Examination of Witnesses (Questions 180-199)
MR IAN
MARCHANT AND
MR PAUL
SMITH
1 MARCH 2005
Q180 Mr Carmichael: Can I first of all
apologise for my lateness, and my apologies to you, Mr Marchant,
if this is ground that you have already covered. You have given
your own definition of the Scottish Executive's target of what
you would like to see as being 40% of electricity supply, which
you think is both achievable and desirable. Do you think in short
that BETTA helps or hinders the meeting of that target?
Mr Marchant: I think that BETTA
has two "Ts", transmission and trading. I think certainly
on the transmission side of it, which we were talking about earlier,
it is almost certainly going to hinder these high charges—I
know the constituency you represent—particularly in the
island groups where we have some very, very good natural resources,
and the risk of the very extreme locational signals could make
what would be otherwise sensible projects not happen, and I think
that you have to remember that BETTA and the whole transmission
charging methodology was built in a pre Energy White Paper world.
So we are implementing one set of policies and we have put another
key objective on it and we have not yet revised those key things.
So I think they are good but they will actually hinder a different
policy objective, and we need a bit more joined-up thinking and
another look and say, "What market structures do we need
to fulfil the policy objectives of the carbon reduction?"
Q181 Mr Carmichael: Forgive me if you
have already answered this question, and please say so, but Ofgem
made its decision on Friday with regard to transmission charging.
What is your view on the impact of that in the development of
renewables?
Mr Marchant: I did cover it but
I think it is worth repeating. I think that decision was the only
one they could realistically have made, otherwise we would have
had a disorderly market on 1 April. The key point is they said
that there were some things that they were still unhappy with.
We have to make sure that that review is wide ranging. There will
be a pressure to keep it narrow. I think it is beholden upon people
in Scotland particularly to make sure it is a wide ranging review
so that we get the chance to say what transmission pricing policy
we want for the long-term that meets our political objectives.
So if you regard those prices as a short-term fix that is fine;
if you regard them as a long-term solution we have a problem.
Q182 Mr Carmichael: One final point briefly.
Are you aware of the position with regard to the EU relating to
transmission charging? Unfortunately I have come without the papers
today but I am aware of an EU directive from 2001, which I wondered
in fact if Sir John Mogg, the Chairman of Ofgem might have been
involved in drafting, which states that the transmission charging
regime should specifically not discriminate about the generation
of electricity from renewables and specifically again especially
those in remote and peripheral, as he calls them, areas.
Mr Marchant: I am aware of that
view. I think that Ofgem's view is that their proposals do not.
My view is that I think it is a very interesting legal question
and something that we have to very seriously think about what
we do with that. But if the charges are for review then let us
make sure that we get it right. So rather than starting off with
a challenge to it I would rather involve myself constructively
in a sensible and thorough review. If it is not a sensible and
thorough review I will have to look at the legal implications
of that, and I think you will find that other Scottish generation
take a very similar view.
Q183 Mr Carmichael: So you are keeping
the door open on a legal challenge?
Mr Marchant: I believe I have
to, until I see the detail behind their review of these conditions.
Q184 Mr MacDougall: Can I just bring
your attention, you may have read the articles in the media, the
scientific research that was carried out, in The Guardian
of 26 February and The Scotsman on 24 February, and both
these reports highlighted different concerns, one on the fact
that wind farms are not the cheap option that people may have
thought them to be in terms of producing energy and they are an
expensive alternative, and the other one suggesting that in terms
of the hydroelectric, that that can be just as damaging to the
environment as burning fossil fuels and may contribute towards
global warming. I have mentioned this before on another occasion
but I did come to the conclusion that nobody seems to have a source
of energy that does not have a problem and what you really have
to try to work out here is where we move on from here in terms
of what is the most sustainable form of energy so that we would
be able to supply Scotland in the short and longer term. Do you
have a view on these particular comments? Do you dismiss them
or do you think there is some reason for concern in them?
Mr Marchant: I will ask Paul to
give you some capital costs in a minute, but I believe your summary
is well founded in the sense that I could find you somebody who
is opposed to every form of energy production. Partly because
the nuclear debate is relatively quiet we have not seen the counter
proposition there. If you think the wind farm debate is virulent
wait until the nuclear debate starts, it will be a whole different
order of magnitude. I happen to think that clean coal can have
a future but if you start talking about permitting a new coal
fired power station you will find people who are against that.
The only thing—and this is the theme of the address that
I was giving at the conference I was at—that solves all
the Government's policy objectives is energy efficiency. The only
way that you can really fundamentally deal with all of this is
not use that unit of electricity; therefore you do not have to
worry which particular form of generation you have. I think the
Government recognised that 50% of its carbon reduction emissions
needed to come from the demand side, energy efficiency and things
beyond the meter. But I do not think that current policy instruments
are going to deliver on that and I just wish that there was the
same amount of energy enthusiasm, the cap and innovation and creativity
on the demand side as there is in renewables. That has put me
on a hobbyhorse there, but in terms of costs, Paul.
Mr Smith: You raised two points.
One was the CO2 from hydro, which I will take first. That study
was actually based on these large hydro schemes that have been
done in China and Argentina and Brazil, these sorts of places,
where you are actually flooding existing valleys and the CO2 comes
from the trapped vegetation that has been flooded. Within Scotland,
although all the hydro schemes were actually existing lochs and
had their level raised slightly or they were running river schemes,
so the actual CO2 within those is just a natural river trapped
level, so you will not see high levels of CO2 coming from the
Scottish hydro scheme. On the second point, in terms of technology,
as Ian has already said, £700 per kilowatt for wind and onshore
wind farm is the rough estimate. For a CCGT—a Combined-Cycle
Gas Turbine plant—you are looking at around £400 a
kilowatt. The operating costs for a wind farm, depending on its
size, are significantly lower than that for a CCGT plant. So if
you were working out an investment clearly you would take the
cost of paying for the capital to build the plant, you would then
take the operating cost, obviously annualised, and work out per
megawatt hour you are generating. For wind you are obviously getting
the energy for free. So it could actually get your investment
effectively at half the cost of a CCGT and it is looking about
the same economics. Wind is actually only economic because the
ROC—the Renewable Obligations Certificate—actually
gives you that uplift energy. If that was not there clearly you
would be investing in fossil fuels.
Mr Marchant: I think the other
question is, do you believe that we are into a period of sustained
high fossil fuel prices? And do you believe that oil and gas will
start to be priced as a scarce commodity? If you do then every
barrel we save is a good thing and every investment we make that
saves barrels in ten years' time is a good thing. If you believe
to the contrary, that the oil industry will continue to find new
fields of production then investment in renewables is not economic.
So again you are talking about very high level views about the
future economics, which is again what I come back to. You end
up saying, "I do not want to put all my eggs into any of
those baskets and some sort of balanced solution is probably the
answer."
Q185 Mr MacDougall: Could there be a
situation, given the development in China and places like that,
that cost wise—for example, Scotland could try to supply
its own energy within hydro power, or whichever one is acceptable,
and I am not sure what should be acceptable or not, to meet all
the criteria expected of that. Would that be an expensive source
having to meet it within Scotland alone, as opposed to within
the UK? Or indeed would it be better in the longer term that we
actually import all our energy from a cheaper source and in that
way give the benefit to the users and that would be a much more
economical way of supplying energy? Does that consideration come
into it somewhere?
Mr Marchant: You have to weigh
up the cost and the security supply issues. There is a price.
Many countries are dependent solely upon imported primary energy
and their economies thrive. We have been well blessed in the UK
for many years with North Sea oil and I think we have got used
to not asking ourselves that question or what that trade-off is.
We are now getting to the stage where we do. Again, from my own
personal view I would not want to be in a position where I was
importing all of my energy, but I would not mind, as long as I
have a balanced range of sources—and I would not want to
be dependent on any one country or any one fuel—a balanced
range of fuels, different infrastructure, I have diversity, I
am not going to be worried if I am importing maybe a significant
proportion.
Q186 Mr Sarwar: Your submission seems
to support the idea of "green coal". Do you consider
that coal does indeed have a future, despite the industry being
rundown over recent years?
Mr Marchant: I personally believe
that any environmental solution that ignores coal is just not
practically achievable on a global scale. If you look at China,
India and the US, they all have substantial reserves of coal and,
in one case, an existing substantial energy requirement, and the
other two substantially growing. They are going to burn their
coal, that is a political reality. So any global solution to climate
change that does not address clean coal is not going to fly above
those three countries. Therefore, we as the UK should be saying
how do we want to take advantage of that situation? The Americans
are spending a lot of money on clean coal technology. My own view
is let them and when they are ready we will grab the technology
and use it! I think the other thing we should be looking at as
the UK is carbon capture because for coal to be really clean you
have to capture the carbon and put it somewhere, not into the
atmosphere. Here the UK has a potential advantage. With the depleted
North Sea oil fields we actually have somewhere that that carbon
could be captured and I think that is the area in the value chain
that the UK should be focusing on for the next 20 years. So therefore
coal and gas can have a long-term almost zero carbon, if you want
it, future. We are waiting any day now for the DTI's carbon capture
strategy paper, and it may even be today—it is imminent—and
again I am looking to that to see the UK stepping up in that area.
Q187 Mr Sarwar: So do you think that
the time is right to start rebuilding Scotland's coal industry?
Mr Marchant: Coal industry?
Q188 Mr Sarwar: Yes.
Mr Marchant: I am not convinced
about that. However, the fact that we have coal fired power stations
still producing I would not want to see them all shut in 2015.
Whether that means that coal can be mined here economically, I
do not know. You are way beyond my knowledge there.
Chairman: There is now a division in
the House and we shall suspend for 15 minutes for our Members
to participate in that division and we will reconvene at 16.18.
The Committee suspended from 16.03 pm
to 16.18 pm for a division in the House
Chairman: I think we stopped you in mid
flow.
Q189 Mr Sarwar: Do you believe in rebuilding
Scotland's coal industry?
Mr Smith: The big issue for coal
power generation in the UK is the Large Combustion Plant Directive,
which comes into force in 2008 and that actually drives all the
coal generation plant to operate at a very low sulphur emissions
environment. Scottish and British coal by nature is very high
in sulphur. The only way you can run those coal stations is if
you have flue gas desulphurisation fitted to the back end of the
coal plant. So there is a large decision to be made between now
and 2008 for about 18 gigawatts of coal plant that has opted out
of the Large Combustion Plant Directive, is it going to fit FGD
or not? If it does not then it is effectively going to have to
reduce its load factor by a half because it is limited by the
number of running hours to 20,000 between 2008 and 2014 when it
must shut. Currently around 30% of the UK's energy is provided
by coal generation and there are only a handful of plants that
have flue gas desulphurisation fitted. So there is going to be
a large drop off and that is why Cockenzie, which does not have
flue gas desulphurisation, and Longannet, will obviously be affected
by that. So to answer the question, it is likely that the bulk
of the coal burnt in the UK will come from imports.
Q190 Mr Sarwar: Which countries do you
think will import this coal?
Mr Smith: Russia, Australia, Indonesia,
Columbia, South Africa.
Mr Marchant: At the moment South
Africa is probably one of the main suppliers. Indonesia has very
low sulphur coal and under the old Large Combustion Plant Directive
it is very attractive. The trouble is that UK coal is very high
sulphur and it is very difficult to see a future for UK-mined
coal.
Mr Smith: The Drax power station
in North Yorkshire is the largest coal fired station in Europe
and it is currently burning British coal and British Coal have
just announced that they cannot supply the quantities of coal
because of geological problems with their mine.
Q191 David Hamilton: Thank you, Chairman.
My apologies for being late. Can I follow on the discussion that
we are having in relation to low sulphur content? Scottish coal
has a lower sulphur content than English coal; I say that for
a start. But the adaptation that is required to be made within
the power stations will be forthcoming if there is a long-term
viability proposal for coal in the UK. My understanding is that
the UK power suppliers have indicated that they will not invest
substantial amounts of money on adaptation to try to achieve the
low sulphur content, the carbon dioxide content, unless the Government
in some way or another talks in terms of allowing a long-term
future for British coal. If we start importing coal from other
areas and 30, 35% of it needs energy for coal, that defeats the
very purpose that we are trying to achieve, and that is self-sufficiency
of energy within the UK. Surely there is a contradiction there?
Mr Marchant: I think one thing
you have to think about from a global point of view is that there
is five times as much coal as there is gas. So if you were going
to put your eggs in one basket you would put it into coal. On
a global security supply issue you have to keep that into effect.
The fact that coal is also coming from different countries as
well, so a geographic diversity. Only Russia is in a sense on
the same list. Gas will come from Norway, Russia, Algeria, whereas
the coal, as we have said, will come from Russia, South Africa,
Columbia, Australia, potentially American companies who were exiting
the UK market. So there are some definite diversity issues there.
I think the issue about fitting FGD, the green coal, we bought
some coal plant last year, July—up to last year we were
just a gas and hydro generation—and we bought 4,000 megawatts
of this old coal from American companies who were exiting the
UK market. They had decided to opt out; they were not going to
fit that equipment. We are re-examining the economics of that
decision and it is clear to us that is firstly a very marginal
decision. The second thing that is also clear to us is that with
the sulphur content of UK coal, even fitting the FGD equipment,
it would not work because the size of the plant that you would
have to build would be so much greater that it would become a
decision that you would not do. If you are going to shut the plant
in 2015 you will not do it. So even if you fit FGD equipment I
still do not believe that leaves a future for UK mined coal of
sulphur content of the sort of 2, 3%, the sorts of numbers that
UK coal has. You are talking about low sulphur coal of about 0.4,
0.5%, so a significant difference. My own view is that I think
the UK coal industry, in a sense, we have had that benefit over
the last 200 years and it is not going to contribute for the next
200 years.
Q192 David Hamilton: It puzzles me because
we are talking in terms of the amount of coal that we have in
the UK, which is substantial, irrespective of the demise of UK
coal—not UK coal generally but UK Coal Company. In Scotland
Scottish Coal produced eight million tons of coal a year, opencast.
The planning applications that are being looked at at the present
time are being changed by the Scottish Executive, which actually
mitigate against Scottish coal because planning applications will
be much more difficult to get, as I understand it, than they have
been up to now. They will have a different planning application
to that of wind farms and it is much easier to get a wind farm
than to get Scottish coal, although the population may object
to both. The issue that I come back to is why would we as a nation
throw away something that we have in abundance, and that is coal?
You are basically saying to me that irrespective of the British
requirements we should not and cannot under the present regime
take any of the British coal because of the sulphur content being
too high.
Mr Smith: I can clarify that.
There are power stations, Drax and Radcliffe in Nottinghamshire,
who have FGD units fitted, which were sized based on the high
sulphur content of British coal, so they will continue to run
and continue to consume British coal. The existing power stations
that do not have flue gas desulphurisation must fit that in order
to not be one with the constraints from 2008 onwards. In the market
place they are looking at it from a market point of view, they
would not fit FGD sized on British coal because it is just marginal
based on power prices going forward.
Q193 David Hamilton: So it comes back
to economic outlay.
Mr Smith: Yes.
Mr Marchant: It comes back to
there are constraints laid down by EU law and the Large Combustion
Plant Directive, and when you factor in the economics that gives
then you would not invest to burn more British coal. If you have
previously invested and can burn it you will carry on burning
it, but you will not invest to burn more.
Q194 David Hamilton: Unless there was
a policy of secure energy for the UK, and coal must be part of
that?
Mr Marchant: Yes.
Q195 David Hamilton: When you indicated
the various coals that could come in from around the world, does
that include Polish coal?
Mr Marchant: It could do.
Q196 David Hamilton: Because I imagine
the EU might change their rules again to placate our Polish colleagues
because of the size of their coal industry.
Mr Marchant: One of the interesting
debates is that about 20 gigawatts, which is about 25% of the
UK's capacity for generation, will shut in 2015. If that is the
case will the lights go out or will the rules be changed? That
is the other half of your question.
Q197 David Hamilton: Can I come back
again, Chairman? We will have a debate in relation to nuclear,
which will be the big one, but there will also be a debate about
all the reserves that we potentially have. Contained in that debate
would it be appropriate—and I am quite sure you will do
this because you are a multi-company now—to ensure that
your voice will be heard along with Scottish Power and so on to
ensure that there is an argument there for the coal industry of
the UK?
Mr Marchant: Having bought these
two coal fired stations it is a bit like I have got religion on
coal and I now make sure that my voice is heard long and loud
on the subject because it made me look at my industry in a different
light. The one thing I always come back to is 200 years of global
coal reserves and 38 years of gas and say, "Hang on a minute,
you have to have a balance of those two," and I know which
side I would bet on. So, yes, I think that we have to continue
having debates about a balanced energy solution, which comes back
again to the carbon capture because the way that you can solve
a lot of the coal issues is if you can get the carbon capture
to work and you then start to get a solution that maybe ticks
all the boxes.
Q198 David Hamilton: One final question,
Chair, and it is a different one. You may not want to answer this,
but do you think it is fair that the Scottish Executive are working
on the basis that they are going to mitigate against certain fossil
fuels and allow planning applications to go through rather easily
in relation to wind farms?
Mr Marchant: I tell you, I do
not find the planning process on wind farms at all easy. It is
not easy.
Q199 David Hamilton: It will be easier
than coal anyway.
Mr Marchant: I have never tried
to permit for coal but I have wind, and I tell you it is not easy.
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