Examination of Witnesses (Questions 200-219)
PROFESSOR KEITH
PALMER
6 JUNE 2006
Q200 Mr Wright: Is it your suggestion
that rather than have an EU ETS we should have a UK ETS?
Professor Palmer: I am suggesting
that we should have a UK forward price for carbon, which is a
slightly strange notion at first blush. If one said to all renewables
and non-carbon-emitting technologies that there was a facility
to underwrite a minimum carbon price, but if the carbon price
in the markets went above it they would have to give something
back, it would be a dramatic change in the environment in which
one was trying to get all non-carbon-emitting technologies off
the ground. This is at least as true for offshore wind as it is
for nuclear. This is not to do with supporting nuclear but all
non-carbon-emitting technologies.
Q201 Roger Berry: You said earlier
that the key intervention in the market was related to the carbon
premium. You almost went as far as to suggest that the carbon
premium was perhaps the only intervention in the market that really
mattered. You clearly indicated that you thought it entirely unfeasible
for the governments of the European Union to agree an effective
emissions trading scheme. There is no market solution to the provision
of an indicator to investors in the UK of the future price of
carbon and, therefore, there should be some floor to the carbon
premium below which the market should not be allowed to operate,
but if the price happens to go higher market forces can rule.
Is that a fair description of your view?
Professor Palmer: Almost.
Q202 Roger Berry: I am pleased, but
where do I digress from your view?
Professor Palmer: To clarify the
last two bits, I do not suggest for a second that we should give
up collaboration in Europe to try to get a really good second
stage ETS. I just do not think that it is very likely, as the
wind is currently blowing, that it will be sufficient to get non-carbon-emitting
technologies shifting forward at the pace which this country and
its Government say they want to see. What I do say about the UK's
position is that it is not a market solution but the reason for
it is that the carbon price is a government-made price. It is
wrong to think that one should just tell the City to go off and
make a forward price in carbon. It cannot do that because the
forward price of carbon will be whatever one decides to make it.
The tougher one wants to be on emitting carbon the higher the
price of carbon abatement. That is the way it works. The reason
we need a government initiative is precisely that. It is the Government
that has decided on behalf of the country that the UK must put
a price on carbon emissions and make people pay for putting that
stuff up there and, therefore, allow a benefit to accrue to those
who do not emit carbon. It is the Government that will decide
all of the parameters which determine what that price will be,
so it is impossible for anybody other than the Government to provide
a solution. But what I tried to say carefully was that, although
devised and implemented by government, it could still be a mechanism
that provided a market solution. One does not have to give people
a guaranteed price because what one should do is guarantee a minimum
price but say that if the price goes above a certain level—because
as a society one wants to be more severe on carbon emitting—there
is no way that the generators should get that benefit and it should
come back to the Government and taxpayer because they took the
initial risks to underwrite a minimum price and get these generation
technologies off the ground.
Q203 Roger Berry: I entirely understand
that and happen to agree with what you say. Would I be right to
conclude that your attitude to the debate about whether we should
have nuclear build or not is that that question is irrelevant?
The point is to set the carbon premium and make clear as a public
policy what the penalties are for emitting carbon and what the
benefits are for not doing so. Do you say that that is the policy
lever and the rest falls out of that and the market should then
be allowed to determine whether or not it is renewables, nuclear,
gas or whatever? Is it right that the key policy decision is not
nuclear or non-nuclear but the carbon premium?
Professor Palmer: That is my position.
If one gets it right and puts a technology neutral intervention
in place which underwrites the carbon premium the lowest cost
and cheapest non-carbon-emitting technology will be brought into
the marketplace. That may be nuclear if the witnesses to whom
you will be speaking next put their money where their mouth is;
it may be lots of offshore wind, but the great beauty of it is
that one is not concerned with picking winners or giving technology
preferences. As you rightly said, one is putting the environment
in place where people can get on and do their business if they
can.
Q204 Roger Berry: Is there not a
particular difficulty in relation to nuclear, namely the timescale?
As you have said already, the economic life of a nuclear power
station is significantly longer than for many other methods of
energy generation. You are saying that the Government should say
something not just about the carbon premium next year or for 10
years but effectively the next 40 or 50 years. Is that a realistic
thing to expect the Government to do and not subsequently to change
its mind as things happen?
Professor Palmer: The changing
of minds is part of life. Everywhere one goes in the world governments
have the right to change their minds and from time to time have
been known to do so. I do not think that that is a distinguishing
feature of nuclear. However, you make an important point about
the long life of nuclear. The design of this mechanism to provide
a certain forward price for carbon is very important. The devil
is always in the detail. I do not propose that you have a different
period that applies to different technologies. If one wants to
create this mechanism, one decides to give a, say, 20-year certainty
about future carbon prices and then nuclear will have to take
its chances. It would have greater risk because it would have
a longer payback period, but it would simply have to deal with
it.
Q205 Roger Berry: Do you have any
view as to whether the Government should lay down such a premium
for 10, 20, 30 or 40 years?
Professor Palmer: I always have
a view.
Q206 Roger Berry: What is your view?
Professor Palmer: My view is that
the longer the profile that one is prepared to provide certainty
the quicker and stronger will be the investment response and the
less expensive will be the electricity. If one put down a five-year
profile one would be wasting everybody's time because it would
evoke practically nothing because none of these technologies can
pay back in five years. If one did it for 10 years one would evoke
a response but nothing like what it would be if it was for 15
or 20 years because that is the full expected life of certain
types of technologies and is well within the payback period of
most of them. If one can devise a mechanism that does not expose
the taxpayer to great risk that extends for 20 years it will be
the most dramatic way quickly to bring into existence all the
renewables that one keeps talking about but are never built.
Q207 Judy Mallaber: I wonder if you
can help me understand more clearly the industry's response. On
the one hand, it seems keen to tell us that carbon prices rather
than public subsidies is its preferred means of financing new
nuclear build and that is about not picking winners and it should
be dealt with through the pricing mechanism. On the other hand,
it is asking the Government to commit itself to nuclear and to
streamline the planning process specifically to help that. Do
you see that as a contradiction in the position of the industry?
Can you give me some clarity on where you think it is?
Professor Palmer: I do not believe
that it is for me to speak for the industry particularly when
you are to meet two great energy companies immediately after me.
My perception is that there are mixed views around. The industry
is not a great amorphous lump of similar views. Some people will
have said one of the things you have suggested; others will say
other things. I restrict myself to saying that I do not think
one needs to do industry- or technology-specific preferential
things to get these investments properly tested and see whether
or not they are economic. One needs to create an environment in
which the people who keep claiming that they can produce this
stuff so cheaply actually have to put their money where their
mouth is. As I said to Roger Berry, if one puts in place a carbon
premium not only does one achieve that but it is done on a technology-neutral
basis. Maybe all the nuclear buffs will go away when they have
to put their money where their mouth is.
Q208 Judy Mallaber: Is it reasonable
for them to expect government to come out clearly at some stage
and say either that it believes nuclear has an important part
to play or that it is very sceptical about all the arguments?
Professor Palmer: Yes, I think
it is. Whether one is a domestic or foreign investor and one is
contemplating huge investments in a strategic industry in any
country, one would not expect to proceed with big investments
unless it was clear that the direction of travel was broadly supported
by government. Particularly given the announcement up to now by
the Government that it is to take a decision, I do not think that
there can be progress unless it is prepared to say that, subject
to all the things I have stressed many times—that it is
not preferential, that it is economic and it can hack it and get
over the usual hassle of doing business in the United Kingdom—it
would welcome the diversity of nuclear. If government said the
opposite it would never happen.
Q209 Judy Mallaber: Therefore, government
cannot stay neutral and say that the market should decide?
Professor Palmer: I do not think
that the Government can stay neutral but it can make clear that
it is not saying it is prepared to subsidise this industry. It
can say it believes that nuclear has an important place, and if
it turns out that the claims about its economics are true and
it provides a technology neutral environment it will be competitive
with the other non-carbon-emitting technologies. I do not think
it can stay neutral in creating the wherewithal to bring carbon-reducing
technologies into existence, but it can stay broadly neutral on
nuclear to the extent it can be disentangled, and to some extent
it can be.
Q210 Judy Mallaber: You keep returning
to technology-neutral mechanisms and pricing mechanisms which
favour low-carbon technologies, but are there no arguments for
mechanisms to encourage other forms of low-carbon technologies,
such as renewable microtechnologies? Are there no changes that
should be made to the planning process or particular incentives
to kick start those other forms of technology that you favour?
Professor Palmer: I do not think
it is an "either/or" situation. I am sure you are well
aware that at the moment we have huge subsidy support for offshore
wind, onshore wind and marine technologies. The operation of the
renewable obligation certificate schemes is currently raising
the cost of energy from those sources by at least 100% over what
it would have cost without the ROC scheme. Yet it is still very
difficult to get those projects financed. For me, it is not that
we should not be supporting them; we already are supporting them,
but we are not doing the critical thing which is to provide a
measure of certainty about what sort of carbon premium all of
those technologies will receive for a much longer period. To me,
it is rather startling that I have been involved in trying to
fund renewables for more years than I like to think about. The
ROC creates tremendous economic impetus to get these things under
way, but it is still extremely difficult because offshore wind
turns out to be very expensive.
Q211 Judy Mallaber: What needs to
be done? What would be the most practical way to get it going?
Professor Palmer: At the risk
of sounding like a cracked record, one needs a technology-neutral
carbon premium which applies to all technologies. I know you smile
because I have said it 15 times, but one of the big problems with
windmill schemes at the moment is that the big premium received
under the ROC scheme extends for only a very limited period. Even
for offshore wind, these projects have significant capital investments
which have much longer lives than the ROC premium is assured.
It is extremely difficult to go to the City and say that one wants
money to invest in a technology which depends on a huge subsidy
that may not be there for much longer.
Q212 Judy Mallaber: What do you say
would be the length of time over which you would need that certainty
for wind technology, etc—20 years?
Professor Palmer: Yes; it is the
same answer as I gave to Roger Berry. That period is not arbitrarily
plucked out of the air; it is based on how long one needs to fund
these things and that tells one how long the assurance needs to
be. The funders get their money back out of future revenue and
it is that premium and extra revenue which pay out the lenders.
Twenty years is a pretty robust answer.
Q213 Mr Clapham: In terms of the
likely impact of nuclear build on CO2 emissions, what is your
response to the Sustainable Development Commission's view that
even if we doubled the nuclear build by 2035 it would be likely
to reduce those emissions by only 2-8%?
Professor Palmer: My private response
is slightly impolite. My public response is that I just do not
understand what it is talking about. The fact of the matter is
that if we do nothing and do not build nuclear, given the way
we are headed about 20% of the capacity of this country will be
gone because the nuclear plants already there will be shut down.
They cannot be life-extended very much more; most of them already
have been. We will have to build a lot more gas-fired power stations
to generate the electricity that our industries and homes need
just to replace what will be shut down. I think that we are talking
about new nuclear, if we have it, having to run like crazy to
have enough capacity on the bars to produce electricity not to
increase the amount of gas-fired but simply to replace the retiring
nuclear stations. That is the fact; I do not know that it is even
contentious. If we say that we do not do that and just have more
windmills three matters are true. First, absolutely all the evidence
I have seen—I have looked at it very hard—is that
offshore wind is at least twice the expected cost of nuclear,
even if it is assumed that the true cost of nuclear is being exaggerated
and it is really a bit higher than the industry says. Second,
one cannot build that much offshore wind in the time; it is simply
not possible. Third, if it were possible so much wind power would
be highly unreliable and one would be put at a serious security
of supply risk because when the wind does not blow there is no
generation. I just do not see the point that is being made. The
fundamental question is: does one replace existing nuclear with
new nuclear? If not, what is to replace it? I promise you that
only one thing that will replace it if we do not have new nuclear
is a lot more gas-fired power stations.
Q214 Mr Clapham: Do you agree with
its assumption, nevertheless, that the impact on CO2 production
is not as dramatic as some people would have us believe?
Professor Palmer: It is not, but
that is only because it is not taking account of the fact that
there will be a big increase in carbon emissions without new nuclear.
One will take all of the existing nuclear plant off the bars and
burn carbon-emitting CCGTs. I can play statistical games too.
Mr Weir: You have told us a great deal
about the carbon scheme and stressed neutral technology. You are
looking purely at carbon which is understandable in view of concerns
about climate change, but nuclear has another problem: it creates
waste.
Q215 Chairman: That is Judy Mallaber's
question. We are dealing next with waste management. Judy can
ask her question on waste and we will then return to it. Let me
ask one further question on the issue of carbon. I have heard
that the German Government is giving assurances to coal-fired
power stations to enable development to take place in Germany,
so there is a European government that is already going beyond
the ETS. Is that also your understanding?
Professor Palmer: I admit that
I am not familiar with that. I cannot comment because I do not
know the facts.
Q216 Judy Mallaber: Have you done
any work on the other side of the equation, that is, incentives
for further energy efficiency and measures to cut demand, which
we have not covered at all?
Professor Palmer: That is a very
important question. I am certainly not an expert, but in the past
I have looked at the cost-effectiveness of energy efficiency savings
schemes and expanding efforts to cut back on industrial and residential
consumption. It seems to me quite clear that we are not doing
nearly enough in that area. I do not believe that it changes the
parameters of the debate because we are talking about replacing
existing nuclear. Any energy review needs to look at least as
hard at demand and new interventions that are paid for by consumers
to improve efficiency; in other words, they pay a price if they
do not improve efficiency, but I do not think that that will change
the overall parameters of the problem.
Q217 Judy Mallaber: Moving on to
waste management, the nuclear industry seems to be fairly relaxed
about being able to cover decommissioning and waste disposal costs,
but do you agree that there is a fair degree of uncertainty about
those issues, especially given that we have not yet worked out
the long-term solution to the current waste legacy?
Professor Palmer: Again, it is
difficult to summarise that in a sentence or two. Decommissioning
is not an industrial issue. Many nuclear power stations have been
decommissioned and industry is used to reserving in the balance
sheet provisions which will be spent in future to deal with that.
I do not believe that the cost risk raises particular problems
for the industry. Obviously, waste disposal is a different question.
Clearly, the nation soon has to come up with a solution. This
has nothing to do with new nuclear; it is to do with the fact
that we have lots of this stuff lying around and we shall be decommissioning
nuclear power stations quite soon. There needs to be a scheme
which provides absolute assurance: first, that the waste is locked
away where it can never do any harm and, second, that the costs
of that are borne by the industry and passed through in whatever
way it is able to pass it through to consumers. But in the first
instance it should be a cost borne by the industry. There are
mechanisms around and are being discussed for a nuclear waste
agency to make certain that the costs are borne by the private
sector for new nuclear. Certainly, some of those schemes will
help to reduce the risk attached to waste management, but I think
everybody accepts that the industry should pay for the costs of
disposing of waste at the end of the lives of the power stations.
The issues are about how one guarantees that if, for example,
they go broke the undertakings they have given to fund those future
costs are met and how one defines a scheme that properly shares
the risks between the people who cause the problem and consumers.
I think that all of those are very important questions that can
be resolved. Why is the industry relatively relaxed about all
these things? I think the answer is that these costs are a surprisingly
small percentage of the total costs that have to be incurred over
the life of a power station. On the numbers that I have put together,
less than 2% of the total cost incurred over the life of a nuclear
power station would represent the amount required to deal with
the waste problem at the end of life.
Q218 Judy Mallaber: On what basis
have you made those projections? Has government or the relevant
agencies done sufficient work to enable us to ensure that those
waste disposal costings are accurate?
Professor Palmer: They are not,
in my language, bankable numbers, but there is a great deal of
information about what the expected costs of the various options
are. All of them are uncertain. We have taken a very conservative
view; we have more or less doubled, and doubled again, the estimates
just to allow for an envelope of uncertainty around it. Because
they are deferred so far into the future and these costs are provided
for very gradually over the full life of the plant they do not
add up to as terrifying a proportion of the cost risk as many
of the others costs involved.
Q219 Judy Mallaber: I am unclear
about the mechanism to ensure that those costs are borne by the
industry. Does government in some sense have to come up with a
global figure and is the industry then required to show in its
accounts that it has put in the appropriate figure? How does it
work?
Professor Palmer: The Government
will need to come up with an arrangement that, first, makes clear
that the costs will be borne annually by the companies that create
the problem to be spent at a future date to deal with that problem.
Second, it will need to put in place financial arrangements—bonds
or some other assurance—which say that if the company ever
goes out of business—or goes back to its home country, if
it is not British—we can be assured as a society that those
obligations will be complied with. Third, it needs some sort of
arrangement which says that if the costs change in future because
the sums turn out to be wrong there is scope for future governments
to reopen them in ways which will not be too frightening to the
financial markets. A whole network of complicated arrangements
has to be put in place.
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