Examination of Witnesses (Questions 121-161)
CHARLES HENDRY MP AND JONATHAN BREARLEY
19 OCTOBER 2010
Witnesses: Charles
Hendry MP, Minister of State, DECC, and Jonathan Brearley,
Director, Energy Markets and Infrastructure, Energy Strategy and
Futures, DECC, gave evidence.
Chair: Minister, welcome.
You have heard some of the evidence. Would you like to introduce
your colleague, perhaps?
Charles Hendry:
Thank you. I am here with Jonathan Brearley, who is heading
up the process for us——the Electricity Market Reform
Process——which we will be formally consulting on later
in the autumn.
Q121 Chair:
What role do you see for coal in Britain's energy mix in the future?
Charles Hendry MP: We see an important role for coal. We think that the future will involve a range of lowcarbon technologies. We certainly see a role for nuclear, and, as we have always said, that would be without subsidy. We certainly see an important role for clean coal - coal with CCS. We see a role for renewables on a large scale being taken much further than we have seen before, and we certainly see some continuing role for gas as well.
Q122 Chair:
So you do envisage some new coalfired capacity being built
in the UK?
Charles Hendry MP: Yes, very much so. We think that there is fantastic potential for coal with CCS in the United Kingdom. We think this is a technology where we should be leading the world. We have 60 plus years of coal supplies which are readily accessible. We have some of the best sequestration sites in the North Sea. We have the skillset for people who are used to working in those hazardous conditions and we think this is an area where we should be leading, and therefore we think that actually provides a great opportunity for a renaissance of coal in the UK.
Q123 Chair:
When you say you see a "fantastic potential for coal,"
is it not the case that we don't yet know how much it is going
to cost to produce coalfired electricity with CCS?
Charles Hendry MP: I think you are absolutely right. I think there is a big challenge over all of the areas where we are looking to secure new investment. I think we are facing the biggest energy challenge of our lifetimes. We have to secure £200 billion of new investment in the energy infrastructure over the next 10 to 15 years. On nuclear we don't know for certain that companies would choose to invest in Britain. On the renewables, clearly we still have to get masses of international investment, particularly on the offshore wind side, for that to happen and that is not clear. On coal, with CCS, there's an enormous amount still to be proven. We have seen that the individual elements of that chain can work, but they haven't yet been put together at scale, and so there could be technical problems but we certainly don't have an absolute handle on what the cost of that would be.
Q124 Chair:
So we might find in five years' time, when we have got some evidence
from the experiments, that the actual price of coalfired
electricity is astronomic?
Charles Hendry MP: It will be higher——clearly much higher—— than coal without CCS but we do believe that it has an important part to play in the mix. I think there is an issue of energy security here. We have an abundance of different sources of supply which we can use, and therefore we don't want to be unnecessarily dependent on any particular one of those. Therefore, if we have the potential of taking this forward, then we believe that we should do. We believe that, from the evidence we have seen so far, this can be done at scale. We believe that this is absolutely of huge importance globally because of the role which coal will still be playing in energy and electricity generation in 2030 to 2040, and therefore to try and make sure this works and to capitalise on the potential lead that we have is something that we should be driving forward.
Q125 Chair:
So fossilfuel-powered electricity is crucial to meeting
Britain's needs from the security point of view?
Charles Hendry MP: Absolutely. We would expect it still to be that 70% of our electricity was from fossil fuels in 2009. We would expect it still to be a very major player in electricity generation by 2020 to 2030 and beyond, especially as we would expect to see perhaps a doubling of the volume of electricity which is necessary by 2050 as we decarbonise transport and we decarbonise heat and we see greater electricity generation required to make that happen.
Q126 Christopher Pincher:
Minister, you said that you anticipate that the cost of electricity
will go up because the cost of CCS is as yet unknown. How do
you think that is going to feed into consumer prices and do you
see the way that consumer prices will be kept down will be as
a result of greater energy efficiency in the home or a greater
mix of supply of energy?
Charles Hendry MP: In looking at these issues, the comparison is always where we think the price of oil is going to be, and if the price of oil is going to be $90 a barrel, which is a general working assumption, then some of these technologies are more expensive than relying extensively on oil and gas. But if that price goes up and the Americans, for example, assume a much higher price, with oil and gas in the mix, then some of these alternative technologies become relatively cheaper. So, in looking at the impact on consumers, one has to look at a comparative approach in that respect.
All of this is incredibly expensive——as I say, £200 billion of new investment, which is necessary. That is essential for our energy security. That is essential if we are going to keep the lights on and we have to find that investment. Therefore, we have got to find ways of mitigating costs for consumers, and there are two primary ways in which we are trying to take that forward.
The first is rolling out smart meters much more quickly. That does not of itself save electricity, but it does enable consumers to choose a more favourable tariff and to look around and to choose how they should optin to the tariff which suits them best and which is cheapest.
The second is through energy efficiency. We have some of the least energy-efficient homes in Europe. The centrepiece of the Energy Bill coming forward this autumn will be the Green Deal, which will systematically go through the housing stock to try and improve the energy efficiency, roof installation, cavity-wall insulation, and new boilers, looking at the sort of ways in which we can significantly reduce the number of units of electricity which people will be required to consume.
Q127 Christopher Pincher:
But there will be an upfront cost in that, will there not, and
that cost will need to be passed on?
Charles Hendry MP: There's no upfront cost in that at all. The formula which we are looking at is a "pay as you save". So we've got high-street retailers, we've got financial institutions, which are looking to come into that space. So the consumer will pay for nothing upfront. But the key element is that there will be a charge attached to the electricity bill of that property. So whoever lives there in the future over the next 20 to 25 years will pay back the cost. But the cost of the work should always be less than the total savings. So the consumer gets the benefit from day one but ultimately the cost is recovered over a 20 to 25-year period.
Q128 Dr Lee:
I have a quick question. It is pretty obvious that we are going
to rely upon gas and coal for the next 20odd years. Do
we get any benefit when it comes to meeting our CO2
obligations from sourcing our gas from a country that produces
the gas in a more CO2friendly manner? I cite
in one fact that every year Russia flares more gas than Norway
produces. Therefore, if that's the case, if we source our gas
from Russia, by just buying it from them we have already emitted
a huge amount of CO2 that we would otherwise not be
emitting by sourcing it from Norway. Is there anything within
international agreements that we would benefit from sourcing our
gas, say, from Norway instead of from Russia?
Charles Hendry MP: All the countries which are flaring are looking at how they can reduce that, and Russia is actively engaging with British companies to try——and others——to see if they can help reduce the flaring. Part of the fact is they have an incredibly outofdate pipeline infrastructure and that needs to be updated as part of that process going forward. We would expect to import from a wider range. We are net importers of gas now. That will become increasingly the case, and perhaps by 2020 certainly over 50%——perhaps as high as 70%——of our gas will be imported. We want to be securing those contracts or more longterm contracts. What we haven't done, I think, in that is looking at how the carbon emissions stack up in the different countries and the different approaches which they are taking. I think that is an area which can be explored. But, without doubt, we are, as I say, seeing real drives in those countries to try and reduce the flaring and the CO2 emissions.
Q129 Dr Lee:
I guess my point is, is there space here for a new international
agreement whereby gas produced by those countries that have ageing
infrastructure and therefore flare more is actually more expensive,
because it all comes back to the cost? We were talking about
the investment you are talking about. At the moment Norway produces
the cleanest gas and yet you pay the same for the gas, do you
not? Well, I know we have different arrangements with them,
but essentially, on the open market, gas is X amount of money,
and it strikes me, and we have heard from the previous panel,
that actually it shouldn't be like that. There should be a premium
gas, that you pay more, because then you actually get back the
return on your CO2 emissions. I'm sure Iran has an
ageing infrastructure and they've got huge amounts of gas, and
in the future we'll be importing from Iran, will we not? Is there
not a danger that we can encourage poor production——an
inefficient production of gas——if we don't actually
deal with this problem with flaring?
Charles Hendry MP: I think there are two separate issues. In Russia, where the gas is flared off, it tends to be where the gas is produced as a byproduct from oil, and they haven't then got the infrastructure in place for capturing the gas. They are looking to address that, but where they are actually exploring for gas then they do capture that gas. It is not the most efficient system in the world, but actually there is a difference between where it is gas exploration for gas sales and where it is gas as a byproduct of oil exploration. As I say, there is a drive going in this direction the whole time, but as we see more and more countries developing their gas infrastructure, particularly with the development of shale gas, then how one monitors that and exactly which part of their gas infrastructure it has come from and therefore what were the associated carbon emissions could be extremely difficult to identify. But it is certainly an area that we could explore further.
Q130 Albert Owen:
Minister, you made clear in your earlier response that you saw
clean coal as an important part of the rich energy mix for the
future, and taking the point of gas that was just mentioned, you
heard what the CBI said earlier on——you had just come
in——that they had been lobbying hard for the four
demonstrations of CCS, for obvious reasons. Do you envisage,
if that doesn't go ahead, that we could be making the same mistakes
as we made in the past by not investing in nuclear, for example,
and then the gap has been plugged by a dashforgas?
They have been lobbying the Treasury hard for the four projects.
Do you see the four projects as being essential otherwise we
could find ourselves in a similar position of our recent
past?
Charles Hendry MP: I think part of the challenge here is timing. With the best will in the world, new nuclear plant can't be on line before 2017/2018. Commercial scale CCS cannot be on line before the end of the decade or just beginning to come through. Some of the most exciting areas of renewable technologies, marine and tidal, would be in the 2020s rather than before then. But we have got an energy challenge which comes more quickly than that, not as early as had been thought because the recession has depressed demand, but we still need to see new infrastructure being built, and the one which can be built most cheaply and most quickly is gas. If you look at the investors' commitment, 12 GW of the consented 20 GW is for new gas plant. So there is a need for new gas to see us through this period, but people will only invest in gas if they can see a longterm future for the plant. They won't build it for an interim technology where they expect it to be closed down in ten years.
We will certainly take forward the development of nuclear, but we recognise there's a realistic limit to how much that can deliver, and in the National Policy Statements yesterday we set out what we think can reasonably be done by 2025. Coal with CCS——we think we could get to four plants. That is the ambition——four plants by 2020——and then to see a further rolling out of that later. But it still leaves a challenge in between.
Q131 Albert Owen:
I fully appreciate that. I am trying to be specific. We
went for the dashforgas and nuclear was put back by
previous governments of all colours, and that was a mistake
in the dashforgas. Isn't there a danger of repeating
that if we don't invest now in these four demonstrations?
Charles Hendry MP: We are looking to take forward the first project. We have brought forward some of the work on the projects 2 to 4. We have done a sounding exercise to find out the sort of projects which industry would be keen to invest in and to see taken forward so that we have got a better idea of how to phrase the next competition. So I think we are taking that as fast as we can. If there are things which we can do to make it happen faster we certainly will, but there is a natural limit to the speed at which this technology can be physically constructed, tested and developed. But I do think we are going to have to see new investment in gas in the meantime if we are going to have the security of supply which is necessary.
Jonathan Brearley: It might be worth just adding that the rollout of CCS in the 2020s is going to be as dependent on the market reforms that we are putting in place as it is on the demonstration programmes. That is one of the things we are thinking through when we are designing the relevant incentives in the market formulas.
Q132 Albert Owen:
Sure. I understand the supply side and the 2020 plus, but
what I am saying is the disincentive to invest now. That's
what worries me——that gas fills the gap and then the
investors go elsewhere or develop in other technologies.
Charles Hendry MP: There is a scramble for international investment in all of these areas, and the companies which would primarily be looking to do it are international companies. They're looking at global opportunities. So we have to make the United Kingdom more attractive for them than elsewhere. There's no reason why, by right, they will simply come here. We have got to put a better package together.
Q133 John Robertson:
There are a couple of things there, Minister, that you have raised.
Can I just ask a short question. You were talking about
the costs for the energy saving projects you are going to put
forward. How does that affect the bills of people who basically
can't afford the bills they have already got? Is it going to
be that the poorest and the worst off social housing is going
to be forgotten or are you going to put something in its place
to make sure that social housing is looked after?
Charles Hendry MP: We have extended the requirement, and building on the work indeed of the last administration, on fuel poverty to try and make sure we protect vulnerable households. We are looking at how you can prioritise some of the work, for example, on smart metering, on energy efficiency, so that we target the homes of those who are perhaps most vulnerable and most likely to be in fuel poverty so we can try and help them first. We are looking very specifically at how we can help those who are most vulnerable.
Q134 John Robertson:
I have concerns there, but over the years we will develop this
argument, I am sure. Can I talk about the new power
stations that you are talking about. The nuclear ones, whatever
gas ones there are and future coal ones, all of which will be
much more efficient and will have higher outputs and therefore
we will have a problem with the National Grid in not being
able to cope with the kind of power that is going to come out
of there. Who is going to pay for the upgrade of the National
Grid to make sure that all these new power stations have the facilities
required?
Charles Hendry MP: At the end of the day, things can either be paid for by Government or they are paid for by consumers. We are, I think, suffering now from a lack of investment in much of this infrastructure over many years and that now has to be made up for. Ofgem suggested recently in looking at the Grid infrastructure that £32 billion is necessary. But I think we also have to recognise there is a fundamental change, which is that, historically, the big old power stations were built either where the fuel/coal was available or close to industrial centres. We now need to build new generating plant where it is geologically and geographically sensible to do so. So nuclear will be coastal; CCS will predominantly be coastal; offshore technologies, inevitably, are coastal. We are looking at the whole range of the ones which are available. We have actually got to have a totally different map of where we are generating electricity, and people will only invest if they can get their power to market. So the transmission issue is absolutely central to the success of this.
Chair: I think we'd better
come back to Emissions Performance Standards. Laura?
Q135 Laura Sandys:
As you say, investment is absolutely crucial and we have just
had three representatives of investor groups here talking about
the EPS and how that doesn't seem, from their perspective, to
give them a platform for longer term investment and it creates
insecurity in that particular environment. Also, Sussex University
say that we are now proposing multiple layers of regulation and
of mechanisms that could be a sort of cocktail that actually
creates conflict in behaviour. I just wonder whether we
feel that there aren't mechanisms that exist already that could
be used or tightened rather than introducing yet an additional
one through the EPS?
Charles Hendry:
I think the Electricity Market Reform process——and
I will ask Jonathan to build on this as well——is
developing new mechanisms which will steer us towards lowcarbon
investment. So the price on carbon, capacity payments to make
sure that either we have backup capacity when it is required
or we can find ways of managing demand, shaving demand at times
of peak demand, other mechanisms, which I think are going to be
necessary, as the previous speakers were saying in order to secure
investment, are all going to be part of that process. This is
the most fundamental reform of the electricity market in a generation.
Some people, I think, don't understand how radical this will
be but it will very significantly change the way in which people
are remunerated for building plant.
The EPS is also part of that process, and the reason why I put it into that process is that, if we put the EPS at the right level and people can see a longterm picture of what is expected of them on environmental grounds, then they can invest in the knowledge that that is what it is going to be. That is why we have actually chosen to do this at a very specific level rather than just a permissive power for ministers because that gives no security because it's a Statutory Instrument and it can be changed. So actually looking at how we build into the legislation the levels at which it will be set I think is a better way of addressing that. Without any doubt, if we set it at the wrong level, it will drive away investment and the easiest way of meeting an EPS is not to build any new plant and therefore you have no problems with it. So we have to set an EPS at a level which gives security, and longterm security, to investors and so we think this actually can help to drive investment decisions because they know around the world that governments are looking at this. Actually, by being a leader in this area and saying, "This is how it will be and this is how it's going to look for decades ahead", I think actually gives them a significant amount of certainty.
Jonathan Brearley:
I agree. If you look back before we started the market reform
process, industry itself was saying to us that the existing incentives
and trading arrangements in the current electricity market are
already providing uncertainty and already making it hard to invest.
So the process itself is designed to put together a series
of financial incentives with a regulation like the EPS to
give clarity to investors going forward. The Sussex University
diagnosis is something that, I think, in a sense, of
the current system we would agree with. What we want to do is
design a reform process that is going to make it much, much
clearer to investors what their returns will be for different
types of investment. Now, as Charles has said, the EPS is part
of that because it gives a very, very clear signal to investors
what should happen in the future and essentially what they should
be planning against, and that has to be there seen alongside the
various changes we might make to the financial incentives, including
the things set out in the Coalition Agreement.
Q136 Laura Sandys:
But you have a range of different mechanisms, whether it be carbon
floor pricing, whether it be the ETS and other mechanisms that
you can look at. Is this more of a message or a mechanism,
because in many ways we've got a situation where you could
end up with conflicting behaviours reacting and responding to
all these different incentives and sanctions? With regard to
the other issue about the longterm setting of the EPS, which
I know the investors are very keen to see, does that not
also create a lack of flexibility as we reach better carbon
emission targets and as the technologies come on stream? You
don't need that greater flexibility, or do you?
Jonathan Brearley: On your first point there are a number of different instruments you will need. We are trying to tackle an energy system that ten or fifteen years ago was simply just much, much simpler. You had security of supply and climate change was an issue but certainly not of the prominence and we didn't know as much about what we would need to do, particularly within electricity. In a world where you are trying to double electricity and in a world where you're trying to decarbonise that at the same time as well as maintaining security of supply, you need different instruments to do that. One of the reasons we are working up the EPS as part of the market reform process is that those things do need to fit together, and a risk of the process is that those provide reverse incentives, which is why we are so keen to make sure that we do these things in parallel and design both our financial incentives and our regulations together. On flexibility, all I would say is that you have to trade off a very clear and certain signal for investors who are making huge investments against the framework that we put in place with the need to be flexible over time and that is something we will consider further in the consultation.
Q137 Sir Robert Smith:
Isn't the EPS coming ahead of the market reforms, though?
Charles Hendry MP: No, it will be part of that same package so that there is a carbon price consultation, which will be led by the Treasury, and then the wider market reform package, which will include the EPS, will be part of that process.
Q138 Albert Owen:
You've partly answered that, Minister, but you have heard what
the potential investors and representatives are saying today.
They feel——and to take Laura's point up——that
there are enough tools, if you like, for investment to come in
but the EPS you've already made your mind up on, that you are
going out to consultation and they may respond and say, "Other
mechanisms, right", and that's going to be ignored and EPS
is just going to come in and that will be a disincentive.
How do you respond to that?
Charles Hendry MP: I think there are specific areas that can drive investment. We have heard concern about whether something could be applied retrospectively, and a statement of saying, "Look, an EPS will only apply to new plant after certain dates," then that gives a great deal of security to investors saying, "If I build a new gasfired plant now then I know what is going to be expected from me for the longer term." I think they are now going to be looking, and there are other countries in Europe which are looking, at an EPS as well. So this is something which is out there globally. We have seen a number of states in the United States putting them in place. So until there is clarity on these issues, then, by definition, there is uncertainty. What we are trying do is to put in place a mechanism which will enable them to go to their boards and say, "This is the longterm requirement. We think we can live with that and therefore it makes our investment all the more secure."
Q139 Christopher Pincher:
You have mentioned one item which might give some clarity to the
uncertainty that investors have around EPS and that is that retrofitting
might take place after a certain point, but aren't there
other elements of the EPS design that need to be made clear to
ensure certainty? So, for example, are you going to go for a carbon-intensity
EPS which is going to essentially drive out certain fossilfuel
power stations or are you going to go for an emissions target
which might mean that they could operate for a certain period
each year? Is gas going to be exempt? People will need to know
what the EPS design is going to be to define for themselves whether
they think they have a most desirable or least desirable
EPS. So I wonder what your thoughts are on the design of
EPS.
Charles Hendry MP: This is precisely the purpose of the consultation exercise——to make sure that we address that in the right way. The Committee on Climate Change has said that we should now look at an EPS on gas, and therefore we are thinking how best to respond to that and that will be part of the consultation process. You are absolutely right——there are very different ways of doing this. It can be done on an individual plant basis or it can be spread across a portfolio of plants. That has an advantage that a portfolio makes clearer driving down of emissions something which will happen, but if you are Drax, for example, with a single plant which is very carbon intensive, then how do you meet that? So there are challenges to that approach.
We also recognise that to meet an EPS one is going to have to have some degree of carbon capture, but in order to start up the plant you need to actually operate it without the carbon capture because there isn't enough power to operate the plant until it is running. So you have got to have exemptions practically for periods like that. One also needs to look at whether there are particular times of very high demand where one wants all of the capacity in the country to be working at full output and therefore you might want to say at certain times you would not have to run the CCS plant because that will use up too much of the power which is available. So there is a very significant number of issues which we are looking to address in the questions which are posed in the consultation exercise. But, without any doubt, you are absolutely right that this is fundamental to how it will be perceived by investors.
Q140 Christopher Pincher:
What will the timetable be for that consultation exercise?
Charles Hendry MP: We will be launching it in the autumn. I know autumn in governmentspeak can occasionally mean 24th December, but it is certainly going to be before that. It will be a threemonth consultation process leading into a White Paper in the spring, and the White Paper will be clear about the intentions. There will be legislation needed subsequently, but from when the White Paper is in place then people will be very clear about the intention.
Q141 Dr Whitehead:
Could I get the process right? There will be no legislation
on EPS coming forward in the Green Energy Bill.
Charles Hendry MP: That is correct.
Q142 Chair:
And there will be no legislation coming forward in the second
Bill that is due in the spring of next year?
Charles Hendry MP: We are not expecting a second Bill in the spring of next year. We are expecting that there will be a Bill towards the end of next year or thereafter which would then include measures on the EPS and the market reform elements. So in the spring of next year it will be a White Paper which provides the market structure which we plan to put in place following the consultation.
Q143 Dr Whitehead:
So it is your intention to integrate the outcome of the consultations
and discussions on Energy Market Reform and follow that with EPS
legislation, which is informed by what happens with Energy Market
Reform consultations?
Charles Hendry MP: Yes.
Jonathan Brearley: We expect other aspects about Energy Market Reform to also require legislation, so, for example feedin tariffs that were announced in the Coalition Agreement. What we would like to do is to discuss those in the consultation together, set out our plan in the White Paper together and then to legislate for these things together, because developing them at the same time and making sure there are no unintended consequences, coming back to the previous question, is something that's incredibly important in terms of getting all of this right.
Q144 Dr Whitehead:
I return to some extent to some previous concerns about how
Energy Market Reform and EPS do indeed work together, and that
is that, as has been recorded, Energy Market Reform will need
to deal with a number of new issues concerning, for example,
how new peak capacity comes on stream——capacity payments
perhaps is a part of that process——and it will
presumably need to take into account what incentives are likely
to stitch together in terms of bringing that about and bringing
a perhaps wider part or complete CCS on to stream, as far as those
plants beyond the four pilot plants are concerned. Bearing in
mind all those factors which are a part of the reform, you
have, however, said there is one anchor point in this whole process
and that is there is going to be an EPS come what may. Is that
wise at this stage?
Charles Hendry MP: Both parties going into the Coalition had committed to that in their manifestos. It is part of the Coalition Agreement. It was discussed and debated significantly in the course of the last Energy Act going through Parliament and there was very significant backing in Parliament, we felt, for the concept. We believe, actually, as I said earlier, this is now like a Sword of Damocles hanging over industry. They believe it will be introduced in many countries round the world. It will make it easier to secure an investment decision if they know what the longterm outlook is here. The reason for putting them all together is that I think industry has a frustration about constant consultation, constant energy White Papers, reviews, policy changes, and by putting all of this together we can then say by the spring of next year, "This is the longterm framework going forward. These are decisions we have made. We have got to stop consulting about this. We've just simply got to go on and invest." Our job as government is then to go out there and help to secure the investment. Otherwise, we will simply have another Ellerman and say, "Well, we can't make our final investment decision until we know the result of the next consultation process," and time isn't on our side. We have got to get this money coming in.
Q145 Dr Whitehead:
So would you be prepared to perhaps identify one or two other
points that might be reasonable anchor points in Energy Market
Reform which might go alongside EPS such as the extent to which
an extension of carboncapture levy into the longerterm
future might underpin a gap between ETS price, a carbon
floor price and what might be necessary in order to stimulate
CCS in the longer term? Are there a number of anchor points
that you may be considering to go alongside EPS or do you think
EPS, as you say, appears to be such a political imperative
because of the commitments that you have already made that it
rather trumps those other anchor points that might come on?
Jonathan Brearley: I think it is worth noting we have four anchor points set out in the Coalition Agreement, which include the carbon price floor, renewables obligation to feedin tariff, a capacity guarantee and the Emissions Performance Standard. Those are the things we are looking to develop as part of the Electricity Market Reform Process. When it comes to a question like, "Should we extend the levy to essentially fund the rollout as well as the demonstration of CCS?", the question we are trying to answer within this reform process is how do you incentivise all low carbon, so CCS, nuclear and renewables? You might, as a result of that, extend the levy to fund the rollout of CCS. You might also think about some of the existing incentives within the system or potential new incentives like feedin tariffs. The process that we are going through is one that we hope at the end of it we will be able to look at and say, "We have a clear understanding of the sort of transition the power sector needs to make and we have the right incentives in place to do that." And we do hope, at the end of that, that's where we'll end up. A question like whether the CCS levy should be extended will be a part of that process, but we have to do all those together.
I think my main point is that, if you take a very practical example for an investor, you are thinking about investing, you are planning your investments far into the future, you are in now sort of 2016/2017 and you are planning your investments into the 2020s. You don't only need to know what the financial incentives will be, which includes the lowcarbon incentives we might have. You need to know the regulatory framework under which you will operate, so the Emissions Performance Standards it will be operating under. It's those two things we need to work out together because the financing you need depends fundamentally on the sorts of regulations you are going to be put under. If we were to split these things, then investors would be in a situation where we would solve one of those problems but they would still have this big uncertainty hanging over themselves. So our aim in this process is to solve them together and give investors a very clear picture of what is likely to come going forward.
Q146 Dr Whitehead:
And, of course, the other dimension then is presumably the standing
of all those pillars against what the EU is saying about its own
future directive development. Are you confident that those pillars
stand up well against those new directives and could you state,
for example, with reasonable certainty, that at least EPS, and
perhaps the other pillars, are proofed against those directives
as they emerge?
Charles Hendry MP:
Just to quote from the Industrial Emissions Directive, it says:
"In accordance with Article 193 of the Treaty on the Functioning
of the European Union (TFEU), nothing in this Directive prevents
Member States from maintaining or introducing more stringent protective
measures, for example, greenhouse gas emissions requirements,
provided that such measures are compatible with the Treaties and
the Commission has been notified."
So our view is that we can do this alongside that.
But we do believe that we have to go beyond some of the European
measures which are there. In an ideal world, the European Emissions
Trading Scheme would be the key driver. But it is absolutely
clear to us that that on its own is not going to provide enough
certainty for investors in lowcarbon technologies and therefore
we do have to have unique measures, we believe, for the United
Kingdom.
Q147 Sir Robert Smith:
Can I just ask on that, though, going back to all the purist
economist argument, if we are still signed up to an ETS across
Europe, anything we do here that goes faster than the price of
carbon from the ETS only means that the rest of Europe has an
easier ride and doesn't have to try so hard and that the impact
on the world is no different because the EU emissions are capped
by the ETS, unless everyone in Europe goes faster than an ETS?
Charles Hendry MP: The challenge which we face is securing the enormous amount of investment in the infrastructure which is necessary. That is a greater challenge than in any of the other 27 EU countries. It is of a magnitude which is different. Therefore, we have to have additional measures which will stimulate that to happen. For example, Germany has much more modern coal plants than we have. Therefore, we are seeing much more of ours close as a result of the Large Combustion Plant Directive and the Industrial Emissions Directive. We will be losing our remaining oil plant as a result of that process. We have a much older nuclear fleet and so all of that, apart from Sizewell B, is due to close by the early 2020s. So it is that gap which we have to fill. Looking at it objectively, we simply don't think that the EU ETS on its own will give enough certainty to investors to secure investment in lowcarbon technologies. So in an ideal world, yes, absolutely, we should have a level playing field across the EU, but that will not generate the investment which is necessary. That will therefore lead to much higher prices for consumers as they start to ration electricity availability by price. That is the challenge we have to overcome.
Q148 Tom Greatrex: Minister,
you have alluded a couple of times, or more than a couple
of times, to the need to provide longerterm certainty to
investors and I think, as you came in, you heard some of the scepticism
or wariness from some of those people representing those investors.
So I don't want you to repeat things you have already had
the opportunity to answer in response to other questions, but
could I just ask how an EPS might be reconciled, given the
importance of having consistency and not having something that
could be changed very easily with a Statutory Instrument, with
the uncertainty over the development of CCS that currently exists
because we still don't know its capabilities and costs in the
future? So if you are talking about an EPS being legislated for,
or coming in in terms of the consultation, the position being
very clear next year, then those type of things don't really match
up and that could cause that uncertainty that we have heard about
earlier?
Charles Hendry MP: I think that there would be a number of steps which companies could take to try and get towards an EPS, so that carbon capture is one element of that; it's not the only one. Some cofiring and some greater use of biomass will certainly help to reduce the carbon intensity. The use of the most modern supercritical plant will help to reduce the carbon intensity. So there is a number of things which come together to achieve things which are feasible. At the end of day we are not looking at setting a level here which is unattainable because that clearly becomes selfdefeating. So we have to look at the technology which is available to us. There may be a need to adapt the EPS over time, but our intention is that we try to lock it in as securely as possible with our understanding of what we would hope and expect to be available but recognising that if the facts change then we change our position as well.
Q149 Tom Greatrex:
I think that, Minister, gets to the nub of the point that was
being expressed, I think, by the investors because you very
clearly said you didn't want to have something that could be easily
changed and fluctuate and yet you have just conceded that, because
of the development of technology, you won't necessarily know at
one point what might happen in the future so that it needs to
be flexible. That, I think, is the very point they were making
about the potential disincentive to investment and maybe you could
respond to that.
Charles Hendry MP:
The purpose of the approach which we are taking of enshrining
of the figures in the legislation is therefore to provide that
greater degree of certainty. The concern which they would have
above all was if the ministers had an enabling power which, at
whim, they can change and therefore there's no longterm
certainty. Having it actually on the face of the Bill, as with
the requirement to reduce carbon emissions by 80% by 2050, that
is a much more fundamental building block of policy than
something which is an enabling power. So we see this as being
a much more robust structure with a view to helping
them secure investment. What we are keen to do is to say, "Look,
if the evidence is there that CCS can't work at a price which
is affordable, then we have to look at that evidence and say we
will we have enough generation coming through which is of a lowcarbon
nature? Will that be possible?" The evidence which we have
from the academics, from industry, is that they are absolutely
persuaded that CCS can work, and we are absolutely determined
that Britain should be at the forefront of developing that. So
we're starting this from a position of determination to make
this work. There will be nothing which happens which we could
do more to make this technology work and to give Britain a global
leadership in it.
Jonathan Brearley:
Can I touch on two things there. First of all it depends on how
you design the EPS. For example, we have choices that were already
outlined around whether it's grams per kilowatt hour, whether
it's number of kilograms per year or number of tonnes per year
that you emit, or whether it's portfolio, as Charles mentioned.
Part of our consideration through the consultation will be how
do we provide a clear signal and how do we make that as robust
as possible to different scenarios?
The second point I would make is that, if CCS didn't work or didn't work at a price that was acceptable, we would still have the problem of what sort of generation we want to see in the power sector and essentially how we regulate our emissions to make sure that our power sector, which will be a major, major contributor to, we think, the country's energy use, both in heat and transport as well, will limit its emissions to take us on the path to 80% and so we will have to be thinking hard about how to do that.
Q150 Tom Greatrex:
Can I just ask touching on one slightly different issue but picking
up something Mr Brearley said a few moments ago about CCS
and support for CCS, Minister, are you considering options for
financial support for CCS that could be put in place alongside
an EPS?
Charles Hendry MP: We have a funding mechanism which is in place. There will be greater clarity provided on many of these issues tomorrow. I'm very happy to come back and talk to the Committee in more detail on those issues, but I am constrained on what I can say today.
Q151 Dan Byles:
I am very interested to know is there--and, if so, what is it--a
plan B if CCS doesn't work, because it seems to me that, if CCS
doesn't work, either the lights go out or we don't hit our emissions
targets and we can't do both?
Charles Hendry MP:
If you look at the sort of map up to 2020, then we are looking
potentially at 5 GW of new coal with CCS. If you look at what
is planned elsewhere, so, perhaps 14/15/16 GW of new nuclear by
the early 2020s and the mid2020s, potentially 12 GW
of gas already consented which could be built and more gas which
could be brought on line quickly if necessary, there is a range
of other technologies and we have obviously got a huge plan
for rolling out renewables as well. We see that as having a great
potential in this next tier, but we are not looking to get to
a stage where we just have enough margin to get by. We've got
to have enough capacity in the system that we don't have to have
the situation of some huge price spikes when it is a cold
day in the winter or trying to get a more stable relationship
for business users.
Q152 Dan Byles:
But we know that fossil fuels as carbon capture is not an alternative
to nuclear or an alternative to wind because nuclear provides
a base load and wind is variable. We need the flexibility
of an alternative power production that is not nuclear or renewable.
So if carbon capture doesn't work, are we going to accept that
we are going to have noncarboncaptured fossil power
stations in the medium term?
Jonathan Brearley: There are other things you can do to provide flexible capacity. For example, there is storage, there is interconnection, but it is true that if CCS didn't work-
Q153 Dan Byles:
It just seems that a lot of eggs are going in the CCS basket,
which is still quite unproven.
Jonathan Brearley: You have to look at our kind of whole strategy for power supply. What we are saying is that we have three major areas of technology, so CCS, renewables and nuclear. At this stage we should be pushing hard to roll those out and test them. All the indications, as Charles has mentioned, are that CCS will work. If it doesn't work, we will have to look towards some small amount of peaking gas plant, for example, but also technologies like storage, interconnection, and also demand side management, so looking at smarter grids to try and manage that intermittency problem. But I think it is fair to say that we would have a huge challenge if CCS didn't work. However, our strategy right now has to be to develop the full range of technologies we might need and to push as hard on them as we can.
Charles Hendry MP:
Just to add to that as well, if you look at the commonly international
talkedabout level for an EPS, which is 500gCO2/kWh,
that is massively below an unabated coal plant, which is 900 plus,
but it is well above an unabated modern gas plant, which is about
405, so that gas can still play an important part in this process
going forward.
The other thing which I think we will see significantly
coming through in this decade, and the capacity market will help
to encourage this, is methods of storage. So, for example, whether
it makes sense if you have a major offshore wind farm to
have a connection to Norway so that when we have excess wind
in the system it is going into pumped storage in Norway then we
get clean hydropower coming back at times of higher demand. The
developments which are happening for other technologies in terms
of hydrogen, batteries technologies, hot water even, there's a whole
range coming forward which will actually shift us from having
the power when the variable source is available to having it when
it is needed by consumers.
Q154 Dan Byles:
Just briefly coming back to a figure you often quote of the
£200 billion required for infrastructure investment, looking
at the medium to longer term energy security threats facing the
country, it does seem to me--and you have mentioned this yourself
several times-- that there is an enormous implied threat or risk
to us there that if we don't attract the financial investment
we are going to have a problem but also there is a limited
construction capacity in the world to do some of the stuff we
need to do, and there are a lot of other countries also seeking
to do it. You yourself have said that if we don't get the investment
regime right, why should these countries come to the UK? They
will go somewhere else. But that's a huge risk. Again, is there
a plan B if we don't get it right? What if the limited number
of companies who can build nuclear power stations, who can do
some of the stuff we need to do, all go China and India and Brazil
because they end up with a better investment regime than
us?
Charles Hendry MP: I think there's no doubt now that the United Kingdom is the most interesting market for investors in Europe for nuclear and possibly one of the most interesting in the world. That significantly built on the work which John Hutton did when he was Secretary of State which really started to transform the situation here. They all understand that there will be no subsidy, but we are removing some of the regulatory challenges. So some of the planning decisions and regulatory justification which were announced yesterday are looking at what are the potential nonfinancial barriers and how do we move those, and I think we are making very good progress in doing so.
At the end of the day, there are, as you say a relatively small number of companies globally who can be involved in that area. There is, nevertheless, at this stage, very significant interest in building in the United Kingdom and it is my job to make sure that that interest continues. In terms of the construction skills, 90% of a nuclear plant is basically civil engineering skills and 10% is nuclear related so that we have a significant base of civil engineering skills. But this is going to be one of the most important areas of growth in the economy moving forward, and, therefore, the opportunities for people to move into areas like this with the appropriate skills and to have a longterm career in that area is a great opportunity at this stage.
Q155 Dan Byles:
Very briefly, coming back to EPS, do you anticipate that the EPS
regime we put in place will only apply to new plants after a certain
date, because there has been some suggestion--and we have discussed
this with the previous panel as well--about bridging the gap and
that if we get it wrong on the one hand we might actually create
a disincentive to creating the extra capacity needed between now
and 2020, but on the other hand there's Albert's point that if
you go the other way there could end up being a dashforgas
and actually we end up with too much sort of legacy productive
capacity? So do you anticipate saying, "Right, EPS is only
going to apply to everything built after 2020 or something like
that"?
Charles Hendry MP: That's certainly what the Committee on Climate Change has said--that it should be on gas post 2020 and it should not be retrospective. We will consult on this as part of the programme, but my instincts are that I don't like retrospective changes. I think that when people have invested under a certain set of circumstances it is extremely difficult to maintain longterm confidence if you just feel at will you can change that. Therefore, people should be able to feel that the set of rules under which they invest will be maintained for the longer term. That is, for example, why we have grandfathered the ROCs for biomass and so to make it clear that, when there are changes which come through, then people who have invested under one set of circumstances have that maintained. But that will be part of the consultation process too.
Dan Byles: Thank you.
Q156 John Robertson:
I'm interested in furthering plan B, I have to say. I could
also mention investment about Sheffield Forgemasters, of course,
but it wouldn't be right to try and make political points, but
if we are investing into new technology that might have been helpful,
Minister. But, moving on to plan B, it isn't unforeseeable that
we could hit a scenario of where we have a severe winter
followed by an extremely hot summer and that could happen in the
whole of Europe, and therefore the demand and also the draw on
storage would be great. Is there a plan B of where we would
have standby power stations that would be brought into service
no matter whether they meet the criteria of the day?
Charles Hendry MP: I will get Jonathan to add to this in a minute, but that is the thinking behind the capacity market as to what is necessary to secure investment in plant which may not be used for the whole time. As Dr Whitehead was saying earlier, in the past we have been able to use older plant for a declining number of hours each year, but as a result of the closure timescales of the LCPD and the IED that won't be possible, moving forward, so that there will be a need for backup plant. But the critical change here on the capacity market is how do you also find ways of managing demand better? How do you shave the demand so that you don't actually need to spend those hundreds of millions and billions of pounds on a new plant which will not be used on a fulltime basis? So that is going to be a key part of the thinking. I think that's where you will start to see the emergence of energy service companies who go in there to help people manage their demand more effectively so that they can remove the spikes in demand as well. But you are absolutely right. If you go back to the beginning of January this year, it was an extremely cold day, there was no wind blowing anywhere and as a result of that all of the plant was operating at absolute full capacity and it was a fairly tight margin.
Q157 John Robertson:
We have used the interconnector in these cases, but, in my scenario,
there wouldn't be anything to draw upon. That's why I am
saying has there been thought about having this plan B just in
case of something that may happen and, with global warming, is
more likely to happen in the future?
Charles Hendry MP: Under the system which we propose people will be able to come forward to advocate the development of a new gasfired plant, and it would normally be a gasfired plant in those circumstances, and then that will certainly be taken through the planning process. So we recognise that there will absolutely be a need for backup.
Jonathan Brearley: If you were to use your capacity mechanism, that would be the method through which you would pay for this. So you would generate scenarios. You would test your system against, as you say, a cold windless winter or a hot windless summer, and then you would look on the system to see whether or not you needed extra capacity to cover those scenarios. Then there's a debate to be had--and we will talk about this through the consultation--about how you would pay for that or how you would make sure that happens. But one of the key changes we have in the future which we don't have in our systems today really is a much, much greater amount of inflexible and intermittent generation, which means that that problem becomes more pressing, which is why we think about things like capacity mechanism as part of the reform process.
Q158 Sir Robert Smith:
On those Electricity Market Reforms that you are looking at, in
any of the thinking you have got, are they all compatible with
where we have pushed the EU to go with the Lisbon Agenda and our
own previous very open market? Is it possible to function in
the new designs you are looking at without changing anything
at EU levels?
Jonathan Brearley: We are looking at the moment at a very, very wide range of options. The sorts of things that we have talked about with stakeholders range from--You have seen, for example, Dieter Helm's representations on a regulated asset base, etc. I think it is possible to make the reforms we need within the current EU regulations. That's something we can say now, but as you begin to develop these things in more detail we will constantly need to look back at that and check whether that is still the case. My expectation is that we can.
Q159 Sir Robert Smith:
On the EU level, what sort of discussions are you having with
other Member States on the design of the EPS, and I think the
Netherlands are looking at their own EPS? Is there any exchange
of best practice or ideas?
Charles Hendry MP: There is nothing formal which has happened at this stage. We are aware of two or three EU countries that are beginning to explore that and so at this stage there is nothing formalised.
Jonathan Brearley: We, as part of the process, are looking at lots of benchmarks across the world, and actually, when you are looking at things that are up and running, it is the US states that we look to who already have this.
Q160 Sir Robert Smith:
Do you see, on a positive side, rolling out or encouraging
other countries to follow down the route, outside of Europe as
well, in terms of international negotiations?
Charles Hendry MP: I think it will become inevitable. I think, once you get some early movers moving in this direction, that others are going to say they have to follow because it is then they need to be making it clear to their potential investors what is expected of them moving forward.
Q161 Sir Robert Smith:
Finally, going back to the interaction in Europe, what signal
does it give about our confidence in the Emissions Trading Scheme?
Are we still going to try and make ETS work?
Charles Hendry MP: We certainly want to see it work. Post 2013 it will become much tighter in those years, and the number of allocations will be reduced every single year and so that will continue to make it tighter. But it is still going to have incredible variability within it as the costs of different fuels rise and fall. Accordingly, we don't believe that provides enough stability for potential investors in terms of what they would see as being the price on carbon. So we do think we need to have that extra mechanism, as I was saying earlier, in the UK, but where we can get international agreement on these issues, then, without any doubt, that will be our preferred way of doing it.
Chair: Good. All right.
Thank you very much indeed for coming in. It was a very illuminating
session.
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