UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 584-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENTAL AUDIT COMMITTEE

 

 

KEEPING THE LIGHTS ON:

NUCLEAR, RENEWABLES AND CLIMATE CHANGE

 

 

Wednesday 2 November 2005

MR VINCENT DE RIVAZ and MR DENIS LINFORD

DR KEITH MACLEAN

DR ANTHONY WHITE MBE

Evidence heard in Public Questions 217-325

 

 

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 2 November 2005

Members present

Mr Peter Ainsworth, in the Chair

Ms Celia Barlow

Mr Martin Caton

Colin Challen

Mr David Chaytor

David Howarth

Mr Nick Hurd

Mark Pritchard

Dr Desmond Turner

Mrs Theresa Villiers

Joan Walley

________________

Memorandum submitted by EDF Energy

 

Examination of Witnesses

 

Witnesses: Mr Vincent de Rivaz, Chief Executive and Mr Denis Linford, Director of Regulation, EDF Energy, examined.

Q217 Chairman: Thank you very much for coming. Thank you for your memorandum and also for trailing your visit to us this afternoon in The Independent newspaper this morning, which we greatly appreciate. We look forward to hearing what you have to say. May I begin by referring to your memorandum? You have set out the extent of generation capacity which you think will be required, the so-called gap. I may have some further questions on that which I shall put to you in writing if I may about the details. It does not seem to us that you have answered the question we posed in our inquiry, namely whether you think the lights will stay on. Will they?

Mr de Rivaz: First of all I should like to say that I am extremely pleased and it is a great honour for us to have been invited to this oral evidence in front of your Committee. We all know what EDF Energy stands for in this country: one of the largest energy companies in this market and 20 million inhabitants rely on us to keep their lights on. I take this responsibility very seriously indeed. Seven point six per cent of the electricity generated in this country comes from our own power plants; we have five million customers' accounts in our supply business and for those customers we have a special policy. We care a lot about them and we have new products which we will probably be able to talk about later. My key message, including my response to this expectation that the lights will stay on, is that diversity is the right approach. I strongly believe that the UK has a chance at the moment to have a good level of diversity in its generation sources and diversity is key for meeting the needs of the future. We are all facing three big challenges and a fourth one probably: security of supply, global warming, the prices, which have been going up and we have to look to the future. I do believe that we need a multi-party consensus to tackle these three big challenges. Nothing can be achieved in the long term without consensus and my contribution to that as the chief executive of this company is to welcome the debate, to contribute to it. I am a strong believer in the market; the market can deliver provided there is a clear and stable framework in which this market can operate efficiently. We are in danger, in the long term, of the market not delivering because we do not have the visibility on some key questions that we investors require.

Q218 Chairman: Do you think that is a gap which the Government should fill?

Mr de Rivaz: It is a responsibility for any government in any country to provide a stable policy and a stable framework. It is a responsibility for the industry and many others to contribute to the debate, to make constructive proposals, to engage with the Government and then it will be our responsibility, within the framework, to be an efficient player in the market.

Q219 Chairman: Is it because of this lack of clarity at the moment that hardly any investment is going into new large-scale generating capacity at all, or are there other reasons for that?

Mr de Rivaz: It is one of the major elements. We have, for instance, the question of the emissions trading scheme. We have phase one and we have phase two, where no decision has yet been taken, and beyond 2012 we have no visibility. The emissions trading scheme is very important because it is a market mechanism which can provide a lot, provided it is based on realistic targets and realistic assumptions and provided, for instance, that all the objectives that we have in the country regarding security of supply and also environmental constraints are put together. A very practical example for us as investors are some plants which in the framework of the Large Combustion Plant Directive will opt out, some others will opt in and those who are ready to invest in FDG devices, which avoid the emission of sulphurs into the air, are going to opt in. The emissions trading scheme at the moment is penalising these generators. There is a strange situation in which those who are not going to contribute to the security of supply are going to be advantaged as opposed to those who are going to contribute both to security and continuity of supply.

Q220 Chairman: That is an EU-wide problem, not just a UK one, is it not?

Mr de Rivaz: No, it is a decision for the UK. The global energy emissions trading scheme is European but this specific point is something which can be decided at the UK level.

Q221 Chairman: All other things being equal, do you have any planning applications for new generating capacity ready to go?

Mr de Rivaz: In our group we have 4,700 megawatts plus some stakes in other power plants and 4,000 of them are from coal-fired power plants. The decision the Government have taken is to invest 240 million in FDG for these 4,000 megawatts, which is a big investment and that is why I am pleading for a fair emissions trading scheme in phase two. We have one gas power plant and we are contemplating - but no decision has been taken yet - preparing for the future by having a new gas power plant but we have made no formal decision; we have made some applications so we have some options. Regarding what will replace our coal-fired plants in 2012, we have exactly the same problem as the rest of the industry: we do not know at the moment what the policy will be which will help us to make the right choice. The last part is renewables, where we have at the moment 250 megawatts of project either in operation, or under development and I plan to have in the order of 900 megawatts from wind farms by 2010, if the planning process allows me to achieve this target. This is an opportunity to tell you that when I am advocating diversity, I put my money where my mouth is. We are investing in renewables, we are investing in clean coal and we are contemplating new investment in the future, as long as a stable framework has been provided.

Q222 Chairman: But you need the framework to be changed, do you not?

Mr de Rivaz: There is the Energy White Paper, which in my view is very relevant and the various objectives of this Energy White Paper are still valid: we must begin the task of cutting the CO2 emissions by 60 per cent by 2050, with significant progress in the meantime; we must maintain the reality of energy supplies, promoting competitive markets not only in the UK but in the rest of Europe - because all our issues are European they are not ours alone; we must pay special attention to the most vulnerable of our customers. There is no change there, but what we must do is see whether we are on the right path to achieve these targets. In this respect we have said that security of supply, global warming and a policy which meets customers' concerns regarding prices, require a good debate. I am pleased that this debate is now well under way, because we need the largest political consensus in order to find the right answer to those questions.

Chairman: Whether the debate will lead to consensus remains to be seen.

Q223 Colin Challen: Would you accept that previous generations of nuclear power plants have been hugely uneconomic and really would not have survived without Government support financially?

Mr de Rivaz: I am more interested in the future, because we can always look at the past but the future diversity requires renewables, gas, coal, energy savings and nuclear. None of these solutions is a silver bullet which will help us achieve our targets, but the addition of these diverse solutions can provide the right answer to our challenges.

Q224 Colin Challen: Would you accept that the premise of my question is indeed correct and then we can put the past behind us?

Mr de Rivaz: I do think we have experienced some difficulties in the UK with the nuclear industry. However, at the moment the nuclear industry is providing ten gigawatts, something like 20 per cent of the output, so it is a real contribution. In the context of rising prices it appears that British energy is in much better shape than it used to be, so I would not qualify the past as a failure. However, there is a new approach which can be brought to this problem and if you ask me what I think about the economics of a possible replacement of existing nuclear by new nuclear, I can tell you that I think the economics are favourable.

Q225 Colin Challen: If that were true, why do you think in Finland's case the construction consortium needed hundreds of millions of euros in export credit guarantees? Could it not just have gone ahead without that Government support?

Mr de Rivaz: The idea that nuclear requires special subsidies, special state financial aid, is, with respect, an old-fashioned view of the nuclear industry. What nuclear requires from Government is a clear policy in terms of licensing, in terms of planning, in terms of putting in place a safety authority, a clear vision and Government which delivers. For the rest, building and operating nuclear with the technologies which are available at the moment on the market is competitive and does not require special subsidies.

Q226 Colin Challen: So you would be in favour of abolishing international treaties which limit the insurance liability of the nuclear industry.

Mr de Rivaz: You are right that nuclear is something which has common grounds internationally. It is a good thing that there is some expertise in organisations like the International Agency for Atomic Energy, such as WANO, which is the World Association for Nuclear Operators. It is an industry which, more than any other industry, is benefiting from international experience to a large extent. So there are existing policies which are good. My point is that provided the Government are doing what they have to do, holding a good debate, creating a political consensus and then putting in place the tools and resources for the licensing, the planning, the safety authority, then the market will deliver the diversity which we all need on nuclear as on other energies.

Q227 Colin Challen: Without Government support financially.

Mr de Rivaz: Without special financial support. Why? If you look at the price per kilowatt hour which the new nuclear technology which is available on the market can provide, it is competitive compared with what is at the moment considered the most suitable solution, which is the combined cycle gas turbine. It is competitive; it is significantly competitive. If it is competitive in the market, it will deliver. There will be investors to invest; there will be customers to buy the energy produced.

Q228 Joan Walley: I want to press you a little more on what you are reported to have said in The Independent. You set out the kind of guarantee which would be needed to encourage private investment. Are you really saying that other than getting a public consensus for the role of nuclear no extra cost would be required from Government other than the list you just gave us of licensing and the tools which would be needed? Are you saying that the total cost would be met entirely by private investors and not by Government? It is not clear what those guarantees are which you are seeking from Government.

Mr de Rivaz: We must not confuse the roles and responsibilities of the various parties involved. Take the example of countries which have been extremely successful in nuclear; there is one the other side of the Channel which is extremely successful. As you know, in France nuclear power plants produce 63 megawatts. The second power utility in the world has 17, which is TESCO.

Q229 Joan Walley: My question was: what guarantees are you seeking from Government?

Mr de Rivaz: It works well in France. There is a very powerful independent safety authority, it is an absolute prerequisite, and that is the role of Government in putting in place the safety authority which can deliver.

Q230 Chairman: It seems to me that much of what you have said to us so far seems to shift the entire burden of responsibility onto the Government when in fact, particularly in regard to nuclear, if you really believed that it is this wonderful economical way of producing clean energy, you could just put in a planning application.

Mr de Rivaz: We should avoid presenting any solution as a silver bullet, one which is a magic bullet.

Q231 Chairman: It is part of the mix.

Mr de Rivaz: It is part of the mix and I agree with you. Excuse me repeating myself, but I do not think we should cut corners and a snap decision yes, or no, which is not based on a good debate is not a good decision. We investors need a very long-term framework which is not going to be changed every five years or so. I am not the sort of person who says it is very simple and we should do it. I am saying simply that all the elements of the debate have to be in place and in terms of planning what is our problem in the UK? There are various horizons. One is maybe next winter; the second one is 2010 for the renewables project; the next horizon is 2016 or so when there will be closure of the nuclear power plants and at the same time, because of the LCPD, the closure of coal-fired ones, which is a big risk. So ten years from now. Another horizon is 2020 for carbon sequestration and maybe 2040 for hydrogen. All these technologies have to be put into perspective according to our priorities and horizons. In terms of planning, if the right policy is in place and the right debate is held in advance of this policy, in ten years we can deliver nuclear power plant operating in the UK, that is the horizon of 2012 or so.

Q232 Dr Turner: Perhaps if I ask a more direct question, we might get an answer. You said that EDF puts its money where its mouth is. Okay. Let us put that to the test. In your own evidence you say "... in the absence of risk mitigation ... by Government, nuclear will not be built in the current market". This seems to me to be a very clear statement that left to the market it will not deliver. What would EDF need to see before it before EDF would invest its money in a new nuclear power plant in the UK and are you proposing to do it?

Mr de Rivaz: When I talk about mitigating risks it is not for EDF, it is for all investors. The risks are those which I have underlined already: licensing, planning, safety authority. None of the investors is asking for any bias; I have been talking with my colleagues in the industry. None of the investors is begging for subsidies. We are all very much in favour of the market mitigating those risks. The development costs, to be precise, for a new power plant are a little bit higher than for building CCGT or renewables; for the first-of-a-kind it is of the order of 250 million, for other units probably much lower, of the order of 100 million. The problem for an investor is whether this investor is ready to put his money on the table. The answer is going to be yes, if there is no risk that these development costs will double or triple and at the end of the day because of all the uncertainty will be lost. I am giving you a practical example to answer your question.

Q233 Dr Turner: You have not really, because you have not told me exactly what conditions you would need before you felt safe with those risks. Let us quantify them. The development costs: would you expect Government to pay that or would EDF pay it. Let us say the market: would you want guaranteed prices, long-term contracts so that you could see a guaranteed return? As to controlling the cost of the development, would you want the Government to guarantee you against cost overruns?

Mr de Rivaz: No; no.

Q234 Dr Turner: Let us get down to specifics.

Mr de Rivaz: You are giving answers which are not my answers. I am not asking for something which will be in any shape or form a bias from the markets.

Q235 Dr Turner: You do not need the market to be rigged.

Mr de Rivaz: The market will deliver. In the framework of biodiversity, which I am advocating, the market will deliver. Instability is a major risk for us as investors, not just for EDF but for all investors; it is a lack of long-term policies. If one day the Government say that they will go for renewables, they will not go for nuclear, and the next time it is the opposite, that is a major risk. Everyone has to shoulder their own responsibilities and it is totally normal and in every country it is the same thing; it is not exclusively in the UK or any other country that Government set the policies. It is not up to us as investors to define the role of the Government; we just have to deliver within the framework of this policy.

Q236 Dr Turner: Given that the liberalised market in the UK is quite a recent phenomenon and you do not in fact have it in France in the same way at all, it is unlikely to change significantly in the foreseeable future. So you have the situation that we have and you say you do not want any Government subsidy, you do not want the Government to contribute to development costs. The simple question is: given the circumstances that you have would you invest in a new plant, yes, or no?

Mr de Rivaz: I am sorry but all investors would give you the same answer. We should not confuse the phases. I have listened to the Prime Minister and I think we have reached the moment for the debate about the policy. Once this policy is established, we investors will be able to make our decision.

Chairman: I think that point has been well covered.

Q237 Mark Pritchard: You might be attracted to various areas of policy for major changes and one is planning. Considering that you can have a mixed development, commercial/retail/leisure, which goes through a local planning process, then perhaps goes to appeal or is called in by the Secretary of State and the Secretary of State is taking 12 to 18 months to make decisions, even on medium-sized developments, let us say leisure and commercial, when you are talking about the time frames you mentioned earlier, that moves us into a difficulty vis--vis switching off existing nuclear plants. What changes would you like to see in the planning process to speed up the whole process going from planning application through to design and build stage?

Mr de Rivaz: May I introduce Denis Linford who is Director of Regulation and can help on this question.

Mr Linford: There will be a process of looking at the design of stations; there will be a licensing process and also obviously a planning process, planning inquiry process. It is important that these concentrate on the issues at hand. What we are saying is that the terms of reference for a planning inquiry should not look at the whole of energy policy, it should concentrate on local issues. The important thing is that the timescale for the licensing and planning should not be over-extended, because that is what will create the risk of not recovering our investment.

Q238 Mark Pritchard: But you accept no doubt that the environmental impact assessment will be a key element in that planning process.

Mr Linford: Indeed.

Q239 Colin Challen: I think you accept that the capital costs and development timescales of new nuclear are really quite long. You also seem to accept the Royal Academy of Engineering's rather low assessment for the generating costs. It is a bit of a mismatch really. Do you think your investors would accept the Royal Academy of Engineering's low generating costs or would they perhaps prefer to see their money being sunk into new CCGT? They have to make quicker decisions perhaps than you are willing to allow or able to.

Mr de Rivaz: It happens that this oral evidence which I am very pleased to give you this afternoon takes place in the middle of the road show which EDF has organised at the moment in London. I have left them to be with you and I am very happy to be here. We are meeting investors and, without giving away too many details about this IPO which is going to raise seven billion euros from the market, which will be the beginning of the process of opening up the EDF group capital, which everybody should welcome as a significant step in the right direction, they are impressed by the strength which the generating fleet in France is giving to the equity story of the EDF group. Having 95 per cent CO2 free nuclear plus hydro in France means we are very competitive because we are not dependent on the price of oil or gas and is something which is extremely appealing for the investors. I do not think that all investors take a short-term view; on the contrary, for the large utilities like ourselves investors are going to embark on long-term policies because they understand that the energy world has changed, has dramatically changed in the last ten years. We are facing new challenges. In Europe there was over capacity; there is no longer over-capacity. In Europe we need to build networks, to reinforce our networks, to build interconnections and the environmental issues have rightly come at the top of the agenda. The global warming issue is now at the top of the agenda. All these elements were not there ten years ago. In that context the investors understand that the players like the EDF group, which is the only large European leader being bought in France, in Germany, the UK and Italy, can provide a good answer and good policies and I am very confident investors will make a great success of this IPO.

Q240 Mark Pritchard: How do you respond to a timetable point that some critics would say that nuclear cannot be built in time to bridge that generating gap? It cannot be built in time.

Mr de Rivaz: When I said ten years, that is more or less five years for licensing and planning and five years for the construction. France is now planning to build a new power plant in Normandy and the construction time is 54 months; four point five years.

Q241 Chairman: The Government are not going to make their position known until 2008. There is then a couple of years' specification work. We have received evidence recently that a new nuclear plant in this country would not be up and running until 2020 or 2021. That is too late, is it not?

Mr de Rivaz: I am afraid you are right. I think the critical time is more around 2016 that 2020 and that is in ten years.

Q242 Chairman: Does that not make the whole question of nuclear irrelevant?

Mr de Rivaz: We should not confuse the cause and the effect.

Q243 Mark Pritchard: On security, not security of supply, but security of nuclear plants, that is going to become more of an issue and you can arguably say in the energy mix that nuclear is the most vulnerable target. How do you think your company, along with others in the industry, is going to convince those who are advising Government on nuclear plants actually being a threat if they were hit, a threat to the wider community? The point is that you have a competitive disadvantage in the context of global terror.

Mr de Rivaz: You are making a serious point, but at the same time, in terms of security of supply, the terrorist threats can hit every type of power plant - I am not saying this to encourage anyone - including networks, which could be a vulnerable element in the chain. I do not see, because the design of the nuclear power plant has taken into account these kinds of risks, a specific additional problem in terms of security of supply linked to that. However, it is a very relevant point that the debate we are in has to address whether public opinion is fully comfortable with that, because it is a question they will raise along with many others. What is important is to accept all the questions. The worst scenario would be to have on the one side the pro-nuclear who are going to lobby against everything else and on the other the pro-renewables who are going to lobby against everything else. I am advocating diversity. If we want a political consensus, we have to accept diversity.

Q244 David Howarth: You recall the MIT study in 2003 envisaging global growth in a nuclear scenario. Even under that the percentage of world energy production from nuclear went up by about two percentage points from 16 to 18. Are we not talking about nuclear not really being part of a future which depends perhaps on another technology? To give you an example, if you look at your own figures, it seems to me that clean coal competes very well in all respects. Would your investors not be more attracted to those kinds of projects than to a nuclear project?

Mr de Rivaz: What we have done at the moment on clean coal is simply because we are serious about the environment; we are a company which is taking its responsibilities seriously in this field. We have opted into the Large Combustion Plant Directive and we intend to operate our coal fired power plant in Nottinghamshire, 4,000 megawatts, as long as we can. However, in 2016 we plan to replace this coal-fired plant with a new one. I think the timescales are favourable to all these things; in the very short term there is the horizon of the 2010 for renewables. The critical moment is in the middle of the next decade where, if we investors do not have the framework we are expecting in the coming 12 or 18 months, we may face a problem collectively.

Q245 David Howarth: The problem we have is seeing how the various options fit into those various time limits. Given the problem we have over the next ten years, nuclear does not seem to fit in there, because things like clean coal seem to be a better option for that timescale and once we have got over that hump, that obstacle, then there does not seem to be any reason after that to invest in nuclear either, because other technologies will be doing the job better.

Mr de Rivaz: First may I put that in a very simple way? I think we should not put all our eggs in the same basket. Betting on technologies which are not yet available to fix our ratios in the medium term is dangerous. The carbon sequestration might be - might be; we do not know; nobody knows - the solution for the years 2020, 2030 or beyond. Hydrogen with its very decentralised energy sourcing might be a solution for 2014. In the meantime, if we are serious about biodiversity, we should consider what is available at the moment: clean coal for some years and gas of course. We all know that 50 per cent of the reserves of gas in the world are in Russia and some reserves are in Qatar and Iran. It is a political choice. We were discussing planning issues. I have 900 megawatts as a goal for 2010 as my contribution to the Government's targets, a very serious contribution. We need to have some acceleration of the planning issues for renewables as well. There is another point which we have not mentioned because we are short of time: energy efficiency is part of the mix, it is part of the diverse approach. Over the last ten years we have invested something like - I do not have the exact figure in front of me - 90 million. We have benefited thousands of householders by reducing their consumption by 11 terawatt hours. We have a plan to invest 10 million more in several London boroughs. We are serious about the energy efficiency challenge.

Chairman: Can we just probe you a little further on renewables? If we have time we will come onto energy efficiency again.

Q246 Mrs Villiers: You emphasise that we should not put all our eggs in one basket and we have to look at a range of ways to tackle this impending energy crisis. On renewables, your paper actually says that the targets for renewable energy should not be increased at this stage beyond those we already have and that we should wait until there is a significant volume and the technical and economic impacts of renewable energy have been assessed. Why that limitation? From what you have just said you are quite enthusiastic about increasing the use of renewables and if one looks at the Scandinavians, the Germans, the Spanish, they have already set more ambitious targets than we have in the UK. Should we not be following their example?

Mr de Rivaz: I am enthusiastic because my background is as a hydro power engineer and it is a beautiful job to tap water out of rivers. It is the first renewable energy which is very efficient. What I am saying is that we have to be realistic. We support the Government's renewables policy. The target of 10 per cent for 2010 is challenging, but it is the right thing to keep this target, because if we change the target we have no chance to achieve it. At the same time, we have to recognise, and it is part of this diversity policy, that in advocating that beyond a certain threshold you have some drawbacks, some difficulties with renewables. These are linked to the fact that the load factor of renewables is only - it depends upon the wind of course - 35 per cent of the installed capacity. That means that if you are relying too much on renewables, you have to add a reserve capacity, generally coming from fossil fuel power plants, of 65 per cent of your renewable capacity. Beyond a certain level wind farms become more of a problem than a solution. We should concentrate on the objective of 10 per cent, and we are not yet there, and not rely overly on that because it is not realistic. I am talking about wind farms.

Q247 Mrs Villiers: Looking at that specifically, it is relatively clear to me that if we were significantly dependent on wind farms, there would be gaps in the power generation when the wind was not blowing, so we would need a fallback solution. I can see you are saying that the duplication could make the situation worse but if we are going through a diverse range of energy sources anyway, surely we should have the option of that fallback to support renewable energy. I do not see that is a reason not to go for more ambitious targets on renewables.

Mr de Rivaz: At that time you have another problem, which is that it is becoming more and more expensive. If you are doubling your capacity, you have to pay for it and having installed 65 per cent as backup becomes hugely expensive. There are four objectives and we should look at all of them and in that case the economic case is not achieved. Unfortunately in the UK we have neither high mountains nor large rivers. In France they are lucky as they have 20,000 megawatts of hydro power, but we do not have that here.

Q248 Dr Turner: You forget that we may not have mountains, but we do have lovely tides. I know that EDF is not uninterested in those as well. You say that if the 20 per cent target is filled by wind that is as much as you should depend on wind, but there is mounting evidence that it is not that simple, because wind is highly variable though it does happen that the wind source is best at the times when power needs are greatest, that is in winter. So in fact, your argument about the limitation imposed by the need for backup generation is not as powerful as you might think.

Mr de Rivaz: I understand your point, and I am very humbled at speaking in front of the politicians who have the responsibility for making the decisions. I recognise that it is not easy. I do not want to speculate on public opinion, because you are the specialists and I am not. However, I do think that if we ask people whether they are happy to have both wind farms in terms of renewables and a certain level of nuclear, if we are not proposing the two together, a consensus would be created. That is my feeling.

Q249 Dr Turner: You are effectively saying that nuclear has to be part of the mix and that no mix will work without nuclear. Is that what you are saying?

Mr de Rivaz: At the moment we know that if we do not replace nuclear we are going to end up with a policy which would not be diverse. I think it is not realistic to imagine that we can replace 10,000 megawatts of nuclear with wind farms and it is not the right policy. If we replace them with gas, we are not diverse in our supply of energy and we are over-dependent on a limited number of countries which are not necessarily the friendliest in the long term. So diversity.

Q250 Ms Barlow: May I first declare a minor interest because EDF is a major employer within my constituency. That aside, you mentioned the investment which you have put into energy efficiency. We felt that in your evidence you were very sceptical about the scope and result both of energy efficiency and micro-generation. For example, last week we received evidence that if micro-CHP units were put in just a quarter of central heating boilers which need to be replaced over the next 15 years, that would be equivalent to six gigawatts of generating capacity, which is half the current nuclear generating capacity. Are you not underestimating the potential contribution of micro-generation and of energy efficiency measures? In other words, what I suppose we and the Government are calling for is for a major company like yours to try in the future to sell less electricity to consumers rather than more.

Mr de Rivaz: Thank you for the question. I am not sceptical. I have a real will to contribute to energy efficiency. I said that we have invested 90 million and have saved our customers 11 terawatt hours through various measures. I am simply saying that we, the power industry, cannot solve all these issues regarding energy efficiency on our own. Where is the national campaign about energy efficiency in this country? We have had campaigns about road accidents and about the danger to health of smoking - without entering the current debate about that. Is the construction industry sufficiently involved in the challenge? All Government organisations have been working together to identify, to target the thoughts about what is to be done. I am not sceptical; I am just describing the difficulties we are all facing. We have to continue: energy efficiency is part of the solution. The current gross demand forecast from the National Grid is 0.79 per cent and probably energy efficiency can save in the order of eight megawatts, something like that in the gap. It is significant, but it is only one element of the solution; it is not the solution.

Q251 Mr Hurd: The Government's energy efficiency strategy is very much focused on the energy efficiency commitment. Do you accept that there may be a structural problem with a solution which requires consumers to believe that companies like EDF want to sell less energy?

Mr de Rivaz: Thank you very much for the question. Do you know that we launched a loyalty scheme in 2003 to encourage our customers to be loyal to us, which is a normal objective for a company which wants to retain its customers, the Nectar scheme, which is a very successful scheme with many sponsors, not just EDF Energy? We are the only energy company in this scheme and we are the only retailer of all kinds of commodities which is not rewarding customers for consuming more. There is no incentive at all, not one Nectar point given for customers who increase their consumption. All the criteria are different: there is loyalty ... I do not want to enter into details. The second initiative we have taken is to launch a product Reduce Reward, which has been developed in Hove by teams there and I am very proud of what they have done. It is designed to actively encourage and reward our customers who give us evidence that they have reduced their energy consumption. So we are in a win-win engagement with our customers: we want them to stay with us and we want to help them to reduce their consumption and we reward them if they do so. There is a lot of cynicism about the industry, saying it is not credible that we are genuinely in favour of reducing consumption. I cannot speak on behalf of the others, but as far as EDF Energy is concerned, we are very serious about that.

Q252 Ms Barlow: I take on board what you are saying about selling. I should like to ask a brief supplementary on the 90 million. How much of that 90 million which you say is being spent on energy efficiency is being spent on R&D to create systems where people are buying less electricity? I should also like to ask a more general question. It seems to me that throughout your evidence you have been putting an awful lot on the Government in terms of raising awareness, of making decisions, of building a framework. This has been a repeated theme throughout your evidence. One thing which struck me particularly within your evidence was the issue which we have only touched on slightly, which was waste disposal. You talk about the Government creating a waste disposal levy at the time of generation and you say the waste problem is pressing and the Government should move to identify long-term solutions at the earliest possible moment, which again fits in with your theme throughout your evidence about how you are looking for a framework. Then, the last sentence of your evidence says "A number of scientifically acceptable solutions do exist and the resolution of this debate should not hold up the development of new stations". Is this not creating a problem before a solution is created? Are you saying that we should go ahead with new build without having identified how we are going to get rid of the waste?

Mr Linford: The nuclear waste issue exists already.

Mr de Rivaz: Are you talking about nuclear waste?

Q253 Ms Barlow: Yes. There was one brief supplementary about how the 90 million should be spent.

Mr de Rivaz: I thought it was a more general issue than the nuclear one.

Q254 Ms Barlow: Particularly in terms of waste, because we have not touched on that throughout.

Mr de Rivaz: Coming to the nuclear debate, the most difficult political and emotional dimension are rightly issues regarding nuclear; I recognise that. At the same time, we do have solutions. The problem already exists, so it is not the construction of nuclear plants with new technology which is creating the problem. If we were replacing overnight the existing 10,000 megawatts which we have in the UK with the new reactors which are available now on the market, the quantity of waste which would be created by that would be only 10 per cent of the waste created by the former nuclear authority. So in this field we have constant technological improvements. Having said that, forgive me for giving this example, but in other countries, including France, we have some good benchmarks: transportation and storage of nuclear waste are safe. In the long term a solution does exist and the point which has to be made is that the final decision has not been taken but there is a long-term solution, which is the burying of the long-term radioactive waste in underground cavities which have been tested for that. France, as far as we are concerned, will be ready to make this choice. I used to say that we have experience in France of 58 reactors, on average 19 years old and eleven centuries of operation of programmes without any incidents in relation to the operation or storage of waste. Eleven centuries, probably back to King Alfred in the year 900; a very long period without any incident, including with the waste. We understand the problem, but we should accept that there are solutions which are safe, available and economic and which are part of the cost of the kilowatt hours produced by nuclear.

Chairman: We will close this session here. I am very grateful to you for your time and for your evidence. Thank you very much indeed.

The Committee suspended from 3.42pm to 4.32pm for a division in the House


Memorandum submitted by Scottish and Southern Energy

Examination of Witness

 

Witness: Dr Keith MacLean, Head of Sustainable Development, Scottish and Southern Energy, examined.

Q255 Chairman: Welcome Dr MacLean. I am extremely sorry that there has been such a long delay. The Government have not fallen, but I dare say there is some nervousness amongst the Government whips which has caused a little further delay. May I begin by asking a question about the demand side and the scale of energy efficiency savings which the White Paper envisages? Do you think that those are credible?

Dr MacLean: The way that the White Paper is structured and the identification of the five or six mega-tonnes of carbon to come from domestic energy efficiency is certainly of the order of magnitude that we should be aiming for, although it is not the order of magnitude which is being achieved by the schemes which are currently in place.

Q256 Chairman: Do you think the savings are deliverable within the timeframe?

Dr MacLean: No. What I am saying is that it is sensible that targets of that sort of order of magnitude are being set, but the current policy measures are unlikely to deliver anything approaching that in the domestic area.

Q257 Chairman: Why is that?

Dr MacLean: At the moment the focus is very much on the relative measures, the relative potential measures rather than on absolute energy savings and in order to deliver real carbon savings, ultimately there needs to be a reduction in the amount of energy used or the amount of carbon which is in it. On the demand side, really all we are looking at is something which will reduce the overall amount drawn from the grid. The amounts which are happening under the energy efficiency commitment are tiny in comparison even with the modest target which is set out in the White Paper.

Q258 Mr Hurd: May I ask about the market for energy services? I should appreciate your comments on why it has taken so long for that market to emerge and what the roadblocks are. I understand you are involved in a project called Project Rachel, which we should like to understand a little more about and what progress you are making.

Dr MacLean: On the energy services side, in some respects it is a very old concept where, certainly in our old hydro-electric days, it was quite common to install storage heating for people. The investment was made by our company on their behalf and there was a longer-term relationship so that was paid off as part of the overall energy costs. Under the current liberalised market structure we have, with a 28-day rule in it which means that an energy supply customer can change supplier within 28 days, you do not have that long-term incentive for the energy supplier to make the investment. That is really the difficulty at the moment for an energy services company to find a contract structure which allows the long-term nature of the relationship, which allows the repayment of the capital over time. Despite the experiments to get rid of the 28-day rule, very little has happened, because that experiment is tied up with all sorts of conditions and administrative processes about how it can be achieved.

Q259 Mr Hurd: And Project Rachel?

Dr MacLean: The basic concept there is to look at moving the longer term relationship away from the energy supplier to the distribution business and use the distribution business as the mechanism for collecting revenues over a longer term for the energy services investment which has been made, while still maintaining the freedom of the end user to choose the energy supplier for the residual commodity, electricity or gas, which is being used. It is a bit like the reverse of the wayleave situation. I have an electricity pole in the garden of my house and there is an ongoing relationship with the distribution company, which says it has to be there. If I sell the house, that then goes on to the next owner and there is no question about it. By having that enduring relationship through the distribution company and effectively through a higher ongoing standing charge, you can overcome some of those barriers within the energy supply rules as well as get over some of the consumer concerns about what happens if they move house. The obligation would simply move to the new owner.

Q260 Mr Hurd: In that context of transfer of relationship from supply to distribution company, could you also talk to us about the idea of moving metering?

Dr MacLean: It is basically the same concept again. At the moment, for an energy supplier with only 28 days, effectively any investment which is made in metering has to be recovered in a 28-day period. So there is no incentive at all to an energy supplier to make investment in metering. If it can be moved into a distribution business, then, just as Ofgem has been doing recently with the regional power zones and the new incentives for initiatives, they can formally incentivise the distribution companies to make the investment. Distribution companies effectively love nothing better than having something to spend their money on to get a fixed return over a period and have shown in their post-privatisation schemes for cost reduction and service improvement the degree of innovation they can actually bring to the market if that contractual structure is in place.

Q261 Mr Hurd: A wider point about the energy efficiency agenda. If I understood you correctly, you were suggesting that the impact of the EEC mechanism was likely to be marginal against the targets which have been set. However, it seems to me that the central plank of Government policy at the moment - and it is energy companies which are the agents of that policy - means there is a fundamental structural problem about a policy which allows consumers to trust energy companies to sell them less energy.

Dr MacLean: To an extent, but there is no real incentive on consumers at the moment to make the changes which would be necessary to achieve the massive savings and that is why, if you take the energy services concept and effectively flip everything round, if the energy services company were responsible for providing the degree of lighting, the warmth which was required within the property, the power to drive things, if they were given that responsibility, they would make very sure that they were doing that with the least possible input: the lower the energy input, the bigger the profit margin on that. That way it is then quite obvious that would be what the energy supplier was doing and it would be obvious to the consumer that they had a guaranteed service, whether heat, light or power. That is a big structural change, but it is the sort of conceptual one which probably has to be thought about if we are going to make the radical change to get to an energy reduction approach rather than simply an efficiency one.

Q262 Chairman: As a matter of interest, how many customers are covered by Project Rachel?

Dr MacLean: It is a concept at the moment on which we are working. Your next witness can probably tell you a little more about that as he is actually involved in it far more than I am.

Q263 Mrs Villiers: It strikes me that we could make a big impact on energy efficiency if we made people's energy consumption much more visible. I wondered whether you had any ideas about how one could change the current structure of metering so, say, when a consumer plugs his mobile phone charger into the wall something pops up visibly and tells him he is spending another five pence for every minute the charger is plugged in. Any ideas on how we might be able to encourage that so that people are aware of the energy they are using and the money they are spending?

Dr MacLean: It is certainly one of the initiatives we are trying to encourage and we are looking at opportunities to trial that at this very moment. It does require a change in the regulatory structure because the changes needed affect both energy supply and energy distribution companies. You are perfectly correct that there is very good evidence ... I do not know how many of you have things in your car to show how many miles per gallon you are doing, but I know from my own personal experience that having one of those has radically altered the way I drive and has radically improved my fuel consumption. It is a concept which has been well proven. It is not that difficult to do technically and it is just finding the mechanism whereby the tens of pounds or hundred pounds which need to be invested in each property to put that intelligent meter there which will connect via the mobile phone or through the television or through the PC to give that ongoing display of something meaningful rather than a thing which is going around which does not really tell anybody that much about their consumption.

Q264 Chairman: It could be done in all new homes.

Dr MacLean: It could. We are in a market at the moment where meters are changed, either because they need to be recertified or because somebody has moved supplier and they are changed anyway. What goes in at the moment is the absolute lowest cost, lowest function meter, because the energy supplier runs the risk of that investment being wasted if the customer changes supplier again.

Q265 Mrs Villiers: Your memorandum states at the bottom of page 2 that you are "... working with Talisman Energy on the development of what could be the world's first deep water offshore wind farm". What stage are you at with that? Are you confident that you are going to get it completed?

Dr MacLean: We are looking at the first smaller-scale installations of units to operate in that environment and clearly that has to be evaluated before we can be clear about whether we would get to the aspiration of the gigawatts of power we ultimately hope to get from that scheme. With regard to the way we have outlined this in the paper, it is to group together all of the as yet unproven technologies, either because of the scale of what we are talking about or the combination of different things which are there. With all of them there is an inherent risk and much as we should like that risk to disappear quickly, there is a lot of work in all of those different schemes which needs to be done to evaluate the risk and make sure that it is manageable.

Q266 Mrs Villiers: What are the economics of the project generally? Are you getting Government assistance for the project?

Dr MacLean: I do not want to mislead you, so I am happy to follow up and give you some exact information about funding arrangements for that. I am afraid I do not know the exact detail.

Q267 Mark Pritchard: Earlier on today we had a witness from the nuclear industry and I just wondered what your view was on their comments that they were not looking for subsidy from Government, they just wanted a clear run in policy terms and they were happy to take the risks in the marketplace. Do you think that puts you at a disadvantage as far as the British taxpayer is concerned, considering that you are receiving and may be looking for even more subsidy in the future?

Dr MacLean: I am not quite sure whether I have got the gist of the question. Certainly as far as support mechanisms are concerned, we are very clear that all of these as yet unproven technologies will require some form of support to get them through the development stage. What we are looking for in support mechanisms is something which is not trying to pick a winner, which does not distort the market in favour of one or the other options, but is simply a mechanism for supporting the development effort which needs to be put into going through the first of the prototypes and into something which can be produced.

Q268 Mark Pritchard: Do you think it puts you at a political disadvantage because of that subsidy issue, as against nuclear who are saying that they are happy to take the risk as long as there is a clear policy framework and we do not actually want taxpayers' money?

Dr MacLean: In some respects, if you take out the decommissioning and the waste issues, nuclear has plants which have been up and running for decades which have produced power for us, just as we have had coal, just as we have had gas and just as we now have wind turbines which are capable of doing that as well. The comparison is not completely valid in that the technology has proven itself able to run over those decades and to provide power. The question is whether, in the cost analysis you do of the whole thing, take carbon capture and storage for the moment, one of the things which is making that more costly is the fact that you have to find a way of disposing of the waste carbon dioxide at the end of the process. If those costs are not being added into the nuclear comparison, clearly you are not comparing like with like. All that we are asking for is that there is a fair comparison of all the costs and not that the public purse is picking up particular elements of any one of those. The obvious issues from the earlier questioning with regard to the waste and the decommissioning costs is how much those are being picked up by the investors and how much those are being picked up by the public purse.

Q269 Chairman: Sticking with cost, I notice that as far as offshore wind farms are concerned you said that the target from that quarter is unlikely to be met because the costs have risen. Why have costs risen?

Dr MacLean: It is one of those inevitable things in these projects.

Q270 Chairman: It is just a fact of life, is it?

Dr MacLean: It is the initial enthusiasm to get things off the ground and perhaps there is more optimism.

Q271 Chairman: There has not actually been an inflation of prices.

Dr MacLean: Nothing cataclysmic has happened which has done it; it is just part of the normal project and technology cost development which most people see. It is also a realisation that once you start going out and trying these things and gain experience, there are things you did not expect and which do cost and which then have to be factored in as it goes through.

Q272 Chairman: It was an under calculation in the first place really.

Dr MacLean: I think that is true.

Q273 Chairman: Is it possible to give us some feel for the scale of the difference between the scale of the projected cost then and the anticipated cost today?

Dr MacLean: I could not give you an accurate figure on that, but I am happy to consult with colleagues.

Q274 Chairman: Just in terms of a percentage would be helpful.

Dr MacLean: I would really need to go back, but I am happy to give you that figures.

Q275 Dr Turner: Offshore wind is only just about commercially viable as it is, with the support of both ROCs and capital grants, so anything which gets more expensive than that is clearly terribly problematical, especially new marine renewable technologies because they have not been deployed on such a scale as to have achieved commercial scale cost reductions. What is your view on the fiscal measures we need to take to get over this problem? Do you think it is best handled by capital grants or do we need an additional market instrument, a super ROC or whatever? In fact DTI are doing this in a sense for marine energy projects on a limited scale. What do you think is going to be the most effective approach to bring through new technologies which are currently expensive, but which need to be deployed on a larger scale before we get the cost benefits?

Dr MacLean: There are at least two stages in the process and in the early stage the capital grant or something which helps with that side of things is the obvious way to go. As you get further downstream - and exactly when it tips over I could not actually say - there becomes a point where having a revenue-support mechanism is advantageous. From the public point of view, if all you are doing is supporting however much is done or produced, if it fails and does not produce, then there is no cost for the public purse to pick up. It has the advantage for the developer that it is starting to get into a commercial environment where everything is happening as it would outside and you are hopefully then looking at a situation where that revenue support is tailing off. It certainly helps more than capital grants do once it gets beyond that stage. With regard to the interface with ROCs, one thing the industry is very clear on and pretty unanimous, is that the big advantage of the ROC mechanism is its longer-term nature and predictability within that. If it is set up as a long-term mechanism and then tinkered with and changed, that not only undermines the confidence in it as a measure, but it undermines the confidence in any future long-term measure as well. That is why there is a degree of concern about things which are being looked at to change the ROC mechanism.

Q276 Dr Turner: You say that the ROC mechanism is predictable, but in fact the value of a ROC can fluctuate and in certain circumstances it can disappear to zero, which would not appear to be the most stable environment for encouraging investment and indeed the DTI and Scottish Executive are looking at the future of the ROC. What kind of changes do you think you would like to see in the mechanism?

Dr MacLean: Back to the point I made earlier on. We would prefer that it was not changed. There is a lot of concern at the moment. If the Government target of the 10 per cent by 2010 is not met then the value of the ROC for those who have invested gets higher the lower the success rate is. Reinforcing a point EDF made earlier on, it is very frustrating for the industry to have thrown back in its face that it is creaming it on the ROC mechanism, when the industry actually has this enormous five-gigawatt queue of projects in which it is desperate, more than happy, to make the investment but which are stuck somewhere in the consent process. It is very, very difficult to avoid the problem that the under success in the ROC mechanism will over reward those who have got in, when really the only way of doing more about that is through the speeding up of the planning and consents process rather than anything Government can otherwise do to the mechanism or the industry can do.

Q277 Dr Turner: But if you had done that then you devalue the ROC.

Dr MacLean: The investors are perfectly happy to invest with parameters which are variable as long as the rules for that variation are known. If it is a volume driven thing and if it goes up to the ten per cent and beyond that, then we are aware of the consequences, we just do not want anything unexpected to happen.

Q278 Dr Turner: Let us look at these gigawatts waiting in the pipeline. We know that some of them are waiting for planning reasons and even if they get through planning hurdles, they are then going to run into grid connection problems and costs of grid connection are also something of a disincentive. Coupled with that, Ofgem have now extended the virtue of NETA to Scotland in terms of BETA and you have zoned transmission charges rather than a postage stamp system which greatly disadvantages a remote generating site where the best resources are. What is your view on that? Are you as investors given sufficient comfort by the protective mechanism which the Government put in the Energy Act and are you worried that that has a sunset clause in it?

Dr MacLean: The issue of transmission charging does significantly disadvantage Scotland from an investment point of view. It is clear that it is the first place you would close down your generation, given a choice, because you make the savings, and it is the last place you would invest, all other things being equal. It is certainly a big issue, not only for the 40 per cent renewables target which the Scottish Executive have, but think more about the 60 per cent and where the rest of it is going to come from with a big disincentive like that. There is quite an issue about where the investment is going to come from and how that gap can be filled. The sunset clause in it just makes it quite absurd, because even the more optimistic projections of when some of the islands could be connected up in the remoter areas would mean that because the clock has already started ticking on the mechanism, at best you are going to have a year or two of it left, which is not enough.

Q279 Dr Turner: Would you agree that it is absolutely essential that the Government address this issue?

Dr MacLean: Absolutely essential. We have responded to the Ofgem consultation on that issue with very clear concerns, not only about the overall level of the transmission charging, but concerns about that sunset mechanism for the islands.

Dr Turner: I sympathise. I just did not listen at the committee stage of the Bill.

Q280 Chairman: Can we talk about carbon capture and storage a bit more? You say in your memorandum that you are engaged in a couple of projects dealing with this. Can you tell us very briefly a little bit more about those projects?

Dr MacLean: There is really only one which has moved forward, which is the project in Peterhead which is working together with BP and BP's partners there. There is a fairly unique set of circumstances around Peterhead because of the gas pipelines coming in and the proximity of oil fields and gas fields there too. The basic principle there is to bring natural gas into Peterhead, to split it up through a chemical plant into carbon dioxide and hydrogen. The hydrogen would then be burned through a fairly conventional combined cycle gas turbine and the carbon dioxide would be pumped back out again through the unique pipeline which is there and capable of carrying it and be used for enhanced oil recovery in the Miller field. That is a set of circumstances which do not come together in any other areas in that way. However, it will be interesting, looking at the combination of the chemistry and the combustion. The big issue will be making those work together. Most of the individual processes are already up and running, but getting them to work together like that would be a big challenge. That is the main project we are looking at with that, but there are others which we would explore, looking at alternatives for coal-fired power stations as opposed to gas fired power stations, probably with some form of carbon capture and then storage following on from that.

Q281 Chairman: The Peterhead project is the one you estimate would cost about 400 million.

Dr MacLean: That is right.

Q282 Chairman: Do you envisage any of that money coming from the taxpayer?

Dr MacLean: All of these early projects will require some sort of support to help them through and there have already been discussions about that. Whether it is ROCs, or something akin to a ROC which can be used as a support mechanism, we are quite open to the options and use measures which are being used elsewhere and can be applied to other technologies rather than specifically for that. Certainly a revenue support mechanism for that is definitely one of the things we would be looking at rather than a big capital grant up front.

Q283 Chairman: This whole area was envisaged in the White Paper to be a priority area for research. Do you think we have made sufficient progress in the last couple of years?

Dr MacLean: It is starting now, but if you look at some of the imperatives which EDF were describing earlier on about the current trajectory for the generation gap, however big that is going to be, which is dependent upon the demandside growth as much as anything else, clearly we are getting to a point now where, if we are not able to use the new technologies, we are going to have to find some sort of stopgap measures to bridge us through until they do come through. The time is very, very short now and we really do believe that the majority of the decisions which we need to be making to deal with the 2010 to 2016 issues which there will be with nuclear closure and coal closure have to be taken now. To go back to one of the points from the EDF discussion, what the market is looking for is clarity in areas on which Government can give clarity, not about the general way markets operate. We should like clarity on things like the implementation of the Large Combustion Plant Directive in the UK, which is in the gift of the UK Government. We should like clarity on the UK's approach to the second phase of the European emissions trading scheme. Again, the UK's approach to that and knowing how it will approach that is something which can be done. The other big imponderable at the moment, which would probably stop investment even in combined-cycle gas turbines, is whether or not the exiting nuclear licences will be extended for a five- or a ten-year period, which may be a sensible stopgap measure for the keeping-the-lights-on debate and also for the carbon agenda. We have these two things which often work against each other: reducing the carbon emissions and keeping the lights on. We have to look at the measures and the decisions in that light.

Q284 Chairman: So you are really waiting on the Government for progress to be made on this broad front.

Dr MacLean: For clarifying those things which are very much their responsibility to provide. We are happy to make the commitments within the market, the market risks and market uncertainties, to do what is necessary, but that framework, those things which the industry cannot themselves change, have to be clear.

Q285 Ms Barlow: To carry on with the markets and policy instruments, you say you need stability but also that there is no precedent for involving the generating requirements within the framework of a market-led economy in terms of the scale that is necessary. You seem to be implying that the present market-based policy, particularly the regulatory framework, may be inappropriate or insufficient and that it will not be able to deliver what the Government's aims are. The implication from that is that the lights will not stay on.

Dr MacLean: It is not difficult to say that if growth in demand carries on as it is just now, if nuclear plants, when they are due to, close and the licences expire, if the Large Combustion Plant Directive, which is outwith the UK Government's gift, imposes the closure of the plants and no other investment decisions are made in the meantime, obviously the consequence of that gap is the lights going out. We know that there are decisions there which need to be made and we are trying to show where Government can give the clarity that the market will need to make those decisions to invest. It is clear that over the last five years there has been no significant investment in conventional generation. The only significant investment the market is making in generation is in the renewables market, driven very much by the ROC mechanism. You could say that is a positive example where the clarity of the policy has driven industry to invest and you can see in the lack of investment elsewhere that that uncertainty has resulted in "wait and see".

Q286 Ms Barlow: How far would you put the blame on the existing regulatory framework in terms of long-term policy and how much change would you want to see in that?

Dr MacLean: There is a framework at the moment. Think of the first phase of the European emissions trading scheme. It came into force in January of this year: it was not until June of this year that the actual allocations were confirmed. That is an example where you have the entire framework and everything in place and it is something which should work. However, if Government do not tell us what the answer is or what the rules are within that existing framework, then it is impossible to go forward. All we are asking is that within the existing legislation of the LCPD, of TXU phase two, of nuclear licence extensions, to name three big examples, just to say what the outcome is of the Government deliberations on that and we will then get on with the job.

Q287 Ms Barlow: Are you blaming the actual framework? You say the framework exists. Or is it the implementation? How far would you say this is responsible for the lack of large-scale investment?

Dr MacLean: It is critical that the lack of information in the areas which are outwith the control of the market is clearly responsible for the lack of investment. There are other things out there which would say it is now a sensible time and has been for investment to happen. The uncertainty is not the fault of the framework; it is simply that the decisions are not being made within that framework.

Q288 Mr Chaytor: Have we ever had or are we ever likely to have a real market in electricity generation?

Dr MacLean: There is a very active market in generation.

Q289 Mr Chaytor: Is there a real market?

Dr MacLean: We have seen the ups and downs of a market scenario. The first up was the so-called dash for gas when there was a tremendous thrust for investment. There was then a change in policy which brought that to an end and it has not restarted since then. There has been a very active market response to the renewables. The market is more than happy to put the money in place for that to be delivered. I certainly believe the market is capable of providing the capital investment, of managing the projects to deliver, operating them to continue to provide the service and looking after all of the risks associated with that. Yes, I do believe that the market is capable of doing that.

Q290 Mr Chaytor: Do you share the view of EDF that diversity and the operation of the market will take care of everything, including all of the risks?

Dr MacLean: I have probably already answered that in that I said the market will look after the risks it is capable of dealing with.

Q291 Mr Chaytor: Can you just clarify that? What is the limit?

Dr MacLean: It goes back. If the market were to invest in gas and there were then the introduction of a punitive carbon tax which then made that economically unviable and drove the companies who had made that investment out of business, that is the sort of change which the market is not capable of managing itself. It is something which has been a significant change of the rules. It is difficult. Anything involving investment over a 30- or 40-year lifetime, if the aim is to have a low cost of doing that, has to be in an area where the risks are manageable. We are not risk averse; we just want to be able to manage the risks and then the premium which is attached to that in terms of cost will be low. If you put very high uncertainties, then the investment will only be made if the returns are appropriately that much higher. All we are saying is that it needs to be derisked at the moment around things which the Government are perfectly capable of and often say they would like to give us the answer on, but have not as yet.

Q292 Mr Chaytor: To be more specific, if the market were to invest in nuclear, do you think the risks attached to that should include decommissioning and waste disposal?

Dr MacLean: It has to be clear who is carrying that risk before investment would be made. The market would be capable of dealing with it at appropriate premiums. That is the issue for risks associated with that sort of thing. If the Government believe they are better able to manage that risk at a lower cost, then that may be the appropriate way of approaching it.

Q293 Mr Chaytor: How do you view the argument about the crowding out, that at the end of the day the Government are going to have to intervene to some degree and if they intervene to support one technology, it is actually going to deliver a diversity of supply because the Government support for that one technology will dominate everything?

Dr MacLean: We certainly have a concern about the support mechanism which is targeted at any one specific technology. We, like EDF, do not believe that there is a silver bullet technology. We believe that diversity does help manage the risks, certainly in the longer term. We would look at support mechanisms like revenue support mechanisms which are based on something which is technology neutral. The two key things we are looking at are security of supply and the carbon agenda, so something which is targeted at one or other or both of those which rewards success in achieving those two criteria would obviously be something which does not pick a winner and could be applied to any of the technologies which are delivering on those two counts.

Q294 Mr Chaytor: Your answers earlier were much more positive about demand management than those of EDF. In terms of demand management, do you think you have the parameters of the debate right? The title of our inquiry is nuclear versus renewables. Do you think it would be more accurate to identify the issue as centralised generation versus decentralised generation?

Dr MacLean: Decentralised generation has a role to play in the overall mix. The more decentralised you become, the smaller you become, the less efficient it becomes. It can actually have an adverse effect. The great security of supply which we now enjoy has been achieved by joining everything up and having quite a lot of central generation in the mix. We are certainly very keen that we get a degree of distributed generation, a degree of micro-generation. We believe that micro-generation in particular can play an important role in reducing the draw of energy from the grid and therefore how much needs to be centrally generated: more actually seeing it as a demand reduction measure rather than as a competitor to something which is supplying into the grid. We are confident in that; we have made a number of investments ourselves and are pushing that very hard at the moment.

Chairman: Thank you very much indeed; you have been most helpful. We are very grateful to you and thank you for your patience as well.


Memorandum submitted by Climate Change Capital

Examination of Witness

 

Witness: Dr Anthony White MBE, Head of Policy and Markets Analysis, Climate Change Capital, examined.

Q295 Chairman: You have been extraordinarily patient Dr White; thank you very much indeed. We do apologise to you for the unavoidable delays in this afternoon's proceedings. You have been sitting here throughout the afternoon and I just wonder whether you want to unburden yourself of any thoughts you might have had during your long wait.

Dr White: First of all I have to declare an interest: Rachel is my daughter. Project Rachel was an idea we had about 12 years ago on how to encourage corporates to invest in domestic dwellings. We thought that the cost of capital for a corporate would be lower than that for a domestic householder. The thing was: how do you make sure that investment could have a long time? So the idea was: could you recover your capital over a network charge? I have to declare an interest in that Scottish and Southern Energy then sponsored us to check that this was all legal and kosher and now we need to go through a change for the distribution system agreements before that can actually happen. At the moment the answer to your question is zero, in terms of what has happened, but we hope it has great potential. The other issue which was not answered by EDF was what you need to build a station. I wrote in my notes that there are four issues. One is licensing. Mr de Rivaz said that it would cost 200 million to get the first through. That is an awful lot of money. The trouble is that if you go ahead and do that and you find the double-spotted newt at the site and you cannot then go ahead, that is a lot of money. I cannot imagine the private sector being willing to pick up that risk. That is my own view. The waste has to be underwritten by Government, not all taken by Government. In other words, a cost and price are agreed and then the person operating the station will pay that and if the cost turns out to be lower, the Government make a profit, if the cost turns out to be higher, the Government make a loss. I think the investors would want a fixed price, which happens around the rest of the world. Public opinion is one for you. The one I wrote my note on was financing. I think that is where the real rub is. It is difficult under these current market conditions to build any kind of capacity, apart from renewables, which has their particular support, gas, let alone nuclear or coal with IGCC, without special support. The weird thing about that is that nuclear is probably one of the least cost forms of generating power, based on the current latest technologies, if you amortise it over 40 years. In answer to your question, we do have a market in power. It is a real market in power: it is just that people do not actually like it very much. I hope you have seen my evidence. I have this chart here which shows quite clearly that when we set up the industry in 1990, we set it up as an oligopoly and in the chart the top line is the price of power and the bottom two lines are the cost of coal and the cost of gas. You can see that there is a very large difference between them, which meant that the generators were making very handsome profits. Effectively the generators could set the level of price at any position they wanted to and, by making a very serious mistake, they set it too high, so lots of people could build power stations and the did. Also the Government regulator got a bit upset with them and forced them to sell some generation, but even after he had sold the generation, they still had their large margins until all this other generation came along. At that point they lost control of the market and we now have a highly fragmented market which means the prices are down at marginal cost and that is where they are today. That is exactly what one would expect in a proper commodity market. That means that people have to recover their capital by building a power station just before demand starts to exceed supply. The prices will go up through the roof, like lemmings other people will come in and build power stations and some people might load manage and then the prices will collapse and we will be back to marginal costs again. The risk for a generator in this market is whether they can get their timing exactly right when they build their power station. Also, they will see the prices rise and say "Actually, given the risk, given that it takes me maybe 18 months or two years to build a gas station, let alone five years to build a nuclear station, when I get my timing right, I want a higher rate of return", so the prices will go up and up and up. The thing I have difficulty with is thinking that prices will start going up through the roof, customers will load manage and, let us not kid ourselves, what that means is that bits of industry will have to turn off because they will sell their power or what have you. Are Government really going to stand around and say that is fine, especially as the peak in this country would occur at a different time from the peak in the rest of Europe? Frankly, as an investor, I find that difficult to accept.

Q296 Joan Walley: On that point about where the peak is in the UK compared with the unliberalised market in Europe, what are the implications of the unliberalised market in Europe in this scenario which you have presented to us in this graph?

Dr White: I might take issue with you on the question of "unliberalised". I think it is liberalised, but it is just that we have a different market structure. Remember, when Germany was liberalised we had quite a few generating companies in Germany at the time, Weber, VEAG, RWE, EnBW, et cetera and they all thought that to be real men you had to capture as many customers as you possibly could, they cut each other's throats and the prices collapsed in Germany. What we have seen in Germany is a consolidation. Now the group of generators there sets prices just a bit below the new entrant level. They have stable prices and they have the confidence that they can set prices above marginal cost. They will not be undercut by the competitors because they are not really their competitors and everybody is happy.

Q297 Joan Walley: I am not clear how it is that they have arrived at that, whereas in the UK we have not and how that relates to the security of the supply.

Dr White: Because we have many more owners of generation in this country than they do on the continent. Maybe it is more of the social way things happen on the continent.

Q298 Joan Walley: And the way that we have privatised here.

Dr White: Most of those utilities are privately owned as well, especially with EDF now. What I am saying is that they do not compete for customers too aggressively. They do not keep fighting their prices all the way down to marginal costs. There is a good gap between the price of power and the marginal costs of power, so they are comfortable about investing and making a return on capital over a longer period.

Q299 Mr Hurd: If the generation market is as you described, does that not raise concerns about why anyone would invest in any generation capacity other than renewables at the moment?

Dr White: Yes.

Q300 Mr Hurd: Therefore, if that is right, have some of the witnesses we have listened to been over complacent in saying that as all this generation capacity comes off stream, in terms of coal and nuclear, it will be replaced by gas.

Dr White: It might be replaced by gas, but not after the price has gone up an awful long way. That is my worry. The reason this is happening is that the contracts by which people buy power from power stations are short-term by nature. They are no more longer-term contracts. It was the previous regulator's view that long-term contracts would develop. I had furious arguments with him on this because he said that Ofgem's view was that the market in long-term contracts would develop and we had not seen one yet because it was an immature market. You do not really get very long-term contracts in oil either and that is not an immature market. The reason is that if you believe you have competition at the customer end, no-one in their right mind would sign a long-term contract at prices well above marginal cost because they would know they could end up on the wrong side of it. However, oil prices are high, the market price slow, so you have to buy expensively and buy cheaply and that does not let you go for very long and that is what happened to TXU Europe. I do not think we are going to get a market in long-term contracts developing at prices which would remunerate capital, which is what you need. You might get them down at marginal costs though but that is not much use to anybody. That means it is difficult to build a new station in this market and be comfortable you are going to make a return.

Q301 Mark Pritchard: You mentioned that finance is perhaps the most critical issue and I accept that, but within the context of a policy framework. Do you think the risks are increased by a devolved energy policy to, for example, the Welsh Assembly? From memory, Andrew Davies, the Minister for Economic Development in the Assembly, was reported by the BBC as saying that they are not that excited about a new generation of nuclear plants and want to move perhaps more to clean coal technology. Do you think, if the Government were to devolve energy policy to the Welsh Assembly, that would help or hinder the type of secure market you are speaking about?

Dr White: To be honest, I had not really thought about that. I would have thought that was yet another level of Government and let us face it, electrons do not stop at the border between England and Wales. I just think it would complicate matters and investors would regard it quite warily.

Q302 Mr Pritchard: So the view of industry, the sector you are representing within the industry, is that having a single UK energy policy would help the market as compared to devolving energy policy to devolved assemblies?

Dr White: Yes.

Q303 Dr Turner: It is quite clear from your answers so far that you have given some fairly cogent reasons why we are facing a potential generation gap in this country and a lack of investor confidence to plug that gap. What measures do you think the Government should be taking to restore some long-term confidence in the future? Do you have any suggestions?

Dr White: Yes; I certainly do. I have thought long and hard about this issue. One is that you allow some kind of cosy oligopoly to exist. Okay; I used to work for the CEGB and there is no way that I should like to get back to the CEGB. However, you have to recognise that there are four risks in generation: the risks are whether you can build to time and to cost; whether the fuel you have is going to become expensive or cheap in the future, the fuel price risk; whether you have built too many or too few power stations; whether you can operate this power station properly. Under the system of the CEGB, customers bore all of those risks. If the CEGB did it badly, the customers paid a lot of money: if they did it well they did not have to pay so much. When you go to a liberalised market, what we have, you end up with customers no longer taking the operational risk, no longer taking the construction risk, taking bits of the fuel price risk and bits of the demand risk and that is inevitable, which is showing prices going up or down and investors would take that as well. What we need to do is give investors a bit more confidence that those risks, particularly for electricity as you cannot store it in those peaks, could be quite severe. We need to ameliorate them a bit. One way is to allow a cosy oligopoly to exist and then the oligopolists, if they are sensible - big question -will price below the new entrant level. As long as you maintain open access to the networks, if they try doing what National Power and PowerGen did by pricing very, very highly, they would soon lose their market share and take the risk of a price collapse. If they are sensible, they price at the new entrant level so customers have a bit of protection, but not as much as a fully over-supplied competitive market. The next step is to have a form of capacity payment and, I cannot believe I am saying this, but that is where I have got to. You need a capacity payment which incentivises people to have capacity and either you could have it plant specific, that is different types, or certain payments for nuclear and certain payments for coal or what have you, or you make it just generic capacity, which works as well and there is a different shifting of who takes the risks there. What you must also do is make sure that the person who builds a power station is not then subject to losing his shirt if too many people build power stations later. There are ways of doing that and it is something I have written to Government about on how we could set up such a thing. The other way of doing it is that the suppliers - and let us face it there are only really six around this in this country - decide between themselves to offer long-term contracts of equal types to new generation coming on so that none of them is more exposed or less exposed than the other. None of them is particularly palatable, but I do believe those are solutions.

Q304 Dr Turner: If Government do not take some long-term intervention of any of these types, and they are all fairly radical interventions given the trend towards total liberalisation, what do you think the consequences are likely to be?

Dr White: I do not think the lights will necessarily go out. What you will see is extremely high prices.

Q305 Dr Turner: In the long term you think it would be better to take some pain now to avoid much greater pain later.

Dr White: Yes. If you could provide some less commodity-like exposure to investors, the kind of cost of capital you could apply to the market would be low and customers would benefit in the longer term.

Q306 Dr Turner: Ofgem is really very much a key player here.

Dr White: Absolutely; yes. Whether you believe long-term contracts will come or not, I do not think they will in this kind of a market.

Q307 Mr Chaytor: I am confused. A few moments ago you were arguing the virtues of the market and saying we really did have a free market. Just now you were saying that the only way to make sure of a market is to rig it. Either your advocacy of more oligopolies, or your advocacy of the suppliers operating a cartel is essentially rigging the market, is it not? This is the root cause of the problem that there is an endemic weakness in our system that the market can only survive if it is rigged. That is what you are saying.

Dr White: Yes, I think I would agree with you. The actual market we have created, which is this very, very competitive one, is unpalatable. In the free market you expect to see extremely large price excursions. Put it another way. If I were a generator trying to decide whether to build a power station now because I thought we might have a shortage coming up in 2008-09 and other people did it at the same time, I would not make a return on my investment. How do I go to my board? A lot of people have said to me that real men like to build power stations, that is what you do and it is true. There is nothing chief executives like more than building a power station; that is very, very strong. Look at the refining industry around the world. At the moment it is incredibly profitable, but it has been awful over the previous 20 years and a power company is a refinery acting in reverse. It takes coal, oil and gas, nuclear, hydro, puts in some capital and generates power which is sold at one price. A refinery takes crude oil, puts in some capital and makes different products, sold at different prices. They are exactly the same.

Q308 Mrs Villiers: This is probably going to sound like a very stupid question. You are talking about the uncertainty caused in a new power station build because one does not know the long-term price of fuel. With ever-decreasing stocks of fossil fuels has the long-term trend not got to be up? Is it not a pretty safe bet that in the longer term the price of energy is surely not going to come down? Is that not some comfort to people who want to build a power station?

Dr White: Possibly; possibly it will not go down, but I can see situations where we could have a price collapse in gas. Let us face it: those of us who were around in the mid 1990s, we had BG beautifully pricing up at oil index prices, because that was what it always used to do; then we had the Government introducing competition, stopping the designation contracts, stopping the flaring in the North Sea, all the gas was coming in and we had new entrants in gas supply. Then suddenly a dollop of gas arrived in the UK because Medway and Keepee[?] were slow in commissioning their power stations. So a dollop of gas arrived and prices collapsed down to the marginal cost level. They stayed there until we built the interconnector. Then the prices went up and followed the European prices. Interestingly as well, when the interconnector was out for maintenance, prices fell again and they went back up when it came in. Yes, you might be right that we are always going up, but if I were a banker looking at this curve of what has happened to prices and someone said they wanted to build a nuclear power station, how much money would I lend them, I would ask what the lowest price they ever had was: 15, 17 a megawatt hour? I would say I did not care as the price was 30 now and that was all I would give them. That is the essence of the problem.

Q309 Mr Chaytor: Do you not think then, when we say the market is unpalatable, what we are saying is that the market is unpalatable in terms of electricity generation? The source of the problem is that when the electricity industry was privatised 20 years ago all the focus was on supply and not on demand. Had we set up a market in energy services companies rather than a market in generators and suppliers, we might have been living in a completely different world now.

Dr White: I could not agree with you more. Our problem is that we have no demand response. We have missed a massive trick in this country and I think Keith was alluding to it. We just have the wrong kind of meters. If we had meters which gave proper signals, people, ESCos, would start giving more intelligent tariffs and you could have various appliances which would turn off if prices were higher and not others. Where we went wrong was back in 1996, when we were talking about splitting distribution from supply. What we did not understand was that in a competitive market what you require from the network is totally different from a vertically integrated monopoly. In a vertically integrated monopoly you are providing transport; you are taking power from here and moving it to there. In a competitive market, what you want the network operator to do is to provide facilities for people to buy and sell energy services. That is what it is about. What you want to reward our network operators on now is not how much wire they have in the sky, which is what our regulation does - it is the rate-of-return-on-assets type basis - you want to reward them on how well they run their network. If you reward people on how many outages they get, how many times the lights turn off, how quickly they connect people, the quality of electricity you receive, how many beautiful overhead lines they have buried, how quickly they connect new people, if you rewarded them that way then the network operators would ask themselves whether they need to build that line over there and if they had a bit of load management there they could pay that person to load manage. To do that properly, you need proper meters. What we did when we split distribution from supply was to put metering into the supply part. We did not only do that, which is the wrong way, but we also made competition in meter operating and all these other things. The idea that drove us was that the more competition you can have at any possible level the better. We ignored the fact that if you introduce competition at these various places, you introduce a whole administrative process as well, which stops any competition. If you had left distribution with meters and said to the distribution operators that they should provide services which allowed people to do intelligent metering and send signals, and do it at the lowest possible cost, that would have been the way forward, but we missed it. If we could go back, then we would get more to your area. Frankly, Italy is going this way, but we are a long way from it.

Q310 Mr Chaytor: This was obviously a political failure and remains a failure at the political level. What is the role of the regulator here? Do you think the regulator should have had a responsibility for advising on this at any point in the last few years?

Dr White: That is a good one. I just regard it as the two working together. The DGI at the time did not want to give a monopolistic service which did not have to be monopolistic to the network operator. Ofgem was of a similar view; OFFER at the time. I think it was a failure of both. What is worse is that at that time the national grid was finally floated and part of it was a 50 rebate to customers. If we had used those 50s to put in meters, customers would be getting lower prices.

Q311 Joan Walley: But we are where we are.

Dr White: Yes.

Q312 Joan Walley: Having had the energy review, we have the current review which is taking place. Following what you said to Mr Chaytor, is there any recommendation you would like to be taken into account in terms of changing the way the big tanker is being steered from what we inherited, which has got us here, to where we need to be going down a different direction?

Dr White: The first thing is that I should like to change the regulation of the networks to be a more performance based form of regulation.

Q313 Joan Walley: How would you do that?

Dr White: I have written papers on it and I am quite happy to send them in.

Q314 Joan Walley: In simple terms.

Dr White: You do not make their revenues related to the size of the asset base times a return plus their costs. You say you will give them so much money for this service and so much money for that service and so much money for the other services. Part of the problem we have is that the DNOs, the network operators, do not look at their business in that way; they look at their business as providing a network rather than the provision of facilities to allow people to offer energy services to buy and sell. That is one. The other one I would say is look very carefully at the incentive mechanisms for capacity in this market. Yes, if we had very violent prices people would load manage, but if they cannot see the signals they will not load manage. Load management does mean or can mean people turning off factories for a time. Let us have a capacity mechanism which could help smooth those prices.

Q315 Joan Walley: May I turn very briefly to the ETS and the issue of the price of carbon, which I understand is now significantly higher than was originally forecast. You said earlier on, if you were a banker, but given the company you work for, does that have any impact on investment?

Dr White: Yes, it does. The European emissions trading scheme. When I last came to see you, I was saying that I thought governments were likely to be lily-livered and not set tough abatement targets. I got that right. What I got wrong was the fact that the oil price went through the roof which threw the gas prices up and the price of an allowance is effectively linked to the cost of abatement, which is what you would expect. So what is the cost of reducing carbon dioxide? The easiest way of doing that is turning down your coal station just a little bit and increasing another gas station somewhere else just a little bit. If you plot what the emissions trading price has been since February this year against what I would calculate it to be, they are entirely correlated with a 95 per cent confidence level; this goes together. What is not right though is that the price of the allowance is only about a half of what it should be, which I do not understand. Normally someone from the City says that it is sentiment. That means they do not know. Why is the price lower? It could be due to a number of reasons like not actually needing to buy any allowances before March 2008 because you can use your 2006 allowances to meet your 2005 obligations, et cetera. The point I should like to make is that the price of an allowance is driven by the gas price and the coal price. Coal prices are "reasonably-ish" stable, even though they have gone up quite a lot recently. Gas prices can go all over the shop.

Q316 Joan Walley: What effect is that having on investment?

Dr White: It stops you investing. What you do is you do whatever you do at lowest short-run cost, which is turning down your coal stations and turning up your gas stations. What it means is that I have no visibility of prices after 2008 and none at all after 2012. I shall just do the things. The issue we have as policy is this: supposing you are an oil company, the price of oil is $60 a barrel, you are not investing in any new oil fields which need $60 a barrel to make them economic; you might do it at $25 a barrel, possibly $30. What we have in the EUETS is a price and allowance of about 20 to 30 a tonne, but any investment is being done on the basis of a cost of maybe 5. Do you see what I mean? It is not an efficient signaller of the need for investment. What it says to us is: how are we going to make this scheme work? That is the crucial thing: we do want it to work. So the more we can give signals about the longer term, what levels of abatement is this country and all the European 25 going to want? Are we going to turn our backs on buying Russian hot air for low costs? If we could make those kinds of statement, it would make the City a lot, lot happier. There is much more visibility of price.

Q317 Joan Walley: You are talking there about the long term. I should like very briefly to turn to the strategic generating options that there are. We have heard quite a bit in the first evidence session about nuclear. I am just interested in your view as to whether or not nuclear does require greater Government financial support than other competing technologies such as clean coal?

Dr White: If I just go to the table which came out of the Royal Academy of Engineering - I am not going to say whether I agree with it or not -

Q318 Joan Walley: It would be useful if you did say whether or not you did. From the evidence paper you have given us, you seem to be suggesting that it is based on assumptions which are no longer relevant.

Dr White: The irrelevance of them is that first of all the fuel prices are different now and also that the cost of capital which they have used is very, very low. They are using about seven per cent. If you are building a merchant station, that is you just build the station and you take your chance on what the price is going to be later, you would be way higher than that; something like 12 to 15 per cent. If, on the other hand, someone is willing to give you a long-term contract at a fixed price, then these are the kinds of rates of return, the seven per cents, eight per cents, which you might well accept. That is why is comes back to this market structure issue. The prices are stable and not going to have these commodity type fluctuations. You can get away with lower costs of capital. In answer to your question about whether I think the nuclear industry needs support, if it could get Keith and all of his friends to sign long-term contracts, as they did in Finland, and maybe even take a share in a power station, I do not think any support would be necessary, apart from underwriting the back-end fuel costs and the decommissioning, maybe underwriting the first projects or the expenditure of 100 million or 200 million to get the first one through. Apart from that I do not think so. Why do we not give another 100 million to get some of the early wave or offshore wind technology going at the same time?

Q319 Dr Turner: Instead of?

Dr White: No, I think you need both frankly; we do need to push those. One area where I did not agree with Keith's evidence is on the ROCs and how to get offshore to work. The trouble with the Renewables Obligation is that it does not really work for new technologies where the cost of the third or fourth or fifth is going to be lower than the first one. Why build the first one, if you know the third, fourth or fifth is going to be lower priced? What you need to do is to give some support to the first one and the ROC mechanism, rather than direct support from the Treasury, is the right way to do it.

Q320 Joan Walley: Going back to what you were saying about nuclear, you were saying that if there were this long-term signal, then that extra support would not be needed. Presumably the same would apply if that long-term signal were given to nuclear. By the same token it would not be given to other technologies including renewables.

Dr White: No, I disagree. What I was saying was that for the nuclear and for the advanced gasification, stuff like that, if you have a stable market, I do not think you would need to give any other support based on where we are at the moment. The renewables still will have to be given some support, at least maybe until 2020 as the costs come down, but maybe in time they will start to be able to compete if you make enough of them. The trouble with renewables, especially wind for us and wave, is that as we are the only people really doing it we need to do it on a large scale and unless there is a lot of build we will not get the costs down. The Renewables Obligation amounts to customers paying 42 billion from now up to 2027 and that is a lot of money. Why not use some of that rather than extra Government grants?

Q321 Joan Walley: Going back to nuclear, would you agree that in global terms it is largely irrelevant?

Dr White: No.

Q322 Joan Walley: You would not?

Dr White: No, I would not. You have to look at what is going on in China and what is going on in India and they are doing both.

Q323 Joan Walley: So you would not believe that carbon sequestration is more important in terms of the overall impact on global warming as a result of the investment taking place in China and in India?

Dr White: It is at least as important.

Q324 Joan Walley: What does that mean for UK policy?

Dr White: We are in a brilliant position here. Here we have a need for new capacity; we have a whole load of oil fields in the North Sea coming to the end of their lives which people are talking about decommissioning. They could do with the CO2 for the enhanced recovery of oil. CO2 is useful in enhanced oil recovery; certainly in Texas, where it is piped many hundreds of kilometres. We are in a great position, so why can we not do it first and then go and sell the technology, or help to lease the technology in China.

Q325 Joan Walley: In terms of the energy review, what do you think is likely and what would you most like to come out of it? Two different questions.

Dr White: What I should like to come out of it, and it is likely, is for Government to realise we are not going to get long-term contracts in this market, therefore we must do something about the capacity mechanism. If that is the case, I have clients who would want to go ahead and build an IGCC, a coal station, and try to do the sequestering at the same time and also the networks.

Chairman: Thank you very much indeed; most helpful.