Examination of Witnesses (Questions 260-279)
DR KEITH
MACLEAN
2 NOVEMBER 2005
Q260 Mr Hurd: In that context of transfer
of relationship from supply to distribution company, could you
also talk to us about the idea of moving metering?
Dr MacLean: It is basically the
same concept again. At the moment, for an energy supplier with
only 28 days, effectively any investment which is made in metering
has to be recovered in a 28-day period. So there is no incentive
at all to an energy supplier to make investment in metering. If
it can be moved into a distribution business, then, just as Ofgem
has been doing recently with the regional power zones and the
new incentives for innovation, they can formally incentivise the
distribution companies to make the investment. Distribution companies
effectively love nothing better than having something to spend
their money on to get a fixed return over a period and have shown
in their post-privatisation schemes for cost reduction and service
improvement the degree of innovation they can actually bring to
the market if that contractual structure is in place.
Q261 Mr Hurd: A wider point about the
energy efficiency agenda. If I understood you correctly, you were
suggesting that the impact of the EEC mechanism was likely to
be marginal against the targets which have been set. However,
it seems to me that the central plank of Government policy at
the moment—and it is energy companies which are the agents
of that policy—means there is a fundamental structural problem
about a policy which allows consumers to trust energy companies
to sell them less energy.
Dr MacLean: To an extent, but
there is no real incentive on consumers at the moment to make
the changes which would be necessary to achieve the massive savings
and that is why, if you take the energy services concept and effectively
flip everything round, if the energy services company were responsible
for providing the degree of lighting, the warmth which was required
within the property, the power to drive things, if they were given
that responsibility, they would make very sure that they were
doing that with the least possible input: the lower the energy
input, the bigger the profit margin on that. That way it is then
quite obvious that would be what the energy supplier was doing
and it would be obvious to the consumer that they had a guaranteed
service, whether heat, light or power. That is a big structural
change, but it is the sort of conceptual one which probably has
to be thought about if we are going to make the radical change
to get to an energy reduction approach rather than simply an efficiency
one.
Q262 Chairman: As a matter of interest,
how many customers are covered by Project Rachel?
Dr MacLean: It is a concept at
the moment on which we are working. Your next witness can probably
tell you a little more about that as he is actually involved in
it far more than I am.
Q263 Mrs Villiers: It strikes me that
we could make a big impact on energy efficiency if we made people's
energy consumption much more visible. I wondered whether you had
any ideas about how one could change the current structure of
metering so, say, when a consumer plugs his mobile phone charger
into the wall something pops up visibly and tells him he is spending
another five pence for every minute the charger is plugged in.
Any ideas on how we might be able to encourage that so that people
are aware of the energy they are using and the money they are
spending?
Dr MacLean: It is certainly one
of the initiatives we are trying to encourage and we are looking
at opportunities to trial that at this very moment. It does require
a change in the regulatory structure because the changes needed
affect both energy supply and energy distribution companies. You
are perfectly correct that there is very good evidence . . .
I do not know how many of you have things in your car to show
how many miles per gallon you are doing, but I know from my own
personal experience that having one of those has radically altered
the way I drive and has radically improved my fuel consumption.
It is a concept which has been well proven. It is not that difficult
to do technically and it is just finding the mechanism whereby
the tens of pounds or hundred pounds which need to be invested
in each property to put that intelligent meter there which will
connect via the mobile phone or through the television or through
the PC to give that ongoing display of something meaningful rather
than a thing which is going around which does not really tell
anybody that much about their consumption.
Q264 Chairman: It could be done in all
new homes.
Dr MacLean: It could. We are in
a market at the moment where meters are changed, either because
they need to be recertified or because somebody has moved supplier
and they are changed anyway. What goes in at the moment is the
absolute lowest cost, lowest function meter, because the energy
supplier runs the risk of that investment being wasted if the
customer changes supplier again.
Q265 Mrs Villiers: Your memorandum states
at the bottom of page 2 that you are " . . . working with
Talisman Energy on the development of what could be the world's
first deep water offshore wind farm". What stage are you
at with that? Are you confident that you are going to get it completed?
Dr MacLean: We are looking at
the first smaller-scale installations of units to operate in that
environment and clearly that has to be evaluated before we can
be clear about whether we would get to the aspiration of the gigawatts
of power we ultimately hope to get from that scheme. With regard
to the way we have outlined this in the paper, it is to group
together all of the as yet unproven technologies, either because
of the scale of what we are talking about or the combination of
different things which are there. With all of them there is an
inherent risk and much as we should like that risk to disappear
quickly, there is a lot of work in all of those different schemes
which needs to be done to evaluate the risk and make sure that
it is manageable.
Q266 Mrs Villiers: What are the economics
of the project generally? Are you getting Government assistance
for the project?
Dr MacLean: I do not want to mislead
you, so I am happy to follow up and give you some exact information
about funding arrangements for that. I am afraid I do not know
the exact detail[22]
Q267 Mark Pritchard: Earlier on today
we had a witness from the nuclear industry and I just wondered
what your view was on their comments that they were not looking
for subsidy from Government, they just wanted a clear run in policy
terms and they were happy to take the risks in the marketplace.
Do you think that puts you at a disadvantage as far as the British
taxpayer is concerned, considering that you are receiving and
may be looking for even more subsidy in the future?
Dr MacLean: I am not quite sure
whether I have got the gist of the question. Certainly as far
as support mechanisms are concerned, we are very clear that all
of these as yet unproven technologies will require some form of
support to get them through the development stage. What we are
looking for in support mechanisms is something which is not trying
to pick a winner, which does not distort the market in favour
of one or the other options, but is simply a mechanism for supporting
the development effort which needs to be put into going through
the first of the prototypes and into something which can be produced.
Q268 Mark Pritchard: Do you think it
puts you at a political disadvantage because of that subsidy issue,
as against nuclear who are saying that they are happy to take
the risk as long as there is a clear policy framework and we do
not actually want taxpayers' money?
Dr MacLean: In some respects,
if you take out the decommissioning and the waste issues, nuclear
has plants which have been up and running for decades which have
produced power for us, just as we have had coal, just as we have
had gas and just as we now have wind turbines which are capable
of doing that as well. The comparison is not completely valid
in that the technology has proven itself able to run over those
decades and to provide power. The question is whether, in the
cost analysis you do of the whole thing, take carbon capture and
storage for the moment, one of the things which is making that
more costly is the fact that you have to find a way of disposing
of the waste carbon dioxide at the end of the process. If those
costs are not being added into the nuclear comparison, clearly
you are not comparing like with like. All that we are asking for
is that there is a fair comparison of all the costs and not that
the public purse is picking up particular elements of any one
of those. The obvious issues from the earlier questioning with
regard to the waste and the decommissioning costs is how much
those are being picked up by the investors and how much those
are being picked up by the public purse.
Q269 Chairman: Sticking with cost, I
notice that as far as offshore wind farms are concerned you said
that the target from that quarter is unlikely to be met because
the costs have risen. Why have costs risen?
Dr MacLean: It is one of those
inevitable things in these projects.
Q270 Chairman: It is just a fact of life,
is it?
Dr MacLean: It is the initial
enthusiasm to get things off the ground and perhaps there is more
optimism.
Q271 Chairman: There has not actually
been an inflation of prices.
Dr MacLean: Nothing cataclysmic
has happened which has done it; it is just part of the normal
project and technology cost development which most people see.
It is also a realisation that once you start going out and trying
these things and gain experience, there are things you did not
expect and which do cost and which then have to be factored in
as it goes through.
Q272 Chairman: It was an under calculation
in the first place really.
Dr MacLean: I think that is true.
Q273 Chairman: Is it possible to give
us some feel for the scale of the difference between the scale
of the projected cost then and the anticipated cost today?
Dr MacLean: I could not give you
an accurate figure on that, but I am happy to consult with colleagues[23]
Q274 Chairman: Just in terms of a percentage
would be helpful.
Dr MacLean: I would really need
to go back, but I am happy to give you that figures.
Q275 Dr Turner: Offshore wind is only
just about commercially viable as it is, with the support of both
ROCs and capital grants, so anything which gets more expensive
than that is clearly terribly problematical, especially new marine
renewable technologies because they have not been deployed on
such a scale as to have achieved commercial scale cost reductions.
What is your view on the fiscal measures we need to take to get
over this problem? Do you think it is best handled by capital
grants or do we need an additional market instrument, a super
ROC or whatever? In fact DTI are doing this in a sense for marine
energy projects on a limited scale. What do you think is going
to be the most effective approach to bring through new technologies
which are currently expensive, but which need to be deployed on
a larger scale before we get the cost benefits?
Dr MacLean: There are at least
two stages in the process and in the early stage the capital grant
or something which helps with that side of things is the obvious
way to go. As you get further downstream—and exactly when
it tips over I could not actually say—there becomes a point
where having a revenue-support mechanism is advantageous. From
the public point of view, if all you are doing is supporting however
much is done or produced, if it fails and does not produce, then
there is no cost for the public purse to pick up. It has the advantage
for the developer that it is starting to get into a commercial
environment where everything is happening as it would outside
and you are hopefully then looking at a situation where that revenue
support is tailing off. It certainly helps more than capital grants
do once it gets beyond that stage. With regard to the interface
with ROCs, one thing the industry is very clear on and pretty
unanimous, is that the big advantage of the ROC mechanism is its
longer-term nature and predictability within that. If it is set
up as a long-term mechanism and then tinkered with and changed,
that not only undermines the confidence in it as a measure, but
it undermines the confidence in any future long-term measure as
well. That is why there is a degree of concern about things which
are being looked at to change the ROC mechanism.
Q276 Dr Turner: You say that the ROC
mechanism is predictable, but in fact the value of a ROC can fluctuate
and in certain circumstances it can disappear to zero, which would
not appear to be the most stable environment for encouraging investment
and indeed the DTI and Scottish Executive are looking at the future
of the ROC. What kind of changes do you think you would like to
see in the mechanism?
Dr MacLean: Back to the point
I made earlier on. We would prefer that it was not changed. There
is a lot of concern at the moment. If the Government target of
the 10% by 2010 is not met then the value of the ROC for those
who have invested gets higher the lower the success rate is. Reinforcing
a point EDF made earlier on, it is very frustrating for the industry
to have thrown back in its face that it is creaming it on the
ROC mechanism, when the industry actually has this enormous five-gigawatt
queue of projects in which it is desperate, more than happy, to
make the investment but which are stuck somewhere in the consent
process. It is very, very difficult to avoid the problem that
the under success in the ROC mechanism will over reward those
who have got in, when really the only way of doing more about
that is through the speeding up of the planning and consents process
rather than anything Government can otherwise do to the mechanism
or the industry can do.
Q277 Dr Turner: But if you had done that
then you devalue the ROC.
Dr MacLean: The investors are
perfectly happy to invest with parameters which are variable as
long as the rules for that variation are known. If it is a volume
driven thing and if it goes up to the 10% and beyond that, then
we are aware of the consequences, we just do not want anything
unexpected to happen.
Q278 Dr Turner: Let us look at these
gigawatts waiting in the pipeline. We know that some of them are
waiting for planning reasons and even if they get through planning
hurdles, they are then going to run into grid connection problems
and costs of grid connection are also something of a disincentive.
Coupled with that, Ofgem have now extended the virtue of NETA
to Scotland in terms of BETA and you have zoned transmission charges
rather than a postage stamp system which greatly disadvantages
a remote generating site where the best resources are. What is
your view on that? Are you as investors given sufficient comfort
by the protective mechanism which the Government put in the Energy
Act and are you worried that that has a sunset clause in it?
Dr MacLean: The issue of transmission
charging does significantly disadvantage Scotland from an investment
point of view. It is clear that it is the first place you would
close down your generation, given a choice, because you make the
savings, and it is the last place you would invest, all other
things being equal. It is certainly a big issue, not only for
the 40% renewables target which the Scottish Executive have, but
think more about the 60% and where the rest of it is going to
come from with a big disincentive like that. There is quite an
issue about where the investment is going to come from and how
that gap can be filled. The sunset clause in it just makes it
quite absurd, because even the more optimistic projections of
when some of the islands could be connected up in the remoter
areas would mean that because the clock has already started ticking
on the mechanism, at best you are going to have a year or two
of it left, which is not enough.
Q279 Dr Turner: Would you agree that
it is absolutely essential that the Government address this issue?
Dr MacLean: Absolutely essential.
We have responded to the Ofgem consultation on that issue with
very clear concerns, not only about the overall level of the transmission
charging, but concerns about that sunset mechanism for the islands.
Dr Turner: I sympathise. I just did not
listen at the committee stage of the Bill.
22 Footnote inserted by witness 15.11.05: The project
is funded 50% by SSE and partners and 50% through DTI, Scottish
Executive and EU. Total planned investment is approximately £30
million. Back
23
Footnote inserted by witness 15.11.05: Project costs have risen
by approximately 20% between the early stages of Round 1 offshore
projects and projected Round 2 ones. Back
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