Electricity Market Reform - Energy and Climate Change Contents

Examination of Witnesses (Questions 204-223)



  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.

  Alan Simpson: 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 gas—there 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 sea grid.

  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.

  Q205  Chair: 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 leaders.

  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 companies—from Statoil to DONG Energy and RWE—found 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 revenue.

  So for those technologies where we can have a leading edge, if you combine action on the efficiency side—which is absolutely vital—with 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 be.

  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 as well.

  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 offer—yes, 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 use—and 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 energy—to some extent, that is anticipated by measures in the market reforms—could, 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 spaces.

  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 ago—and maybe you want to comment on this Doug—about 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 driven—or failed to drive—UK 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 times?

  I will just finish on that point about Hamburg. One of the great advantages there is that, at a participation level, citizens, businesses—whatever they are—get 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 deployment—for example, with a heat store to allow greater levels of flexibility—is 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 about—for 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 environment—the leading science-based think-tank in Germany that advises the German Government on environmental and energy issues—issued 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 stand—if 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 pollution—some of us at least are old enough to remember them—the 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 precisely that.

  Q212  Barry Gardiner: The costs and the disincentives in the UK are such that knock-on costs for goods and employment—as well as the potential for unemployment—would 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 gas—we 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 countries—perhaps nuclear-powered electricity from France—if 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 make—perhaps not clearly enough—was 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 objectives—security and affordability—over to the international gas market. Now, does that strike you as a wise policy move?

  Barry Gardiner: I think the clear answer to that rhetorical question is "No".

  Doug Parr: Exactly.

  Q216  Barry 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: Sorry—I 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 solutions required.

  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 stage—certainly if you look at wave and tidal—to 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 both questions?

  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 price—the total value—rather than in its generation aspect. There might not be a short answer to that.

  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 industries—again, there seems to be cross-party consensus about the need for the stimulation of these new technologies in offshore—the 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.

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