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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 259-iv House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE SCOTTISH AFFAIRS COMMITTEE
MEETING SCOTLAND'S FUTURE ENERGY NEEDS
Tuesday 1 March 2005 MR IAN MARCHANT and MR PAUL SMITH Evidence heard in Public Questions 153 - 218
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Scottish Affairs Committee on Tuesday 1 March 2005 Members present Mrs Irene Adams, in the Chair Mr Alistair Carmichael Mr Peter Duncan David Hamilton Mr John Lyons Mr John MacDougall John Robertson Mr Mohammed Sarwar Mr Michael Weir ________________ Witnesses: Mr Ian Marchant, Chief Executive, Generation Operations, Scottish and Southern Energy and Mr Paul Smith, Director of Generation Operations, Scottish and Southern Energy, examined. Q153 Chairman: Gentlemen, could I welcome you to this public evidence session on our inquiry into Meeting Scotland's Energy Needs. I know you have had a great rush to get here and we are grateful to you for rushing the way that you have. For the record, would you like to introduce yourselves? Mr Marchant: My name is Ian Marchant, I am Chief Executive of Scottish and Southern Energy, and I am joined today by Paul Smith, who is Director of Generation Operations for Scottish and Southern Energy. Q154 Chairman: Thank you. Before we start on the detailed questioning is there any statement that you would like to make? Mr Marchant: Just two very short things. Apologies for being late. I can, as it happens, blame the UK Energy Minister. I was speaking after him at a conference and he was late. The interesting thing is that the theme of that conference was Energy in Crisis, the conference sponsored by Amicus, and the very interesting flavour of that conference was that the debate was a UK-wide focus, and I think it is very opportune that you are looking at the particular issues facing Scotland because a lot of the issues are being dealt with purely on a UK-wide basis, and I think this is a great opportunity and I welcome being able to help the Committee in their deliberations. Q155 Mr Sarwar: Paragraph 4 of your submission paints a very pessimistic picture, and you say that Scotland is on course towards being an importer of energy in the medium term. Could you please define "medium term"? Are we talking about in ten or 15 years' time or even sooner? Mr Marchant: My belief is it is more like a ten-year to 15-year horizon. If I can characterise the difference between the UK and the Scottish issues? I think the UK-wide issues are getting quite urgent; I think for Scotland the issues are more important but slightly less urgent. We do have time to resolve this issue particularly because the nuclear stations in Scotland are not expected to close until 2011 at the earliest, and maybe 2016 with life extension. So the issues are less pressing, but I think they are very, very important. Q156 Mr Sarwar: From where do you think Scotland will have to import its energy? Could it be from elsewhere in the UK? Mr Marchant: Yes, as I said in my introductory remarks, UK policy is driven at the UK level and the view on security supply will be taken at a UK-wide level. So, yes, as a region Scotland will be an importer but the UK as a whole will be more worried, for instance in the electricity, about its overall reserve margin. At the moment Scotland has a significantly higher reserve margin than in England and Wales. I think that that could reverse. Q157 Mr Sarwar: But do you think in any future time we will have to import from countries like Norway or from Russia or the Ukraine? Mr Marchant: If you are looking at gas, yes; undoubtedly the UK - and Scotland I do not think will be any different - will be a net gas importer, and if it is not this year it will soon become a net gas importer. As the North Sea gas production starts to decline, which we have already seen evidence of that, the UK will become a net energy importer. My comments were more focused, if you like, at electricity. Q158 Mr Sarwar: When you say about gas and you say "this year", that means it could be this year or next year? Mr Marchant: We probably have been this winter. We almost certainly are today a net energy importer. Today, as you know, it has been a cold spell. My day started badly with snow in Edinburgh, and it has been a cold spell since last week, and almost certainly the UK has been a net importer of gas this week. So that trend has been coming for years and it is here with us today. Q159 Mr Weir: In your submission you talk about the transmission charges problem, and you quote a figure of between £23m and £26m more to operate a gas-fired power station in Aberdeenshire than the Southwest of England. Can you expand on that and tell us how you come to these figures? Mr Marchant: What we have had until now are three separate transmission charging areas. We have had England and Wales, which the National Grid have charged, and we have had the central belt of Scotland, which Scottish Power have charged and the north of Scotland - they have been run separately. And you pay different amounts for generation. One of the consequences - not one of the objectives - of BETTA is that we will have a national set of transmissions charges. They are being put in place by the National Grid Company, who is the system operator and they have a model. I cannot explain to you how that model works because I think there are only about eight people in the country who understand how that model works, but it is very, very extreme locational charging. So as a result our Peterhead power station will pay £18 a kilowatt for every kilowatt it has connected. A power station in the central belt of Scotland will pay around £12 a kilowatt. A power station in the north of England will pay around £5. A power station in the Somerset area will receive £5, so you have a very pronounced tilt. What the numbers in our evidence were saying was, converting those to pounds million on the bottom line, if you have two identical power stations with the same efficiency they will lose the same amount of gas, they will have the same ONM costs; the only difference is the transmission bill and in one I am paying £18 a kilowatt and in the other one receiving £5, and the difference of that is £23m. So if you were trying to decide where to build a new gas fired power station you can guess it would not be in Scotland because the price of land does not anywhere near get to £23m a year. That is why I have made the statement that given these transmission charges Scotland is the first place you would shut a power station - all other things being equal - and Scotland is the last place you would build a fossil fired generator - again, all other things being equal. That is the consequence, that is what these charges are designed to do. They are a very, very extreme economic signal. Q160 Mr Weir: What do you say to the Government's response to the argument that the generators in Scotland will benefit because of the ending of charges on the interconnector? Mr Marchant: As a company as a whole that is true, and therefore why at this stage we are looking at those charges. I can live with them. I am talking about the public policy consequences of the charges in the long-term. Those facts that I have given you - and Ofgem would not dispute them - are the facts. If you are talking about a transitional change, yes, there are swings and roundabouts, but in the future when I make economic decisions about power station location that is what I will be facing - a UK-wide market, the interconnector has gone, so any decisions are based on a UK-wide market. So the consequence of that is that Scottish power stations will shut before English power stations. Q161 Mr Weir: What about the impact on future renewable energy developments? To the north of Scotland is widely tipped to be the area where renewable generation will be most appropriate. Obviously your main generator is in the North of Scotland. How do you see these charges impacting upon renewables? Mr Marchant: I did say all other things being equal, and obviously the wind speed is different in Scotland than it is down here. Why are all the wind farms wanting to locate in Scotland? Because of the higher wind speed. We will see two things happening as a result of these charges. The first is that renewables still will get built in Scotland; good projects can still afford to pay these charges. But what that means for the fossil generation is, if you think about when the fossil generation closes the pricing signals should do that, they should soften and load and generation supply gets more imbalanced in Scotland. But what the renewables will do is replace that fossil generation and push the charges back up. So some renewables still get built, but less will get built with these extreme charges. It is quite clear that the more marginal projects will not happen. We are currently trying to consent a new hydro station at Glendoe on the banks of Loch Ness and the economics of that are being directly affected by transmission charges, and that makes a marginal project probably uneconomic. I am not saying I will not be doing it here, but there is clearly a marginal project that is being affected. There are two different things that are going on here. Q162 Mr Weir: But is the implication of that - and I do not want to put words into your mouth - that in future when you are looking at the type of generation you would favour, would that put you against renewables? Are you more likely to look at more conventional generation under these charges in the south rather than in the north? Mr Marchant: Yes. I am almost caricaturing what could happen here, but in 20 years' time you could find that Scotland, in 20 or 30 years' time, after the second nuclear closure, only has renewable energy, and all of the fossil conventional generation is in the south. Therefore, what is Scotland's energy position? Well, if the wind is blowing and the tidal regime is favourable, Scotland is self-sufficient for energy. But for the other half of the time it is not and it is a net importer - back to the original question. That is a caricature of where we may well end up, but that is where the compilation of the transmission pricing policy and the renewable pricing policy - it is an unintended consequence of these two policies competing in an economic market place - will end up. Q163 Mr Duncan: All around the world clearly the security of supply is becoming, if it was not already before, one of the major issues at the forefront of policy making. In your submission to the committee in paragraph 7 you say that, "Within ten years Scotland seems likely to lose around 4,500 megawatts of nuclear and coal-fired generation capacity, and a further 1300 megawatts when Torness closes." Mr Marchant: Yes. Q164 Mr Duncan: In broad terms could you give us what percentage of Scotland's requirements that represents? Mr Smith: Currently Scotland is around 30, 35 terawatt hours. British Energy and Scottish Power generate around 22 terrawatt hours, in broad terms, and that will disappear and that will leave Peterhead, which is around eight terrawatt hours, plus the existing hydro fleet of around three, so there will be 11. So effectively there will be a third of the existing capacity left generating. Q165 Mr Duncan: So at a time when all around the world everyone is concerned with security supply, we are facing within ten years the loss of one-third of our requirements in Scotland? Mr Marchant: When Cockenzie, Longannet and the first nuclear station close - which is the scenario we were talking about - Scotland is in that position I caricatured. It is not as extreme as that because it still has one nuclear station and Peterhead, but you still have that the fossil generation and the nuclear generation will be insufficient to support Scotland's energy requirement. So from being at maybe a 40 per cent reserve margin, on a fossil and nuclear only you have gone below 100 per cent - I cannot work the maths out in my head but you have got to that point already. I think the interesting issue is that if you take Cockenzie, we think that is likely to be the next coal station that shuts in the UK. It is not ours so we can give you some comment on it, but it is a marginal plant. So it starts to happen quite quickly. Q166 Mr Duncan: With such dramatic figures as that how likely do you think it is that we are going to face significant security issues in that ten-year period? Mr Marchant: The fundamental issue, as I see it in energy policy at the moment, is transmission pricing. Ofgem approved these prices only last week and they announced as part of that that there were some conditions they want reviewed. I think it is important, and I would urge the Committee to look at those conditions and, if you see fit, to recommend that those take a particular view of security supply in Scotland because there is a chance to change these policies, these prices in the next two years. To me it all hinges around those transmissions because they are sending signals for certain things to be done. They are not the signals that you, the politicians want, but you have to change the signals otherwise the market will respond. So there is an avenue, there is a review and the key thing is to make sure that that review is comprehensive. Q167 Mr Duncan: Obviously the other issue in the medium and longer term to ensuring security of supply is the relative balance between the individual components of our energy mix. In your submission you seem to foresee Scotland's future energy needs being met by a mix of fossil fuels and renewables, essentially. What future do you see within that for nuclear power? Mr Marchant: It is quite nice for a politician to be asking me that rather than me asking a politician. My own personal view is that I think it is going to be very, very difficult if not impossible to meet the two objectives of security of supply and reduce carbon emissions without some new nuclear Bill. But I believe that we have to sort the waste issue out as a country before we can properly address that issue in a professional and grown-up way. We should sort out the waste issue first and then when we are comfortable and we know how we are going to handle it we can then look at that question in the next few years. When I look at the numbers I find it difficult to see newer technologies like marine making enough progress in enough time by 2015 - and that is the cliff edge as far as the UK is concerned, 2015. What can get there in ten years? Nuclear can because it can be built in that time because the technology is there. I am not sure about marine and some of the other technologies. Q168 Mr Duncan: I do not want to go too far down this line because obviously it is a very specialist area, but am I not right in thinking that nuclear waste is, to a large degree, an historic issue in that we have a stockpile of nuclear waste and if there were to be a new generation of nuclear plants then it would be considerably efficient in terms of generating waste than was the original generation? Mr Marchant: I agree. It is a personal view; I would rather know how we were going to sort out the past one before we make it a little bit worse. Q169 Mr Duncan: Just to summarise this, it is your contention, irrespective of the silence from politicians, that in order to achieve both our security supply objectives and our Kyoto objectives it may well be necessary to commit to future nuclear power? Mr Marchant: It may well be necessary. That is a good way of putting it, it may well be necessary. Q170 Mr Lyons: Mr Marchant, you referred to the mix of fossil and renewables as our future in some ways. What would be the optimum mix in your opinion between both of them? Mr Marchant: Unfortunately I do not know because it depends really upon the rate of technological progress. For instance, if I had to make those decisions I would want to know what the rate of progress in reduction of the level of waste from nuclear is versus the future costs of marine, the future cost of biomass, the consequences of the agriculture of economy energy crops, all those sorts of things. I cannot predict but I think any solution that becomes unbalanced - because we will know when we have got the wrong answer, I am not sure we will ever know we have the right answer - if we end up with 85 per cent gas and 15 per cent wind we have the wrong answer. Q171 Mr Lyons: Can I just clarify a point from Mr Duncan's question? On nuclear are you saying that there should be no new build until they have some solutions found for the question of waste? Mr Marchant: It is a personal view, yes. I think we should sort out our past problems before getting worse, but it is a personal view. Q172 Mr Lyons: To keep on the terms of renewables, in terms of Scotland what is the most appropriate renewable for Scotland, do you say? Mr Marchant: The most efficient in terms of economic effect is obviously onshore wind. Let us be clear, 16 gigawatts of onshore wind is not going to be built in Scotland, which is the level of connection applications that currently exist. That was occasioned by a particular quirk in the ways that the industry and Ofgem have decided to handle the move into BETTA. Effectively, we encouraged every person who thought they might ever want to build a windmill anywhere in Scotland to put in an application because you get a certain reserved place in a queue. So in a sense we have the maximum. My own view is that we will probably see less than half of that built because of the issues of visual amenity and environmental impact. Local resistance will mean that with the planning process we will end up with the right answer, which will be more than we have today but significantly less than the asking of developers. I think the big prize for Scotland is in the marine, where it is a technology which is fairly immature - no one country or region in the world has a lead in that technology - and I think that there is a good argument for sustainable development in that area which will bring jobs into Scotland as well as meeting some of the energy requirements. That is why we are investing with the Weir Group, the Glasgow based engineering company, looking at tidal technology, because I think that that has the potential to be a long-term solution. Q173 Mr Lyons: At the outset you said that you would be looking at some new hydro stations. What is the potential in that area? Mr Smith: The majority of the schemes have already been identified in the past and were built with the North of Scotland Hydro Board. The new one that we have been currently looking at is the Glen Doe scheme, which is a 100 megawatts scheme up on the banks of Loch Ness, at Fort Augustus. We are still looking at a number of small one and two megawatt schemes, but, again, they are going to make a very small impact on the overall hydro output. Typically the 1300 megawatts of installed capacity we have generates just about three terrawatt hours a year, and in UK terms that is only one per cent of the energy. Mr Marchant: Scotland is a well hydroed country. If you look on a global basis we make good use of the rain we get, and most of the best schemes that were stopped in the early 60s, when the hydro programme was billed were what are called cross-catchment schemes, where you take water from one catchment into another. You now cannot do those under environmental regulations, I think it is the EU as well as UK law, and the Framework Directive is making that worse. The best unused schemes are now off limits. What we did about four years ago, we went into the company archives and we looked at all of the old schemes and Glendoe was the best one we could find that would meet the current legislative requirement. It has so far taken us 22 months through the planning process and we still do not have an answer. Just to give you a flavour, that is going to cost us about £1,400 a kilowatt to build compared to about £700 of £800 for an onshore wind farm, and it will only be used half the time of an onshore wind farm, about 15 per cent, a little over. So the economics of the hydro are not compelling. Q174 Mr Weir: I just want to take you back to the wind farms on one point. You mentioned this rush for permission to meet this artificial deadline. Do you think that this rash of applications has irreparably damaged the image of onshore wind because of the impression given that the country is going to be covered in windmills? Mr Marchant: I hope not. It is clear that the industry shot itself in the foot with this. In a sense I understand why the policy objective was pursued because the alternative would have had the wind developers up in arms that they could never have got connected unless there was deep reinforcement in the southeast of England, which is what the debate was around. But there is a hearts and minds issue still to be debated, both ways, and I think at the moment that the debate is quite polarised. The opponents of wind are focusing on 16 gigawatts and that is their answer, but the debate is what is the right level of wind farm development and do the existing political process of market forces get us there? I believe they do. I believe that the market will impose a discipline on a developer and that the planning process and the appeal will also allow the political process to work. I find the planning process dreadfully frustrating and dreadfully slow, but that is actually part of the price of having a democracy and making sure that we get to the best answer. Q175 Mr Weir: Given that, I understand that there are also similar planning problems with some of the small hydro schemes as well, and the Scottish Executive has made a commitment of 40 per cent renewable energy by 2020. Given all the problems how realistic do you think that is? Mr Marchant: 40 per cent of what, is one of the questions? I think we are going back, to answer that question. Is it on electricity production in Scotland, because 40 per cent of nothing is not a great deal? Or is it 40 per cent of energy supplied in Scotland? Or is it 40 per cent of renewables in the UK? 40 per cent of what? What I think is that Scotland's ability to have a growing and thriving renewables industry is very strong and that the amount of renewable energy capacity in Scotland will grow. It is difficult for me to predict because 40 per cent of your electricity generation, then when does the nuclear shut? And it is something I have been actively encouraging the Scottish Executive to give greater definition to what that policy meant or potentially to redefine the policy in different terms. I hope I am explaining what I am talking about? Q176 Chairman: Maybe I can interrupt and help you here with this? The Scottish Executive say in their report, "The Executive has set a target of 18 per cent of electricity generated in Scotland to be from renewable sources by 2010 and an aspirational target of 40 per cent by 2020. Current generation from renewable sources stands at around 12 per cent." Mr Marchant: The 40 per cent will be achieved very, very easily just by shutting Longannet and Cockenzie, and that is my point. If you define it as a relative point it is easy to achieve by reducing the amount you generate. I think that is the wrong definition of policy. I think it should be of energy supplied, in other words what Scottish consumers use rather than what Scottish generators generate. Q177 Mr Duncan: Can I ask you, if the policy were to be that 40 per cent of energy supplied, would that be either desirable or achievable? Mr Marchant: I think it is both. I think it is achievable, 40 per cent of energy supplied is achievable without an enormous onshore wind. The question of whether it is desirable then comes back to whether you fundamentally believe one of the most pressing problems we face is climate change. That is a personal view and we will all have different views in this room. I happen to think that it is right up near the top of the list and if you can produce a sustainable plan that has an economic benefit in terms of jobs through its construction facilities and intellectual property then you potentially can have a desirable outcome. And if you think about the costs of adaptation if climate change happens it may be that if there is a price maybe it is a small price to pay. So I do think it is achievable and I think it is desirable. But that in a sense is political - the question of desirability is a political decision and I have given you my personal views. Q178 Mr Weir: You also mentioned, when you were talking about BETTA, and it perhaps comes back to what we were discussing before, that those who think that meeting Scotland's future energy needs is straightforward is a complacent attitude. Can you explain why you think it is complacent? Mr Marchant: I think in the short term BETTA will have no issues. The lights will stay on. There will be no adverse consequences next winter because we are in a BETTA environment. But we deal in a long-term industry, investment decisions in networks and power stations of 30 years, and if we do not start making the right decisions fairly quickly then we will find ourselves in a position in 2010 that we do not want to be in, where they are making urgent decisions and they are probably the wrong decisions. We still have the time to get some of these things right. But I think there is a complacency that because things will be all right on day one they will be all right in year five. Q179 Mr Weir: In principle are you supportive of BETTA with these problems? Mr Marchant: Yes, I think the larger market will be more efficient and we will strive to an overall lower cost solution. I just think that as a region Scotland has to decide what its energy policy wants to be. Do they want to focus exclusively on renewables or do they want to have a regional self-sufficiency? It can be either of those objectives or any combination can be accommodated within the BETTA market. I just think there needs to be more parity on what those objectives are. 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 per cent 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 1st 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 26th February and The Scotsman on 24th 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 her 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 per cent 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 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 very much 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 per cent 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 per cent 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 North America. 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 4000 megawatts of this old coal from American companies who were annexed to 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 two, three per cent, the sorts of numbers that UK coal has. You are talking about low sulphur coal of about 0.4, 0.5 per cent, 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 per cent 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. Q200 Mr Carmichael: On carbon capture in fact, presumably you are talking about something which is similar to the Enhanced Recovery Operations where the gas coming from the North Sea is pumped down to extract it? Mr Marchant: Yes. Q201 Mr Carmichael: I am aware of some work - and it is fairly Blue Skies, if I can use the term - being done at Imperial College London on that. I am not aware of it being financed or promoted in the research project that I have come across. What is your assessment of the timescale for that to be commercially applicable? Mr Marchant: I think that we are talking a ten-year type of time for it to be fully commercially deployed. It has a potential to be a major contributor to our 2015 debate that we were having, nuclear, renewable, old coal, and clean coal I think has a part to play. It is not going to solve the problem next year, but hopefully we can see demonstration of scale within the next few years. That is the key, once you have the first one or two plants actually up there on a reasonably sizeable scale working. Because the technology exists. We could go and buy in small scale today to get it through to the next stage. I am starting to have some interesting discussions in that area and I will make sure that I firstly find out what Imperial College are doing as well. Q202 Mr Lyons: On the question of the FGD units, you say it becomes uneconomic if you have to invest in that. If the Government were to invest in that with coal, would that make a difference? Mr Marchant: It depends how they invest in it, as they do not own any coal fired assets. Q203 Mr Lyons: In terms of giving assistance to people looking to reduce carbon? Mr Marchant: If they gave either capital grants or some sort of assistance, yes, but from where we sit, having another look at that issue, it is a marginal decision. You would not need to pay 100 per cent capital grant before it would be worth doing. To be honest I have never thought I could go and ask Government for such a grant - maybe I should. Obviously that does not affect Scotland because my plants, one is just outside Liverpool and one is in Yorkshire. Q204 Mr Lyons: You talk about the Scottish coal and the high sulphur content that is in the coal. Is there any research or approach in terms of burning something with coal that will reduce the sulphur content? Mr Smith: Currently on our two coal plants we are burning biomass, which is basically pine kernels, all of residues from the third pressing and woodchip and that obviously has a carbon reduction because it is carbon neutral and it also tends to give the heat without sulphur, although some biomass does have sulphur content. That is the only potential fuel. You can have gas over burn, which takes sulphur out and gives you heat but then you are actually effectively converting your coal station into a gas fired power station. Q205 Mr Lyons: So effectively a mix of biomass and coal. Mr Smith: It gives you some. There are two fundamental issues here. One is Large Combustion Plant Directive, which comes in in 2008, is very much controlling your sulphur dioxides and your nitrous oxides. You then have the Kyoto Protocol and all of the other things which the climate change issue is driving, which is about reduction of carbon dioxide. The Large Combustion Plant Directive is not carbon dioxide, that comes later. Mr Marchant: About six per cent biomass burn currently at our power stations. Mr Smith: By weight. Mr Marchant: And we are investing £20m to increase that, which is enabling us to extend the life of those coal fired stations anyway, and you will find again that Scottish Power are doing the same at Cockenzie and Longannet, but that at this stage not going to tilt the decision one way of the other, but it helps. Mr Smith: The one other point that is worth pointing out is that the other bit of legislation that you need to be aware of is the Integrated Pollution Prevention Control (IPPC). That is also constraining power generation in terms of sulphur bubble. Chairman: Moving on from coal, you will be glad to know. John Robertson. Q206 John Robertson: Thank you, Chair. My apologies as well for being late. One question relating to biomass. We took the evidence of Professor Lovelock last week and very interesting it was too, and he basically said that he would not touch biomass at all because nobody has done any investigation and work on the kind of effect it actually has into the atmosphere or into the ground itself. Do you know anybody who has done any experimentation or checking to see if there are any problems in the increased gasses that would be created? Mr Marchant: I am not aware of anything. Mr Smith: Combustion gases are CO2. Mr Marchant: We have to get a permit from the Environmental Agency in England and Wales. We have to run pilots before we can burn any sort of material. It is not a free-for-all; you have to go through some quite stringent hurdles. John Robertson: It came as quite a shock to us last week when he said it and I thought I would throw the question in to see if anybody else had looked at it. Q207 Chairman: I think his other concern was the amount of land that would be taken up building plants for this particular project and the effect it would have on the natural environment. Mr Marchant: Again, it is one of these things that it is exactly the same argument for onshore wind. If you set a large requirement then the counter arguments are very strong, but it can have a role. I think biomass and energy crops can have a role in both supporting the agricultural economy and helping to reduce our CO2. Q208 John Robertson: Moving on, what are your thoughts on the UKAEA's comment that nuclear fusion might be a viable energy source in about 30 years' time? Mr Marchant: Can I ask the engineer sitting at the table to have a go at that one, because I am interested in the answer! Mr Smith: I attended a presentation by Sir David King, Chief Scientific Adviser to the Government, and he was certainly talking favourably of that but he believed it is a long way away. He actually put forward projections from the Government in terms of 2020, he is looking at the energy mix being 60 per cent from gas fired power stations and the rest from renewables, predominately wind onshore and offshore. Coal was not there, nuclear was disappearing, but he was then showing maybe ten per cent or so going forward. So I think it is a long way away. Q209 John Robertson: We talked about a secure balance policy for energy. Do you think that there is a place for nuclear even today? Mr Marchant: Yes. Q210 John Robertson: And that we should go forward with that as part of the balance? Mr Marchant: Again, I mentioned earlier, my own personal view is we have to wait the issue out before we build new nuclear, but we should certainly be looking at extending the life of what we have, if that is economic to do. Q211 John Robertson: You maybe mentioned this earlier on, but what sort of time are we talking about? In the United States they talk about 20 years. When we talk about extending the life in this country it is five years. Mr Marchant: As I understand it, and this is a question I asked the Trade Association in America, the plant was fundamentally designed differently 30 odd years ago. The American plant is a different design and had a different philosophy from day one. They were permanently replaced. The UK plant was built differently and therefore it has a finite life. That was what the nuclear experts were telling me. Mr Smith: British Energy have issued statements to this effect - and we would have to ask them the exact answer - but the graphite core of the reactors are actually cracking on a large number of the stations, which will potentially reduce their life, and if the reactor gives way then that will reduce the overall life of that, and it is based on a three-year cycle. John Robertson: So the five years is probably about right. Q212 Mr Weir: Your memorandum sets out a sobering scenario in many ways with the gradual closure of power stations, questions about the viability of renewable resources, but it ends optimistically in the assertion that none of it is unavoidable. Then you mention your favourite topic of this afternoon, transmissions charges. What benefits do you think could be achieved by a review of the transmission charging scheme and what do you think is the outcome if it is not reviewed? Mr Marchant: The outcome, if it is not reviewed, as I have portrayed it, is that Scotland's energy mix is driven increasingly to a renewable, and whatever that is from a UK perspective it will have more than its fair share because it is rich in it. But Scotland will be an energy importer and will not have indigenous fossil and nuclear generation. I think that some element of locational charging in transmission pricing is sensible so there are some economic signals about distance between demand and supply. But I think the economic signals are very extreme, are very, very marginal. That is as I understand this model works and, as I said, it is very, very complicated. It is very unstable and it is very, very marginal. The odd 100 megawatts of generation moves the slope of the line quite significantly and I think what we need are more moderate locational signals, stable transmission prices, that people make sensible investment decisions. I think transmission pricing is so fundamental that it has to be reviewed in the light of overall public policy on energy as well because the transmission network is the core energy that drives the fuel diversity issue in the long-term. Q213 Mr Weir: Is it your understanding of the proposals that they take any account of the locational imperatives for renewable energy? We are talking about wind and wave. Mr Marchant: They take no account of that at all - none. Q214 Mr Weir: So would the net effect be that any new generation is likely to be in conventional rather than renewable, if you follow it to the logical conclusion? Mr Marchant: Not necessarily because you have the renewable obligation driving your policy from a different point of view. You have two things driving you to different answers, so you still can get renewables built but that means you do not get fossil generation build in Scotland. That is the logical consequence of it. It is not possible therefore to say that you will not get renewables but it is possible to say that less will get built than would otherwise be the case because the marginal project, whatever that happens to be, will not get built with the higher price. But you cannot say that nothing will get built. You see that and the amount of appetite for onshore and emerging technologies is still as high as ever, the economics are still there for the early projects. That will change; it will dampen enthusiasm in the later years. Q215 Mr Weir: As I understand the Energy Act there is a cap on the transmission charges for renewables for a specific period. Will that help initial projects and what effect will it have on future projects? Mr Marchant: There is the power to cap rather than the actual caps. The Government has the power. I am not sure it wanted the power but the House in its wisdom decided to give it the power. My understanding is that they are reluctant to use that power, partly because they would rather see an enduring long-term solution. The capping power is only for ten years and for the emergent technologies, marine, deep offshore, wind - we have not talked about deep offshore today - it is too short because you are only at the end of your demonstration phase and you are looking to deploy a 20 and 30 year project just as the capping regime comes to an end. The risk with the way the model works is if you have a capping regime then it encourages even more extreme prices when you come out of the cap, just because of the way the model works. The more generation there is in an area the higher the prices go. Q216 Mr Weir: Am I right in understanding that the cap runs for a specified period so that only those up and running at the beginning get the full benefit? Mr Marchant: Because the cap does not exist I do not know. You may be right. All I know is that it has a ten-year period. I do not know what happens to projects that come on in those ten years. I had assumed that they would get nine, eight, seven, however many years left. I had assumed that, but on an onshore wind farm you are talking of a 15 or 20 year life of which you are looking at the economics. So even ten years is going to have a dent on the end of it. Q217 Chairman: Are there any other beneficial reforms that you would like to see introduced? Mr Marchant: In the energy sector? I want to come back to the demand side because it is very easy, because the generation industry is the one that attracts attention because it is going to be big assets and big decisions. That is only half the issue, the other half of the issue is from the demand side and the customer side, and I would like to see more done to encourage investment and creativity in the energy efficiency demand side. If I could give you a couple of examples? Installing rooftop wind turbines on rural properties can make a significant difference to fuel poverty. It would be great if you could also use those to effectively claim energy efficiency credits under the EEC scheme. It is a relatively minor thing that could give a real boost to an emerging technology that is actually coming out of Scottish universities. And manufacturing could also be based there. So that is a very minor thing. Another example is a whole promotion of energy efficiency. I believe that Government should look at something like a Social Obligation Certificate. We have talked about Renewable Obligation Certificates - ROCs - so why not SOCs to actually encourage companies like my own to really invest in energy efficiency in a very significant way and make it a business opportunity? Then we will go for it. So I think there are some policy reforms in particular on the social obligations, and I am happy to let the Committee have some of our detailed thoughts on that, which we have not submitted, but which I think people might find interesting. So if you are happy I will submit that supplementary work. Q218 Chairman: Gentlemen, that concludes our questions to you this afternoon. Can I thank you once again for coming along. Is there anything else you would like to add in conclusion, that we may not have covered with our questions? Mr Marchant: I think we have had a very comprehensive view of the energy industry today, so thank you. Chairman: Thank you very much again for your attendance. |