Select Committee on Science and Technology Minutes of Evidence


Examination of Witnesses (Questions 182 - 199)

WEDNESDAY 30 OCTOBER 2002

MR DERRICK FARTHING AND MR BRIAN COUNT

Chairman

182.  We have the generating companies too, please. Mr Derrick Farthing and Mr Brian Count. Thank you very much for your patience and sitting through it all. Last but not least, of course, of great importance and we look forward to your advice. Let me start off by just asking a quite simple one. The regulatory and market dissenters in this country, to conduct R & D, what do you consider they are, briefly?

  (Mr Farthing) You referred to us as a generating company. Today we are a generating, distribution and retail company. I am actually the Director of Power Technology, which is part of the Powergen Generations business and therefore I can represent Generation and the approach to science and technology for Generation within Powergen. Obviously today we have to have a commercially focussed and scientific approach. So Power Technology has that commercial and scientific focus. We are a strategic business unit within Powergen. We have to be sustainable. We have to pay our way. So we look for every possibility in terms of how we might become and continue to be a sustainable business. We look for such things as tax credits—

183.  You just put electricity prices up, do you not?

  (Mr Farthing) Well, in the regulated—the deregulated market, the electricity prices actually reflect short run marginal price for electricity. They do not reflect medium and long-term needs for the industry. What we are seeing today is that the market is very much based on short term financials. None of these things are actually conducive to an environment where you would expect to see lots of research and development. So what we find ourselves doing is taking what we see is a very scarce resource available to do research and development and placing it where we think we will get the maximum delivery for every buck that we spend.
  (Mr Count) From our perspective, I think the market rules clearly have been set by Government and the Regulator. The market rules, since privatisation, has been to deliver secure supplies to the consumer in a competitive framework.

184.  That does not cover this weekend, I take it, for some companies.

  (Mr Count) That is for the distributors, but ultimately, having been a member of the nationalised industry we had the same thing—poles do blow down in gales. So I sympathise and I think they are doing a stunning job in getting supplies back on line. But ultimately this industry has invested. It may not have invested in British technology, but it has put a lot investment on the ground. A huge amount of money has been spent in this industry over the past decade. I think it is very important to separate energy policy from technology and industrial policy. Our remit at the moment is to buy what is best available technology on the world markets. My company has invested a lot of money in a technology storage business, some hundred million pounds. We have invested in a new high efficiency development on a small turbine. Ultimately we will invest in that as long as the market is there. If you come to carbon, why are people not investing in carbon? Because we do not understand where the value is. If the Government sets the rules that there is a value for carbon, investment will surely come in.

Dr Turner

185.  I take it you gentlemen are both familiar with the German Renewable Energy Act. If we had some arrangement of that nature which guarantees renewable energy prices, what effect do you think it would have on stimulating exploitation of renewables in Britain?

  (Mr Farthing) I think we do have something similar in the renewable obligation certificate—

186.  But that is not as sharp though.

  (Mr Farthing) It is not as good, I have to admit, and I think those in Germany would say it was not as good. But what I was about to say is; it gives a good lead. The situation with ROCs gives a good lead in terms of the way we might go. It does actually incentivise. You asked earlier about—you said the simple question, Dr Gibson, but I guess it was the opening, a not so simple question, but it does actually incentivise developers to invest in renewable technology. Powergen actually has just bought the remaining share in Powergen Renewables and it paid £57 million to do that. That is a very significant sum. That demonstrates the commitment to renewable technology, as part of its Generation portfolio. That is very much because Renewable Obligation Certificates give a degree of financial uncertainty. It is not a hundred per cent financial certainty. We would like to see rather longer term guarantees associated with ROCs, but nevertheless it is a good start and it is in line probably with Brian's earlier point as well.
  (Mr Count) Clearly if you stimulate and the investor is convinced that Government is not going to tinker and take it away, you will get that investment. The question is; should Government be choosing technology winners, because they have a poor history at it, or should they create a framework where business chooses technology winners? So yes, you can say certain technologies get certain support. Is that the best thing for the consumer or could you turn it round and say let us go to something like a carbon traded world, if you want a sustainable world, and let us produce carbon at the lowest possible cost? Renewable credit scheme is stimulated. We will probably be the first to build an offshore wind farm off North Hoyle. I now have my Board commitment for that to move ahead. However, if I look at the Renewable Credit Scheme, the consumer is paying around £300 per ton for carbon removal, yet co-generation removes carbon at something like £50 a ton. Now, as a consumer, I think I would buy into sustainability, but I am not sure I would buy into supporting toys or a particular lobby group. So I think that is the issue at stake.

Dr Iddon

187.  Could you both tell me how much you invest in R & D and give it a sort of measure as a percentage of turnover or whatever? What profits—

  (Mr Farthing) Can I describe the answer in two parts? One, in the financial that you directly asked for, I would like to give some other examples of what we do, which I believe is very material but is not, as it were, entirely deduced to simply to describe as a budget. The science and technology business for Powergen, Power Technology, has a £20 million income. That, as it were, gives you the sort of size of the business. I have looked at this very closely, if you could define how much of that is absolutely pure R & D, it is actually only about £3 million. Most of the rest of it is applying the know how that we have and marketing it internally within Powergen and actually we market about 50% of our income around the UK and around the world. So that kind of scales it in terms of budget size. But what you also find is that we contribute in lots of ways. We contribute on an ad hoc basis when we are asked by Government, of course, but we contribute to work that the DTI does. There are four documents here. These are just examples. I would be happy to leave these with the Clerk at the end. It actually says DTI at the bottom of the document, but believe me, my team produced everything that you see here and we are proud to say that.

Chairman

188.  Did they pay you for it?

  (Mr Farthing) We were. We were indeed. Not everything that we do for the Government we actually receive any payment for. Sometimes we believe it is nevertheless in our interests to do that. So we contribute to workshops and so on without any payment. In that particular case we received payment. I mention that as well as the budget because I think we are leveraging our knowledge. I think we are focusing on what we believe are the important things. We are leveraging it in a businesslike way. Also I work with colleagues elsewhere in Powergen and they may say "Where should I best spend these scarce resources?" and myself and my team will advise on that. It could be a decision between more or less marine tidal wave research and development versus more wind or hydro or fuel sales or whatever. So we are very proactive with the people that we have. We have actually have a member of our team who has just joined a DTI mission to the US, one member of a 10 man team. Again, we believe that is the right thing to do. It is a kind of corporate citizenship, as it were.
  (Mr Count) Ours is around £40 million, which is between one and 2% of turnover.

Dr Iddon

189.  Could I ask you both what ratio of carbon to non-carbon R & D you are investing in? I know it is a difficult question.

  (Mr Farthing) It is actually very difficult to pin it down absolutely precisely. If you say absolutely non-carbon it is something round the 20% mark of the totals that I gave you, because actually our belief is that a fully non-carbon future is clearly an excellent goal, but to get there you need to take stepping stones. And we are as much looking at stepping stone technologies as we are the actual final item. An example of that would be home combined heat and power, using perhaps Stirling engines or that type of technology. It is not actually your pure fuel cell, but it is certainly a stepping stone along the way to a fuel cell. It is certainly very carbon friendly. We are doing work in developing that as a commercial proposition. I suspect that probably Brian's team—
  (Mr Count) I think most of the research could be judged that it is certainly adding to environmental improvements because one of the big risks out there is an environmental risk and that risk manifests itself as additional cost burden, particularly on the coal technologies. Therefore our major expenditure is on improving performance of power plant but our biggest tranche is in the Regenesys Storage Scheme, where we are building a utility scale version here and in the United States. That is storing electricity. Does it come from non-carbon production in the first place? It should take more efficient production and displace less efficient production. So I would say definitely it is about carbon reduction. But ultimately, is it carbon free? Probably not, but that is not the issue. It is carbon reducing.

190.  How has privatisation and liberalisation of the energy markets affected your investment in R & D? Has it gone down because the competition has increased as a result of that?

  (Mr Count) I think it has certainly gone down from the CEGB and early National Power days in my case, but ultimately I think there has been more focus. What is indeed the issue for us and the structure of the market is what should the electricity consumer pay for and what should the taxpayer pay for and what should industry at large, the plant supply industries, invest in development? Previously I think it was very muddled. If you looked at the CEGB, we developed many ranges of steam technology and very few, almost nothing of that, is now world competitive. What has happened in this decade is that people have bought gas turbines, the one technology that has had little stimulus from sort of regulated bodies because the suppliers themselves have done it and now it is a globally consistent technology. So therefore we have bought global technology that you can buy anywhere in the world and you get the same recipe.
  (Mr Farthing) Can I, as it were, complement that point. To do with using gas turbines as an example, the market in the past actually there was sufficient value to support development projects. We have one called Cotham Development Centre which is a very large industrial gas turbine plant built as a test bed, but actually it is equally a commercial operation. So there is collaboration between the manufacturer and the operator to build a test bed machine and as it comes out of its early development phase, it becomes a commercial generating set. That, you would say, is obviously the idea of putting together all that science and technology and at the end of it you have got a useful commercial enterprise. But we could not do it in today's market. That is a simple fact. You simply could not do it. It is is not because of any kind of latent reluctance. All of us, all of our companies, need investors to invest, investment banks or other forms of investor. Investors will not invest unless they see the return.
  (Mr Count) I would add to that, neither should we and I think we must be clear who should do this. Our industry and my competence is buying technology, operating it and efficiently delivering a product to a market which I retail in as well. I think there is a legitimate saying that I am not good at manufacturing equipment. That is not my core skill. There are companies that are set up to be global manufacturers and there are three big power supply companies, if you look at consolidation that is happening on wind power. It is a big, heavy capital intensive business. So I do not believe the electricity companies are set up to be developers of technologies or manufacturers of technologies. Ultimately our Regenesys technology will not be core. It will have to be taken away into a much more manufacturing environment. So I think it would be wrong to say that we are the best people to develop and manufacture technology.

191.  I quoted the figure of minus 87% reduction in investment in R & D earlier. In a 10 year period when Japan is the only one increasing, admittedly, in that league of nations that the table produced, they invested plus 47%. Now I put it to you, somebody has to invest in R & D to produce the new technologies. Who should that be and what involvement should the Government have?

  (Mr Count) Government clearly has a key role in investing. Three questions when technology development comes up; does it work? And that is very early stages of research and development. Clearly very high risk. I think certainly a remit of Government and I think we under-utilise our universities. Secondly, does it have a market? Again, a remit for Government because let us understand the environment in which this technology—there is no point in developing a technology that has no value. And then, can you actually bring it to market, which is the big chunk of money. That is when it gets very expensive. I think there needs to be much more cooperation of industry and Government. But who should build it, clearly plant suppliers should be incentivised to develop new technologies because we are very willing buyers of that. If they have a competitive edge, I am going to buy more technology from that supplier than the other supplier because that will give me competitive advantage in my market. So Government clearly has a key role.
  (Mr Farthing) We do not quite do things in exactly the same way. I think perhaps one difference is our view of research and development in technology is that the value of it to Powergen is to ensure that we are appropriately positioned in the future to continue to be a thriving business. If we understand the trends and we understand which are likely to be the winners, we are probably going to place the bets in the best place for that future. So you cannot be looking back. You have always got to be looking ahead at what will be the winning technologies in future. That incentivises us to continue to invest those millions that we spoke about earlier.

Dr Turner

192.  Do you think R & D investment is key to competitiveness?

  (Mr Farthing) We see it as an activity that our company must do and it is a question of not so much the pure budget. It is actually how you spend those pounds and how carefully you spend those pounds.
  (Mr Count) I would say that we spend pounds as well. Is that true R & D or is that just being a very educated buyer out there? I think the test is; will our pounds lead to new technologies or will our pounds lead to being an informed buyer? Clearly we must be an informed buyer. I happen to have bought two technologies through from the past, from 10 years ago, and they kept meeting their benchmarks. Would I develop another Regenesys technology? Unlikely in the environment. Should the ABBs of this world, the GEs, the Siemens, the Alstoms be developing it? Yes.

Bob Spink

193.  I would like to address my questions to Brian, if I may. Your web site says that you are interested in offshore wind. What other new energy technologies are you pursuing?

  (Mr Count) We are investing in offshore wind simply because the ROCs incentivise that to give a commercial return, the renewable credits that the government support system has put in place. We have an alignment with Solar Century on our retail business that if there are situations where the retail solution is best with a solar technology, then we are able to offer it. But fundamentally, we are very open to buy what technology is available in the renewables or any other environment in order to meet our requirements to give the consumer cleaner, more sustainable electricity, subject to the market conditions that are imposed on us.

  Chairman: I will suspend the hearing now so you can relax and draw breath. We will be back shortly.

  The Committee suspended from 18.05 pm to 18.10 pm for a division in the House

  Chairman: Des, will you just take the question and R & D activities for Powergen?

Dr Turner

194.  Yes, certainly. You have made clear that Innogy's philosophy is to wait for other people to mature the technologies and then you may buy them off the shelf. Do you take any part in the maturing process? Do you, for instance, collaborate with demonstrator programmes, commercial prototypes and so on?

  (Mr Count) Yes. Obviously Regenesys has demonstrated that we were the first to buy 9F technology from GE. So that is gas turbine technology, leading edge. So yes, we do see competitive advantages. We do not wait until it is off the shelf, because then everyone else can get hold of it. I think the point I am making is that my role is to bring them—there is partnership needed between the industry to bring the technology to market and put it on the ground on a large scale. That is where the big money is spent; hundreds of millions of pounds. So we quite often will have to pioneer and take a technology risk in the foreseeable future as we move into larger wind turbines offshore to make them economic. Somebody has got to do that. We, of course, will evaluate the technical risks and the benefits, but we have a major part to play.

195.  You say that you see your role as the educated customer, do you not think that, perhaps like your competitor—are you competitors? I am never quite sure—your competitors Powergen, that in order to promote that competitive edge it is useful to have a certain amount of in-house R & D that informs yourself.

  (Mr Count) Yes. We have that. I suppose I was distinguishing that my in-house R & D will not ultimately produce a product, a new technology, into the market really. But yes, it will have knowledge of all the technologies. We are always looking at technical technology development in our existing plant in order to burn different fuels, in order to get better efficiency, in order to get better combustion. All of those things, of course, are core to us. But if you are asking will this industry bring out the new carbon reduced technology of the future, I do not think so.

196.  Are you prepared to fund development projects in academic institutions, for instance?

  (Mr Count) One of your last speakers said UMIST—we do fund that and again we do have relationships with the academic institutions and we fund quite a bit of work in that area.

Bob Spink

197.  Powergen. You are taking on TXU. Are you taking on their R & D operation in the UK?

  (Mr Farthing) We expect to take over retail and Generation assets and, as it happens, Power Technology, I did mention, we market our services into the external UK market. The TXU power stations are already fully committed customers of Power Technology. So we already have them as customers for a range of technical services. So we would expect, naturally enough, that that would continue.

198.  You are interested in wind, in combined heat and power, biomass, hydro, do you buy these technologies as mature technologies or are you interested in developing these at all?

  (Mr Farthing) Our approach, I think, is subtly different. I think we go further upstream. We are working with 12 different universities at the moment and that works—often we provide the industrial input, the focus, the project management. Often, I think, what we enable the university to do is to present a well-presented proposal for funding by collaborating with ourselves. It is often that kind of help that I think they find most valuable. I could name all of the universities, but right now we have got two projects that I could mention; Nottingham and Imperial are the two universities. Power Technology happens to be near Nottingham but there is no real connection there. Perhaps because it is geographically close we get on well with Nottingham, but we get on well with 11 other universities. You might say "Why on earth would you do that?" There is a kind of vested interest. I have heard previous witnesses say to you something about a skills shortage and what we see happening, if we want to recruit somebody with energy industry know-how, often we find that there are any number of graduates, but there are not the right graduates that actually have the knowledge that we need. We either take industrial placements and any help with industrial placements would be gratefully received. They are actually a cost to us as a business. We see it is a strategic thing to do because from those industrial placement students, in effect, it is part of our recruitment plan. Some of those guys and girls might become future employees from the knowledge that they gain through that industrial placement. So that is one aspect. But actually collaborating with universities on collaborative projects is in our financial interest as well because for us that is geared income. So that is another approach that we make to this.

Dr Iddon

199.  Can I ask if you actually fund those university projects that you have mentioned and, if so, to what sort of extent?

  (Mr Farthing) I do not actually have the figures for that in front of me. The answer is, we do in part. In some cases in part, often what we actually do is to provide a resource which, in the world of consultancy, would of course be a cost. We provide a resource.


 
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