Examination of Witnesses (Questions 1-38)
LORD TURNER, DAVID KENNEDY AND PROFESSOR JON GIBBINS
12 OCTOBER 2010
Q1 Chair: Good
morning and welcome to, I think, our first public session
with the Committee. Congratulations on finding your way to this
rather remote corner of the Palace, which might have been too
much for some of my colleagues. Anyway, it is very good to see
you again. Do you want to say anything by way of opening
statement or shall we just crack on with some questions?
Lord Turner: I
think we should just crack on.
Q2 Chair: Fine,
okay. Perhaps a general one to start with because I know
that the Committee has been very explicit about the dramatic decarbonisation
of electricity generation that is needed by 2030. I think
you talked about a 90% reduction in emissions from electricity.
Do you think at the moment that the UK is on track to achieve
that quite challenging target?
Lord Turner: Broadly
speaking, if we think about the path that has got to occur, we
are now at just under 500 g/kWh. We need to get to somewhere
in the region of 50 g/kWh,
or something like that, by 2030. The forecast would show us getting
to somewhere in the region of 300 g/kWh by 2020. So you can break
it into two questions: how realistic are the forecasts that take
us to the region of 300 g/kWh in 2020; and what is our plan to
drive it thereafter?
On the road to 2020, as we set out in the letter,
which was public and went to the Secretary of State in relation
to renewable energy targets, we basically believe that, if we
manage to hit the renewable energy targets and they are doable
but they require a lot of building, particularly of wind
plants, between now and 2020, and if by 2020 we have one new nuclear
plant in place, then, yes, that story of from here to 300 g/kWh,
with the phaseout which is going to occur of several of
the coal stations, is doable.
I think the challenge then is how we keep that
pressure up in the 2020s where it has to come from some combination
of a nontrivial element of nuclear, a further
rollout of wind—and possibly other renewables but
still primarily wind—and a role for carbon capture
and storage? I think our concern is whether that will occur without
some category of new policy instruments including, we are suggesting,
some quite fundamental reforms to the structure of the electricity
market to make sure that there are incentives for that longterm
investment. I think that is how I would sum up. I do
not know, David, whether you want to add to that.
Dr Kennedy: Just
in terms of investment requirements, to give you an order of magnitude,
I would say that we need about 20 to 25 GW of low-carbon plant
added to the system over the next ten years. Between 2020 and
2030, we are looking at up to 40 GW, so a very significant acceleration
in the pace of low-carbon investment. We don't think that would
happen under the current market arrangements, so there is a need
for fundamental reform.
Professor Gibbins:
If I can just add something here, in terms of where you want
to be by 2020, I think you can characterise it as certain amounts
of plants that are constructed, but you also need capacity in
place, and that is actual physical construction capacity—people—and
then also regulations so that you can do things rapidly in the
2020s. You cannot start from having done nothing on CCS, for
example, and hope to get large numbers of plants built in the
2020s. So there is potential and preparation as well as actual
metrics of plants built.
Dr Kennedy: And
it tells you if you want to have this stuff coming on the system
in the 2020s, you need to plan for it now; you can't wait five
or ten years to change the market arrangements. We need to be
really focused and do that for the next one, two and three years
so that then investors can make decisions on, for example, nuclear
plants.
Q3 Chair: We
will come back, I think, on to the question of the reform of the
existing market, which is clearly very relevant. Are there any
other specific obstacles you see to making this programme?
Lord Turner: Obviously,
apart from the reform of the electricity markets, there are crucial
things that continue to be important simply on the planning regime.
There have been reforms to the planning regime, but we are now,
for instance on the nuclear side, going to come up to real tests
as to whether things do go through that process in a reasonably
smooth fashion. That is an important potential barrier, both
in relation to wind and in relation to nuclear.
On CCS, of course, that is in a different category
from either nuclear or wind in the sense that it is not yet a technology
proven at full production scale rather than at experimental scale.
Clearly, therefore, for us to have confidence that that is available
as an option—both in relation to coal but also, we would
flag, in relation to gas during the 2020s—it is important
that it is tested at scale and demonstrated at scale. So that
is an important part of the picture which has to happen during
the next decade in order for it to be an option which is feasible
in the decade thereafter.
Q4 Chair: Is
it your view that we could produce enough electricity in the UK
without commissioning any new coalfired capacity?
Lord Turner: Yes,
I think that is possible. There are tradeoffs at the
margin in terms of cost and, indeed, I think it is quite
possible that the free market left to itself, with the carbon
prices that are likely to exist in the 2020s, would do large amounts
of gas rather than coal, but the system would still work. Indeed,
one of the points we have made is that we should not, on the CCS
story, entirely concentrate on coal. We see no feasible role
for coal without CCS in the 2020s, given the then likely carbon
price and given what we are going to achieve, but we are also
increasingly concerned, if there are large amounts of unabated
gas in the 2030s, that that also would be incompatible with achieving
what we need to achieve by 2050.
Professor Gibbins:
Can I just add something there, though? I think there may
be an interim period when existing coal plants would still be
useful as backup, essentially for other activities, because
you can store coal—it does not evaporate; you can have a coal
stockpile. There is also some interest in looking at running
or converting existing coal plants to biomass. If they still
retain the capacity to use coal, as they would, that could also
be a useful national security backup.
Lord Turner: Can
I just say I think we would agree with that? One of the
things which we did flag at an earlier stage is that one of the
things that one could be doing with unabated coal in the 2020s
is having a hoursperyear limit on it. So it would
still be part of what was available to meet peak capacity or downturns
in other things going off the system, but with a sufficiently
small hours-per-year running that it does not make a fundamental
difference to the average grams per kWh.
Q5 Chair: Eventually
would the same apply to unabated gas?
Lord Turner: Yes.
I think eventually unabated gas would only have a role
as a peak capacity element. It cannot be something running
all the time. Basically, if you have got to get below 50 g/kWh
by 2030 and lower thereafter, you cannot have much in the system
running at the sort of 300 g/kWh that is typical of a gas
system.
Dr Kennedy: We
should just differentiate. If you get to 2020, there is very
limited scope to add any new gas capacity to the system and decarbonise
at the same time. There is a question of what you do with
that capacity that we add to the system over the next five and
10 years. You would run that, but you would run it at reducing
load factors over time.
Q6 Sir Robert Smith: Can
you just clarify on that back-up role of coal? Obviously we are
looking here at carbon emissions mainly, but do the other emissions
from coal mean that it won't be able to fulfil that back-up role?
Professor Gibbins: It
depends on what sort of derogation you have if it is not fully
fitted with emission reductions. But, actually, I think
most of the plant that will be around in the 2020s will have quite
advanced emission controls on it, if it is there, so I don't
see that as being a serious problem.
Q7 John Robertson: I
wonder if we could move on a wee bit. Do you think the Government's
aims for an EPS—emissions performance standard—to
provide certainty to investors and to contribute to reducing emissions
from the electricity sector are appropriate and adequate? Would
you suggest any alterations or additions?
Lord Turner: I will
let David talk in detail about this, but our overall attitude
is that there could be a role for an EPS system. Of course
an EPS system can be applied in a number of ways, from corporate
average EPS through to something very specific on individual coal
plants requiring them to achieve a degree of capture. We
certainly see it as one among the tools which is available to
help drive decarbonisation, but we have also become increasingly
convinced that it is not adequate in itself, or necessarily the
best instrument in itself. We also see a role for more fundamental
reform of the electricity market to create elements of price and
quantity certainty for low-carbon providers, and these can be
done by, essentially, contracting for longterm delivery.
You can keep price discipline through a tendering process.
These are fundamentally tendered feedin tariff-type systems
rather than administered feed-in tariff type-systems. We will
be talking in our December report about things that go above and
beyond EPS. David, do you want to comment on that?
Dr Kennedy: We
had recommended an EPS in two specific contexts. One was the
investments in unabated coal, where we had said that there is
not a role for significant generation from unabated coal
through the 2020s, and a way to signal that would be an EPS
which basically says, "You will not run a plant unless
it has CCS beyond a certain point in time."
The second recommendation is that, given very limited
scope for investment in unabated coal or gas generation beyond
2020, you could have an EPS which effectively says you can't invest
in unabated coal or unabated gas.
You wouldn't want to put those in place on their
own. These are stick instruments. You would want, as Adair says,
a carrot in the form of longterm certainty that you
can give to investors so that they can put their money into nuclear
or renewable sources.
Q8 John Robertson: So
the Government's ambition is to try and accelerate CCS. Is it
feasible to do that?
Professor Gibbins:
It certainly is feasible, yes, given where we are now. We are
not moving very fast but things are moving. Obviously, doing
CCS for the first time takes longer than you think it does, going
into it, but certainly there could be movement. The biggest obstacle
at the moment, I think, is guarantees about funding. The levy
was a very strong signal. We now know it is potentially
under threat, and I think that would send a disastrous
message in terms of accelerating CCS.
As regards what you might achieve with accelerated
CCS, the Advisory Committee on Carbon Abatement Technologies to
DECC, which has recently finished, said that we could probably
achieve 5 GW of CCS capacity by 2020 in a combination of
gas and coal. I think that target is still achievable, and
I think one of the things that we should actually bear in mind
is that—David was talking about capacity and what needs
building—you cannot confuse some renewables capacity, particularly
wind, with CCS capacity. You have to divide the wind by three
or multiply the coal by three. So actually even 5 GW of CCS is
quite a lot of wind—it is of the order of 15 GW. That
is significant. I have to say I think that, if you
actually want to be in a position of rolling out tens of
gigawatts of CCS in the 2020s, 5 GW is not too much, and it is
not actually that many plants. You are talking about five significant
sites.
Lord Turner:
I would say on CCS that there have to be two things. There
have to be some very clear signals, which can include EPS signals,
that tell the generators that if they want to have fossil fuel
plants running in the 2020s, they are going to have to have CCS
on them of some certain percentage of capture. That depends on
what you set the grams per kWh within the EPS. That determines
whether they have got to get 80% capture or 90% capture or whatever,
so it is a sort of sliding scale. That is, as David has said,
the stick—the driver—that means that they know there
will be limits on their ability to run unabated. But it is also
vital that we actually have the capability created, and that is
why I think the demonstrations are important and the funding
for the demonstrations is important.
Professor Gibbins:
And subsequent reference plants. Can I just say, though, Lord
Turner, I think the idea that if the generators want to run
unabated fossil fuel, they won't be allowed to, is not tenable.
If the country wants electricity, we will have to run fossil
fuel plants in the 2020s. Now, whether those have CCS is clearly
an option, but not running fossil fuel plants in the 2020s is
not an option.
Lord Turner: We
think it is an option to be not running coal plants. You could
be running gas plants and certainly we could end up with no unabated
coal plants. We see that there will continue to be unabated gas
but we would like that coming out of the system during the course
of the 2030s and being, therefore, replaced with, probably, CCS
gas—gas with CCS.
Professor Gibbins:
I agree entirely—
John Robertson: Can I
interrupt? I am sorry to interrupt, but you are now having a conversation
and I feel I am out of it.
Chair: It is a very, very
interesting one.
Q9 John Robertson:
Let me try and bring together what I think you are saying
to me here—I am trying to clarify it into very simple terms—and
that is that we are talking about cost here and how much money
is going to be invested. So how would that affect the price of
carbon? What would you have to have in the carbon price to achieve
what you are suggesting?
Dr Kennedy: We
haven't worked this out as a price of carbon. I think
the estimates are that the four demonstration projects that are
planned at the moment will cost up to £4 billion in support
through the levy or through some other mechanism. But certainly
for us that £4 billion would be money well spent, and if
we don't move ahead with it—if we don't have the four demonstration
projects—you have to question actually is it plausible then
to decarbonise the power system through the 2020s just based on
nuclear and based on renewables? So there is a significant
investment, but it is an investment that will have a pay-off
in terms of our longer term objectives.
Professor Gibbins:
May I just say something, Chair, on the price-of-carbon
issue? It is interesting that we would expect the cost of carbon
capture and storage to be highest at its inception. So we have
carbon capture and storage with a falling cost and we expect
carbon price to increase over time. So there is a natural
mismatch in using the carbon price to incentivise carbon capture
and storage. One starts out high and goes low; the other starts
out low and then goes higher.
Q10 Chair:
Just to be clear on what you said a moment ago, Professor
Gibbins, are you saying that if next week in the CSR we learn
of any change in the funding for the CCS competitions, that will
be disastrous?
Professor Gibbins:
I think it will certainly delay, depending on the change, whether
or not CCS is available to deploy in the UK in the 2020s. It
takes a long time to develop technology. Even if we could
import the technology, we still need to have practice in regulation
and deploying pipelines and infrastructure, and that has to be
with our particular country. You can't import that sort of experience.
Q11 Chair:
I think a lot of what has been said in the last 15 minutes
emphasises the importance of having that ready by 2020.
Professor Gibbins:
As I say, we will be running fossil fuel plants to keep
the lights on. It will have to be done.
Q12 Dr Lee:
I get the impression that we are a bit late to the
party and that we are trying to play catchup a bit
here, in that we have got this gap to fill in time and, if we
don't do this, we are going to have to do this, and it's because
it is all a bit late. I was just struck by this interconnector
between Norway and Holland—the electricity connector that
has actually paid for itself already and has only been in since
2007. Norwegian electricity is 100% renewable. We had an interconnector
plan and it did not happen because it wasn't viable. I wonder,
in terms of the fact that we need almost to buy ourselves some
time from a renewable source so that we can hit CO2
emissions targets, etc., is it cheaper to proceed with that even
if it requires some subsidy than pursuing some of the other paths
that we have just been discussing now in terms of buying in electricity
that is from a cleaner source?
Professor Gibbins:
My understanding is that Norway in some years has been a net
exporter and in other years has been a net importer of electricity.
They have done badly in dry summers. There was a period
when they were importing coal-fired electricity from Denmark to
meet a shortfall. The have had some wet summers recently, so
they have managed to export a bit. But their main value
is a balancing. In other words, you can effectively use them
as longdistance pumped storage.
Dr Kennedy: We
are just actually finishing off some work on interconnection as
one of a number of options for providing more system flexibility
and we will publish this in our report in December. I think
the key message is that this is not a substitute for investment
in low carbon capacity; it is a complement.
Q13 Dr Lee:
What about the shortfall, because clearly there is some debate
as to whether we are going to need coal or not, or gas, in terms
of the timing of everything? I am just wondering whether
one way we might circumvent that is by importing it from a renewable
source.
Dr Kennedy: Well,
if the objective is just to keep the lights on over the next ten
years—
Q14 Dr Lee:
I think at the moment that is probably the number one objective,
being realistic.
Dr Kennedy: We
can quickly add gas-fired generation to the system. We know actually
that more capacity already has planning approval in terms of gas-fired
generation than we will need over the next 10 years, and the lead
times for those projects are relatively short. I think
the risk of security of supply can be dealt with.
Professor Gibbins:
But you are talking about quite large amounts of electricity.
Interconnectors are of the order of a few power plants, not tens
of power plants, and they may not have the capacity themselves
to generate that much electricity.
Lord Turner: I
think also that if you said, "We'll do an interconnector
and then we'll have somebody else's low-carbon electricity,"
the fact is that everybody else is driving for low-carbon electricity,
so it's highly likely that that is going to be at the expense
of them at the margin of doing something else.
Q15 Dr Lee:
I am not suggesting it is a longterm solution. I am
just suggesting, without wanting to get party political, that
in view of the fact that we have arrived at this a bit later
than perhaps we should have done, I wonder whether we just
need to—
Lord Turner: I
think some of the things that we were late doing but are now rapidly
catching up on are things like the issues of Scotland-to-England
grid connections—the ability to take some of the large developments
of wind power in Scotland and bring them south, where there have
had to be quite significant changes in the degree of strategic
outlook of National Grid, and the whole greater willingness to
take a more planned approach to that has been important.
I think we probably were at one stage behind in our thinking
on that, but that has gone through a significant acceleration
over the past few years
Dr Kennedy: Looking
forward, the key thing is decarbonisation of the power sector,
which is central to moving towards the 80% target. That is still
in play, but it is in play only if we support the CCS demonstration
and it is in play only if we reform the electricity market. If
we don't do those things, you have to ask a question.
Q16 Dr Lee:
In terms of where the UK fits in in the CCS race, are we fast
coming up? Are we up front here, because it strikes me as an
opportunity?
Professor Gibbins:
Yes, we are actually. Just to use an example with which I am
fairly familiar, if you look at Canada, which has traditionally
been fairly active on CCS, they have a couple of projects
for which they have got funding approved. They also have one
to do with tar sands and also a coal plant in Alberta, but
nothing has been built. We are very, very close to that ourselves.
If the levy was there, we would be at exactly the same position
with Longannet particularly, where we have an existing plant that
is ready to retrofit. We have also got the project at Peterhead—an
existing plant ready to retrofit. These are very analogous to
the projects that are being talked about in Canada. Also, if
you look at the FutureGen project in the States, which has now
turned into a retrofit of oxy-fuel on to an existing plant,
that is just at exactly the same stage. They are doing design
studies and waiting to make the final financial commitment. So
we are actually almost parallel with those countries.
Dr Kennedy: The
fact that there are other countries active here, whether it is
Canada the States, Australia or China, is a good thing as
well because if we get a critical mass in the UK, we are
in the club and we can share their learning. We can leverage
what we learn here, and it is good for us then to be able to deploy
the technology in the 2020s.
Q17 Sir Robert Smith:
But what happens if there is not a levy? Is there anther way
of trying to keep the momentum going without a levy?
Dr Kennedy: It's
not clear what that would be, and if you are looking for £4
billion, given the current fiscal situation, without the levy,
you have to question where would that come from? I think we would
be in the situation we have been in for the past few years before
we had the levy, and that was we had one demonstration project.
It took many years to get to where it is now, which is we are
at the engineering-feasibility-study stage, and the reason it
took many years was because there was not a funding source
for that one project. Now, looking forward, we're talking about
four projects which wouldn't have a funding source and it's not
clear what that funding source could be.
Q18 Chair:
Let's not assume the news is going to be bad. Just turning to
the EPS itself, of which there are a whole variety of different
designs, do you have a view about which one would be particularly
effective in achieving the goals we have talked about?
Dr Kennedy: It
depends what you are trying to address. If you are trying to give
a signal to potential investors in conventional coal, you
would have something that is plant-specific that says there is
a limit on how much you can run this coal. If you want to
give direction of travel for the system as a whole and investors
thinking of investing in anything for the 2020s, you would look
at something that is broader which says you can't invest in anything
that is unabated fossil fuel. There is a third option, which
says, "Okay, if this is the path that we want the sector
to achieve—to go from 300 gCO2/kWh to 50 over
a 10-year period between 2020 and 2030—you could divide
that path up and give it to the energy companies."
Now, for us, there are a lot of complexities
with that third option. It is not something we would dismiss,
but we are not absolutely confident that that would deliver.
I think the first two you would have in conjunction with broader
electricity market reforms around tendering of longterm
contracts or low-carbon tariffs, which Adair has referred to.
Q19 Chair:
Is there a case for saying that we should wait until we know
about the outcome of the work on CCS before we start playing around
with EPSs?
Lord Turner: I don't
necessarily think that is the case. I think, for instance,
the role of unabated coal in the 2020s is so clear and, as I think
we agreed earlier, not essential to keep the lights on—let's
draw a distinction between that and unabated gas—that
I think it would be very valuable to be making it clear that
that is simply not going to be allowed, or allowed for only a certain
number of hours per year. That could take the form of some category
of EPS which is setting either some limit on the grams kWh that
is going to be allowed, or basically some sliding scale that says
you can have so many hours at this grams per kWh that are unabated,
but that if you want to run it for more than that, you are going
to have to have it down to X g/kWh, which will require CCS.
I think that is something that we could have
as part of the armoury at the moment because I think it is
very important for the generators to understand and therefore
for them themselves, along with public support for CCS, to have
a very strong incentive for CCS—to know that they will
need CCS on coal in order to be able to run it on a significant
scale.
Dr Kennedy: There
is a specific opportunity, and that is the broader consultation
on electricity market reform that DECC will publish in November.
We would expect to see discussion of an emissions performance
standard as part of those broader sets of reforms and then expect
to see it in a White Paper next spring.
Professor Gibbins:
Chair, could I just say something here? I think, since we have
already agreed that coal is not essential to keep the lights on,
coal is not essential to the utilities either. If the emphasis
is on coal, all that will happen is we will get unabated gas,
and since we will have gas in shed loads and we won't have that
much coal, if we don't have CCS on gas, and if the utilities are
in a position where they can claim that they cannot be forced
to have CCS on gas, we will be in a mess. I think this emphasis
on coal is interesting but it is yesterday's fight. It was a fight
that was important when coal was relatively cheap compared with
gas. That isn't the situation we are in now.
The point was made in the debate on the previous
Energy Bill whether existing measures for the permitting of new
coal plant gave sufficient power to the Secretary of State to
say that they would not be built without fitting CCS. I think
that power is already there and I think it is at least worth
considering whether or not we have sufficient measures in place
for new coal plant, should they be built, and it's pretty unlikely
that they will be built.
I think what we really ought to consider is the message
that is going in on gas and the development that is ready on gas
and that will really convince the utilities that CCS is needed.
If they think CCS is needed on gas then for sure they will think
it is needed on coal. But if they think it might not be needed
on gas, they will leave no stone unturned to preserve gas as not
needing CCS.
Lord Turner: I agree
with this and it is interesting. The attention has changed—I think
legitimately and appropriately over the last year—from coal
to gas, both with the realisation of outlooks for the gas price,
which now looks relatively cheap relative to coal, with the whole
shale gas issues, combining with our increasing realisation that
the decarbonisation that we require to meet our climate requirements
actually requires that we are abating gas as well. So those two
things come together and that was one of the reasons why we wrote
to the Secretary of State earlier this year arguing that it is
important to have gas CCS projects as part of the four projects,
not just coal CCS projects.
Q20 Chair:
This is also behind your thinking about how an EPS could apply
to new gas after 2020?
Lord Turner: Yes.
Q21 Sir Robert Smith:
One of the other questions is what impact an EPS would have—whether
it would encourage other lower-carbon technologies like largescale
biomass.
Professor Gibbins:
It would do if the EPS was applied properly to biomass. With
large-scale biomass at the moment we are seeing some travesties
of environmental do-goodery, in fact, because we are seeing 295
MW biomass plants being built, which is 5 MW under the capture-ready
limit. If you are going to build a large biomass plant like
that, it should have CCS at that scale. It is a very large
source of carbon; it's about the same amount of carbon as an 800
MW gas plant. So, yes, it could encourage things but it needs
to be applied properly. If you give people an out with large
biomass plant from capturing the very large stream of CO2
that is coming out from it, they will do it. You need to look
at all large sources of carbon; not capture-ready for biomass
is just as wasteful.
Q22 Sir Robert Smith:
Do there need to be more safeguards in how biomass is calculated?
Professor Gibbins:
Absolutely, yes.
Dr Kennedy: In
calculating it. They need to be thinking as well, "If we've
got constrained biomass here in the UK and globally constrained
biomass, where is it best used?", and it's not clear that
it is best used in electricity generation when you have alternatives
to decarbonise it. It may well be best used, for example, in
energy-intensive industries where we haven't got a good story
about how we will cut emissions.
Professor Gibbins:
Can I just differ from that? I think if it's used in electricity
production with carbon capture and storage, then actually it is
as good as using it anywhere and better than most. It is the
carbon capture and storage in conjunction with the biomass that
achieves the benefit because you can effectively transfer the
negative emissions from your power plant to your industry, if
that is more convenient.
Dr Kennedy: Yes,
but you would use CCS on biomass in industry as well and decarbonise
the whole sector and you would be in a better position.
Professor Gibbins:
If you can do that. But if it is unabated biomass anywhere,
it's probably not as effective as biomass with CCS.
Dr Kennedy: Yes.
Q23 Sir Robert Smith:
The other question is what should be done about combined heat
and power? Is it a Cinderella still, in the sense of not having
a recognition of the efficiencies that come from the heat
it produces?
Dr Kennedy: This
is something we have not considered in detail as the Climate Change
Committee until recently. We will publish a view on the future
of CHP and district heating as well. We think actually now it
has been a bit neglected. You have to differentiate between
CHP that uses unabated gas, which you cannot regard as low-carbon
and so there can't be a longterm future for that, but
there is CHP that is CCS, or there is CHP where you are using,
for example, the waste heat from nuclear and piping it to residential
areas and district heating. There may be a very useful role
for those kinds of CHP and district heating in the future. I don't
think we're anywhere near having a policy framework to support
that, and actually we don't understand the potential role, so
a lot more thinking needs to be done in this area.
Q24 Sir Robert Smith:
Should an EPS for a CHP, though, recognise—not just applied
to the electricity but applied to the heat—the advantages
coming from that heat being made use of? Obviously one plant
is sitting there wasting the heat and another plant is using the
heat.
Professor Gibbins:
Can I just say, sir, the efficiency of a CHP plant
for heat is no better than a good condensing boiler, and
in fact it is probably worse? So, as the benchmark for heat,
we have already achieved perfection, effectively, with condensing
boilers. Now, if you have a CHP plant, the heat is no better
than a condensing boiler. The electricity is maybe 100% efficient
if you are running the plant very precisely. A central natural
gas plant is achieving nearly 60% efficiency on its electricity
already, so there are actually relatively small savings. I think
it would be quite relevant actually to say you have got to do
better for your heat than you can do in a condensing boiler
for it to be seen as a significant advantage.
Dr Kennedy: So
the principle that you would not expect investment in a carbon-constrained
world, and that you wouldn't expect investment in conventional
gas-fired generation beyond 2020, I think you can extend to conventional
CHP, and we would want to look at other forms of low-carbon CHP
for that period.
Sir Robert Smith: Chair,
I forgot I should have reminded the witnesses—and I think
it is relevant to this inquiry because I think they put it in
their submission—that I am a shareholder
in Shell on the entry in the Register of Members' Interests.
Q25 Dr Lee:
What progress has the Committee on Climate Change made in its
analysis of the implications of the fourth carbon budget and renewable
targets for market reforms? Have you reached any conclusions
about the role for an EPS?
Lord Turner: We
are working on the recommendation for the fourth budget period,
which is the period 2023 to 2027, which we will produce in December,
but in working on that, rather than just focusing on the years
2023 to 2027, we thought about 2030—we have thought about
where we want to be by the end of the 2030s. We still have—indeed,
if anything, we have intensified it—our story about the
importance of decarbonisation of electricity, both to take out
the emissions from electricity itself and also to then enable
low-carbon electricity to be used in new uses, whether they be
surface transport or domestic and other heat. So we see it as
incredibly important, and I commented in relation to the
Chair's question earlier about what was our confidence level that
we would achieve the degree of decarbonisation. We think it is
technologically possible but we think there are more instruments
required.
What we will be commenting on in the fourth budget
is the issue of electricity market reform. We believe that the
time has now come really to look in depth at the issue of how
we run our electricity market. We have an electricity market
which was designed to achieve some very specific effects which
it achieved in the early 1990s. It drove some cost efficiencies
in de-manning in particular functions. It drove a shift from
coal to gas, and it is organised in a very particular way.
Basically, you invest in your plant, and 15 or 20 years later
you are getting a stream of revenues which depends on a fluctuating
price of electricity which fluctuates during the day.
Now, this is a system which works and has some
advantages if you have a set of competing alternative fossil
fuel providers, each of whom has a capital cost but also
a significant marginal cost. It is a system which,
if your system entirely existed of low carbon, in which you broadly
invest in the ground and then have zero marginal cost—or
close to zero marginal cost as you do with wind and nuclear—you
would never have designed this system because not only would it
not be optimal, but it couldn't work at all, because when you
have competing zero marginal cost providers, they would compete
the price to zero on a marginal basis and they would never get
paid back for their investment. So we have a system that
was designed for one purpose and, as we head towards a more
low-carbon basis, which tends to be or has this feature of incredibly
high capital intensity and very low marginal cost, is just not
an effective system.
You can pull through the low-carbon investment by
chucking money at it. You can increase the ROCs higher and higher
and higher, you can have a very high carbon price, and there is
some level of price at which you will just subsidise it through.
But that may not be actually the most efficient way for society
to make sure it gets low-carbon electricity. The Government have
the ability to change the rules of the game so that you take some
of the risk off the table for the low-carbon providers. There
are some risks you shouldn't take off the table for them. They
have got to own the risk of the construction and the operation.
That should clearly exist with the private players, but we can
have a structure where, in some fashion, they are being given—tendering
for—contracts for future delivery at pre-set prices. That
is doable. That is the sort of thing that we are going to be talking
about, and we are wary of the idea that it is always possible
when you have an existing system to say, "Well, okay, I'll make
the existing work by doubling the ROCs here or increasing the
carbon price there or doing some fiddles with it." We think
we are now at the position where we've really got to step back
and say, "What is a logical structure of incentives
within an electricity system which has huge amounts of very high
capital cost, low marginal cost production?"
Q26 Dr Lee:
Would you agree that an EPS should be introduced as part of a package
of measures by government or should it be a standalone
policy?
Lord Turner: We
would see it as part of a package. We would like to see—
Q27 Dr Lee:
If that's the case, a package of what? What other policies
would you like to see?
Lord Turner: As
I was just describing, there is, we believe, a need
to do electricity market reform that has this nature of providing
low-carbon, high-capital-intensive providers with the ability,
in advance, to contract for the delivery of future electricity
with preset quantities and prices. That is the proposition
we are putting on the table. That is not incompatible with also
doing some other things, like having a carbon price underpin—mechanisms
to make sure that although the carbon price oscillates it has
a minimum level within it, which essentially can be done
by a variety of different devices. So we are not against
that. We think there may be a role for EPSs and we think
there may be a role for a carbon price underpin, but
we think the really fundamental thing we have got to do is to
look at this fundamental electricity market reform.
Professor Gibbins:
Can I just comment on that? I'm not familiar with the mechanism,
but clearly for CCS you are exposed also to a significant
fossil fuel price risk. I think with nuclear and wind you
know what your construction costs are and you could actually build
a business model on firm prices out forward. With CCS, you
would be taking a very big risk if you did that because you
don't know what international fuel prices are. But there's still
a large capital cost.
Lord Turner: I
think what you have got to recognise here is that we have two
different things. With CCS, because it fundamentally has somewhat
higher capital requirements but still has this large marginal
cost, you could imagine, if everything was CCS, essentially adjusting
the existing system to have a high enough carbon price so
that it would pull through. If it was all CCS, we would not necessarily
need the fundamental reform. The fundamental reform comes in
relation to nuclear and wind, and that is why I think we
need a variety of different aspects of the total package
that include a more certain carbon price—a carbon
price underpin. I think that will be relevant for the CCS
technology.
Professor Gibbins:
There is also, though, a differentiation I think between
how you would run the market in a steady state post 2030 and how
you would make the transition from now to 2020 and from 2020 to
2030. I think you might well want different mechanisms there,
because in 2030 just about everything that is running any significant
amount of time wants carbon capture and storage, but in the transition,
in this decade, we are looking at building a limited number
of demonstration and then larger reference plants—plants
that we would actually like to build. Then, in the 2020s, what
we want to achieve, starting out with maybe four or five plants,
is we want to build one and then another one and then another
one. We do not want to do it across the board. That is not an
economically efficient way of doing it. So you might need a different
mechanism there to keep on adding a plant at a time
than you would do in the 2030s when you want to run the plants
you have got and you want to build the occasional new plant with
CCS from the outset.
Q28 Dr Lee:
If one can look at it in terms of UK plc—and clearly there
are upfront costs for CCS; that goes without saying—is there
a view that, if Britain takes the hit in this decade, it
is going to benefit in the medium to longer term because it would
then be able to do the CCS, because, ultimately, our emissions
are pretty paltry in comparison with places like China?
Professor Gibbins:
Yes, but it's not a hit in the sense that we do not actually
expect that carbon capture and storage is going to be significantly
more expensive than other low-carbon options.
Dr Kennedy: There's
an upfront investment, which is the up to £4 billion. Is
that worth doing? The pay back is in the 2020s because if you
don't have CCS and if we don't demonstrate it—whether it's
available in other countries, you've got to question could we
deploy it here—we will be at the back of the queue. So
if it's not available here, what happens in the power system?
Either you invest more in offshore wind, which is expensive,
or you revert to investing in unabated gas, which doesn't have
a longterm future, and you buy carbon credits to offset
the emissions from it and then you strand it. So there is a quick
payback from it.
Q29 Dr Lee:
My point is: is this an industry that we can create for ourselves?
Professor Gibbins:
Yes, it most certainly is.
Dr Kennedy: It
is an industry we can create for ourselves through deploying the
technology here and possibly for exporting the technology as well,
if we can become a leader in it. So there are two benefits from
it.
Chair: Robert Smith's
disclosure reminds me that I should also remind colleagues about
my entry in the Register of Members' Interests as chairman and
a shareholder in AFC Energy, whose fuel cell technology may conceivably
be applicable to CCS. Robert?
Q30 Sir Robert Smith:
I have just a couple of things on the back of that. In your
new reformed electricity market, who is driving the decision making
about where the priorities go?
Lord Turner: Well,
it does require that we have made a strategic national decision
that we want low-carbon electricity, but we have made that—we
have got an 80% CO2 reduction target. Within that,
it then essentially says, okay, what we want, because we recognise
this is the structure the market requires, is to buy future low-carbon
electricity at a price now that we know while also maintaining
the price-competition discipline of a tendering process.
Right? So you are basically tendering for the future delivery
of low-carbon electricity. From the point of view of the generator,
once it is in place, it gives them the same certainty as a feedin
tariff, but it does not require that we say, "Okay, I am
willing to pay you 7p per kWh." It basically says, "I would
like somebody to deliver me so many TWh of low-carbon electricity
in 2025. What am I bid?" We go through a tendering
process and the lowest tender gets that promise to pay, but once
that promise to pay is there they have a certainty of future
price and quantity.
Q31 Sir Robert Smith:
And that system would fit in with the EU's liberalisation agenda
under Lisbon?
Dr Kennedy: There
are possibly some legal questions about whether you could have
that kind of market arrangement under current EU legislation.
Lord Turner: I think
if that is a barrier, we have got to face it. I think, to
be blunt, there is an element to which we have been so proud of
our complicated liberalised energy market, which was created for
a particular set of purposes, that we have managed to sell
it to Europe and they are rolling ahead to try and make everybody
have to have it just at the point where we are realising that
it is not necessarily the most efficient way to drive a low-carbon
economy.
Professor Gibbins:
Just to paraphrase one of my colleagues, Rob Gross, it was designed
to sweat assets and build gas, and it does that quite well. It
did it very well and we have reaped the benefits of it but we
are not reaping them now.
As to the point about tendering for different sorts
of low-carbon electricity, we have seen one tender, if you like—I think
done in public—about the London Array where the builders
said, "We would like two ROCs." After a bit of
thought, the Government said, "Okay, made it two," but
doing public procurement to one-significant-digit precision by
a tendering process like that is not really very adequate.
What we are suggesting here is a very effective way of getting
people the money they need but not significantly more.
That would also apply, I think, with some proviso
about fuel price allowances, to carbon capture and storage—certainly
some of the larger projects. If, for example, you followed some
of the recommendations that were made by a study group last
year that I was part of to have a national carbon storage
authority that would actually take carbon for a fee from
people and transport and store it, that is something that could
also be delivered against a tender.
Q32 Sir Robert Smith:
One other interaction obviously with Europe is that if we have
a successful EPS system, we could well lower the price of
carbon. Could this hinder then the carbon abatement in the rest
of Europe relying on the ETS?
Lord Turner: That
doesn't just apply to EPS. That almost says anything you do in
your traded sector—your EU ETS—by whatever means:
building a gas plant not a coal plant; running a gas
plant not a coal plant. At the margin, if you are not changing
the EU ETS cap, it is, of course, reducing the price of carbon
and shifting supply and demand within the carbon market. But
I don't think you can have that as an argument against.
The crucial thing in here is: is the cap within the EU ETS tight
enough? If it is tight enough, obviously it is the case that
somebody who, within that, takes an abatement opportunity is then
in a position to buy fewer credits or sell credits that they
would not otherwise be able to sell.
I think the crucial issue here is: is the EU
ETS cap tight enough? I think the answer is no, and I particularly
think it is no because it has not been adjusted to deal with the
very significant influence of the recession across Europe. I think
that if one had known in advance that that was going to occur,
one would have a different EU ETS cap than is in place at the
moment. We do have significant concerns that the present EU ETS
cap that has been set is not sufficiently tight to drive the sort
of carbon price for the carbon price to be playing the role that
it should be playing along with other instruments in driving through
low carbon, both in the power sector and indeed in industrial
sectors. So I think the big issue here is the overall tightness
of the overall cap.
Dr Kennedy: It
comes back to your earlier question. It would not make sense
for the UK to be decarbonising the power sector at a rapid pace
and no other European member state is doing the same thing. The
way to get around that is, as Adair says, tighten the ETS cap
to make sure everyone is decarbonising but get a consistent
set of electricity market arrangements across Europe of the kind
we are talking about, which are based on longterm contracts
for low carbon.
Q33 Sir Robert Smith:
So quite a big role—quite a major redirection of European
strategy is really going to be needed.
Dr Kennedy: There's
a legitimate question around that.
Lord Turner: It relates to the debate about whether Europe is on 30% targets or 20% targets, post Copenhagen and post whatever happens at the end of this year. I think there clearly is an issue about the tightness of the EU ETS cap. Across Europe, as in the UK, there were very significant reductions in CO2 emissions last year with the recession, which had not been previously anticipated and which, therefore, have produced quite a significant shift in both the present year but also the future expected years' supply-demand balance within the carbon market.
Professor Gibbins: We are now in a situation—and we always are in a situation—where it is hard to see how European emissions collectively would be any lower than the cap, irrespective of what individual countries do. The only way we could get lower emissions is if the UK cut its own emissions and also retired some allowances. Of course, you can retire allowances at any time anyway. So I think there is a serious question here not just of the price but also the effect on CO2 emissions, and that is just because we have a cap and you don't exceed the cap but also rarely do you go under it.
Q34 Dr Lee:
Can we move on to energy security? How do you see an EPS affecting
energy security—positively, negatively? What's your general
view?
Professor Gibbins:
A typical academic response: what do you mean by "energy
security"?
Q35 Dr Lee:
Allow me to be a layman and say that for me it is do we know
that we have enough power on the island to run business and domestic
need?
Professor Gibbins:
I think the question there comes down to what role we see for
coal in the future mix, and I think there is a role
in that coal is an easily stored energy source and a source
that can be accessed from a lot of different countries.
At the moment we think gas is going to be fairly cheap, but that's
not certain, so it would be very useful to have the option to
build more coal plant. That option might be available if we had
a gas CCS system. For example, it is a lot easier to
go from a gas CCS system to a coal CCS system than it
is to go from an unabated gas system to a coal system with
CCS. So we could keep that option open.
In terms of keeping the lights on, I think CCS
is quite a good back-up. It is actually potentially fairly
flexible, although at a cost. It will fill in the gaps; it will
come on. You can also, which is quite useful, as part of that
flexibility, decide for periods of time not to operate with CCS
provided you have that option. It does not matter; the climate
will quite happily integrate CO2 emissions over years,
so the fact that you are not operating with CCS for a short
period is not an issue. So I think in terms of keeping the lights
on in the short term, it's quite good. Provided we do some CCS,
it's also quite good for energy security in terms of keeping a
coal option realistically open.
Q36 Dr Lee:
Do you see any problems with an EPS being applied only to new
gas plants after 2020 as opposed to retrofitted? Is there a danger
that if you say, "Oh, it's from 2020," we're going
to have a sudden burst of gas power stations that then will not
be compliant going forward with what we would like?"
Professor Gibbins:
Yes.
Dr Kennedy: So
if you said that beyond 2020 you cannot invest in unabated fossil
fuels including gas, you would expect to see a new dash for gas
in the period to 2020, which would give you a load of plant in
the system that you don't really want there ideally. The way
around that is to have your emissions performance standard in
conjunction with the arrangements that pull through the low-carbon
investments. So you will not invest in unabated fossil fuels,
but there will be sufficient revenues to make your projects in
lowcarbon technologies viable and that would avoid the dash
for gas.
Professor Gibbins:
I would comment there, though, that at the moment we are building
natural gas plants as capture-ready, and that capture-ready, in
terms of a future retrofit of CCS—if it is exercised
reasonably rigorously—actually does mean that you can retrofit
CCS, and it is not a choice that you just have to make when
you build the plant initially. So if people are building power
plants before 2020—natural gas power plants—and they
are capture-ready, then there is no reason why you cannot say,
"Well, you said your plant was ready to retrofit capture.
Go away and do it."
There have been some moves by industry, and I think
even the Committee on Climate Change has seen this, to say, "Oh
well, you either build it with CCS, but if you let us build it
without CCS, we don't have to fit it for 10 or 20 years until
the plant is refurbished." In other words, basically, "We've
paid off our money. Go away and leave us alone."
I think we are in a situation now where
if capture readiness is implemented sensibly, it is not a big
deal—but it needs doing sensibly—and industry is made
to realise that when they say their plant is capture-ready, they
will have to retrofit CCS if required or take a financial
penalty in terms of closing down. Then I think actually
we are in quite good shape not to be left with a legacy of
plants that can't be retrofitted.
Q37 Dr Lee:
Is there a danger, though, that we may get to a point
where we have seen coal off at the pass and we are left with a nuclear
sector with which we're dependent upon the French and with gas
where we are dependent upon the Norwegians and the Qataris; and
that we are at the point where we are fulfilling our targets but
actually our dependence on others and the diversity of our energy
supply has made us actually more vulnerable if there is a geopolitical
change? I'm not suggesting that we are going to go to war with
the Norwegians tomorrow, but I just wonder whether we are putting
ourselves in a more vulnerable position.
Professor Gibbins:
You are quite right, but if, for example, we have demonstrated
CCS at scale and we know that we can do CCS, and we have left
particularly some coastal power plant sites available to build
coal plants, then we can build coal plants as rapidly as the money
is there to do it. If people are not prepared to pay for coal
at a time when coal is more expensive than gas, clearly we
cannot have it, but we can have the options. I think one
of the valuable things in longterm energy planning is options,
and an option is valuable even if you do not exercise it. It
is a backup, and you can guarantee that if you keep
options open, you will be seen as backing losers, because not
all of the options will be exercised, but, hey, you want more
options than you need. You don't want to have just no choice.
I think we can see CCS on gas as also a way of keeping
an option open for coal even if we don't do coal CCS.
Q38 Dr Lee:
But in terms of preventing the diversification of energy sourcing—let's
say marine sources or whatever—is there a danger with
CCS, in being so successful at managing CO2 emissions
from gas and from coal, that wave technology, the Severn barrage
and all those other things that have costs attached to them will
be less likely to happen as a consequence of the success
of CCS and therefore we will be less likely to be energy independent
or as independent as perhaps we might have been?
Dr Kennedy: If there was only a small investment needed through the 2020s, it could be dominated by CCS but, given the scale of what we are talking about, which is 40 GW and about 30 power plants over a tenyear period, that's going to need nuclear and gas CCS and coal CCS, onshore and offshore wind and probably marine as well, so we will have a very diversified mix.
Chair: Thank you very
much. As ever, that was an extremely interesting and useful exchange.
I am sure we look forward to seeing you again before very
long.
Lord Turner: Thank
you.
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