Select Committee on Science and Technology Fourth Report


69. Our report makes recommendations to the Government and our inquiry's focus has been on its policies and expenditure. The inquiry would not be complete, however, without an assessment of the low and non-carbon energy RD&D being undertaken by the private sector. It is not appropriate to generalise too much about different types of energy company and the conclusions we have drawn are based on those companies who submitted evidence.

70. Before privatisation in the early 1990s British Gas and the Central Electricity Generating Board had corporate RD&D facilities that conducted a large amount of energy RD&D. This has declined dramatically. According to the Tyndall Centre, in the 1970s and 1980s, public expenditure of RD&D was typically several hundred million pounds, and much of this would have been conducted in these laboratories. For example, British Gas typically spent around £70 million before privatisation. Lattice, which took over most of British Gas's research functions spent £14 million in the 15 months to March 2002.[95] In 2000 nine companies invested a total of just over £130 million in RD&D. The 'nuclear' companies, BNFL and British Energy, contributed just under half of the total expenditure in the sector. The ERRG suggested that privatisation and a more market-oriented business strategy has resulted in less of energy RD&D conducted by UK industry.[96] This view is supported by several witnesses. The Advanced Power Generation Technology Forum, a Foresight Associate Programme, comments that privatisation has had a "negative effect" on RD&D, claiming that the generation companies "are increasingly risk averse".[97] Professor Ian Fells from the New and Renewable Energy Centre in Newcastle argues that the liberalisation of the energy market has "wholly malign" effect on RD&D.[98] The Institution of Electrical Engineers agrees, stating that with exception of some RD&D to meet the Renewables Obligation, there is no incentive.[99] The evidence from the Building Research Establishment (BRE) in relation to energy efficiency is similarly forthright:[100]

"Privatisation of the gas and electricity utilities has resulted in a catastrophic loss of a number of major centres of expertise in the UK associated with energy utilisation research. Energy price reductions, although advantageous to the economy, have had the effect of reducing interest in developing new energy sources and improving energy efficiency".

71. The Government disagrees, attributing this decline in expenditure to the maturation of a range of important technologies and a shift to energy providers in the North Sea and the renewables sector.[101] In this case the reduction in expenditure might have been expected, yet a discussion paper produced for the Government's PIU noted in 2001 that "It was ... anticipated that a liberalised market might be more open to innovation in meeting customer needs than a monopoly". However, it said that "Liberalisation introduced commercial competition to the R&D process and with it, improved efficiency in the allocation of resources. However, there were costs associated with this and R&D budgets have seen substantial reductions. Moreover, there is some evidence that increased competition has shortened the time horizons for R&D expenditure creating a focus on short-term commercial goals rather than long-term investment.".[102] We are puzzled by the Government's assertion that privatisation and liberalisation has not led directly to a decline in energy RD&D—it has led to a dramatic decline, by far the largest decline in all OECD countries. The forces that drove innovation in the past are at least as strong as they ever were and it seems hard to believe that the Chief Scientific Adviser's energy group and several of our witnesses are so ill-informed. We are concerned that the Government is poorly placed to stimulate energy RD&D investment in industry if it is in a state of denial over its causes.

72. More efficiently run private enterprises may have streamlined their RD&D effort and improved its focus. Brian Count of Innogy told us that research conducted by the CEGB (Central Electricity Generating Board) was muddled and that it "developed many ranges of steam technology and ... almost nothing of that is world competitive".[103] The PIU concluded in 2001 that "The CEGB's system of innovation was inefficient with significant levels of research funding being wasted through lack of proper controls and monitoring and inadequate financial commitments by manufacturers".[104] The fall in private sector RD&D expenditure has been higher than would have been expected from simply improving its focus. We conclude that there has been a real and damaging reduction in the amount of private energy RD&D spend since privatisation and liberalisation of the market.


73. We took oral evidence from Innogy, Powergen, British Energy and BNFL and received written evidence from TXU, before its UK operation was purchased by Powergen. Of these, only BNFL is investing significant sums in new generation technologies (see paragraphs 163-180 below). It is our impression that generating companies are doing very little beyond improving efficiency of existing power plants or positioning themselves as informed purchasers of technology. The RD&D facility at Powergen is interesting, as it is a self-contained business unit, Power Technology, within the company. We do not doubt that this provides a valuable service to its customers, but hardly demonstrates an attempt to provide Powergen with the technologies it will need in the future. Indeed, Power Technology's Director, Dr Derrick Farthing, reckoned that only £3 million was spent on pure RD&D.[105] Innogy's electricity storage technology Regenesis is more interesting but it is revealing that Chief Executive Brian Count says that "I do not believe that electricity companies are set up to be developers of technologies or manufacturers of technologies".[106]

74. We note that all the companies from whom we received evidence from had interests in wind power, but as purchasers not as developers of the technology. This interest, as Dr Christopher Anastasi of British Energy made clear, is driven by the Renewables Obligation (see paragraph 207-208): "We have to have 10% of [our supply] by 2010 in renewables or pay the penalty. The quickest way to do that is to build wind and that is what most people are tending to follow".[107]

Electricity transmission and distribution companies

75. The electricity transmission system in the UK is comprised of four high voltage grids (400kV and 275kV): one in England and Wales (the National Grid Company), two in Scotland and one in Northern Ireland. A number of Distribution Network Operators (DNOs) link the grids to consumers using lower voltage connections (132kV and lower).[108] They have no direct role in the generation of non-carbon sources of energy but there are a number of physical features of the electricity transmission system that impede the greater use of low and non-carbon sources of energy. Many of these are not constrained by technology. For example, the transmission system evolved to transmit electricity large generators to consumers, in one direction. Many non-carbon sources of energy are diffuse and situated a long way from major urban areas.[109] As a result, modifications to the system are necessary: this requires massive capital investment but there are no technical barriers. Also, there are features of the market and its regulation at least as important in bringing power generated by renewables onto the system. These are dealt with in paragraphs 198--214.

National Grid

76. Conventional power stations hold stocks of fuel and can generate at will to meet demand almost instantaneously. Some renewable sources of energy, notably wind and solar, suffer from intermittency, which provides challenges for the grid companies, as discussed in detail by the Trade and Industry Committee's report on Security of Energy Supply.[110] The National Grid has the responsibility of balancing supply and demand but it has stated that no major changes to the grid would be required if 10% of electricity were generated from renewable sources, and that there is no technical ceiling to the use of renewables.[111] Nevertheless, we do have concerns about the level of RD&D being undertaken by National Grid. At £5 million it represents 0.5% of the company's turnover. We accept that it is a capital intensive company and that it purchases new technologies from suppliers. Its RD&D spend is still very low, however. Dr Lewis Dale, the company's Regulatory Strategy Manager, admits that the grid is ageing, with some components 50 years old.[112] He said that much of the RD&D looked at how the grid aged. We feel that some of this money would be better directed at finding innovative and efficient means of controlling the network and transmitting electricity, and researching techniques to minimise losses (currently 1.5% of generated electricity[113]). In its evidence to us, National Grid outlined their funding of EPSRC's SUPERGEN initiative (see paragraph 27 above) and in establishing the National High Voltage Research Centre at UMIST.[114] Its investment in these research programmes is admirable but the amounts involved (£800,000) are modest.

Distribution network operators

77. Renewable sources of energy are typically diffuse with many generation facilities producing much lower outputs. It is more appropriate for such facilities to connect to the lower voltage networks. This "embedded generation" raises technical issues (and indeed financial ones). Embedded generators provide electricity into the system where it was not originally expected. This poses particular problems with intermittent sources such as wind energy as the power flow will depend on whether the wind is blowing or not.[115]

78. A promising strategy for delivering reductions in CO2 emissions is for domestic users or communities to generate their own electricity, using technologies such as CHP, photovoltaics, wind or energy from waste. A key part of such a strategy is making it financially viable for the user to sell surplus power back to the area's supplier. This raises technical problems. Domestic users need to run appliances from a stable and standard voltage and unreliable inputs to the network would disturb this stability. Furthermore, metering systems would be required to establish the net usage or supply of power. According to United Utilities, these present more fundamental problems than strengthening the networks to allow new generation to connect.[116] We were pleased to learn from the Energy White Paper that the Government is "exploring the scope for developing simpler metering arrangements to help micro generators (including solar PV) obtain a fair value for the surplus electricity they export to the grid".[117]

79. Despite the fact that many of the technical solutions to the connection of distributed sources of energy are known, it is less clear how these solutions will be applied in practice. United Utilities has called for a programme of demonstration projects, saying that they "are not alone in being confused as to how to seek assistance in developing these solutions into practical workaday applications".[118] This seems a practical way forward. We recommend that the Government establish demonstration projects to establish how distributed sources of electricity generation can be incorporated into local networks, in particular the development of metering systems to allow domestic generation to export power to the network.

80. United Utilities rightly recognises the value of non-technical research into commercial and regulatory initiatives for distribution networks. We recommend that the Economic and Social Research Council make provision for such studies.

Engineering and technology companies

81. In the 1980s energy innovation was focused within the nationalised industries rather than UK equipment manufacturers. When the market was liberalised, the burden of innovation shifted towards engineering and technology companies. There were few UK companies to take things forward, and these were slow to adapt to the new environment. Foreign-owned companies such as GE, Siemens, Alstom and ABB, who at the time had firm bases in unliberalised markets, were able to take advantage.[119]

82. A discussion paper produced for the PIU argued in 2001 that "While electricity companies cannot be expected to carry out technology RD&D alone, as the franchise holders for the monopoly networks, they need to provide a framework that enables innovative technology".[120] It is our view that energy RD&D burden has fallen too heavily on engineering and technology companies. We appreciate the commercial constraints on companies and recommend that the Government and the regulator work to create a better environment for RD&D.

Fuel companies

83. We received evidence from Shell and BP. They come first and second in the Government's RD&D Scoreboard for RD&D expenditure in their sector, investing £267 million and £266 million in 2001, although not necessarily invested in the UK.[121]

84. BP's RD&D spending on non-carbon energy is directed at three main areas: carbon capture and storage, hydrogen and solar. It is developing a small number of wind projects in addition.[122] BP makes clear that while it collaborates with a number of academic research groups, its own RD&D is market-led. Basic research, it stresses, is matter of public investment and should be conducted as an end in itself. Shell has a similar focus. According to its evidence, it has interests in carbon sequestration, hydrogen and fuel cells, and biofuels.[123] A look at its website also indicates an interest in solar and wind.[124]

85. A surprising omission from both companies is any activity in marine renewable technologies such as offshore wind, wave and tidal. Our predecessor Committee found that one of the UK's great strengths to be in marine engineering stemming from the North Sea oil and gas industry.[125] We asked Shell and BP what plans they had to apply their experience in offshore technologies to marine energy technologies. Mr John Mumford of BP said "We would certainly consider it" and "It is an area that we have some expertise in, clearly, but at the moment we are not doing anything in BP of a demonstration nature in that area".[126] Dr Bernard Bulkin, Chief Scientist at BP, went on: "If a company like BP or Shell proposed to build such a structure in the sea for any part of our business we would be roundly castigated in the press for disturbing the sub-sea environment". This is a pity. Undoubtedly, environmental groups would have concerns but they should have more confidence in the public's ability to weigh up the merits of the case. Brian Wilson, in giving evidence to us, said that we thought synergies would develop between companies active in the North Sea and those developing marine energy technologies: "There are some interesting projects coming forward".[127] He did not, however, reveal any incentives that would help the process. It is disappointing that the UK's experience in the North Sea oil and gas industry is not being employed to develop new marine energy technologies. Clearly the incentives for oil and gas companies are insufficient, a situation which the Government should remedy.

Renewables SMEs

86. Renewable technologies can be at very different stages of development. The RD&D contribution to research will be considered in discussions on each technology in paragraphs 115-162.

Government incentives

87. Between 1981 and 1998 total UK private sector spend on RD&D fell from 1.5% to 1.2% of GDP, and a large proportion of the total (37%) is undertaken by the pharmaceutical sector. Total UK RD&D expenditure was 1.8% of GDP in 1998. This compares with 2.5% in the US and 3% in Japan.[128] The last two spending reviews have included substantial, real-terms increases in public expenditure. In contrast, private sector RD&D spend has changed little in recent years. The European Commission, supported by the UK, has stated an aspiration that total RD&D spend in the EU should reach 3% of GDP by 2010, with two thirds from private sources.[129] Outside the pharmaceutical sector, the oil and gas companies perform well in the RD&D scoreboard but elsewhere in the energy sector investment is not so high. We are pleased that the UK Government supports an EU target of 3% of GDP invested in RD&D but given the strong link between investment and productivity, we are disappointed that it has not adopted this "aspiration" for the UK. We recommend that the Government does so.

88. The lack of private RD&D investment is barely recognised in the White Paper. The Government says it will "work to create a policy environment that encourages the private sector to bring the key technologies forward, and play a key role in the delivery of major new infrastructure".[130] It announces new money for capital grants to bring laboratory research to the market, which is welcome, but nothing to provide new incentives for industry to invest its own money in RD&D. This is a regrettable. Tom Delay, Chief Executive of the Carbon Trust, told us that to get anywhere near to 20% renewable generation billions of pounds of private investment in innovation would be required and that this is "very hard to envisage at the moment".[131] Sir David King told us that, of the £100 million going into the DTI's LINK programme, over half was from industry.[132] He felt that the £28 million going into the Research Councils' Sustainable Energy Programme would have the same effect in providing leverage from the private sector. To get anywhere near to the billions of pounds mentioned by Mr Delay a huge amount of leveraging will required. Brian Wilson told us that a liberalised energy market in Europe would force companies to invest in RD&D through self-interest.[133] Given the effect of liberalisation on the UK market it is clear to us that this is unrealistic.

89. Government encouragement for companies to conduct RD&D falls into two categories: direct incentives such as the RD&D tax credit; and indirect incentives that create a fiscal and technological environment in which RD&D investment is more likely. The latter category, including Renewables Obligation and the Climate Change Levy will be considered later.

90. An RD&D Tax Credit for SMEs was introduced in April 2000. The Chancellor said it would underwrite almost one third of research and development costs for small business.[134] In the 2000 Budget the Chancellor announced that this would be extended to larger companies, albeit with relief at 125% (as opposed to 150% for SMEs). This came into force in April 2002.[135] We asked our witnesses for their views on this initiative and to what extent it had changed, or is likely to change their RD&D investment strategy. Dr Bernard Bulkin, Chief Scientist at BP, welcomed the tax credit, but stated that "It has not been the force that drives us to where we do our RD&D".[136] He commented that the cost of conducting RD&D in China is a quarter of that in the UK or the US. Sir David King insisted that it was too early to determine the effect of the tax credit but that "there is now ... a much greater degree of willingness to look into this issue.[137]

91. For other energy companies the tax credit is purely hypothetical. As Powergen pointed out, if you have no taxable profits then it will make little difference, and it would rather the Government provided cash payments.[138] Given that a feature of the energy market is difficulty for companies, particularly the generators, to make any money, the tax credit is particularly ill-suited as a stimulus for innovation in this sector. The Government should recognise that even companies not regularly making a profit need to think long term and invest in RD&D and should consider introducing mechanisms that provide that incentive.

92. Of equal concern to us is the complexity of the rules. In giving evidence to us, neither Innogy nor Powergen seemed particularly sure as to what qualified under the tax credit's rules and what did not.[139] Private companies are not usually reluctant to employ the tax system to their benefit. Don Spearman from Vent-Axia also revealed hesitancy over what would qualify for the tax credit. He had only just heard of it when he came in to give evidence: "I took it through to our accountant and he told me that our group company had considered the sort of work that we were involved with and felt that it was not appropriate and I told him to go back and ask again".[140] The existence and nature of R&D tax credits are not well understood by companies—particularly the smaller ones—and the rules of the R&D tax credit seem to be too complicated or inadequately explained. The Government should remedy these problems, since if energy RD&D is to be resuscitated in the UK in the field of low carbon technologies, a clear and significant tax incentive is much-needed.

93. A combination of EU rules on state aid and the Government's unwillingness to interfere with the market has meant that the Government has been unwilling to intervene to fund RD&D in industry.[141] The Japanese Government is more interventionist. The DTI's policy of not supporting research that is close to market or should be conducted by industry contrasts with Japanese companies being subsidised heavily to conduct research on priority technologies. We were struck that while Japanese industry has a impressive record of conducting RD&D, it was clear from our discussions that much of the research conducted by companies such as Sanyo in photovoltaics and fuel cells would not be taken on in the absence of Japanese Government funding and subsidies for installation. Given the more benign energy market in Japan, it is not surprising that UK industries are hesitant about investing in RD&D. The Government has failed to encourage an environment that encourages technical innovation, to provide sufficient direct investments and to make any significant response to the scale of market failure.

95   Ev 40-41 Back

96   Ev 107 Back

97   Ev 18 Back

98   Ev 6 Back

99   Ev 23 Back

100   Ev 136 Back

101   Ev 107 Back

102   PIU, Discussion Paper: Electricity Market Liberalisation and Innovation in a Carbon-Constrained World, November 2001, paras 9, 37 Back

103   Q 190 Back

104   PIU, Resource productivity: making more with less. Annex J: Electricity market liberalisation and innovation in a carbon-constrained world, The Cabinet Office, November 2001, p 107 Back

105   Q 187 Back

106   Q 190 Back

107   Q 319 Back

108   Ev 124 Back

109   Q 444 Back

110   Second Report of the Trade and Industry Committee, Session 2001-2002, Security of Energy Supply, HC 364, para 33-43 Back

111   Q 444 Back

112   Q 448-449 Back

113   DTI, Transmission Losses in a GB Electricity Market, a consultation paper, January 2003 Back

114   Ev 125 Back

115   Second Report of the Trade and Industry Committee, session 2001-2002, Security of Energy Supply, HC 364, para 38 Back

116   Ev 140 Back

117   DTI, Our energy future-creating a low carbon future, Cm 5761, February 2003, para 4.56 Back

118   Ev 140 Back

119   PIU, Discussion Paper: Electricity Market Liberalisation and Innovation in a Carbon-Constrained World, November 2001, para 15 Back

120   PIU, Discussion Paper: Electricity Market Liberalisation and Innovation in a Carbon-Constrained World, November 2001, para 12 Back

121   RD&D Scoreboard, Back

122   Ev 96 Back

123   Ev 97-100 Back

124 Back

125   Seventh Report of the Science and Technology Committee, session 2000-2001, Wave and Tidal Energy, HC 291, paras 40-41 Back

126   Qq 541-542 Back

127   Q 583 Back

128   DTI, Our Competitive Future: Building the Knowledge Economy, December 1998, Cm 4176, para 2.32 Back

129   Barcelona European Council, 15-16 March 2002 Back

130   DTI, Our energy future-creating a low carbon future, Cm 5761, February 2003, para 7.28 Back

131   Qq 254-255 Back

132   Q 577 Back

133   Q 612 Back

134 Back

135   HM Treasury, Budget Report 2002, April 2002, paras 3.54-3.58 Back

136   Q 540 Back

137   Q 579 Back

138   Ev 166  Back

139   Qq 205-206, Ev 166  Back

140   Q 504 Back

141   DTI, European Community State Aids, June 2001 Back

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