appropriate mix of fuels for electricity generation, although that need not prevent intervention by the Government and the Regulator to ensure that long-term security of supply is maintained. (Paragraph 53).

    (k)  Furthermore, we consider that security of energy supply can be improved by retaining a capacity to use a variety of different fuels to generate electricity. Even if the exact mix of fuels is left to market forces, it is arguable that the Government should at the very least take no action that closes off options, and perhaps should be prepared to make adjustments to its policies to keep options open. (Paragraph 53).

Strategic planning

    (l)  As far as we could ascertain, the timeframe for energy planning adopted by the Department was "at least 7 years". We agree that changes in energy markets over longer periods are difficult to predict, but given the long lead-time necessary to provide new infrastructure and the apparent short-termism of markets, it would be prudent to try to take a twenty year or longer view. This would not necessarily mean the establishment of a "futurology" section in the DTI; it might simply require a commitment to revisiting the sorts of questions considered by the PIU on a regular basis with ad hoc teams from all relevant Departments, say every five to seven years. (Paragraph 54).

Exploitation of the UK's oil and gas reserves

    (m)  We are pleased that PILOT appears to be contributing to the exploitation of the UK's gas and oil reserves. However, we are concerned that there may still be gaps in the approach. We also support the UKOOA's comments on the desirability of a flexible approach to the taxation of the UKCS oil industry if reserves are to be used to their full potential. (Paragraph 58).

    (n)  We welcome the Regulator's assurance that offshore costs were being taken into account when Ofgem was considering gas regulation. Clearly, investment in maximising the exploitation of UK reserves will delay the time at which security of supply becomes an issue for this country. We understand that the Regulator is about to publish amended proposals for gas balancing and express the hope that they do not damage offshore investment (paragraph 73).

New Electricity Trading Arrangements

    (o)  The problems with NETA epitomise the conflicts inherent in trying to achieve an energy policy that simultaneously guarantees security of supply, delivers environmental objectives and combats fuel poverty. They also encapsulate the dangers of trying to deliver a broad, balanced energy policy solely by means of a Regulator whose chief objective is to promote low prices through competition. As presently constituted, NETA poses a major disincentive to the commissioning and operation of small-scale generators. It is clear that urgent action must be taken to ameliorate the effects of NETA if the Government is to meet its environmental objectives. (Paragraph 69).

    (p)  We do not advocate specific amendments to the NETA regime. However, a 'wait and see' policy does not seem likely to stem — let alone reverse — the dramatic decline in both the output and the profitability of small scale generators. We are pleased that the Department acted swiftly once the problems with NETA became clear, and we trust that in its reply to our Report the Department will be able to outline what measures it is taking to ameliorate the situation. (Paragraph 70).

Generating capacity

    (q)  We were rather startled to learn that Ofgem has no target for maintaining a reserve of generating capacity: it regards its task as being limited to monitoring generating capacity and publishing this information for the benefit of the market, so that the market can then act to meet any shortage. (Paragraph 77).

    (r)  We have not yet heard any evidence that leads us to believe that the market is sufficiently far-sighted to guarantee enough reserve generating capacity without some element of planning by Government or one of its agents. This does not mean that we believe that Government should try to dictate to the market; simply that someone, whether the Department (which we would prefer) or Ofgem should take a strategic view about what level of reserve capacity is necessary — presumably, slightly more than 20% — and should be prepared to use market mechanisms to encourage the construction of extra capacity if necessary. (Paragraph 78).


    (s)  Planning problems so strongly recurred in the evidence given to us that we conclude that the planning system currently forms a major obstacle to the Government's achieving its energy policy in respect of both security of supply and environmental objectives. We believe that a better way of proceeding would be considerably to strengthen planning guidance in favour of granting permission to energy developments, and for the Government to be prepared, if necessary, to call in more planning applications to enforce the guidance. (Paragraph 84).

    (t)  We are aware that the Department for Environment, Food and Rural Affairs (DEFRA) has been engaged in public consultation on planning guidance (PPG 22), and we look forward to learning the outcome of that consultation and any amendments that the Department may make as a result. (Paragraph 84).

Domestic customers

    (u)  Domestic customers show little awareness that the recent low prices of gas and electricity are, for various reasons, unlikely to continue. We hope that both this Report and that from the PIU, when it is made public, will help to inform public debate about these issues. (Paragraph 87).

Quality of electricity supply

    (v)  We consider that the effect of variations in the quality of electricity supply is an area worth some investigation; and we would welcome the Department's comments on whether any research is being carried out at present, and where it might best be directed. Any growth in embedded generation and increase in the number of generators on the network will possibly add to the difficulties in maintaining quality of supply. These factors have to be taken into account now in considering what investment is necessary to maintain a secure, reliable electricity supply. (Paragraph 90).

Industrial customers

    (w)  We do not consider that it would be feasible or desirable to re-allocate the costs of electricity production to place a greater burden on domestic customers. However, we are concerned about the effect of energy prices on the competitive position of UK industry. We are pleased to note the high priority that the Minister gives to the Department's objective in this regard; we do not underestimate the difficulties he and his officials will face in continuing to meet that objective. A number of other factors, such as the Climate Change Levy and the situation of the CHP sector, have a significant impact on industrial consumers and we draw the Department's — and, indeed, HM Treasury's — attention to our comments on these issues elsewhere in this Report. (Paragraph 95).

Liberalisation of gas and electricity markets in the EU

    (x)  It would be sensible to concentrate efforts within the EU on the most important areas: liberalisation of transmission systems should take precedence over opening up domestic markets, if the former is feasible without the latter. But for the short term, it would also seem prudent for the UK's policy on energy security to be based on the assumption that liberalisation is not certain. The Government must take a view as to whether this means that there must be a greater reliance on indigenous sources of supply than may be either necessary or desirable in the longer term; if so, then the recommendations we make elsewhere in this Report about maximising the exploitation of UK fossil fuel resources and removing barriers to the development of non-fossil fuel energy become all the more urgent. (Paragraphs 98 and 102).

Renewable Energy

    (y)  While not questioning the Government's commitment to increasing the share of electricity generation provided by renewables, we do not know how the Government reached a figure of 10% as the target for 2010 and we would like the reasoning clarified. (Paragraph 105).

    (z)  A target of 10% of power generation from renewable sources, if achievable, would be a very helpful contribution to achieving greater security of supply, as well as meeting environmental objectives. We note that some proponents claim that renewable sources have even greater potential to meet energy requirements. We are not in a position to judge such potential, but welcome the fact that the feasibility of higher, longer-term targets has been investigated by the PIU. We look forward to learning its conclusions on this. (Paragraph 110).


    (aa)  The key players — the National Grid Company and the distribution companies as represented by the Electricity Association — seemed confident that a 10% target for renewable power would not cause insuperable problems for the network. (Paragraph 107).

    (bb)  In practice, it is almost impossible accurately to estimate the costs of the Renewables Obligation to consumers, because of the significant variation in factors such as predicted underlying electricity prices and possible changes in the costs of generating renewable power. We think the costs of meeting the target in the current market may well be higher than the Government hopes. This is critical because the 10% target is subject to the proviso that the costs to consumers "are acceptable". The Government must take other measures, such as amendments to the planning law and direct assistance with research and development costs, if the renewables sector is to meet the 10% target by 2010, let alone any higher target by 2020. (Paragraphs 109 and 112).

    (cc)  As far as the scope of the Renewables Obligation is concerned, it seems perverse that some industries being promoted by the Government for their environmental benefits should be excluded from support under the terms of the obligation. The Combined Heat and Power Association told us that Ministers are considering the possibility of introducing primary legislation to remove the anomaly from that sector. We recommend that a Bill be brought forward as soon as possible, and that Ministers should take the opportunity of that legislation to review the position of other sectors. (Paragraph 111).

Combined Heat and Power

    (dd)  We trust that the Government's strategy for the Combined Heat and Power Sector will be produced very soon: firm priorities need to be established in the industry's 'shopping list', and a clear indication from Government as to how it intends to assist the industry would in itself be helpful in restoring confidence. (Paragraph 114).

    (ee)  If the Government's target of 10GWe of CHP production by 2010 is to be met, more radical action needs to be taken. Adjustments to NETA, even if they are eventually agreed to, will take some time to implement: changes to the Climate Change Levy would be quicker to introduce and would provide a useful signal to the market. (Paragraph 120).

Climate Change Levy

    (ff)  As for the pleas from other sectors for exemption, we revert to our conclusion that, even while not prescribing the fuel mix or picking winners, prudence may dictate at the least that the Government does not unnecessarily or simply by default close off options. We therefore recommend that the Departments involved give further consideration to whether the provisions of the Levy could and should be changed in favour of these sectors. (Paragraph 121).

    (gg)  We recommend that the Government review the operation of the Levy after it has been in force for a year and, in particular, that the review team look closely at the arrangements for Climate Change Agreements to ensure that they are as fair as possible and that bureaucracy is minimised. (Paragraph 122).


    (hh)  We are encouraged that the Government is showing strategic thinking on the issue of alternatives to petrol- and diesel-driven road vehicles. We commend the work of the DTI on road fuel gases and biodiesels. We are also pleased to note the recent publication (in December) of a draft Government strategy for the promotion of newer technologies, such as fuel cells, which represents a welcome step forward in the area of strategic planning of energy requirements, and a good example of inter-departmental co-operation. (Paragraph 126).

    (ii)  We recommend that Ministers ensure that vital issues such as the role of transport in energy policy are not neglected because they fall between Departments. (Paragraph 127).

Nuclear Industry

    (jj)  The transfer of the historic radioactive waste management liabilities should decrease the cost of nuclear generation, at least as far as the British Nuclear Fuels fleet is concerned. It remains to be seen — and will doubtless take some months to become apparent — whether relieving the industry of these liabilities will actually change public perception of the industry and encourage investment. (Paragraph 135).

    (kk)  It is essential that there be no further delay in government decision-making; the Government should make a clear statement on the future of nuclear energy as quickly as possible. (Paragraph 136).

Coal industry

    (ll)  There is no doubt that unless urgent action is taken to sustain it, coal-fired generation will end in this country. Moderate Government investment in a demonstration plant — as recommended by our predecessors — might help to sustain coal-fired electricity generation, at a comparatively low cost to the Exchequer. At the very least, it might encourage those electricity producers currently considering investing in Flue Gas Desulphurisation for either existing or new plants to go ahead. We therefore endorse the recommendations of the previous Committee. (Paragraph 140.)

    (mm)  It seems that a full examination of the international research on carbon storage should be undertaken as part of the process of deciding about the long-term future for coal-fired plant. (Paragraph 142)

    (nn)  We note Coalpro's view that any financial support for clean coal technology — such as the suggested obligation — may need to be only temporary, as rising gas prices may make clean coal economically viable. However, a mechanism like the proposed obligation would raise electricity prices until then. The Government must take a view about whether the benefits to security of supply arising from continued coal-fired generation would be worth the cost. (Paragraph 143.)

Renewable power technologies

    (oo)  We note that some forms of Government support like capital grants are not of equal assistance to all renewable technologies. We draw the relevant Departments' attention to this problem and recommend further discussions on measures that might be taken by them to ensure an even-handed approach to assistance. (Paragraph 145)

    (pp)  We agree that the Government should not try to 'back winners' among renewables technologies, but we believe that it should display commitment to helping with the launch of those technologies unlikely to benefit from the Renewables Obligation. This might include help with development costs and with market stimulation programmes. (Paragraph 146).

    (qq)  We understand that a minimum of 600,000 tonnes of coal mine methane is escaping into the atmosphere from abandoned coal mines in the UK every year. It seems to us desirable on these grounds alone to explore whether some form of support could be extended to encourage the use of this gas. Least-cost options to the tax payer would be an extension of the Renewables Obligation and/or exemption from the Climate Change Levy. (Paragraph 147).

Energy efficiency

    (rr)  We note that at present the House of Commons is considering a Bill called the Home Energy Conservation Bill, which seeks not only to impose tighter obligations on local authorities (not least in reporting what they are actually doing to promote energy efficiency) but also to tackle the landlord/tenant problem mentioned above. We welcome the all-party support for this Bill. (Paragraph 154).

    (ss)  It would clearly be politically difficult for the Government to use fiscal instruments to curb domestic consumption. If energy savings are to be increased in the domestic sector, they must initially be achieved by means of greater promotion of the benefits of energy efficiency, insulation and by raising minimum standards for buildings and appliances. We recommend that the various interested Departments — the DTI, DEFRA and HM Treasury — look at the range of options (both carrots and sticks) for raising energy efficiency standards, and come forward with proposals as soon as practicable. (Paragraph 156).

    (tt)  Micro-CHP does appear to have the potential to contribute to energy saving. However, we suspect that, in their enthusiasm, some witnesses may have under-estimated the difficulties of connecting micro-CHP to the distribution system safely and in such a way as to maintain security of supply on the network and for individual consumers. Moreover, we understand that there are considerable problems in ensuring an appropriate match between heating and electricity needs at a domestic level. The technical problems for smaller units need to be addressed before micro-CHP can be widely adopted. We do not dismiss the potential of CHP; we just wish to record a caveat. (Paragraph 159).

    (uu)  We do not know whether the Energy Technology Support Unit has sufficient resources to expand its work, if demand is there, but we recommend that the Department look into this matter and, if possible, publicise the work of the unit to a wider audience. (Paragraph 160).

Strategic energy authority

    (vv)  We are not convinced of the need for the creation of a strategic energy authority. However, we strongly urge the Government to put in place a more transparent structure for the formal co-ordination of energy policy development and implementation across Government. In the absence of a strong formal structure, we cannot see how the responsibilities of the Energy Directorate of the DTI could be dispersed throughout that Department in the way envisaged in the recent departmental restructuring proposals. (Paragraph 166).

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