Examination of Witnesses (Questions 260-279)
MR ALISTAIR
BUCHANAN AND
MR STEVE
SMITH
22 NOVEMBER 2006
Q260 Mr Drew: Could we move on to
carbon trading, which I think is an equally interesting area?
Could you just spell out for me what you understand are the differences
between carbon trading allowances and the idea of cap and trade?
Do they impose on each other, or are these quite different concepts?
Mr Smith: I do not think they
are. I think cap and trade traditionally has been something which
has been imposed upon businesses and businesses which directly
emit carbon. I think the ideas about personal carbon allowances
is, in addition to doing that to business, actually saying to
individuals, "Here are the things you do in driving your
car and the way you heat your home which has a carbon footprint
and we are going to, in some sense, cap your ability to do that
or give you an allowance, and if you use less allow you to sell
your surplus to other people, or if you use more you will have
to go and buy it." So I do not think they are fundamentally
in conflict. They can sit alongside each other and work together,
because I think one is predominantly business-focused and one
is more focused on the individual than on the citizen.
Q261 Mr Drew: So you are clear that
cap and trade will in the due course of time apply to individuals
as well as businesses?
Mr Smith: No, I am not making
any statement on whether it will happen, I am saying if that is
something which the Government wants to do then I do not think
there is any fundamental problem in having the two sitting there
together. I think they can be made to dovetail.
Q262 Mr Drew: I just want to be absolutely
clear. In terms of, therefore, people making changes in their
lifestyle, I have a problem with the trade idea because I think
that could be terribly complicated, but if people actually were
to reduce their carbon footprint that is something that you would
think is feasible and is deliverable in the long run, or would
this be faddish?
Mr Smith: It is not something
we have spent a great deal of time and effort thinking about.
My concern would be, as with yours, with the practicability, which
is that given the number of people who do not even have bank accounts
the idea that you could give all individuals a personal carbon
allowance and expect them to interact with that, I think it is
an awful lot to ask people to do. So I think you would have to
think very, very carefully. As I said, if you ask me in theory
if you could overcome those problems, could it be made to work
sitting alongside what is there already, yes, but I would share
some of the practical concerns that I think you are alluding to,
particularly on the trading aspect. The idea that you are going
to have 25 million households or 65 million individuals in this
country actively trading, I think you would have to ask yourself
the question why you were doing that and is that really the best
way of achieving what you are trying to achieve?
Q263 Mr Drew: So to make a difference
then, we should be concentrating the effort on suppliers, and
should we be concentrating the effort on capping suppliers? In
other words, we have got the ROCs on the one hand, which in a
sense is trying to divert them away from the traditional forms
for creating energy and towards more renewable ways, but the cap
would in a sense be a physical cap. It would say, "We're
going to ask you not just to divert but also to reduce."
Is that something which you again think is feasible? Your paper
was a bit unclear whether you thought this was going against human
ingenuity and people would not therefore respond?
Mr Smith: I think in our energy
review response to the Government's energy review it may be a
bit clearer. We basically said, I think, that we were optimistic
that if you did cap carbon, and cap carbon quite aggressively,
and give people a clear, long-term path of where that was going
to go, with the ingenuity of the variety of technologies that
are out there we said, "Yes, energy efficiency will have
a part to play. Yes, development of low carbon or no carbon generation
sources will mean that through a combination of those measures
you can get to where you need to be. There has been some discussion
about capping energy." What we were saying was, "Do
not cap energy, focus on what your real objective is, which is
carbon. Cap carbon, and do it in a credible way, and then allow
suppliers, generators and customers to work out what the different
range of solutions, partly energy efficiency, partly generation
technologies, they want to deploy to do that."
Q264 Chairman: Mr Drew touched upon
renewables. Do you know what the relationship is between the sales
of renewable energy and the amount of renewables available for
sale?
Mr Smith: In terms of, does all
the renewable energy out there actually find its way to market?
Is that the question?
Q265 Chairman: That is one way of
putting it, yes. I am just intrigued to know what the supply and
demand balance is, because somebody told me that there was more
renewable energy being sold than there was actually being generated.
I would just like to know, if somebody signs up for a renewable
tariff are they actually getting renewable power?
Mr Buchanan: I think this brings
us back to our discussion about how we need to look at how renewable
or green power is being sold.
Mr Smith: There are basically
three different types of green offering and there are companies
like Good Energy, who basically guarantee you that every electron
you buy has been sourced from—and they will define what
they mean by a "green generator". There is a second
class where they say, "We can't guarantee you that, but we
will ring fence a certain proportion of what you pay and we guarantee
that will be invested in future green generation." The third
sort, which is where the confusion comes in, is where it is green
but it is only green because they make a contribution to, say,
Greenpeace or Friends of the Earth—
Q266 Chairman: So it is an offset?
Mr Smith: Exactly, and that is
why I think you are probably right that if you added up all of
the different products you would get to far more than the total
amount of green energy on the system because people are doing
these different things and labelling them as green offerings.
Q267 Chairman: So it does need to
be made clear, or clearer, so that if the public decides, for
example, that its personal contribution would be to switch to
a renewable tariff it needs to know which of those options it
is actually buying into?
Mr Smith: Yes.
Q268 Mrs Moon: Can I ask you what
you are doing to actually make it easier for the green energy
suppliers to actually get into supplying, because I was talking
to a company yesterday and it was telling me that even to get
a feasibility study from the grid about putting the energy it
is going to generate into the grid, it is a blank cheque book.
You go along and they almost make up the figures as they are going
along. There is no fixed tariff as to how much you will earn for
the electricity which you sell into the grid, and again you are
at the whim of what they decide to pay you for the energy you
supply. What are you doing in terms of facilitating the creation
of that market so that in fact there is actually a market which
is attractive for the green energy producers to move into, so
that we can increase the number of green energy suppliers who
are out there?
Mr Buchanan: I am not surprised
you have had that complaint and it has been an Achilles' heel
of Ofgem for some time and one which we are addressing currently.
It falls under the heading of the supply licence review, but effectively
over the 20 years since liberalisation and privatisation 150 pages
of rules and regulations have been created, thereby frankly, in
my view, stifling potentially new entrants wanting to come into
the market. It is just rule-bound now. Steve and his team are
working towards a position where we can cut that by around 50%
in the middle of next year. As you can imagine, we need to carry
with us all the consumer groups, Energy Watch, we need to ensure
that vulnerable customers are protected, but I think at the end
of this I would really look to hear from suppliers wanting to
come into the market a positive view that we have made it much
easier. But at the moment I think you have absolutely put your
finger on one of the weaknesses that we have had and we are sorting
that out.
Mr Smith: The only thing I would
add is the points you made about access to the grid as well are
fair and we have a major project under way at the moment, which
is every five years we review the pricing regime and the revenues
the grid companies are allowed to earn, and as part of that they
will be making changes to the arrangements for new generators,
not just green generators but anyone who wants to connect so that
you do not have to get the cheque book out and make some enormous
contribution before they will even put a spade in the ground,
to get a much clearer and more stream-lined process. That is all
on the positive side. The only difficulty which will remain, which
is perennial, is the whole planning issue, which is part of the
problem in the delays. They have to get planning permission for
the transmission lines. You have to get planning permission, but
there will be major changes to actually the commercial terms and
the way you get to sign up to the grid, and they should come in
from April next year.
Q269 David Lepper: I just wanted
to come back to the point you were making about different definitions
of what "renewable" means in terms of supply and relate
that to Madeleine's mythical recently retired consumer who wanted
to survey the field. Is that information about individual suppliers
readily available to that mythical consumer? Where would he (or
she) go to be able to understand what this company means when
it is telling him he is buying from it renewable energy?
Mr Smith: I think the system at
the moment, as Alistair said, is one which is policed by the Advertising
Standards Authority, so in essence those companies you go to will,
in their marketing material, set out what it is they mean by "green"
and what sits behind it. As Alistair said, Scottish and Southern
recently was actually found in breach by the ASA for actually
over-egging what it was offering and it was told it had to withdraw
that marketing material, but at the moment it is predominantly
the marketing material of the company which will say, "When
we call this `green energy' this is what we mean," and that
will be in their marketing and their contractual information,
as I said, overseen by the Advertising Standards Authority.
Mr Buchanan: If I could just add,
one of the things which really struck me as tremendously useful
from our point of view from this session today is that in the
different questions you have asked us there has been almost a
sense of helplessness for the consumer. At the end of the day
you are relying on the ASA, on the EST, on Energy Watch, arguably
possibly Ofgem, these faceless organisations, very difficult to
get in. Will I get the information? In picking up particularly
this green energy which Sir Peter Soulsby started with as an issue,
I am going to take that away from this session. This is something
we had been thinking about as one of our targets for next year
and it is quite clear from the range of questions you have raised
that this would be a useful area for us to explore.
Chairman: Mr Drew said before he went,
"I'm even more confused than I was before!"
Q270 Sir Peter Soulsby: Could I say
that I am very pleased to hear that because I was going to suggest
it was a bit of a cop out to rely on the ASA, but in the light
of what has been said I am actually very encouraged by the response
we have had there from Ofgem, because it does seem to me there
is a desperate need for an accreditation scheme for so-called
green tariffs and really only Ofgem is in a position to provide
that scheme.
Mr Buchanan: Or if we are not,
we have to find out who is and we can use our brand and our facilitation
process to try and work that through. So it is something we need
to look at. I cannot do that now, it would be inappropriate for
Ofgem to do that, but it is one of my take-aways from today.
Q271 Sir Peter Soulsby: Thank you
very much. Chairman, if I could just return to the micro-generation
issue, because in their evidence to us the Energy Saving Trust
talked about the potential for, I think it was, somewhere in the
region of 30 to 40% electricity generation being from micro-generation.
It is an enormously exciting prospect, and of course we have now
got the Climate Change and Sustainable Energy Act with the obligations
under that. In your evidence to us you said that you were, I think
I quote you correctly, "working to ensure no undue values
to micro-generation." I just wonder whether you would accept
that that does not sound as if you are being particularly pro-active?
It sounds rather more as if you are hoping that the market will
sort things out and that others will take the active initiatives.
Mr Buchanan: Just in two areas,
quickly, we announced our forward view on Microgen a couple of
weeks ago. There are two elements to that. One is to get rid of
what I just call plain silly rules, which I where, if you want
to put a Microgen unit in your house you have to have to get permission
from the local planners. It is just nonsense. The other issue,
which is an issue that Ofgem does not take lightly because under
a better regulation remit and under a view that light-handed regulation,
where possible, is a good thing, we have warned the companies
that if they do not sort out selling back we will basically put
on the regulatory hobnails and sort it out for them. That is not
something which as an organisation we do lightly because it is
slightly running against the whole better regulation agenda, but
we feel it is important enough for us to signal that.
Q272 Sir Peter Soulsby: That is very
encouraging. I just wonder when you think you might have progress
with that and how you measure your success in smoothing the way
for micro-generation?
Mr Smith: We said in our press
release that suppliers needed to get this sorted. It comes back
to your point. What we said is that because there are very few
of these things installed, we need very simple products which
your average customer can understand which just says, "If
you install one of these things we will pay you, five, six, seven,
whatever the number is, pence per kilowatt hour, just with simple
marketing material, and we have basically given them a year to
say that if we do not see those products in the marketplace within
that time then—
Q273 Chairman: Is there anybody doing
that now?
Mr Smith: The response was positive.
The trade bodies' response from the suppliers was, "Oh, this
is all terribly premature." Two of the suppliers, npower
and Scottish and Southern came forward and said, "It's a
fair cop. We will put effort and resource into developing these
products," because we only need one of them to do it and
if one of them do it and it starts to become a success then clearly
the others will follow suit. So we are encouraged that two suppliers
did step forward to say they will meet the challenge.
Sir Peter Soulsby: Chairman, could I
just press the issue of timescale?
Chairman: Of course, yes.
Q274 Sir Peter Soulsby: When might
we actually expect to see this becoming a reality?
Mr Smith: I would be really disappointed
if it got to the end of the year and it had not happened—sorry,
one year from when we put the press release out, which was probably
about three weeks ago, so October 2007. I would be disappointed
if we got to there—
Q275 Chairman: Let us be very clear,
when we talk about micro-generation, because I want to make certain
I really understand what we are talking about, this is a device
like a mini gas boiler which does electricity and heating as a
combined unit in a house, and does it do 100% of the consumers'
electricity or not?
Mr Smith: That is the issue, because
obviously your use of electricity varies over the day. So at points
in time you may be actually producing more than you are consuming
and therefore the question is how much will you be paid by your
supplier when you are actually exporting. At other times, when
you are using a lot, you may still be drawing down and the problem
is at the moment there is no simple product out there which says,
"This is how much we will pay you when your wind turbine
is actually generating and your lights are switched on."
Q276 Chairman: If somebody wanted
to do down the micro-generation route, what is a ballpark figure
for a normal house? How much would it cost to get into being a
micro-generator?
Mr Buchanan: You have got the
list in the middle of page four.[3]
Mr Smith: So a wind turbine for
your roof currently retails for about £1,500, solar power
is anywhere from two and a half to £10,000, and then these
boilers which actually generate electricity start at about £3,000
compared with a normal condensing boiler, which might be £1,000.
Q277 Mrs Moon: Do you know what the
difference is between a micro wind scheme which is going to cost
me £1,500 and one which is going to cost me £12,000?
Mr Smith: It is just the simple
size of the thing and how much electricity it will generate. The
bigger they are, the more they generate, and obviously that will
depend. The £12,000 ones are ones which will be aimed more
at commercial buildings where you have got a large building and
you have an array of them on your roof. The £1,500 one is
a single one which you can mount on top of the roof of an average
domestic property.
Q278 Chairman: Just to sum up, what
you are saying is that within the next 12 months the economic
offer that is micro-generation should become should become clearer
and at this moment in time two companies which you mentioned are
working on some kind of "product" to buy back surplus
electricity from that generation. I suppose the interesting question
is, if you applied energy saving, energy efficiency, plus micro-generation,
what impact would that make on the emissions in the United Kingdom
of either carbon dioxide or greenhouse gases? Has anybody done
that format?
Mr Buchanan: The Energy Saving
Trust, coming back to your figures, has estimated it will be 15%,
if you get that 30% in, and I would just go back to page four,
because again they are EST figures. On those schemes which are
listed there, except for the fuel cell CHP, you are looking at
a form of subsidy right the way through to 2050. That does somewhat
bring me back on a circular argument where I started. If you have
got lots of pots of subsidy, great, because you can have a subsidy
for renewables under ROCs and you can have a subsidy here for
these schemes under the energy export equivalents, but it may
be that for you in policy there is going to come a point where
you have to make a choice. Is it the wind farm and the wave scheme,
say, in Scotland, or is it the local generation scheme in somebody's
home? It would be great if we have all, but—
Q279 Chairman: One of the questions
I was going to ask about micro-generation is that the trouble
is that this area becomes full of new popularisms and the new
popularism is a disaggregated generation; in other words, we do
away with the National Grid and it is all done in the backyard,
to put it at its crudest, but on the other hand the renewables,
particularly if you are dealing with wind and wave, happen to
be miles away from where people live. So what are the implications
for the National Grid as such of what we are talking about? In
other words, if there was a wholesale move to micro-generation
and the amount of electricity flowing across the existing grid
drops, demand from the major generator drops and we have got an
increase to the potential of wind and wave but we need to get
it to us, what are the economics of keeping a grid system in operation
to delivery the renewables and give us some back-up? Has anybody
done any work on that?
Mr Buchanan: I think it is a great
question, because our bread and butter work is network regulation,
which first of all we have addressed up front in so far that,
unlike the situation we traditionally had at Ofgem, we have fast-forwarded
the allowance of investment for wires, particularly the backbone
scheme from Beauly to Denny in Scotland, which is broadly Inverness
to Perth and then on to Glasgow. We have fast forwarded £600
million for the development of that.
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