Examination of Witnesses (Questions 80-99)
ASSOCIATION OF
ELECTRICITY PRODUCERS
25 JANUARY 2005
Q80 Chairman: Is there any kind of body
in the United Kingdom that can take up cudgels on behalf of the
electricity producers to take on what some might call a cartel
in terms of gas prices or coal prices?
Mr Porter: If our members thought
they were suffering from the effects of a cartel I am quite certain
they would come to us and ask us to take action. We as an Association
do not see power contracts or fuel supply contracts. We are interested
in the opportunities that our members have to make and sell electricity
and the obstacles that stand in the way in terms of the trading
rules, the cost of connecting to the system, the charges for using
the system, that kind of thing and in matters where government
and regulators have an impact on the market that we operate in.
Q81 Chairman: On a price-driven basis,
how do your members go about making medium to long-term decisions
about whether they are going to put their money into coal-firing
or are they going to put it into gas-firing as far as new power
stations are concerned, or hold off and see if the government
is going to do anything about nuclear and open up another market
there?
Mr Porter: They make those decisions
individually as companies and they have to make their own best
guesses of what technologies are going to develop and what fuel
prices are going to be. We may not do that, but they most certainly
do. You have alluded to another factor and that is a very important
one: it is governments and regulators; and that is something which
can have just as big an impact on the market they operate in as
rather more obvious things like fuels and technologies. To give
you an example, in the late 1990s, for what it believed to be
good, sound reasons, the government imposed a moratorium for two
years on the development of gas-fired power stations. I suspect
that if one of our members had announced, before the winter of
2003-04 when there was much talk of a shortage of capacity, they
were going to build new gas-fired power stations the government
would have been delighted to hear that. Factors like this are
enormously important to people that expect to invest in the industry.
They want to get it right and, I have to say, that the government
has a massive influence on whether they do or not.
Q82 Mr Clapham: Before we leave that
area of core generation, if the government was to provide a programme
for some of your members by virtue of a programme of investment
in clean coal technology, would that be attractive for some of
them to go over to concentrate on their coal generation rather
than gas?
Mr Porter: That depends of course
on exactly what was on offer, but coal does have its attractions.
It is penalised rather heavily environmentally, but it offers
two particularly important things to the electricity system: one
is the security element; but another one is the flexibility element,
in that coal-fired stations are better able than some stations
to respond to short-term changes in supply and demand. I suspect
that most of the members of the Association, which is a very broad
church, probably recognise that and would not be averse to seeing
coal maintain a position within the energy mix in the UK.
Q83 Mr Clapham: Can you see a situation
where, for example, we are likely to see investment in critical
boilers which burn more efficiently?
Mr Taylor: As far as I am aware,
there is as we speak a project which is involving a number of
our members and Mitsui Babcock looking at super-critical boilers,
which are boilers that burn coal more efficiently, so you are
getting more megawatts/tonne of carbon. As far as I am aware that
is not being done on its own; it is being done alongside looking
at things like abatement and carbon sequestration and so forth,
so it is a full package. Those technologies are not yet mature;
that is why it is development work. I do not think we are looking
here at an answer which you could look forward to implementing
or being seen implementing within the next year or so—it
is a number of years off, perhaps. Yes, it is a good thing to
be looking at; it is a very sensible thing to be doing the development
work on. Will it give you an answer tomorrow? No.
Q84 Linda Perham: It is difficult to
predict the cost of electricity generation over the medium to
long-term, but will the price of fuel-stock such as coal and gas
or the cost of environmental measures like emissions trading be
more significant in determining electricity prices?
Mr Porter: So far it has very
clearly been the cost of fuels that have had the biggest influence,
but environmental measures will increasingly play a part. I mentioned
the pressures on the coal-fired generating sector just now—they
are facing the impact of the Large Combustion Plant Directive—and
they are not entirely clear what that is going to be yet. They
are also facing the impact of the Emissions Trading Scheme, and
their circumstances there are at least as bad, in that the scheme
began on 1 January this year and they still do not know exactly
what their individual allocations or carbon emissions are. It
is likely to be March before they know, and that is not a very
sensible way of dealing with an important part of our industry.
If we are to deliver the kind of carbon reductions which the government
wants to see, and our industry is actually keen to help to do
that, there is bound to be a price involved; in that for so many
years, of course, the industry has been able to emit carbon free
of charge and what we are moving into is a situation where you,
in effect, have to pay to emit it. Depending on the limits which
are placed on the generating industry—and of course they
will assume greater significance when the second phase of the
Emissions Trading Scheme starts in 2008—environmental factors
may begin to play a much bigger part, but it just depends how
tough politicians want to be on abatement of carbon emissions.
Q85 Linda Perham: Environmental factors
have increasingly been something which are taken more into account,
with more effect, than the fuel-stock prices?
Mr Porter: I should explain that
the tighter the abatement of carbon emissions position becomes
the more it forces them into either using fossil fuel generation
less, or into building non-fossil alternatives; and that leads
you into new investment costs. The Committee will know in any
case that our coal-fired generation in the UK is 30 years old
and more, and we are going to have to face up to paying for new
power stations in real money in the next few years.
Q86 Sir Robert Smith: In a sense a message
for the fuel poverty concerns are that there could be all sorts
of other pressures as well on fuel prices in the long-run and
we really have to get our housing stock and our energy efficiency
up to speed?
Mr Porter: As far as the housing
stock and the energy efficiency qualities of that stock are concerned,
we have an interest in that but we recognise that to achieve any
really fundamental change there it takes time, and it takes very
effective government incentives.
Q87 Sir Robert Smith: You mentioned earlier
that you do not take any interest in contracts your members have
for their sources of energy. Do you have any knowledge at all
of that, in the sense that when it comes to buying gas, do you
know whether they buy direct from shippers or direct from producers?
Ms Cox: Some of our large members
are shippers themselves anyway, so in some respects they will
be potentially buying gas for a portfolio not only of gas-fired
generation but also potentially to supply their domestic and industrial
supply businesses as well and in order to do that may well have
a mixture of long-term contracts which could be indexed to oil,
or shorter-term contracts, or potentially even buying it very
short-term in the market days ahead.
Q88 Sir Robert Smith: The different operators
operate in different—
Ms Cox: It is down to each individual
company to decide its own strategy on how it meets its demands.
Some of the smaller members may just have one power station they
are supplying to and for that may just have a specific contract
with a third party supplier.
Q89 Sir Robert Smith: Do you have any
feedback at all whether they feel that the gas wholesale market
is competitive, as purchasers?
Ms Cox: It is not an issue they
have come to us about specifically. I think some of the published
information shows that there is a reasonable level of liquidity
in the short-term markets. With the on-the-day market, the day-ahead-market,
there are published figures you can see which show that before
gas is delivered it has traded X times, but I am not aware of
the level of liquidity in the markets further out than that. I
am not sure that kind of information is so readily available.
I am just a bit concerned that there might be less liquidity further
out.
Q90 Sir Robert Smith: Obviously from
the point of view of the end user, there is a competitive market
at the retail end. Does that feed back in the sense that your
members, if they really felt they were facing a distorted supply
of their source of energy, would be coming to you saying, "Get
on to it"?
Mr Porter: They would, Chairman,
and they have done so to the extent that they are not happy with
the progress of liberalisation of European energy markets. As
an Association we have used our contacts with the European Commission
to push for that to be speeded up, and we have good links with
the DTI in London on that issue, and indeed with the regulatory
bodies. We are very interested to see the European market liberalisation
take effect as quickly as possible; but I would add that there
are people in the Association in quieter moments that would say,
"Yes, we want it. Yes, we want it as soon as possible",
but it is actually quite remarkable what has been achieved in
Europe so far, bearing in mind that we have had some 15 years
in the UK of a liberalised electricity market and they have had
rather less time and I think the problem for them is a bigger
one than it was for us. We have noticed you have got
E.ON coming along to see you tomorrow and Centrica,
and you will no doubt explore those issues with those companies.
They can comment individually.
Q91 Sir Robert Smith: On your last point
in your evidence you do say that, "Any policy initiatives
must be well-signalled, timely and consistent with the Government
policy framework. This is crucial to both short-term order in
the market and long-term confidence for investors. Ad hoc
intervention will undermine confidence in the market".
Mr Porter: This is a point that
crops up in lots of responses to consultations that the Association
sends. We do it almost, I am afraid, to the point of being boring.
We are always fearful, representing companies in a highly competitive
marketplace, of knee-jerk reactions to things which usually look
reasonably sensible at the time but can have unintended consequences.
I made the point earlier about the impact of government and regulators
on companies' investment prospects. I sympathise with the questions
that were asked earlier this morning of the witnesses that wanted
to levy windfall taxes, apparently, right, left and centre. That
kind of thing does not send out a very good message to people
who might be contemplating investing in the UK.
Q92 Chairman: Do you think the windfall
tax which was imposed in 1997 had the impact that you are suggesting?
Have you any evidence to prove it?
Mr Porter: That was one specifically
on our industry. Our members I think paid that fairly willingly
and it was a very large sum.
Q93 Chairman: "Paid that fairly
willingly" suggests it was not large enough!
Mr Porter: All I am suggesting,
Chairman, is that they did not come to us and say, "Help
us fight this tooth and nail". They did pay it and I would
not want to go into the detail of why they did it quite as readily
as they did; but you have to say that that kind of money can buy
a lot of new technology in terms of power plant and so on, and
they might wish they still had some of that cash when the time
comes to invest in new power stations.
Q94 Mr Clapham: I hear what you say about
using your forum to press whenever you can for liberalisation
in the European markets, but their consumers in Europe must, of
course, be opposed very much to that liberalisation since it does
appear there is greater predictability of energy prices in Europe?
Mr Porter: "Appear"
I think is the word to use. You may have said that about the UK
before our own liberalisation. I suspect that over time the pressure
for liberalisation in the rest of the European energy markets
will come as much from customers as anywhere else.
Q95 Mr Clapham: Have your members had
to absorb extra fuel costs that they have been unable to pass
on to consumers in the latest price increases?
Mr Porter: I cannot comment in
detail on how individual companies tackle the fuel price rises.
All I can say is that they have to provide electricity into a
highly competitive supply market where people are able to change
supplier at the drop of a hat and that will have had a lot of
effect on their thinking.
Q96 Mr Clapham: To give the household
consumer the opportunity of being able to change quickly, is there
not the need for much more information to be down the line to
people than there is at the present time?
Mr Porter: I think they have got
quite a lot. The `churn rate', as it is called, is something like
40%. Towards half of the customers have found it possible to change
supplier and as prices rise I think people will indulge in that
rather more.
Q97 Mr Clapham: Is that something you
are predicting as prices rise that we will see many more people
changing their supplier?
Mr Porter: To a point, yes.
Q98 Linda Perham: It has been suggested
to us that the demise of gas traders like Enron and Dyenergy has
significantly reduced the liquidity of the futures market for
wholesale gas. Have your members noticed any such reduction in
liquidity?
Mr Porter: They were very enterprising
companies and, apart from anything else, they took it upon themselves
to push very hard for the liberalisation in the rest of Europe
I was talking about.
Ms Cox: That is not an issue which
has been brought to us physically by our members. As I said earlier,
it is difficult to know, in terms of information on traded volumes
in the forwards market, as to whether that has declined significantly.
Certainly in the short-term spot-market and the day-market the
volumes there still seem to be healthy. Further out there could
be issues to look at there. I would suggest perhaps, as David
said earlier, asking those more actively and closer in the market
than we are, E.ON and Centrica, to make their comments on that.
Q99 Linda Perham: You have got no evidence
from your own members that liquidity is a problem?
Ms Cox: Nothing specific; but
it does not mean to say there is not something they are concerned
about.
Chairman: Thank you very much for your
time and trouble. If we need to, we will get back to you.
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