Examination of Witnesses (Questions 160-179)
MR CHRIS
SHEARS, MR
MARCUS RAND,
DR GORDON
EDGE AND
MR DAVID
MILBORROW
25 OCTOBER 2005
Q160 Chairman: They would not get rid
of the pylons!
Mr Rand: It is roughly four times
the number of turbines we have got already. That is what it means.
Q161 Colin Challen: By that point, talking
about 2020, some of the earlier wind-farms will be perhaps past
their sell-by date and will be replaced. Does that mean that on
those sites there will be a net reduction in the number of turbines,
or would you see those sites being upgraded to have the same number
of much larger turbines?
Mr Shears: Yes, there is some
experience of that already in what we call the repowering of projects
both in the UK and my company in the US, where we have taken down
ten old turbines and put up one new turbine to generate the same
amount of power. In a UK context where re-powering has occurred,
we are generally probably halving the number of turbines and tripling
the power output from that particular site.
Q162 Joan Walley: In your evidence you
say that you are agnostic, or Dr Edge says he is agnostic about
the decision to invest in a major programme of nuclear or, indeed,
any other low carbon generating technology. Why are you not concerned
about the fact that if there was a decision to go for a big, ambitious
nuclear programme that that would not provide all kinds of uncertainties
and create difficulties for your programmed courses of investment
and stability over the next three years?
Dr Edge: We are very concerned.
Q163 Joan Walley: Why do not you say
that in your evidence?
Dr Edge: The rest of the sentence
in the submission does say we are agnostic "so long as our
market is protected".
Q164 Chairman: You are agnostic as long
as no nuclear building takes place?
Dr Edge: I think it is entirely
possible you could have a new nuclear build programme and protect
the targets we have for renewables as well. Whether that actually
happens is something that we will be very concerned about in the
Energy Review as it comes in the next year. We are not anti any
other technology. We are pro wind, wave and tidal and we are very
keen to see it built.
Q165 Joan Walley: Why has your evidence
not spelt out the effects that an ambitious future policy for
nuclear could have a detrimental effect on your industry, if that
is what you are saying is in fact the case?
Mr Shears: I think, as Gordon
has indicated, our key ambition is to prove what we can do as
a renewable energy industry, as a wind energy industry.
Q166 Joan Walley: What does that depend
upon?
Mr Shears: It depends upon maintaining
the support that we have up to the 15% target by 2015 and extending
beyond that to 2020 as a medium-term measure. Clearly we are very
concerned, if renewables and the renewables obligation was to
be put into an energy review and the whole thing reviewed, that
would send an awful lot of uncertainty, first of all, into the
market, particularly into the financial market, about what our
prospects are; so our message to government has really been: "Look,
we are committed to 15% renewables by 2015, we know we can deliver
that. Let us not review that, but we very much want to input into
what the longer term ambitions are for this industry beyond 2020.
Q167 Joan Walley: Can I clarify from
Dr Edge as well: you are saying, much more strongly than what
is in your evidence, that what is there in terms of certainty
for your investors does not need to be changed in any significant
way?
Dr Edge: If it was changed, then
the renewable targets would be under threat, but we do not see
why necessarily you would have to change the renewable targets
if you were going down any other route for the other 80% of the
market that you might want to argue about. We are doing our part
of what we are being asked to do, and the other 80% of the market
is up to other players in the market to discuss as to where it
needs to go. We have been asked to do a particular thing and we
are doing it.
Mr Shears: Being candid, I think
where we do need to think harder is looking beyond 2020, because
when we are looking at nuclear we are looking at that sort of
timetable and by that point I think this industry will be very
mature and some of the other technologies—wave and tidal—will
be coming forward, and to get to 30% renewables by 2030, 40% by
2040, these are all highly credible targets in our opinion.
Q168 Joan Walley: But you would not want
them diverted?
Mr Shears: No. All we can put
forward is what we think as an industry we can achieve technically
and practically both from wind and from wave and tidal, and we
look forward to engaging in that process when the review commences.
Mr Milborrow: I would just quickly
recap on the point that Mr MacKerron made about half an hour ago
that there could be an indirect, and possibly serious, effect
on the competitiveness of wind if a large proportion of nuclear
were brought on which had the effect of depressing wholesale electricity
prices.
Q169 Joan Walley: You would want that
to be taken into account?
Mr Milborrow: Yes, that is all
part of Gordon's final sentence.
Joan Walley: That is very helpful. Thank
you.
Q170 Chairman: We are going to have to
speed up, I am afraid. I will try to ask a short question, so
would you make your answer as short as possible? Looking at Mr
Milborrow's evidence—and thank you for that—it seemed
to me, on the basis of the figures that you put in there, that
on-shore wind currently in cost terms is just about as competitive
as gas and off-shore wind could be going the same way. Is that
right?
Mr Milborrow: Yes, I would agree
with that.
Q171 Chairman: Over the next couple of
decades?
Mr Milborrow: Yes. There is a
little bit more uncertainty over off-shore, but most commentators,
and I have referenced several, expect costs to fall substantially
over the next 10 to 15 years.
Q172 Chairman: Your figures take account
of the transmission costs, do they, connecting up off-shore wind?
Mr Milborrow: As far as my database
is reliable and does reflect the inputs from developers, but,
yes, it normally does.
Q173 Chairman: Do your figures take account
of the financial value of the Renewable Obligation Certificate?
Mr Milborrow: No, I have done
a straightforward discounted cash flow analysis, which is a standard
technique used by DTI, the International Energy Agency, and so
on, so my analysis is independent of the particular support mechanism
that is used.
Q174 Chairman: What is the current value
of a Renewables Obligation Certificate?
Mr Milborrow: It is about £44
a megawatt-hour, is it not?
Dr Edge: I think the point that
needs to be made here is that the cost, which is what David is
calculating, is different from the price you get under the renewable
obligation.
Q175 Chairman: That is the point that
Mr Milborrow made in his evidence.
Dr Edge: Absolutely so. The point
of the RO is it is doing what it set out to do, which is limiting
the cost to the consumer through putting a cap on the total cost
of the system and then dividing up that cap by whoever gets to
generate in that year. So the price of the Renewable Obligation
Certificate is not directly related to the cost; it is related
to how many other people get to generate in that year, which I
am sure you are familiar with. The difficulty with that is the
amount of generation in a year is not necessarily reflected, it
is not a function of the RO necessarily how many people get to
generate, it is as much the planning system, the transmission
system it gets to connect, so the price that people get is in
a way somewhat divorced from what it actually costs them to get
that power onto the grid.
Q176 Chairman: The National Audit Office
seemed to imply that some onshore wind generators are currently
making a substantial profit because of the complexities we have
just been talking about. Is that correct?
Mr Shears: No. What has happened
is that, as Gordon said, the RO has been set up and it has stimulated
a huge amount of investment and many thousands of megawatts and
there are millions of pounds being spent looking at schemes, and
that is its first fundamental success. The way to get best value
from the RO is to consent more projects because the level of it
is the same whether we build one megawatt a year or 2,000 megawatts
a year and really the price in the market at the moment is a reflection
of the shortfall in renewables capacity. To put it into context,
the current target under the RO is 4.9% and last year 3.1% of
what credits were put down, so our message is that really to get
best value from the RO, the key thing is to increase the turnover
of projects coming through the planning system.
Q177 Mr Caton: Continuing with the question
of the costs of wind power, you say that wind has higher capital
costs than gas, but lower operating costs, and that has been confirmed
by other witnesses. What impact does that have on cost-benefit
appraisals and particularly on the ability of wind generators
to attract funding?
Mr Milborrow: It means in a nutshell
that wind developers prefer long-term finance. I sat in on the
discussions re nuclear half an hour ago and yet the arguments
for wind are exactly the same. Wind developers need the security
of long-term finance, typically 15 or 20 years, because, without
that, they are pushed into charging high prices because the capital
has to be recovered over a shorter time-frame and that simply
means higher generation costs. This is much more important for
wind than it is for gas. If you halve the repayment period for
a gas-fired installation, you may push up the generation costs
by about 0.2/0.3 pence per kilowatt hour, whereas if you halve
the repayment time for a wind installation, you may push up the
cost by about a penny per kilowatt hour. Don't hold me to those
figures, but they are of the right order.
Q178 Mr Caton: You have already mentioned
the Renewables Obligation. Do you think it would be better if
the Government introduced a banded Renewables Obligation which
could, for example, offer varying incentives for onshore and offshore
wind?
Mr Milborrow: That is more of
a policy question. I think I would defer to my colleagues.
Q179 Mr Caton: If the Association is
going to answer it, can I refer you to your submission where you
say that you do not go for banding renewables, but you go for
other initiatives presumably from government to help the offshore
sector. Why not the banding of the Renewables Obligation?
Mr Shears: A key thing for us
with the Renewables Obligation is that it was set up as a technology-blind
mechanism that is reflective of the market and, just to reiterate,
that has created a huge amount of investment in the renewables
sector, particularly obviously relating to wind, so our fundamental
concern is the uncertainty that any talk of amending the RO would
bring to the investment community in particular which we think
would undermine our ambitions of getting to the 10% target. That
overarches, I think, any talk of amendments to the RO. Beyond
that, we are clearly keen, particularly looking at wave and tidal
which we look at within the Association as well, to find additional
support measures for those technologies and we have been successful
in securing £42 million from the DTI to seek capital to encourage
various technologies which are now coming forward, so we think
that is the best way to go rather than creating uncertainty by
playing with the RO system.
Chairman: We are coming on to marine
in a minute.
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