Examination of Witnesses (Questions 204-223)|
HARRY HUYTON, NICK MOLHO, DOUG PARR AND ALAN SIMPSON
8 FEBRUARY 2011
Q204 Chair: Good morning.
Welcome to the Committee. I think most of you have been listening
to the previous evidence session. Without offending the other
three of you, I particularly welcome Alan. It is nice to see him
back here. He is familiar from our previous discussions on these
issues. If I may say so, he was much missed.
We know who you all are, so we won't have formal
introductions. I can see the nametags on this side, and I know
those of you who are on the other side. I start with a general
question about the objectives of the electricity market reform
process. Some witnesses have suggested that it should be more
specific, do you agree with that? Should there be goals for decarbonisation
and security of supply? Should they be built into the process?
Nick Molho: I would agree with
that. It could be more specific, but it could also address other
areas that are not currently addressed in the electricity market
reform. Starting with that particular point, the one key area
that, unfortunately, is not currently addressed by the electricity
market reform is the potential for reducing energy demand in the
long term. The reductions on the demand side could play a key
role not only in reducing costs for consumers by achieving our
decarbonisation targets, but also in significantly helping the
UK's economic recovery.
Just before the Green Deal proposals were put
forward in the Energy Bill, Chris Huhne said that an ambitious
Green Deal could deliver up to 250,000 jobs by 2030. So there
is significant potential for cost reductions, both for consumers
through demand reduction measures and for the UK economy through
the demand sector, that is not being considered.
The position of Friends of the Earth would be the same. Ideally,
the focus has to be on energy security and sustainability, but,
beyond that, the terms of reference have been quite narrowly cast.
It ignores the huge opportunities for demand reduction, and it
seems to cast a narrow light on gasthere is a danger in
owning the wrong type of gas infrastructure. It misses out on
the huge opportunity for the UK to be a world leader. In that
sense, our disappointment is about the lack of ambition in the
EMR proposals, rather than the presence of a grand vision.
Doug Parr: Yes, let me build on
that. It seems to us that there is an opportunity to explicitly
recognise the important role that we can play in certain key renewable
technologies. It has already been acknowledged by the Prime Minister
in his recent speeches. And the former Secretary of State, now
the Leader of the Opposition, has made similar remarks about the
role of marine renewables. They should be more explicit about
the decarbonisation target for the grid. We should also be explicit
about playing a role in fostering a decarbonised EU, both through
setting an example of market rules and how an economy can transform
and, of course, in interconnection and the creation of a North
Harry Huyton: It won't surprise
you that we agree with that. We all collectively see EMR as an
opportunity to confirm this Government's commitment to decarbonisation
of the grid. So the Climate Change Committee has recommended that
we should aim for 50g CO2/kWh by 2030 and EMR should
have that as a central aim. If we ignore that then we will further
sow the doubts that appear to be arising in people's minds about
the future of renewable energy. We heard some of that in the evidence
session before our own. So I think that needs to be put to bed
with a clear overall target around decarbonisation and the role
that renewable energy will play.
To echo what has been said, some fairly substantial
parts have been left out of this, including demand management
but also sustainability. Our energy mix, going forward, will have
significant repercussions for the natural world in the UK, and
we would like to see that acknowledged. There are certain things
that we could do through the EMR to take that on in terms of technology
choice, but there are also things that need to happen outside
EMR, which perhaps are not happening yet, to minimise those impacts.
But it is clear that if we were to achieve the target set by the
Climate Change Committee, the consequences for consumer prices
are alarming. Furthermore, what would be the penalties for Britain
if we went much faster than our competitor countries in this direction?
Would we not have a double whammy in terms of very high consumer
prices, and very painful that would be, enormously increasing
the problem of fuel poverty and, secondly, handicapping Britain
in competitive terms by having higher domestic energy costs than
our competitor countries?
Nick Molho: We need to look at
both sides of the equation: action on the demand side and action
on the generation side. On the demand side, we know from the UK
Energy Research Centre's 2050 project last year that it is technically
perfectly feasible to reduce energy demand in the home and transport
sectors in the UK by 50%, compared with business-as-usual levels,
by 2050 and that this could reduce the costs of delivering a low-carbon
system in the UK by up to £70 billion. So clearly, first
of all, we need to find ways in which we can maximise on efficiencies
on the demand side to limit the increase in consumer prices that
come through measures on the decarbonisation side. Now this takes
us first of all to the question: how can we deliver those energy
demand reduction targets?
The first point to make is to refer to the experience
in the PJM markets in the United States, which Rachel Cary mentioned
to the Committee a couple of weeks ago. The experience in that
market showed that if you treat long-term energy demand reductions
on equal par with low-carbon generations through your long-term
contracts, in 90% of the cases the energy demand reduction targets
are delivered. In terms of a first concrete suggestion, that is
one thing that, unfortunately, the EMR is not doing at the moment,
although Redpoint Energy, who carried out the underlying analysis
made a recommendation for this. So we should look at ways in which
we could include long-term energy demand savings in those long-term
contracts as a key way of ensuring that we deliver those targets.
There are clearly also ways in which energy
efficiency measures throughout the different sectors of the economy,
not just in the home sector, which is currently the subject of
the Green Deal, can be realised. The key question here is how
can we fund those energy efficiency measures? There are different
ways in which we can do that. If, for instance, the carbon floor
proposals go ahead, we have estimated that the sum of EUA auctions
and of the carbon floor price could amount to roughly £4.5
billion by 2015-16, and then £8 billion by 2020. That would
be a very good source of revenue that you could recycle through
the Green Investment Bank into energy efficiency projects. Now,
on the generation side, clearly we need to focus on creating the
best possible frameworks on the technologies on which we can have
a natural advantage.
I think it is worth referring here to the Low-Carbon
Innovation report from the Committee on Climate Change, which
came out last July. Precisely what that report did was look at
a whole range of low-carbon technologies and figure out which
ones we should develop and deploy, as opposed to just import and
deploy in the UK. The report found that offshore winds and other
forms of marine technologies, as well as CCS technology, were
three areas in which the UK had a natural leading edge through
our experience in the offshore oil and gas industry, which we
could bear to fruition and in which we could become industrial
To give an example of what could be achieved
here, the Offshore Valuation Report, which was put forward by
Government as well as leading energy companiesfrom Statoil
to DONG Energy and RWEfound that by using just 29% of our
practical offshore resource, we could get to a situation where
the UK could become a net exporter of electricity. The figure
for 2030 is an installed capacity of 116 GW, and this could generate
up to 145,000 jobs for the UK and around £62 billion of annual
So for those technologies where we can have
a leading edge, if you combine action on the efficiency sidewhich
is absolutely vitalwith action on the generation side,
the overall cost to the economy can be contained. The evidence
that Chris Hunt gave in the previous session is very interesting
in that respect.
Alan Simpson: I think it would
also be worth the Committee looking at a report published by Deutsche
Bank a year ago last November, which was a sort of global take
on the introduction of feed-in tariffs and the specific audit
of how this had affected Germany. Their figures for the 2008-09
financial year showed that the introduction of feed-in tariffs
and the shift into renewables was saving the German bill payers
money, rather than costing them money. The real financial gains
were to be found in the merit order effect, which is the avoidance
of high-cost, high-carbon energy at the margins. If you built
that into the equation, even before you fed in the jobs element,
this turned into a real economic gain rather than an economic
cost both to the public and to society.
The second point I would make is that it is
also worth looking at China and the National Grid calculations
about UK potential for biomethane injection. We have one pilot
scheme that has opened at Didcot in Oxfordshire. There are a total
of five pilots in train. China has 3,000 cities operating on city-wide
biomethane plants and plans to have 6,000 by 2020. If this was
replicated in the UK, it could deliver 50% of our gas needs from
renewable gas. You would get that if you had priority access to
a system that transformed it and which set emission performance
standards that were tough, transformational and set a premium
on the shift into renewables and priority access to systems for
renewables. That is the widening of the agenda that I think we
would collectively want the Committee and Parliament to address,
because there is huge potential for gains that would vastly outstrip
the costs of change. In real terms it is the long-term costs of
staying where we are that are the scary prospect.
Doug Parr: Of course I agree with
all that. To quickly supplement, I think the important point is,
what is the overall package that large renewables growth would
deliver? Take, for example, the scrappage scheme that was introduced
on cars in the emergency Budget. That was effectively giving people
taxpayers' money to get something they might have got anyway,
but because it was in support of the car industry, it still had
a fairly wide amount of support. There are analogies with the
possible rises in costs to bill payers that would come from that
if there is an industrial base here, as one would hope there would
The scope for effective demand-side measures
is significant. We already know about local authorities that are
potentially interested in a capacity mechanism that would allow
them to replace fluorescent lights in street lighting with LEDs.
Those closer to this industry than me say that if there were an
appropriate capacity mechanism where people could bid in, the
possibility of reducing demand from supermarkets and data centres
would also come into play. Some of those costs would inevitably,
in a competitive industry, be passed on to the consumer. If properly
structured, demand reduction can drive reductions in costs elsewhere
Harry Huyton: May I just add that
on costs we have to be careful to compare like for like? You cannot
simply take the investment required for x GW of gas and
compare it with x GW of offshore and onshore wind. You
have to think about the long-term costs if we take our decarbonisation
goals and our 80% target seriously. You have to account for the
costs of retiring those plants early, or retrofitting CCS to them,
if we want to meet our 2030 targets and beyond. You also have
to account for the costs of exposing consumers further to international
gas prices; we don't know what will happen to them.
So, you have to look at costs in the round but
you also have to consider benefits. The Government talk a lot
about the benefits and the potential jobs we could get from an
offshore wind industry, but I think that needs to come together.
I guess I'm a bit concerned there is not an overarching strategy
for green growth. That appears to be missing, and I think that's
reflected in EMR and in the other flagship policies that are coming
out of Government on climate policy at the moment. We have the
Green Deal and the Green Investment Bank; alongside EMR, in all
of those what's proposed is well short of the ambition required
to deliver targets, because there is not an overarching commitment
and strategy for green growth.
Q206 Dr Whitehead: May I take
some of the points that have already been raised about demand
reduction a little further in the context of the EMR itself, with
the four pillars that are at the heart of it? Which of those do
you think, if any, positively foreclose on demand reduction? It
may well be possible to incorporate what you have mentioned about
demand reduction into EMR, but if certain pillars actually prevent
that incorporation or work against it, one may then say that the
issues of demand reduction and of EMR are two different spheres
and you may pursue those by different means. Do you think, in
terms of those pillars, the demand reduction suggestions that
you have made could be incorporated into something like the architecture
of EMR as it now stands?
Doug Parr: As I understand it,
there seem to be several different suggestions for the capacity
mechanism, and at the moment they are perhaps not broad enough
to account for the innovation that could take place on the demand
side. I don't think specifically the current framework rules it
out, but it just doesn't emphasise the opportunities enough. That's
where I would draw the distinction, because of the possible variety
of capacity mechanisms on offeryes, it could be included,
but if you look at the actual EMR proposal, not much is on the
demand side. It's as if that isn't terribly well understood and
the opportunities aren't terribly well flagged up.
Q207 Dr Whitehead: We could
say that to some extent the Green Deal, as currently proposed,
looks like a suggestion that demand reduction may well be pursued
as a parallel device running alongside an EMR mechanism. I think
I may anticipate your response to this, but first, do you think
that demand reduction measures in EMR may not be necessary if
the Green Deal works as well as some people consider it might?
Secondly, if you don't consider that it will work that well, to
what extent do you think that measures relating to the Green Deal
might then run in alongside demand reduction measures within EMR?
Doug Parr: Although my colleagues
may want to add something, I see the Green Deal and what is going
on within EMR as complementary, but parallel, because so much
of what is going on within the Green Deal is focused on the building
stock and the condition of the building stock, rather than power
usage within buildings. That's not to say that we are not supportive
of the Green Deal. We would hopefully see a higher level of ambition
in it. We are, however, missing some innovation on the demand
side, to do with power useand specifically that, because
power use is the focus of the electricity market.
Alan Simpson: Chairman, at the
risk of repeating a conversation that Alan Whitehead and I had
in an earlier session, which was specifically on the Green Deal,
I think the Green Deal is likely to end in tears. In the economic
circumstances, it's hard to see the fuel-poor wanting to take
on personal debt at a time when we are encouraging them to reduce
national debt. If the interest rates are above something like
2%, most families will face what is not a pay-as-you-save scheme,
but a pay-as-you-pay scheme. I doubt that there will be a queue
of people lining up to make themselves poorer. How we deal with
demand reduction and the inclusion of the fuel-poor is absolutely
critical. It is critical for the Government, because all the projections
about how we meet the 2050 carbon reduction targets suggest that
two thirds of that progress will have to come through demand reduction.
Therefore, we are going to need a much more robust framework to
take us there than the Green Deal appears to offer.
The other thing about it is that it is a very
individualised process. It fails to capitalise on the positive
experience that we have of such things as warm zones and strategic
whole-area approaches that have, in the past, been much more successful.
Those are the learning curves, and I don't think EMR engages with
that at all. It's hard to pull out any single pillar. It's just
that the four cornerstones of the house leave me feeling that
the house has been built in the wrong place. Actually, a fundamental
rethink of what market reform is to deliver is what has to be
addressed. It is unlikely to break the closed energy market that
we have in the UK. The Government's commitment to increased competition
is laudable, but it is not going to be found in here. Many of
the opening proposals are structured to favour the continuing
interests of where we are today, through the big energy companies.
It won't deliver a shift into a change of thinking towards demand
reduction and sustainability.
Q208 Dr Whitehead: Some people
have suggested that the substantial emergence of a greater level
of distributed energyto some extent, that is anticipated
by measures in the market reformscould, in itself, drive
substantial demand reduction. How local authority generation is
combined with demand reduction district power arrangements may
be relatively efficient in recirculating energy. It has been suggested
that that, in itself, could be half an additional pillar, as far
as EMR is concerned. How do you react to that?
Alan Simpson: It would certainly
be a phenomenally important addition to widen the thinking. In
Berlin at the moment, for instance, the local energy company provides
40% of its own energy needs from renewable sources, and across
continental Europe, the presence of distributed energy systems
has on average, an ability to reduce the peaks and troughs by
about 15%. So that aspect of decentralised systems is really important,
but it also gives the opportunity to take the debate into different
I would really encourage the Committee to look,
for instance, at what is going on in Hamburg, where their own
energy appraisals said the city needs perhaps 2 GW of additional
electricity to give energy security in future. After a long debate,
they decided that they were not going to build any of the power
station options that were on the table, and instead have come
up with a scheme called LichtBlick. That is a partnership with
Volkswagen to install 100,000 CHP boiler systems in people's homes,
schools, factories, libraries and so on. They provide the individual
needs, and at the same time, when the city has an additional energy
requirement, the central control unit simply sends out an instruction
and all the boats in the harbour just come up with the tide
Q209 Dr Whitehead: At the
risk of cutting you slightly short Alan, how might that sort of
idea link in with what Doug was mentioning a moment agoand
maybe you want to comment on this Dougabout the role that
the capacity payment element of EMR might play? That is, the extent
to which you are providing bid for capacity payments, either for
a whole lot of backup gas-fired power stations, or maybe providing
that capacity payment backup for different forms of backup for
the energy section as a whole? If that is what you are suggesting,
how would that work, in terms of the capacity payment systems
that are presently proposed in the EMR?
Alan Simpson: My answer would
be a returned question. There is a choice of capacity payment
mechanisms, and instinctively I would say that unless you have
mechanisms that widen the participation within the energy market
and introduce a genuine sense of competition, you will be left
with the same set of extended cartel interests that have drivenor
failed to driveUK energy policy to where we are now. So
the question is, what sort of system does the Committee and Parliament
want to have for the decades ahead, in what will be very turbulent
I will just finish on that point about Hamburg.
One of the great advantages there is that, at a participation
level, citizens, businesseswhatever they areget
to know when the city has taken a contribution from their system
when they receive cheques in return. The transformation of the
energy debate shifts from the corporations to citizens, in the
process of driving energy security for the future.
Doug Parr: Let me just add a couple
of comments, because it is a good question about how all these
pieces of policy would work together at the implementation level.
First, the capacity mechanisms would have to be structured differently
in terms of giving demand-side response, which we understand DECC
are looking at quite hard, and demand reduction, which is more
akin to baseload than some kind of flexibility mechanism. We support
the extension of CHP for a number of reasons, including flexibility,
but also future-proofing in terms of fuel shift and so on, so
there are advantages to the deployment of CHP.
Secondly, however, their deploymentfor
example, with a heat store to allow greater levels of flexibilityis
a different kind of mechanism. This would need to be thought about
in relation to the Green Deal, vis-à-vis the long-term,
baseload type demand reduction mechanisms that I was talking aboutfor
example, through better and more efficient data centres or changes
to street lighting.
So there are two different parts that a capacity
mechanism would need to account for, but I think it's important
because at the moment there is no innovation in that space. There
is not the opportunity for companies to identify the opportunities
and go in and try to make a bid for sorting them out, because
as we know very often these things are actually cheaper than adding
new generation capacity. I would say that is the key thing about
the capacity mechanism: to be able to open up that innovation.
Nick Molho: If I could just concur
with one finding that goes back to the start of your question
on the role that EMR could play on demand, it is very important
to realise that if we want to reduce energy demand, we need to
look at realising efficiencies across all sectors of the economy,
not just the home sector, albeit the home sector is an extremely
important one. That is where the EMR can play a very helpful role.
If you look at what happens, for example, in the United States,
you have companies like Wal-Mart who can enter into a long-term
contract to deliver x amount of energy reductions by a
particular date. That is a very helpful tool; it gives you the
contractual certainty of any energy demand reductions, savings
by big businesses, by a particular point in time, which helps
you plan your baseload mix on the generation side as well.
Q210 Laura Sandys: I am interested
in how UK and EU policies come together. When we look at the ETS,
one of the things we have been having many discussions about is,
first of all, the impact of the interconnector; and secondly,
the European objective of the ETS stance and whether the measures
in the reforms are actually just going to hit the UK, while, in
many ways, letting the rest of Europe off the hook. What do you,
as the environmental groups, feel we need to do about that pan-European
debate? How do we ensure that we don't end up, not only not on
a level playing field, but also not increasing the pressure on
those ETS figures?
Nick Molho: There are a few points
here. First of all, it is worth remembering that a lot of what
the UK does in the energy sector tends very often to be implemented
afterwards at EU level. The privatisation in the 1990s was a good
example of that. We then had a series of three internal market
directives at EU level to try to emulate what the UK had put in
place. Our European policy office is already being asked regular
questions at the moment by the EU Commission and different departments
about exactly what is happening in the UK with electricity market
reform. What is happening in the UK at the moment is being followed
very closely in Brussels, and it is worth bearing that in mind.
Clearly, while it is important for the UK to
take the lead, and that can have an influence on other European
countries, action is needed at EU level. As a first concrete step,
continuing Government efforts to get a 30% emission reduction
target by 2020 would be an improvement, given that we know from
the Commission that the current 20% target does not require any
real emission reductions in the 2013-20 period, because the recession
has basically already given us enough additional allowances to
get there. Therefore, the increase to a 30% target is really important.
But it is not just the UK looking to decarbonise
its power sector. In fact, just a few weeks ago, the German advisory
council on the environmentthe leading science-based think-tank
in Germany that advises the German Government on environmental
and energy issuesissued its report recommending the move
in Germany towards a 100% renewable energy system, arguing that
it was not only technologically and economically feasible to deliver
that, but it was also the only option in terms of sustainably
decarbonising the German power sector. So the German Government
are taking that very seriously.
We also know that the French Government announced
back in October that they were going to launch their first big
offshore wind programme as well, so there is a fair amount of
momentum, albeit currently not co-ordinated across the EU, but
clearly, both through a combination of leading by example and
continuing action at EU level, we are very unlikely to end up
in a situation where it is just the UK focusing on decarbonising
its power sector with the rest of Europe doing nothing.
Alan Simpson: I think you're on
the horns of a dilemma here. The Government have no choice other
than to press, at an EU level, for the highest set of common standards.
That is morally and ethically the right decision. Is that likely
to happen? I would say, not a cat in hell's chance. The measures
that could be implemented were set out in a joint letter from
organisations to the Treasury and those standif the EU
were serious, those would be the things that would be done. My
gut feeling is that they won't happen. There has been huge cheating
in the EU ETS; there has been fraud at a massive level, and I
think that is likely to continue. The question then is, does the
UK have a default position?
One of the things that I hope the Committee
is able to do, if DECC is not, is to push for a fundamental rethink
of what needs to be done. I do not believe in carbon pricing,
and I have to confess that I am only a lapsed economist. If you
cast your mind back to when the clean air Acts were introduced
in the UK to tackle air pollutionsome of us at least are
old enough to remember themthe Government of the day didn't
say, "Well, we've got this problem, because we don't have
a decent market price for soot." They told industry that
it had to raise standards and change the game, which is a bit
like the arguments we are making for the emissions performance
standard. You have to go in for game-changing mechanisms and let
industry and the market deal with that against the certainty of
moving to a higher set of standards. In a way, the arguments you
heard in the previous evidence session were precisely the arguments
that were being used in the '50s and '60s against the introduction
of the clean air Acts. What transformed the game was that Government
decided to set a different rules base.
Q211 Barry Gardiner: But with
respect, there wasn't a market in clean air. The question that
the Chairman asked earlier cuts back in again, because, through
interconnection, there will be the problem that the artificially
high prices, tariffs and barriers set here in the UK are undermined
by energy coming in from the continent. That presents exactly
the problems on which the Chairman was challenging Mr Molho earlier
on. I thought he gracefully finessed him away from it, if I may
say so, but he didn't really tackle this issue.
Alan Simpson: I think the interconnector
is an issue of mutual interdependencies, which has to be addressed.
How you weigh the carbon content of imported energy is a separate
and technical matter, but my point about the UK is that we have
the capacity to become a net exporter of energy. The trouble is
that we are being driven into rerunning the past by a set of old
energy presumptions. All the really exciting opportunities are
for a game-change. The arguments on the clean air Acts were about
Q212 Barry Gardiner: The costs
and the disincentives in the UK are such that knock-on costs for
goods and employmentas well as the potential for unemploymentwould
result from a differentially high cost of energy here in the UK
when compared with the continent. Do you not think that it would
be a problem for us, rather than a solution?
Alan Simpson: Well, I think you
should talk to the Germans about the job consequences of making
that shift. For them it has delivered almost 300,000 new jobs.
The late Hermann Scheer travelled to California to talk to them
about whether the shift to renewables would bring about colossal
job losses. Within two weeks of being there, he had convinced
both of the major parties and pretty much all of the pension funds
in California that it was almost suicidal not to make that shift.
The same arguments are to be found pretty much everywhere you
look. Real job gains will come from a bold leap into renewables
in the way that Germany is suggesting. The real substantial long-term
costs to bill payers, to taxpayers and to the economy are to be
found in trying to crank up the old mechanism and pretend that
it is new.
Doug Parr: May I come at this
in a slightly different way? Is some of this stuff going to cost
money? Well, of course it is. It is going to cost quite a bit
of money. What is the alternative? The alternative being touted
seems to be that we just throw up some cheap combined-cycle gas
turbine plant. There are a number of problems with that. First,
as Ofgem's Project Discovery pointed out, one of the most expensive
scenarios is that we build a lot of gas and then find that gas
prices have gone up. That is more expensive than taking a green
approach. The other thing is that we have to think of ourselves
in terms of
Q213 Barry Gardiner: When
you say it is more expensive than taking a green approach, what
is more expensive: the cost of the new kit as opposed to a renewables
kit? What are you saying is more expensive?
Doug Parr: The scenario where
we take a business-as-usual approach, and then prices go up compared
to the green scenario, which had a variety of measures including
heavy renewables and energy efficiency.
Q214 Chair: Have you calculated
what the gas price would need to be to match the solar tariff?
Doug Parr: No.
Q215 Chair: I think it would
probably be about 25 times what it is today, but I don't know
either. I understand your criticisms of another dash for gaswe
all understand that. The danger is that it would produce some
stranded assets in the 2020s that would have substantially lower
carbon than coal and substantially higher carbon than some of
the alternatives. But I think Barry asked you a question that
you haven't fully answered. It is not clear to me, if we have
a free European market, why we wouldn't simply buy lots of cheap
energy from other countriesperhaps nuclear-powered electricity
from Franceif it was much cheaper, because we invested
a huge amount of money in hideously expensive renewables in this
country? That seems to be the question which you haven't adequately
answered, and it's a gamble. Of course if fossil fuel prices go
very much higher, then we would be in a better position. There
is, however, more and more evidence that there is going to be
a big decoupling between oil and gas prices now. A tremendous
number of uncertainties underline your side of the argument, although
this Committee does understand and sympathise with it; we just
have to work out what the consequences are for consumers and the
competitive position of Britain.
Doug Parr: I agree with that.
The point I was trying to makeperhaps not clearly enoughwas
that there are significant uncertainties associated with the alternatives.
If there were another dash for gas, as you articulated, and we
remained heavily dependent on gas in the heating sector, then
effectively we would be transferring at least two of our energy
objectivessecurity and affordabilityover to the
international gas market. Now, does that strike you as a wise
Barry Gardiner: I think the clear answer
to that rhetorical question is "No".
Doug Parr: Exactly.
Gardiner: The point surely is this: one can see the dangers
of the dash for gas, and it would appear that the EMR is being
structured to try to get a diversity of supply, precisely to avoid
putting all our eggs in that one basket. But on the other hand,
the evidence that you and Mr Molho and Mr Simpson have given us
this morning has very much been that we should put all our eggs
in a different basket. Obviously, the responsibility of the Committee
is to probe the flaws in that argument as well, and that is what
I feel has not yet been satisfactorily countered by you. As the
Chair said, all of us are sympathetic to the place you want us
to get to and we all want to get to, but the question is, how
do we overcome the problems associated with your singular alternative?
Nick Molho: I would like to make
just one point. Going back to the interconnection question, we
have to realise that I don't think anyone here is advocating one
singular technology. Renewables is a combination of several different
technologies; it tends to be treated as a single basket, but actually
it is made up of onshore wind, floating offshore wind, fixed offshore
wind, wave, tidal, solar and, potentially, other alternatives.
Q217 Barry Gardiner:
Mr Molho, if you were to break that down, though, would you accept
that by far the vast percentage comes from wind, and by far the
vast percentage of that comes from offshore wind?
Nick Molho: At the moment, yes;
in current technology, given the stage of development at the moment,
you are absolutely right. That is precisely why, from an R and
D perspective, the Committee on Climate Change called in its low-carbon
innovation report for focusing not just on improving economies
of scale for offshore wind, but on improvements in wave and tidal
technology. But what
Q218 Barry Gardiner: SorryI
hope it's helpful to develop this into a dialogue. I don't wish
to frustrate you.
Nick Molho: No, that's fine.
Q219 Barry Gardiner: I am
really trying to tease things out here, because it seems that
we're talking about a fairly short time scale in terms of the
Nick Molho: Absolutely.
Q220 Barry Gardiner: Ofgem
has said that £200 billion is required over the next nine
years. We're looking at that sort of transformation in our energy
infrastructure and energy economy. While one might say, "We
need to do more in these other areas," you are attempting
to counter my suggestion that you are over-investing or asking
the country to over-invest in one particular technology, and I
have accused you of not being diverse enough. You are saying that
you are being diverse, because there are all these other technologies.
My push-back against that is that none of those are yet at a sufficient
stagecertainly if you look at wave and tidalto be
producing the capacity that we would require by 2020 and beyond.
Chair: Please answer very briefly, because
we are rapidly running out of time. We can amplify the answers
in writing afterwards.
Nick Molho: Okay. You need to
look at this step by step. We know that we have roughly 85 GW
of capacity today. We know that we will lose between 20 GW and
25 GW, according to the National Policy Statement, over the next
20 years. Two years ago, WWF and Greenpeace commissioned a report
from Pöyry Energy Consulting, which showed that if the UK
met its renewable energy and energy efficiency targets by 2020,
there was no need to build further base load generation until
then. What is interesting to note here is that that report was
based on estimations of energy demand that were much higher, because
they were at pre-recession levels, and it also did not take into
account those gas plants that had been consented but not yet built.
So that is the first step to 2020.
In the period from 2020 to 2030, it is important
to note that we know that we can expect a fair amount of new offshore
wind on the system while, as you say, wave and tidal technologies
are being developed and brought up to scale. From the Offshore
Evaluation Report, we know that if you use 29% of our practical
offshore resource, the figure that you could get, in terms of
total offshore renewable capacity by 2030, is 116 GW. If you take
the average load factor in 2009 for offshore wind, which was 35%,
that gives you a net capacity of 40.6 MW.
Actually, the truth is that if you look at the
proposed projects for round 3, for instance, the wind speeds are
expected to be higher, because those projects are going to be
further offshore. If you add the technological developments that
will take place, you can expect increased load factors of between
40% and 50%, which could give you a higher net capacity. If you
combine that with increases in onshore wind capacity, increased
combined heat and power, energy efficiency measures and a clever
use of the existing plants that we have on the system, there are
a lot of parameters that could help you reach the answer without
going down the nuclear route or the new dash for gas route. On
the increases in onshore wind capacity, the DECC 2050 pathways
look at a range of 20 GW (Level 2) to 30 GW (Level 3) by 2030.
On combined heat and power, we currently have 7.5 GW on the system
and that could easily double over the next 10 years. On energy
efficiency measures, as we suggested to the Committee in the EPS
inquiry, for example, some of the old plants on the system could
have derogation from a strong EPS and just operate at times of
high demand, and a lower renewables factor.
Chair: Okay. We are very short on time.
We'll have one question from Alan and one from Laura, and then
we have to be out of here in seven minutes.
Q221 Dr Whitehead: I am going
to try to help you out. An interconnector, by and large, is a
balancing mechanism not a fundamental growth mechanism, which
means that it tends to balance what else has been produced against
peak demand. It presumably will continue to do so unless it is
suggested that interconnection actually play a far larger role
in the energy mix of the UK. That may also have a hand in things
such as developing storage, and we heard from other witnesses
that, for example, the interconnector to Norway could be used
as a storage mechanism.
Alan, you mentioned the Deutsche Bank analysis
of the extent to which renewable power might be judged against
peak cost. How might you put those factors together in terms of
the pillars that are in EMR, the arguments about energy demand,
the use of storage, possibly, and interconnectors and the overall
trading picture? As Barry has emphasised, that is what we need
to look at fundamentally. What will the trading position be as
a result of these reforms?
Alan Simpson: Sorry, are we taking
Chair: Laura, is yours sufficiently related?
Laura Sandys: Mine is a bit more radical.
Chair: Let us have the answer to that
last question, then.
Alan Simpson: The debate needs
to come back to something broader than the four pillars. That
is part of the problem. If you stick with the four pillars, the
likelihood is that the UK will end up with the same closed, rigid
energy market that it has today. It will be stuck with a system
of quite regressive long-term subsidies, rather than transitional
ones. All the learning curves from elsewhere around the planet
about the falling cost curve for renewables are being missed in
the nature of the debate.
It is worth looking at North Carolina, where
last year the unit costs of electricity from nuclear was coming
in at 16 cents per kW, and that was the crossover point with the
unit costs from PV. Their projections are that by the end of this
decade, while nuclear costs will have risen to 24 to 27 cents
per kW, PV will have dropped to 5 cents. In a sense, the debate
fails to move the UK into leading-edge technologies, learning-curve
processes and subsidies that are presumed to tail off, rather
than trying to shuffle new subsidies to old nuclear. If that is
where we end up, then we have lost sight of what the real balancing
mechanisms are about.
Q222 Laura Sandys: The Clean
Air Act is an interesting thing. I have a family interest in that
piece of legislation. The issues are about game-changes. While
we are talking about looking at the sector as it is today and
tweaking it, we had an interesting suggestion from Dieter Helm
that instead of valuing carbon generation, we should look at carbon
consumption. Is that a game-changer? In a strange way, what you
are talking about is not necessarily even enough of a dramatic
game-changer. If you start to look at carbon consumption, you
get around some of the issues about energy transfer from Europe,
because it will be in the total pricethe total valuerather
than in its generation aspect. There might not be a short answer
Doug Parr: There isn't a quick
answer to that, no. The analysis is correct in the sense that
the UK in many ways has not cut its carbon emissions very much.
Therefore, responsibility for these emissions still sits with
us. It is not much of an extension to say that we should be responsible
for the emissions we produce, even if they are produced in the
power market offshore.
To come back to the point that Barry and Tim
were making, I take this quite seriously. If we are keen on fostering
our own industriesagain, there seems to be cross-party
consensus about the need for the stimulation of these new technologies
in offshorethe case histories of Germany and Spain are
that they had to protect their home industries to make them viable.
In Germany they did it by insisting on technical standards for
wind turbines that nobody else could meet. In Spain, they had
local content rules. In the classical economist's view of the
world, these are bad, bad things; but look what they have got
in exchange! Denmark had similar provisions. If there would be
a cost, then we need to be clever about finding ways of ensuring
that we have a domestic industry that can build on the back of
what would be a higher level of interconnection with the continent,
which we thoroughly support.
Alan Simpson: I
Q223 Chair: Right. Sorry to
cut you off, but we have some deadlines to meet. Thank you very
much indeed. It has been a very stimulating debate from our point
of view. I know that it will continue. We may want to ask you
to develop one or two of these things in writing afterwards. Thank
you very much for your time.