Examination of Witnesses (Questions 280-294)
DR KEITH
MACLEAN
2 NOVEMBER 2005
Q280 Chairman: Can we talk about carbon
capture and storage a bit more? You say in your memorandum that
you are engaged in a couple of projects dealing with this. Can
you tell us very briefly a little bit more about those projects?
Dr MacLean: There is really only
one which has moved forward, which is the project in Peterhead
which is working together with BP and BP's partners there. There
is a fairly unique set of circumstances around Peterhead because
of the gas pipelines coming in and the proximity of oil fields
and gas fields there too. The basic principle there is to bring
natural gas into Peterhead, to split it up through a chemical
plant into carbon dioxide and hydrogen. The hydrogen would then
be burned through a fairly conventional combined cycle gas turbine
and the carbon dioxide would be pumped back out again through
the unique pipeline which is there and capable of carrying it
and be used for enhanced oil recovery in the Miller field. That
is a set of circumstances which do not come together in any other
areas in that way. However, it will be interesting, looking at
the combination of the chemistry and the combustion. The big issue
will be making those work together. Most of the individual processes
are already up and running, but getting them to work together
like that would be a big challenge. That is the main project we
are looking at with that, but there are others which we would
explore, looking at alternatives for coal-fired power stations
as opposed to gas fired power stations, probably with some form
of carbon capture and then storage following on from that.
Q281 Chairman: The Peterhead project
is the one you estimate would cost about £400 million.
Dr MacLean: That is right.
Q282 Chairman: Do you envisage any of
that money coming from the taxpayer?
Dr MacLean: All of these early
projects will require some sort of support to help them through
and there have already been discussions about that. Whether it
is ROCs, or something akin to a ROC which can be used as a support
mechanism, we are quite open to the options and use measures which
are being used elsewhere and can be applied to other technologies
rather than specifically for that. Certainly a revenue support
mechanism for that is definitely one of the things we would be
looking at rather than a big capital grant up front.
Q283 Chairman: This whole area was envisaged
in the White Paper to be a priority area for research. Do you
think we have made sufficient progress in the last couple of years?
Dr MacLean: It is starting now,
but if you look at some of the imperatives which EDF were describing
earlier on about the current trajectory for the generation gap,
however big that is going to be, which is dependent upon the demandside
growth as much as anything else, clearly we are getting to a point
now where, if we are not able to use the new technologies, we
are going to have to find some sort of stopgap measures to bridge
us through until they do come through. The time is very, very
short now and we really do believe that the majority of the decisions
which we need to be making to deal with the 2010 to 2016 issues
which there will be with nuclear closure and coal closure have
to be taken now. To go back to one of the points from the EDF
discussion, what the market is looking for is clarity in areas
on which Government can give clarity, not about the general way
markets operate. We should like clarity on things like the implementation
of the Large Combustion Plant Directive in the UK, which is in
the gift of the UK Government. We should like clarity on the UK's
approach to the second phase of the European emissions trading
scheme. Again, the UK's approach to that and knowing how it will
approach that is something which can be done. The other big imponderable
at the moment, which would probably stop investment even in combined-cycle
gas turbines, is whether or not the exiting nuclear licences will
be extended for a five- or a 10-year period, which may be a sensible
stopgap measure for the keeping-the-lights-on debate and also
for the carbon agenda. We have these two things which often work
against each other: reducing the carbon emissions and keeping
the lights on. We have to look at the measures and the decisions
in that light.
Q284 Chairman: So you are really waiting
on the Government for progress to be made on this broad front.
Dr MacLean: For clarifying those
things which are very much their responsibility to provide. We
are happy to make the commitments within the market, the market
risks and market uncertainties, to do what is necessary, but that
framework, those things which the industry cannot themselves change,
have to be clear.
Q285 Ms Barlow: To carry on with the
markets and policy instruments, you say you need stability but
also that there is no precedent for involving the generating requirements
within the framework of a market-led economy in terms of the scale
that is necessary. You seem to be implying that the present market-based
policy, particularly the regulatory framework, may be inappropriate
or insufficient and that it will not be able to deliver what the
Government's aims are. The implication from that is that the lights
will not stay on.
Dr MacLean: It is not difficult
to say that if growth in demand carries on as it is just now,
if nuclear plants, when they are due to, close and the licences
expire, if the Large Combustion Plant Directive, which is outwith
the UK Government's gift, imposes the closure of the plants and
no other investment decisions are made in the meantime, obviously
the consequence of that gap is the lights going out. We know that
there are decisions there which need to be made and we are trying
to show where Government can give the clarity that the market
will need to make those decisions to invest. It is clear that
over the last five years there has been no significant investment
in conventional generation. The only significant investment the
market is making in generation is in the renewables market, driven
very much by the ROC mechanism. You could say that is a positive
example where the clarity of the policy has driven industry to
invest and you can see in the lack of investment elsewhere that
that uncertainty has resulted in "wait and see".
Q286 Ms Barlow: How far would you put
the blame on the existing regulatory framework in terms of long-term
policy and how much change would you want to see in that?
Dr MacLean: There is a framework
at the moment. Think of the first phase of the European emissions
trading scheme. It came into force in January of this year: it
was not until June of this year that the actual allocations were
confirmed. That is an example where you have the entire framework
and everything in place and it is something which should work.
However, if Government do not tell us what the answer is or what
the rules are within that existing framework, then it is impossible
to go forward. All we are asking is that within the existing legislation
of the LCPD, of EU ETS phase two, of nuclear licence extensions,
to name three big examples, just to say what the outcome is of
the Government deliberations on that and we will then get on with
the job.
Q287 Ms Barlow: Are you blaming the actual
framework? You say the framework exists. Or is it the implementation?
How far would you say this is responsible for the lack of large-scale
investment?
Dr MacLean: It is critical that
the lack of information in the areas which are outwith the control
of the market is clearly responsible for the lack of investment.
There are other things out there which would say it is now a sensible
time and has been for investment to happen. The uncertainty is
not the fault of the framework; it is simply that the decisions
are not being made within that framework.
Q288 Mr Chaytor: Have we ever had or
are we ever likely to have a real market in electricity generation?
Dr MacLean: There is a very active
market in generation.
Q289 Mr Chaytor: Is there a real market?
Dr MacLean: We have seen the ups
and downs of a market scenario. The first up was the so-called
dash for gas when there was a tremendous thrust for investment.
There was then a change in policy which brought that to an end
and it has not restarted since then. There has been a very active
market response to the renewables. The market is more than happy
to put the money in place for that to be delivered. I certainly
believe the market is capable of providing the capital investment,
of managing the projects to deliver, operating them to continue
to provide the service and looking after all of the risks associated
with that. Yes, I do believe that the market is capable of doing
that.
Q290 Mr Chaytor: Do you share the view
of EDF that diversity and the operation of the market will take
care of everything, including all of the risks?
Dr MacLean: I have probably already
answered that in that I said the market will look after the risks
it is capable of dealing with.
Q291 Mr Chaytor: Can you just clarify
that? What is the limit?
Dr MacLean: It goes back. If the
market were to invest in gas and there were then the introduction
of a punitive carbon tax which then made that economically unviable
and drove the companies who had made that investment out of business,
that is the sort of change which the market is not capable of
managing itself. It is something which has been a significant
change of the rules. It is difficult. Anything involving investment
over a 30- or 40-year lifetime, if the aim is to have a low cost
of doing that, has to be in an area where the risks are manageable.
We are not risk averse; we just want to be able to manage the
risks and then the premium which is attached to that in terms
of cost will be low. If you put very high uncertainties, then
the investment will only be made if the returns are appropriately
that much higher. All we are saying is that it needs to be derisked
at the moment around things which the Government are perfectly
capable of and often say they would like to give us the answer
on, but have not as yet.
Q292 Mr Chaytor: To be more specific,
if the market were to invest in nuclear, do you think the risks
attached to that should include decommissioning and waste disposal?
Dr MacLean: It has to be clear
who is carrying that risk before investment would be made. The
market would be capable of dealing with it at appropriate premiums.
That is the issue for risks associated with that sort of thing.
If the Government believe they are better able to manage that
risk at a lower cost, then that may be the appropriate way of
approaching it.
Q293 Mr Chaytor: How do you view the
argument about the crowding out, that at the end of the day the
Government are going to have to intervene to some degree and if
they intervene to support one technology, it is actually going
to deliver a diversity of supply because the Government support
for that one technology will dominate everything?
Dr MacLean: We certainly have
a concern about the support mechanism which is targeted at any
one specific technology. We, like EDF, do not believe that there
is a silver bullet technology. We believe that diversity does
help manage the risks, certainly in the longer term. We would
look at support mechanisms like revenue support mechanisms which
are based on something which is technology neutral. The two key
things we are looking at are security of supply and the carbon
agenda, so something which is targeted at one or other or both
of those which rewards success in achieving those two criteria
would obviously be something which does not pick a winner and
could be applied to any of the technologies which are delivering
on those two counts.
Q294 Mr Chaytor: Your answers earlier
were much more positive about demand management than those of
EDF. In terms of demand management, do you think you have the
parameters of the debate right? The title of our inquiry is nuclear
versus renewables. Do you think it would be more accurate to identify
the issue as centralised generation versus decentralised generation?
Dr MacLean: Decentralised generation
has a role to play in the overall mix. The more decentralised
you become, the smaller you become, the less efficient it becomes.
It can actually have an adverse effect. The great security of
supply which we now enjoy has been achieved by joining everything
up and having quite a lot of central generation in the mix. We
are certainly very keen that we get a degree of distributed generation,
a degree of micro-generation. We believe that micro-generation
in particular can play an important role in reducing the draw
of energy from the grid and therefore how much needs to be centrally
generated: more actually seeing it as a demand reduction measure
rather than as a competitor to something which is supplying into
the grid. We are confident in that; we have made a number of investments
ourselves and are pushing that very hard at the moment.
Chairman: Thank you very much indeed;
you have been most helpful. We are very grateful to you and thank
you for your patience as well.
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