Examination of Witnesses (Questions 295-299)
DR ANTHONY
WHITE MBE
2 NOVEMBER 2005
Q295 Chairman: You have been extraordinarily
patient Dr White; thank you very much indeed. We do apologise
to you for the unavoidable delays in this afternoon's proceedings.
You have been sitting here throughout the afternoon and I just
wonder whether you want to unburden yourself of any thoughts you
might have had during your long wait.
Dr White: First of all I have
to declare an interest: Rachel is my daughter. Project Rachel
was an idea we had about 12 years ago on how to encourage corporates
to invest in domestic dwellings. We thought that the cost of capital
for a corporate would be lower than that for a domestic householder.
The thing was: how do you make sure that investment could have
a long time? So the idea was: could you recover your capital over
a network charge? I have to declare an interest in that Scottish
and Southern Energy then sponsored us to check that this was all
legal and kosher and now we need to go through a change for the
distribution system agreements before that can actually happen.
At the moment the answer to your question is zero, in terms of
what has happened, but we hope it has great potential. The other
issue which was not answered by EDF was what you need to build
a station. I wrote in my notes that there are four issues. One
is licensing. Mr de Rivaz said that it would cost £200 million
to get the first through. That is an awful lot of money. The trouble
is that if you go ahead and do that and you find the double-spotted
newt at the site and you cannot then go ahead, that is a lot of
money. I cannot imagine the private sector being willing to pick
up that risk. That is my own view. The waste has to be underwritten
by Government, not all taken by Government. In other words, a
cost and price are agreed and then the person operating the station
will pay that and if the cost turns out to be lower, the Government
make a profit, if the cost turns out to be higher, the Government
make a loss. I think the investors would want a fixed price, which
happens around the rest of the world. Public opinion is one for
you. The one I wrote my note on was financing. I think that is
where the real rub is. It is difficult under these current market
conditions to build any kind of capacity, apart from renewables,
which has their particular support, gas, let alone nuclear or
coal with IGCC, without special support. The weird thing about
that is that nuclear is probably one of the least cost forms of
generating power, based on the current latest technologies, if
you amortise it over 40 years. In answer to your question, we
do have a market in power. It is a real market in power: it is
just that people do not actually like it very much. I hope you
have seen my evidence. I have this chart here which shows quite
clearly that when we set up the industry in 1990, we set it up
as an oligopoly and in the chart the top line is the price of
power and the bottom two lines are the cost of coal and the cost
of gas. You can see that there is a very large difference between
them, which meant that the generators were making very handsome
profits. Effectively the generators could set the level of price
at any position they wanted to and, by making a very serious mistake,
they set it too high, so lots of people could build power stations
and the did. Also the Government regulator got a bit upset with
them and forced them to sell some generation, but even after they
had sold the generation, they still had their large margins until
all this other generation came along. At that point they lost
control of the market and we now have a highly fragmented market
which means the prices are down at marginal cost and that is where
they are today. That is exactly what one would expect in a proper
commodity market. That means that people have to recover their
capital by building a power station just before demand starts
to exceed supply. The prices will go up through the roof, like
lemmings other people will come in and build power stations and
some people might load manage and then the prices will collapse
and we will be back to marginal costs again. The risk for a generator
in this market is whether they can get their timing exactly right
when they build their power station. Also, they will see the prices
rise and say "Actually, given the risk, given that it takes
me maybe 18 months or two years to build a gas station, let alone
five years to build a nuclear station, when I get my timing right,
I want a higher rate of return", so the prices will go up
and up and up. The thing I have difficulty with is thinking that
prices will start going up through the roof, customers will load
manage and, let us not kid ourselves, what that means is that
bits of industry will have to turn off because they will sell
their power or what have you. Are Government really going to stand
around and say that is fine, especially as the peak in this country
would occur at a different time from the peak in the rest of Europe?
Frankly, as an investor, I find that difficult to accept.
Q296 Joan Walley: On that point about
where the peak is in the UK compared with the unliberalised market
in Europe, what are the implications of the unliberalised market
in Europe in this scenario which you have presented to us in this
graph?
Dr White: I might take issue with
you on the question of "unliberalised". I think it is
liberalised, but it is just that we have a different market structure.
Remember, when Germany was liberalised we had quite a few generating
companies in Germany at the time, Vebar, VEAG, RWE, EnBW, et cetera
and they all thought that to be real men you had to capture as
many customers as you possibly could, they cut each other's throats
and the prices collapsed in Germany. What we have seen in Germany
is a consolidation. Now the group of generators there sets prices
just a bit below the new entrant level. They have stable prices
and they have the confidence that they can set prices above marginal
cost. They will not be undercut by the competitors because they
are not really their competitors and everybody is happy.
Q297 Joan Walley: I am not clear how
it is that they have arrived at that, whereas in the UK we have
not and how that relates to the security of the supply.
Dr White: Because we have many
more owners of generation in this country than they do on the
continent. Maybe it is more of the social way things happen on
the continent.
Q298 Joan Walley: And the way that we
have privatised here.
Dr White: Most of those utilities
are privately owned as well, especially with EDF now. What I am
saying is that they do not compete for customers too aggressively.
They do not keep fighting their prices all the way down to marginal
costs. There is a good gap between the price of power and the
marginal costs of power, so they are comfortable about investing
and making a return on capital over a longer period.
Q299 Mr Hurd: If the generation market
is as you described, does that not raise concerns about why anyone
would invest in any generation capacity other than renewables
at the moment?
Dr White: Yes.
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