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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