Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 24 FEBRUARY 2010
MR RODDY
MONROE, MR
TED SANGSTER,
MR JOE
HULM AND
DR JEFF
CHAPMAN
Q1 Chairman: Can I welcome everybody
to this first oral evidence session of our inquiry into The Crown
Estate. The role of the Treasury Sub-Committee is to scrutinise
the work and performance of the smaller departments and bodies
which ultimately come under the Chancellor of the Exchequer. This
year we are focusing on The Crown Estate, which covers a wide
range of activities. I would like to thank all those who have
submitted written evidence. Obviously we cannot hear everybody's
oral evidence, but that does not mean their evidence is not going
to be useful for the inquiry. Next week we see the Commissioners
themselves and the Treasury Minister responsible, but today we
begin with a number of representatives of the marine and offshore
industries. Could you begin by perhaps identifying yourselves
formally for the shorthand writer, please, starting with Mr Monroe?
Mr Monroe:
My name is Roddy Monroe and I am the Chairman of the Gas Storage
Operators Group.
Mr Sangster: I am Ted Sangster,
Chief Executive of Milford Haven Port Authority but appearing
here on behalf of the British Ports Association.
Mr Hulm: I am Joe Hulm, Marine
Development Manager for International Power plc, representing
the Renewable Energy Association.
Dr Chapman: I am Jeff Chapman.
I am Chief Executive of the Carbon Capture and Storage Association.
Q2 Chairman: You are all very welcome.
Let me just make it clear, in the interests of time the four of
you do not have to answer each question. You can try and share
the questions between you, although obviously if you do want to
comment you must. In your evidence generally you identify a whole
number of opportunities for economic development onshore and offshore.
How much is at stake here?
Mr Monroe: I will start. In terms
of our gas storage offshore, there is an awful lot at stake. The
need for the UK to have additional storage for energy security
of supply and for the reduction of transporting was recognised
many years ago. In 2007 the need for gas storage was made very
clear. Unless gas storage is developed offshore in depleted gas
fields, in salt caverns of such size to give us seasonal storage,
we can foresee problems going forward in the future.
Q3 Chairman: Do you want to add to
that?
Mr Hulm: The Renewable Energy
Association has a number of work groups, including the Ocean Energy
Group and it is that group I represent, and technologies in regard
to wave and tidal stream power. What we have here is an emerging
industry. The industry is required to deliver. The emergence of
a new industry is at stake.
Q4 Chairman: Are The Crown Estate
Commissioners in general terms doing everything they should be
doing to help you and your industries realise these opportunities?
Mr Sangster: Ports perhaps have
a sort of secondary role in some of the things my colleagues are
talking about in that we are perhaps the beneficiaries but also
some of the participants in realising the potential for offshore
renewables and, therefore, there is that link with what has been
talked about. To give you an example, for the UK to secure the
maximum potential for what has been identified offshore there
is some £1 billion going to be spent, needing to be spent,
in new port facilities over the next 10 to 15 years. Therefore,
it is important for ports and the role of ports to be recognised
by all those who have a part to play, including The Crown Estate,
and in forming the linkages and involving ports to assist UK plc
in gaining the maximum advantage.
Dr Chapman: The carbon capture
and storage industry is likely to be very, very big into the future,
probably measured in trillions of dollars. The UK is committed
to do four projects and the CO2 for these four projects will have
to be stored offshore. This should position us in the way of this
industry, so it is very important that we get on with these projects
as quickly and efficiently as possible. I have to say that whilst
it sounds like a very big market, we are dealing with a low value
waste product and, therefore, any additional cost in the value
chain is very significant, especially because the storage cost
of CO2 is relatively small compared with the cost of capturing
the CO2.
Q5 Chairman: Okay, but coming back
to my question are The Crown Estate Commissioners doing everything
they should be doing to help you realise these opportunities?
Dr Chapman: We have had some problems
with The Crown Estate in terms of the discussion on costs. Because
of the monopoly position of The Crown Estate they do find it difficult
to deal with trade associations, excluding anti-competitive issues,
and that has inhibited the discussions to some extent, although
now we have found that The Crown Estate talks with us quite freely
and we are having meetings every two months and we have meetings
rolled out for the rest of this year.
Q6 Chairman: So it has improved?
Dr Chapman: It has improved.
Mr Monroe: From an offshore development
perspective, I believe The Crown Estate is seen as one of the
biggest impediments to actually getting the projects to fruition
with the level of rental charges that they are proposing, the
delay that we are having in actually trying to get the lease arrangements
sorted out, and there appears to be no real focus from The Crown
Estate on the wider need for gas storage and purely focusing on
revenue generation. So instead of, are they doing everything they
can to help, it is almost flipped the other way, it is that investment
decisions now—one of the top items, I would suggest, is
the threat posed by The Crown Estate.
Chairman: My colleagues are going to
pursue that in more detail.
Q7 John Thurso: Joe, could I just
ask you one question for factual purposes? If the Pentland Firth
is going ahead the target is 1GW of energy, which is equal to
four or five power stations, by 2018-19.
Mr Hulm: I understand The Crown
Estate's own target is 700MW by 2020.
Q8 John Thurso: Which is a substantial
amount and generally the industry thinks that as it develops it
will go up to 10 to 12GW, so it is a very large power source that
is potentially there?
Mr Hulm: Indeed.
Q9 John Thurso: Can I follow on,
Mr Monroe? My question really follows directly on from your last
answer, which is that The Crown Estate Commissioners have a revenue
producing remit subject to the requirements of good management,
so they have a dual balance there. I was going to ask, have they
got the balance right? I would suggest your answer is, "No".
What would you like to see changed?
Mr Monroe: I think the problem
is that for offshore gas storage they do occupy a monopoly position
because offshore gas storage is the only opportunity to develop
seasonal storage. There are different sorts of storage, but storage
that helps with security of supply is the sort of stuff that you
develop offshore, the large fields, and there are not the opportunities
to do that successfully onshore. The basic supply/demand is that
supply of the porous strata far exceeds the demand for it. The
UK has a deficit of storage because historically we have not needed
it, we have relied on UK continental shelf supplies. As they dwindle
we need to import more and we need to complement that with additional
storage, so we are lagging behind a bit behind our European partners,
who traditionally have imported gas. To get us back up to those
sorts of levels we need about 20BCM (billion cubic metres) of
capacity in total. We already have four and we are developing
some more onshore. The total availability of capacity offshore
totals around 90BCM. There are various studies that have had a
look at it, but about 90 plus BCM, which can be found in 57, 58
different potential sites. If you were looking at it as a pure
economic exercise what you must say is, "How can you ensure
that the rents are fair, that the rents are what a competitive
market will bear?" What you would use is the analogy that
all of the 57 sites were owned by individuals, that they were
owned by individuals and they were trying to sell to a constrained
supply side. What that would mean is that the price would gravitate
to the cost of provision plus some sort of return, which equates
more or less to what you find when you apply a production licence,
which is sort of tens of thousands of pounds for a licence.
Q10 John Thurso: I know one of my
colleagues is going to ask about the monopoly situation, but your
answer is broadly that that is what needs to be looked at?
Mr Monroe: Well, it is three things.
It is the initial rent, it is the ongoing provisions, the rent
review is another big one, and there is also the delay, the apparent
lack of urgency there is within The Crown Estate, because we need
gas storage now.
Q11 John Thurso: Mr Sangster, can
I ask you, are there areas where you would like to see The Crown
Estate Commissioners play a more active development role, particularly
at port side, where you very often have to acquire the seabed
or a lease of it in order to be able to develop your port?
Mr Sangster: Yes, we believe The
Crown Estate—and it comes back to the question you asked
just before this about the revenue remit—if they adopted
a more flexible point of view the long-term benefits to them and
also to the ports and the communities could be increased. They
are very much driven by this revenue remit, which in some circumstances,
perhaps a new development or where there is a degree of regeneration,
it is not always appropriate that they have their 15% up front
in a new development, whereas perhaps a different approach would
lead to a greater share of the risk with The Crown Estate in participating
in terms of potential profits which might take time to arise,
but loading their requirements upfront can swing a potential development
into either not taking place or taking place in a different way.
Q12 John Thurso: Do you think the
fact that they often use outside agents rather than dealing with
it internally is a help in that process or an impediment?
Mr Sangster: I think it is a help
because certainly the agents they use in Wales, who we have a
lot of contact with, have an understanding of the local conditions
and they are actually very helpful to us and also, I believe,
to The Crown Estate as well. That is in the generality of their
relationships with ports. Where I think there is something missing
in The Crown Estate's use of agents is in some of what they are
seeking to do, particularly the renewables sector, the offshore
renewables, where that is all kept centrally and we and other
ports have sought through our local contacts and normal contacts
with the agents to participate in that and to get information,
they know very little about it, they are not kept informed and
that is being dealt with back at headquarters. So they are not
making full use of what is working in other areas very well by
this retention, perhaps for very good reasons, I do not know,
back at headquarters.
Q13 John Thurso: The last question,
please, is to Joe Hulm. In the joint submission of the British
Wind Energy Association and Scottish Renewables, broadly they
commended The Crown Estate for the way they have handled the offshore
wind licensing. They had some pretty good reservations with regard
to wave and tidal power. Would you like to substantiate that and
is that because it is at an earlier stage of development and perhaps
needs a more collaborative approach?
Mr Hulm: I think it is more important
to clarify the difference between offshore wind and wave and tidal
power, marine tidal stream power. Wave and tidal is a far less
mature industry, although the UK has a technical lead and a great
technical resource. I think the industry needs nurturing far more
than that much more mature industry that is offshore wind. That
is not to say that there is less potential to deliver in terms
of security of supply, carbon targets and particularly manufacturing,
and in order for UK plc to fully realise those benefits, carbon
reduction, security of supply, green jobs, then an industry must
be nurtured and The Crown Estate is one party involved in that.
Q14 John Thurso: You made a very
interesting point, just to pick you up on that. You said that
in regard to marine renewables Britain is in the lead and is in
the lead in technology, which is of course very different from
wind. Is that a substantial lead that we really ought to nurture
and grow?
Mr Hulm: Britain is head and shoulders
globally above any competitors in terms of technology, know-how,
with our significant offshore oil and gas experience, and in terms
of legislation, the Marine Bill, et cetera, Marine (Scotland).
The focus that has been placed on this potential growth sector
is commendable and The Crown Estate should be commended indeed
for their lead in driving the industry forward, but it needs to
ensure that it can demonstrate, beyond the prototype stage of
actual individual devices, an array of, say, five, 10, 15MW, before
significant lenders can get involved in the space and a UK roll-out
not just of power plants but also for the manufacturing of devices
can take place.
Q15 Sir Peter Viggers: The management
of Crown Estate have, of course, a monopoly position in respect
of the assets they are responsible for. Do you think they exercise
this monopoly responsibly as far as your sectors are concerned?
Dr Chapman: I have to say that
for carbon capture and storage the point is yet to be determined
because, unlike gas storage, no price has been set. I would like
to draw a distinction between gas storage and carbon capture and
storage because gas storage is temporary storage and is an ongoing
business. Carbon storage is permanent storage and once you put
it there you leave it there forever. That is a distinction and,
as I have said before, it is a lower value article altogether.
Another thing is that the support for carbon storage will arise
out of a levy on electricity consumption, so that levy on electricity
consumption will pay the operators of the carbon capture and storage
chain to do their thing and some of that money will get paid to
The Crown Estate. How we determine that amount of money fairly
I actually do not know at the moment, given the monopoly position,
but you can see that there is the potential here for this to become
regarded as a stealth tax.
Q16 Sir Peter Viggers: Specifically,
do you regard their exercise of power as being fair and reasonable
bearing in mind the monopoly position?
Mr Sangster: In terms of ports,
many of which have dealings with The Crown Estate for leases for
extraction of the seabed, there is the recognition and the slight
discomfort that The Crown has a monopoly and there is no reference
point to the market value in what is being discussed and agreed
or imposed. Whilst in the main there are not many significant
difficulties, there is always at the back of the mind of my colleagues
in ports, in dealings with The Crown Estate, whether what is being
required of them is a true reflection of the market value when
the only market is from the one supplied at Crown Estate.
Q17 Sir Peter Viggers: Can I ask
a parallel question? Is there an appeal procedure which enables
you to challenge a decision by this monopoly which you think is
fair and transparent?
Mr Sangster: Within the BPA we
have got a Memorandum of Understanding with The Crown Estate of
an appeal procedure which brings in the district valuer as a means
of reference for that. It has not been used often, but it is there
and it is a mechanism which would appear to be appropriate.
Mr Monroe: To continue my piece
on the monopoly element, we at the Gas Operators Group are fairly
convinced that there has to be a monopoly element included in
the rental charges for offshore fields, given the analogy, as
I have explained, of oversupply and seven figure rental charges
per annum. Our frustration, and my frustration particularly—I
have worked in the monopoly business for over 20 years for monopolies
of companies who use monopoly services—is if ever there
was a case for some form of regulatory oversight this is one where
it is needed because we have nowhere to go. I understand that
if a case could be presented we could go down the route to the
OFT, but that is a lengthy, time-consuming process to resolve
something like whether the charges are including an element of
monopoly rent or not. One of my recommendations would most strongly
be that there needs to be some sort of regulatory oversight so
that customers who are using the services of The Crown Estate
can challenge what is being proposed and have an independent regulator
who is aware of all the facts and who has the economic acumen
to actually assess these things and to say yea or nay. At the
moment we talk to The Crown Estate and we say, "We are sorry,
we cannot accept these rents. These rents will materially damage
our projects", and The Crown Estate says, "Well, go
onshore". As I explained previously, you cannot go onshore
and it is that sort of thing I think we need to—
Q18 Sir Peter Viggers: So there is
no such mechanism. Do you agree, Mr Hulm?
Mr Hulm: Can I come back on monopoly?
Yes, there is a monopoly of the seabed with The Crown Estate,
but the seabed is one of only six items that need to be covered
as a project developer in the offshore field, particularly with
regard to wave and tidal. The seabed, yes; also grid, you need
to get the power ashore; also technology, we have a global lead;
supply chain, installing the equipment and servicing it, and support
mechanisms from the UK Government to ensure that it delivers in
the short-term and then later on in the longer term. What I am
getting at is greater coordination to ensure that all six of those
sides of the project can be delivered as required.
Q19 John Mann: You seem to be saying
slightly contrary things between you. Mr Monroe, quantify it for
me. If you got everything you wanted out of The Crown Commissioners,
because this sounds like pretty leading stuff in terms of UK plc
gas storage, as is renewables, as is CCS, the potential position
in the global market. With CCS we could be first. With renewables
we could be world leading, exporting, et cetera. How much more
efficient could you be, where is the defining efficiency, if you
had everything you wanted from The Crown Estate?
Mr Monroe: How much more efficient?
| 
