Memorandum submitted by Leslie Mitchell
FREng
Dr Mitchell has spent his career in the electricity
industry. Beginning in CEGB Research at Berkeley Nuclear Laboratories,
concerned with commissioning problems on Magnox reactors, his
interests developed to embrace all aspects of electricity generation.
At the time of privatisation of CEGB, he was responsible for all
three CEGB headquarters laboratories. Privatisation brought a
career change when he took responsibility for business planning
in National Power—Nuclear. This was at a particularly interesting
time for nuclear power. As Director of Technology for Nuclear
Electric and later Magnox Electric, he contributed substantially
to the improvements in performance of the UK gas-cooled reactors.
He is now a consultant on energy and environmental matters and
until it was disbanded was a member of the Government's advisory
committee on Radioactive Waste Management.
1. INTRODUCTORY
REMARKS
1.1 I believe that the Inquiry is timely
in view of the increasingly important concerns being expressed
publicly regarding the realism and robustness of the current energy
policies. Energy is a business with long time horizons. Plant
is expensive and designed for lifetimes of up to 40 years. Operators
need to be reasonably assured that they can make a return on investments
and environmentalists need to satisfy themselves that the potential
of plant is realised as a significant contributor to capital cost
is the energy used at various stages of construction from mining
of materials through fabrication and construction. This is true
for all plant. Therefore the main requirement of a policy is that
it stands the test of time.
1.2 It is but 18 months since the Energy
White Paper was published in March 2003. While the concept of
an energy policy was a welcome change from the previous laissez-faire
policies, the importance of the challenges being made to its
validity indicates that, in its formulation, too much weight was
given to short-term issues and too little to the risks attached
to the policy.
1.3 There appears to be no need to list
the many questions that have been raised regarding the policy
as the second paragraph of the announcement of the Inquiry lists
several of them and, from this, it can be judged that the EAC
attaches considerable importance to them. Indeed, they are clearly
the main driver behind the Inquiry. Thus I take this as common
ground.
1.4 In my view the EAC Inquiry can make
a major contribution to environmental and energy planning if it
can introduce a proper balance into the evaluation of the strategic
options. To this end, I suggest that the Inquiry should adopt
techniques used by businesses to devise and test strategies.
1.5 Suggestions regarding an approach that
could be adopted will form the main thrust of this submission
rather than provision of answers to the particular questions.
Others are better placed to provide the necessary data.
2. A FRAMEWORK
FOR DECISIONS
2.1 Even with relatively simple problems
it is rare for all the factors that need to be taken into account
to point in the same direction. It is for this reason that considerable
attention has been paid to methods of decision analysis. For determination
of appropriate strategies, a commonly used technique is multi-attribute
analysis. This requires the construction of a matrix that identifies
the available options together with the major factors that could
influence the decision. Each option is assessed against each factor
and allocated a score based on how well it matches that requirement
and, very importantly, a weighting factor reflecting the importance
ascribed to the particular factor.
2.2 As can be deduced from the questions
posed in announcement of Inquiry document, the problem that the
EAC has posed for itself is multi-faceted and a technique similar
to the one described above will be essential to manage the data
input and, eventually, to assist in the communication of the reasons
that lie behind any decision that emerges.
2.3 It should go without saying that the
process must be objective and this means applying each factor
to all options. There are examples in the list of questions where
answers are being requested regarding nuclear power when it is
silent on the same question for other options. A clear example
of this is question 6 regarding whether or not nuclear power is
carbon-free. The subsidiary points in that question that mining,
construction and operation might all consume energy are valid.
But they apply equally to any plant—ore is mined to produce
steel, and smelting and fabrication consume energy. Adopting an
appropriate methodology would impose a discipline that would prevent
such questions being asked of only one option.
2.4 The factors chosen need to:
— Reflect the benefits in, for example,
meeting environmental targets or providing security of supply
— Define the status of the technology
in terms of confidence that it will meet claims for it
— Identify any barriers to implementation
on the scale or rate supposed
— Address relative cost issues
2.5 Some factors, such as the means of financing
a project, have such a wide range of variables, many of which
are changeable at the discretion of Government, that it becomes
confusing to include them all in the first pass. In this event,
it is preferable to separate the development of strategy into
two phases; the first considering the desirable goal and the second
addressing means by which it could be achieved.
2.6 To answer the questions posed by the
EAC requires access to reliable data. As indicated above, I leave
this to others but it also requires judgements on matters such
as factors to be included in an assessment and weightings to be
applied. The remainder of this submission offers advice on the
four points below:
— Factors I deem to be important that
are not included in the EAC's list of questions
— An indication of the relative weighting
that I believe to be appropriate for the more important factors
— Suggestions for overcoming barriers
to implementation
3. FACTORS NOT
OBVIOUSLY INCLUDED
IN THE
LIST OF
EAC QUESTIONS
3.1 The most obvious omission is an assessment
of the value of diversity in the overall energy mix. Clearly,
diversity can remove sensitivity to a number of factors outside
the control of the UK such as
— Availability of non-indigenous primary
fuels
— Price changes in primary fuels
— Failure of one energy source to meet
its technical or environmental targets
— Failure of one source to meet its
target contribution.
3.2 In considering the importance of diversity
it should be noted that the questions being asked of the 2003
strategy relate to shortcomings on at least two of these issues.
4. VIEWS ON
THE WEIGHTING
OF FACTORS
4.1 I have not sought to undertake a comprehensive
analysis of the form suggested above, that would be prejudging
the outcome of the Inquiry. Therefore, the comments below should
not be interpreted as indicating a complete list of factors to
be taken into account. Rather, the discussion below addresses
only the relative weighting of four of the factors I believe to
be the more important. They appear in order of weighting that
I judge to be appropriate.
4.2 Contribution to environmental goals
This should have the highest weighting. The Prime Minister has
recently identified global warming as the greatest challenge being
faced today.
4.2 Security of supply Following
from the comments on diversity of supply above, I perceive that
the root cause of the shortcomings in the 2003 strategy were that
it failed to address properly the risks unavoidably associated
with such a narrowly based policy. The importance of energy to
the UK economy is such that it is foolish to gamble on such matters.
4.3 Contribution to energy saving
Clearly, an important objective, but in scoring any factor under
this broad heading account should be taken of the value of using
fuels that have no alternative use.
4.4 Cost I would relegate cost to
a relatively weak fourth position for two reasons:
(a) Cost has always been seen as the major
parameter governing choice of fuel. However, an examination of
the history of investment in electricity generation plant over
the past 50 years would show that various times the primary fuel
of choice, on cost grounds, has included coal, nuclear, oil and
gas but, rarely, has any preference remained true for a decade.
The most spectacular change occurred when the CEGB was constructing
five large oil-fired power stations at just the time OPEC formed.
Those plants have never been fully utilised. None of these price
changes was accurately forecast—all came as a surprise,
even the tripling of oil prices on the formation of OPEC. Thus
claims regarding the efficiency of the market and advocates of
anyone fuel who claim to see the future with clarity should be
viewed with scepticism.
It does not require much imagination to see the
parallels between the OPEC event and today's oil and gas market.
(b) The differences between the costs of
generation from the different fuels are actually fairly small.
They can be the difference between profit and loss to an operator
in a free market but are not necessarily so important in a macroeconomic
sense in relation to the size of the national energy bill. What
is demonstrably needed is a little "insurance" to protect
against the uncertainty.
A major deficiency in the electricity market
place is that it is all about today's price—a consumer has
no way of paying an insurance premium for long-term security even
if he/she recognises the need. But would the premium be affordable
and how and to whom should it be paid?
If the premium is used to buy diversity, it is
easy to show that any premium that would be required is low. It
would be the cost to the consumer of departing from a policy of
using only the lowest cost option. As an example, suppose it was
decided that 10% of required capacity should be met by plant with
generation costs 10% dearer than today's cheapest source. This
would add 1% to total generation cost for all electricity. However,
because generation is only a fraction of the retail price, it
would add only the same fraction of 1% to domestic electricity
bills. This would be a remarkably small premium.
5. AN OUTLINE
STRATEGY
5.1 The arguments presented above lead to
an inescapable conclusion that, to deliver what is necessary,
the overall objective must be to create a an energy market built
on a diversity of fuels that can contribute positively to a reduction
in "green house gases." The environmental issues will
restrict the range of options available but it will be essential
to use any that can contribute and for Government to allocate
targets for the capacity of each. To a degree these targets must
be subjective but a sensitivity analysis to possible future events
would provide a framework for testing the robustness of supply
with different assumptions.
6. SUGGESTIONS
FOR OVERCOMING
BARRIERS TO
IMPLEMENTATION
6.1 The operation of the electricity market
will be seen as a barrier to implementing the above strategy as
it could be seen as inhibiting competition. There will certainly
be no change without changes in the market structure.
6.2 It should be remembered that the present
market developed following privatisation of the electricity industry.
The Electricity Bill that enabled this initially saw the need
to protect two primary sources that were judged unable to survive
in an entirely free market, namely, renewables and nuclear. The
forms of protection for the two differed and that for nuclear
has since lapsed but the protection for renewables remains and,
indeed, the 2003 strategy is dependent upon its continuation in
some form.
6.3 Renewables have not entered the market
because they are a preferred source on the grounds of cost—they
have always been more expensive than other generation sources.
To introduce them against market forces, the Electricity Bill
created a premium market that required electricity distributors
to purchase a defined portion of their electricity capacity from
renewable sources. By this means the price paid to renewables
sources could be different from that paid in the main market.
Bids were invited to fill this capacity and the choice of type
of renewable and/or operator based on cost, thereby preserving
competition but within this limited market. Operators needed to
have a reasonable expectation of a return on their investment
and looked for long-term contracts. For these to be possible assurances
were provided about the continuity of this premium market into
the future.
6.4 This model appears to have worked well.
It delivers a strategic objective whilst maintaining an acceptable
level of competition. If it were to be applied to other primary
fuels that meet the environmental standards to be included in
the strategy, there could be several independent markets. Just
as it has for renewables, this would eliminate concerns about
the ability to finance different options.
6.5 It would have the advantage of providing
the Government with levers to influence energy strategy to meet
their wider goals whilst, at the same time, preserving sufficient
competition to ensure value for the consumer.
19 September 2005
| 
