Examination of Witnesses (Questions 224-249)|
ROBERT CROSS, ADRIAN HAWORTH, JOAN MACNAUGHTON, AND
CHRISTINA GRUMSTRUP SORENSEN
15 FEBRUARY 2011
Q224 Chair: Good morning.
Thank you very much for coming in. You know that we've been looking
at electricity market reform during our last few sittings. Obviously,
it's a highly topical but wide-ranging subject. We have about
an hour with you. Please feel free to participate in any discussion
that you want to, but don't feel obliged to answer every single
question if you don't feel you have anything particular to add
to what has already been said.
I start with a general question about whether
you think that the proposals in the consultation document are
likely to promote investment in low-carbon power. Will the proposals
reduce some of the risks that are already inherent in such investment?
Joan MacNaughton: Alstom begins
with A, so perhaps I should go first.
We strongly support the objectives of the reform,
and we strongly support the goal of decarbonisation. Because we
think that all of the technologies will be requiredwe actually
have an offer for all of the technologiesyou will need
a varied portfolio, which is essential to maintaining security
of supply and minimising the cost to the consumer. As well as
those technologies, you need to drive up efficiency of power generation,
and you need to drive carbon capture and storage.
Will the current proposals succeed? It is very
difficult to tell on the information currently available. There
are big design issues with the contract for difference, which
are acknowledged in the consultation document itself. There is
no certainty about the proposed rate of decarbonisation. We are
not absolutely clear about the trajectory on either price or carbon
There are a whole lot of questions that need
to be answered. There are a lot of questions on the interaction
between the different proposals, which need to be pulled through
and made more visible. Until we have visibility on that, it is
quite difficult to be confident that this is going to drive the
real uplift in investment that is absolutely crucial.
Christina Grumstrup Sorensen:
My name is Christina Sorensen from DONG Energy. We generally welcome
the energy market reform, and we believe that it is a reform of
this nature, and with this ambition and will, that is needed to
ensure that we achieve the challenges in front of us.
We both talk about the aggressive capacity build-up
plans that are needed; we also need to attract new investors to
achieve the emission targets. We also talk about working towards
security of supply and about the role of the different technologies
in the electricity system. We also talk about the need for affordability,
which means supporting the low-carbon and renewable technologies
that are at hand right now.
We are concerned that one of the main risks
is that market liquidity is not targeted directly in this energy
market reform; we believe that market liquidity is a prerequisite
for many of the initiatives to be successful. We also believe
that auctions as a means of delivering the feed-in tariffs will
be disruptive to the build-up plans, because planning is needed.
We need to bring down costs, to build a supply chain and to attract
new investors, so we really need a stable investment environment.
Lastly, we believe that the timing of the energy
market reform is a challenge. It is a challenge to balance getting
certainty on these big initiatives and, at the same time, working
them to the right detail level to ensure that the incentives are
correctly aligned to achieve the objectives.
Adrian Haworth: I speak on behalf
of GE. We are looking right now at substantial investment, certainly
in the offshore wind sector, and the timing is crucial. We believe
the UK has a unique circumstance where it can lead the world in
offshore wind; it can develop that technology and export it in
future. But right now, we need to ensure that the momentum is
not lostthat investment in the offshore sector is kept
in the UK and does not move to other countries that are also competing
to be the supplier to this newly developing technology. We see
it as being like the oil and gas sector 30 years ago. We have
recently made several acquisitions in the oil and gas sector,
in which we would never have been in the UK had we not moved 30
or 40 years ago. We think now is the time to move into the offshore
market and make the UK a leader, because it is unique in the world
to be able to do that.
Robert Cross: Statoil would support
the reform, but I think that generates a great deal of uncertainty
for investors. From an offshore wind perspective, we are quite
happy with the renewables obligation. We have almost completed
our investment in the Scira wind project. More generally speaking,
we have some concerns about the impact that these changes will
have on the structure of the electricity market, and the consequences
that that will have on other markets that relate to the electricity
market, such as the gas market. Some of the measures may be necessary,
but perhaps not all of them all at the same time, because that
creates a great deal of instability.
Q225 Chair: Given the scale
of the investment needed, a variety of investors will have to
participate in this, who may have slightly different objectives,
looking for a return over different time periods. Is it possible
to produce one set of policies that maximises the attraction to
investors with different objectives?
Christina Grumstrup Sorensen:
I think the initiatives that are set out in the EMR and that are
multiple, will work well hand-in-hand. So I don't see that we
should need less compromise and only have one initiative for one.
For the feed-in tariffs as well as the RO banding, there has been
this banding that has given different support to different technologies.
We see that as an example of how a mechanism can work well with
Adrian Haworth: Offshore wind
has many risks associated with it, and they are not all financial.
There is a lot of technology risk, which needs to be understood.
We believe that eventually there will be economies of scale, but
right now we need to get experience offshore. We need to understand
that technology better; then we can develop further. Getting offshore
established and started is going to be an issue. I don't think
there will be one mechanism that suits a developing technology
and a mature technology. That is the problem for offshore wind.
Joan MacNaughton: I think the
particular risks of the new technologies and of the large-scale
technologies mean that the investors need predictability over
a time scale. That doesn't mean that you need a single instrument
that can fit all, but you do need confidence in the direction
and pace of travel. There is quite a focus on 2020; there is a
target at 2030 that we know about, although the Climate Change
Committee has made a recommendation to toughen that target. But
we don't have clear visibility of what the trajectory is, yet
for a lot of these investments the payback period really will
have go over that 20-year period at a minimum.
I do think we need more granularity around what
is said in the document about how some of these decisions are
going to be taken. If you take the contract for difference, which
has a lot to commend it as a proposal, we don't yet know how it
is going to apply across the different technologies, and how the
strike price is going to be set. Until investors have some confidence
in those issuesnot just the formal statement, but how that
regulatory regime is going to work in practicethere will
be a high value to wait-and-see. And that is actually what we
don't want; we don't want the hiatus in investment.
Q226 Chair: Given the absolutely
overriding need for predictability, we heard evidence last week
from someone who suggested that the potential cost to consumers
of achieving quite challenging targets for renewable energy, and
climate change more generally, was such that investors might be
nervous that a future Government might lose their nerve in terms
of what is going to happen to people's household bills and so
on. If people thought that the consequences for consumers might
become too much for the Government to stick to their commitments,
might they be deterred from making long-term investments?
Adrian Haworth: Yes. I don't think
it's just the UK. In Europe generally, a lot of people think that
once the cost of leading the world in carbon abatement is realised,
they'll back off. But I think there is the political will throughout
Europe, and especially here in the UK, from all parties and walks
of life. People are willing to pay the little extra for a renewable
future. Perhaps that needs to be better stated to people outside
the UK who are the potential investors and who may not have the
confidence that the people in the UK seem to have in the Government's
binding contract for the future. Certainly there are sceptics
outside the UK.
Robert Cross: There does need
to be a great deal more transparency about what the impact on
consumers' bills will be and the effects that these policies will
have on the prices that they pay. The other issue is the availability
of capital to make all these investments all at the same time,
which may, in itself, drive up some of those costs. I think that
there are options available to policy makers that will allow other
pathways to be achieved in conjunction with the investments that
are being made, such as relying on natural gas generation to some
extent to soften the impact of that trajectory.
Joan MacNaughton: I understand
the point about the pace. The pace could accelerate or it could
slow down a bit if people did begin to lose their nerveto
use your phrase, Chair. What we've been seeing over the last several
years has been, directionally, all the same, which is that people
are becoming more concerned about the information on climate change
and more determined to tackle it. Even in some countries where
there have been two steps forward and one step back, there has
eventually been another step forward. I am thinking of Australia,
for example. The actions that are being taken in Asia are really
quite significant. The Chinese are really moving in this area.
So we are either going to grow these industries and deliver on
low carbon here, or we are going to find ourselves having to deal
with these issues, because of the evidence, but we're going to
be buying the equipment and services from other people who have
seen the advantages of giving a clear policy steer and moving
But I do think that the pace needs more detail
around it than we currently have, and there needs to be an early
move to give information on the issues that are not yet covered,
to deliver the White Paper on time and to avoid more of a hiatus
in investment than seems inevitable.
Christina Grumstrup Sorensen:
I think, in general, there is high confidence from an investor
point of view. We are seeing pension funds and private equity
funds entering into the offshore investments, which we have not
seen before. The past 10 years have shown us that this climate,
the carbon emissions targets and the need for a low-carbon world
is the right direction. Investors also see that.
We should see it as an opportunity. We are,
as I said, using or deploying all the available technologies right
now. We are building up a supply chain and creating new jobs,
so we should think of it as not only a cost, but an opportunity.
Adrian Haworth: Just to re-emphasise,
we truly believe that the UK has the best platform in the world
to launch offshore wind. It would be a great pity if we lost that
initiative by just not moving quick enough.
Q227 Albert Owen: What impact
do you think the EMR proposals will have on supply-chain investment?
Mr Haworth mentioned technology. Are people queuing up to be part
Adrian Haworth: I am not sure
that we all fully understand it yet. We believe EMR is going in
the right direction. We are trying to understand how fast this
market is going to move. Therefore, we could ramp up our investments
in the supply sideit is not just primary supply side but
also secondary and tertiary supply sides. Obviously we believe
that the UK is the place to be because it seems to have the biggest
opportunity for offshore wind. But there are other places that
are developing. There were recently announcements from France;
there have been lots of announcements from Germany and so on.
We think that if there are delays in the UK, that could compromise
the potential for investment in the UK because we will be almost
forced to take opportunities elsewhere, which will often necessitate
having sourcing locally there. Secondary and tertiary sourcing
will be lost from the UK. That is why it is necessary to forge
ahead right now and ensure that no hiatus is caused by the EMR.
We think the EMR is the right direction, but if it causes a hiatus,
that will be very negative for the industry.
Q228 Albert Owen: That is
a very neutral answer, if I may say so. Do you think that prior
to the EMR, there was confidence for the supply chain, and that
it is now more difficult, from what you have seen thus far, for
the secondary ones to commit themselves?
Adrian Haworth: I think we are
going in the right direction. There are people lookingsome
people are here, but we have not all committed yet.
Q229 Albert Owen: We have
had road shows and various things.
Adrian Haworth: We have. We need
to understand right now that there are several other things taking
place, along with the
EMR, which need to happen to give everyone the confidence to take
the big leapand it is a very big leapinto this marketplace.
That is our position. Yes, we are going in the right direction,
but speed and time are of the essence here.
Robert Cross: To echo that, timing
is critical. We are not operating in a vacuum because other countries
are implementing their own policies, and industries other than
offshore renewables are also entering into these investment programmes.
Equally as part of the EMR, the potential for pressure on this
budget is quite significant if there isn't clarity about how all
this is going to work.
Q230 Laura Sandys (South Thanet)
(Con): One of the things that we have heard from many of the people
giving evidence is the importance of breaking the monopoly of
the six big generators. Do you feel that the EMR allows greater
openness for the market? What are the barriers that the EMR still
does not address? What exact levels of investment do you feel
that your companies can be making in the next 10 years? Have we
got the framework to, in some ways, break the market open for
companies like yourselves?
Christina Grumstrup Sorensen:
As I started by saying, the market liquidity issue is not addressed
as directly as we would have hoped for in the energy market reform.
If we go for a feed-in tariff, it is difficult to see exactly
how this index price would be framed. At best, you would have
an intransparent price that you would then need to top up to make
the feed-in tariff level. In the worst case, there could be room
for price speculation. So we are very worried about the contract
for difference, especially with an illiquid electricity market.
Robert Cross: It is not clear
from the EMR consultation what the structure of the market will
be in 2020 or 2030. You could have a situation where a significant
proportion of the market is on some kind of contract for difference
or on some capacity payment for balance and generation. I think
they all in themselves will have an impact on the incentives for
the generators and how they operate on a day to day basis, and
I don't think that is very clearly thought out in the consultation
and how it will affect those of us that are looking to be in the
market as part of our investment programme.
Joan MacNaughton: I agree with
that. I would add that transparency is really important here.
In principle, with the kind of market we have at the moment with
six big players, that shouldn't be uncompetitive. In principle,
that is capable of being competitive and there are various studies
that suggest it is pretty competitive, but more transparency would
help, and it would help with liquidity. That comes back to the
point that we've got to have coherence between these proposals
and the liquidity review from Ofgem and the carbon price support
mechanism review from the Treasury. There are all these different
moving parts and they seem to be being handled somewhat separately
but need to be brought together. We need to have visibility of
how they are going to be brought together pretty quickly.
On the question of implementation, a timetable problem is already
emerging. Given that the time scale for any project is so long,
and the 2020 targets are so demanding, how late do you think we
can agree the outcome of this consultation and still hope to attract
the necessary investment in time to achieve our targets?
Joan MacNaughton: The later you
leave it, the longer the hiatus in investment, and some of that
investment will then occur elsewhere. We are in competition for
that investment with other countries, because the investment goes
wherever there is a good project with a good risk/reward profile.
So I would put it the other way and ask, how soon can we do it?can
we deal with this as a time-driven project in order to ensure
that we do hit the decarbonisation targets that we all think are
I do have concerns about the "taking one
issue and then taking another issue" kind of approach. That
has been very evident in relation to the CCS projects, which are
taking far too long to bring through to award of contracts. Yet,
they could makethey will have to makean important
contribution by the time we get to 2030, but if they are going
to do it in 2030, you have to be rolling them out in 2020. That
means you really ought to be thinking of starting the demos as
soon as possible. That is one example of where you are not taking
it as a critical-path-driven project but you are doing your consultation,
your award process and everything else in sequence, so you are
doing everything in sequence rather than driving it down a critical
Christina Grumstrup Sorensen:
I think from an offshore wind perspective, in the system we have
right now, we give evidence 3 years in advance of the current
system running out in April 2014, so in April 2011 there should
come out a new level for the ROC in 2014, so that time frame is
okay3 to 5 years. That is also why we don't see an issue
in having a staged approach, in having not to fix all 5 initiatives
at once. It's good that we know that all 5 initiatives will be
in place, but we could move ahead with the market liquidity first,
and some of the other areas, and then move further with the feed-in
tariff once we have comfort in the market liquidity area.
Adrian Haworth: Some of the initiativesfor
instance, the capacity mechanismwill be required as a consequence
of other policies being successful; if the other policies are
not successful, you will not need a capacity remuneration. Therefore,
there obviously needs to be a concentration on the matters at
hand that are important right now, and resources should not be
deployed on policy that is not required right now. We don't believe
that the capacity mechanism is required right now and we don't
know whether that should be more focused on the supply side or
the demand side. We don't know how fast the demand side will be
taken up, and we don't understand exactly how much wind will be
deployed or what the profile will look like that will need support
from capacity mechanisms. Clearly, sorting out the FIT system
is the most important for us right now, from a supplier's point
of view, to make our investment plans.
Joan MacNaughton: I largely agree
with what both colleagues have just said. I think the worry would
be that if you have a potential capacity mechanismyou know
it will happen, but you don't know when or how it will workthat
in itself may stall some investment. You could argue that the
capacity mechanism and the emissions performance standard do not
add much to the package at the moment, but if they are always
about to happenon the shelf, about to be pulled offand
you don't know what shape they will be or when they will be brought
off the shelf, it will have a dampening effect on investors' decisions.
Having said that, I absolutely agree that one of the constraints
here is the policy resource to get all the rather complex and
difficult issues to the point where they need to be as quickly
as they need, to be delivered.
Q232 Chair: Given the risk
to which you referred of investment simply going elsewhere, which
is perhaps compounded by a less regulatory regime in some parts
of the world, higher growth economies and so on, I feel that there
is a touch of complacency in much of the discussion here. I know
we've got to get all this sorted out and it's very important to
get it right, so would it be helpful to have an early indication
from the Government on some of these points, even before the consultation
is complete, so that some of the uncertainties could be removed?
Robert Cross: I think that while
it may be useful, it is also important to ensure that a sufficient
impact assessment is undertaken of the changes being made, because
the changes create quite a different structure in the electricity
market, and those consequences ripple out to other markets as
well. I don't think that any early indications or commitments
channelling the direction of policy should be at the expense of
thoroughly understanding the wider implications of the market
as it is changing. There are obviously markets that supply the
electricity market, which will be impacted by the structure going
forward, particularly the gas market.
Q233 Chair: There is particular
sensitivity about the transfer from ROCs to FITs, where there
appear to be particular concerns. Do you want to say more about
that? I know that DONG particularly expressed views on that.
Joan MacNaughton: I just want
to pick up on your question, if I may? Because this policy has
so many risks and requires so much information that needs to be
managed, maybe one needs a highly iterative process. Some visibility
of some decisions on the consultation ahead of the White Paper
could be quite good for testing some of the conclusions before
the White Paper stage of what has been quite a traditional consultation
Christina Grumstrup Sorensen:
On the transition from the ROCs to the FITs, we have no problem
working with the FIT system; we work with it in other markets
and are quite comfortable with it. The prerequisite is that market
liquidity is working well. The energy market reform document sets
out that ROCs will be extended until 2017. As I said before, we
need clarity three to five years in advance, so that there is
time to work through all the devilish detail to ensure that all
the incentives put in place are working effectively and coherently,
and supporting the objectives and aims that I set out.
Q234 Dr Whitehead: May I return
to capacity mechanisms? You have mentioned that there is a potential
problem of, as it were, a looming capacity mechanism not being
there, but perhaps being there somewhere in the future. Because
we can't determine exactly what the future will look like, a looming
capacity mechanism may be the best we will get. On the other hand,
in terms of the various directives and so on, we know that a lot
of plant is closing. Therefore, we can't replicate in an automatic
capacity mechanism the way that the market has previously pushed
certain plants aside, and they then provide the back-up capacity.
Do you think that what the Government are putting
forward about capacity mechanism is perhaps as good as it needs
to be, in terms of indicating that there will be a need for capacity
mechanism to keep the total amount of capacity available, and
that that, therefore, should be put centrally into the system
for the future?
Robert Cross: If I may answer
first, with the capacity mechanism, we think it's good to recognise
that you need to have that balancing power available to the market
when you are going to have, potentially, a great deal of intermittency
on the grid. What we see as one of the concerns is that although
that gives you the generating unit sitting there ready, the question
remains as to where the fuel for that generating unit comes from.
If you have the significant amount of balancing capacity required
to suddenly switch on and then support intermittent load, that
is likely to be gas-fired generation, which is the flexible supply
source. You then have to find that gas in the system to suddenly
meet that generation capacity. What the capacity mechanism doesn't
do is send that additional signal further upstream to where those
supplies need to come from at short noticeeither storage,
or imports, or LNG, or whatever.
Adrian Haworth: It doesn't seem
to be clear exactly what the capacity mechanism is yet. The market
is already handling the situation quite well, and given some adaptation,
there could be a mix between new potential peaking capacity, if
it's required, or investment in the existing plant to make it
fit for purpose as it changes its back-up role for renewables
to demand-side measures that may be just as strong as supply-side
measures. It is not clear yet what is required, and I'm not sure
that anything in the document specifies what, in fact, the Government
wish to drive forward. I am not sure that we know what is going
to be necessary or what will be the best solution moving forward.
Certainly, demand side is not very clear, but it is potentially
very strong. The major concern for an investor would be the potential
to subsidise peaking capacity and new peak capacity in the future
that would threaten existing assets. I think that is what the
lady from Alstom was alluding to.
Joan MacNaughton: Could I add
to the comment that Robert made? There is one particular risk
that hasn't clearly surfaced, although it is there if you read
carefully; a lot of coal is going to retire, and there is a clear
intention that there should be no new investment in unabated coal,
which is perfectly understandable. But coal plays an important
role at the moment, and the question is whether you are going
to have coal with CCS, and gas with CCS in due course, as part
of your overall mix. Coal plays a particularly important role
in the winter, when gas prices are high, which is when you see
it providing quite a lot of our generation. That is when it becomes
a very important hedge against gas price volatility. It is an
important hedge for the country, rather than necessarily for an
individual generator, because generators will hedge on their gas
I think some thought needs to be given as to
whether there are enough incentives to invest in coal plant, when
there is a clear signal that we are going to drive forward with
CCS and allow coal with CCS to play a role in the system, as well
as the very large proportion of renewables which we are legally
required to do, the nuclear projects to which we aspire, and a
lot of flexible gas. That would be a truly diversified portfolio,
but as currently constructed I think the combination of these
measures risks driving coal out of the system, or at least driving
it to quite a small level and making us much more vulnerable in
the winter. It takes away that intrinsic hedge against gas price
Q235 Dr Whitehead: What do
you make of the so-called "slippery slope scenario",
whereby if you have a capacity mechanism which is plant based,
more or less, then the logic may look as though you do not invest
in new plant outside that capacity mechanism, so that as the capacity
mechanism unfolds, it comes to encompass all investment over a
period of time, and therefore rather overthrows its own purpose.
Do you think that is a realistic possible scenario for a capacity
mechanism, or are there ways to avoid that? Are there other examples
that may have occurred elsewhere? Robert Cross:
It depends on the detailed design of the capacity mechanism, which
is not apparent as yet. But it is a possibility that you have,
as I said at the beginning, a significant proportion of your generation
on some form of support, be it the contractual difference or the
capacity payment. I think that what that does is leave you in
a situation where the market for providing generation is very
much altered, and it is difficult to see how you would fit unsupported
generation in that mixture. I think it is certainly a potential,
but it is difficult to say exactly without having more detail
about the capacity payment mechanism.
Q236 Dr Whitehead: Is that
view held by everybody?
Joan MacNaughton: I agree. I do
not think that we have seen examples of where capacity mechanisms
are confined to very specific circumstances. I agree with what
Rob has said.
Q237 Ian Lavery: You mentioned
the coal and carbon capture and storage and the need to look at
the energy mix in the future. How critical in your view is coal
and carbon capture and storage in the future energy mix of the
country? Joan MacNaughton: I think it is critical.
If you look at the Government's 2015 road maps, it is envisaged
that there is going to be a lot of fossil fuel generationgas
and coaland that you therefore need to develop CCS. The
International Energy Agency says that if you attempt globally
to get to 2050 without applying CCS to power generation, then
it will cost you 70% more than with CCS. That is not specifically
a coal point. But if CCS works I cannot see why you should not
be applying it to coal equally as to gas. In fact, given that
coal reserves are highly abundantthey are well diversified
across stable countries as well as in some less stable parts of
the worldI do not see why you would deny yourself use of
that resource. Indeed we know that there are a lot of countries
that are not going to deny themselves access to that resource.
This is going to happen globally, and I cannot see why the UK
would choose not to take advantage of that particular technology
and fuel mix if that is really what is going to happen globally.
Robert Cross: One of the issues I would see
with coal particularly is that whereas there is an issue with
the transition aspect of it, from the older plant to the new abated
volumes, the difference with gas is that you can still make a
lot of your contribution towards meeting your carbon reduction
targets by unabated gas to which you can then apply CCS. Whether
there is enough in terms of developing both of those together
after 2030 depends on what happens in between.
Q238 Dr Whitehead: On capacity
mechanisms and plants, the assumption that a number of people
have been making is that any capacity mechanism, looming or otherwise,
would be plant-based. That is effectively underpinning new plants,
for example to replace standby oil plants as they have gone out
of commission. There have been a number of suggestions that a
substantial element of the capacity mechanism might consist of
non-plant-based measures such as storage and substantially increased
use of interconnectorsassuming there is something on the
other end of the interconnector when you are connecting. Indeed,
suggestions have been made that new players might be able to come
into the market to aggregate demand-side measures, which then
effectively operate as capacity mechanisms and could actually
come into the capacity mechanism itself. Have you thought about
those particular suggestions in your companies and organisations?
Do you think that they could play a role in what may turn out
to be how the capacity mechanism works?
Christina Grumstrup Sorensen:
We certainly believe that all of these levers must be applied
in the future electricity system, as they are also in other markets.
Some of the means are not yet fully developed on the demand-side
management and we should really embrace this opportunity to develop
these things. We will not be able to know exactly what will be
available 10 years from now, so solving it on a 10, 20 or 30-year
horizon with all of these mechanisms not at hand right now could
Adrian Haworth: I would absolutely
echo that. Some of you have visited GE's Smart Grid Centre in
Bracknell, which we are very proud of. I think we see a really
strong future for demand side. We don't really know; it is an
evolution, but the UK is one of the world's leaders in this evolution.
We think there is very big potential on the demand side but we
can't quantify it yet, so it would be very difficult now to try
to define where we will be in 20 or 30 years when we are really
stepping out into the unknown at the moment. Definitely there
is supply-side opportunity. There is so much interest in storage
mechanisms right now that that would also be very interesting.
On interconnectors, and on supply side and various ways of making
that supply side responsive to what the needs will be in the futurewhich
again is somewhat unclearwe think setting a rule now for
what the capacity mechanism will be is premature.
Joan MacNaughton: May I add two
points? First, more connectivity definitely reduces risk and helps
with cost, but one needs to be a little bit careful that we don't
interconnect to take a lot of high-carbon generation from other
places. That's slightly self-defeating in terms of the goals of
The second point is on efficiency: how effectively
you manage your dispatch, your management of your power generation
assets, efficiency at the supply side, the whole transmission
piece and demand-side response driven by smart meters, among other
things. All of those are important. We have begun to move down
the road on smart meters, but I think we need a coherent approach
to the whole smart power piece, involving the storage, the dispatch,
managing the intermittency, managing the likelihood of intermittency
with different weather patterns very close to time and managing
the transmission losses. Those technologies are beginning to emerge,
and what we need to do is think about just how we incentivise
getting them all in place. That's another important interaction
with the current proposals and one that Ofgem has under its purview
in the RIIO proposals, which I think in principle are quite promising.
Q239 Dr Whitehead: That suggests
that you might take the view that in terms of existing EMR consultation
and what we know the pillars will look like, demand-side measures
are perhaps not as present as they might beor at least
the co-ordination of demand-side measures to balance the overall
market mechanisms. Is that your view or do you think that what
is in the EMR at the moment, and the development of the various
measures on grid-smartening and smart meters and so on, will do
Joan MacNaughton: I come back
to my initial answer. It is quite difficult to tell. It depends
on how you design some of these individual instruments. They contain
the potential for getting hold of some of the demand-side response,
for allowing some of the new models of how you manage these issues
to emerge, but it is not exactly clear how and at what pace that
Adrian Haworth: Right now I think
the system works with the STOR (Short Term Operating Reserve)
arrangements and other arrangements with the grid. We are not
clear why an extension of that right now would not leave a level-playing
field for these technologies to compete and sort themselves out.
I am not sure that they need interference right now. I think people
were looking to 20 years hence and a very spiky supply curve and
thinking that we need to do something. But we are not there yet
and we don't understand what it will look like in the future.
So right now I think that enhancements to the grid's operating
mechanism will suffice.
Q240 Chair: You mention the
need to avoid interconnecting to sources that are high-carbon,
but in practice there is no way of controlling that, is there?
Okay, if we interconnect to France at the moment all that is nuclear,
but if we interconnect somewhere else and they decide to have
a lot of high-carbon generating capacity, we are stuck with that,
Joan MacNaughton: Yes; you can't
label the electrons. But if you are going to factor in a certain
proportion of interconnection you can be very conscious of what
you are doing to your mix by implication. So, I come back to transparency
and being very clear about what it is you are trying to achieve
and what the impacts of your measures will be.
Q241 Chair: I can see that
interconnection might be beneficial in terms of security and price,
but it couldn't be a sure-fire way of guaranteeing progress towards
Robert Cross: One of the things
that becomes apparent with the carbon price support is that you
can cover generation of carbon within the UK but when you have
interconnection, you can't apply the same rules to the electricity
that is brought in. That is one the problems that we see with
Q242 Laura Sandys: I am just
trying to turn it around a bit. Is there any way in which one
could incentivise the capacity issue to penalise companies in
distribution if they have to access additional capacity? In many
ways one is putting the emphasis on the demand side and pushing
companies and generators to look at better management and to incentivise
them to ensure that consumers are managing energy more effectively.
Instead of paying extra for this capacity, could we penalise for
the need for extra capacity?
Adrian Haworth: I think the market
does that now. To a certain extent the pricing in the market already
addresses that issue. Peak-time electricity is more expensive
than non-peak-time, and it is in the interests
Q243 Laura Sandys: But the
consumer ends up paying for it.
Adrian Haworth: Yes, but
Q244 Laura Sandys: Whether
one relays it on to the generator or not.
Adrian Haworth: This is all part
of the smart grid evolution. Part of the idea of the smart grid
is to solve the problem that you are addressing. If you are paying
real-time prices for electricity, you will modify behaviour. That
is the theory. I am not sure that that is the whole goal here.
It may not be the householder himself, but maybe a co-operative
of householders, or however it evolves, will manage the demand
side based upon pricing. That is the ultimate goal.
Q245 Laura Sandys: Let me
continue on the different subject of international comparators
and international investment models. Are there markets out there
that are more attractive for investment? What elements of the
market regulation do you find particularly appealing, or offer
you longer-term opportunities in different areas that we could
Adrian Haworth: From a supplier's
standpoint, we are obviously driven by customers. We don't self-develop
generallywe are not a utility, we supply equipment to utilities
and other independents. We are where the markets are moving the
quickest, so clearly a market that has defined the way it wants
to go and is attracting investment is where suppliers will focus
In the UK, we see that offshore has everything
we need for a supplier baseit has the skill set, it has
the training, it has the ports, it has the continental shelf,
it has the windit has everything you need to lead, but
if there was activity elsewhere that was going to happen sooner,
it would be attractive to us to play in that market first. We
all want to get experience and we all want to be early in the
market, which is why time is so important. The UK has all the
ingredients, but if other markets are moving for other reasonswhether
that is due to feed-in tariffs or other mechanismsand are
more attractive to the people buying our equipment, then we will
follow them. That is just the way that our shareholders drive
Joan MacNaughton: I agree with
that; I would just mention the importance of consistency and predictability.
Traditionally we have had a very clear regimevery market-oriented
although it has always been regulatedand people have had
confidence in the stability of the regulatory framework. We have
had some very large investments in infrastructure over recent
years, and in plant we don't have a problem with reserve margin
at the moment. If investors feel that they have a predictable
and stable regime and there is a consistency of principle then
they will be drawn to invest. You have a problem if you are chopping
and changing every few yearstrying this, you don't think
it works, trying that, you don't think it worksso it is
important that we understand the principles and criteria that
will underlie some of these mechanisms, and important to know
that they will persist.
Q246 Laura Sandys: What other
markets would you say are at the top of your list for investment
due to their regulatory framework and management of the electricity
market? What could we learn from them?
Joan MacNaughton: Again, we are
a supplier and it's down to customers, so I agree with Adrian.
Actually, I think the UK has traditionally been a very strong
market from that perspective.
Christina Grumstrup Sorensen:
From a generator's point of view, we have invested heavily in
the UK in the past two yearsoffshore wind farms in Gunfleet
Sands, Walney and London Array, where we are majority owners.
We have done that because we have confidence in the UK regulatory
framework. I very much agree that rocking the boat should be done
with great care and implemented in a good way. I think the industry
now needs stability, predictability and a long-term planning horizon.
That is why we argue so heavily against the auctioning process,
because that will be a major step back in the long-term planning
of offshore and will not serve the aim of bringing down costs,
bringing in new investors who have not been in the offshore industry
before, or developing a supply chain.
Robert Cross: To echo those points,
Statoil have chosen the UK as a market to invest in already, and
I think that is reflective of the support mechanisms that are
currently in place being sufficient for those projects. I think
it is important that future support mechanisms retain some of
that auctionality for investors to be able to manage their needs
in exposure to the market. The current renewables obligation gives
you a bit of certainty and a bit of market exposure, whereas some
of the other mechanisms that are proposed in the EMR might not
give you that same flexibility.
Q247 Albert Owen: Sticking
with the point that was raised by the Chair about integration
with Europe and the interconnectors, how much interconnection
do you think the UK will have from neighbouring Europe? Do you
think that brings associated risks with it? What is the balance?
At the moment, it is very low; we just have the nuclear coming
in and the Irish connection. How do you see the market developing?
Does that pose risks for the United Kingdom?
Joan MacNaughton: I would just
repeat that I think, in principle, more interconnection will reduce
risk rather than increase it, because you have more choices about
how to manage your supply and demand balance. Peak demand is at
different times. You will have intermittency factors operating
in different ways at different times. If you add together the
large nuclear component that is France and even the storage from
hydro that you get from the Nordic countries, you have, in principle,
a very diverse mix. At the moment I cannot, therefore, see reasons
why it would necessarily add to the riskassuming that it
is built to all the right standards, which we do.
Adrian Haworth: Clearly, more
interconnection would help the renewables build out, but I think
there is a limit to how much you can get in any case. So I don't
see that we're going to be wheeling power in from China to the
UK. Once you get to a certain point, you start merging peaks,
so there's really not much point in having an interconnection.
It is limited, and I don't think it's a threat to the UK. It can
only be an enhancement to the UK situation.
Robert Cross: I think it will
improve security. The other thing that you have to look at is
that there is a European framework within which the UK electricity
market operates, which is meant to be driving us towards a single
European market. The structure of that market will be important
in determining power prices in the UK.
Q248 Albert Owen: So if we
get that harmonisation, will some of the issues that we have been
discussing as a Committee, such as emissions performance standards
and raising the cost of British electricity, provide some sort
of risk that people will be buying cheaper and maybe dirtier electricity
Robert Cross: I think that is
why the policies have to be aligned with those of other countries
and why there has to be an effort, on a European level, to make
sure that countries are trying to move towards the same goals
and objectives in the same way.
Q249 Albert Owen: What would
be your advice to the Government on EPS?
Robert Cross: From Statoil's perspective,
we replied to your emissions performance standards consultation
and said that we didn't think it was a necessary tool at present
and that it may, in fact, draw resources away from investment
in things such as CCS, because it basically stops you from investing.
It may be something that you want to introduce at a later date,
but it is almost as bad to have it hanging over the industry than
not having it there at all. We would probably not see it as the
Joan MacNaughton: Just on that
specific point, I can see a case for certain forms of EPS or for
an EPS that is, as your report on emissions performance standards
set out, surrounded by an appropriate package of measures to incentivise
CCS. I don't think that the current proposal actually does that,
and I don't think that it is going to drive CCS. In fact, it will
drive a lot of unabated gasgrandfathered under the current
detail of the proposalswhich means that you're going to
have higher emissions in the late 2020s than you would without
it. So I don't think that the current EPS proposal is either right
in itself or necessarily surrounded by the right package of measures.
I think it is quite a risky proposal.
Adrian Haworth: We don't have
any comments. We don't think that it's a major piece of the current
legislative effort, and it is not necessary at the moment.
Chair: Thank you for your help. I am
sure we will be in touch again.
1 Note from the witness:
"such as the ROC Banding Review, grid connection and