Examination of Witnesses (Questions 40-59)
SUSSEX ENERGY
GROUP
17 OCTOBER 2006
Q40 Chairman: I doubt that you have
in front of you the Government's Microgeneration Strategy, published
in March, but there is a table in that with a summary of expected
break-even points for different scenarios, and interestingly it
said solar water heating will not break even until about 2017,
but in fact that is not my understanding at all. It says, "Solar
water heating requires significant price reductions for break-even",
but I do not think it does; that is simply wrong. The trouble
with solar thermal is that it requires a very heavy upfront capital
cost, which actually repays its costs over the lifetime of the
installation handsomely. So it is very difficult to install retrospectively.
What I am driving at is: how do we actually make the market work
here a little better? Grants are not actually needed because the
householder will get a financial benefit and, given the increased
gas prices, a very real financial benefit. But actually government
grants create the wrong psychology, which is saying, "No,
this is good news, go for it, it brings you real personal benefit."
Dr Watson: That is a point that
Malcolm Wicks often makes, and I have heard him make it several
times, that particularly the middle classes do not need grants
for these things. But the thing that I would always point to is
that, yes, they have a fair amount of disposable income in some
cases but they would much prefer to spend it on another foreign
holiday, a patio heater, a plasma television, whatever, some of
which or all of which are going in the wrong direction carbon
emissions-wise. So I think it is up to government to send the
signal that the kind of consumption we want is lower carbon consumption,
and that is why one of the ways you could do this—the one
we emphasise—is the tax system as a way of getting to that.
Because I agree that grants are a very sub-optimal solution—they
suffer from stop-start cycles, the industry gets in trouble in
between those and loses capacity—and I think a reform of
taxation systems might be one way that is more durable and long-term,
as is the other proposal we make, which is allowing consumers
to get the market price for energy they export. That is not an
easy thing to do but there are systems that large generators now
use, which you could extend to apply to smaller generators in
homes. It links to the agenda of things like smart metering and
so on. I think there is a whole transformation of the infrastructure
of the way the market works, which could really help a lot of
consumers.
Q41 Chairman: When we had the Energy
Minister in last week he put a lot of emphasis on the building
regulations and that new houses embrace these technologies and
they can be paid for through a mortgage rather than a single consumer
payment; is that a good way forward too?
Dr Watson: I think in new-build
that is right, and places like Merton have shown that that can
be done.
Chairman: Let us give Mick Clapham something
to ask you!
Q42 Mr Clapham: Jim has done a lot
of work on clean coal technology. There is a multiplicity of generating
schemes out there, but if we are going to see, as you said, an
increase in the percentage use over the next decade then there
has to be a way of distributing that energy that is generated
into use. That means a scheme to be developed by the suppliers
to pay for that electricity. Have you done any work on what kind
of a scheme is required and how do we incentivise the large suppliers
to take on the electricity for microgeneration?
Dr Watson: There are probably
again two sides to this. One is how much they pay when you export
electricity to the system; and there is some work being done,
and if you look at Ofgem's statement last week they have said
they are quite in favour of a minimum price from the industry,
and the industry is currently working away on what kind of scheme
they might invent. I thought, to be honest, that was a rather
weak part of the Microgeneration Strategy, that the Government
was not able to say, "This is the scheme we would like and
we would like the industry to respond", but instead they
said, "We do not know what we would like, we would like the
industry to tell us what it wants." It did not send a very
strong signal of seriousness. Anyway, that is going to happen
and one option for that might be allowing them to get the market
price for exports. But the other side of the coin, which I think
I started alluding to, is this idea of linking microgeneration
into the business model of the energy suppliers and if, as the
Energy Review suggests, we are moving towards regulating them
differently to act as energy service companies then that might
allow them to reach some of the householders that would not normally
go for this kind of technology and offer it as a package with
energy saving technologies as well. But that is quite a radical
thing to do. At the moment I would like to see a lot more analysis
of what the Government thinks that might look like because at
the moment I think there is a consultant's report out there on
that, but that is about all I have been able to find.
Q43 Mr Clapham: Turning to the way
in which community generation is developing, do you see skills
being a barrier, for example? Do we have the necessary skills
to make sure that it does become a workable scheme, community
generation?
Dr Watson: I think that is something
that Raphael can answer.
Mr Sauter: We have not looked
at it specifically for the community approach, as you say, but
I think on the skills problem in general we have to distinguish
between energy suppliers who want to go for microgeneration investments
and independent installers who want to offer microgeneration.
The suppliers I have spoken to do not see any problems in skills
so the retraining of their existing installers' network seems
not to be a big problem, whereas for independent installers I
was told that there might be quite an issue in terms of providing
them with the necessary skills for the installation of microgeneration
technology, not only the technical skills but also marketing skills.
Not only the sale of a microgeneration unit in terms of the payback
times, which are still long, and I think it would rather disappoint
the market or the consumers if you sell them a micro-wind turbine
and the payback time is very long. So it is marketing skills which
I would emphasise.
Q44 Mr Clapham: So there needs to
be emphasis on the actual marketing skills; the technical skills,
you feel, are there?
Mr Sauter: Both for the installers
but not only focus on technical skills, I would say.
Chairman: I think Brian Binley wants
to come in.
Q45 Mr Binley: A supplementary, because
it seems to me that all the evidence we have is that the large
suppliers of anything are not good at providing the add-on point
of sales stuff. Look at gas, look at electricity, look at telephony
and they could not do it. I am very worried about incentivising
to throw good money after bad, quite frankly, and I think that
you are right to mention marketing because this is where all of
this lies because there has to be a good business programme here.
But it seems to me that we can waffle on and go right off the
point and throw money away and not achieve our objectives.
Dr Watson: I would probably disagree
with you there. I think if you incentivise companies differently
they start having to behave differently. That will not happen
instantly and if you were to say, for example—or the Energy
Review was to propose—that all supply should have a cap
on the amount of either carbon emissions from their supply or
the amount of kilowatt-hours they can supply, then they suddenly
have to start thinking, "How do I make my money? I have to
make it in different ways, stay within the cap and do different
things." The other thing I would say is that for many years
in the United States there were demand-side management programmes
and when the caps—because it was just the same although
these companies were monopolies but regulated, they were private
companies—on what they were allowed to supply were sufficient
and strong enough then they did all kinds of things in consumer
homes to help them save energy. That has since become discredited
because some of the caps are not as strong as they should be and
of course, therefore, the incentive dissipates. I do not underestimate
the fact that this is a big, big change and it will take a long
time to turn around, and certainly some people question whether
the incumbent big players are the ones that are really going to
deliver this stuff, and whether when you design the legislation
for this you should actually think about how it might apply to
newcomers, new entrants, and I think that is something that is
a bit under-explored, to be honest, which is part of the reason
why I would like to see more analysis of what this might mean
in practice.
Q46 Chairman: There is a risk of
market rigidity, is there not, that you actually enshrine the
status quo in caps?
Dr Watson: You could do, but at
the same time if you have caps and people's demand is growing
at 1 and 2% a year then something has to give somewhere, something
has to be done differently.
Q47 Mr Berry: You said that you were
disappointed with the Government's Energy Review and you commented
on there being few specific proposals. Can I ask you to summarise
where you think the Energy Review could have gone further? What
are the key things you would have liked to have seen in there
that are missing?
Dr Watson: I will give one positive
first, which is the reform of the Renewables Obligation, which
is long overdue, to band that Obligation, and instead of the `one
size fits all' incentive, which just benefits wind, so it picks
a winner, but the market does it rather than the government, and
it is actually proposing to band that obligation so that further
market technologies can get developed and innovated and make a
contribution. But in terms of microgeneration, that area in general,
I guess one disappointment was not to see more on the energy service
concepts. That was partly because I listened, for example, to
a speech by Alistair Darling a few weeks before the Review was
published and he spent half the speech talking about this revolutionary
change in the way energy companies work, and then there was one
paragraph on it in the Review, and I thought that the talk and
the actual substance of the Review were out of kilter there. But
the other areas, I guess, were things like smart metering. Again,
there has been a lot of talk about the potential of smart meters
to give people better information on their energy demand and time
and day pricing and that kind of thing, signals which might help
them save energy or shift their demand pattern around. Again,
Government has said, "That is interesting, we will have some
trials," but if it is that important—and I think it
is that important myself—then why not have a national roll-out
like they are doing in Italy and other countries? To me smart
metering is not an optional extra it is something which, like
distribution wires, energy markets, is a facilitator of choice
and competition for consumers.
Q48 Mr Berry: In your memo to the
Committee you say that your economic analysis suggests that current
incentives miss an opportunity to level a playing field for microgeneration
and household energy saving investments. Could you clarify what
you mean by a level playing field and what the problem there is?
Dr Watson: Of course we all have
our version of the level playing field, of what it might look
like, and we all disagree about which is level and which is not,
but we used it as a phrase and I guess the two things we had in
mind, which we tried to bring together, are differences in incentives,
if you like, for energy generation when it is in the home and
energy generation and actual energy efficiency investments when
it is in businesses or in large power stations. For example, there
is huge disparity in tax treatments across different parts of
energy investment, depending upon who does it and where it is
done. So if you do energy investment offshore, offshore oil and
gas, you will get all kinds of tax incentives. Large power stations
can be written off in the normal way, as capital allowances against
the tax bill of the company concerned. Some businesses can invest
in energy efficiency and get enhanced capital allowances so that
they can write off the whole cost of that on day one in the first
year against their tax bill. Householders get none of those things,
and if we are asking householders to be energy investors in the
same energy system and contribute to that infrastructure then
why not give them the same incentives, so that there is an incentive
for the money to go where it needs to go? The other aspect of
our level playing field, as I think I have mentioned earlier,
was the idea that if large generators can bid in and sell to the
market at a varying market price why should not micro-generators
be able to do the same rather than getting the very poor and patchy
deal that they get at the moment?
Q49 Mr Berry: Do you see any evidence
in the Energy Review that the Government recognises that issue?
Dr Watson: I think probably not.
There are general statements about taxation and that it should
go in an environmental direction and should be reviewed and so
on, but I have not yet seen any of the evidence that the whole
issue of tax disparities of different parts of the energy system
has been thought about in any depth.
Q50 Chairman: Your recent report
says: "Our research says that smart meters are an essential
element of microgeneration systems." I do not have the government's
Energy Review in front of me, I only have the Microgeneration
Strategy, but all that had was less than a page of the smarter
metering, with the conclusion that the DTI will be investigating
the possibility of a field trial of smart meters. How has the
debate moved from the DTI's concerns since then; and I want to
push you little bit on this as it seems quite an important aspect
of what you are talking about?
Dr Watson: They have now moved
towards an actual field trial, there is money from the last budget
now to support field trials, which is going to be not only supporting
field trials of smart meters but also looking at the link between
smart meters, better information and possible behaviour change
and demand reduction by consumers. It is a rather hot area of
research at the moment, there are a lot of research projects going
on on it, because hitherto the evidence for that behaviour change
is there but it is not as strong as it needs to be, but certainly
at the moment that is as far as policy has got, doing field trials
and so on, but it certainly has not got to the point of saying,
"We would like smart meters as of right." The reason
why we link it to microgeneration is if people are making this
investment in their home in most cases they may have to change
their meter anyway, so why not future-proof that and say, "These
are the specifications for the kind of meter we would like you
to have so that it can link up in the future as smart meters get
more widely used."
Q51 Chairman: Is the Government doing
enough on smart meters?
Dr Watson: I do not think so,
no.
Q52 Judy Mallaber: Do you need to
have smart metering to be able to sell electricity back to the
grid, and is that something that households could conceivably
end up being in a position to do, to produce more electricity
than they are using themselves?
Dr Watson: Yes, in fact just about
all microgeneration systems will, at some point, generate more
than you use in the home, so will export; but smart meters are
not strictly needed, no, you can just have a very simple meter
that monitors the exports and you can read it every month, every
quarter, every year. What the smart meter allows you to do is
to look at what time of day those exports are exported and if
the value of that electricity has different values at different
times of day, which it does—for example, at five o'clock
in the evening when everybody wants it it has a high value, but
in the middle of the night it has a lower value—then if
people could capture that value it may allow them to move around
their demand within the home and perhaps minimise it. Or if people
do not want to be bothered doing that actively there could be
systems which allow appliances to be switched on and off at various
times of day to take advantage of that, if people did not want
to do it in such an active hands-on way. So that opens up all
those possibilities.
Q53 Rob Marris: Two linked questions.
If I replaced my electricity meter in a house how much is it going
to cost me? If I instead install a smart meter how much is it
going to cost me?
Mr Sauter: It depends who you
ask, but I would say starting from £50, £70 up to £150.
Q54 Rob Marris: For a normal meter?
Mr Sauter: For a smart meter.
Q55 Rob Marris: How much is a normal
meter?
Mr Sauter: It is £12 I would
say, £10, for a very standard meter.
Q56 Rob Marris: Yes. It is quite
a price difference then?
Mr Sauter: Yes, but if you ask
larger manufacturers of smart meters you could even go below the
£50 mark, but it is very difficult to tell about the cost
assumptions.
Q57 Mr Bone: Distributed generation.
It struck me that when the Prime Minister announced that we were
going pro-nuclear before the Energy Review was complete it seemed
that the Government had already made up its mind it was on central
generation and distributed generation was something, "Okay,
we will put a paragraph or two in here and there," but they
had already seemed to have made up their minds. Am I being unfair?
Dr Watson: No, I do not think
so. I think it is widely agreed that the answer was invented before
the report, although the distributed generation chapter is something
that was written quite late in the Review, as I understand it,
to kind of balance that out.
Q58 Mr Bone: When I suggested to
the Minister it was bolted on he denied that, but it is hard to
see how we are going to move forward on distributed generation
if we decided that a fair bulk of our energy is coming from nuclear.
Dr Watson: You could say that
we might need both things to meet low carbon targets. I think
that the risk of the focus on nuclear at the moment is that it
is taking, particularly, the political resources, the political
will, because it is going to be quite a political battle until
these stations get built, whether it is in terms of the kind of
price guarantees you are going to offer to nuclear power generators
or putting a floor on the carbon price, either of which is going
to be necessary to do this, and I wonder whether there is enough
political will in the system to do that at the same time as making
all these rather extensive changes, if you like, to local energy,
to energy efficiency policy, extending markets, thinking about
energy service companies. That is quite a lot to do at the same
time, so I think that there is perhaps a risk that pursuing those
simultaneously will be quite difficult. Certainly at the incremental
level at the moment there is no reason why you cannot, but there
is risk of conflict there, particularly in the area of political
will and political resources.
Q59 Judy Mallaber: I know nothing
about Woking and Kirklees but we are assured that they are fantastic
and they have been very successful in promoting local generation.
Can you tell us a bit about it and how come they have been successful?
Dr Watson: Woking is often quoted
as the shining light, particularly because it is a real example
of where a local person in a local authority has decided that
they are going to build their own local grid, local network, put
in lots of different distributed generation sources and actually
have a private wire network partially independent from the main
grid, and they made that work with the council money they had
available by reinvesting it, and so on.
Judy Mallaber: How did they do that?
I do not understand how that works?
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