Select Committee on Trade and Industry Minutes of Evidence


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. Some—a minority, I would say—are 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 issues—issues of sustainability of energy supply and issues related to distributed generation—are 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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