Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Quesitons 360-379)

MR ALAN ROBINSON AND MR DAVID MANNERING

3 JULY 2006

  Q360  Roger Berry: How good are markets at dealing with strategic gas storage? Some people have looked at the experience of the last two winters and drawn the conclusion that government should impose a requirement for storage capacity on gas supply companies and other witnesses we have had have said the opposite. What is your view on that? Do you think government has got a role to play there?

  Mr Robinson: I am very, very firmly in the opposite camp.

  Q361  Roger Berry: I thought you might be! Why would this be, Mr Robinson?

  Mr Robinson: For a couple of good reasons, I think. One is that I believe once you decide that you are not sure whether markets are going to work and you start planning centrally `plan Bs', as it were, it almost becomes a self-fulfilling prophecy. We have got a lot of people using a lot of innovative ideas to develop further types of gas storage: onshore, offshore, liquefied storage, all sorts of stuff. If you announced that there is to be some centrally built gas store I suspect the first thing it would do is it would stop all of those projects because they would all say, "This is going to be a huge overhang in the market, it makes it impossible for us to judge whether our projects are going to be economic because there is to be some centrally managed store". For that reason I think it will operate against security of supply and will turn what is currently a market which does deliver security into a centrally planned market, or half a market, and I am a great believer that you cannot have half a market, you either have a market or you do not. There is that reason. The second reason is another large gas store like Rough would be a very expensive proposition, I think ILEX have estimated £2.5 billion for a single gas store, where I have indicated we have a facility already within the CCGT fleet if we maintain some diversity of other plant that does more than Rough and did not cost anything extra to create. I think it would be a very expensive project and it would be a major overhang on the market. The only people that I think strongly support it within the industry are those maybe charged to build and operate it, but no-one who is active in the market would support it, I think.

  Q362  Roger Berry: So your experience is that the market delivers infrastructure in time?

  Mr Robinson: Yes.

  Q363 Roger Berry: And consumers never find themselves in difficulties because some infrastructure apparently is not there when it is needed?

  Mr Robinson: The market generally builds it on time. There are sometimes delays that are not of the market's making. We talked about the Langeled pipeline from Norway coming in this coming winter. That was delayed for no technical reasons, no development reasons, it was delayed, I believe, because the treaties with Norway were not processed to the original timescale. There are lots of other issues. Generally markets deliver on time.

  Q364  Roger Berry: There are a whole range of infrastructures one can think of where there have been overruns, where deadlines for completing infrastructure have not been met. Is it unique to gas supply that this never happens?

  Mr Robinson: It is not a question of any individual project, I am just saying in the market generally, even if projects are delayed, other flexibilities are brought to bear, as we saw this last winter. We saw the CCGTs responding and other market reactions to it, and that is the great thing about markets, it is not a question that you have to have that one project. If you have got a diverse set of solutions, if one project is delayed other factors come in and other people realign their positions to cover for that. I do not believe that any centrally planned projects are any more or less likely to be successful from a technical and timing perspective but I do think they will stop people investing in the current infrastructure that is being looked at from a commercial basis and, therefore, you will move very rapidly to forcing centrally planned infrastructure which is something we have been trying to move away from.

  Q365  Roger Berry: Presumably your general position would be that it is quite erroneous for governments to talk about a concern about security of supply, they should ignore that problem entirely and simply leave things to the market?

  Mr Robinson: No, I do not believe that is the correct statement. I believe that the government should be enablers of it, not providers of the direct solution. So the government are quite rightly asking what constrains projects coming on quickly, what gets in the way of markets delivering, and let us remove those barriers to allow things to happen more swiftly, and that is where you get concerns about planning and lots of other things, things that the government can do. It is not for the government to say, "Let us build them instead" because I do not think that would help us very much.

  Q366  Roger Berry: Let us move on to planning. In paragraph 16 of your submission you talk about the importance of streamlining planning procedures. Are you satisfied with the Secretary of State's recent announcement of changes to the planning regime for gas storage?

  Mr Robinson: Yes, and I think that is a good example of being able to set out a factor which otherwise would not be taken into account in a planning inquiry, that there is a national need or a national advantage. We have seen that being developed a little bit in wind as well. We have certainly put forward in more detailed evidence in the Energy Review that for clean coal, for carbon capture, for nuclear, it is very important that there is an overarching Strategic Environmental Assessment first, which is government managed, which does create that very framework which says, "This is acceptable, it is practical, a sensible way forward". It is a choice that the market then has, it is not forcing people to do it but it is enabling, and, as I say, the role of government in security of supply is as an enabler.

  Q367  Chairman: Just a few concluding questions from me, if I may. First of all, you have been trailing your coat a little bit in public as a company about this Pembroke CCGT power station, 2000 megawatts, so presumably that is three or four CCGT units in one place.

  Mr Robinson: Yes.

  Q368  Chairman: A hell of a bloody big gas-fired power station that would be at 2000. Are you going to build it?

  Mr Robinson: We would like permission to build it. At the moment we are still in the consenting process. Eighteen months after the application has gone in we are still answering questions from statutory consultees, et cetera, and I do not want to go into detail, we can write to you if you want us to about it. One of our issues about the planning process is that there are, rightly, a whole group of statutory consultees on each project, and I have no problem with that at all, and I have no problem with positions that they take, but they do not have any responsibility at all to respond within timeframes. We have spent 18 months providing more and more data to everyone who asks and they then turn round and say, "We have got so much data now it is going to take us many more months to process it". It is frustrating. Yes, we would like to build it. We have got the grid connections sorted out. We are going through the tendering process for the plant. We would be ready to go on that project come this autumn if the consent were there but it will not be by this autumn because it is already too late to achieve that, so the project will be delayed. Frankly, we thought allowing two years for the consenting process for building a CCGT on an old oil-fired power station site ought to be plenty but it is proving not to be.

  Q369  Chairman: I think you make quite a powerful case there. I think the Committee would like to take advantage of that note about the difficulties because planning issues have come up regularly across the whole scene of energy, whether it is nuclear, grid, gas or gas storage.

  Mr Robinson: A real example may be helpful to you.

  Q370 Chairman: It would be very helpful indeed. That leads me on to a rather complicated omnibus question. You have said that the cost advantage of gas is likely to lead ceteris paribus again to less diversity or more diversity. Scottish Power and the Environmental Audit Committee in their recent report said that they are worried that the current focus of the Energy Review on nuclear power will actually divert attention away from what needs to be done to plug the generating gap over the next five to ten years, which that Pembroke station will obviously make a contribution to. They are worried about the adequacy of CCGT provision in the short to medium-term. Others of our witnesses have said if you do nuclear then renewables loses its momentum, clean coal technology loses its momentum, it will distract from energy efficiency, you do not need energy efficiency because energy is freely available again. Do you think the market which you praised in your answers to Roger Berry is going to sustain progress on all these different fronts and deliver a diverse energy mix?

  Mr Robinson: I do not buy the argument of distraction. Within RWE npower, which is one of the largest renewable energy companies, and I used to be responsible for that and its CHP area, it has one of the largest CHP businesses. It has coal, it has oil, it has CCGT. It is looking at clean coal, it is looking at further CCGT options, it is looking at demand-side management. Large companies and industries can actually manage to do more than one thing at a time. I do not buy the major distraction argument. I do buy the argument that there is a need for a clear route map, a clear plan for how some of these longer term technologies are going to be enabled so that when we get to that point in six or seven years' time perhaps there will be genuine choices available to companies like ours as to what to build. As I think David touched on earlier, the economics of nuclear, coal and of gas are spookily similar at the moment in terms of long-term view, so you would have to take a view about carbon, et cetera, but the ranges overlap each other very heavily and, therefore, for the first time perhaps for a number of years, there is a real reason to expect a diversity of solutions to be chosen but, of course, those solutions have got to be enabled first. Therefore, we see a parallel track of getting our act together as a nation on carbon capture and clean coal, on nuclear, on offshore wind, on all of those issues which have a longer lead time, while at the same time ensuring that there are short-term options available to fill in for as long as is needed, and we are working to that end.

  Q371  Chairman: That leads me on neatly to the next question I was going to ask. I think I can anticipate your answer but I shall ask it nonetheless. Do you think government should try to bring about a specific generating mix or should it just adopt a technology neutral approach and see what the market delivers?

  Mr Robinson: The simple answer is you have guessed what my answer is going to be. No, government should not be attempting to pick technologies. I would put two caveats on that. Firstly, I think there is a role for government in pump-priming novel technologies, marine and other things which need some research monies, some upfront funding. Particularly where there is an industrial opportunity for the UK there is a role for government in that, but that is pump-priming. The second one is that government should be removing barriers which disadvantage one technology over another. That is not quite the same as favouring, but there are other technologies that are available which are perhaps disadvantaged by the way that the regulatory framework has been set up. Yes, the government should make efforts in those specific areas to re-level the playing field.

  Q372  Chairman: Can you give us an example of that?

  Mr Robinson: I think biofuel for heat is disadvantaged. Biofuel for electricity gets Renewable Obligations Certificates, if you have biofuel for a CHP scheme you get no value for the heat by using biofuel, things like that. The tax treatment of long life assets like a nuclear or coal-fired power station is much less favourable in the tax stream than a CCGT. Why? It is not obvious to me.

  Q373  Chairman: I do not think we knew that. That is a very interesting little nugget you have given us there.

  Mr Robinson: I can give you the one minute explanation and I can certainly send you a note on it. The simple explanation is that any asset which has a projected life of longer than 25 years is deemed by the Treasury to be what is called a long life asset, very originally. That has what is called 6% writing down allowances, so how quickly you can count the capital gains tax is a very slow process. It takes forever to get any capital allowances back. An asset with a shorter life, which a CCGT technically would have, gets what is called 25% allowances so it gets most of its capital allowances allowable against tax much, much more quickly. A project that does not involve capital at all, like buying carbon permits, goes straight against your revenue and, therefore, gets immediate tax allowances against profit because it is this year's expenditure. So you have got three different options to achieve a carbon reduction with three very different treatments. Our estimate is that the cost of nuclear is disadvantaged, lifetime costs, by about 20% relative to revenue cost and about 10% relative to CCGTs purely by the tax treatment.

  Q374  Chairman: Well, well, well. That is why you are not interested in nuclear as a company.

  Mr Robinson: I am not saying one thing or the other. I am saying that is why I am off to the Treasury in a few weeks' time to try and find out from them whether this is deliberate or whether it is just an accidental factor of the fact that these tax rules exist for all industry, they are not specific to the electricity industry, but their consequence, I am sure unintended, is to disadvantage. The longer life asset you try to build, the worse tax treatment you get for your pains.

  Q375  Chairman: That is fascinating. We do not have you on the list of people who are interested in the building of a nuclear power station. Are you actually looking at the possibility?

  Mr Robinson: We are looking at the nuclear issue alongside other people. We are certainly in favour of enabling the option, as I said earlier, we just feel it is far too early to start making commercial statements, so that is where we stand.

  Q376  Mr Hoyle: We had another witness who suggested that energy prices to UK industry were 20-25% higher than in Europe. Is that fair, do you think?

  Mr Robinson: I have not seen the exact comparators recently so I cannot comment on the numbers. I am certainly aware that energy prices over the last ten years have been 20-25% lower in the UK. I could not give you the spot comparison now. I know Ofgem are producing figures, I do not know whether you are familiar with them, David.

  Mr Mannering: The DTI produce some data but it is usually about six months or more out of date so it is quite hard to get up-to-date with this and to know whether they are doing a like-for-like comparison because sometimes the data that is chosen on the other side comes from long-term contracts that would not be replaced if they were done today.

  Q377  Mr Hoyle: So you have nothing to say whether the 20% or 22% higher is true?

  Mr Robinson: I know that the prices in the UK are now very much within the pack of European prices overall but countries define industrial sectors differently and things like that, so one would have to look quite hard to get a true comparison.

  Q378  Mr Hoyle: It was a car plant that said the energy costs are 22% higher in the UK than in the European factories.

  Mr Robinson: For a specific customer of specific demand size in a specific country that might be the case, I do not know.

  Q379  Mr Bone: I think the thing that came out was that UK companies are very efficient but the problem that we saw with the European market was the wholesale price of gas. Gas is gas and it is ludicrous that there is such a difference in what is supposed to be one market area. I think that is the thing that concerns us most about it.

  Mr Robinson: As we say, a lot of the European gas is clearly priced on long-term contracts and does not have that same seasonal effect that you see in the UK because it is very much off price, whereas most UK industrial companies now buy on a rolling basis rather than fixed term contracts. In the summer they will be seeing significantly lower gas prices in the UK than on the continent. In the winter the position tends to reverse because there is a much flatter profile across the year in Europe than there is in the UK.


 
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