|
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1123-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TRADE AND INDUSTRY
UK DEPENDENCY ON GAS AND COAL IMPORTS
Monday 3 July 2006 MR ALAN ROBINSON and MR DAVID MANNERING Evidence heard in Public Questions 315 - 383
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Trade and Industry Committee on Monday 3 July 2006 Members present Peter Luff, in the Chair Roger Berry Mr Peter Bone Mr Michael Clapham Mr Lindsay Hoyle Mr Anthony Wright ________________ Memoranda submitted by RWE npower
Examination of Witnesses
Witnesses: Mr Alan Robinson, Director, UK Markets, RWE npower, and Mr David Mannering, Director of Economic Regulation, RWE npower, gave evidence. Q315 Chairman: Gentlemen, welcome to our evidence session on UK dependence on gas and coal imports. We are nearing the end of our inquiry. I think this is the last but one evidence session in our programme. We are very grateful to you for coming and for your written memoranda. Can I begin, as I always do, by asking you to introduce yourselves? Mr Robinson: My name is Alan Robinson. I am now employed by RWE Trading. I have been in the industry for 26 years - CEGB, National Power, Energy, npower, and very recently I have moved across to the trading floor. I am still involved, though, in long-term strategic issues by my day job is involved in actually despatching the power stations and delivering the fuel to the power stations on a day to day basis. Mr Mannering: My name is David Mannering. I am Director of Economic Regulation at RWE npower. My background has been in regulation more or less since privatisation, starting with National Grid, then National Power, and then I spent five years with Anglian Water, and now I am back with RWE npower. Q316 Chairman: Can I begin by asking you a broad question about your reading of the market. You have told us that you think the Government's assumptions about growth in demand for electricity are "unrealistically low". What do you think the growth in demand is going to be over the next, say, 20 years? Mr Robinson: We would start from the same place as the DTI, and indeed the same place as National Grid do in their long-term, seven-year statement, which is that you start with an assumption about GDP growth at 2.5 to 3 per cent a year, and then you allow for two factors: one is energy efficiency improvement and one is just a general reduction in the energy intensity of the economy. Traditionally, those would have knocked 1 to 1.5 per cent off GDP, and you would have had a growth of 1.5 to 2 per cent. We would suggest that perhaps going forward with further, more intensive efforts on energy efficiency, that might be more like 1 or 1 and a bit. Our view is 1 to 1.2 per cent, that sort of level, per year compounding into the future. The Government figures I think start with a similar number, which they call "without special measures", and then they flatten it to pretty well zero growth with special measures. We think that those special measures, which generally are energy efficiency, are probably already in our numbers. We are very closely aligned with the NGC forecasts, the government forecasts, which have largely been renewed for carbon allocation purposes and they are, perhaps understandably, a little on the optimistic side in terms of energy efficiency. In dealing with long-term security issues, one does not want to start with an overly-optimistic assumption about demand management. One has to build that on top as an additional measure, rather than as an underlying factor. Q317 Chairman: There is a phrase which economists like to use, ceteris paribus (other things being equal) which applies to my next question. Ceteris paribus, therefore: what do you think the consequences of that forecast are for demand dependence on gas and coal-fired generation and therefore for our dependence particularly on gas imports? Mr Robinson: We have said in our evidence that one of the consequences of aiming at a lowish-number for demand, given that new plants, particularly in the medium‑term, are likely to be to gas, does mean you probably understate the amount of new gas required, and obviously you change the percentage total. You change the denominator as well in the equation. Our judgment would mean therefore that we think more gas will be required in the short term. Our overall view, like that of many other witnesses you have spoken to, is that diversity is the key issue here, but inevitably, in the short and medium term, the only new plant that is likely to be built is gas. Our view is very much one of quickly bringing the other options into play. You are still probably talking six, seven or eight years at the earliest for some of the other larger options, and perhaps 10 years plus for nuclear. Yes, it will mean more gas; it will mean a greater dependence on gas, and therefore inevitably with UK continental shelf declining, a consequent additional dependence on imported gas. Q318 Chairman: You gave some quite dramatic figures in your written evidence to us. You said that this could result in greater than 80 per cent dependence on imported gas and as much as 75 per cent of electricity generation fuelled by gas by 2025. That means that in less than 20 years' time, 75 per cent of electricity will be coming largely from imported gas. Mr Robinson: Yes. That comes back to your opening piece of Latin, which says very much that we have assumed in that, quite deliberately, that everything that is built is CCGT. We do not believe that is going to be the outcome in the 2025 timeframe, but we feel it is the illative starting point: if nothing else changes, if we do not sort out some of the issues on which we can touch on consenting and enabling of other technologies, then that is the consequence. I do not believe it is the likely outcome because I think other measures will be taken, but it just concentrates the mind on where we would otherwise have to go. Q319 Chairman: There will be no new coal-fired generation then alongside that CCGT? Mr Robinson: Not in that assumption, but, yes, our assumption would be that indeed there will be some new coal plant coming into play in eight, nine or 10 years' time. Yes, in that timeframe there will be coal and therefore gas will be lower than we said, but we started with that just to give a base case and say that is the worst; it is not a question of the lights going out because CCGTs can and will be built. It is a question of increasing dependence on gas and, given our belief that diversity is a key part of the answer, that would be an over-dependence on gas, in our judgment. Mr Mannering: Since we did the analysis that underpinned that reply, we have done some updated analyses. The balance between coal and gas has shifted somewhat more towards it being more of an even decision between the two technologies. Mr Robinson: From an economic investment perspective, the two look much more similar than perhaps they did even a couple of years ago. Chairman: That is very interesting. Let us look first at your gas situation and then move to coal. Q320 Mr Wright: In terms of the importation of gas, we have heard evidence from a number of companies that have suggested that they have some rather large projects in being at the moment which are going to take into account that importation of gas, such as the Langley Field and ExxonMobil in terms of the LNG depot. What we have not seen is any evidence about any projects that you as a company, RWE npower, are involved in. Do you have any projects? Where does your gas come from at the moment? Mr Robinson: The projects we are involved in are ones that will probably already have been covered in the sense that we are not the lead players in projects. We are involved in a number of potential LNG import projects, et cetera. They are confidential in their nature because it is a very competitive area at the moment. Yes, we are involved in some of those LNG projects, looking at long-term arrangements, contracts and possible capital investment, but the reason we have not led on them is because we are not the lead player. Upstream gas is not a key part of our business. Within RWE, there is a company RWE Dea that is an upstream gas company but it is a very small part of what our business is. We are much more about securing contracts on other people's facilities. That is really the way we have seen it. Q321 Mr Wright: Where do you get your gas supply from at the moment at your existing stations? Mr Robinson: We have a number of long-term contracts that were put in place at the time the stations were built. Some of them are just flat, 15-year contracts for an amount of gas; others are fuelled contracts where you take the output of a field and, as the field declines, so the volume declines. We have some of those. Otherwise, for the balance of our requirements we look usually about three years ahead into the market and we source gas on a rolling programme in the traded market in the UK. That is where it comes from: it is a mixture of long-term contracts, medium-term contracts, and forward purchasing in the traded market. Q322 Mr Wright: So you are satisfied in terms of the security of supply for gas that can look after your projects in the foreseeable future? Mr Robinson: Yes. The reason to be involved in these LNG projects is that we think it is right to have a mixture of tenor, as the trades would say, of period ahead that you buy. That is the right risk approach - not to buy everything on a long-term contract nor everything in the spot market but to do a rolling programme of contracts of different durations. It is our long‑term contracts that were obviously signed a number of years ago that are starting to come to an end, and we see those very much being replaced by arrangements to import LNG particularly. Q323 Mr Clapham: Mr Robinson, just before I turn to look at coal, your coal-fired stations in particular, coming back to your analysis there of gas in the energy mix, if we look at the shorter period - you were looking at the long term - we know that there is likely to be a gap around 2012/2015. Even if a decision is made therefore to bring on new nuclear build, we still have that first gap to deal with. We know that we are going to have gas coming in from Norway and there is likely to be a glut of gas in another 12 months on the market. There are people who say the market needs to be controlled, otherwise we may have another dash for gas. The forecast that you have given for the longer term of 80 per cent of our electricity generating capacity coming from gas is likely to come sooner, maybe not the 80 per cent but perhaps 60 per cent. That therefore means that the diversity that we are looking for in the market could in fact be thwarted. Is it your view that gas should be controlled when that first new import of gas comes in from Norway or are you satisfied, do you feel that the market will actually decide which is going to be the energy mix? Mr Robinson: Let me correct one point. The statement we made about gas is not a forecast; it is a consequence of doing nothing. We are not proposing that nothing be done, so it is not in that sense a forecast; it is just saying that if you do nothing and just let gas be the only form of new plant, then that is the natural consequence of that situation. Coming back to your question, though, we do expect to see some coal coming in around 2015, maybe a little earlier than that, with some clean coal projects. We have announced our own study for the Tilbury project. We can come back to that if you want to do that. Otherwise, you are right to say that for the next four or five years, clearly there is going to be significant emphasis on energy efficiency. We have some thoughts about how those efforts can be redoubled. Also, you have to be aware that the majority of the plant that will close over that period is plant that is closing not for any market or technical reason but purely for regulatory reasons. Clearly, that is an option that exists in seven, eight or nine years' time. If there is some new plant under construction, perhaps committed in five years' time, some new nuclear, some clean coal, et cetera, then there has to be a question mark about whether plant that is due to close in 2012, 2013 and 2014 could be life-extended a few more years to cover some of that gap. We would certainly say that there is very little, if any, of the plant on the system, non-nuclear plant at least, which is technically incapable of running on. It could all be refurbished; it could all be kept going for some more years, if that was needed to fill a gap. It is a short- term option and it is good to have short-term options because uncertainty means that you would want to have some things you can turn on and off at one or two years' notice rather than at eight or ten years' notice. We do think that the coal and oil plant are candidates for re-thinking about exact life expectancy in a few years' time when we really know where we stand on the other options. Q324 Mr Clapham: Turning to what you say in your submission about coal, you tell us that you burnt in 2005 something like 7,089 kilo tonnes of coal. Where did most of that coal come from? Mr Robinson: Of that 7 million tonnes, the vast majority is imported. The reason for that is that the three power stations in Germany are all southerly based and the one on Tilbury on the Thames does not even have a rail link; it is an importing coal station with a jetty and international coal ships come straight into the station. Didcot is linked directly by rail to our own facility within the port at Bristol and it takes its coal that way. Aberthaw is the one station that does burn some local Welsh coal. The quantities of that are constrained for two reasons: one is that we could not get anywhere near our sulphur counts if we were to use all local coal; secondly, the availability of Welsh coal has actually declined anyway. There are quite a few, like Tower Colliery, which is right at the back-end of its life and is beginning to run down just through naturally using the recoverable reserves. About one-third of Aberthaw's coal is Welsh coal; all of the coal at Tilbury and nearly all of the coal at Didcot is imported. The source of that coal varies from year to year depending on the quality we require, the sulphur level, the ash quality level and the cost of shipping. You will appreciate that with the Chinese economy shipping charges around the world vary enormously over the years. When shipping costs are low, it tends to be more Australian and South African; when shipping costs are high, it tends to be more local in the sense of Russian, Polish, that sort of more local sourcing of coal. Last year, just over half was Russian coal, about 29 per cent was South African, and something like 12 per cent was Welsh coal, and the balance was small amounts of coal from Indonesia, USA and a few other odd spot cargoes from other locations. That is the broad balance but it does change from one year to another because we buy on quality and price, and shipping costs in particular are a key factor in that decision. Q325 Mr Clapham: The two things that you are looking for from your imported coal, is, one, to ensure that the price is right, but, two, the sulphur content? Mr Robinson: It is particularly the sulphur content. If I use the example of Aberthaw, we have to achieve an average sulphur content of below 0.6 per cent. Welsh coal is typically 1 to 1 and a bit per cent sulphur. International coal of that quality is generally 0.4 per cent sulphur. You can immediately see that you have to do about two-thirds imported coal, one‑third Welsh just to maintain a sulphur balance. If you try to get a higher proportion of Welsh coal, you would have to turn the station down to achieve the sulphur limit, to it is a self-defeating attempt if you wanted to move. Once the flue gas to sulphurisation equipment is fitted from 2008, clearly that largely solves the sulphur issue. There are still some other quality factors to bear in mind, but it does do that. We are in discussion with half a dozen parties in Wales about longer term contracts, post-2008 contracts, but they do pretty well all require planning of some sort - open cast, either extensions or new mines - and that is a slow and difficult process. I know it has been subject to judicial review and challenge in the couple of projects that have tried to proceed to date. We are having to manage on both fronts. We can burn more Welsh coal and we are negotiating contracts. At the same time, we are maintaining our import capabilities so that we can see which option to play out for us. Q326 Mr Clapham: Given that the UK coal industry is now down to six or seven collieries and that the world market price is beginning to change a little, which makes British coal comparable, would there be any chance of looking at longer term contracts with British coal producers, bearing in mind what you have said about the need perhaps to sleep on the coal in order to be able to reduce the sulphur? Mr Robinson: For the Welsh, that is very much where we are headed. The station at Aberthaw is specifically designed to burn what is called low volatile coal, which are the anthracitic coals that you get in South Wales, but are available on the world market as well. Local coal, known quality, short delivery routes clearly have the advantage that we are looking at. In terms of delivery, Tilbury is really not a credible delivery for UK coal. It would mean literally taking it from a mine to a port, loading it on a ship and bringing it round, and that would be a very expensive triple-handling job. Didcot in Oxfordshire obviously historically going back all the way to the CEGB days, has taken Midlands coal, but again it is very expensive to bring in any further than the south Midlands, a short hop from the port at Bristol but a very expensive run down from Yorkshire, and Scottish coal would be infeasible. We are the furthest away from the UK coalfields, apart from the Welsh, and that reflects our purchases. Q327 Mr Clapham: You mentioned flue gas desulphurisation at Aberthaw. Are you likely to go that far with regard to Didcot and Tilbury? Mr Robinson: No. We have had to make irreversible decisions under the Large Combustion Plant Directive, not easy decisions, clearly. We have had to look at each of our stations in turn and really look hard at the feasibility and economics of running them after 2008 with FGD. We are spending over £100 million at Aberthaw on that one. We felt that as a justifiable economic decision, but we also recognise that within a portfolio of coal stations, some have to operate at medium to lower load factors, which makes it very hard for them to remunerate these big capital investments. Quite correctly across the system as a whole, some stations have opted to fit FGD; others have opted not to. At Didcot there were significant feasibility issues as well, such as moving materials and everything else that would be required to run FGD to Didcot. Tilbury can achieve a strong environmental performance just through the control of the type of coal it takes internationally. We felt again that FGD was not justified and that we can achieve some very good sulphur performances just by controlling the coal guides. Q328 Mr Clapham: What about your plans for new clean coal burn? For example, do you have any super critical boilers? Mr Robinson: Yes. We have announced a feasibility study for Tilbury. It is our smallest station with 350 megawatt units; it is one of our oldest, so it is probably the one we are likely to close first. We are looking at re-planting it with high efficiency coal, which at least initially is enabled for carbon capture. It is at an early stage. We have announced the study so that we can talk openly to all the stakeholders involved. We announced that a couple of months ago, and we have started that work, but we are looking at all the different technologies. Our parent company, RWE in Germany, has announced that it will build an integrated gasification combined cycle station with carbon capture and storage in a local onshore gas field. They are well away with that. We are looking at the more high efficiency tradition coal station with carbon capture. They are looking at the integrated gasification and we are sharing technical knowledge across the group and developing those options. Yes, it is early days, but we feel that we need to get on with it and to look at all the options. Q329 Mr Bone: I want to get in my mind that you are suggesting that taking coal from a British coal field and putting on a train and trundling it down to Didcot is more expensive than taking coal that has to be dug out in Australia, boxed from somewhere to an Australian port, transported half-way round the world, then put on a train to Didcot. Is that right? Mr Robinson: In terms of net cost, yes, because UK coal is intrinsically more expensive to mine. At the moment, Australian coal with transportation because of where we are, on that equation probably would not work, but in terms of Russian coal, South African coal, et cetera, it is cheaper to bring it in large vessels into Bristol and then on a train to Didcot than it is to bring UK coal down, as well as again the sulphur issue. Because Didcot will not have FGD fitted, we still would be under very strict sulphur constraints at Didcot. So again we have to maintain a very low sulphur diet. I have been involved in the UK coal industry for many years. I negotiated long-term, five-year contracts with RJB Mining some years ago for National Power. Yes, I believe the UK coal industry has a strong future but its best future is supplying its coal to the neighbouring coal stations that were built right next door, for good reason, rather than shipping it the length and breadth of Britain. Q330 Mr Bone: I did get it wrong. It was not the transportation costs that you were suggesting were unfavourable; it was the fact of the price of the coal. Mr Robinson: The additional transportation costs would tip the balance. It is not the total transportation costs but the additional cost of spending another £3 to £4 per tonne bringing it a long distance that would just tip the balance in the economic stakes. Frankly, it would give a lower value to UK coal because we would have to net that back to the pit. We could play a lower price than a more local generator could for the same coal because we would have to recoup that extra cost. Q331 Mr Hoyle: You have stated with regard to Welsh coal that there are always delays in planning guidance issues and securing consents and that is why there have been no new pits. Is it fair to say that? Mr Robinson: It is certainly true of our experience in South Wales. I can talk publicly about one or two issues. Those who are familiar with the South Wales coal area will perhaps know of a project called Ffos-y-Fran which has been nearly there for eight years. I think it is eight years since it was originally thought of. It did originally get planning consent. That has now been challenged and has gone to judicial review to review the Welsh Assembly's decisions and the fact that the planning guidance for open-cast mining in Wales allows mining nearer to houses than is allowed in England or Scotland. What is being challenged is why the rules have not been changed in Wales as well. This is fairly typical of the situation that exists. We have been purchasing coal from existing facilities, from Tower, the deep drift mine there, and indeed from three or four companies that run open-cast, but all of those licensed deposits are running down and, within a couple of years, will be run down not quite to nothing but will certainly need topping up with new consented pits. We are lending our way wherever we can in lobbying to help that happen, but it is a slow process. Q332 Mr Hoyle: The reality is that you do not mind raping the countryside through open-cast but you do not believe that sinking a new pit with new shafts would be the answer. Mr Robinson: Two of the mines from which we take coal in Wales are deep mines. Q333 Mr Hoyle: Are they new mines? This is about planning consent? Mr Robinson: As I say, two are deep mines; one is certainly looking to sink new shafts and is looking for a contract from us. That is one of the parties to which we are talking. So we do not have a particular thing about open-cast versus deep mines; it is just that the majority of the recoverable reserves in Wales now tend to be open-cast mines. Q334 Mr Hoyle: UK Coal have said to us that the biggest problem is that pits will not exist in 20 years' time. The difficulty is not that they will not be sinking any new shafts but trying to ensure keeping the existing pits open is difficult enough. They are saying that the reality is the price that you will pay for coal is killing the UK coal industry. Mr Robinson: The price we would pay for coal is associated with the international competitive price. That has always been the case. We would not be negotiating with half a dozen parties if they all felt that we were not able to meet their aspirations in terms of what they need to open up new facilities. Q335 Mr Hoyle: Do you really care if there is an indigenous UK coal industry? Mr Robinson: It certainly contributes to the security of supplies. It is much less clear for Didcot and Tilbury, for the reasons I have explained. Clearly, Aberthaw contributes to our security of supply so that we have a mixture of sources of coal. In particular, the international spot market where you can source additional coal quickly if the burn is higher and demand is higher in a particular year underpinned with some longer term contracts for indigenous coal is a good mix and we would want to maintain it. Q336 Mr Hoyle: If I have follow what UK Coal is saying, it is because you do not pay a fair price for coal that they --- Mr Robinson: I have no information about that. We do not buy any coal from UK Coal. Q337 Chairman: It is important to clarify this. You have gone to customers --- Mr Robinson: We do not buy any coal from UK Coal because they do not own any Welsh coal pits. We buy Welsh coal from a range of companies. Q338 Mr Hoyle: Would you say that security of supply is important? Security of supply is only there if there is coal to buy? Mr Robinson: Yes. Mr Hoyle: Therefore, the only way that you can continue with UK Coal is if you were to put a premium on to ensure that we could sink a new shaft, or it would pay for existing coal? Q339 Chairman: I know you do not deal with UK Coal at all. Lindsay, you have asked him to be objective and I think what is needed is help with the English pits rather than the Welsh pits from your experience of the industry. Mr Robinson: I think there are two issues. To me, the key issue of supporting new investment is the term of the contract. It is not a question simply of saying, "Let's pay an uneconomic rate and hope somehow to pass that on to someone else". It is a question of paying the right rate but, if capital is needed, whether it is a new open-cast mine where you incur significant cost to take the burden off and to place bonds to repair it all at the end, or whether it is a shaft, it is still an up-front capital cost, which is only economic if supported by a term contract. As for the nature of that term contract, we would obviously refer on balance that to be indexed to international coal prices. I have dealt with UK Coal or RJB and British Coal before them, and they do prefer international prices where international prices are high and they prefer RPI Index of prices when international prices are low. If you want a term contract, you have to decide up-front how you are going to index the price. You cannot keep coming back and saying, "We want an international price but the international price has dropped, so can we change it again?" We have a mix. We have some contracts that are fixed price; some related to inflation; and some indexed to international prices. It is a free negotiation with the supplier as to which type of contract works and we can price up the risks and benefits of those different contract structures. Q340 Mr Hoyle: Should we really be concerned about the security of supply for gas and goal then? Mr Robinson: I think we should be concerned to maintain sources of both so that both contribute to the generation of electricity in the UK. I think that is the key point. As I say, I think there is a strong future for coal in the UK. For those owners of power stations that have opted into the Large Combustion Plant Directive, they have, perhaps for the first time for many years, a knowledge that that station has at least a 10-year life and they may need to consider their contracting strategy in the light of that. If you go back a number of years when it always seemed that coal stations were just about to close and the pits with them, then it became difficult on both sides to let term contracts. Now I think everyone believes that the opted-in plant have at least 10 more years and that does create the ability to back investment with contracts. I cannot tie anyone else to that but that is my judgment. Q341 Mr Hoyle: There is a great worry at the moment, and we have seen it already. You have talked about Australian coal. You say it is far away and distant, but the reality is that Australian coal is being sucked up by China. We also see India's growth at the same time as that of China. These two great expanding markets have great energy needs and they are turning to gas and coal. That is what is driving the issues about security of supply in this country because previously we dealt with Australia. All right, we are going to look at Russia, South African coal and a little bit from Indonesian but the truth of the matter is Australia did not even blink; China just soaked all that up and it is now looking for more. Mr Robinson: China exported about 80 million tonnes of coal last year and was I think the third largest coal exporter, so it is still a net exporter. To come back to your question, am I satisfied that long-term I can source coal internationally? Yes, I am fully satisfied. You are talking about a world market of something like 4 billion tonnes a year production, of which over 500 million is internationally traded. Can I source five or six million tonnes reliably for my uses? Yes, I can. There are many plans in many countries around the world to expand that. The shipping is easily expanded if necessary, so, yes, I believe that there is a long-term secure international market for coal from stable places, not from difficult places. Q342 Mr Hoyle: That is excellent. Is that the same for gas as well? Mr Robinson: For gas again it is a question of diverse sources. We have seen recently the growth in LNG projects. We are now seeing that gas is becoming the global market where it was previously a regional market, if you like, or the European gas market. It is now very much a global market with LNG ships that can move from the Henry Hub point in east coast America through to Europe and the Far East as well. Certainly, all the studies we have looked at suggest that there is again a lot of gas out there, but much of it will have to be in liquefied form into the future. I think that is fair. That is one of the reasons why I mentioned earlier that we are looking at securing LNG-based contracts. Q343 Mr Hoyle: I have mentioned about demand being driven by China and India. How do you see coal and gas prices in the future? Will the price continue to rise or do you think the price will be level at where we are now? What are your projections? Mr Robinson: The big advantage of diversity is that you can switch generation according to relative fuel prices. It is very difficult to see gas in the medium or even the long term moving very far away from the oil-indexed route, for some perfectly good reasons and some perhaps less good reasons, but I think it will stay heavily indexed to oil, whereas coal price tends to be fairly independent of oil. Obviously there is a certain amount of oil in the freight costs. What we see is the relative costs of coal and gas moving around quite a lot. That is why a diverse mix is commercially attractive. If you can move generation in a high gas priced year more to your coal stations, and then if the coal price starts to rise, you can move back, you can re‑balance your portfolio. That is why commercial integrated generators value diversity. Many economists say that they do not and it will become a monoculture. I am saying that we do value diversity because it is commercially sensible to be able to switch fuels as prices move and to try to keep the total cost down to the minimum. Q344 Mr Bone: I want to ask one or two questions about improving security of supply. We are getting different views on how important that is. You seem to be quite relaxed and you suggested a list of possible ways of doing it: diversity of sources, supply chain for gas, improved storage, demand reduction for energy, energy efficiency and demand management. One of the things that has come up frequently as we have taken evidence is the fact that the European market, as you referred to it earlier, is not a European market; it is a protectionist market in continental Europe and an open market in the UK. Are you satisfied with the action recently taken by the European Commission to open up the continental gas market? Mr Mannering: I think what we have seen from the European Commission is a period of quite extraordinary energy on this particular topic. There have been a number of initiatives that are underway at the moment. First of all, we have the DG Competition inquiry into the operation of the energy markets across Europe, which is currently underway. Secondly, we have the benchmarking report by DG TREN, which will be reporting towards the end of this year, and will be looking at the development of competition in individual countries across the EU, and will be making recommendations as to whether there are any further legislative changes that need to be made. Thirdly, we have the gas regulation, which came into effect just two days ago, and which makes great steps towards the kind of liberalisation that is so important to the UK's access to European gas supplies. For example, it promotes the transparency in tariffs for the transport of gas. It promotes transparency in the utilisation of capacity and the amount of free capacity, so that will make it much easier for companies like our own, RWE Trading, who specialise in trading gas from continental Europe and importing it into the UK when we need it, to undertake that function. At the same time, recently, on 25 April, the European Regulators' Group for Electricity and Gas, which is group of the 25 national regulators set up by the EU, has recently launched the Gas Regional Initiative specifically aimed at making the European markets more integrated and breaking down the barriers. The UK is in the north and north-west region, which puts us together with most of the markets where we would be seeking to source our gas. Lastly, there is the European Union's priority Interconnection Initiative, where they are funding feasibility studies with a view to looking at where interconnections should be built as a priority. I am very optimistic that the European Union will be moving on apace with integration measures that will really open up the markets and improve our access to Europe. Q345 Mr Bone: With all due respect, that sounds like the normal EU claptrap and waffle. What on earth have you got evidentially to suggest that they are actually doing anything? Our consumers, our domestic gas payers, our domestic business customers have been screwed by the European Union, to be honest, over the last few years. We have done what the European Union said should be done. Our continental cousins have not. Do you really think that in six months' time that is going to change? Mr Mannering: I think one needs to take a step back and reflect that it perhaps gook us 12 years to move to the position of the liberalised, fully competitive market that we have in the UK now. The electricity industry was privatised in 1989. I do not think the full GB arrangements came in until 2002. It has taken the UK quite a long time to get to the fully competitive, fully liberalised market that we now have. To some extent, we anticipated some of the regulations of Europe where we were ahead of the game. As I have mentioned, the gas regulation that builds on the Gas Directive only became effective two days ago on 1 July. I think we have to give time for these measures to take effect. It is probably a bit premature to pass judgment as to whether they are effective or not. As I have said, if they are not effective, DG-TREND will be producing its report at the end of the year on how progress has been made. If it finds that insufficient progress has been made against directives that are in place, then they will be recommending further measures. I would say to you that at the moment there is a very large number of very energetic European initiatives in train. We need to give them time to see if they work. Q346 Mr Bone: I am going to press you on this point because this is not just some academic argument about the UK and the European Union. It really does affect households. I am thinking about the evidence that it is calculated that the average family paid £189 a year extra last year but because of the failure to liberalise the EU market. We have seen that the wholesale gas price was more than double here from what it was in the continental European Union. We really are at a significant disadvantage. Do you think that is going to be cleared up, shall we say, within the next year? Mr Robinson: Do we think it is going to be cleared up absolutely in the next year? The simple answer is no. As David has said, there is a new energy in Europe, an energy which has never existed before, to try to get the UK style market really operating. What are we doing about it? It is hugely in our interests as well. We are a trading group. We have created a trading group to try to trade across Europe to try to arbitrage out these price differences and make sure that there is, if you like, close to a single price across Europe. We are absolutely wedded to that. We can but lobby; we fully support all the Ofgem work that they have been doing in their investigations. We have experienced the same problems. We have tried to move gas from Germany across into Belgium and found it difficult to get capacity. We are not blaming individual companies because we understand that there are regulatory constraints on the use of storage and all sorts of things, which need to be sorted out. For once, I am optimistic on this because I have seen really strong action now from Brussels to try to get it sorted and push individual Member States to do it. It certainly has our support from RWE. Q347 Chairman: What do you mean by "we" in this context? RWE is riding a couple of different horses, is it not? In the UK, you are in a liberalised market. In Germany you are the heart of the cartel arrangements that Peter Bone is attacking. It may be that your evidence on energy is that it pays to know the fact that you know your own front door was opened on a dawn raid by the Commission, how many days ago was it now? Mr Robinson: We are talking gas here and our Chief Executive Harry Roels has made it very clear that we fully support liberalisation of gas markets across Europe. Q348 Chairman: You did have a dawn raid six weeks ago, did you not, from the Commission? Mr Robinson: Not on the issues of gas; those were other local issues not anything to do with European gas markets. Mr Mannering: I would say that RWE very much supports liberalisation and supports competition. There is a lot of evidence to justify that claim. It is just not an empty statement. For example, the company has built new interconnectors between Germany and Holland and Germany and France recently. It is currently exploring the possibility of building a further interconnector between Germany and Holland. As you may know, the European Commission has really emphasised the importance of interconnection to create market integration and moving towards the European market. RWE is one of four companies that has recently started publishing production data on the European Energy Exchange. RWE Energy was one of the companies that unbundled its businesses before German law required them to do so under the directive. Mr Robinson: To summarise, we are very much a free market company. We have a chief executive, an ex-Shell guy, who believes absolutely in free markets. That is the way we are trying to drive our business and set up our business. Q349 Mr Bone: To follow on from what you have said, I want to talk about the LNG import capacity. Last winter when we thought that that was going to be used a lot more, there was a lack of capacity. Why do you think that happened? Mr Mannering: There are a number of possible explanations. Ofgem is currently very actively pursuing an initiative across Europe to try to understand in more detail the reasons for that. The discussions that I have had with colleagues internally suggest that most of the explanations may have a contribution to make to the answer that Ofgem would come up with ultimately. The first point to note is that just because there are pipelines on a map does not mean that gas can flow through those pipelines. In particular, there is a point on the Holland‑Belgian border, I think it is called Zelzate, where gas literally cannot flow into Belgium. Mr Robinson: The pressure differentials and the way it flows are not in that direction. There are physical constraints there stopping Dutch gas getting into Belgium, for example, which is where it needs to get to if it is going to flow through into the UK. With the (Balgzand) link directly from Holland, maybe that will bypass that. Q350 Mr Bone: This is new evidence, is it not? I do not think we have heard this before. The gas that was going to come through our interconnector from, say, Holland, could not come through because it got stuck. Mr Robinson: That happens at certain times of year with certain flows and things like that. For gas to flow, clearly you have to have a greater pressure for it flow down. There are certain times of year in the winter when it is very difficult to flow gas in that direction down that pipe. I think that is something that Ofgem have already worked out, that the flows between Holland and Belgium have physical constraints, as they do between Germany and Belgium as well. Getting gas into Belgium has proved to be a constraint. As I think Ofgem observed, how is it a constraint one day and then suddenly later on in the winter when Rough went down, it ceased to become a constraint? I think that is because it is a physical factor; it depends what gas is coming out of what store when, what LNG has being delivered at what terminal. It is to do with managing flows in networks. It is not perfect by any stretch. I think people are now investing to get round these issues. We are certainly encouraging that investment. I think there are genuine physical reasons. It is not someone somewhere is sitting there saying, "Let's try to be awkward here". People would love to sell gas into the higher priced UK market. Q351 Mr Bone: There are one or two bizarre things about the whole of last winter, are there not? You would have thought that that was the case. Mr Robinson: In the same way as today the interconnector is exporting heavily because UK gas is much cheaper than continental gas at the moment, so it is going the other way. Q352 Mr Bone: Can I make my last point? You may have answered this. Did other suppliers have the gas which they could have sent here if we had had the right sort of infrastructure, or better infrastructure? Mr Robinson: I think certainly for the early part of the winter, the simple answer is that they had gas in storage but, for understandable reasons based on their own need or projections of what their requirements were across the winter, they were reluctant perhaps to release it. The physical limits came in as well but I think there is a lot of storage in Europe, more storage than in the UK, but that is because most of the gas flows into Europe are base-load constant supplies coming in from Russia and Norway and the only way of managing summer to winter demand levels is through storage. Therefore, at the very beginning of winter, when you pump the stores up, you are still expecting to need that gas in February and March to meet your own customers' needs. I believe they have similar regulations to ours. We have storage monitors in the UK which allow the National Grid Transco to block gas coming out of storage if they feel that too early in the winter the storage is being drawn down too fast. It is difficult to criticise our colleagues in Europe for having similar regulations because we have them as well, even in our free market. Mr Mannering: The point is that although Ofgem say that there was a price differential and you would expect gas to flow, as Alan has said, what that does not take into account is that continental companies buy for their customers' needs, and they will then have to buy back the gas at some future point. It is very likely that they may have to pay more than they sold it for. It is not economically viable for them to do it either, quite apart from the fact that clearly understandably the prime concern of any company is first for its customers' needs. Q353 Chairman: I am a little confused as to how I sum up your evidence on this point in one or two sentences, which I am always anxious to be able to do. At one stage we have a dysfunctional gas market that is universally criticised and condemned by all and sundry and the European Commission praised for its robust action to free it up and liberalise it. Now we hear it is a bunch of very happy little traders really anxious to sell their gas to us but given it by only entirely rational economic situations of the marketplaces and infrastructure issues. I am just a bit puzzled. Mr Robinson: Perhaps to draw the two together, the missing ingredient in that recipe is the fact that the market structures are in themselves a barrier. Some of the market structures make it difficult to move this gas quickly and easily to get access to the pipelines on a spot basis rather than a contractual basis. We are mentioning some physical things that we did not talk about because I had assumed you had had quite a lot of evidence about it already. Yes, there are contractual and market structure blockages to people who have already bought the capacity in the pipe; they do not have use-it-or-lose-it rights; and it is very difficult for them, even if they wanted to, to sell it on in some of the market structures that exist. It is not just physical. There are contractual and market structure blockages as well. Chairman: Thank you, you have brought the two halves together. Q354 Mr Wright: I suppose one of the ways over this particular problem about supply is to have a dual-fuel plant, such as the one you have at Didcot. Could you let us know how that was used last winter? Mr Robinson: Didcot A coal-fired station is 400-500 megawatt coal units; three of the four are also capable of building gas. They can switch on-line from coal to gas, any mix of the two, and switch back and forth. It is a very flexible set-up at the station. To be honest, the winter use of that is not something that occurs because clearly that is an economic switch. Is gas cheaper than coal, allowing for carbon, sulphur and other costs? Clearly in the winter the station is already fully on burning coal. If it was burning gas, it could release the gas in the market but it will not be economically; it will be burning coal anyway in the winter. So it tends to burn gas at certain periods in the summer, and a few weeks ago it burnt gas for a while at times when in particular the interconnector is down to Europe. The UK is still a net producer/exporter of gas in the summer. Didcot can take some of that spare gas and not burn coal in that period. The more useful thing for the winter, if I could develop the question, is really: how do we use the rest of our portfolio in this fuel flexibility, this diversity I talked about earlier? How is it practically used? I think the very good example is on the peak days in February and March for peak gas prices. Oil-fired power stations at Littlebrook down the river on the Thames and at Fawley near Southampton, which would normally run one or two hours through the peak, we switched on to run for 16 hours from before breakfast through to late evening. We switched the CCGTs off and released the gas back in to the gas market, so that we can literally better use stored oil, if you like, rather than stored gas. Obviously those gas-fired stations, we can then offer back to National Grid. If they do need them at peak, then they let us know, and we will then purchase a small amount of gas on the spot market just for peak running. Effectively that is how the fuel switch occurs in our portfolio. In the summer, yes, we can switch coal/gas but in the winter the coal is running anyway, so it is not helping to release any gas, but we can run oil and release gas. We saw the CCGTs in total do more than Rough. People talk about having a second Rough. We have a second Rough; it is the CCGT portfolio. Overall in the winter, they turn down by more than the peak export of Rough, and they reduce their total winter demand by more than the total store capacity of Rough. The CCGTs are a second Rough, all the time you have the diverse fuel mix of coal and oil and other plant to make the electricity instead of the gas. Q355 Mr Wright: To get this right, you said that during February and March when the peak varies you can release the gas back into the market again? Mr Robinson: Yes, by running other plant. Q356 Mr Wright: Would that mean that you could actually make a profit on that? You have bought the gas on the spot market and you could put it back into the market again at a profit? Mr Robinson: Yes, if we bought the gas on a term contract or whatever. That is how markets work. We would look at the overall net cost of producing electricity, but if the value of gas in the gas market, allowing for the efficiency of conversion to CCGTs and carbon costs, is higher than the cost of burning oil and the carbon cost and all the other factors, then we will switch our merit order round, if you like, and we will run oil plant ahead of gas plant and sell the gas back into the market. Yes, it is all about cost minimisation and if that means we can sell the gas on at a profit, we will sell at a profit. Of course, at the same time our retail business is having to source additional gas, so some of that extra gas we may use internally because as the weather gets colder clearly people consume more gas within our retail business and we have to go into the market and source additional gas. On any one cold day we are both releasing gas from our generation facility but we are also having to source additional short-term gas to make sure our retail customers get all the gas that they require. Q357 Mr Wright: Would you consider any plants to be of the flexible nature that you have got at Didcot, duel-fuel? Mr Robinson: There is a limited use of that sort of fuel-switch, the coal-gas fuel-switch. Certainly we have seen a lot of CCGTs in the system that have the capability of switching to distillate oil, doing that, and, again, it is a similar economic switch in that distillate is more expensive than heavy fuel oil we burn at Littlebrook, but efficiency of the CCGT burn is higher than the efficiency of oil. It is a very similar economic switch. Clearly, in the sorts of markets we have seen and the volatilities we have seen, anyone looking at new CCGTs will certainly be seriously looking at whether they want to make them duel-fired from day one. I think that is more likely where fuel-switching will be seen. We saw a lot of fuel-switching this winter and I think it will be a feature of next winter as well with more oil being burnt, more coal, in order to release gas at the appropriate time. Q358 Mr Wright: Do you see a role for the government in trying to encourage the maintenance of this type of flexibility? Mr Robinson: Frankly, I think there is no need. All the economic incentives are there for people to do it. It costs money to retain that capability and you make these decisions every day, that is what running a commercial business in markets is about, often you have to spend the money upfront in the hope that an opportunity arises to take benefit from it. We brought back Little Barford power station in Cambridge. We had duel-firing with oil capability, distillate capability originally, we had effectively mothballed it but we brought it back last winter because the economics were right, so we made the investment to bring it back and use it in the marketplace. That is the beauty of flexible plant portfolio, you can make these decisions six months out, one year out. For this winter we are bringing back another oil unit at Fawley in Southampton, a second oil unit at that station, because we judge the market will pay for it, but it is going to cost us millions of pounds to bring it back. It is our commercial risk; maybe the market needs it and maybe it does not, but our judgment is it will so we are bringing it back for this winter. Q359 Mr Clapham: Is there not another aspect of this and that is the coal-fired stations are even more flexible than the gas-fired stations, they can be brought on and off quicker and, therefore, there is a predisposition to use the coal burners in the winter time? For example, in this last winter we were producing 50 per cent of our electricity at peak periods from coal. Mr Robinson: There are two parts to that. Coal was significantly cheaper than gas, so coal plant would have been running first in cost order. Traditionally you would have been right. If you had asked me three or four years ago I would have said coal plant is definitely a lot more flexible than CCGTs. The coal plant has got no less flexible but people are beginning to learn how to be a lot more flexible in the running of CCGTs. In the same way as when the coal plant was built in the 1960s and 1970s everyone said it could not do shift, it cannot switch off, it cannot be done, when markets require it people learn how to do it, and certainly we have seen most CCGTs, if not all, capable of now switching off and turning up and down during the day very much in a similar way to the coal plant. The advantage is we have no less flexibility there and we have added flexibility in the gas portfolio now. 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 planned 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: on-shore, off-shore, 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 charge 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, if you have get biofuel for a CHP scheme you get no value for the heat by a fact of 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 six per cent 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 per cent 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 per cent relative to revenue cost and about ten per cent 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 per cent 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 per cent 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 per cent or 22 per cent 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 per cent 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. Q380 Chairman: Finally, this is not a short subject to raise as a final question so I raise it with some concern: mechanisms to establish the price of carbon, which are obviously crucial factors in your investment decision-making process. The ETS - the Government announced its position in the second round last week - is hardly a long life mechanism, to use your phrase about taxation. What would you do to create more certainty to enable investment in coal and nuclear particularly to be treated on a level playing field with other shorter term assets? Mr Robinson: Our view, and I know the players in the market tend to split into two here into those who want to see some fixed price, some underpins, some carbon contracts, is we are not in favour of that approach. We are very much in favour of seeing at least a 15 year phase three recognising that phases one and two to some extent have been teething phases, but let us get properly into it for phase three. Our view is very much one that says we accept the price of carbon, the precise price being a market risk alongside the cost of gas and the dollar-pound exchange rate and the other things, and we will manage that risk, we are not asking for anyone to fix the price for us, in fact we would be against fixing the market price for something that should float as a market price. What we are very much in favour of is a certainty of the regulatory regime in which we can then take a sensible judgment about what that price is in the same way as we take judgments about the other commodity prices that impact on our business. We will make judgments but it is very difficult at the moment as we stagger along in little chunks. You mentioned last week's announcement and I defy anyone to have read that announcement and really know exactly what it means, so we continue to release information in a very bitty way which makes it very difficult for people to make judgments. We are a long-term market. We would like to see the UK Government building much stronger alliances in Europe to really make the EU ETS work and to further internationalise it so it becomes a genuinely global carbon trading system. We think that will produce the right signals, the right stability of price, because the bigger the market the more stable the pricing. We will make our judgments against that. Q381 Chairman: The Government is using quite a lot of its auctioning capability in this second round, do you welcome that? Mr Robinson: We are neutral to it. We understand why the Government is doing it. We understand the economic theory behind auctioning but, equally, we recognise there are grandfathering issues in terms of existing investments, et cetera. We see that as within the rules of the EU ETS and what we have called for is the rules to be consistently applied. Mr Mannering: It does provide an opportunity for the Government to use the revenues in a way that we have advocated for some technologies for pump-priming purposes, for example. Another point that I would like to get over in relation to phase two is the importance of encouraging all sectors to participate in the EU ETS by setting them allowances that relate to what they can achieve in terms of emission reduction. In phase one, for example, we saw that more or less all the sectors were given allowances on a business-as-usual basis and that did not really give them enough incentive to trade whereas the electricity sector was set a target much tighter than anybody else, and to promote the kind of liquid trading environment that is more likely to achieve a correct price, which Alan was talking about, it would be much more satisfactory if there was more incentive on all sectors to participate in the trading. Q382 Chairman: That concludes all our questions, gentlemen. Is there anything else you felt you wanted to say? Mr Robinson: No. I think we have had a very good thrash around the subject. Q383 Chairman: Thank you very much. We look forward to that further note about the planning permission issue. Mr Robinson: Would you like a note on taxation? Chairman: We would welcome it if you want to give it to us. That is two notes then. Thank you very much indeed for that. |