Examination of Witnesses (Questions 250-286)|
MARK RIPLEY, JEFF CHAPMAN AND TONY GLOVER
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
lightingLEDs, 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
Q251 Chair: What does all
this mean for consumer prices?
Tony Glover: From a consumer point
of view, there are some major opportunitiesfor 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 productin
other words, electricity without emissionsbut 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
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 infrastructureto
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 usewe are here to promote CCSbut
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 billionthat
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
Tony Glover: Massive investment
is required at transmission network levelNational Grid
levelbut 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 passiveit's been one-way,
rather like the wiring system in your homeso 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 processsomething Ofgem has recognisedis
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 changewell,
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
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 whateverso
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 windwind being not as reliable as a resource
due to the weather factors we all know aboutthen 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
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
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
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
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 moreI'm
long out of date in that aspect of itthere 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
Q262 Albert Owen: So it's
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
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
onNational 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 technologywe
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
technologyno 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 onesbut 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
itwhen 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
payif 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 initiativesthe North Sea Countries
Offshore Grid Initiative, Electricity Network Strategy Groupall
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 suggestthe 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
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 daysI think it was up to 30 days in the yearbut
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
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 futureas
we have discussedthe 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 investmentand
possibly more than that. If we don't look at it from the demand
perspectiveand I mean consumption, not generationit
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 possibleand we at ENA
are looking at this and working with suppliersthat 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 consumptionconsumption
at different times of the day, using different energy sources.
If we are going to change behaviour and the
demand and consumption of energy, wethe Government and
the industryare 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 futureand, 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 respectnot 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
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
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 playerswho will tell you that
their business is risk-managementwill 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 wellis that something that could present an alternative
model, or would it be something that might stand alongside a largely
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
compatibleand we've touched on that as wellwe 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 mixboth
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
jobwhat 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
mechanismyou get a guaranteed price for your carbon-free
electricityit 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 plantan offshore wind farm, or whateveryou
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 measuresthe financial incentive through the feed-in
tariffand 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
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
timewhich it clearly willthat 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
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 elementcoal
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 levythe carbon price support mechanismand
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
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
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
Jeff Chapman: It produced nine
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.