Examination of Witnesses (Questions 287-338)|
LORD TURNER OF ECCHINSWELL, DR DAVID KENNEDY AND
15 MARCH 2011
Q287 Chair: Good
morning, and a warm welcome back to the Committee. It is good
to see you. This is a pretty wide-ranging inquiry we are engaged
on at the moment, so lots of angles. Could I start by asking:
you have set out the target of getting emissions down to 50g per
kilowatt hour by 2030; should that now become explicit in the
EMR consultation process? Would you like to see the Government
accept that as an explicit target?
Lord Turner: I
think that's an interesting question and not one that we have
formally considered, whether that should be made an explicit target.
We certainly think that achieving a grams per kilometre of there
or lower by 2030 is highly likely to be required as part of the
path to the 80% reduction by 2050, and that is something that
we have a high degree of confidence that we need to be around
there. I think the difficulty would be saying, if somebody said,
"Well, the optimal figure would be 60g or 40g", the
range of precision of 50g. The calculations are not so precise
as to be able to say it absolutely has to be 50g. On the other
hand, a number of other targets in public life at the end of the
day are created as stretching targets, even though the logic can
take you to about that range, but not to precisely that figure.
We certainly believe that in the operation of the
post-review structure, the Government will need to have a vision
of roughly where it wants to be in 2030, because that will determine
the amount of the quantity of low-carbon electricity for which
it is effectively contracting through the process. So I think,
as I say, we haven't thought about what the degree of formality
of that target should be. I guess there would be some value in
setting it as a formal target and saying, "That is the aim."
Certainly, I think when we get down to the detailed operations
of the EMR, DECC will have to develop an effective operational
target, because otherwise how is it going to determine how much
contracting it places? David, do you want to add to that?
Dr Kennedy: We're
not saying, "Adopt 50g now" for the White Paper
in summer, but we are saying in the letter that we sent to Chris
Huhne last week, "A quantity-based approach is needed".
It's not that the Government can just set the price and then see
what happens in the market. The Government has to have a view
of: how quickly do we want to decarbonise the sector; how much
investment are we looking for in low carbon? So what we've said
is that 50g of CO2 is our best estimate now. Clearly,
it should be less than 100g, but is it 50g or 60g, as Adair says?
Well, we don't know, and further analysis is needed and that would
have to be done in the course of working out the implementing
arrangements and developing the contracting strategy.
Q288 Chair: So would
you say that you would like them to set something that is less
than 100g anyway?
Lord Turner: Yes,
definitely. I think that is clearly the range of what we think
is required by 2030, yes. It's how much lower than that.
Chair: It is how to raise the level of
ambition that they currently have. They have to raise their level
Dr Kennedy: They
were working with a number of 100g, and I think they were working
with that because previously we'd suggested 100g or less was appropriate.
They took that as a given and they worked out: how can you get
100g and how much does it cost? Our new analysis suggests 100g
is probably a bit on the high side, given the investment opportunities
that we have.
Chair: Redpoint's analysis
was based on 100g.
Have you worked out what would need to change in the DECC proposal
to get it down to 50g?
Duncan Sinclair: We have done
some supplementary work and we have shown that it is possible.
It depends on whether it is more nuclear or more renewables to
get there. It does have quite a profound effect on the energy
market itself, because at that level of decarbonisation, it's
quite a big impact on market prices. So although it sounds like
a relatively small shift from 100g to 50g, it is quite a profound
difference. We think it reinforces the need for feed-in tariffs
with CfDs, but we think it is possible. I guess the key risk is
around technology, that to set a target as low as 50g, all the
technologies are going to have to develop and come to fruition
in a timely manner. So there is some risk around that, but at
this stage, it looks like it's feasible and the cost of that isn't
excessive, given where carbon prices may well go under the Government's
Q290 Sir Robert Smith: Yes,
I had better remind the Committee of my interest in the Register
of Members' Interests as a shareholder in Shell and also that
I am an Honorary Vice-President of Energy Action Scotland, fuel
Just on this debate, it is quite often focused
on where the new capacity is going to come from for supply. What
analysis has the Committee on Climate Change done of how we can
reduce demand: energy efficiency, distributed generation and demand
side responses? Have you been looking at what measures could be
Lord Turner: Yes,
I mean, within our forecasts of total electricity demand, we have
the assumption that we will continue to achieve electricity demand,
use efficiency, energy efficiency improvements in electricity.
A significant element of that comes through the residential appliance
route, where there has been a rate achieved in the past that we
have assumed can continue to be achieved in the future. It won't
occur naturally. It has to occur as a result of, for instance,
continued regulation. I think this is an area where regulation,
in simply banning the very inefficient level of appliances and
continually increasing the grading systemwhen you buy a
washing machine, moving up from A to A+ to AA+ and then slowly
making the Ds or the Cs illegal rather than simply labelledthat
is very important. But whenever we have
Robert Smith: So you think the consumer, left to their own
devices, is not necessarily going to follow the price signal?
Lord Turner: I think that is right.
I think the consumer, left to their own devices, the price signal
for some consumers is not strong enough. I mean, the fact is that
at medium or higher-income levels, the amount of electricity used
on domestic appliances, although it's still significant, is not
a large enough part of the family budget that there is a very
strong focus, left to themselves, on the price sensitivity. People
seem to be somewhat more sensitive to needing the trigger of when
they buy the new appliance, information and guidance and encouragement
and an element of regulation that moves them away from the low-efficient
ones and more towards the high-efficient ones. When they do that,
they are aware that they will get a benefit from it, but they
need to be triggered and encouraged down that route. Left to itself,
it's unlikely to do it.
The net effect of all the energy efficiency
though is even with significant amounts of energy efficiency,
we still believe that from the 2020s onwards, we will have rising
electricity demand across the system because of two major new
areas of use of electricity, one of which is in surface transport
through electric cars, and the other is the application of electricity
to, in particular, domestic heat through ground-source and air-source
heatpumps. It's those two new forms of applications of electricity
that we believe will inevitably overwhelm even important and significant
improvements in the efficiency in existing uses.
Q292 Sir Robert Smith:
Do you think more can be done though to make the housing stock
more efficient to reduce that demand for heating?
Lord Turner: Oh, yes, we undoubtedly
need to do that. I mean, at the moment, of course, the vast majority
of residential housing is heated by gas, not electricity, so at
the moment, the improvements in the energy efficiency, the insulation
of the housing stock, which are extremely important, translate
into reduced gas usage. However, once we start moving to an increasing
element of electrical heat, the improvements in insulation will
be helping to moderate that increase. Indeed, it's particularly
important, because the efficient way to run with an air-source
heatpump or a ground-source heatpump is to have low level of quite
low background heat, which only works efficiently when you have
a well-insulated house. They're not very efficient in terms of
the way that some people heat their house at the moment, which
is to have a very inefficient house and then blast on some intense
heat into a particular area. That way of heating your house just
doesn't tend to work well with the air-source or ground-source
Q293 Sir Robert Smith:
Did the Redpoint analysis do much on demand side and efficiency?
Duncan Sinclair: We did, and we
took DECC's views on demand going forward, taking into account
the Green Deal. We also looked at an overall flattening of demand
shape associated with, for example, heatpumps or with electric
vehicles, assuming that there were some price signals to encourage
consumers to flatten their demand. We took that into account and
we also recognised the possibility that the demand side could
play in providing additional capacity and helping with the security
of supply issue, so that was all taken into account. I mean, the
big uncertainty is smart metering, with the roll-out of smart
meters. There's a lot of interest around what that could do in
terms of changing consumer behaviour, and I think that is definitely
a positive sign in terms of how security of supply could be managed,
so there are some good opportunities there going forward. So we
looked at it semi-quantitatively, but also looked at some of the
qualitative issues around the technology unknowns at this stage.
Q294 Sir Robert Smith:
How did you assess the Green Deal's impact?
We didn't assess it directly. We sort of took the assumptions
from DECC in terms of what they felt the impact would be on electricity
demand, so we didn't get into the details of that. That was an
input into the analysis.
Q295 Sir Robert Smith:
Finally, was there any analysis given to the potential role of
storage and interconnection to other electricity markets in Europe?
Duncan Sinclair: We included some
additional interconnection. We took some relatively conservative
views of the additional potential. There's certainly again upside
in terms of security of supply and this may also reduce the cost
of managing the intermittency around renewables. So that's definitely
an issue, but as I said, we took some relatively conservative
views on the super-grid, for example, going forward.
Q296 Dr Lee: Putting
Japan to one side and their short to medium-term need and desire
for gas and so on, to what extent have you factored in possible
imports of shale gas, liquified natural gas, into this? We have
just been to the US and they were talking about changing a terminal
potentially so that it started to export gas, as opposed to just
importing. Do you see that causing any problems to your calculations?
The gas assumptions and the price assumptions were again DECC's
assumptions, and the central case has gas around where it is currently
and rising gently, about 3% year on year in real terms to 2030.
So that's probably at the higher end of where some analysts are
expecting it to be. We also looked at a low-gas sensitivity as
well, and it's clearly the case under lower gas prices the cost
of some of this looks higher. But the risk is with low gas prices
is we don't achieve the decarbonisation objectives that we've
set out to achieve, and therefore while the analysis could show
with lower gas prices lower cost for consumers, it may also show
that we haven't reached the environmental objectives. So it's
a difficult question, that one.
We weren't trying to evaluate the rights and wrongs
of whether we should or shouldn't invest this money in achieving
these targets. We were just looking at the analysis around, if
we are going to try and achieve those targets, what is the most
cost effective way of doing it? That was the focus of what we
Dr Kennedy: Just
to say our analysis says we should not change the objective, to
move to a low carbon power system. I think there is a myth around,
which goes something like: we are going to have this low-cost
gas, so we can decarbonise based on unabated gas fire generation.
That's not true, because you can't decarbonise using unabated
gas, because it is carbon intense, not as carbon intense as coal,
but still carbon intense. Now, our analysis says, "Would
you change the 50g target, for example, in a low gas price world?"
and the answer is no. So the decarbonisation strategy is robust
for a different set of scenarios for gas prices. Even in a low
gas price world, you would still want to decarbonise the power
sector. It tells you that gas CCS may be a very valuable option
to have in your portfolio, and so we have stressed the need to
have a gas CCS demonstration project, which then can sit in the
mix going forward in the 2020s next to nuclear and to power agreements.
Q297 Dr Lee: I guess
my point is that, if it wasn't for shale gas, that would be a
bit easier for the renewable market, wouldn't it? The suggestion
is that suddenly we found all this gas that we did not know was
going to be there. If the gas had not been there, then the rest
of it would then become, in the eyes of the public, more justifiable
in that they would be thinking, "Well, we cannot get our
power from gas, so therefore we are going to have to get it from
renewable sources". I am just suggesting that this flood
of gasand it would appear that there is vast amounts of
Dr Kennedy: I think
it makes it harder to sell the story that we need to decarbonise,
because people think we can decarbonise with this cheaper source
of fuel, but it's not true.
Q298 Dr Lee: Do you
think it would be perhaps, if you could choose, better to have
a low-carbon target instead of a renewables target?
Lord Turner: This is something
that we have to give advice on in May in our Renewables Energy
Report. We clearly are attractedas we were discussing
earlierto very strong targets expressed in grams per kilowatt
hour. We also think that it is important to think about how much
of the system should be zero carbon, whether nuclear or renewables,
but we don't think that we should throw away the aim of a renewables
target as well, because in the long term, by 2050, we have to
be close to zero grams per kilowatt hour in the electricity system.
I think there are good argumentseven if you believe that
nuclear was the cheapest optionfor not putting all of your
eggs in that basket. I mean, there are things to do with waste;
there are things to do with over-reliance on any one technology,
which I think says that even if you believe nuclear was the cheapest
option, you would want a balance of nuclear and renewables.
So I think it is highly likely that when we come
back in May, we will not be suggesting that we should no longer
have a renewables target as well. We think that is a useful part
of the story, but it certainly needs to be combined with an approach
to all three of what we see as the key sets of a low-carbon technology,
which are: renewables, in the way that that term is used, nuclear,
and the application of CCS, particularly the gas. I think increasingly
we think the long-term future of CCS may be applied to gas, rather
than, as people used to think a few years ago, exclusively to
I think it's definitely the case that the 2020 target is pushing
up the cost of the renewables, because it's a very, very rapid
timeframe and the analysis suggests that a sort of slower glide
path, still going to where you would be in 2030, the same renewables,
same amount of nuclear, but on a slower trajectory would be a
lot cheaper. You have to pull out virtually all the stops to hit
the 2020 target and that's going to incur cost and cause pressure
on supply chains and pressure on available sites. Then what you
find if you hit the 2020 target, your rate of renewables deployment
in theory could slow right down, and that's not the most cost
effective way of achieving it. So there's no doubt the EU target
does put additional constraints that are economically challenging,
where the target for 2030 and the 50g a kilowatt hour could be
achieved cheaper if that was not the case.
Q299 John Robertson:
If you were to go from the 2020 target to the 2030 target, what
is to say you would not go then for a 2040 target and a 2050 target?
What kind of, shall we say, putting that into tablets of stone
has to be there, because eventually you have to draw the line
somewhere? If you take away the 2020 target, then do we have a
Lord Turner: We
see that by 2050, as I mentioned a moment ago, if the UK is to
meet its legislative Climate Change Act 80% target, then electricity
essentially has to be pretty close to zero grams per kilowatt
hour or 5g per kilowatt hour, you know, a trivial amount, because
the figures simply do not add up otherwise, given the difficult-to-reduce
sectors, which include agriculture and bits of industry and aviation,
areas where there are emissions to which we cannot see technological
ways of entirely getting rid of them. Given those difficult-to-reduce
sectors, we believe that electricity decarbonisation essentially
has to be pretty close to total. There may be a small amount,
because you may still have non-100% CCS gas plants providing the
last margin of production capacity.
So when we talk about a target of, let us say, 50g
for 2030, what we describedand we described in our fourth
budget report last Decemberis that there is further steps
thereafter. Having said that, of course, most of the steps are
achieved by 2030. We are now on 490g per kilowatt hour, I think
it was, 2009. It will then be at about 300g per kilowatt hour
by 2020, below 100g by 2030. You know, we will have achieved most
of what we have to achieve then, and then beyond that, there would
be further progress on, in particular, hopefully CCSing any unabated
gas. So, yes, we see that as a long-term path to 2050.
Dr Kennedy: There's
a practical reason to have a 2030 target, which is given the very
long lead times for projects. If you look at nuclear, that's a
five-year construction, two-year development. What we do over
the next 10 years will determine the power system we have through
the 2020s and in 2030, and so we need that target to frame our
thinking and our actions over the next five and 10 years.
Q300 John Robertson:
I mean, it appears to me that you put CCS as "it must happen"
rather than "it may happen."
Dr Kennedy: We need to see if
it is technically feasible and economically viable, so cost competitive
with renewables. It certainly will make decarbonisation easier
through the 2020s and beyond. If you did not have CCS, that raises
the question, could you still decarbonise at the same pace, and
I think the answer is yes. It will be more challenging; it will
possibly be more expensive, but we would do more of nuclear and
renewables. Ideally, we'll have CCS in the mix and that will help
drive this decarbonisation.
Lord Turner: Without
CCS, you'd have to do more nuclear, more renewables and it would
increase the importance of the super-grid interconnectivity across
Europe to balance the renewables, because you'd have a system
that you couldn't simply easily balance through the gas-fired.
Q301 John Robertson:
Is there a plan B?
Lord Turner: There is a plan B.
Most of the modelling says that if you knock out the possibility
of gas CCS, it is still doable at a not absurd economic cost.
It is a higher economic cost, but it doesn't dramatically increase,
but it is simply more difficult. The best way forward is with
all these three sets of technologies to be part of the mix.
Q302 Sir Robert Smith:
Lord Turner, you mentioned sort of in passing the future of the
gas CCS being almost a swing generator, but apparently the first
generation of CCS is going to be very much baseload, because it
is not the kind of thing that likes to be switched off and on.
Lord Turner: Yes, well, you're
quite right, that initially, because CCS in itself is quite capital
intensive, you can't just use it at the swing.
Sir Robert Smith: Also the process itself.
Lord Turner: Yes, the process.
No, I agree with that. Indeed, it has to be, and provided it gets
efficient enough, it can be a part of the permanent baseload as
well. I mean, the crucial thing here, which is one of the things
that has to be focused on in CCS for the long term, is how efficient
it is. Does it take out 80% of the carbon or 90% of the carbon?
We sometimes talk of this as being sort of CCS or non-CCS. One
of the crucial things that we are going to have to get down to
is what percentage is achieved. If it can achieve very high percentages,
then it can be part of the long-term baseload as well as the rest.
Dr Kennedy: We
should stress though that the baseload that we have at the moment,
which is kind of 30 to 35GW on the system, we envisage will increase
very significantly over the next 20 years because of the demand
for overnight charging of batteries for electric vehicles and
because of storage heat that is electric. Now, the scenarios we
have actually add the capacity to run as baseload, whether it
is gas CCS or nuclear.
Q303 Chair: Given
the importance that CCS is likely to have in relation to achieving
these targets, does it worry you at all that with the prize of
£1 billion of public money available for competition, that
competition only attracted one entrant?
Dr Kennedy: Well,
I think the key is that we have four potential demonstration plants.
We are very interested in the second competition, which is for
the second, third and fourth demonstration plants. My understanding
is that, in terms of expressions of interest, there are a lot
of expressions of interest. Within that, there are some very serious
project proposals that DECC is considering at the moment. So I
think the test of this will be the second phase. I think it's
important to go on with the Longannet project and get that into
construction, so to get the contract signed and to move forward,
but also to move forward with the second competition and get those
other three projects, of which one we stress should be gas CCS.
So that's the key for us, the second phase.
Q304 Christopher Pincher: Without
naming names, are those expressions serious expressions of interest
from members of the Big Six, because I spoke to two of them this
week and last week and those two certainly were not interested,
so that leaves you with four, of which one is already in there.
What about the other three?
Dr Kennedy: As
far as I know, not having looked at the details of this, there
are some big players within the Big Six who are interested in
doing demonstration projects; not all of them, but some of them.
As I say, I think there are enough serious proposals that are
there for consideration to make us feel reasonably confident about
this. I think the bigger issue actually is confirming and securing
the funding for this second set of demonstration projects. That
is something that the Government, I understand, is going to comment
on over the next several months.
Q305 Chair: Just
reverting to the question of the technology mix, the challenging
2050 target and the possibility that we may flooded with cheap
gas and therefore a lot of gas capacity is built in the next 10
years, do you think that a 35% contribution from renewables in
2030 takes us far enough to get to the near total decarbonisation
Lord Turner: Well,
this is precisely what we will be setting out in the renewables
review. We're looking carefully at precisely these figures; we
were debating them just on Friday. Obviously, it crucially depends
on how much nuclear you think should be in the system and the
prospects for CCS. It is as simple as that. That's the balance
that you have to strike there. So that's whether you need to put
it higher, and then whether you can take it higher at a reasonable
cost depends crucially on what we think is going to happen to
the cost of offshore wind. Now, there are reasonable cases from
forward-looking engineers that over time, this thing will come
down in cost, in particular with, for instance, movements to very,
very large turbines, for instance, even 20MW turbines and so on,
and just the relentless process of engineering cost improvement
that typically happens with a technology. If those are achieved,
there will become a point, I think, by 2030 or so where offshore
wind will not have the cost premium over nuclearor maybe
even over onshorethat it has at the moment. At that stage,
you could then expand the renewables element of the total mix
without facing a cost penalty.
As Duncan has said, there is, however, undoubtedly
some cost penalty in the pace at which we are going to 2020, because
over that period of time, you just do not have enough time for
the cost improvements to work, and also there are some bottlenecks
in the supply that drive up the cost. So we are looking at the
issues. As Duncan has also said, at the moment, there is a danger
that we have a ramp-up of offshore investment to 2020, then a
drop and then a lower level in the 2020s, which certainly does
not make sense in terms of a consistent supply industry slowly
driving down cost. It is, therefore, possible that the optimal
path might eventually, if these costs reductions are indeed achieved,
have a slight moderation of the targets to 2020, but an increase
in the long-term target.
But what that illustrates, I think, is that while
you need a broad direction of change, and while we'd certainly
say that there needs to be a minimal renewables target that should
form the contracting within the new market review, you do not
need to be precise. You need to know that, as part of your strategy,
you want it to be at least 30g or 35g by 2030, but you do not
need to decide whether the balance in 2050 is 35g, 35g, 35g between
renewables, nuclear and CCS or 40g, 30g, 30g. You do not need
that. Indeed, there is a loss of flexibility by setting things
too far in advance, even if you set certain minima to drive the
development of the technologies.
I would agree with that. I think that at this stage, it's just
too early to say. We are on a path of learning on multiple technologies
here, and by the 2020s, presumably we will not be in the situation
we are now. I would expect that two of the three technologies
will be demonstrated to be a low-cost option and we will start
gravitating more towards those options. So at this stage, we are
talking about a balanced portfolio in CCS, nuclear and renewables.
It may well be by the time we get further on10 years',
15 years' timethe winner is a bit more obvious and we're
starting to sort of consolidate on the lowest cost option. So
I agree with Lord Turner. I think to say explicitly, "You
have to have this target for X, Y, Z" is probably wrong at
this stage. We need to have some flexibility there as well.
Q306 Chair: Your
analysis showed a roughlywhat was it?a similar level
of renewables, whatever the scenario. Was that because we do not
know enough or because you simply built in a 35% assumption for
That was just because that was an assumption given to us by DECC,
so we kept that constant across the cases, because I think if
we hadn't done that, then the different costs in renewables would
have then kind of drowned out the messages with respect to the
effectiveness of the different policy options. So we deliberately
kept that fixed.
Q307 Albert Owen:
Yes, can I just try and consolidate what you have been saying
about unabated gas? You have commented on a number of occasions
indeed, Mr Sinclair, today that too much unabated gas from power
stations might jeopardise the UK's long-term targets, and can
I bring you back to our inquiry on EMR and the EPS within that?
Do you think that the EPS will allow unabated gas plants to be
built as in the consultation documents?
Certainly at the levels set out in the consultation documents,
yes. Obviously, there's a concern from investors that once the
legislation is in place, that could be tightened up, so that does
create some risk for them. But it's one of those things that I
think, given security of supply is another key issue here, it
seems to me very unlikely that the EPS is going to be assessed
at a level that jeopardises security of supply. Therefore, if
we need new unabated gas for security of supply, I think the assumption
should be that that should be allowed, or else we are going to
have a security of supply problem. So I think the EPS in some
ways is an added backstop. That's not entirely necessary, given
the other measures, but it is there as a backstop.
Q308 Albert Owen:
Phillip Lee mentioned that we had been the States on the shale
gas thing on another inquiry that we are doing. Do you think there
is a possibility of another dash for gas in this country? What
analysis have you done of that and how that will impact on the
I do not think there's a risk of that currently, because I think
everyone is nervous around
Albert Owen: It depends what we are talking
about "currently". You say in 2020, 2030, 2050. I mean,
if the dash for gas was to come onstream relatively quickly, then
it is going to impact on your targets.
It would do, but again, it depends on what happens with the feed-in
tariffs. If the feed-in tariffs are being offered and plenty of
low-carbon technology is coming forward through that mechanism,
then the room for gas is going to be squeezed and that's going
to put pressure on price and that will deter investors. So by
definition, the CfD policy is failing if we end up with a dash
for gas. I think that's the case.
Dr Kennedy: It
comes down to the credibility of the new arrangements. If that
carrot that says, "If you invest in low carbon, we will pay
you for it", if that works, then we won't have a dash for
gas. If nobody buys that story and wants to sign these contracts
and bring on the low carbon, I think there's a risk that you get
some portfolio investment instead with some nuclear, some renewables,
but also some unabated gas. That's why you might want to consider,
"Well, what can we do in terms of stick, which says, 'We
don't want unabated gas on the system behind a certain time'?"
Q309 Albert Owen:
Sure, I mean, some of the experience that we picked up in the
States was basically that, although they had invested heavily
in renewables, wind, now the dash for gas was pushing that back
and there are less ambitious targets. This is the danger. Do you
Lord Turner: I
think the answer is: it entirely depends upon the tightness of
the overall policy framework. I think given the possibilitynot
certainty, but possibilityof the scale of the supply of
shale gas in particular, it's certainly possible, indeed, I think
likely, that if we didn't have a Climate Change Act, an Electricity
Market Review and a set of constraints, we would, as it were,
see a new dash for gas or an intensification of the dash for gas.
I mean, gas is the safe option in terms of the balance between
marginal cost and capital intensity. So the issue is simply what
are the constraints that constrain that through the renewables
objective, through the details of a target for grams per kilometre,
through the scale of the contracting, the contracting for differences
for effectively the feed-in tariffs for low carbon? Those are
all mechanisms that essentially constrain it. In an unconstrained
world, yes, the supply of shale gas might well mean that people
would build less renewables and less nuclear, because if the forecasts
of large supply are there, then that is quite a new, pertinent
Q310 Dr Whitehead:
Mr Sinclair, you mentioned the role of an EPS as a backstop. What
is your view on the relationship of the levels that are being
consulted on in the context of the idea of a backstop? It appears
certainly that the high level would permit only very marginally
greater coal, perhaps even by the addition of some biomass, and
the lower level would permit pretty widespread unabated gas. Therefore,
it might appear that this is not a backstop but a non-stop. Would
that accord with your analysis or do you think there is a role
for EPS at those sorts of level?
To be honest, I think it potentially is redundant, because with
the Carbon Price Support and with the support for low carbon through
CfDs, naturally the higher emission plants should be pushed off
the system through the basic economics, because they get pushed
out of the merit order. If they are not, that implies that we
need them anyway for security of supply, and so if anything, the
EPS is an unnecessary complication that could threaten security
of supply. That is my own personal view. You know, EPS as a mechanism,
as a stick, is a possible option, but you might want to pursue
that if you were not going down a Carbon Price Support or a CfD
route. It does seem a little bit like overkill to have both in
place, in my own personal view.
Dr Kennedy: We
have had a slightly different perspective. The wording in our
letter to Chris Huhne last week says, "At the level proposed,
it will not have a material impact on investment decisions".
We have suggested a tighter level. For example, the alternative
proposal in the consultation, which I think was about 450g rather
than 600g, that would tell you, if you're thinking of investing
in unabated coal, you better be planning to retrofit it, which
is an important issue. Then a tighter performance standard still
would tell you: do not invest in unabated gas beyond a certain
time. So there is a potential usefulness in those backstops.
We have not suggested you necessarily would introduce
them straight away, for example, in the case of CCS, to prevent
investment in unabated gas. It may be that the market arrangements
pull through low-carbon investments and you don't need it, but
what we have said is that certainly you shouldn't rule those things
out at the moment.
Q311 Chair: In that
letter, you suggested an alternative, which would be a forward
contract for low-carbon capacity, alternative to an EPS. Would
you like to enlarge on how that would work?
Lord Turner: Well,
we certainly think that the quantity-based instrument is absolutely
fundamental here. Essentially, what we are proposingbut
also the Government is heading towards this in its responseis
a mechanism whereby an investor in low-carbon plant has the certainty
of a future quantity times the future price. That can be done.
You can do that by directly setting it up as a feed-in tariff,
or you can essentially do it by having a contract for difference
from a fluctuating price.
We see that as the absolute core of the way forward.
We think all of the debates about the EPS are whether or not there
is a useful ancillary set of policies, but the core policy we
believe is these effective feed-in tariffs. We are arguing that
they need to have a quantity element to them, that people are
assured of the ability to deliver a certain quantity at a particular
price, rather than simply a price but no assurance of quantity.
We also believe that this is preferable to premium
feed-in tariffs. Premium feed-in tariffs essentially give you
a little bit extra above the fluctuating price, but can be quite
expensive ways of buying low carbon. You can end up paying more
through that mechanism than you would if you simply did a straight
feed-in tariff or contracts for difference.
So essentially, we are saying we need to get as close
as possible toand essentially, all the way toa mechanism
where for a certain proportion of their output, a low-carbon investor
knows in advance, or has reasonable certainty in advance of the
ability to deliver a certain quantity of electricity at a certain
price, and to us, that is the core of what needs to be achieved
in the Electricity Market Reform.
Q312 Christopher Pincher:
Can we talk a little bit more about CPS? You mentioned, Mr Sinclair,
the play-off against using EPS against Carbon Price Support. Lord
Turner, with your previous hat on in the City, EU ETS is a mechanism
for setting a carbon price, but the view is that that is too low
to change behaviours demonstrably; therefore, further CPS is required.
I just question whether applying that price unilaterally will
have a deleterious effect on industry, on the economy, and if
it does have that effect, will investors not be less likely to
want to invest in it?
Lord Turner: Well,
a couple of points. First of all, I think the difficulty with
the EU ETS is that it is at the moment far too weak an external
constraint. I think there were always some concerns as to whether
the total quantities set in the ETS, and in particular the ability
to meet them through clean development mechanism purchases, was
too soft. But the impact of the post-crisis recession, which therefore
decreased total production and demand, has led to a situation
where the prices within the EU ETS are simply too low to do the
pull-through of a low-carbon economy. That is point one.
The second point is that I think if you go back to
Nick Stern's work on the economics of climate change and whether
you best incentivise low-carbon technology through a fixed-price
instrument, where youthe Government, as it weresets
the fixed price of carbon, or a quantity instrument, which constrains
the quantity and allows a fluctuating price, you'll see there
and in a lot of the economics literature, a suggestion that the
optimal way forward is always probably a hybrid. It's to have
some quantity limit with a fluctuating price, but with some carbon
underpin within it.
So to us, the ideal way forward here would be if
we could get our colleagues across Europe to agree to a tightening
of the European EU ETS, with moving to a 30% target, combined
with an underpin price within the EU ETS. That should still be
In the absence of being able to get that, we believe
there is a strong case for a carbon price underpin in the UK.
You are absolutely right that you then have to think what about
the effect is on the competitiveness of potentially mobile industries.
In relation to electricity, broadly speaking, it is not a highly
potentially mobile industry, which is why, for instance, across
Europe we've been able to move towards auctioning within EU ETS
the permits, and people have argued very strongly against that
in the non-electricity sectors. So a carbon price underpin, as
it relates to the electricity sector, can work well.
Obviously, there are then difficulties of how to
apply that and at what level to the non-electricity sectors. And
if you get it wrong, and if you get it too high, then yes, you
could start inducing a movement of steel production from one part
of Europe to another, which would be neither beneficial to the
economy, nor of any benefit in terms of the carbon emissions.
So I think there is a crucial distinction there between electricity
and non-electricity sectors.
Dr Kennedy: People
have said, "Well, if you have these long-term contracts,
why do you need a carbon price underpin done, because it's the
long-term contracts that will drive the low-carbon investment".
We have highlighted four benefits of a carbon price underpin in
the context of the long-term contracts. They are: first, it gives
you the signal not to invest in unabated coal generation, you
have to think about retrofitting it, which we have suggested is
a key issue; secondly, I think it will strengthen incentives for
energy efficiency improvement; thirdly, it will help investors
make choices within these new arrangements about investment in
coal CCS and gas CCS, where you need to know what the carbon price
will be in the future; fourthly, I think it is consistent with
the Government's objective, which we think is a sensible objective,
to increase the share of green taxes within the overall tax take.
It will provide a revenue source to finance low-carbon innovation,
and particularly CCS demonstration.
I think, overall, the cost of decarbonisation is going to be fairly
high upfront, and hopefully the savings will come later. So that
is the thing that's potentially going to have an impact on competitiveness
and consumer bills. So that is kind of a given. The Carbon Price
Support is an element of that. The problem with it, or potential
problem, is it created unintended consequences, because we have
an interconnected electricity market and we are going to have
the possibility that we have more imports into the country from
emitting plant from elsewhere in Europe.
Q313 Christopher Pincher:
It does not have any Carbon Price Support and, therefore, benefits
from our high prices, but is not any cleaner.
Duncan Sinclair: Yes, I think
that is a problem with it. The other potential problem with it
is that, while it is generating additional receipts for Treasury
and that is fine, we are estimating at about 25% of the cost of
the CPS is going to inflate profits for existing renewables and
nuclear generations, so that is increasing the rents for those
players. So there are some downsides with it. As David has mentioned,
there are some potential advantages, but those have to be considered
quite carefully in the context of the additional cost to consumers
in the near term.
Q314 Christopher Pincher:
You mentioned downsides. What do you think is the biggest downside?
I think the biggest downside is we distort the economics of the
electricity markets across GB, Europe, and also in Ireland as
well. That is an unintended consequence and that's not achieving
any additional carbon reduction. It is not probably achieving
any additional low-carbon investment, because we have the CfDs.
Therefore, it is increasing cost to consumers. It may be we can
shift taxation in other areas to compensate, but we have an interconnected
market. It is going to get more interconnected. By far the preferable
solution, as Lord Turner suggests, is that we have a European-wide
mechanism and a European-wide underpin and then I think it's a
viable option, but to do it unilaterally, it does incur significant
Q315 Christopher Pincher:
Do you think we are doing enough to prepare the public for the
potential, or indeed, the likely higher prices, given that there
is much more likelihood of that than getting a European agreement?
No, I do not think we are. The question is an intergenerational
question here, which is the extent that consumers over the next
10 years are paying more for their electricity to save consumers
in the following decades for the cost of their electricity. That's
quite a significant shift. I think that needs to be probably understood
and the public need to be aware of what those costs and trade-offs
Though that is a slightly different issue or a wider issue than
the specific one of a UK unilateral carbon price underpin, because
that cost would still arise from a European carbon price underpin,
or indeed from a contracts for difference or anything that involves
a carbon price and a commitment to low-carbon technology, to the
extent that that is higher cost. I mean there are non-trivial
increases in electricity bills that are going to occur. I think
we believe those are small in the context of the total economy,
but they are non-trivial and they will be noticed. I think it
is important for us to be honest with people that that is part
of the cost of achieving progress towards a low-carbon economy.
Q316 Chair: Given
that even in Phase III the EU ETS is unlikely to drive very significantly
a high enough carbon price and to tighten the limits in Phase
III requires unanimity, and we are not going to get all 27 countries
signing up, do you think we may have a problem here? If for perfectly
normal reasons we introduce a carbon price, which critics will
say is much higher than the EU ETS price and, therefore, we are
simply penalising British consumers and making us less independent,
is that going to be a political challenge, do you think?
Lord Turner: I
think the crucial thing there is to explain that this is also
producing a revenue flow for the Treasury, without which there
would presumably be higher income taxes or higher taxes elsewhere.
This has always been the challenge with green taxes to explain
to people that, within a fixed total amount of revenue that the
Treasury needs, more tax from this is presumably at the benefit
to something else that is lower elsewhere. That is the overall
case that I still think needs to be made more effectively for
a shift towards green taxation, of which, however, we are strongly
Q317 Christopher Pincher:
Lord Turner, you mentioned that prices are going to go up and
you said that the impact will be non-trivial.
Lord Turner: Yes.
Christopher Pincher: Granted
that it is your opinion and that, if you increase the tax take,
there are ways in which you can then offset the increased costs,
what would your view of a non-trivial uplift in prices be?
Lord Turner: Can
you remember the actual figures? David is probably closer.
Dr Kennedy: Order
of magnitude over the next 10 years, we would expect the carbon
price impact within electricity prices to be less than a 5% increase.
I think the impact from financing offshore wind under the renewables
obligation, again, about 5% there.
Lord Turner: So
it could be a 10% increase.
Dr Kennedy: That
is electricity bills. I think you need to bear in mind electricity
bills are a small percentage of energy bills. If you translate
that into energy bill impacts, I think you are looking at 3% or
4% through the combination of the carbon price and the renewables
Lord Turner: The
problems get most acute of course with a subset of the housing
stock that has electrical heating in it, often correlated with
relatively low-income people. That is where these figures become
much more important and significant. For many people who heat
their house at the moment with gas central heating and are middle-income
people, that 10% on their electricity bills is not trivial but
it is not a major threat to their household budgets, but there
is undoubtedly a subset where there is. That is why we need to
continue to have policies and an element of targeting within the
Energy Efficiency Policy, which tries to make sure that we are
improving the insulation and the electricity of those houses in
Dr Kennedy: There
is enough energy efficiency potential to largely offset those
price increases. The question is: can we unlock that potential
through the Green Deal? I think that is an open question.
To reiterate, it is a timing issue that the bills will seem to
increase in the near term, but the analysis we did for DECC suggested
that from the mid-2020s onwards the prices would be less, under
the CfD in particular, because consumers are protected from the
increase in fossil fuel prices and carbon prices going on from
there. So it is that trade-off between paying now potentially
for gains later, but of course that critically depends on what
you are seeing gas and carbon prices will do in the future.
Q318 Dr Whitehead:
Could I take the question of CPS and interconnection a little
further? At present, interconnection counts for something like
3% of our electricity supply in any one year. With the proposed
introduction of new interconnectors, and possibly even the emergence
of a European super-grid, have you done analysis on the point
at which the supply, as a proportion of UK electricity, undermines
the potential of a Carbon Price Support to the extent that it
becomes a brake on that interconnection; that is, is there a point
at which you either go for interconnection or you continue with
Carbon Price Support, assuming it is UK as opposed to European
Yes, if the Carbon Price Support level is consistently higher
than the EUA price that potentially will stimulate further interconnection.
Most of the interconnection investment at the moment is looking
at the opportunities of arbitraging between two markets, because
the generation mix of some of our near continental neighboursFrance
exceptedis quite similar, so the concept is very much around
balancing around wind, and so on. If there is a systematic bias
that gas or coal-fired generation in GB is a higher cost than
elsewhere, then that will naturally lead to greater flows into
the country rather than out of the country. So I am not sure whether
that answers your question, but it potentially could have an impact
Clearly, interconnection is a good thing, to the
extent that it helps security of supply and it is a more efficient
and cost effective way of balancing interconnected markets. It
is not an economic solution if it is being built to address distortions
created by unilateral policies in one market or another.
Q319 Dr Whitehead:
I think the thrust of my question is that eventually, if you wish
to pursue a unilateral CPS arrangement, at what point would you
have to discourage interconnection in order to maintain that policy.
Oh, I see what you are saying, yes.
Sir Robert Smith: Where
is the tipping point?
Yes, good question.
Lord Turner: It
is a perfectly valid point. When I described electricity earlier
as primarily a non-internationally competitive market, that isyou
are absolutely rightbased upon the fact that the interconnector
is a relatively small part of it. If you had a significantly different
carbon price in the UK than elsewhere, over a period of time in
which people could respond to that by building gas plants somewhere
else, and building the interconnectors to do it, yes, you could
have a problem. You are absolutely right. I do not think we have
calculated at what level of price, or at what level of interconnection,
that would occur but you are logically right to spot that as a
Dr Kennedy: We
do want significantly increased interconnection over the next
two decades to balance intermittency. This could become more of
an issue. We have not looked at that particular cut off. I think
it takes you towards saying we should not do this in a vacuum,
and we should be looking for a set of arrangements at the European
level that make us confident that Europe is decarbonising its
power system, partly through a tightening ETS cap, but possibly
through the kind of arrangements that we are looking to introduce
here, which is the low-carbon contracts. We know that there is
a lot of interest in Brussels in this issue and the kind of reforms
we are looking at here, with a view to making those a model for
There is another related issue, which is perhaps even more significant
in the long run, which is: if we are supporting our low-carbon
investment here and we are driving down our own electricity prices,
we could be exporting power to continental markets. That could
be at the cost of UK consumers who are paying the additional support
prices. So I think the general message is that we cannot really
afford to be too far out of whack with what our interconnected
neighbours are doing or else we are going to have economic distortions,
which perhaps are not sustainable. So I think the UK taking a
lead is kind of where we are at. It is going to be a good thing
if everyone follows suit. If they do not, it is going to become
harder and harder to sustain a unilateral policy.
Q320 Sir Robert Smith:
Would you say that the priority is probably the super-grid or
a highly interconnected market? It is probably a better long-term
solution for the problems we are facing.
Lord Turner: A
highly interconnected market, with a tighter EU ETS and a carbon
price underpin across Europe, is policy nirvana.
Q321 Sir Robert Smith:
If you cannot get the tighter market, do we then have to become
unilateral and not become part of a super-grid and go it alone?
That is the process.
Lord Turner: I
think we have to find a way to be part of a super-grid because
eventually, at the whole European level, I think there are some
significant, potential efficiency improvements from greater interconnectivity,
particularly the higher you push the renewables percentage. It
is the renewables in particular, with their intermittency, where
you need the interconnectivity to reduce the cost at the margin.
Dr Kennedy: As
well, are we going to be out of whack with Europe? If we look
at the 2050 Pathways work, which was published I think
last week, it says that they are aiming to decarbonise at the
European level. In the view of the Commission, that is what they
should be aiming to do, possibly at a slightly slower pace than
we are here because of the differences in capital stock in the
UK and on the continent, but as you get into the late 2020s and
into the 2030s, we would broadly be in the same place.
Sir Robert Smith: In earnings,
but maybe not in mechanisms, I suppose is the problem.
Dr Kennedy: I think
the next stage for Europeand certainly DG Energy has to
come up with its 2050 analysis by the end of the yearwill
be to start to consider the kind of things we are thinking about
here in the UK and respond to that.
Q322 Dr Lee: My policy
nirvana would beand I would be interested to know your
commentswhy do we not disconnect continental mainland Europe;
connect with the Norwegians; double our nuclear build; reduce
our energy need by 20% through efficiency programmes? In view
of the fact the Norwegians have not maximised their hydroelectricity
output at all, they have a vast amount of gas, which is the cleanest
extracted gas on the gas market.
Lord Turner: The
answer is that does heavily depend on your attitude to nuclear.
At the moment with the figures we are looking at, it would look
that nuclear might be the lowest cost low-carbon electricity right
now. There are some figures that suggest that that is not necessarily
the case in 20 years' time, once other things have gone down a
price reduction path, and I think the attitude of the committee
is that there are some disadvantages in a strategy, which is,
as it were, the French strategy of going for 80% of your electricity
from a nuclear basis. You can clearly. It is clearly technically
Dr Lee: I am not advocating
Lord Turner: All
right, well, then it becomes a matter of balance because, if you
are not advocating that and you are still limiting nuclear, and
you are still committed to achieving the 80% overall reduction
Climate Change Act by 2050, which requires the decarbonisation,
then you still need a very significant element of renewables.
Then there is a value in that being able to balance, not simply
against Norway, but against other bits of Europe as well.
Q323 Dr Lee: If you
have gas CCS, hydroelectricity and nuclear, you are not using
Dr Kennedy: It
depends on what potential there is in Norway to export hydro
Dr Lee: You are not using
carbon, are you?
Lord Turner: Of
course, that crucially depends on the gas CCS.
Dr Lee: Yes but, with
respect, everything does.
Lord Turner: No,
Dr Lee: We are all fingers
crossed, aren't we, with CCS?
Lord Turner: I
return to the point we made earlier: given the uncertainties,
we think this is absolutely an environment where sensible policy
does not limit itself to two of the three main categories of options.
As between nuclear, renewables and gas CCS, all of which are different
ways to a low-carbon future, we believe that a rational policy
has a significant element of each of these in the mix, with the
precise amount of it not something that you can or should fix
at this time. So that is our approach.
Q324 Dr Lee: My point
is this renewables target, which is Europe dictated, seems to
be pushing us down a path of increased subsidy, something that
maybe we should not be doing. Maybe if we extracted ourselves
from the European mainland and its approach, and physically disconnected
because the reality is we are relying upon all of our European
partners behaving themselves with regards to how they generate
electricity. By doing that, are we not more likely to get to a
situation where we do meet all our carbon targets and, at the
same time, retain some stability with a secure neighbour, such
Norway is connected to other European markets
Dr Lee: Of course, it
So it would not want preferential treatment.
Dr Lee: Yes.
Historically, why do we not have more interconnection than other
European countries? It is a geography thingall the other
European markets are interconnected and flows over the interconnectors
between those markets are very large. So it is an historic thing
and history has proven that is a cost-effective way of managing
and balancing an electricity system. To separate ourselves because
of some policy differences flies in the face of what rational
economics would say in terms of a least cost solution, so that
would be very extreme.
Q325 Dr Lee: You
think what we are getting at the moment is based upon rational
No, it is not. It is based on an objective to try and decarbonise.
There are different views on how to do it, but here we are today
and things are going to change over the next few years so it is
hard to say.
Dr Kennedy: There
is a possible role for imports in decarbonising. So if you can
have additional investment in Norway, or if it is in North Africa
for concentrated solar power, that could make a contribution.
I think we should open up these electricity market reforms to
consider: could you give a contract for difference for something
that is imported into the UK? I think you would not rule that
out at the moment, whether it is Norwegian or North African or
anything else imported.
Q326 Dr Whitehead:
Turning to feed-in tariffs, do you think the introduction of feed-in
tariffs, in whatever form, would encourage or, as some suggest,
rather discourage and marginalise CCS energy and electricity storage?
Lord Turner: We
believe that, although CCS is important, we cannot rely entirely
on it and a sensible mix requires elements of nuclear and elements
of renewables as well. Therefore, we believe that the feed-in
tariffs achieved, either directly or via contracts for difference,
is a key way forward there. Obviously, the more that you are effectively
buying through those feed-in tariffs and contracts for difference,
you have somewhat reduced the amount of the market that is gas
CCS, but that is just how much you buy. If we did the electricity
market reform and then the Government chose, we would not advise
it at all to say, "We are now going to have contracts for
difference and feed-in tariffs for the entire amount of our demand".
Then there would be, by definition, no space for gas but that
just becomes how you sensibly allocate the quantities you are
buying on this.
On the issue of storage, David, do you want to comment
on the storage point because I was not quite sure what you were
getting at there?
Dr Kennedy: Storage
is a crucial part of the story and so in our fourth budget advice,
which we published in December, we highlighted the role of, for
example, the importance of having car batteries as a store on
the system. Now, it does not have to be car batteries; you can
simply have storage on the system that you can then put back to
balance intermittent generation. Is it the feed-in tariffs that
will drive investment in storage? I think it is a separate instrument
Dr Whitehead: I think
that is precisely the point, isn't it?
Dr Kennedy: It
needs complementary policies.
Q327 Dr Whitehead:
Essentially, storage relates to what might be determined as surplus
electricity. Surplus electricity, by its definition, would not
come within a contract for difference very easily and therefore
would have to be perhaps issued by separate mechanisms such as
Lord Turner: Yes,
I understand now, you are basically saying if you over did the
feed-in tariff approach you could remove the incentives that we
want people to have to drive storage, which enables them to sell
at the high price arena. With a contract for difference, they
are still able to shift it during the day, aren't they?
Dr Kennedy: There
are two things that will drive the storage story and they are
Dr Whitehead: It only
becomes equipment when it is no longer surplus and is put back
into the system after it has been stored.
Dr Kennedy: Yes,
smart meters are key, and the roll-out of smart meters in a way
that will support storage and putting stuff back into the system
is very important. The second thing, as you said, is the balancing
market and possible capacity mechanisms and allowing those to
bring in demand-side flexibility, as opposed to unabated gas-fired
Q328 Dr Whitehead:
If the Government did indeed choose to go down the contract for
difference path, how would the Government set the prices for that
contract for difference? Indeed, Mr Sinclair, I think you may
have done some analysis, for example, on the extent to which non-competitive
baseline suppliers, under a contract for difference, could essentially
receive large amounts of free money, as the arrangements progressed
without effectively bidding into a contract for difference market.
Did you do that analysis and did it appear in your final document
that was published by DECC?
We didn't quantify it. We highlighted it as a significant risk.
The problem with this is
Q329 Dr Whitehead:
Did that highlighting appear in the final document or did it disappear?
What we said was that, to the extent to which the prices were
set above the level they needed to be, that could have an impact
on consumers. I think we estimated for every £5 a megawatt
hour the price was higher than what was needed, that would cost
consumers on average about £5 a year additional cost. So
that is not insignificant. So there is that risk.
That risk exists today with the renewables obligation
because we are assessing ROC bands based on imperfect information.
It is going to be the same challenge with nuclear and CCS. Inevitably,
although auctions are a long-term objective and potentially are
a good solution, in the near term that is not realistic. Given
the number of potential players, that has to be bilateral negotiation
and that is going to be difficult, but over time moving to auctions
is possible. It may well be that the Government will have enough
information to be able to set the CfD strikes based on technologies
that are more established, for example, onshore wind and maybe
by then offshore wind. They can set the price as effectively as
they are doing today.
It is a big challenge. There is no doubt about it.
There is a risk of making mistakes, and mistakes will inevitably
be made and consumers will pay more because of it, but the flip
side is not going down that route and not achieving the decarbonisation.
So that is the price that we may have to pay.
Q330 Dr Whitehead:
You mentioned, Lord Turner, in your recent letter to the Secretary
of Stateand you have touched on this issuethat since
different low-carbon technologies are at different levels of maturity,
you would need some form of differentiated technology support,
which is not easy to see how that might be incorporated into at
least certain forms of FIT or contract for difference. What is
your view on that and what did you mean by the different levels
of technology support that we need?
Lord Turner: Of
course, we have different levels of technology support at the
moment, by the ROC banding mechanism.
If you simply said the Government wishes to make
sure that there is a certain amount of low carbon, either capacity
or delivered power, and organised an auction for a contract for
difference for that quantity, that would not assure a particular
support for particular technologies, because one technology might
be able to bid the lowest price in terms of the contract for difference.
So the way that this would essentially work is that you would
have to say, "In total, we are going to want to purchase
this amount of low-carbon capacity or generation and we are going
to ring-fence an element of this".
There are then two ways to proceed: there is either
ring-fenced auctions, right, where you are essentially saying,
"The only people who can enter this auction are people who
are willing to do offshore wind, but nuclear cannot enter this
bit of the auction", or some process of quasi-administrated
mechanism where you are trying to work out what a fair price is.
As Duncan has said, the long-term vision, the ideal,
would be it is all in one pool and it is all done through an auction,
but I think realistically we are going to have something where
there is a willingness to have some subsets of quantities for
particular technologies and, to a degree, some administrative
processes of setting the price, rather than a pure auction technique.
Having said that, that is not really a level of complication beyond
what we have at the moment, where we have to set the ROC bands.
The ROC bands are themselves an expression of different support
for different technologies.
Q331 Dr Whitehead:
Except, of course, as you have observed, we presently have ROC
bands. There will be no ROCs under FITs.
Dr Kennedy: There
has to be some kind of banding mechanism, effectively.
Dr Whitehead: So is this
FITs with a bit of ROC added to it?
Lord Turner: No,
they would be FITs that would vary by technology. You would need
Dr Whitehead: Variable
FITs, banded FITs.
Dr Kennedy: There
would have to be a price in the contract for difference depending
on the technology, so if it is nuclear it will be £70 a megawatt
hour. For offshore wind it might be £100 or £110 a megawatt
Q332 Dr Whitehead:
Would it not be determined by market trading, but nevertheless
it would still be banded, I assume?
Lord Turner: You
essentially will end up with some sort of banded FITs. I think
that is a reasonable definition of what you will end up working
with. You will end up with a variant of banded FITs, rather than
banded ROCs, but there still could be a price discovery auction
process, within a particular technology for what that price is.
Q333 Dr Whitehead:
So might the bands then be determined to some extent by auction
Lord Turner: Yes,
but within a particular technology.
Q334 Dr Whitehead:
So how far away is that actually from the ROC trading system?
Lord Turner: It
is still significantly different from the ROC trading system,
Dr Kennedy: The
ROC trading system is effectively a premium feed-in tariff, which
we have been very clear is a bad thing because it is unnecessarily
expensive for the consumer. So it should be very distinct from
Lord Turner: The
ROC is essentially on a banded basis determining how much extra
you get as a price above whatever the future price of electricity
is; a contract for difference based feed-in tariff is essentially
determining what price you will get in future, independent of
what the rest of the wholesale price is.
Q335 Dr Whitehead:
It is mediated by auction discovery.
Lord Turner: Yes,
but that price can be to a degree informed by auction discovery.
That is the ideal, and I think one simply has to pragmatically
work out how much of that one can do while still supporting reasonable
technology. For instancelet us be clearthe difficulty,
in relation to the nuclear bit of that upfront, is going to be
how real an auction you can have when you have only a small number
of players. Therefore, these things may have to have an element
of judgment and negotiation as to what is the appropriate, effective
feed-in tariff, rather than believing that it can all be determined
by a perfect auction.
Q336 Dr Whitehead:
Is that not where the free money argument comes in at that point?
Lord Turner: That
is absolutely right, that if you get it wrong you can be handing
over free money, but I think we have to realise that all these
policy instruments have the danger of free money, both carbon
prices and ROCs; almost any other instrument has a danger of free
money. One of the things we are trying to do is minimise it. That
is the challenge here.
Q337 Chair: I am
afraid we are running out of time. Could I conclude with a question
about how we measure the success of all this, EMR, and how it
is going to pan out. Do you see a role for your committee, monitoring
and reporting on the costs and impact of the various alternative
Lord Turner: As
a committee, every year we have to produce our monitoring report
to Parliament against the Budget. We have in the past and would
propose in the future to comment, not just upon the emissions
last year, but the development of the policy frameworks and whether
the policy frameworks, in principle, look like ones that would
be delivering future developments.
I am sure, as part of that monitoring, within any
particular regime, we would be looking carefully to what occurred.
So, for instance, if there was a contract for difference scheme
put in place we would then be very carefully looking, in 2013
and 2014, at what volumes of contracts had been contracted, because
that would give us powerful forward indicators of what was likely
to happen in 10 or 15 years' time. One of the things that we are
very focused on within our monitoring reports is how do we get
things that are forward indicators of what is going to happen
in the future, rather than indicators now.
So, to a degree, there is an element to which we
naturally do that. It would be up to the Government whether it
wishes, in addition to those regular reports, which are written
into the Climate Change Act, to ask us to do a more detailed investigation
of the particular impact of the regime.
Q338 Chair: What
are the metrics you think the Government should use to assess
whether it is achieving its objectives as set out in the EMR?
Lord Turner: We
certainly think that grams per kilowatt hour is a very important
one, but I think one also has to look at degrees of certainty
as to what the future grams per kilowatt hour will be. You do
that by tracking, as we try to, how many offshore wind platforms
have gone into planning; how many have gone into construction,
because that tells us how many will be in place in two or three
I think one of the values of the contract for difference
techniques is that that will give us a very concrete form of forward
indicator, because once you have contracted that someone is going
to have that contract for difference applicable in some future
year then that significantly increases that certainty. So I would
say the three categories of things are: the grams per kilowatt
hour, now and prospective; the physical indicators of what people
are investing in and what that tells us about the future; and
the balance of the contracts that have been struck and what that
tells us about the future.
Dr Kennedy: We
probably want to look at costs and price impacts as well. It is
Yes, I think tracking consumer bills against the European average
would be an interesting metric and of course security of supply
is going to be key to track that as well, both in terms of where
we are today but also projections going forward.
Coming back to the investment question, clearly there
is a lot of nervousness in the City right now about the impact
of this change and I think in near term the thing to measure is
going to be the level of activity over the next one to two years
to see if we do have a hiatus in investment while people try to
absorb what is going on with these changing rules. So I think
there are some quite near-term things that have to be tracked
Chair: Thank you very
much indeed. We could have gone on for another couple of hours,
I am sure, but we much look forward to your report on renewables.
Thank you for coming in.