Examination of Witnesses (Questions 182
WEDNESDAY 30 OCTOBER 2002
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
(Mr Farthing) Well, in the regulatedthe
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 thingpoles 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.
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 aboutyou
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.
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.
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.
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
(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
(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
(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 technologythere
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
192. Do you think R & D investment is key
(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.
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
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?
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 themthere
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 competitorare
you competitors? I am never quite sureyour 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
(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
196. Are you prepared to fund development projects
in academic institutions, for instance?
(Mr Count) One of your last speakers
said UMISTwe do fund that and again we do have relationships
with the academic institutions and we fund quite a bit of work
in that area.
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
(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 worksoften
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
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.