House of COMMONS
MINUTES OF EVIDENCE
ENVIRONMENTAL AUDIT COMMITTEE
NUCLEAR, RENEWABLES AND CLIMATE CHANGE
Wednesday 26 October 2005
PROFESSOR GORDON MACKERRON, DR ALISTER SCOTT and DR JIM WATSON
and MR DAVID MILBORROW
USE OF THE TRANSCRIPT
Taken before the Environmental Audit Committee
on Wednesday 26 October 2005
Mr Peter Ainsworth, in the Chair
Ms Celia Barlow
Mr Martin Caton
Mr David Chaytor
Mr Nick Hurd
Dr Desmond Turner
Memorandum submitted by The Sussex Energy Group
Examination of Witnesses
Witnesses: Professor Gordon MacKerron, Director, Dr Jim Watson, Senior Fellow, and Dr Alister Scott, Research Fellow, Sussex Energy Group, examined.
Q104 Chairman: Welcome, thank you very much for coming and also for your memorandum. May I begin by asking a question which I have asked other witnesses in this inquiry, which is about the need for another review of energy policy, coming, as it does, so soon after the PIU report, which, I think, Professor MacKerron, you were involved in and the Energy White Paper? What has changed to necessitate another review at this stage?
Professor MacKerron: Thank you. Good afternoon everybody. Let me just briefly say that Dr Watson and Dr Scott are people I will bring as necessary to answer your questions. Dr Awerbuch, unfortunately, cannot be here today and sends his apologies. It is actually quite difficult. We have also read, at least briefly, the unedited transcript of your last week's proceedings, so we have some familiarity with your questioning there. It is quite difficult to understand what the particular urgency is on another review when the one initiated through the PIU and culminating in the White Paper 2003 appeared to be of a long-term and fairly comprehensive nature. The speculation I would make is that, for a variety of reasons, the nuclear power issue has climbed up the political agenda. It is now much more prominent than it was at time of the White Paper and that is one possible motivation, but I have no inside knowledge and it is not entirely clear to me. I would, though, perhaps similarly to Tom Burke last week, suggest that too regular a reopening of big questions of this kind is not helpful for investor confidence in any of the technologies which the Government relies upon entirely in the private sector to do the main work now; so I think there is that significant draw back and there need to be compensating advantages that would overcome that.
Q105 Chairman: You say that the nuclear issue has risen up the political agenda, and in your memorandum you refer to the decision by Finland to invest in a new nuclear capacity. Is that really enough to put it back on the political agenda, or do you think there are other forces at work?
Professor MacKerron: Clearly the positive decision of the Fins to build a reactor does send a particular signal. No-one has tried to build a new reactor in any part of Europe or North America for well over a decade, and experience elsewhere, especially in Asia, I think is not terribly relevant to our own, so I think that matters quite a lot. It is clearly not the only thing. I think there is a perception, rightly or wrongly, that some of the other technologies and policies designed to deliver low carbon are not always working as well as some people thought they would, and that naturally leads to a search for new technological approaches. It is perhaps noticeable that carbon capture and storage has also risen up the agenda and may well be a contributor to this apparent need for a new review as well. I think that is probably a material factor, but I am in the realms of speculation. I do not have any authoritative view.
Q106 Chairman: Do you think, given the relatively slow progress towards meeting the targets set out in the Energy White Paper, there is a very serious problem about reconciling CO² reduction targets with security of supply?
Professor MacKerron: I do not think that is a major problem. One does not want to be complacent about the security of supply, but a good deal of what one hears in much public debate about security of supply seems to me unduly alarmist and it moves too quickly from the suggestion that we will soon become significantly dependent on Russian supplies to some notion that we are therefore going to be in some very deeply dependent and vulnerable position. Clearly, there are issues about being dominated by any one supplier, but I do not think the security of supply issue is significantly more serious than it was a couple of years ago, and I do not think that its interactions with climate change are much more troubling than they ever were. It does not seem to me to explain a great deal.
Q107 Chairman: Again on the question of the White Paper, and if you have read the transcript of last week's evidence you will have seen that I asked this one before as well, do you think the problem with it has been that the objectives and targets were simply too challenging, or that the political will behind meeting the challenges set down in the White Paper was insufficient?
Professor MacKerron: I am not sure I would support either of those views. I think the things to which we are committed under the Kyoto protocol have not been particularly challenging. The 20 per cent domestic CO2 target was always going to be quite difficult to meet. As for political will, I am not sure. The real difficulty about changing direction in energy strategy is that with very long-term objectives, like the 60 per cent reduction by 2050, it takes time to build momentum, and it perhaps was never realistic to suppose that we would move very quickly in the early years, because very large things have to change, including patterns of investment: because investment is so long-lived in the energy sector, you perhaps do not realistically expect to move very rapidly towards targets like that, at least not in a kind of linear way. On the other hand, you have to be careful that you are moving in the right direction. I am not really clear about political will. I think in political will terms the most difficult problem is that of transport. The great advance in the White Paper was that for the first time ever there was a chapter on transport in an energy White Paper, and one should not underestimate the significance of that. The fact it did not say very much and did not have many targets in it is perhaps secondary, but at least it has brought transport into the agenda. I think it is widely agreed that politically effective action to curb carbon dioxide emissions from transport is exceptionally difficult. I would have thought that political will there is probably still fairly limited, and it is difficult for all developed countries that have a significant transport problem.
Q108 Chairman: This is an unhappy situation, is it not? The PIU Report was widely acclaimed, the Energy White Paper received support from most quarters, the agenda seemed clear and now we are in a situation where apparently it is likely to be torn up and replaced by something else. Is there not a danger that, if what emerges from another review of energy next year is significantly different from the course that was charted in the last White Paper, it will fail to command the support of stakeholders, the public and politicians?
Professor MacKerron: I think there is a very real risk. If it is as extreme as you suggest - the old White Paper gets torn up and replaced by something entirely new - then that would be certainly true.
Q109 Chairman: But if it is not entirely new, then the whole thing is a waste of time at a point in time when we do not have much of that commodity?
Professor MacKerron: I share some of your difficulties in quite knowing a way through that.
Q110 Dr Turner: Your memorandum contains a rather nice under-statement that construction costs and timescales in new nuclear build are uncertain. Why do you think this is? There have been, and are still on-going, significant programmes in Japan, South Korea, China, okay not in Europe or the States. Why do you think this is?
Professor MacKerron: The uncertainty derives from a number of things. Let me just point to a few of them. First of all, every country continues to feel the need to have its own safety regulatory system for nuclear power, so that, although we may at some point decide to adopt an apparently ready-made, off-the-shelf design, it has to go through our own regulatory system. The last time that happened at Sizewell the design significantly changed as a consequence of specifically British licensing requirements with significant costs impacts, and the time that might take will be significant. Second, the experience in other countries of current nuclear programmes I do not believe to be very relevant to the UK. There are something like 24 reactors currently at least nominally under construction around the world of which about a third are Russian designs and about a third are Indian designs, which clearly have no chance whatever of competing in UK conditions. It is only the Finish reactor, the so-called EPR (European Pressurised Water Reactor) that I would regard as a serious candidate if the UK should choose to take the nuclear road. Further, the kinds of industrial and labour conditions which you get in countries like Korea, which has held out, some say rightly, as a successful example of a recent nuclear programme, are different very, very different to those we have here. There is an institutional industrial structure that really does not resemble our own, and, given this lack of experience and the fact that any of the designs we might choose are basically novel and are not being built anywhere in the world, and given the regulatory uncertainty and some of the political uncertainties, it is very difficult indeed to give a realistic forecast of either how much a reactor would cost to build or how long it would take to do so.
Q111 Dr Turner: To what extent do you think the fact that these programmes are helped, facilitated, by government subsidies and by the fact that they do not have a transparent or liberalised energy market?
Professor MacKerron: I think you are right, if I take the implication correctly, that there are very large amounts of government involvement, often monopoly utility structures, of a kind very different from our own. The apparent exception is Finland, which is subject to some of the same liberalisation directives as we are, but, as you may know, the Finish situation is quite exceptional in that the utility that has ordered the reactor is owned by those companies mainly, some local municipalities, that are going to buy the electricity at cost with contracts that we understand will run for 30 years into the future. The notion that one could sign a 30-year contract for electricity sales in the UK at the moment is clearly way off the agenda and quite contrary to the evolution of the market, which has been rather painfully constructed in its present competitive form, so it is not a very good analogy either.
Q112 Dr Turner: You suggest that the work of new nuclear build without considerable government subsidy, and we all know the arguments behind that... Can you put a figure on the scale of the subsidy that might be involved?
Professor MacKerron: I do not think subsidy is quite the right way of putting it. It is pretty clear, I think, that governments are very unlikely to put any of its own money into the actual construction costs of reactors. It may have to give a range of different kinds of guarantees that might cost it money in the future.
Q113 Dr Turner: It was put at a dinner I was at last night that either it needed subsidy or the market rigged?
Professor MacKerron: "Rigging" is, of course, an emergent term. It would need to be radically changed. I do not believe there would be very large up-front subsidies. I think there might be guarantees against certain kinds of political risk that would affect construction costs or times, there might be an attempt to extend the current renewables obligation to some other kind of non-fossil obligation that would require the signing of long-term contracts for Oftec - and that is a very important one - and there might need to be some capping of companies' liabilities for waste and decommissioning, and this might all kick in at different points at which government would actually have to pay out sums of cash, and they might be significant. My own view is that what would be more significant would be the very large knock-on effects, especially on the way in which we organise markets, and the fact, of course, that there will almost certainly be references under state aid provisions to the European Commission. I am mindful of the fact that recently the BFNL reference in relation to the nuclear decommissioning authority - where, in my view, the infractions of competition were small - has taken at least 18 months, which suggests to me that any such reference in the future would be substantially larger and would be another of the ways in which one could not anticipate how quickly it would be possible to get new nuclear capacity onto the British system.
Q114 Dr Turner: Nuclear industry has always argued that it should be exempt from climate change levy. What effect do you think that would have on the economics of nuclear power?
Professor MacKerron: It would help, but it would not be enough. It seems to me that the economics of nuclear power are not just about numbers and bringing relatively high numbers down to lower numbers, although that is, of course, important. It is to do with a pretty wide range of risk and uncertainty which exemption from a particular tax would not do a great deal to alleviate.
Q115 Dr Turner: Given the timescales that have been put on the completion and operation of a putative nuclear build in this country, do you think it is going to be relevant in terms of dealing with our carbon emissions in the next 15 or 20 years? Do you think that, for instance, the Emissions Trading Scheme or further increases in the price of oil are going to change this scenario at all?
Professor MacKerron: I think if you formulate the question in terms of carbon emissions in the next 15 to 20 years, the answer has to be that the effect will be minimal. Tom Burke last week told you he thought it would be unlikely that any new unit of electricity from nuclear could come on stream before about 2021. I do not think it is useful to put a special date on it, but I think that is roughly in the right order of things if you add up the planning time, the licensing time, the construction time, and so on and so forth. On the other hand, if you are interested in carbon emission reductions going forward to mid-century, you would still want to be interested in a wide range of potential technologies for the longer term. If you are interested, for example, in carbon capture and storage, you would have to be interested again over a timescale that was 15 to 20 years plus. I do not know that the fact it does not make a contribution in that timescale means that we should ignore it; we just have to be realistic that it is other things that will make the contribution up to 2020, and neither nuclear power nor, in my opinion, carbon capture and storage will make any significant impact until beyond that time.
Q116 Dr Turner: Part of the reason for that, do you think, is a lack of economic incentive to bring them forward because the cost of carbon is not high enough at the moment?
Professor MacKerron: I think the problem is not that the cost of carbon is not high enough - as you may know, it has recently been quite high in the market - but, again, it is not something against which people who are planning long-term investments can be sure. You need to know something like a floor (minimum) price for carbon over quite a long period. The fact that the market may produce a relatively high price for a number of short-term market reasons is not very helpful, so it is really a question of stability and the long-term, rather than a specific, price at any given moment.
Q117 Mr Hurd: I wanted to confirm that you accept the vendor argument that, if the British Government was to go down the nuclear route, it is only worth going down if you go for scale. I think your memorandum mentions 10 gigawatts, 20 per cent of demand.
Professor MacKerron: Yes.
Q118 Mr Hurd: Can I just be clear that you accept that argument?
Professor MacKerron: I do, and the history is important, it is not imprisoned by it but it is useful, because when we thought we would build initially ten and then four pressurised water reactors, which turned out to be one at Sizewell B, the industry legitimately argued that a significant part of the very high cost were 'first of a kind' costs which they had hoped to spread over many other units. The industries own figures, and, of course, you can expect the industry legitimately to be relatively optimistic - all developers in new technology will tend to be - had argued that just building one or two would almost certainly not be worthwhile because it would be very expensive. There has been a recent industry argument that if there were to be a programme of up to ten gigawatts or eight or ten reactors that might be shared, in some sense, with other interested countries perhaps elsewhere in Europe, but the commercial, political and regulatory difficulties in coordinating a ten reactor programme across many counties sounds to me like we are moving from 2021 to a few years beyond that, to be frank. We have never done anything like that before. It would be one way of trying to make the investment more digestible within any one economy, but I think you would dissipate some of the scale benefits that you would otherwise get from building eight or ten reactors.
Q119 Dr Turner: Finally, if there was a situation in which, in the absence of subsidies and guarantees in any shape or form, a combination of investors and power companies came forward with proposals to build a nuclear plant in the UK, would you welcome that or not?
Professor MacKerron: I think it is a legitimate thing for people to do. If they can persuade regulators, licensing authorities and communities that this is a good way forward, then you have to say that it is an important way of reducing carbon emissions. There are, of course, questions still, which I am intimately connected with wearing another hat chairing the Committee on Radioactive Waste Management, about what the acceptability would be of new nuclear construction until or unless some resolution is found to the waste issue, and that clearly is a major issue, but, subject to resolution of that, it seems to me that it would be a perfectly legitimate way forward and it would have in the long-term - I stress "the long-term" - potentially quite a significant effect on carbon emissions.
Q120 Joan Walley: In respect of what you are saying about the regulatory waste management aspect of it, how would you factor the short, medium and long-term costs of that into any equation as to how nuclear should be judged against other forms of energy?
Professor MacKerron: I think if you were seriously considering new reactor construction and you set up a careful funding system in which the promoters of the plant had to set aside into a properly segregated fund significant sums of money each year and allow them to accumulate over 30 or 40 years, possibly more, before you would need to expend much money on waste and decommissioning, it is, I think, unlikely that that would be a very serious obstacle in economic terms to the future of nuclear. The big obstacle, as I have stressed earlier, is not the absolute sums but the open-endedness and the uncertainty. What I think investors would want would be some cap, some limit, on their liability even if it did not seem to have a very large effect on the financing requirement - the size of the fund - in the short-term. I think it makes quite a big difference, but not because it is an indomitable issue. The fact that we have such large liabilities for nuclear power now is a consequence of past decisions to use technologies that were very waste intensive and not to fund in any serious way at all the expenditures that are now necessary to clean up that waste.
Q121 Chairman: Does that not imply that the question of waste would need to be settled before the green light was given to any new investment in nuclear?
Professor MacKerron: The Government plainly in its last White Paper said very little about nuclear, but one of the things it did say was that there would need to be something it called "a resolution" of the waste issue before it could proceed to propose new nuclear power.
Q122 Chairman: You cannot put a cap on the liabilities, can you?
Professor MacKerron: We are talking about a hypothetical situation in the future where new liabilities would be created from a new programme and possibly a cap could be put. There are plenty of precedents for that in the United States where the main waste is spent fuel which is not chemically reprocessed. Utilities pay a standard fee to the Federal Government, now amounting to about $26 billion, and that will in principle take care of quite a wide range of possibilities for eventual solutions there, but it is also important to say that most countries have found it relatively difficult to reach full resolution of the issue.
Q123 Colin Challen: The Finish governments reckon that they will not subsidise at all the fifth nuclear power station that is to be built there and that the investors will pay for the construction, the operation, the decommissioning and the final disposal of the waste in one go. Is that really practical or do you think there are flaws there which means that eventually the government will have to find some subsidy to cover some of those costs?
Professor MacKerron: It very much depends upon what those costs turn out to be. It is clear that at least up-front the consortium that is offering the reactor to Finland is willing to absorb some of the risks of up-front cost overruns, though I suspect there are force majeure clauses within the contract that do not allow the investors to escape completely from some of the risks. I think the nature of nuclear waste decommissioning is that all sovereign governments eventually have to be the funder and regulator, if necessary. It is possible, partly because Finland appears to have reached a resolution of its waste problem, that the entire expense might be absorbed by investors, and it might be more than they currently expect but I do not think you could confidently predict it would necessarily be much more. I stress that the Finish situation is different from ours, and what might be true for Finland may or may not be true for the UK.
Q124 Mr Chaytor: In your submission you are very keen in arguing the case for portfolio approaches to energy policy rather than being concerned about the fixed cost of the initial engineering. You argue that that is a case for including wind power in the mix, but is it not also a case for including nuclear in the mix?
Professor MacKerron: It is in principle an argument for including nuclear, provided you can overcome the specific risks that attach to nuclear power, especially in the run up to licensing, planning, construction and so on. Dr Scott may want to say more, but the introductory point is simply that where you have technologies like wind and nuclear which are uncorrelated with the risks that attach to fossil fuels, in principle they will improve the overall mix that you get, but you have to look at specifics; you have to look at wind as well. Wind may not be feasible in the quantity that Dr Awerbuch suggests because physically it is impossible to find sites, nuclear might not be possible because you might not get planning permission or it might not be publicly acceptable, but you are right, as a matter of principle, yes, it would favour nuclear in that context.
Q125 Dr Turner: A quick supplementary. One of the arguments of the nuclear industry is that it is required for balancing. Do you believe that?
Professor MacKerron: I am sorry?
Q126 Dr Turner: It is required for balancing the grid?
Professor MacKerron: Not required.
Q127 Dr Turner: And that an excess of renewables will be difficult to handle, to say the least, on the grid?
Professor MacKerron: Let me handle the first part of that and hand over to Dr Watson for the second. The kind of grid we currently have certainly needs reliable sources of power that will be normally available at any time of day and at any time of year, and nuclear qualifies, but many other sources of power do as well. There are systems - to give you one example, the Italian system, which is roughly comparable to our own, it did have one major black-out but not for this reason - which operate perfectly acceptably with no nuclear at all; but on the subject of wind and variability or intermittency, Jim, you might want to comment about that.
Dr Watson: I would agree that it is definitely not something that nuclear has to do. In fact most balancing in our current system, as you may know, is done by fossil fuel plants; it is not done by nuclear at all. For some people looking at the system as a whole and the network, nuclear is also a problem in the sense that it tends to run rather inflexibly. The idea in the past may have been that it ran flexibly, but it tends to occupy the base-load it operates all the time. It is happiest when it does that. Sometimes for system engineers that is a problem, may be not quite big as having a variable or intermittent source like wind, but it is also in itself a constraint, and so a lot of the responsibility, if you like, for doing the balancing tends to lie on things like fossil fuel stations, particularly coal, and gas to a lesser extent.
Q128 Mr Chaytor: Coming back to the portfolio approach, why do you think it is that the DTI is unsympathetic to this approach or even hostile to this approach? Is it only your research unit that is really arguing this as a basic principle?
Professor MacKerron: I am not sure, unless you can tell me a reference, that DTI or others are necessarily hostile to it.
Q129 Mr Chaytor: I think the reference is in the annex to your report where there is quite a disparaging comment on the DTI which, if you can give me a moment or two, I am sure I can quote back at you. There is a line in the annex which speaks of this.
Professor MacKerron: I think the difficulty is that it is much easier to understand how portfolio approaches work if you have a single investor - perhaps a monopoly - responsible for the system as a whole. It is not immediately obvious how, if you have many competitive firms investing in different technologies, any one of them would wish to have a sort of mini-portfolio that mimics the best portfolio for the system as a whole. In fact, much of what DTI and government does is give incentives that will lead us towards, in Dr Awerbuch's terms, a better portfolio. One of the ways in which you can understand the renewables obligation is precisely to expand the quantity of renewables - in practice often wind but not necessarily always wind - so that renewables become a larger element in the portfolio. The point that I think we are making, I do not think we are remotely alone in making it, though Dr Awerbuch does makes it particularly strongly and effectively, is that whether or not you think individual wind projects happen to cost more on their own that projects, for example, that use gas, the long-term effect is to give you a lower expected cost than if you went for the thing that always looks cheaper in the short-term. You can reformulate it in security of supply terms. You are paying, in a sense, a premium in the shorter term for something that is slightly more expensive now with the expectation in the longer term that your costs will be lower.
Dr Scott: May I make a supplementary point? Dr Awerbuch was referring in his evidence to a reliance within the DTI on stand alone costs as your way of looking at technologies and the costs of generating electricity, and the over-arching point of a portfolio approach is that that is not enough in itself to get an idea of what the overall costs of generating within the system are. Indeed, at a meeting we held last week there were several people from the DTI. We had a robust discussion with them about portfolio approaches and they seemed very interested.
Q130 Mr Chaytor: I am very interested in that, because the reference in the annexe is not the DTI being disparaging of your approach but you being disparaging of the DTI's method of calculation, where you say that these methods should not be given any weight in policy-making; so I can understand it was a robust exchange that you had with them the other week?
Dr Scott: The direct analogy that I would draw, which many people understand, is in investing. In the world of investing investors very rarely put all their eggs in one basket, and at the moment in the electricity system we have a very large reliance on gas-fired power stations. The general point is that by having a greater portfolio of generating types you reduce your risk profile. For example, at the moment we have high oil and gas prices and that is increasing the risk profile, in other words the ultimate costs within that generating portfolio. If you bring in renewables, they tend to have very fixed cost profiles; so once you have spent your outlay (your capital), you have put up your wind turbines, or whatever it happens to be, there is a fixed costs profile, very predictable, and it tends to be counter-cyclical, if you like, uncorrelated with the costs of gas, gas-fired power stations. In other words, these other investments provide you with stability and diversity benefits.
Q131 Mr Chaytor: On that argument, coming back to the question of nuclear in the portfolio, nuclear would help the portfolio approach on condition that there were no risks to nuclear. There is the issue of spreading the risk, is there not?
Dr Scott: That is correct, but you also have to bear in mind that we also have a very small proportion of renewables in the portfolio at the moment, about three per cent.
Q132 Mr Chaytor: Can I pursue that a little bit and deal with the question of the crowding out argument. It is often said that one of the arguments against seeing nuclear as the way forward for reducing carbon emissions is that it would completely crowd out investment in other technologies. Is it really an either/or situation or is there a way forward?
Professor MacKerron: I think it much depends upon one's view about the minimum size of a nuclear programme that will be necessary. If it is the case that you would need, let us say, 10,000 megawatts of nuclear to make it worth the game in the first place, then it is plain that, once a market has signalled that there is a fixed quantity of base-load investment of that size, it would certainly kill off interest in gas-fired investment for, I think, some time to come. There simply would not be room in the market, because those technologies compete against each other rather directly for the base-load relatively inflexible power at the start of their lifetimes. The implications for renewables are less clear. There is not a system competition between nuclear and renewables; they tend to fill different parts of the overall system. If the Government's appetite for the renewables obligation and it successor were as strong as ever, investors might well be persuaded that it was still worth investing in renewables, but I think you have to come to some political judgment about whether or not you think the Government's appetite for supporting renewables would be undiminished in the face of a large nuclear programme or not, and, frankly, we are not in a particularly good position to judge that one.
Q133 Mr Chaytor: One of the other aspects of that, which you refer to in your submission, is the impact on regulatory changes to the market. Could you give us some examples of how that might be the case. If nuclear was prioritised what kind of regulatory changes would be made that would disadvantage the growth of renewables or microgeneration?
Professor MacKerron: Let me give you some examples of regulatory change, and then perhaps Jim can come on to micro-generation in a moment. I think the most fundamental one would be that anybody who wanted to invest in nuclear power would need to show a quite long-term contract for a minimum price of the electricity that you would produce from the nuclear stations. Given that we can only have any confidence at all in electricity prices now, roughly three years ahead, and you would need to have a contract that ran for more for more than three years ahead, for another ten or 15 years, you would have to oblige people in the market to buy quite large amounts of electricity at minimum prices - in fact you would probably oblige consumers, I suspect, to pick up the tab rather than governments pick it up directly - but that would be a major interference in the way in which the market would operate. We already have a minor interference through the renewables obligation, and, as Dr Scott says, the total amounts of renewables are sufficiently small at the moment, but that is quite a small perturbation. This would be a very big one. Jim, any comment on microgeneration?
Chairman: We are coming on to microgeneration shortly. I am afraid we need to move on now.
Q134 Ms Barlow: You were talking about the market and successive governments have created a very competitive wholesale market for electricity. You are suggesting that government subsidies for nuclear, which include any form of guaranteed long-term contracts for the electricity produced, would undermine this market. Would that be so different, for example, from the subsidies that you have just mentioned which apply to renewables and, fortunately, to microgeneration?
Professor MacKerron: In kind, no. I think the scale would be different. The assumption, I think - if I interpret it rightly - behind government's policy towards renewables has always been that by kick-starting renewables with relatively large subsidies from consumers in the shorter term, by the time renewables became a significant part of the market they would have established themselves as a fully commercial source and the market would then more fully resume its normal operation. The difference, I think, would be in the case of nuclear, if there were a large programme, that a very large slice of the market would suddenly be interrupted and, without any expectation at all, because these contracts would be rather long-term, that you would go back to the previous status quo. Nothing of this is to say it is not possible. It could probably be done. It is whether or not you think that think these trade-offs - these impacts on wider technologies, markets and so on - are worth while.
Q135 Ms Barlow: Does not the need for such subsidies indicate a failure to create a properly functioning long-term futures market in electricity?
Professor MacKerron: I am not sure it is possible to create the kind of futures market that would run the period ahead you would need. I talk about ten to 15 year contracts - that is after the new nuclear power station starts operating. The industry itself says it will take about ten years from now, that is if we made a decision today, before the first unit of electricity gets generated; so the very most optimistic moment you need to start signing this contract is from the year 2015 to 2025 or 2030. Nobody really, I think, expects a futures market to tell you something interesting against which you would reliably invest over that kind of timescale.
Q136 Ms Barlow: You believe, because of the timescale involved, nuclear would do nothing to diminish our likely dependency on gas, for example, by 2020?
Professor MacKerron: I think it would do nothing at all by 2020. It might do significantly beyond that if there was an early commitment to a significant programme.
Q137 Mr Hurd: Can I move on to microgeneration? You argue powerfully that it has tremendous scope to be an important part of a supply that is going forward, but you raise some doubts about the ability of microgeneration to reduce carbon and there are some uncertainties about the impact on the distribution network. Given everything that needs to be done in terms of accelerating renewables and energy efficiency given finite political resource, is microgeneration not a leap of faith resulting in distraction?
Dr Watson: I do not think it is a distraction, I think it is part of it. You cannot distinguish between renewables and microgeneration given that some microgeneration technologies are renewable. Neither can you distinguish between the combined heat and power of microgeneration given that one of the main candidates is the combined heat and power technology; so I think this is a rather unuseful classification. What we do say in our evidence is that the problems and solutions that you would advocate are quite different for, say, renewables at the medium-scale and micro-generation because you are dealing with consumer markets rather than large renewable energy companies.
Q138 Mr Hurd: How well would you say the DTI and Ofgem have done it in terms of developing microgeneration - how would you score them out of ten - and what would they do to make you confident they are serious about it?
Dr Watson: Like Gordon, I hesitate to get into numbers, but I would be nearer the bottom than the top of the scale, definitely. The strategy documents that both have produced over the last few months are very welcome. Particularly in Ofgem's case, I would be quite frank and think they have not done very much to encourage this at all - in fact they have done quite a lot to make it as complicated as possible - and that is one of the main issues we take up in our evidence to the DTI and which we would append unto you. If the DTI strategy - because it is they who should be in the driving-seat here and giving some direction to Ofgem on this if this is to happen - is going to be meaningful, they are going to have to come up with some pretty serious policies, and I do not mean just coming up with, if you like, a target for symbolic value, like in the combined nuclear power case. I would rather see no target at all but some well worked out policies of the kind we have outlined, for example levelling the playing field between microgeneration and central generation. There are two ways we have suggested that they might do that: one is to give it the same tax treatment, which means that householders would be able to write-off their costs against their tax bill; they would pay no VAT, they would have access to other kinds of tax breaks, just like large power companies do; and the second one would be to give microgenerators access to the wholesale electricity market in terms of getting a price that is reflective for any power that they export to the grid so that if they export at peak times they get a premium price for that. At the moment the systems for that are not in place, but that could be done. You do not have to give them special treatment. I would argue the first thing you need to do is give them equal treatment with larger scale investments.
Q139 Chairman: That is refreshingly radical. If all that was done, do you think there is a realistic chance that microgeneration can deliver at the kind of scale of energy-savings which are going to be needed over the next ten to 15 years?
Dr Watson: I think, even if that was done tomorrow, you would still expect a relatively slow start. I think with microgeneration, as with nuclear, in its supporters there is a certain amount of optimism in terms of what it can to. I would expect it to start off slow. All sorts of products, which no doubt you have seen, have been advertised in the press and announced. With micro-wind, for example, it is quite hard to phone up a company tomorrow and say, "I want one of those installed." With some micro-combining heat and power you can say that. I would see a slow start, but some quick calculations I did on the way here mean that if, for example, half of the boilers that are replaced in the UK every year were replaced with micro CHP units, up to the year 2020 you could just about generate as much power as Drax - the largest power station on the system - but that is a pretty optimistic thing to do in such short order. Even if things were made right, I think it would take a few years for these things to accelerate for people to be confident in the technology.
Q140 Joan Walley: Can I press you in terms of how you make progress with that. Is not one of the obstacles the lack of training, in terms of plumbers and fitters and everybody else, to have the expertise and capacity to equip and fit the new technology?
Dr Watson: Yes, I think that is true. As with a lot of these aspects, you have to distinguish between different technologies. For example, the photovoltaic industry will argue that recent subsidies have built up quite a good body of stores and we need to store expertise, but when you talk about micro-combining heat and power the companies have understandably been very cautious about how they offer that technology and using in-house expertise to install them in the early stages, because, frankly, they got their fingers burned about condensing boilers where there was a lot of rather poor experience early on. I think that is an issue still.
Q141 Joan Walley: And that has to be costed into the global cost of things?
Dr Watson: Absolutely.
Q142 Mr Hurd: Even if you did achieve that wonderful push through in terms of micro CHP, what would that do in terms of carbon reductions? Your paper seems to suggest you do not know. Why spend all your political energy in pushing down that route if you do not know how much carbon you are going to reduce as a result of all that effort?
Dr Watson: In terms of carbon reductions there are a lot of uncertainties. The first one is that it depends what you are replacing; and there is quite at lot of work going on, not by our team but by other people, to see when it would generate and, therefore, to try to get some understanding of how it would replace different types of power and the carbon emission reduction that would give you. Obviously it is going to give you some, if it is replacing any fossil station, unless it is replacing central CHP, because micro-combined heat and power is generating heat as well, and that should not be forgotten. That is its main function. It is only generating electricity when the householder wants heat or hot water. So, if you are displacing any type of fossil generation, added to that the losses on transmissions lines and so on, then you really are getting quite a gain kilowatt hour for kilowatt hour on your CO2 savings, but obviously you do have to have a lot of these units in the field, several million I would say, before you start making some significant dent in UK CO2 emissions as a whole.
Q143 Colin Challen: Surely the quickest way to solve the problem is to have district CHP systems installed rather than looking at the individual householder at the first stage so that new housing developments - and this is a big issue at the moment - could use this solution straightaway: because the CHP technology already exists, does not it?
Dr Watson: Yes, it does, but it is something we have got a very poor tradition of in the UK, with a few notable exceptions. I think one of the interesting things why that micro CHP or micro wind has taken such a hold in the imagination of the UK is that we are so individualistic in the way that we deliver our own energy. We all have our own boiler; we have our own way of doing things; we do not particularly lend ourselves well to these kinds of communal solutions. Having said that, your point about new-build is that you could design that in from the start. I have certainly been in discussions, for example, about the Thames Gateway development, which is due to be very large, and the idea that you could build this stuff in and make the Thames Gateway not energy independent but certainly largely self-sufficient.
Q144 Colin Challen: Are you optimistic from those discussions that this will happen?
Dr Watson: I am not, unfortunately, no. We had some nice conferences, all the right people saying things, but when I asked people, "Is this really going to make a big difference to the big developers" - because that is who you are having to deal with - people always point to their rather poor record and building sustainability in, and so getting the housing and construction industry to take this seriously I think is a major challenge.
Q145 Chairman: We are conducting a separate inquiry into housing and all those issues, so maybe you would like to send us a memorandum for that one as well. We would be more than happy to receive it. I thought for one moment on skill shortages we were going to end up bemoaning how difficult it is to get hold of a decent plumber these days! We just managed to avoid it. I am extremely grateful to you for your time, for your thoughts and for your contribution this afternoon. Thank you very much indeed.
Memoranda submitted by The British Wind Energy Association
and Mr David Milborrow
Examination of Witnesses
Witnesses: Mr Chris Shears, Renewable Energy Systems and BWEA Chair, Mr Marcus Rand, Chief Executive, Dr Gordon Edge, Head of Offshore, British Wind Energy Association, and Mr David Milborrow, Independent Consultant, examined.
Chairman: A warm welcome to the British Wind Energy Association, and to Mr Milborrow. Thank you for coming today.
Q146 Joan Walley: I was glad that you were able to be here for the first part of our inquiry this afternoon. I am moving on to wind. In terms of the memo that you have given us, in paragraph 11, I think it is, you say that there is no technical or physical reason why renewable energy, and wind power in particular, could not deliver on the target of 10 per cent renewable energy by 2010. I would like to know exactly what the current target is in respect of ten per cent as far as wind is concerned and what expected contribution for wind you would see being made by 2010?
Mr Rand: Obviously a key question. In our submission we said, yes, technically we do believe that the 10 per cent target is achievable. Renewables, as you are probably aware, currently generate just over 3 per cent of the nation's needs. The BWEA have said all along, from the formulation of the target through to the formulation of the RO, that the wind industry will be delivering the bulk of that target. We see that to be around 7,000 to 8,000 megawatts installed capacity by 2010. We have always said we see that split more or less evenly between on-shore and off-shore. We see a minimum of 4,000 megawatts on-shore being developed by 2010 and up to 3,000 megawatts off-shore created. How are we doing? This year has been a record year for the wind industry. We have installed, or will have installed by the end of the year, 500 megawatts of capacity this year, which is a doubling over last year. As a result of the RO some 6,000 megawatts of on-shore projects have gone into planning and some 3,000 megawatts of off-shore projects have gone into planning. The RO has certainly stimulated a strong interest in terms of delivery of the project, and so there is enough wind capacity either in planning, approved, under construction or built to deliver on the target. The other statistics are at present we have got around 1.3 gigawatts of projects built and a further 700 megawatts of projects under construction which we are pretty confident will be built next year. In terms of how we see that expanding over the next couple of years, we see the on-shore market remaining pretty strong at around 500 megawatts per year, so we are pretty confident that we will deliver on the 4,000 megawatts of on-shore. The big question mark, we have said in our submission and in our work with the DTI and around government at the moment, is whether we can bring off-shore into play in a big enough quantity to deliver the 3,000 megawatts of off-shore that we need to by 2010, and that is another key part of our submission. Yes, it is technically possible, but we think the key factor will be bringing off-shore into play.
Q147 Joan Walley: There are two issues I am still not wholly clear about. We heard earlier about the length of time it takes to get up to speed on these things early on, and you have to pay the premium, and you produce very little and then you suddenly start to get dividends and you can make a more accelerated pace later on. By 200 will wind be delivering five per cent of what is required or will you be doing a lot more? I still do not quite see where you will be.
Mr Rand: About seven per cent of the nation's electricity supply if we deliver on those numbers, seven to eight gigawatts.
Q148 Joan Walley: That is perfectly feasible?
Mr Shears: Coming in on that, there is a sort of sea-change happening in installation rates that we can see now. Through the nineties and the first half of this decade we have done about 1,000 megawatts and we have already done 500 megawatts this year, so there is a bit of an exponential up-ramp in the installation of wind energy both on-shore and off-shore.
Q149 Mr Chaytor: May I clarify one point in your figures? You said, on the applications you have got in or the sites under construction, you would reach the target by 2010. Surely the problem is the applications that are in: because it is still the issue of the obstruction to on-shore planning permissions that is your biggest obstacle. What proportion of your projections is due to planning applications that are in but have not yet been approved?
Mr Shears: The statistics are interesting actually. We have got 1.3 gigawatts built now, we have got about another 1.2 gigawatts with planning consent and we have got about 600 megawatts under construction (0.6 of a gigawatt under construction). You look at that and you think: this is talking about on-shore. We need another 1 to 1.5 gigawatts to do what we have already said we have set out to achieve on-shore. There are now currently about another 6 gigawatts of wind in the planning system and we would anticipate that there will be perhaps another 1 to 2 gigawatts in the next 12 months coming into the system. The bulk of that is in Scotland at the moment, and I suspect there will be a spread further south and into Wales as well of new schemes coming forward. Our position is that we anticipate that there will be a reduction in the success rate, if you like, for schemes in planning, but the key thing is that we keep the churn of projects going and that the best schemes bubble to the surface and move on to contribute towards the targets.
Mr Rand: A further piece of information on that. If you look at it on average, it takes around two years post- planning to get a project up and running just because of construction time, so really we need to have achieved another 1,500 megawatts of consents by the end of 2007 for us to have confidence that what we have got approved now and what is being built now plus those future approvals can be built out by 2010. That means that the bottom line is that we need to be getting approvals around 700 megawatts a year. The good news is that last year we achieved that target of 700 megawatts a year, and I think this year we are at about 550 megawatts with the recent announcement that the Minister made last week.
Q150 David Howarth: Can I ask about the technical improvement in regeneration? At what rate are we seeing technical improvement? Is it the case that one way to increase numbers is by increasing the efficiency of equipment?
Mr Milborrow: To answer your last specific point, increases in efficiency will generate relatively modest improvements. What will generate more energy productivity will be increases in the size of wind turbines, and the taller they are the higher the wind speeds they see. Coupled with that, the larger wind turbines also go with cheaper installation costs, partly because the turbines achieve that, partly because you need fewer of them for a given number of megawatts. There are improvements but several different factors contribute to that improvement. To answer the other point in your question, that trend has been quite evident for the last 20 years and shows no signs of decelerating.
Q151 David Howarth: Within the period 2009 and 2010?
Mr Milborrow: Agreed, yes.
Mr Shears: To put it in context, the turbines which are being installed at the moment, as a rule of thumb, are around the two megawatt installed capacity mark, and there are some five megawatt prototypes being looked at at the moment now. The focus for those is perhaps for the off-shore market in the future, but it does show that there is still huge potential in the technology.
Q152 Chairman: The five megawatt ones are much bigger, are they?
Mr Shears: They are.
Q153 Chairman: Is there a correlation between the tallness of a wind turbine and the number of local objectors?
Mr Shears: Not necessarily in our experience.
Q154 Chairman: They object to them anyway, whatever their height?
Mr Shears: Potentially that element may be there, but I think generally it is perceived that to have fewer bigger machines is a more effective way of getting delivery than perhaps where we were 15 years ago where we were installing three or four hundred kilowatt machines and we are now installing 2,000 kilowatt machines.
Q155 Joan Walley: There would not be objections if the profits that were coming were invested back into the local communities, but be that as it may. We have had various different questions and I am still not absolutely clear. Are you saying for the figures in respect of 2010 that if you have 7,000 to 8,000 megawatts by then, that would be equivalent to delivering 7 per cent of electricity?
Mr Shears: Yes.
Mr Rand: The point is we have got three per cent already from other renewable sources; so technically you can meet a ten per cent target.
Q156 Joan Walley: Given your reference to things like the consents coming on stream, in terms of where you will be by 2020 how much do you think wind will realistically deliver by then?
Dr Edge: A lot of that depends on how much of the off-shore resource is employed by then. Most of the figures we have been talking about here have been on-shore, and post 2010 there will continue to be on-shore development, and you are looking at maybe something like 5 or 10 per cent electricity from on-shore at 2020, but in order to get the large increases in wind power capacity then you will be moving on shore, and so by 2020 you might have seven, eight per cent on-shore and 10, 12 per cent off-shore wind. Those are the kinds of ball-park figures that are entirely feasible at 2020.
Q157 Joan Walley: Effectively you are being quite upbeat about what wind can deliver. What I need to be clear about is whether or not you feel that renewables, including wind, could contribute substantially to the gap that has been left by the phasing out of older nuclear power plants and also coal plans?
Mr Shears: I think the context is that we are coming up the curve very quickly as a new technology, and the numbers that Gordon has outlined, we believe are wholly achievable from a technical and resource perspective. Going beyond 2020, we have been thinking closely about this and we will be thinking more about this in relation to the impending energy review next year, but we certainly think we can go on with another 1 per cent of wind beyond that on an annual basis, so the long-term ambitions of this technology can be pretty substantial in terms of our UK requirement. Let us not forget that off-shore we can provide three times our power requirements just from the off-shore wind resource, and so there is a huge potential there.
Dr Edge: Also, you have to remember this is just off-shore wind we are talking about. There is also the wave and tidal stream resources which will be contributing substantially post 2015.
Q158 Mr Hurd: Could you help me picture what an on-shore wind industry generating seven to eight per cent of British electricity might mean in terms of the number of sites? Very broadly.
Dr Edge: The seven to eight per cent is with the combination of on-shore and off-shore.
Q159 Mr Hurd: I meant 2020, seven to eight per cent on shore only?
Dr Edge: By that point we are saying somewhere around 8,000 to 10,000 megawatts of capacity, that sort of level. If we assume the two megawatt turbine like the ones we are putting in now, that is about 5,000 turbines across the whole of the UK. To put that in context, I think there are currently around 80,000 pylons in the UK.
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 per cent 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 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 per cent renewables 2015, we know we can deliver that. Let us not review that, but we will 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 per cent 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 per cent 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 per cent renewables by 2013, 40 per cent by 2014, 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 £14 an 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 best 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 per cent and last year it was 3.1 per cent 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 must pay for 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 per cent target. That sort of 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.
Q180 Mr Caton: But there have been those, including the Public Accounts Committee of this place, who think now that the way the Renewables Obligation works is actually that it is very good for onshore wind and, therefore, all the effort is going into onshore wind and actually it is a disincentive perhaps to some of those other alternatives, including offshore. How do you respond to that?
Mr Rand: Well, all I was going to say is that the Government has set up the RO which is a technology-blind mechanism, a market-based mechanism and it could have gone for something else. It could have gone for feed-in tariffs where it decided to pick the price and award it and to a certain extent banding is a kind of halfway house in between. Our view is that what you do not want to do is send a sort of concern, as Chris said, or shockwaves through the investor community that the Government might go in and suddenly transform the RO and completely change it, so we were as concerned about banding, not because we do not want to support offshore and not because we do not want to support wave and tidal or any other renewable, but because we are concerned about the undermining it might have on investor confidence and that is our concern. That is why we have always argued that the way to do it is to provide additional support on top, as it were, of the RO and that is what we are engaged with government in at the moment about trying to find a solution to the offshore economic gap. Round one offshore projects, through which we think there will be about 1,000 megawatts delivered by 2010, they are being supported through capital grants and nobody seems to have a problem with that, but that is additional support to the RO. We are supporting 1 per cent of our nation's electricity supply currently by additional measures, but nobody is jumping up and down about that, and I presume that is because everybody thinks that is the right thing to do. The logic of that argument is that we think there is some logic in applying that to some of the round two developments and, likewise, applying that logic to other renewable technologies. I note that the Biomass Task Force yesterday also came out with some recommendations of applying additional support to help biomass as well.
Q181 Mr Hurd: I would like to ask about wave and tidal which would appear to be a technology where Britain has some natural advantages. You have painted a picture of it effectively taking over from wind as we strive towards these longer-term targets, but it clearly needs to accelerate down the cost curve. Your memorandum talks about an intriguing project called Npower Juice Path to Power. Unfortunately we cannot wait until May 2006, so is there anything you can tell us today about what that project is aimed for and some of the policy implications you expect to come out of it?
Dr Edge: Unfortunately it has only just started in that we are interviewing particular players in the market. In the first stage we are looking at where you might go and how you might consent the projects. The bit about how much it will cost and the sort of monetary values involved will come in the last part of the project, so unfortunately I will not be able to talk about that today. This is a project which is very kindly funded by the Juice Fund that Npower run on the back of their Juice Tariff where they have put some money aside for these kind of projects and we are looking to find a way of building on the experience of offshore wind in working its way through the consenting system, where, with the Grid issues, if you are going to be building a lot of offshore wind power off the west coast of Scotland, you need to be talking about putting a Grid infrastructure there, for instance, and then also what the implications are in terms of bringing those extra costs down the cost curve to where offshore wind is today. I cannot really say much more than that because the project has not yet got much further on than that.
Q182 Mr Hurd: So do you have any sense of the kind of government funding that may be required to bring this technology down the cost curve?
Dr Edge: Certainly we would anticipate that the £50 million that the Government announced in August last year is just a down-payment.
Q183 Mr Hurd: What sort of multiple would you put on that in terms of what you think might be required?
Dr Edge: I think the order of magnitude will be ten times that over the next sort of ten to 15 years.
Mr Rand: The Carbon Trust are also doing quite a lot of work on this, about how much money needs to go in to move the technology from a relatively high cost down to compatibility with the RO, and I think they are going to be publishing their work quite shortly.
Q184 Colin Challen: I have heard what you say about the Renewables Obligation and I have also heard what one or two people in the anti-wind movement have said about the way that the onshore wind farms are generating wind millionaires and that is yet another reason to oppose the development of wind - a curious argument, I have to say. If there were any truth in the belief that onshore wind is generating good profits for those developers, are they recirculating money to less viable schemes, offshore for example? Is there any truth in the allegation to start off with, that the onshore people are making huge amounts of money?
Mr Shears: Clearly there are different returns on different projects and some are doing better than others under the RO. I will not repeat the structure of the RO, but the point is that, certainly speaking with my company hat on and a Renewable Energy Systems hat on, we have a portfolio of projects across the whole of the UK, some of which are in relatively low windspeed areas which, in our forecasts of what prices we can get in the market on a long-term power purchase contract, just get those projects over the line, and then we have upland sites in Scotland which have higher winds perhaps, but a lot more expensive Grid connections, higher transmission charges, et cetera. Therefore, it is not as simple as saying, "You've got a very windy site, so you are going to be making millions of pounds". Clearly we are investing and we have about 1,500 megawatts of projects which we are developing at the moment, and again this is with an RES hat on, and we hope to build somewhere around 50 megawatts of capacity a year, so we need to show a return to our shareholders and have a sustainable business model going forward. I think we do have to look at it in the round and look at it from a portfolio point of view. One of the key reasons for the RO being set up, from my recollection of when that process was happening, was to offer a way of getting a geographic spread of projects around the country which it has now successfully been able to do to get away from the previous mechanism, a non-fossil fuel obligation, which did drive developers to go to the very windiest locations which were perceived to be those which had the most difficulties in planning.
Q185 Colin Challen: Would you agree that the feed-in tariff systems in Spain and Germany perhaps have been more successful than the Renewables Obligation in generating new schemes?
Mr Shears: In simple terms, yes, if you look at the delivery which is taking place. If you look at Germany, I think there is now 17,000 megawatts of wind energy installed and Spain has got 89,000 megawatts, but I think if you look below the headline, those systems have been in place for a good number of years and the reason for that delivery is in part due to a far more friendly, shall we say, planning system for the delivery of those schemes, so I think there is a decoupling between the commercial framework, if you like, and the institutional barriers to the development of the technology.
Q186 Colin Challen: You have pointed to the urgent need to address the funding gap for round two of offshore. How large is that funding gap and have you had any signals at all recently from the Government regarding that issue?
Mr Rand: Before I ask Gordon to come in on the funding gap, I will just give you a bit of context. We believe that this offshore issue is as significant an issue as the debate about the future of nuclear and the reason for this is because if we want to get 20 per cent of our nation's electricity needs from nuclear, we can go away and change systems and do things and intervene, but there is that resource there from offshore, that amount of capacity that is there ready for this nation to utilise if we want to. So that is the background, that we see this decision in terms of the next five to ten years as one of the most important decisions the Government can make in terms of carbon-free power delivery. In terms of the gap, well, Gordon?
Dr Edge: At the moment if we are looking at onshore wind, in David Milborrow's evidence you have seen the costs. Offshore, we are looking at somewhere in the region of £1.3 million a megawatt in terms of investment cost, capital cost. That is somewhere in the region of £300-400 per kilowatt, too much. You need to be in the region of £1 million a megawatt for it to fly under the RO. At the moment that is where we are at. To put a little bit of context to this as well, I think you need to be clear that there is only 700 watts of offshore wind anywhere in the world as opposed to a total installed fleet of 52,000 megawatts of wind power. It is very early days and the costs have not been well defined up to now. What we are finding in the UK, as in our pioneering programme of offshore wind, is that we are actually discovering the difficulty is in the costs, so those initial costs have not come down as we had hoped from those first round one projects, but we are hopeful that they will come down over time as long as those initial round two projects are supported adequately. In terms of what signals we have had, it is clearly a very tight government Spending Round at the moment and we are not getting a lot of hopeful messages in terms of direct funding from the Government. There are other ways that the Government can underwrite or otherwise support new generating projects and we are hopeful that we can get a different plan in order to do that, but at the moment we are currently very engaged with the Government in trying to find different routes as opposed to necessarily a straight capital grant as part of that.
Q187 Colin Challen: Clearly there is a lot of hope involved here, but the hope that one had at the beginning of round one, obviously that was looking in the dark a little bit and not knowing some of the circumstances, so in round two the hopes may be more accurate based on the past experience, but it still seems to me very hopeful. Can you really pin down what you need with any accuracy? The Government might be thinking, "Hang on here, this is going to cost us a lot more, so let's just go with something else".
Dr Edge: When it comes to costs, historically in the wind industry you find that with a doubling of overall global capacity, you get a reduction in the costs of maybe about eight per cent in terms of output. We are only at 700 megawatts of offshore wind and we are talking about doubling that number in UK waters alone in the next five years, so we should get that learning experience in the UK, but the UK has to invest in order to get it because no one else is doing it at the moment. A lot of other countries have plans, and particularly Germany has very grandiose plans, but they will not be putting it in in significant quantities in the next five years and we will.
Q188 Colin Challen: Why are they not doing it? Are they waiting for us?
Dr Edge: Well, the cynical attitude is that they have done the heavy lifting onshore and they are waiting for us to do it offshore.
Mr Milborrow: That is not totally true. There is a tender out at the moment for a couple more offshore.
Dr Edge: But that is only two 200 megawatt projects you are talking about.
Mr Milborrow: And we are hopeful that some of the large German projects which have been floating around for some time will move to fruition in the next few years. There are a number of citations in my paper as to projections of future costs from very respected experts.
Q189 Chairman: I am afraid we have got to end this session now, but I am grateful to you for your time. We may, if it is okay, drop you a line with a couple of questions that we have not had time to ask you today. Thank you very much indeed.
Memoranda submitted by the Energy Saving Trust and the Micropower Council
Examination of Witnesses
Witnesses: Mr Philip Sellwood, Chief Executive, and Dr Nick Eyre, Strategy Director, Energy Saving Trust; and Mr Dave Sowden, Chief Executive, Micropower Council, examined.
Q190 Chairman: Thank you very much for coming. Can I begin by asking you, Mr Sellwood, whether you think we need another energy review?
Mr Sellwood: I think probably, on balance, we do actually. I would divide it into two parts, I think. I think we actually would say that the fundamentals which were set down in the Energy White Paper two years ago, certainly in the areas where we have expertise, remain the same as they were. We believe, as was written in the Paper, that energy efficiency still remains, and should still remain, the first choice of energy policy; it is the cheapest, it is the cleanest and it delivers on all of the current Government's energy policy initiatives. Therefore, as far as energy efficiency is concerned, we think those fundamentals are still very much valid. However, as we have just been hearing, things have changed elsewhere in the last couple of years with the whole question of reopening the nuclear debate possibly and public opinion for and against onshore wind. These are events which have taken place in the last two years, so to that extent I think it is appropriate that we take a look at the policy levers that were put in place two years ago.
Q191 Chairman: The problem I have with that is that actually the nuclear debate was around at the time of the PIU Report, it was around at the time of the Energy White Paper, it was considered and considered very carefully and thoroughly, and it was decided to frame the Energy White Paper in such a way as effectively to exclude nuclear from the solution, so that really has not changed and the fundamentals have remained the same. It is very hard for us to understand what dynamic is driving the sudden decision effectively to tear up something which I think you signed up to very much at the time and, I have to say, I think many other people did.
Mr Sellwood: First of all, I am not prepared to defend the Government's policy on whether it reopens nuclear or not. That is entirely a judgment that they would need to make. I do not necessarily agree that things have not changed. I think the point that I was trying to say is that in the area of energy efficiency and certainly domestic renewables, there are certain things that remain fundamentally true. Having said that, we are also in a position where the targets which were set are now looking exceptionally challenging in certain areas.
Q192 Chairman: Is that because they were too challenging at the outset or because not enough has been done meanwhile?
Mr Sellwood: I think that the targets, whether they are in energy efficiency or whether they are in renewables, are achievable. They are pretty tough, but they are achievable. However, having said that, there are certain areas, local authorities, public procurement, transport, where clearly it is just not happening, so to that extent I think it is appropriate that we take another look at some of those areas.
Q193 Chairman: You point out in your memorandum that energy efficiency has doubled since 1970. The White Paper, I think, reckoned it was going to double further. It has not happened, has it?
Mr Sellwood: Yes, it has happened.
Q194 Chairman: Has it?
Mr Sellwood: The issue is around energy efficiency versus energy saving. The biggest issue we have is that the consumption of new goods plus the increase in temperature in domestic households has grown at a rate largely consistent with the energy efficiency that has taken place since 1970, so I absolutely do not accept that energy efficiency has not worked. It is our judgment that had we not had in place plans for energy efficiency domestically, we would be looking probably at an annual rate of increase of CO2 of nine million tonnes, 6 per cent more than we currently have. Now, the question is how do we ramp that up beyond holding the line and that is really the issue that we are seeking to address at the moment.
Q195 Chairman: And one of the reasons why you seem relaxed about another energy review is that you feel that would be an opportunity to make your case?
Mr Sellwood: I feel very confident that whatever the nature of the review, the fundamental validity of energy efficiency, particularly now it is allied with going forward with micro-generation, is more valid and even more important. The scale, as you have just alluded to, of what can be achieved in energy efficiency is huge and I think one of the issues that we want to get across again to government is that energy efficiency and mass market renewables are not about small targets, but these are about substantial sums of saving in terms of CO2 and also saving for consumers, about ten billion, we think, since we started on these programmes and about 28 million tonnes of carbon. Just to put that in context, that is actually three times the reduction of emissions generated by nuclear and it is almost the entire reduction in carbon emissions for the whole of the coal industry, so this is not small stuff.
Q196 Chairman: It makes it even more worrying that CO2 emissions are rising though, does it not?
Mr Sellwood: Absolutely, and that is why in some of these areas, as I have alluded to, transport and in work with citizens and consumers beyond the home, we have got to do much, much more.
Q197 David Howarth: It is not just that though, is it, because if you look at electricity demand, that is rising by 1.5 per cent a year, so we are not talking about transport there? The forecast is that that is going to continue for the next, what, seven years to the extent that we can forecast it at all, so one of the policy aims here was to decouple economic growth from increased consumption of energy, and electricity in particular. Now, that has not happened, has it, that kind of decoupling has not occurred?
Dr Eyre: I think it depends precisely what you mean. I would say it has largely decoupled. You quoted electricity, but we tend to look more at the total energy mix and certainly electricity is on a sharper upward trend than other fuels certainly in the household sector. The figures that Philip quoted imply that energy efficiency has improved typically in the household sector by about two per cent per year over the years since the initial oil crisis. It has perhaps slowed down a bit in the last decade or so to something like 1.5 per cent. To put it in context, the underlying pressure, because of the increased number of homes, higher temperatures in homes and more appliances, is forcing up the demand for what we want from energy at about 2 per cent a year, so it is the difference between those two numbers, the 0.5 per cent a year that energy is going up. I think that shows you that actually we do not need to make huge changes to that 1.5 per cent to tip the curve gently negative and I also think that, as we look out to the longer term, one of the major drivers of increased household energy use will tend to slacken off and that is rising temperatures in homes. It will keep on going up, but at some point people do not want to live in hotter and hotter buildings, so that will tend to flatten off, although there will be other pressures around consumer electronics. I am not saying that growth will not generate more demands for energy, it will, but I think energy efficiency, with a serious effort, should be able to reduce consumption.
Q198 David Howarth: I suppose, as colleagues have mentioned, there is a danger that people then switch to wanting air conditioning and we get the kind of American-style increased consumption of electricity during the summer.
Mr Sellwood: I think unless you firmly believe that global warming will deliver the situation where we are using air conditioning domestically for five or six months of the year, which I suppose for some people is a tenable position, though it is not ours, we actually do not think at the moment, certainly not on the projections that we have done of industry, that air conditioning actually represents quite the challenge that people are talking about, an order of magnitude of about three per cent. Now, that can change, but that is where we are at the moment. I think, just to add to Nick's point, one of the things that we really want government to get engaged in, which currently we believe they are not sufficiently engaged in, is working with the EU particularly to ensure that the sorts of product standards that are being brought forward for some of these exceptionally energy-inefficient products, plasma TVs, second-generation DVDs, et cetera, et cetera, where we believe, looking at some of the figures we have seen, that if we do not take the necessary steps to work with the European governments and also beyond Europe, what we will actually see is a situation where all of those gains we have made on energy efficiency in the home could actually be replicated by the growth in these goods. The answer actually lies at the design stage; just do not let them make them.
Dr Eyre: Just to give one illustration of that, the average set-top box, I am told by colleagues now, consumes something like six watts which individually is not very much, but, when you consider how many of them there might be in our homes by 2010, adds up to an awful lot. Technically, we know that at very low cost that can be one watt, so that is a saving of over 80 per cent that can be achieved by just having a good product policy in place at the European level.
Q199 Chairman: Are you discussing this with the BBC, for example, who are in charge of rolling out digital technology?
Mr Sellwood: Well, we started by discussing this with the DTI actually because, with the switch from analogue to digital, they have the opportunity at a stroke to prevent this happening. Now, at the moment the thrust of that move from analogue to digital is very much literally about getting people to change. Their view currently, and not the current Minister, I have to say, but the previous Minister, was that any additional complication that we put into that particular parcel of goods would prevent the uptake and the switch from analogue to digital, so, to answer your question somewhat elliptically, the BBC unsurprisingly are not very engaging on this particular subject.
Q200 David Howarth: Are there any other issues of product design of that sort we should hear about?
Mr Sellwood: The answer in short is yes, there are, and we would be very happy to give you further evidence on that.
Q201 Chairman: Yes, would you send us a memorandum on that? It is extremely interesting.
Mr Sellwood: Certainly.
Q202 David Howarth: Just to come back to the overall situation, do you think the Government should be setting absolute targets for energy consumption? Would that be a help?
Mr Sellwood: Are you talking of sort of a personal level or ----
Q203 David Howarth: No, the global level.
Mr Sellwood: I think my answer to that is that they have set a target which they wish to achieve in terms of reducing CO2. What we have not got, and what we have been engaging internally very much about, is we do not have any milestones or waymarkers to see whether or not actually we really are on target. Every time you open a newspaper, you are either five per cent off the target, six per cent off the target or nine per cent off the target and you would not think you could run a business or an organisation in that way, so, to answer your question, I think it is much, much more important or as important to know where we are in order to know where we can get to. Just sort of setting the target without any means of measuring it I think is actually worse than having no target at all.
Q204 David Howarth: Yes, that is probably right, but assuming you could get a target, are there any further ways that we could then build the target into incentives for energy supply companies or product designers?
Mr Sellwood: I think one of the things I just wanted to take the chance today to say was that we do have some proxy measures, some of which have been exceptionally successful. The energy efficiency commitment, the first round and it is now into the second round, actually beat its target by 40 per cent, a little-known fact, and the reason it actually beat that target was two-fold, in my view. Government gave a consistent message that there would be another energy efficiency commitment and another energy efficiency commitment beyond that, so they were not just looking at a three-year target, but they could actually see that they could plan things for the next six to ten years, and it is entirely unsurprising to me that they have actually beaten the target hollow. The reality now is that we do not want just to say, "Well, let's carry the 40 per cent we have exceeded the first target into the second target", but we want to raise the bar in terms of what can be achieved. I do not want to sound complacent in any way to the Committee, but I think some of the things we are saying is that this is not rocket science and there are very simple things that can be multiplied many, many times to actually deliver very, very significant savings.
Q205 David Howarth: Can I take you on to a different topic which is government financial support for energy efficiency and for renewables. The UK appears to perform quite badly, say, compared to Germany or Japan, if you just take the example of photovoltaics, for example. Is that one of the problems we are facing, that there is not actually the funding in this sort of area?
Mr Sellwood: If I may, I would be very happy to talk generically about that and then bring David in to talk about some of the specifics. You can always say clearly that we need more money, we need more resources, but at what point do you say, "Enough is enough"? I think, generally speaking, we would say there is insufficient in certain areas and I am sure David will talk to that. Much, much more important, and very worrying for us, is the Government's inconsistency in the giving of these grants. There are two areas that the Trust is actively involved in at the moment, one of which you have already referred to, the photovoltaic programme which we manage, and also some of the major transport programmes that we manage. Both are about to move into a position of hiatus which could last from six to nine months and I am sure you have heard from industrial and business colleagues that that just leads to a leaching away of confidence in terms of this marketplace and there is no doubt that in other countries there is very good evidence of consistent support over time of delivery. I am rather less vexed than perhaps some about the absolute amount, but actually saying, "We will come back next April and see whether you have got a budget" is not a way again to run an organisation or a business.
Mr Sowden: I do not have a great deal to add to that actually, apart from the fact that the need for long-term certainty is absolutely paramount. We heard this in the British Wind Energy Association's evidence a few moments ago, that long-term signals and the need to give clear targets and clear visions into the future are absolutely what catalyse investment. Certainly in our submission and in our discussions with government, we major on this. We think it is very, very important that those long-term targets are set. In the short term, the microgeneration companies that are currently commercial that are out there installing today face this immediate hiatus that Philip has talked about where, across the next six to nine months, they have teams of people that they do not know what to do with simply because they do not know whether there is going to be a continuation of a funding programme for a rollover period from next April and indeed what the size of such a rollover programme might be because the Government has taken so long to announce its intentions on the replacement for Clear Skies and the major demonstration programme. However, although the grant schemes are important, I think we all do need to recognise, and we have to recognise, that in the long term if we are interested in a true mass-market commercialisation of microgeneration technologies, then grants are not the answer in 15 years' time and in 25 years' time. We need to bring about permanent reductions in the price at which these technologies can be put on offer to the general public and the key to that is getting them into mass production, getting them into mass, automated production and, to achieve that, you need investment. We have heard a lot today from other evidence submissions about the uncertainty that currently exists over the future of energy policy, not least this rather binary question of, "Are we going to have another ten gigawatts of nuclear or are we not?", and, against that backcloth of uncertainty, certainly our corporate members face a very big challenge in persuading investors to part with the £10 or £20 million they need to scale up their production levels. Therefore, some certainty, some clarity and some targets for the microgeneration sector that actually quantify where government sees it fitting into energy policy are very important for this nascent industry at this stage.
Dr Eyre: If I can just add a general point, I think the comparison with other countries can be misleading where different support systems are in place and that the support systems which earlier witnesses have identified as being important, the Renewables Obligation and the energy efficiency commitment that Philip mentioned as being very successful with other countries looking to model their support systems on it, do not require government resources. I think it is important that government should perhaps in this context focus its resources where government has a unique role in things like public procurement, in ensuring that local authorities can play the proper role that they need to play and engaging with citizens, which it is not reasonable to expect the private sector to do.
Q206 Mr Hurd: Can you make a brief comment on whether you have looked at the Braintree example as a mechanism for breaking through consumer apathy through their council tax bill?
Mr Sellwood: Again we would be delighted to submit to the Committee a report that we published called Changing Climate, Changing Behaviours which some of you may be familiar with. It actually is the first time, I believe, that a piece of policy work has been rooted not only in the policy itself, but it has also actually been based on a very significant piece of market research which takes in Braintree and the other two schemes which are currently being run by British Gas and local councils. We actually spoke only today with the Treasury because we are very excited, I think is probably the way we would describe it, about the results of these two particular trials. Now, it is early days, but if I could just give you some context for those of you who are not familiar with it, the Braintree scheme essentially gives a council tax rebate for householders who take energy efficiency measures and, in this particular instance, cavity wall insulation. As everybody will be aware, not many people lie awake at night thinking about cavity wall insulation, it is for many people a deeply dull and uninteresting subject, but getting citizens engaged is absolutely critical because the savings in carbon are very substantial, so typically with these sorts of policy levers, if you are able to get 10 to 15 per cent of people actually moving from saying, "Yes, I understand the proposition" to doing something, you are actually doing pretty well. These two schemes have been running now for the best part of six months and actually just before I came here I got the latest figures from British Gas and Braintree. Bearing in mind we are talking hundreds of households, not 12, but many hundreds, the conversion rate is 60 per cent. I cannot think of another single policy lever that has actually delivered that sort of conversion and changing of people's behaviour, so we are pressing very hard with the Treasury and everybody else to say to the Chairman's opening question, "Let's not spend all our time worrying about the next generation of supply when perhaps some very, very significant cost-effective measures are already in front of us". Again just to give you the scale, to do that nationally would cost £100 million, money in the margin.
Q207 Ms Barlow: I will address my question to the Micropower Council, if I may. You say on page one of your memo that installing micro CHP boilers in half of UK households would generate 13 gigawatts of generating capacity. That is more than the present capacity of nuclear power stations and this is a very surprising statistic. Can you say how you came by it?
Mr Sowden: Well, the mathematics are fairly simple. A typical micro-combined heat and power boiler, which is a boiler which also generates power using some of the heat that is wasted by conventional boilers, would provide one kilowatt of capacity or it generates one kilowatt of electricity. If you simply take half of the housing stock, and there are 26 million houses, and multiply that 13 million by the one kilowatt, you get 13 gigawatts of capacity, all of which or the vast majority of which is likely to be generating at winter peak because winter peak electricity demand is the time of year when we have the coldest day of the year and people have their central heating systems on and, therefore, their micro CHP boilers running. Therefore, at the very point where we start to see a pinchpoint in terms of the ability for the country to meet its energy demand, something on that scale makes a very substantial contribution. I think one thing that it is important to draw out from this is that those numbers are merely put in there for illustrative purposes just to show the scale. We are not suggesting here that any single microgeneration technology is a substitute for nuclear power or, for that matter, a substitute for any other type of power because different microgeneration technologies have different generating profiles. Micro CHP, the example we have used here, certainly would generate at winter peak, but it would not generate in the summer, whereas nuclear, for example, may well generate in the summer and, on the other hand, photovoltaics would generate in the summer if they were up at a substantial scale as well. Therefore, it is not intended in the evidence to be an argument about direct substitution, but it is intended really just to put it on the map, to say, "Look, this is the scale of some of the numbers involved". There is another statistic which is in there as well which is if you take the current rate of gas boiler replacement which is driven by breakdowns, and this is a fairly reliable statistic year on year, between 1.3 and 1.5 million natural gas-fired boilers break down every year, those are currently replaced by condensing boilers. If, by 2020, just one-quarter of those that are going to be replaced anyway between now and then were not condensing boilers, but were micro CHP, then that would be a quarter of all households generating their own power at one kilowatt by then, yielding around five million tonnes of carbon savings which, incidentally, is broadly equivalent to what the Government was looking for from the entire domestic energy efficiency sector between 2010 and 2020. Now, I do not think for a new technology that a one-quarter market share across a 15-year period is an unrealistic expectation. I think that is entirely realistic if we put the right policy measures in place now to make it happen.
Q208 Ms Barlow: Until the completion of the field trials which the Carbon Trust is running, there is little current data which exists on the actual energy savings. You mentioned some, but there is very little statistical evidence. Is this one of the reasons you think why the Government has held back so far?
Mr Sowden: I think, to be fair to the Government, they have not entirely held back. Let's give credit where it is due. There have been some useful measures that have been introduced. There is the reduced rate of VAT that applies across the board on almost all microgeneration technologies, there are measures within the energy efficiency commitment to give certain technologies a boost and indeed the Government is committed to producing a microgeneration strategy next year. However, in terms of the data that is available, there are the Carbon Trust field trials which have moved forward more slowly than anybody would have liked, us within the industry included, and part of that has been due to the industry not being able to bring forward the technology as quickly as we would have liked, and I think that is to a certain extent inevitable with new technology anyway. Manufacturers have done wider trials, all of which point quite consistently to the sort of information and the performance data that has been coming out and obviously we very much hope that the Carbon Trust field trials, when the results emerge, which probably will not be available in final form for another 12 to 18 months, are going to act as a decent back-check to what the industry has been measuring now for quite some number of years.
Q209 Ms Barlow: Mr Sellwood, you mentioned a study that you have been doing for the DTI. Has that been finalised yet?
Mr Sellwood: No. We were actually asked to do a scoping study which in fact we are presenting to the Minister next week which broadly attempts to do three things really: one, it is to sort of scope the size of the prize in terms of the entirety of microgeneration; two, it is an attempt to give an indication of how quickly some of these technologies would come along and reach market penetration, as David was referring to; and, three, and more problematically clearly at this stage, it is to show what sort of emissions reductions we can expect from these technologies over those time lines. Obviously I cannot say at the moment because it is not in the public domain, but I think what we can say with some certainty is that this is at the moment, as David referred to, a small and nascent industry - I am talking microgeneration in its totality - but we are very clear from the initial work that the potential for some of these technologies in the very short term is actually very significant and even those that currently are looking commercially difficult, with the right sort of policy levers brought forward by government, could indeed again in the 2020 time-frame be offering some significant savings, all of which, as I say, will be hopefully available next week after we have discussed it with the Minister.
Mr Sowden: If I might make a follow-up point, it is not just about the savings that you get directly from the installation of microgeneration, and I think it is important that we recognise that as well. We have heard earlier on about the minority sport of cavity wall insulation and it is not a barbecue talking point by any stretch of the imagination, not unless you know some of the friends that I know anyway, but I think you would face a rather different family barbecue or dinner party if you had a display unit in the house which the family is seeing every day which is indicating that the household is currently producing half of its own power requirements or if there is a visual reminder because they have PV or a small wind turbine on the roof of the house. All of a sudden, that whole household becomes much more energy aware and they may even get round to clearing the loft out and putting in some insulation or they might even get round to doing the thing that we all know makes perfect economic sense which is putting in the appropriate level of cavity wall insulation and they start selling the concept to family and friends. I think that catalytic effect that microgeneration could have is very, very difficult to measure, very, very difficult to quantify, but if it helps to bring about this cultural change that we know is so important, then actually a vibrant microgeneration industry is not just about its own direct carbon savings, but it is about a multiplier effect in other areas as well.
Q210 Mr Chaytor: You are arguing the case for microgeneration partly as a fashion accessory and partly as a behavioural change agent, are you not? Is not one of the problems that the figures you quoted earlier to Celia are difficult to substantiate because the projections of the carbon emissions that you gave up to 2020, that is not a precise science? This is the difficulty at the moment, is it not, in working out exactly what a given microgeneration installation will save, that it is hard to work out, so is there a way around that and what has to happen before we can be more confident in the CO2 emissions reduction figures that you promote?
Mr Sowden: I think actually you are absolutely right, that it is not an exact science and there are two reasons for that. The first is that you are facing an ever-changing benchmark with your assumption in 2010, in 2015 and in 2020 of just what plant you are displacing and it is not just electricity we are talking about here, but it is heat as well, and what the alternative heat sources are that are coming in. Therefore, how do you evaluate that against what we all know is a fairly uncertain background in energy policy across that time period? The second area that I think is of concern is that, if we take micro CHP as an example, the way in which we evaluate the carbon performance of boilers is through a system known as the 'seasonal efficiency of domestic boilers in the UK', or SEDBUK as it is affectionately called in the industry, and that tends to take a seasonal performance characteristic of an individual boiler, the minimum requirement of which is 86 per cent, so the legal minimum efficiency of a boiler that you can install now is 86 per cent. When people compare the carbon performance of a micro combined heat and power unit to the performance of a gas boiler, they tend to assume that if you put 100 units of gas into the boiler, you get 86 units of useful heat out of it and use that as the benchmark. That is not actually what happens in the field because in practice they are not always optimised in the way they are installed in order to ensure that you get the maximum energy savings out, so we have a challenge there in that there are often simplistic assumptions made about the absolute performance of boilers in context, and often glib assumptions which are incorrect, and we have that changing background across time which makes it difficult for us to assess what emission factors we ought to be taking into account when we calculate those carbon savings, so yes, I agree, and it is an area where I think a lot more research effort needs to be put in.
Q211 Mr Chaytor: In your submission, you have listed a whole series of policy changes you would like to see to give the stability that investors need, but if micro CHP is such an obvious winner, why is the City not coming up with the investment by itself? Why do you need such a level of public support and government support to pave the way?
Mr Sowden: I think in many senses part of this is about government support, but mostly it is actually about confidence and it is about confidence in the future path of energy policy, and we have heard several times today about uncertainty in the market. What companies are facing when they present their investment appraisal case to their board or to their investors, and in some cases these are new companies, are some very difficult forecasting challenges of how big the market is going to be for microgeneration. I think that is understandable because there is not anything like it out there at the moment that you can easily benchmark against. Parts of the industry have not got very deep pockets for substantial quantities of market research and that causes investors to be relatively shy, so you have that combination of new technology which is inherently risky, an uncertain market and a fairly uncertain path for future energy policy, and all of those together actually make it very difficult to raise capital at a reasonable cost. What tends to happen is that the venture capitalists are the ones who are interested and of course the returns that are demanded by venture capitalists are significantly higher than if you use alternative forms of finance. We actually spend a lot of time advising potential new entrants into the market on making the right connections with the City and introducing them to the analysts and the investors who understand some of these issues, all of whom come back to us and say, "Well, if we had a government vision that said that by 2025 half of all houses will have some form of microgeneration installed, that is extremely bankable compared to what we have got now".
Q212 Mr Chaytor: So in terms of the shopping list that you put in your submission, which is the most important?
Mr Sowden: Targets.
Q213 Mr Chaytor: Targets?
Mr Sowden: Targets with a commitment to underpin them with policies to deliver those targets, but I think you will find that once targets are set, investment capital will flow, prices will start to come down and actually the market does it for you, so the need for hard-driven policy measures and particularly subsidies is much lower.
Mr Sellwood: One thing that we have not mentioned is that there is a tendency to think that the Government can only help by putting its hand in its pocket. One of the policy levers that we think is much ignored currently, not only in terms of microgeneration, but this whole concept of renewables and energy efficiency, is the whole area of public procurement. Government owns 50,000 buildings in the UK and I would hesitate to suggest that very, very few have any decent level of thermal energy efficiency, not least microgeneration built in. You have a £9 billion school programme with no requirement under PFI to put in any of these measures. We are building 240,000 houses this year with no requirement from government, no targets set. These are the sorts of things which are no cost. The houses will be built and buildings stand and across the road, as we well know, is probably one of the least thermally energy-efficient buildings in London. In all seriousness, this is not a cost to government, but this is actually a plus to UK plc.
Q214 Mr Chaytor: Could I put one other question which returns to the earlier point about your projections of energy efficiency savings. Obviously you have got reliable assessments of carbon savings at the moment, but is it not a case of diminishing returns? You quote a figure of the potential for 16 million tonnes of carbon savings a year simply through energy efficiency measures, but it cannot go on for ever, can it? That 16 million tonnes must gradually reduce as we exhaust the possibilities.
Dr Eyre: If technology were static, I think that would be true, but, as I thought you might ask that question, I have brought this with me. It is my front bike light. It is light-emitting diode technology, not used at all in the household sector as it is a bit too expensive at the moment, but the technology is changing and this sort of technology could be providing lighting in the next decade or the one after that, and that is probably half a million tonnes worth of carbon. There will be new things coming on stream which means it does not all stop once the cavities are insulated. We need new technology for insulating solid walls, we have got heat-improved lighting technologies, we have got the microgeneration technologies, the CHP technologies, so the absolute thermodynamic limits we are way, way, way away from.
Mr Sellwood: I would just add one thing, and you probably know this better than anybody, but we also have to reflect on the absolutely woeful state of the public and private housing in the UK relative to our neighbours, in most cases between 20 and 25 per cent less energy efficient, so we are starting from a very, very low base, so there is still plenty to do.
Chairman: Both housing and procurement are subjects of other inquiries we are currently undertaking, so we will note your comments with reference to those inquiries as well.
Q215 Mr Hurd: Can I bring you back briefly to microgeneration. Mr Sellwood gave some positive news about the energy efficiency commitment of the EU and I think, Mr Sowden, you mentioned in your evidence that there were some incentives for energy supply companies to promote microgeneration. Can you expand a little bit on that and do you feel that Ofgem could take more decisive action in this area?
Mr Sowden: Just to deal with what incentives currently exist, there are some fiscal incentives, and I have mentioned VAT already. Under the energy efficiency commitment, when the order was laid for the period 2008 to 2011, anything that is defined as micro-cogeneration, which means micro CHP, but within a defined meaning in the Cogeneration Directive, qualifies for a 50 per cent, what we call, uplift, so it means that an energy supplier, if it got ten energy credits on the basis of the micro CHP's performance alone, would be allowed to claim 15 for encouraging the installation of that micro CHP and that is intended to be in there as a temporary measure to provide something of a kick-start to encourage manufacture. The other thing that exists is in the micro-renewable sector where the Government made a change to the Renewables Obligation last year which allowed generators that produce up to one megawatt per year, and the previous threshold was much higher and was one megawatt hour per month in fact, to claim access to ROCs, renewable obligation certificates. Now, there are quite a number of subsequent changes which are needed in order for energy suppliers actually to get any value from that because currently the administrative procedures that surround the RO mean that the majority of the value of an individual ROC is absorbed through the transaction costs associated with processing it for an individual domestic customer, ergo, it is not a great deal of benefit at the moment, but the Government is actively looking at that in the current review of the Renewables Obligation. In terms of Ofgem's views, Ofgem has expressed some fairly strong views on metering in particular, not all of which we are comfortable with. I think we are comfortable with the basic position that they ended up with which was that if you install a microgenerator and you wish to be paid for your exports, then that exported power needs to be metered. However, in actually implementing a scheme of that nature, in the context of the current competitive energy supply market, it is very, very difficult to get the meter changed unless it happens to be your own existing energy supplier that is the one that is selling you the microgeneration unit because that supplier currently has responsibility for the meter. If you envisage a scenario where somebody wants a micro wind turbine installed, for example, they want it installed next Tuesday and they are going to switch supplier because the energy supplier has a good deal on it and can offer them an energy services package perhaps, that energy supplier cannot do anything about changing the meter until the process for switching the customer to the new supplier is completed, which can take up to 42 days. A more serious example is in the distressed purchase scenario of micro CHP where the boiler has broken down and it is a choice of the plumber up the street who has one in the back of his van which he can replace or it is the micro CHP where you might have to wait a month before it can be switched on ----
Q216 Chairman: With no hot water.
Mr Sowden: ---- with no hot water or heating in the meantime, so some of those procedures really do need tackling quite urgently. I think the one that is probably more important is the settlement system as it operates today where if a customer produces more electricity than they can consume instantaneously on site, in other words, they export power back on to the network, currently energy suppliers cannot cost-effectively trade that power and if they cannot cost-effectively trade that power, they are not willing to share a proportion of the value with the customer, so there is no mechanism there which allows energy suppliers to catch a value and, therefore, there is no value available to share with the customer. That is almost entirely down to the way in which the settlement system operates and it has been notoriously difficult to get energy suppliers engaged in getting the rules changed that are needed to bring about the changes to the settlement system which are needed to correct that. Therefore, the policy measure that we are advocating as a temporary measure for a period of time is that energy suppliers should have a reciprocal duty on them to offer terms to customers who wish to export power. In other words, they should be obliged to offer to purchase power, not at a prescribed rate, I have to say, but they are already obliged to offer terms to the customer who wishes to buy power from them, so we are looking for that to be flipped over so that any customer wishing to sell power, suppliers are obliged to offer them a price and then we will go through the PR, the naming and shaming exercises as a means of identifying who has got the good deal and who has not. We think that will catalyse all of those changes that are necessary.
Chairman: Very good. We look forward to that exercise. Thank you for your evidence this afternoon; it has been most helpful.