Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 12 JANUARY 2005
MR DAVID
PORTER, DR
JOHN MCELROY,
MR ANDY
LIMBRICK, MR
DAVID GREEN
AND MS
KIRSTY HAMILTON
Chairman: Right, ladies and gentlemen,
we move to our next group of witnesses who effectively are on
the production side of energy. May I just say that I do appreciate
that several of you are here and the one thing that we are always
short of on the Committee is time, so I am going to make an appeal
to everybody, including me, to try and keep our questions crisp
and our replies of equivalence. It may well be that there are
points that are put to one witness that others would wish to comment
on, if you just raise a finger, a pen or in some way indicate
to me that you might want to come in in addition to whoever has
been asked to respond to the question, I will do my best to bring
you in. So with those points, may I formally welcome on behalf
of the Association of Electricity Producers, Mr David Porter their
chief executive, Dr John McElroy, who is with RWE npower and chairman
of the AEP Environment Committee. You have a very important title
there; it is quite the longest one I have seen for some time.
You are accompanied at the end of the table by Mr Andy Limbrick,
who is your head of environment. From the Business Council for
Sustainable Energy we welcome David Green, chief executive and
Kirsty Hamilton who is their international policy advisor and
Mr Paddy Tipping will commence our questions.
Q120 Paddy Tipping: Can we just take
stock of where we are at the moment? I think my old friend John
Prescott would say that the reduction in carbon emissions since
1990 has been largely on the back of the generating industry and
the table that you kindly produced shows that quite significantly.
What I wanted then to go on to say was that you then project those
emissions forward from 158.2 million tonnes of carbon to 139 million
tonnes of carbon by 2010. Is that achievable?
Mr Porter: I will ask Dr McElroy
to comment in a moment Mr Chairman, but you made the point almost
for us, that we have, as an industry, borne the burden of reductions
so far and I was most encouraged to hear the previous witnesses
talking about their willingness to get involved in this as well.
We have often, as an association, pointed to transport as a sector
that probably could do more. John would you like to add to that?
Dr McElroy: I would have to start
by saying that the projections which are referred to in the Association's
submission are those of the DTI and are not those of the electricity
industry. At the moment, the gap between DTI's forecast of CO2
emissions in 2010 versus the government's target of 20% is to
60% which means a significant gap exists and, the point you made
yourself, the UK electricity industry has already contributed
significantly to those CO2 emission reductions and
at the moment is the only sector in the EU Emissions Trading Scheme
in the UK that has been asked to make further reductions in the
next three years. Therefore, I would have to say that things are
getting tight for the electricity sector already and within the
EU Emissions Trading Scheme, it is going to be important that
other sectors start to play their part as well. In the wider context,
then you are talking about the issues of the transport sector
and we have already heard some of the comments from the aviation
sector and the domestic sector in how they can play in to contributing
to achieving the overall government ambition.
Q121 Paddy Tipping: Okay, let us
just stick with that for a minute. You have just told me that
of those projections the 139 million tonnes is a DTI projection.
Are we going to meet them?
Dr McElroy: I would have to say
that those DTI projections are based on some fairly heroic assumptions.
Q122 Paddy Tipping: Explain that.
Dr McElroy: The assumptions are
effectively that we will go from a position at the moment where
our electricity demand is rising year on year at a level of about
1.5% per annum and effectively that would have to be turned around
to achieve something around -0.2% reduction to achieve the DTI's
139 million tonnes. The other thing which the DTI numbers say
is that there is no need for any new investment in capacity within
the electricity sector between now and 2010 that demand can be
met effectively with the existing capability. I would have to
say that that seems to us to be somewhat ambitious.
Q123 Paddy Tipping: If you were to
meet the target, what would you need to do?
Dr McElroy: The important point
here is that we are engaged not in a UK Emissions Trading Scheme,
we are engaged in a European Emissions Trading Scheme. Therefore
all of this is about encouraging investment to reduce carbon emissions
in the most efficient way across Europe. Therefore the options
open to us in the UK are either to invest in new plant, if that
is the most cost effective way of addressing the issue, or if
others can do it more effectively, to buy allowances in the market.
The whole point is that what we want to see is market liquidity
encouraged and efficient investment is the best way of creating
that liquidity, but the answer is not entirely obvious at the
moment, because it is very early days in the scheme.
Mr Porter: What is obvious, it
is fair to say, is that investment will not play a part in the
first phase of the scheme.
Dr McElroy: Absolutely right.
Q124 Paddy Tipping: Because there
is uncertainty about future marketplace and the regulation and
the rest of it, people are not prepared to invest. You need to
have a long-term investment climate.
Dr McElroy: That is one part.
The simple fact is that the lead time on investment in the UK
electricity sector is typically three to four years, so major
investment cannot come into play in the first phase of the scheme.
I think a lot of the perception was that early reductions could
come from coal to gas switch and the current fact is that in the
market, gas prices have risen very steeply. If we are looking
at winter prices next year versus coal prices for winter next
year, the economics of gas switching do not tally with the current
price that we are seeing in the emissions trading market. Therefore
under those circumstances, if the allowances are available to
buy at that price, that is what the market would do.
Q125 Paddy Tipping: I will not get
into price rises because that would detract us, but can you just
tell me this in simple terms. The expectation is a 20% reduction
by 2010, a 60% reduction by 2050. These are wildly optimistic
figures are they not?
Dr McElroy: The government itself
has done a lot of analysis on this area. A lot of work was done
underpinning the Energy White Paper which showed that even if
the electricity sector become carbon neutral, it would be impossible
for the UK to achieve its 60% target. This comes back to the point
we were making earlier, that we must find ways of engaging other
sectors and what we want to do is to do that in the most cost
effective and most efficient way.
Q126 Paddy Tipping: I am broadly
sympathetic to the industry as you know, but there are people
who are more hawkish than I who would say "Hang on you lads.
This is like a game of poker. You're telling us, this isn't possible
to do, you're telling us it is hard, because there won't be such
demands made of you later on in the cycle". What is the answer
to that?
Mr Porter: Some of those hawkish
people have given us a lot of grief in the last few months.
Q127 Paddy Tipping: Could we have
some names on the table?
Mr Porter: I think you will be
seeing some of them next week. An error that the government made
last year in calculating the "business as usual" situation
for emissions played into the hands of the people who want to
hit at the power industry. Roughly a year ago the government had
quite seriously underestimated the "business as usual"
level. As an industry we had already accepted that we would take
a cut against "business as usual" and when they published
their figures, unfortunately, they were wrong and they were much
higher than they should have been and that led to a lot of difficulty.
We had to argue with the government, quite sensibly, that they
had got their calculations wrong and while that was going on,
the hawkish people portrayed us as really trying to avoid our
responsibilities. We are not: we actually want to help the government
achieve its environmental objectives and in fact I can say with
a certain amount of pride that the Association put the idea of
a cap-and-trade approach to this on the agenda as long as 10 years
ago. I have to say as well that we were probably a little bit
ahead of our time there.
Mr Green: You introduced us all
at the outset saying we broadly represent energy suppliers. It
is important that one actually looks beyond the industry as energy
suppliers, because the Prime Minister has made clear, and it is
something that the Business Council strongly supported, that the
government is firmly committed to the drive to a 60% and that
the government is firmly committed to its 20% target. What is
clear from the work that has been done as far on the climate change
review is that on current policies alone, we will not get to the
20% target, we will only get to 14% That therefore begs the question
as to what additional policies are going to be put in place. The
other thing it would be worthwhile sharing with the Committee
is that the forecasting exercises that are done by the DTI, for
example on renewables, are essentially political exercises and
the DTI's energy model would not, of its very nature, deliver
an outcome of a 10% renewables target. That is an external factor
imposed on the model to achieve a given goal and in relation to
the field that I have worked in for some years, combined heat
and power (CHP), the DTI's model assumes the government will not
meet its target. Now, if you were to put in place measures which
would meet that target, it would then help industry to achieve
the 50% of its carbon savings which it is estimated could come
from CHP. That is not just the industry; that is the manufacturing
industry. So there is a range of measures which could be put in
place to get us to that 20% target, but they are probably measures,
as John has said, which are outwith the electricity sector, apart
from the fact that it is the electricity and gas sectors which
have been heavy investors and are heavy investors in both renewables
and energy efficient technologies. A whole swathe of measures
could be put in place to ramp up general delivery of energy efficiency
in commercial buildings, industrial, etcetera. It is probably
in those sectors and in the transport sector, and a sub-set of
that is the aeronautics sector, where significant savings could
be achieved with a much more determined effort.
Paddy Tipping: We will come to CHP in
a bit and there may be a chance to talk about other policy models.
You had just better tell us where we are on the EU Emissions Trading
Scheme, because I do not quite understand where the government
is in relation to this. They made a bid, they submitted it to
the Commission who are now threatening legal action. Could you
just explain this in simple terms?
Q128 Chairman: May I add a point
to that as well? In your evidence you say that you do not think
the process is transparent. I am not quite certain why, after
all this sort of proselytising you have been doing about it, you
still cannot see the wood for the trees.
Mr Porter: I will ask Dr McElroy
to comment in a moment, Chairman, but with your permission, may
I just correct something that I said earlier. I think, as I played
it back in my mind, I said that the government's initial allocation
to us was higher than it should have been, in fact I meant it
was lower than it should have been.
Dr McElroy: In terms of the transparency
regarding the Emissions Trading Scheme, we saw the draft national
allocation plan last January and we have had subsequent discussions.
The important thing is that the draft national allocation plan
set everything out down to the lowest level, so every installation
in the UK knew what was proposed at that stage. We have not seen
any update of that since January last year. We have seen a lot
of discussion about what the total cut might be, we have some
idea of what the cuts for the other sectors within the trading
scheme might be, but the government has now taken the view that
they will allocate to them first and whatever is left in the pot
after that will go to the electricity sector. So, until we really
understand what everyone else is getting, we cannot actually understand
what is going to be left for us. The original intention was that
allocation would be finalised in autumn last year, we were then
given a date of 5 January this year. Just shortly before Christmas,
we were given a date of 7 February, with the ongoing debate with
the Commission on which we have no direct information.
Q129 Paddy Tipping: Tell us what
you know, because I only know what I have read in the newspapers.
It does not make any sense. Just explain this.
Dr McElroy: All we know is what
the government actually told us back in October, which was that
they had identified this gap because of their revisions to the
projections, they have decided as a result of that, that they
need to increase the total allocation to the UK by something of
the order of 18 million tonnes a year; I do not have the specific
figure. They are going to give the electricity sector about a
third of that which compares with the original shortfall, which
was identified once the errors were spotted, which was around
20 million tonnes. They have obviously gone to the Commission
to negotiate on that basis, but we await the outcome. We understand
that relationships are difficult.
Q130 Paddy Tipping: I was just going
to say that. The Commission are saying "You have to prove
your case" and the British Government are saying "We'll
see you in court".
Dr McElroy: I could not possibly
comment on that because we are not party to those discussions.
We can only read the press, just as you do.
Mr Porter: We might add, that
we thought that being given our allocations in the autumn of last
year was quite late enough for a scheme that began on the 1 January.
We have now been in the scheme for 11 days without the necessary
knowledge of the allocations.
Q131 Chairman: Let me pursue some
of the technological arguments. You indicated in your opening
comments that the move towards gas generation of electricity had
certainly assisted us in terms of reducing CO2 outputs
from the energy sector, but we have something of a paradox in
that over the foreseeable future—and my colleague Mr Drew
is going to question you more closely on nuclear energy in a few
moments—we have the nuclear sector declining as a proportion
of our energy mix. We have, again as you indicated to us earlier,
a rising demand for electricity. The third factor we have is some
perversities in the pricing where the obvious move would be to
go and build some more gas power to replace the nuclear that is
disappearing and hope that somewhere along the line renewables
might be able to fill in behind there to keep the whole show on
the road. You then just said to us earlier on that the price of
gas, particularly in the short term, does not encourage any further
investment in that direction. So against that background, question
number one: what actually do you think within our known technology
is the potential for further savings of greenhouse gas emissions
from the electricity generating sector? Given current technology,
how much more can we get out of you?
Mr Porter: May I give a fairly
general answer and then perhaps pass it to John for a more detailed
one. The other factor here is price and in one sense, you can
have nearly anything you want if you are prepared to pay for it
and of course, as an industry, we have right in our sights the
environmental objectives and we cannot ever forget them. At the
same time, we are given competitiveness objectives, fuel poverty
objectives and almost above all, security of supply objectives.
That is the context within which we work.
Q132 Chairman: Who gives you security
of supply objectives? They were the missing words in the Energy
White Paper and only in the latest government strategy document,
which appeared a couple of months ago, do we actually see the
word "security" creep in as a sort of bit player.
Mr Porter: For some time, the
government has had three legs to its energy policy as far as our
industry is concerned: one is competitiveness, one is reducing
carbon emissions and the other one is maintaining security of
supply. We take that very seriously because we know that we would
be very firmly in the spotlight should that lead to any difficulties.
Q133 Chairman: So putting 70% of
your eggs into one basket is called "security of supply"
is it?
Mr Porter: I suspect that you
are alluding to the take-up of gas for electricity production.
Q134 Chairman: I am.
Mr Porter: We have not reached
that level yet, but if it is any comfort to the Committee, although
the competitive market that we are required to work in does drive
us in that direction, it has slowed a little bit recently with
the rise in gas prices, but, having said that, there have one
or two very recent announcements about new gas-fired projects.
The industry nevertheless is just as aware as the informed public
are that there are question marks against becoming that dependent
on gas.
Q135 Chairman: Anyway, to come to
my specific technical point, Dr McElroy, would you like to give
us a specific answer to my question?
Dr McElroy: At the moment the
options essentially open to us are investment in renewables.
Q136 Chairman: Let me hammer you
right down. In terms of the parts of the generating system that
produce CO2, how much more is there that one could
take out of you in terms of improving the efficiency, reducing
the greenhouse gas transmission from your sector?
Dr McElroy: In terms of existing
plant, those changes would be incremental. There are obviously
investments that could be made to achieve some improvement in
the efficiency of existing plant and I would say that the EU Emissions
Trading Scheme will drive some of those investments and make them
economic, but that is limited. If you really want to get a step-change
in efficiency on the plant and the reduction of CO2
emissions, then you are talking about building new plants. At
the moment, in terms of fossil plant, the only plant which is
close to the market at all is higher efficiency CCTG plant and
linked with that, there is the CHP element which David previously
mentioned and whether that has any advantages in the market, particularly
a carbon market. At the moment, anything in the way of new coal
is out of the market, as is nuclear.
Q137 Chairman: I will tell you the
reason why I asked the question and it follows on from what Mr
Tipping was saying. In response to his line of enquiry, you pointed
out to us that the government's estimates are an act of political
fiction, these numbers were created for some purpose and they
did not reflect the true energy consumption situation, therefore
by definition did not represent the true emissions position. I
think you also said at the beginning of your evidence that you
were pleased that aviation might be called upon to shoulder some
of the burden. If we are to understand whether policy is right,
what we have to know is whether you have the potential of dealing
with the shortfall in meeting the government targets or whether
in fact meeting that target is properly allocated amongst all
the sectors. So are you able to put a number on your potential
for us? If we say X million tonnes of carbon dioxide emissions
which have to be dealt with, how much of that X can you account
for?
Mr Porter: I think John said earlier
that we could get to a point where we were carbon neutral and
that possibly would not be enough. Is that part of the answer?
Dr McElroy: It is part of the
answer in the longer term. At the end of day, the only mechanism
available in the short term is to switch to gas. Effectively,
at the moment we have somewhere around 120 terawatt hours of coal-fired
generation in the UK which is responsible for just over 100 million
tonnes of CO2 emissions a year. Gas-fired generation
gas emissions are pro rata about 40% of those of coal.
Q138 Chairman: That would still lead
you to an even more unbalanced energy portfolio would it not?
Dr McElroy: Yes. This comes back
to the issue that David raised, that the decision on the part
of government is how it is going to balance affordability versus
security of supply versus its environmental ambitions.
Chairman: Could I ask you to reflect
and perhaps let us have a supplementary paper? Perhaps you might
just be able to quantify for us what you think is the target of
CO2 emissions that we have to deal with, particularly
to bring us back onto the government's target, how much of that
you think you could contribute and, ballpark figure, what has
to be dealt with by the rest. I will move onto David Drew.
Q139 Mr Drew: The Chairman has already
mentioned what is left out the equation which is what we do with
nuclear. There does seems to be some warming—no pun intended—to
the view that there is a role for nuclear, maybe not immediately
but somebody has to talk reality into what was the fudge in the
last White Paper over how we do have much more control over security
of supply. I just wonder what your views would be on that.
Mr Porter: There are quite warm
feelings towards nuclear power within the Association. I should
say that we are an association which represents all the commercial
generating technologies and we are most certainly not anti-nuclear.
We have, these days, five companies within the Association which
have nuclear power interests: that is the two well-known British
ones, one French one and two German ones. So we are not an anti-nuclear
organisation and in fact, we are beginning to do some work now
on our own position on where nuclear ought to fit in the fuel
mix. This is a rather tricky thing to do because, although people
around the table in the Association recognise the carbon benefits
of nuclear power and they recognise the security benefits of nuclear
power, the difficulty is how to bring nuclear into the marketplace
in an environment which is so commercially driven. We do not have
the answer to that at the moment, but if people want to pursue
nuclear, that has to be addressed.
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