Energy Bill

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Q 54Charles Hendry: How do you assess the carbon price when it goes up from a few cents a tonne to €30 a tonne? Do you need a floor in that process to make the calculation work?
Denis Linford: As I said, we will have assess this at the appropriate time. We are assessing the impact of the reforms to the emissions trading scheme on the carbon price and we hope that that market will develop and strengthen between now and the time when we have to make a decision. The Government have reserved the option of introducing a UK measure to strengthen the effect of the emissions trading scheme, and we will have to see whether that is needed in due course.
Rupert Steele: From our perspective, we see a substantial programme of work ahead in terms of the design-type approval and sorting out waste and decommissioning, justification and all the things that were set out in the Government’s White Paper. We think that the Government have identified exactly the right tasks to make this option viable, and what we now need to do is to make sure that it is actually delivered.
Q 55Charles Hendry: When will you need to know the carbon price to make that investment decision? When will you need to know about the nuclear waste disposal regime to make that decision? It would be helpful to know the year.
Denis Linford: I should have mentioned the waste. Clearly, we must all have plans in place and approved in accordance with the Energy Bill for decommissioning and waste management. We must have those plans approved when we get consent for the station. Those plans will have to be drawn up over the next couple of years in accordance with the Act, and the guidance that will be put in place to support the Act.
Rupert Steele: We will be making an investment decision in 2011 or 2012, which is when we will need good visibility of all the components that go into that decision.
Q 56John Robertson: Lady and gentlemen, I have been impressed by your line that competition and the marketplace are important, but that goes in line with the fact that you put your prices up together and on a similar basis, so you are obviously working well in tandem. Can you comment on the fact that you say that competition is a primary consideration and that market forces are important? At the time that we are talking about, there are no subsidies for nuclear development and the amount of money that has been ploughed into renewables already with very little return has not exactly been a winner for the Government, so should we allow, or do we need, the same competition, as in market forces, to apply to all forms of energy, and not just to nuclear energy?
Q 57John Robertson: You mentioned Scottish and Southern. You are doing really well, and you have done all that, but 0.6 per cent. of your turnover is used for research and development. Is there a reason why you do not want to get involved in research and development, and why you do not plough money into renewables? Do you think it would be advantageous to introduce something into the Bill requiring a minimum amount of turnover to be invested by companies?
Dr. MacLean: We certainly recognise the need to up the ante, and the spend on research and development. We are exploring a number of ways of doing that. We recently picked up the sponsorship of a chair of renewable energy at Exeter university, and we are working with a number of other universities, particularly in Scotland, to see what we can do to further research and development in that field.
You mentioned renewables, in particular, and no one could say that we are not prepared to put our money where our mouth is with regard to renewables, having recently spent more than £1 billion buying Airtricity, which is a 100 per cent. renewables-focused company. That underlines both our belief that renewables are a sensible and substantial part of the generation mix going forward, and our determination to develop the technologies and supporting infrastructure to ensure that they work and deliver.
Q 58John Robertson: Do you think that 0.6 per cent. is enough?
Dr. MacLean: No. I said that we have recognised that we need to do more research and development, and we are looking for appropriate ways of doing that. You should see a marked increase in our spending on research and development.
John Robertson: We will keep an eye on that.
Guy Johnson: In terms of renewables, we operate the first major offshore wind farm in north Wales. We are also seeking to rapidly expand our renewables business. We are seeking in particular to operate a 90 MW capacity wind farm on Rhyll flats, on which construction has started. The cost of that project, however, is about £190 million. We are also seeking in the longer term to operate a substantial wind farm at Gwynt y Mor. That will produce 750 MW and the cost will be £1.4 billion. There is no delay or lack of willing on our part to expand our renewables business. Indeed, we have publicly stated that, from 2008, our group as a whole will spend £750 million a year on its renewables business. I know it is not a matter for the Committee today, but the issue for us is particularly one of planning where we are suffering substantial delays in that programme.
Sara Vaughan: Probably like the other companies at the table, we are also looking at investing and we are investing considerable sums of money in renewables. Picking up on your other point, like EON, we are also investing a lot of money in research and development, both through the Energy Research Partnership, which is co-chaired by our CEO, Paul Golby, and also through the Energy Technologies Institute which is a 10-year £1.1 billion public-private partnership initiative. We recognise the importance, therefore, of research in improving the industry, looking at how, for example, we can improve the efficiency of renewable energy going forward. It is certainly something that is very high on our radar screen.
Guy Johnson: Like E.ON—
The Chairman: Order. I am interrupting at this point because, as I said earlier, questions should be relevant to the scope of the Bill and in answering questions perhaps the remaining witnesses can relate their plans to whether the Bill encourages or discourages them from implementing them. Could we focus on the clauses in the Bill?
I interrupted you, Mr. Johnson.
Guy Johnson: The only comment I would make in this area is that we have some concern about the transmission regime as it will apply to the offshore wind activities. Our concern is not in relation to that scheme per se, but is in relation to the transitional arrangements. The concern is very much one of delay to the extent that a programme that involves existing assets or assets in the course of construction has a property scheme or buy-out arrangement imposed upon them in the event that commercial negotiations do not prove fruitful. We ask that there should be as much clarity about that as soon as possible; otherwise the risk in relation to the transmissions sections of the Bill for offshore energy is that there will be further delay in the construction of wind farms.
Q 59Steve Webb: Ofgem has estimated that all your Christmases have come at once and that over the next few years you will get a £9 billion collective windfall courtesy of HM Government under the next phase of the EU emissions trading scheme. Would you object to us taking all or some of that back to use for some of the things we have been talking about?
Rupert Steele: We do not accept that number or indeed necessarily the concept that the emissions trading scheme has led to a windfall. It is simplistic to add up the value of the allowances and say that it is a windfall. There are two reasons for that. First, it is clear that a number of generation projects went forward as a result of the Government’s announcements about the ETS phase 2 some years ago. Those projects will contribute to higher generation levels, better generation margins and a more stable grid and therefore fewer peaks in the wholesale electricity price. Secondly, the evidence that we have given to a Select Committee makes it clear that we look, among other things, at end-to-end costs in setting our prices. That again will reduce the upward pressure on pricing. In our view, a substantial part or perhaps all of the value of the allowances will, in a competitive market, find their way to customers. We therefore do not think that the suggestion made by Ofgem is appropriate.
Denis Linford: Just to reinforce the point, on this end-to-end process, in a competitive market, we can only reflect the costs we incur and not some possible opportunity cost. We are actually going to get fewer allowances in phase 2 and so buying the allowances we need in addition to those that we are given will actually mean higher costs.
Guy Johnson: The risks are obviously the risks that I have referred to in relation to the £750 million pounds a year that we are going to invest in renewables; if we look at our investment programme over the next 10 years or so we are talking about something of the order of £8 billion. At the moment, thankfully, we have the majority of the renewables spend being made in the UK and we hope that that will continue. Obviously what have to be weighed up are the risks in relation to that, coupled with the sort of proposals that you might be talking about. I do not know what the answer to that is.
Q 60Steve Webb: Perhaps I can move on to the renewables obligation section in the Bill. Ofgem will be giving evidence later, so I will put to it that its suggestion is simplistic and ill-informed.
Are you, in principle, in favour of the banding of the renewables obligation? Is that the right strategy? Is there a danger that it becomes Governments choosing technologies and being a bit rigid and over-prescriptive? You want long-term certainty and yet a Government can, by regulation, change any of the bands, any of the relativities and any of the technologies that renewables obligation certificates apply to. How do you view the Bill’s proposed banding of ROCs?
Sara Vaughan: We would have preferred the renewables obligation to remain technology-neutral, with specific support being given to emerging technologies rather than having the banding that has come about. That was our position. However, we are where we are and therefore will now work within the provisions that appear in the Bill.
Q 61Steve Webb: Can I just press you on that for a second? In a sense we are not where we are because it has not happened yet. The job of the Committee is to make sure that the right thing happens. You might be sceptical of our ability to change the Bill, as am I, but we will give it a try. If you were sitting where we are sitting, what would you change?
Dr. MacLean: Can I suggest that in some ways it is almost just a theoretical discussion at the moment? Since the Bill was published, we have had the European Commission’s proposals for renewable energy and, as Sara rightly says, the 15 per cent. all-energy target is estimated to mean 45 per cent. renewables. That is a completely different ball game from where we were. It is a tenfold increase in the overall renewable energy position for us and a threefold increase in the target for renewable electricity. I do not think that even changing to banding, which we opposed in principle, is going to be able to deliver what is needed.
Unfortunately we are back into yet another review situation where any clarity that there might have been is going to be removed. In all probability we are going to be looking at yet another legislative process to deal with how we are going to achieve the new targets. The overall plea that I would certainly make is that we achieve clarity on that as soon as possible, because the time scales are incredibly challenging.
I would just highlight that point with a project that we have been working on: the Beauly-Denny transmission upgrade, which is one of the important infrastructure developments that is required to deliver renewables. We started serious work on that in 2001 and at the moment we are unlikely to see it up and running until about 2013. So you do not need to add up an awful lot to work out that if we do not push the button on renewable generation and the supporting infrastructure, there is no way that we can deliver in 2020. The challenge now is to see how we can get clarity in a way that does not block what is already happening and will maintain the delivery of what is already there, and how we can accelerate that through things such as planning. The main thing is not to create a scenario in which we get more uncertainty, and people waiting to see what is going to come out of the next thing and the next thing before they act.
Q 62Mr. Reed: Given that the problems the Bill is designed to address are fairly universal across the western world and that the majority of you represent international companies that can invest in any part of the world at any time, do you broadly welcome the aims, goals and provisions of the Bill?
Rupert Steele: Yes.
Denis Linford: To an extent. They enable certain things to be done; yes.
Q 63Mr. Reed: So will you require, as part of the long-term stability and certainty that you require to make long-term investment decisions, a broad lasting political consensus from this place on the provisions of the Bill?
Rupert Steele: It would be very helpful.
Q 64Mr. Reed: With that in mind, would you be at all interested in making any investment whatsoever in nuclear electricity generation, if it were the view of Parliament, and the Government and parties within it, that it should only be pursued as a last resort?
Denis Linford: We have always said that we need a political consensus and public acceptance. That should be as broad and firm as possible to support any investment.
Q 65Mr. Reed: When it comes to making your investment decisions on nuclear, will you require a fully operating deep geological depository before you are minded to invest or not?
Denis Linford: The Government have a process for dealing with waste, and, as I understand it, there will be a White Paper on the creation of the repository, presumably setting out the process and the steps that will be taken to achieve that. As long as that is clear, and progress is being made towards it, that should provide sufficient reassurance.
Rupert Steele: Just to add to that, in practice there will not be any need to ship waste to a repository for quite a number of years after the investment decision about a nuclear station. As long as we can see that the process is in hand, actually having the repository open is not necessary at the time of the investment decision.
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