Examination of Witnesses (Questions 100-119)
RENEWABLE ENERGY
ASSOCIATION
17 OCTOBER 2006
Q100 Mr Weir: Ofgem's microgeneration
paper makes reference to the need for electricity suppliers to
move towards becoming "energy service providers", providing
"one-stop shop" services that look to reduce consumers'
energy consumption, and I think the Energy Review also talked
about moving that way. How easy do you think it will be to persuade
electricity suppliers to become energy service providers and will
the big players sign up to this or will the Government have to
compel them?
Mr Wolfe: Well, within our membership
we have a lot of those companies. Somea minority, I would
sayare actively pursuing this and do believe that is the
way things are headed, and I think the majority are sitting on
the sidelines to see how it develops. I think it will take measures
from central government to encourage the market in that area in
order for the majority to move down that path, so I am not sure,
with the status quo as it is, that many of the centralised
energy companies will decide that this is a change of their business
model that they want to adopt unilaterally. I think they are again
looking to government for signals that this is a change that we
wish to encourage on a national basis and that they can all follow.
Q101 Mr Weir: On a related matter
then, there has been a lot of talk, particularly with the Climate
Change and Sustainable Energy Act going through, about the electricity
companies buying energy that is developed from micro-renewables
or domestic generation. It was claimed in the debate yesterday
that in Germany someone who generated from micro-renewables gets
paid 10 times basically what a UK electricity company will pay
them for that energy. Do you think that the energy companies are
currently putting sufficient effort into developing schemes to
deal with the expansion of microgeneration?
Mr Wolfe: It comes back in a way
to the answer earlier on. These are commercial companies and they
will be investing in making changes to their business model where
there is a return to be made. If there is no visibility of a return
to be made from making that change, then it is unrealistic to
expect them to be changing unilaterally. We come back to the point
that it is important for the Government to take a lead not because
we expect them to pay for it all, but just because they need to
signal the direction in which we need to travel.
Q102 Mr Weir: It is all very well
for the Government to say, "Put a wind turbine on your roof",
or "Get a CHP boiler", or whatever, but it is not going
to make any difference unless also the electricity companies or
you are going to take the electricity that is generated and really
pay a reasonable price for it to put the system in place, so at
the moment we have got half a system going forward, but the other
half just is not there. Is that right?
Mr Wolfe: It is right. As you
say, the Government, as part of the Microgeneration Strategy,
have made it clear that they expect the energy companies to be
paying a fair price and this has not been
Q103 Mr Weir: A fair price?
Mr Wolfe: A fair price for energy
exported to the grid and obviously that is one of the prerequisites.
In other countries, as has been suggested, the feed-in tariff
model has obliged energy companies to pay a prescribed rate for
renewable energy fed back into the grid and that has certainly
proved very successful in expanding those markets very much faster
than our market has expanded over here with a far lower degree
of clarity about what the compensation is.
Mr Lee: I can give you examples
of the feed-in tariff. Japan started it and they have grown their
market. The feed-in tariff was two and a half times what they
would have paid for a unit of electricity. That was then reduced
over a five-year period by a percentage each year down to zero
for the consumer market and the consumer market has stabilised
and continued growing, so basically what it did was it enabled
it to get on its feet. France are apparently paying about four
and a half times, Germany just under three now, and they are on
a dwindling percentage, so they will go down another 5% in January
and this carries on each year until there is no subsidy or feed-in
tariff, and Spain and Italy are also on tariffs ranging between
2 and a half and 4. I think in 16 countries they are currently
offering a feed-in tariff model, all of which have been extremely
successful and built the business right up.
Q104 Mr Bone: If I could just come
in on that point of the feed-in tariff, you mentioned subsidy
in your reply, but does the Government then pay the difference
back to the supplier, the energy company, or is it just the energy
company that has to bear the costs?
Mr Wolfe: It is generally the
energy company that is obliged. It is an obligation on the energy
companies to pay that.
Q105 Chairman: So the consumer pays?
It is a cross-subsidy by the consumer?
Mr Wolfe: Yes, as it is for the
Renewables Obligation.
Q106 Chairman: It is not the majority,
but where it ends up. Peter Bone asked an earlier question about
the aggressive implementation of the Microgeneration Strategy
and the Microgeneration Strategy says that the energy supply companies
do not have suitable schemes to encourage microgeneration and
the Act gives the Government the power to make modifications to
supply and distribution licences. That has not happened and that
was March and it is now October. Do you think the Government will
actually have the aggression to implement that provision of the
Act?
Mr Wolfe: I think they are hoping
that the knowledge that they have that stick will achieve the
necessary results without them having to use it.
Q107 Chairman: Do you think they
have got the resources at the DTI to do that work or would it
be Ofgem who would do that work?
Mr Wolfe: It would be Ofgem who
would do that work if it were done, and I would just like to underline
the point that Chris Miles made, that the very name `Ofgem' identifies
the extent to which we still do not recognise the
Q108 Mr Bone: If I can come in there
because it follows on really, and you have perhaps answered this
already to some extent, but do you think Ofgem is doing enough
to support the distributed generation?
Mr Wolfe: Well, frankly, no. Ofgem
have interpreted their primary requirement or their primary duty
as being to keep prices down and they have been arguably very
effective in doing that. We have been concerned over a long period
of time that the other duties that ought to be part of Ofgem's
remit, particularly duties with regard to environmental issues,
for example, are not being treated at the same level of priority
and, therefore, it seems to us that Ofgem have interpreted their
remit as such that all other issuesissues of sustainability
of energy supply and issues related to distributed generationare
given a secondary priority compared to the fundamental priority
of keeping consumer prices down.
Q109 Chairman: We have all kinds
of targets now in the energy world at present: renewable targets,
carbon emission targets and targets for combined heat and power
as well. I do not much like targets, but sometimes they are necessary.
Do we need specific targets for distributed energy, microgeneration?
Mr Wolfe: That is a matter on
which the industry is not fully united. I think on the whole the
belief is that it is important to have targets out there in order
to see where we are going, not necessarily as a stick with which
later to beat people, but as a statement of
Q110 Chairman: Aspirations rather
than targets?
Mr Wolfe: Yes, and to that extent
it is certainly useful and it has certainly proved useful to have
a series of targets for renewable power generation, for example.
It is probably counterproductive to break targets down too far
Q111 Chairman: That is the trouble,
is it not?
Mr Wolfe: and then to regionalise
it and then to do it technology by technology because you are
then destroying the ability of the market to respond in the most
efficient way, so our view is that targets are important at the
high level, but it is not necessarily helpful to break them all
the way down to individual sub-sectors and technologies.
Q112 Chairman: Incentives rather
than targets?
Mr Wolfe: Yes, exactly.
Mr Paine: I think a key part of
targets is that they are realistic and all the other not quite
peripheral, but almost peripheral issues are there then to deliver.
I would quote as an example the position about connecting distribution
projects to the grid in Scotland at the moment. Because Scotland
has a relatively low-density population and a high windspeed area
and it has encouraged a lot of windfarm development, but because
the grid is relatively weak, it requires an awful lot of reinforcement
to connect more projects, so we have a massive pipeline of something
like over 10,000 megawatts of projects that have applied to the
National Grid to connect, but which are unable to do so because
the grid infrastructure has not yet had investment and delivered.
Therefore, we have rather unusual situations of projects that
are fully consented and could build tomorrow if the rules that
govern connection to the grid were changed and enabled that to
happen. My point is that it is all very well having targets, but
we need to have some joined-up thinking that goes around that
to enable the infrastructure and everything else we need to fall
into place to enable those to be delivered.
Q113 Mr Weir: One of the problems
there has always been with wind farm development in Scotland has
been the connection and you mentioned the connection charge regime
that Ofgem brought into being. Is that still a problem for you?
Mr Paine: Yes. I think there are
a number of issues and more fundamentally it is the massive number
of particularly wind farm developments in Scotland and the state
of the grid, but also the rules that surround the way that access
to that grid is governed. Typically, they operate what the industry
calls an `invest and connect model' where all the necessary investment
has to be made in the infrastructure and only when it is there
and delivered can you connect your project. Effectively, the business
plan that governs the delivery of that infrastructure and the
size of that infrastructure is based around the number of projects
that have applied for connection. We know, as an industry, that
a number of those projects simply will not get planning consent
or are badly developed, so in practice the 10.5 gigawatts I referred
to may just be a few gigawatts and it may fall down to something
much, much smaller. So we have an absurd situation of a particular
project that is consented and could be built tomorrow, but we
are delayed from accessing the grid because of all these other
projects supposedly in front of us or in a sort of waiting period;
and only when they start to fall away under the current rules
will we be able to connect, so the industry is really looking
at different models, but is generally focusing on what is called
a `connect and manage-type model' which basically says that if
you have a project that is ready to connect, it should be physically
connected and then the system generation managed to enable that
project to generate. That means that if existing generators are
backed down, then there is a compensation mechanism that falls
into place to enable that to happen. For us connection to the
distribution network is a very fundamental issue; the same constraints
existing now in Scotland are starting to develop in Wales, particularly
south Wales where the transmission network is becoming constrained.
Q114 Rob Marris: Is that partly a
technical problem rather than a regulatory problem and can the
transmission network handle it or is it just a question that the
rules are not right?
Mr Paine: It is a bit of both.
Put more fundamentally, it is the rules. The first change for
us is the rules and then it is a more realistic business case
for planning and investment in transmission upgrades because then
we know exactly which projects will go which way.
Mr Wolfe: The word "manage"
in "connect and manage" is really having the technical
issues, getting the connection made and then
Q115 Rob Marris: So it is the rules
rather than the infrastructure?
Mr Wolfe: Yes.
Q116 Rob Marris: I just wanted to
touch on renewable heat, which is something you raised, Chris.
I understand you feel quite strongly, and I think Philip referred
to it as well, about Ofgem covering heat rather than just gas,
as it were. What more can the Government do to encourage renewable
heat other than obviously to throw shed-loads of money at it?
Mr Miles: We have talked about
planning and I think to spread the Merton rule across the country
would be very important and then you create a level playing field.
I have talked to certain counties about bringing in the Merton
rule and they say, "We don't want to bring in the Merton
rule because it will mean that the county next door attracts the
development rather than ourselves", so certainly a level
playing field across the country and the Merton rule in every
council. Then it is building regs; a Renewable Heat Obligation,
which we have talked about; and then public sector procurement
is very, very important and highly influential in places like
Barnsley, Sheffield and Worcester
Q117 Rob Marris: As a driver of the
market?
Mr Miles: as a driver of
the market. However, I very often come across the flip side of
that which says, "Yes, we have a policy to install biomass
heat or renewables or whatever. However, I don't have a budget
and our council at the moment is in deficit", so it is all
very well having a policy if you do not have a budget; it does
not work. The other issue is targets and you mentioned two targets,
but you omitted one. You mentioned micro-renewables and distributed
generation, but we need to add a renewable heat target to that
as well, I think.
Q118 Rob Marris: The other thing
on renewable heat, and this is the limit of my technical knowledge,
is that in terms of community heating schemes, you may or may
not have heard me ask the previous witnesses this question, but
if you have got some kind of community electricity scheme, you
can reach each householder, but can you do that with community
heating or do you get to the situation where in fact your carbon
emissions can increase because people leave the windows open because
it is powered from community heating and they are not paying directly
for it?
Mr Miles: Not at all. We have
metering there today and it is relatively low cost where each
house has a heat meter and the central supplier has a heat meter,
so you can see the
Q119 Rob Marris: So you are kind
of metering hot air as opposed to what we do now in electricity?
Mr Miles: Generally it is hot
water, but the technology is totally
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