Electricity Market Reform - Energy and Climate Change Contents

Examination of Witnesses (Questions 250-286)


15 FEBRUARY 2011

  Q250  Chair: Good morning. Thank you very much for coming in. I think you probably heard most of the earlier discussions.

  We have a situation where the Committee on Climate Change has recommended that the carbon intensity of electricity needs to fall from its present level of about 500 grams per kWh to 50 by 2030. DECC's modelling for the EMR consultation document is based on achieving 100 grams per kWh by 2030. How much more difficult would it be to get down to the CCC figure of 50 than just to go for the DECC figure of 100?

  Mark Ripley: Getting down to 50 requires more radical solutions. We have been talking about decarbonising the current power market in terms of 2020, but in fact you need a step change with what you are doing with electricity to get to the 50 level, which means you need to have electrification of vehicles on a large scale, and you need to have an overall improvement in energy efficiency with a drive to more efficient lighting—LEDs, that sort of thing. You also need a very broad church of generation: you do need nuclear and renewables, but you also need CCS as part of that. It is big solutions for getting down to 50 for 2050, rather than the steps you need to take to decarbonise the current market.

  Jeff Chapman: It probably means that we will have to a lot of biomass co-firing with CCS, so that we can operate open-cycle gas turbines for peak lopping, and compensate for that as well as the inevitable residual CO2 emissions from fossil fuel with CCS. We can do that: we know we can burn biomass and we know we can capture CO2, so we can do biomass with CCS and that will shift the average downwards considerably.

  Tony Glover: Obviously it is an incredible challenge just to 2020, but to 2050, we are talking about a major challenge, as many of your witnesses have been saying. Another key area will be along the lines referred to in the previous session, about the role that demand-side management will have to play. Mark referred to efficiency measures, but in the next 20 to 30 years, we have to change fundamentally not only the way we use our energy, but the way we manage it and the way the network operates. We will no doubt come on to it later, but the idea of a virtual power plant as almost an alternative generation source is going to be crucial in terms of aggregating locally generated energy.

  Q251  Chair: What does all this mean for consumer prices?

  Tony Glover: From a consumer point of view, there are some major opportunities—for instance, with the development of smart grid and demand-side management. We are looking at major investments, but we can reduce the level of those investments if we manage that process effectively. Ofgem has talked about a £32 billion investment in the networks over the next 40 years, but we at Energy Networks Association are working with Imperial college and others on ways of reducing the level of network development that will be needed and on how demand-side management may reduce the level of cost to the public while meeting low-carbon targets.

  Mark Ripley: Building on that point, I agree with Tony. Unless you have the control structures in place, costs will go up. If, for example, we were in a world in which there was large scale electrification of vehicles and people just plugged them in when they got home from work, all you would be doing is increasing the peak and increasing the need for generation capacity. You need the smart grids and smart metering technologies to enable time-of-use tariffs and to be able to use energy at the right times to minimise your overall peak and to drive down costs in terms of plant availability.

  Jeff Chapman: When we get to 2030 and we've achieved 100 grams C02 per kWh or 50 grams C02 per kWh, the consumer will really need to know what that is costing. Openness and transparency will be very important, not only about the costs of generating clean power, but the cost of providing back-up support for intermittent supplies. We will be providing the consumer with a higher added value product—in other words, electricity without emissions—but we need to be absolutely clear that that will cost more, not only because it is carbon-free, but because of the need to deal flexibly with the supply.

  Q252  Chair: Looking at gas and at gas prices in particular. DECC has made some assumptions about gas prices, but supposing that we discover that shale gas is recoverable and usable without difficulty and without damaging anything else and, therefore, gas prices are much lower, does that undermine the whole set of assumptions? Will it be much harder to get investment in low-carbon capacity?

  Tony Glover: Yes, at Energy Networks Association, we commissioned research. We are not a gas organisation as such, but our members are network operators in both gas and electricity, so they have an interest in that infrastructure—to which, I might add, we are connecting 100,000 new customers a year. Lots more people want to be connected to gas. We are renewing the network in a multibillion pound programme of which we're all aware out on the streets to replace cast iron with plastic. This is a very big infrastructure and probably one of the most comprehensive gas networks in the world.

  We commissioned research from Redpoint Energy, which has been doing a lot of work with Ofgem and DECC. The research paper looks at the future role of gas, and in certain scenarios we could be looking at up to £700 billion of savings over the next 40 years while meeting the low-carbon targets, where gas will play a role. That points towards there being a role for gas in future while meeting the low-carbon targets. We could be looking at £20,000 of savings per household over the next 40 years while meeting all of our other objectives.

  Mark Ripley: In simple terms, if the price of gas falls, gas generation becomes attractive from an economic point of view; you would therefore expect more people to build. The contract for difference would therefore play a greater role in underpinning renewable sources compared with the wholesale price. Gas would get you to the 2020 targets, and there are arguments that it is cheaper than some of the other options, but it won't get you to the 2050 target of 50 grams C02 per kWh. Although gas has a role in the long term transition, it would need to be abated gas rather than the combined cycle gas turbines as we know them today.

  Q253  Chair: If we had lots of cheap gas, I would question whether we would electrify heating. If you as a consumer can buy your gas very cheaply and conveniently, why would you switch to electricity? Yet both the Committee on Climate Change and DECC assume that the electrification of heating will happen before 2030.

  Jeff Chapman: To achieve the 80% reduction target overall you would still need to provide heating by carbon-free means, and gas heating would obviously contribute to emissions. We at the CCSA are a bit agnostic about which form of fossil fuel to use—we are here to promote CCS—but we observe the fact that the current arrangements appear to work very much against coal and we are concerned that coal has been regarded in the past as a strategic part of our generation mix. Big piles of coal are the best possible energy store, and certainly the cheapest possible energy store when you compare it with, let's say, underground gas storage. We may well be missing a trick if we vest all our faith in cheap gas, which might not quite deliver.

  Q254  Ian Lavery: Looking at the network impacts, the investment in the upgrade of the energy market is estimated at more than £200 billion—that is Ofgem's estimate. Of that £200 billion, I think £32 billion needs to be in the energy networks themselves. How will electricity networks need to change to enable the transition to a lower-carbon energy-secure system?

  Mark Ripley: We've talked about smart grids and smart metering in terms of grids that are able to facilitate two-way communication for time-of-use tariffs, which enables us to access more of the demand side. We will need to invest; National Grid has a £20 billion investment programme outlined, largely in the electricity transmission system in Great Britain to keep it fit for purpose for a change in generation mix.

  Tony Glover: Massive investment is required at transmission network level—National Grid level—but there will also be a lot of work at the distribution network, local level, involving the regional companies. Traditionally, the network at local level has been passive—it's been one-way, rather like the wiring system in your home—so it is not being managed actively. That clearly is going to have to change. There is the idea of what is called a distribution system operator managing that local network in an active way, and distribution network operators playing a very different role to the one they currently play in order both to manage the microgeneration and to ensure that increasing penetration of things like electric vehicles and heat do not have an adverse impact on the network. This is clearly a very big challenge. The previous Government and this Government and Ofgem have been developing the low-carbon networks fund, which is a fund to provide up to £500 million-worth of investment in basically thinking about projects that will make the network able to manage this process more effectively. We strongly welcome that; we think it is a very valuable thing and at ENA we're co-ordinating the various projects that distribution network operators are undertaking. One of the really good things that have come out of this process—something Ofgem has recognised—is that this is a very collaborative approach, with distribution operators working with others in the renewable heat sector and the electric vehicles sector. It is a very collaborative process, but there is a lot of work to be done.

  Jeff Chapman: Transmission networks were put in place to get the power from where it was generated to where it was required. Historically, a lot of power was generated in places like South Yorkshire because there was a lot of coal there—"coal by wires" would be an expression. In the world of CCS, another factor will come into play: we will want to ensure that we build fossil fuel power plants close to the shoreline to get the CO2 quickly offshore and inject it into reservoirs under the North sea and the Irish sea. Largely, that probably maps on to existing arrangements, but we will have to bear in mind that CCS in future will bring about this change—well, it may not be a change of requirements too much, but there will be a demand for putting power stations on the shoreline.

  Q255  Ian Lavery: An awful lot of new capacity is required for the future. Is £32 billion enough?

  Mark Ripley: It might be. Ofgem presented a series of ranges in its discovery document. You can come up with scenarios that would involve spending more than that, and you could come up with scenarios that would involve spending less than that. By way of example, a lot of investment is required in offshore wind subsea infrastructure. We have done analysis that said that if you had possibly a more integrated approach where you created subsea motorways which linked into the offshore wind, rather than a multiplicity of connection points coming inshore, it would save something like £4 billion to £5 billion and would probably obviate a number of difficult planning issues.

  Tony Glover: One of the important things to remember is that in terms of the customer's bill, the network component is comparatively small. It is 17% to 18% of the average household bill—£60, £80 or whatever—so when we talk about the level of investment that is required in the networks to make the rest of the system operate more efficiently, we are looking at a proportion of something that is not gigantic in the general scheme of things. To be quite frank with you, we get very good value for money from our networks in terms of their efficiency and the service that is provided. Yes, there will be an increase in what the public have to pay, but in the grand scheme of things it is very good value.

  Mark Ripley: May I echo a point from the previous session, when one of the panel talked about the knock-on effect of gas, but from a supply perspective? If gas, as is largely predicted, will provide the substitutable power source for wind—wind being not as reliable as a resource due to the weather factors we all know about—then we may see a need for gas stations to come up and down relatively quickly, more than they have done so far. The national transmission system was built on the basis of largely UK continental shelf supplies flowing north to south with fairly flat deliveries. Over time it has evolved, but it will need to evolve further both to meet changing supply demand, with significant amounts of LNG coming into the south of the country now, and changing use in terms of CCGTs coming up at relatively short notice, perhaps in short periods of time.

  Q256  Albert Owen: You talked about the subsea network. How developed is that and how large are the savings it can make? As all three of you rightly said, we will now generate in non-traditional areas. Most of it is under the sea and there is offshore wind, obviously, and new nuclear on existing sites will have increased capacity. How advanced is that? Secondly, how much will it impact on household bills if there are subsea and underground networks as opposed to traditional pylons across land? It might be a lot of money for the actual infrastructure, but over a period of time, how much will that mean to the consumer in electricity prices?

  Mark Ripley: Subsea technology is relatively well established. We have subsea interconnectors in several places around the world. It is largely an efficiency point that we are making.

  Q257  Albert Owen: Who makes that decision?

  Mark Ripley: That is an Ofgem-driven model for offshore generation. I think there are a number of players in the market who are quite keen to have a debate about what is an efficient outcome. Some players will compare and contrast that with wanting to get on with it, which is a legitimate trade-off to make. Certainly we have done analysis to show that there are potentially significant savings in going to an integrated model, which would not necessarily have to be as you built it. Obviously, we would have an interest in that as a transmission company, but there is a sort of self-evidence about an integrated plan rather than a piecemeal plan.

  In terms of the onshore costs, you mentioned undergrounding, which typically costs somewhere between 12 and 17 times what it costs to overground. Those figures are reasonably well known. We operate under a regime where we are rightly incentivised to be efficient and economic in what we do, and while the transmission component could be argued to be relatively small, it's important that all components are looked at with a cost-management perspective to ensure the best result for the end consumer. As we have said, we would be happy to engage in a broader societal debate about overgrounding, but we work under the regime that we do.

  Q258  Albert Owen: Do you want to add to that, Tony? How much do you think it's going to cost the average household? You've got all these other simultaneous targets such as the capacity, as we have just talked about in the previous session, and the need to get the investment in. There are aesthetic reasons why people don't want pylons, but there is a practical element here, especially if you tell people in advance.

  I was a bit concerned when you said that you're having a debate. Really, we should be getting on with it, shouldn't we, rather than having a debate about this? The consumer should be all the wiser knowing exactly the cost differences in putting it underground, and what that's going to cost on their bill for the next 30 or 40 years.

  Tony Glover: As I said, in terms of the component of the bill, that gives you an idea of the level of investment. This is still a smaller component of the bill than other aspects, and it's good value for money. Mark's referring to the whole issue of undergrounding, for instance, and quite clearly it's 17 times—

  Q259  Albert Owen: That is the initial cost.

  Tony Glover: Yes, that's the initial cost, which is incredible if you look at the kind of lengths that we're looking at. Rightly, Ofgem has delivered over the last 20 years a highly cost-efficient model for the industry, which is very efficient and able to deliver far more for far less. We're regulated very strongly, and quite rightly so. That's the way it should be.

  Undergrounding has to go through that rigorous process as well. Having said that, all our member companies at both the distribution and the transmission level are obviously working with people such as the AONBs, and there are now incentives through Ofgem for undergrounding in specific areas of outstanding natural beauty. Obviously, this is a sensitive area, but work is going on. It has to be justifiable, however, because we are looking at considerable increases in cost by undergrounding over very long distances.

  Q260  Albert Owen: So you can't tell me how much it's going to be overall?

  Tony Glover: I can't tell you exactly, no.

  Q261  Albert Owen: One more point, if I may. There doesn't seem to be much joined-up thinking here between gas and electricity. For instance, in west Wales they have had a fantastic project involving the undergrounding of a gas pipe there, and there is now talk of pylons, possibly, or another way of bringing electricity from the west coast of Wales across to large conurbations such as Cardiff.

  Why don't you all sit down together and say, "We could put a cable in here and we could put some broadband in to follow"? It's a serious issue that I'm raising here. Rather than having massive planning debates and so on in the future, if we're talking about the huge capacity that a colleague raised earlier surely we can have that sort of foresight so that disruption to the landscape can be kept to a minimum.

  Mark Ripley: While I'm not on the practical engineering side of the business any more—I'm long out of date in that aspect of it—there are some practical engineering safety considerations about running high-voltage cables and high-pressure gas pipes in very close proximity. While there is some scope to do that on a distribution level in a high street, in terms of a pipeline that's running at 94 by gauge, in the case of the south Wales pipeline, that brings its own particular engineering challenges.

  Q262  Albert Owen: So it's not practical?

  Mark Ripley: I believe that's the case, although it's not my actual area of expertise.

  Q263  Chair: I want to go back, Mr Glover, to what you were saying, which is the characteristic industry defence of its insistence on using 1950s technology for transmission rather than looking at something newer. That argument drives a complete coach and horses through the "polluter pays" principle, because overhead transmission lines pollute landscapes occupied by a small number of people in order to keep costs down for a vast number of other people who live somewhere else.

  In every other aspect of planning and decision making in relation to this industry, we accept that the polluter pays. If we want to put up a great big coal-fired power station next to a housing estate, you would expect to see some objections which we would pay attention to. Why do you think we abandon the "polluter pays" principle when we deal with overhead transmission lines?  Tony Glover: The reality is that everybody has to pay. That is the reality of this. The polluter is the public, in a sense, because it is the public who is getting the benefit of the network. Of course, work is going on—National Grid is working with the IET and looking at undergrounding, and at various technical options to improve the way that operates. To say that we are operating 1950s technology—we are actually looking at developing that technology—  Chair: Overhead transmission lines do not seem to have altered very much in the last 60 years.  Tony Glover: That's what I'm saying. There is work going on at the moment on this very point.   Chair: It's not going on very fast. There is no other aspect of this technology which is still using 1950s technology—no single other aspect. You are quite keen on these smart meters and smart grids and so on, which are actually more expensive than the old ones—but we do that for a purpose.   Tony Glover: We have been going through a period where there has been a real pressure on costs. The industry was privatised and a lot of work was done to reduce costs. But work is going on at the moment and I think it is fair to say that, right across the industry, nobody underestimates the importance of the impact of our infrastructure on the public. There is a lot of work on community engagement—

  Q264  Chair: Let's be clear. Your proposal is that the polluter should not pay in this instance. The extra costs of avoiding the pollution are not costs which you think the polluter should pay?  Tony Glover: I think they need to be quantified and I think that's probably a matter for the regulator.

  Q265  Chair: I'm asking about the principle. We can discuss the quantity afterwards. You are saying that the polluter should not pay the costs of avoiding the damage done to a certain number of people in very beautiful landscapes? Is the industry view that those costs should not be borne by the polluter?   Tony Glover: Certainly, but no, I think the principle is that the public will have to pay what is generally agreed to be the level of cost that people are prepared to pay to address this issue. But make no bones about it—when you say "the polluter", it is the public.   Chair: Yes, but you said the polluter pays. I'm saying that you are trying to justify your insistence on 1950s technology by saying that the extra costs should not be borne by the polluter.   Tony Glover: No, I'm saying that if the polluter, which is the public because it is done on their behalf, is to pay—if that is something that the Government and Ofgem feel should happen and that therefore a 17 times increase in expenditure on overhead lines should be paid by the public, then that will be the case. But that is not a matter for our industry. We are regulated and controlled in what we can spend and invest, so it is not something that is within our power. That is for the Government and for Ofgem.

  Q266  Ian Lavery: Getting back to the development of the new networks, do you believe that the Government need to set out explicit goals in relation to the development of the new networks in that connection which will facilitate EMR, or do you believe that possibly it should be left to Ofgem and the market?  Mark Ripley: I think we would resist any Government central planning in this area. The regulatory and legislative framework that we have had to date has by and large delivered the investments that we need. We have been involved in a number of offshore initiatives—the North Sea Countries Offshore Grid Initiative, Electricity Network Strategy Group—all looking at what is required. Investment is coming forward. I do not believe that a central planning approach in terms of grid infrastructure is necessary.   Ian Lavery: So what would you suggest—the Government or Ofgem and the market?   Mark Ripley: The market.

  Q267  Laura Sandys: Looking at the demand side, do you feel that the EMR really is creative and smart enough and creates the right incentives to look at the demand side in a much more fundamental way? Obviously, we have smart meters, grids and appliances, and there are also distribution networks. The Combined Heat and Power Association has said that there aren't enough incentives to look at new models of how we utilise energy.

  One other aspect, which is not in the EMR at all, is about how we help, work with and create a smarter consumer. Jeff was talking about lots of different mechanisms, and we need to ensure that there is the right environment transparency, which has been mentioned many times, as well as consumer information about what they are buying and at what cost. Do you feel that the EMR really covers the demand side enough?

  Jeff Chapman: The demand-side proposals in the EMR remind me very much of what industry used to have in the way of interruptible gas contracts. You could take out an interruptible gas contract and be interrupted for a number of days—I think it was up to 30 days in the year—but you bought your gas for a lower price, so there was an incentive to take out such a contract.

  In the electricity market, I think we can basically do the same thing. The corollary, of course, is that anybody who has an intermittent supply has a lower value of electricity, because that creates a problem. So, anybody who can be flexible should be rewarded, whether it is a consumer or a supplier, and anybody who is inflexible or intermittent should be penalised in some way.

  Mark Ripley: We use demand-side services now as the system operator of the GB electricity market. We have contracts with a number of demand-side players for curtailing demand for short-term operating reserve, which covers off things such as forecasting errors, or unexpected plant failures.

  We also have demand side for what's known as frequency response, which is the first reaction to a generator falling off the bars, and therefore we have to take demand off to maintain frequency. They have proved very successful in that market, but by their nature, those energy products operate for very short periods of time. It's not clear to us, with the current range of services that are available, that demand side could provide, if you like, alternative capacity to offset the wind not blowing.

  If you think about the first two weeks of December last year, we had a big blanket of cold weather without much wind. At the moment, it's not clear how demand would be able to step into that gap. That said, if we can develop in the future—as we have discussed—the smart measurement arrangements, smart grid arrangements and aggregator arrangements whereby peaks can be reduced, that will offset the need for capacity in the first place, which will be beneficial.

  Q268  Laura Sandys: But, I think in some ways you are talking about demand from a supplier's perspective. What about issues relating to consumption? Have we got the right levels of incentives? Do you see these new technologies actually changing behaviour? Of course, that is part of the equation because, otherwise, what we are looking at is just a huge increase in generation capacity, having to meet £200 billion in investment—and possibly more than that. If we don't look at it from the demand perspective—and I mean consumption, not generation—it is different.

  Mark Ripley: I agree, and that was the basis of my point earlier about the electrification of vehicles. Unless you have the time-of-use tariffs, all you do is add to the peak. You need to have innovative use of electricity for new purposes so that you manage that peak. That enables you, first, to use your wind generation at times when we traditionally haven't had high demands and secondly, to manage that peak down as well. You actually manage your need for generation, because you have a well managed use at the supply end. That requires technology in terms of measurement and communication.

  Tony Glover: To add to that, there are two issues, and I'll use the example of electric vehicles, because potentially we are looking at a very large demand. They are talking about 1,300 additional charging points in London in the next year or so for the Olympics. That is very small-scale at the moment, but it could have a massive impact. There are two ways of managing that: the first is to put in lots more local wire, and the second is to have a smart network and manage that process more effectively. We believe that it's absolutely crucial that, as we proceed on this incredible project of smart meter roll-out over the next few years, we actually ensure that that process, the design specification and the way in which those smart meters will operate are completely and utterly in line with, and will facilitate, a smart grid.

  Going back a few years, when smart meters were originally looked at, they were just seen as a means for the consumer to understand energy usage and to manage it accordingly, but they have the opportunity and the potential to be far more than that. At some point down the line, it is possible—and we at ENA are looking at this and working with suppliers—that smart meters, in conjunction with smart grids, could develop a very complex network of demand-side management measures with multiple tariffs. That will actually probably have to be managed by some sort of ESCO or some sort of programme that will be able to manage that process so that the public are able to get the most benefit out of it.

  Q269  Laura Sandys: But that really worries me, because what, in some ways, you are saying is that it is going to be an incredibly complex balancing system, and I, the consumer, am not going to be smart enough to be able to make the choices that I need to make to reduce my consumption—consumption at different times of the day, using different energy sources.

  If we are going to change behaviour and the demand and consumption of energy, we—the Government and the industry—are going to have to design it from the consumer's perspective. That means small businesses, not just households, and even medium-sized businesses. The complexity of this will merely create middlemen or wholesalers who will be packaging up and hedging the market itself.

  Jeff Chapman: But we ought to discriminate between short-term peaks and the flexibility needed to keep the power on all the time. If you lose a lot of supply through intermittency in the typical few days of the anticyclone in January, you must have a lot of capacity sitting by to be able to fill that gap. That problem will get worse and worse. No matter what we are talking about with demand-side management, that is not going to fill that problem. It might contribute to the tea-time peak, but it's not going fill those problems that exist over several days, rather than a couple of hours. We will be dependent on fossil fuels being flexible into the future—and, of course, they'll have to be equipped with CCS.

  In terms of the EMR, the capacity payment mechanism will be absolutely essential in that respect—not paying on capacity, but paying on flexibility. The word "availability" is touted and that is fine, but what we are really talking about is the flexibility to be able to deliver this. So there is a lot of devil in the detail of this mechanism. It hasn't been fully thought out yet, and it needs to pay for the flexibility of supply.

  Q270  Dr Whitehead: Jeff Chapman has said that a capacity mechanism is absolutely essential. Mark, you have said that, as far as National Grid is concerned, you are not convinced that a capacity payment system is necessary and that you might be able to deliver sufficient capacity through, in particular, sharpening imbalance payments, which sounds to me like continuing to whack supplies around the back of the head until they damn well go and build power stations. Is that how it works? How would you see that functioning as an alternative to what Jeff was mentioning?

  Mark Ripley: Yes, we're not persuaded that there is a need for a capacity mechanism. We have particular concerns about a targeted capacity mechanism, because it's a slippery slope. You would find that capacity that wasn't receiving a payment would either close or seek a payment, and, incrementally, you would end up with an across-the-board capacity payment. We did have a capacity energy split in the pool days where there were capacity payments and commodity payments, but we've been in an energy market for some time now.

  Imbalance prices provide signals to market players about what the cost of their not having sufficient generation capacity is causing. At the moment, the imbalance prices on electricity are damped. They are very much an average of a range of actions that we have taken, rather than a marginal price at one extreme.

  It is worth exploring whether a change in the imbalance arrangement would provide the right incentives on the supply market to ensure it has sufficient capacity available. In that way, you would leave the decision making on providing the right levels of capacity to the market, rather than a central focusing arrangement.

  Q271  Dr Whitehead: You say there might be an exploration, but presumably in order to suggest that you have already explored how the system might work in more detail for the national grid?

  Mark Ripley: We are supportive of more marginal imbalance prices to send the right signals to people of the consequence of their not having enough capacity available.

  Q272  Dr Whitehead: Concerns were also raised about how you might specify the required functionality of whatever capacity there is. Linking to your statement on imbalance payments, how do you see the functionality, particularly in terms of Jeff Chapman's points about the extent to which capacity measures might not be necessary just for peaking, but also for ensuring that an overall supply was available in a much more variable field? How would you see that specified functionality happening?

  Mark Ripley: We wouldn't want to prescribe what was required in terms of capacity availability because, as we have already discussed, there is a potential combination of generation availability and demand-side actions. Providing you send the signal to the market about the cost of capacity and availability, then market players—who will tell you that their business is risk-management—will be better placed than a centralised player to manage that risk and make sure they have sufficient capability available.

  Q273  Dr Whitehead: A thought for everyone. I mentioned this question in earlier exchanges: to what extent might a capacity mechanism be forged, not so much on the basis of standby plants, but on the basis of interconnection? You mentioned not only demand reduction, but storage capacity as well—is that something that could present an alternative model, or would it be something that might stand alongside a largely plant-based mechanism?

  Mark Ripley: I think it's complementary. To go back to my point on choosing how you meet this need, interconnection has a significant role to play. I think connection to Nordic countries for pump storage was mentioned earlier, but also if you connect to the broader European network you are diversifying the risk of the wind falling away. The wind not blowing in Great Britain might not mean the wind not blowing in mainland Europe, and likewise you have your peaks offset. So if the market arrangements are compatible—and we've touched on that as well—we should see a freer transfer of power to countries as it is required.

  Tony Glover: I think this was touched on in the earlier session, but the nature of the European market is being driven into a more liberalised approach, and we are encouraging that. Therefore, free flow and interconnection, as Mark says, can provide a serious contribution to our energy situation. Diversification is absolutely key to this, and I will come back to the point about electricity market reform, but we must bear in mind the important role that gas can continue to play, in terms of providing both a cost-effective and secure solution to some of our energy generation issues. When looking at electricity market reform one of the things that must be considered is the role that gas may play, particularly in relation to the fact that there may be numerous supplies which will impact on the cost. The public will begin to appreciate that fact, and that could have an impact on what energy sources they want, in terms of the choices they make and what is the most cost-effective solution.

  Jeff Chapman: I echo the caution of Joan MacNaughton earlier, that if you are going to call for electricity from the European pool, it may well be high-carbon electricity that you are pooling. To extend what she said, it is more likely to be high-carbon because it will be fossil fuel at the margin.

  Q274  Dr Whitehead: A related question that I want to ask is a simple one. If you have a substantially greater penetration of interconnection into the energy mix—both as a balance and I presume as a mechanism on some occasions to give basic output on days when our wind is not doing its ideal job—what level of interconnection might be reasonably feasible to look at? What percentage of the energy supply might be supplied by interconnection? Does that not lead to potential prisoner's dilemma outcomes for Europe in terms of overall supply? If everybody in Europe believes that they can have interconnection to their particular energy economy, no one puts anything at the end of their interconnector. Therefore, you have a problem collectively across Europe of having a capacity deficit that may have to be addressed by other means.

  Mark Ripley: In terms of percentages, I don't know, I would be speculating, and I would rather not. In terms of the prisoner's dilemma, if the markets are providing signals, people will face exposure to that imbalance. That is an incentive for building capacity. We are also talking in EMR about a packet of changes to provide incentives for low-carbon generation to build in this country. Therein lies the devil in the detail of getting the balance right on these interventions.

  You made a point earlier about carbon linkage, on how you set the carbon floor price. We are much of the view that the carbon floor price should do little more than create a stable platform, which the EU ETS scheme is set out to do, but hasn't delivered. Clearly, if there is a different price of carbon in European countries, that has an impact and is something that needs to be looked at, to try to make it work as it should have in the first place.

  Q275  Ian Lavery: In the session prior to this, we touched briefly on CCS and coal. Looking at CCS and coal together, what impact might that have on the EMR? In your submission, Mr Chapman, the CCSA said that the EMR would inhibit investment in clean coal. Will you explain why you think that could be the case?

  Jeff Chapman: Do you mind if I review the four pillars of the EMR? First, the FIT is the bit that is going to be doing the heavy lifting in this area. There is a particular problem with a FIT with a contract for difference, in terms of fossil fuel and CCS. While it is a very creditable mechanism—you get a guaranteed price for your carbon-free electricity—it isolates you from the fossil fuel market, so you are totally exposed to fuel market risk. We would recommend that the FIT, if it is a CfD FIT, should in some way be index-linked to fuel price. Obviously, this mechanism discriminates against coal, because coal is a much bigger proportion of the payment.

  I have talked about the capacity mechanism, which is very important. The carbon price support definitely discriminates against coal, because a coal-fired generator is going to pay more carbon price support, even on the residual emissions after the CCS. If we get everything else right, the EPS is pretty well unnecessary. I'm afraid that it discriminates against coal because the Government have committed to four demonstration projects while at the same time saying that they will bring in an EPS of 600. If you are not one of those four demonstration projects, you won't be building a new coal-fired power station, because you won't be getting the support for it. The same thing applies to the existing regime under which, basically, you cannot build a coal-fired power station without demonstrating 400 megawatts gross of CCS.

  Unfortunately, you have to compete in the area of CCS. In the past week nine projects have gone forward in a competition, which is incredible. It is absolutely marvellous that in the UK we have put nine projects forward, which probably equals the number of projects in the rest of the EU member states. But we will probably do only three of them, because out of the four we are committed to, one of them will likely be gas. So we will do only three coal projects at the most. That means that if you are not one of those three, you are not going to build a coal-fired power station, because you will be constrained by at least 600g per kWh, which would entail CCS. There is no mechanism in place at the moment to pay for that, unlike, of course, with the renewable obligation. As it stands at the moment if you want to develop a renewable plant—an offshore wind farm, or whatever—you know that you can get support for it; you don't know with CCS.

  Q276  Ian Lavery: If the electricity market reforms, which you suggest are anti-coal in some way, did prevent the development of new coal-fired power stations, do you think it would impact on new development of CCS technologies?

  Jeff Chapman: Yes. It's very important that, as Joan MacNaughton said earlier, we get CCS projects under way as quickly possible, show the rest of the world that we can do it and get out there and do some exporting. The EMR, taken as a package, is a mechanism that is focused on business as usual for mature technologies. Well, CCS is not mature and is not business as usual. It has a lot of first-of-a-kind costs, which break down as the additional technology costs for being demonstration projects.

  The other element is the infrastructure, for which there is a huge first-of-a-kind cost. The Energy Act 2010 created a CCS levy that would have been an excellent mechanism for paying for first-of-a-kind costs over and above what the market would deliver, but, at the moment, that has been put on ice while the Government think about EMR. Fine, but we could have been getting on with it, and we can be getting on with it if we use the CCS levy for the purpose for which it was intended. If we don't do that, we will have to find another way of covering those first-of-a-kind costs. I would suggest that a good way to do that would be to use the guaranteed revenue that HMT will get from the auctioning of allowances plus the carbon price support mechanism.

  Q277  Ian Lavery: Thanks. The panel will be very familiar with the phrase "grandfathering". On the grandfathering of an EPS, do you think this approach is fairly risky? Do you think it would decrease the incentive to develop carbon capture and storage because, if it happens, there will not be any requirement to retrofit CCS in the future?

  Jeff Chapman: Yes. If you build a 600g per kWh coal-fired power plant now, you will be grandfathered for the rest of your life. There is no regulatory incentive to refit later. The incentive will have to come from the package of other measures—the financial incentive through the feed-in tariff—and we had better ensure that the latter works properly for fossil fuel and CCS, otherwise we will be left without fossil-fuel stations and without the ability to respond flexibly with low-carbon electricity as will be necessary in the future.

  Q278  Ian Lavery: I asked this question of someone in the previous panel: do you think coal has a crucial role to play, together with CCS, in the future energy mix of the country?

  Jeff Chapman: I think it's very important as a component of electricity supply to provide supply security.

  Mark Ripley: As you said at the start, to reach the 2050 targets, we will need a significant amount of CCS generation, which coal can play a part in alongside gas.

  Tony Glover: Just to add to that, as some of the gas network infrastructure becomes redundant over time—which it clearly will—that can also play a role, as can the expertise of that industry, in the CCS process, particularly in relation to coal.

  Q279  Dr Whitehead: I wanted briefly to explore the question of the fact that in EMR we have a form of feed-in tariff essentially to drive preferences to low-carbon generation. On the other hand, we have investment in CCS, which simply makes possible generation by, for example, coal-fired power stations. But it does not give them any incentive other than that: that is to say, they would operate without a FIT. Would you suggest that a logical extension of that would be, as you seemed to imply, Jeff, that there might need to be some form of feed-out tariff post-CCS to give some sort of certainty for CCS investment beyond pilot projects, for perhaps gas-fired power stations in the future, and indeed coal-fired power stations which otherwise would not be built in a post-CCS world?

  Jeff Chapman: I'm not sure I've come across a feed-out tariff.

  Q280  Dr Whitehead: I'm sorry, I was going to say I've just thought of it. But it does occur to me from what you are suggesting that under a number of circumstances some form of additional mechanism may be necessary to secure the place of non-fossil fuel mechanisms within an architecture which, as you and other witnesses have suggested, seems to drive them out.

  Jeff Chapman: I think so. Certainly to cover off this infrastructure issue, somehow a way has been found to finance the infrastructure demands of offshore wind, which we have talked about. We will have to find a way of financing the infrastructure needs of CCS in future. It will not come from just the demonstrations, because it is a local thing. If, for example, the four demonstrations turned out to be in Scotland and Humberside, you would not have provided any infrastructure for Thameside. In any event, at the moment, policy is not to provide any associated infrastructure that is sized for the future. That is a big thing that we really need to address. How did we get our sewerage system in place in the first place? Because that is what we are talking about: we want a sewerage system to dispose of CO2, and we need to find a way to finance that, which is not necessarily associated with CCS project-by-project.

  Q281  Chair: It's apparent, is it not, that to achieve the amount of generating capacity we need, we are going to continue to have some fossil-fuel element—coal and gas? It is also apparent that to get anywhere near the targets for emission reductions we cannot have unabated coal or gas. The Government tossed £1 billion on the table for the CCS experiment. How many bidders are there now?

  Jeff Chapman: Well, the previous Government, if I can remind you—

  Chair: Absolutely. A welcome reminder.

  Jeff Chapman: They created the CCS levy and attached a figure of £11 billion, which they estimated would be raised to finance the four projects over their lifetime. It is a pity that we have ended up with a headline figure of £1 billion coming out of general taxation, because that immediately pits CCS against schools, hospitals and general social expenditure. Wouldn't it be much better to say that fossil fuel power generators will pay a lot of money to the Treasury through the climate change levy—the carbon price support mechanism—and from the auctioning of allowances? The sum of these two things is a guaranteed income for the Treasury. The Treasury can predict what it will get.

  Q282  Chair: I don't disagree with that but let us put that one on side for the moment. My concern is this. We have agreed that we are going to burn fossil fuels and they can't be unabated. The first of these four experiments for which £1 billion, from whatever source, is available has resulted in a position where only one bidder was interested in doing it. Aren't we being incredibly complacent about the likelihood of carbon capture and storage being ready anywhere near in time to achieve the other goals? With all these incentives from the worldwide market for the first breakthrough in this area, the pessimism shown by the industry and the lack of enthusiasm are extremely striking. How on earth can we assume that we will have the technology to abate coal and gas generating capacity in time if there is so little interest in 2011 in doing the work?

  Jeff Chapman: The competition we had for the first project turned out to be a process of attrition rather than competition and took an awful lot longer and was a lot more difficult. You can understand that many large industrial organisations got bored with the process and have gone elsewhere. That has happened. At the same time, out of the bids for the so-called NER300 funding from Brussels, the UK has pitched up nine bids. There is no shortage of enthusiasm for CCS in the UK at all.

  Q283  Chair: Is there a project at Hatfield at the moment?

  Jeff Chapman: I understand that the administrator is keeping the project alive in the hope that someone will find it sufficiently attractive to pay some money to it.

  Q284  Chair: So, to summarise, we have only one bidder for the £1 billion available; we have considerable uncertainty about where the money will come from, notwithstanding your perfectly valid points about whether there will be any money to pay for the further experiments, assuming anyone is interested in them; and we have a busted project at Hatfield. That is the sum total of the UK's response to this vitally needed technology.

  Jeff Chapman: No. We have a further eight projects in addition to that one project that will bid for the extra three. The cost of bidding for these projects is enormous. If you have a one in three chance of getting funding for your project, that is enough to put an awful lot of investors off.

  Q285  Chair: But what is the basis of your optimism that there will be eight bids for these three projects? We don't know where the money is coming from for the three projects, when it will be available or precisely what the definition will be. The one project that we did have produced one bidder.

  Jeff Chapman: It produced nine bidders.

  Q286  Chair: They all bolted away. As soon as they had the details they said, "Oh, we can't be bothered."

  Jeff Chapman: No, that's not quite true. Four were selected from the long list of nine and out of the four, there ensued what I called a process of attrition. That is true. But it is true that that are nine projects. That is the number of projects that applied for funding through the NER mechanism. The NER mechanism will be closely linked to the UK demonstration programme, obviously, because it will require funding from both directions. So the projects are out there. There is no shortage of enthusiasm. I have to say, and I'm going to crow now, the Carbon Capture and Storage Association is unique in the world. It is a UK organisation. There is no other organisation of this size and with its breadth of membership representing the CCS industry anywhere else in the world. The UK is ready to go. Industry is ready to go. We just need the right conditions and we'll be there.

  Chair: Let's hope so. Thank you very much for your time. It has been a very useful session.

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Prepared 16 May 2011