Examination of Witnesses (Questions 420-424)
MR ROBERT
ARMOUR, DR
STEVEN RILEY
AND MR
IAN FOY
3 JUNE 2008
Q420 Chairman: You are beginning
to convince me that you are interested in expanding your operations.
That is what I wanted to hear. I get a slight sense of complacency
from the three of you. It is all okay really. You could live with
it.
Mr Foy: We are in this market.
Drax has announced that we are going to invest around 80 million.
We are going to become the biggest biomass co-firer in the UK.
We are also investing £100 million in renewing all our HP
and LP turbines to make them more efficient. We are willing to
invest. We want to invest, but to invest in the retail business
we do not see as particularly possible and to invest in new power
stations we do not see an incentive in the market.
Q421 Mr Clapham: As a risk profile
for example on an independent investing into new gas stations,
has it gone to a degree where it militates against that investment?
Dr Riley: For us, when we look
at this investment now, I would probably put my money in other
markets rather than the UK in terms of the deals that I can do
in building new gas fired stations but I do not necessarily think
that is always going to be the case. If I could get a long term
offtake contract in other markets and that would present a lower
risk profile for me. In any of the markets we look at at the moment,
one of the subjects that we have not touched upon at all is just
the rising cost of building new power stations. Not just the UK
but the whole of Europe and elsewhere around the world is in need
of new capacity. If you take a view over the last two or three
years, the cost of putting a new power station on the ground has
also gone up significantly and we have not even started to see
the impact that that is going to have on the returns of investors.
Q422 Mr Clapham: Given that you are
in Europe, do you find that for example with regard to a gas fired
station you are more encouraged to invest in gas fired stations
in Europe than you would be in the UK?
Dr Riley: At this point in time
we are investing in two gas fired stations in Europe and none
in the UK so I think that answers the question. Referring to a
point that Ian made earlier, if you look at the spreads now as
the key determinant as to whether you would invest in the UK compared
to where they were two or three years ago, the signs are much
more encouraging. There is optimism there. Have you the optimism
that this market can deliver the returns that are required to
burn new CCGT on the ground? The question is then your level of
confidence as to whether that is going to be there for the long
term or not. That is changing.
Q423 Miss Kirkbride: Having listened
to all the evidence this morning, it seems to me that we are in
quite a difficult position because North Sea oil is running out
very quickly, it would seem. We have a situation where domestic
consumers and industrial consumers are being hammered with the
potential that our industrial consumers might well withdraw industrial
production from the UK, which is extremely grave. We have an unliberalised
market in Europe which again, according to our previous guests,
suggested that that was meaning that prices could be higher in
the UK because companies were able to take advantage of UK consumers
without being able to do the same in Europe. We have producers
saying, "Look, if you really want us to make these investments
which are dead expensive and getting more expensive, if you do
hit us with a Competition Commission inquiry, you are not going
to get what you want in terms of future capacity." We are
really in a very difficult position and yet in 2003 the Energy
Minister, Brian Wilson, had a review of energy in the UK and a
review of nuclear energy in the UK and said, "There is not
a problem. It is all fine. We do not need to worry about this.
We will just put it on the shelf for the next four years."
Would you like to comment?
Mr Armour: I think that is why
there was another energy review in 2006 and a series of papers.
Clearly, the gap that is facing the industry in terms of generation
capacity either driven by retirements or the Large Combustion
Plant Directive and environmental constraints or by low carbon
is getting that much closer.
Q424 Miss Kirkbride: Was that not
a grossly irresponsible judgment at the time?
Dr Riley: It was at a time when
generators were going bust and losing money. Companies were writing
off significant amounts of investment that they made in those
power stations. We should not lose sight of the fact that back
in 2002-03 it was a completely different environment to the one
that we are facing now.
Mr Foy: In 2003 I was at Drax
and the American owner walked away. We had in the past year got
rid of virtually all the coal stock. There was not a lot left
at the station. Part of our argument here is that we do not want
these swings. We want to be able to hedge. We want to have the
signals out there such that you can see a long way forward and
make these big investment decisions. We want a more liquid market.
One of the arguments is that vertical integration may be stopping
those long term markets.
Mr Armour: All I was saying was
investors, credit rating agencies etc., have a long memory. They,
like all of us here, got burned in 2001-02. Looking forward at
the challenges, regulatory uncertainty is not a conducive factor
to meeting those challenges. I am not necessarily saying, "Do
not do anything on the Competition Commission." It is just
that that overall LD Investment environment does not look easy.
Chairman: We could go on all day. I think
you have agreed with Julie Kirkbride's question but in a diplomatic
way. Thank you very much, gentlemen. We have been courteous but
we have treated you with a degree of robustness sometimes. Thank
you very much for rising to the challenge. We are very grateful
to you. If you think there is anything we did not say or you want
to clarify in further written evidence, please feel free to send
it. Thank you very much indeed.
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