Examination of Witnesses (Questions 120
- 134)
TUESDAY 3 JUNE 2008
Mr Campbell Dunford and Dr John Constable
Q120 Lord Lawson of Blaby:
May I ask you a question in a number of parts? The Germans do
generate much more of their electricity from renewables in general
and wind power in particular than we do, so they are ahead of
us. What would you say is the main lesson that we can take from
the German experience? I have the impression that they are slightly
less enthusiastic about it now than they were. Is that correct?
Mr Dunford: The German experience of
renewables has caused them some technical difficulties as well
as considerable cost, of course. They have, for example, the largest
wind carpet in Europe. They have major balancing difficulties
and they have to export quite a lot of power under duress to neighbouring
countries. This has caused complaint, for example, from some of
the surrounding economies.
Dr Constable: Poland and Holland specifically.
Mr Dunford: So yes, that is a problem
for them. It has not been an entirely happy experience. They are
also having to construct an additional high voltage grid in order
to cope with the fluctuations created by this large wind carpet
and we understand that Germany is building five new coal stations,
which it does not otherwise need, purely to provide covering power
for the fluctuations from their wind carpet, so they are driving
up their cost quite a lot. The other thing that they have done,
which comes up a lot, is that they have a feed-in tariff to encourage
the spread of renewables at a local and domestic level. This is
certainly a way of encouraging domestic renewables but it again
introduces, in addition to the cost, a great deal of uncertainty
into the management of your power base. I am not sure that it
has been a great success for them.
Dr Constable: The German experience is
extremely instructive and we should all study it very carefully
indeed. The principal difficulties they have had are ones of cost.
There are areas in which the German experience is not relevant
and they found it much easier to solve their balancing problems
because they are so richly interconnected with their neighbours.
As Mr Campbell has just said, the neighbours have not always welcomed
these overflows and I know at present that the German grid operators
are recommending that connections with Denmark should actually
be reduced to protect stability in the Danish grid which is highly
important. In a positive way, there are areas in which Germany's
experience, for example of ground source heat pumps, has been
very beneficial. It has not been all bad for the Germans. Certainly
at the utility scale, the costs have been extremely high. I would
wonder whether it was unduly cynical to suggest that German enthusiasm
for the 2020 renewables targets was an attempt to ensure an equality
of economic burden across Europe, so at competition, at least
within Europe, was levelled off for them, whatever it did internationally.
Mr Dunford: It is also true that in Germany
and Austria there has been a considerable take-up of biogas for
example. Virtually every farm or village has a biogas unit available
to generate electricity locally and put wealth into the local
community. That simply has not happened here because of the way
our system is set up and it really should do. Again, it is a low-hanging
fruit.
Q121 Lord Lawson of Blaby:
I absolutely take your point about the low-hanging fruit. Nevertheless,
the present policy of the Government is to focus very heavily
on wind power. I would like to ask you one or two further questions
about that. You mentioned the fluctuations in the intermittency
and the need for backup. That produces two consequences. First
of all, it adds to the cost obviously and presumably the bigger
the proportion of your total electricity supply which comes from
wind power, the bigger the extra cost you have, the more important
the backup is. It would be helpful if we could have some indication
from you—maybe it is in the paper you said you are offering
us—about how much this costs extra. Also, you mentioned
that in Germany they are building new coal-fired power stations
to provide this backup, to deal with this intermittency problem.
This obviously means that the amount of carbon dioxide emissions
which wind power is meant to cut out is diminished by the amount
that is generated by the backup systems. So what is the net effect
there? Is it possible to get away from that by having your backup
not coal fired or gas fired, not a conventional power station,
but nuclear as your back-up? When I was Secretary of State for
Energy, it was certainly believed in the department and it was
certainly the case then, because that was a long, long time ago,
25 years ago, that really nuclear was only remotely economic if
you had it as a base load. You could not have these kinds of fluctuations
which you would need, switching on and off when the wind was not
blowing or whatever. I am not up to speed with the new nuclear
technology and I wondered whether there was some development in
the technology of nuclear power which would enable it to be used
in this way.
Mr Dunford: If I might take the emissions
question first, because that is the easy one, the truth is that
in both Denmark and Germany, emissions have risen, not quite in
line with the penetration of wind, but their carbon dioxide emissions
have risen and continue to rise. They are higher than they were
when they started. The inference has to be, we are told, we have
not researched the subject ourselves, that this is because they
have had to resort to backup. The experience of providing backup
to date has always been that the engineers need to respond very
quickly, therefore they have used those generating technologies
which are capable of being ramped up and down quickly without
causing damage and that therefore has tended to be either oil,
coal or open cycle gas. Regarding nuclear, John, do you have a
view?
Dr Constable: Certainly it is true that
the older generation nuclear stations were relatively inflexible,
technically inflexible, whereas with the latest generation, I
understand, it will actually be required in the licences that
they have the ability to follow load, and there is no particular
reason why a PWR should not be able to do so. However, it is not
our field of expertise; I know that simply as incidental knowledge.
You would have to ask a nuclear reactor design operator. Economically
I would suspect they would prefer to run at full load, but if
you are asking them to flex, then I am sure they would do so and
charge appropriately.
Mr Dunford: The only comment I would
add, if I may, is that when you are talking of a large wind carpet
and the wind suddenly blows like a hooligan, you have a lot of
power already in the system. You do not have a great deal of time
to react, to crank things up and down. It is not that controllable.
I have to say I personally would be worried about nuclear plant
being turned up and down.
Q122 Lord Lawson of Blaby:
On the question of cost, how much is the intermittency factor
and the consequent need for backup, as you were saying, the bigger
the proportion of your electricity supply which is produced in
this way, the bigger that problem is, what does this do to the
cost of electricity?
Dr Constable: There are two senses of
backup here, often confused, and it is very important to keep
them separate. One is the need for rapid response reserve and
the cost of that is estimated at somewhere between £5 and
£8 per megawatt hour of wind energy in the UK. That may be
a little low, we are not sure, but it will do. The other cost,
which is the most interesting cost in some ways, is the cost of
running the rest of your conventional fleet at lower load factor.
That is another sense of backup. The Germans call it "shadow
capacity". We refer to it sometimes as "support capacity".
That is relatively easy to work out. You can produce a cost curve
for load factors, so you can see the cost for the conventional
generator rising as the load factor declines. I have not included
such a chart in the document I have with me today, but I am very
happy to direct you to an industry standard chart of that kind
and you can read more. It is not a linear effect; it is quite
a steep curve, so there is effectively a threshold effect, that
you reach a point where it becomes significantly more expensive
quite suddenly.
Q123 Chairman:
Dr Constable, last year you said that the UK regime of renewables
obligations certificates has been a disaster for the renewables
sector. Why do you think that is so? What do you think of the
Government's proposed changes to the scheme and are there other
changes to that scheme that you would like to see?
Dr Constable: Yes, I have said many things
which are critical of the renewables obligation. It is an extraordinary
system; it provides 60 per cent of the income for a renewable
generator. It is a very blunt instrument. It produces high profit
for the least capital intensive ticket to the subsidy stream.
In some cases internal rates of return for onshore wind projects
exceed 25 per cent. This is remarkable, to say the least. What
it has done to the sector is reward, serially, the least capital
intensive technology. Initially, that was landfill gas which is
a very good technology but hardly in need of subsidy, and its
benefits were very dearly bought. Latterly it has been wind, a
technology which, in our view, is limited in scale of deployment
and, if correctly sited, at present does not really require subsidy.
So what the RO has done for the sector is narrow development focus
on to one or two technologies which in fact least require support,
the least capital intensive ones, and it has depleted resources
available to other technologies which are either in need of technical
development or are more capital intensive. We know that because
we have innovators and technologists coming to see us all the
time, desperate to find capital support and finding it almost
impossible. We do our best to help them but it is very difficult.
In the wind sector it also created a perverse incentive for wind
developers to install plant in locations where there is fundamentally
very little wind. For many years the industry has premised its
output on a 30 per cent load factor and that is routinely used
but in fact, if you look at data which we publish, the load factor
for all 900 renewable generators, not just the wind, you can see
in fact 80 per cent of onshore wind farms failed to achieve that
sort of load factor. I believe you will be receiving submission
from Professor Jefferson of London Metropolitan Business School
who has been analysing this material. So the RO has created permanent
subsidy clients, and this is critical because there is a limited
capacity for wind in the UK grid. We have incentivised the construction
of wind which is saturating that limited capacity with sub-optimal
plant. It is very unfortunate indeed. Wind has a role in the UK's
grid but at the moment we have sub-optimal deployment. I would
find it very difficult to say anything positive about the Renewables
Obligation, except that the Government doubtless meant well in
introducing it. It was a very complex instrument and it has had
unforeseen and very unfortunate consequences. We welcome the current
proposals to band the obligation. Last year, we judged that such
revision should be seen as a step towards abolition. At present
I am prepared to come further forward and say that with rapidly
rising fossil fuel prices, the RO is needless and it should simply
be abolished.
Q124 Lord Moonie:
When you talk about the availability from a renewable source,
do you count the extra transmission losses into that?
Dr Constable: The load factor.
Q125 Lord Moonie:
Yes,
Dr Constable: No, it is usually calculated
at the edge of the site.
Q126 Lord Moonie:
Is that significant?
Dr Constable: The voltages in the network
are very high and the transmission losses are not very large;
I would not say that they were. In the distribution network they
are rather higher and that is interesting. It is very little studied
and it is very difficult to get data about losses in the distribution
sector. The distribution network operators frequently do not keep
this data and are not even capable of analysing it.
Q127 Lord Moonie:
How much investment in Britain's transmission and distribution
networks will different renewable energy sources require compared
with other forms of generation? Are the current transmission and
distribution systems capable of managing a large share of intermittent
renewable energy generation and, if not, how should they be changed
and are the rules on connecting capacity supportive of renewables?
Dr Constable: In a document we are leaving
with you, we have given some detailed numbers, some of the estimates.
The grid expansion would be very large, if the wind carpet were
very large itself. You are really looking for grid in order to
allow power flows around the country, so you want a very extensive
grid. In Germany for example, and this is an aspect of German
experience which is highly relevant, they are looking at about
1,200 miles of new extra high voltage grid by 2020, at a cost
of some £2 billion, and that is not counting the expansion
and reinforcement in the medium voltage grid. It is very significant
and we know it is going to be needed; it is not a theoretical
matter, it is real. Even more modest levels of renewables would
require significant grid expansion. National Grid estimated in
2004 that it would be something like £250,000 per megawatt
installed. That is a very significant number and even if we took
a lower figure, also used by National Grid, about £125,000,
50 gigawatts would require about £6 billion of grid. Now
that is investment which has to be recouped, so you have effectively
a standing charge on the customer. We have not done work on this
ourselves, but Professor Laughton, one of my advisers, has presented
an analysis to me which suggests that for every billion pounds
of grid, electricity prices would have to rise by about £3
per megawatt/hour. For £6 billion, well you can do the sums
yourselves. It is a significant overhead and not to be ignored.
Are the current transmission and distribution systems capable
of managing a large share of intermittent renewable? No, they
would have to be expanded to handle the capacities currently considered.
We would suggest that perhaps those capacities are rather too
high and that therefore it should be reduced to the point where
the economic burden becomes tolerable and indeed, returning to
the fuel saving point, where it does not wipe out any value from
the fuel saving. Are the rules on connecting capacity to the grid
supportive of renewables? I will hand that over.
Mr Dunford: The last speculative number
that came out of National Grid as to what they would like to have
to strengthen the grid was actually, and I stress that it was
a speculative number, £9 billion. There is pressure at the
moment for those who are proposing to create renewable generating
assets to have it made mandatory that they be connected to the
grid and, if they are not connected to the grid, that they should
be paid a fee as though they were connected to the grid, which
I find an extraordinary way of looking at life, but there you
go. The grid connection rules at the moment provide that connection
will take place as the grid judges the value of the power to the
overall system. Any changes would inevitably mean that the grid
itself was being asked to accept power and cost which was not
necessarily contributing to the value of the grid. Frankly, it
is a complex matter but it should not be changed lightly because
we do not know what the consequences should be. We do know that
the costs will be very, very great and we do not know what benefit
might accrue.
Q128 Chairman:
Let me just take you back to the renewables obligation and something
I should have picked up when you said that you wanted to see it
abolished. Would you want to see anything else in its place? For
example, would you like to support feed-in tariffs and, if so,
what do you think the impact would be on the investment of the
generators?
Mr Dunford: We debate that constantly
and six months ago we would have argued for a refinement of the
renewables obligation and probably a very, very finite life to
it. Now, however, electricity prices have risen and are continuing
to rise and everything that we see shows that they are just going
to carry on going that way. We honestly believe that most technologies
should now be able to survive without ongoing subsidy at the very
generous level that the RO provides. Let us remember that it is
60 per cent of the income for the average wind turbine now, for
example. That said, we do believe that some of the technologies
which we see every week need help to come to market. We do not
think that a subsidy is the right way to do it because that is
taking an infant technology and guaranteeing that it never grows
up, you just keep it in swaddling clothes. We do believe that
it would be prudent for the UK to look at increasing its level
of R&D support and early-stage support. We are way, way down
below competing economies on the amount we spend on R&D in
the renewables and energy sector, so we would like to see that
going forward. In terms of encouraging penetration into the marketplace,
we would probably seek to argue, particularly at a domestic level,
for a mechanism of capital grants to help technologies to come
forward. Simple straightforward subsidy has skewed the market
and we see no reason why it should not continue to skew the market,
if it is left as it is.
Q129 Lord Layard:
You have argued in favour of carbon capture and storage for coal-fired
plants. What would you like the Government to do about this?
Dr Constable: If you are interested in
reducing emissions from the electricity sector, both here in the
UK and by example elsewhere in the world, carbon capture and storage
(CCS) is absolutely essential. A consistent theme in the material
that we present you with today is that renewables are not a particularly
effective method of reducing emissions; they are valuable as a
fuel saver, which is a different matter. If you actually wish
to reduce your emissions, you are going to have to clean up the
conventional sector, not least because it is a matter of fact
that the world's fossil fuels are going to be used. China will
use its fossil fuels. The IEA, the International Energy Agency
in Paris, is estimating that in the next eight years China and
India combined will build 800 gigawatts of new power stations,
98 per cent of it coal fired. This is a very significant fact.
If we care about emissions, CCS seems to be absolutely unavoidable,
but it will be expensive and it is something governments have
to be open to the public about and say that if they want to reduce
emissions, they are going to have to pay to do it, but there is
no reason why that should not happen. Legislation requires that
sulphur dioxide be removed from power station outputs and the
market was left to find the most effective way of doing it, and
it has been very successful. It could happen with carbon capture
and storage but adoption in my view is absolutely conditional
on continued commitment to reduce emissions on a global scale
and if there is no coordinated global policy, the UK would be
better off spending its money on adaptation domestically and on
funding and granting overseas aid for adaptation responses internationally.
It is critical that CCS has to take off globally, if we are going
to do it. There is no point in us undertaking that extra cost
unless it is a truly international effort.
Q130 Lord Griffiths of Fforestfach:
You have argued that there has not been enough support for offshore
wind. Do you think that Shell's decision to withdraw from the
London offshore wind farm is influenced by the lack of support?
If you feel more support is needed, then how much and what kind
of policies would give rise to that?
Mr Dunford: We were disappointed. We
have long argued that the place for wind development is offshore
where the wind is more constant, it is stronger and where you
can position your investment close to the centres of load and
demand. Economically, it makes much more sense than scattering
the things willy-nilly across the countryside. So we were disappointed.
Q131 Lord Griffiths of Fforestfach:
How far offshore would the windmills be?
Dr Constable: The London Array? I cannot
remember. The Greater Gabbard offshore wind is 18 miles.
Mr Dunford: We are not privy to Shell's
decision making, but, as you will have seen from Exxon's chief
executive only this morning, the oil majors are, in current market
circumstances, concentrating their efforts and their capital expenditure
on making sure that there is enough oil and dealing with increasingly
tight geology for that oil. I suppose we should be grateful for
that. Shell faced significantly rising costs in Europe and in
America where it is also active in wind. Funnily enough, against
all predictions, the American subsidy system at the moment is
extremely attractive for all forms of renewable investment and
I should think that Shell is quite simply switching its resources
there. What would we like to see the Government do? Well, we have
argued against subsidy, we continue to argue against subsidy because
we do not think in the long term that is going to be healthy,
but to enable these very significant investments to get off the
ground there has to be some recognition that there is money going
to be tied up and there is going to be a commitment. So, once
again, we think that a capital grant mechanism or possibly a tax
mechanism, a rebate mechanism, rather than a subsidy would be
the way forward. I think that answers your question.
Dr Constable: It seems to me that the
Shell decision is quite an interesting example of the way that
international market interventions have distorted the UK market.
I would say the Obligation in the UK has probably put the brakes
on offshore wind, it has not helped, and taking it away would
help offshore wind, but a major market intervention in the States
has convinced Shell that they could get better margins elsewhere.
Probably, yes, we would support offshore wind capital grants,
which they did receive once, though I have a hunch that with rising
fossil fuel prices, large energy companies would invest in offshore
wind at a high wind site as a way of diversifying their portfolio
and hedging against increasing fossil fuel prices. It would be
interesting to test that hypothesis.
Q132 Lord Lawson of Blaby:
As I understand it, what you were saying a moment ago was that
you do not see really any case for wind power in terms of achieving
a stabilisation of carbon dioxide concentration in the atmosphere;
you see other arguments for wind power, providing it is wind power
which is offshore rather than onshore. If we do, however, focus
on the issue of stabilising carbon dioxide emissions in the atmosphere
which is what the Government's Climate Change Bill is all about
and what the climate change committee is all about, you made a
point, with which many people would agree, that that only makes
sense if you could have a global agreement and a global agreement
requires inevitably there to be carbon capture and storage installed
globally. Whether that is technologically possible nobody knows,
and even if it is technologically possible, nobody knows what
the cost would be of that. However, getting everybody else on
board is clearly important and Lord Stern has very recently produced
a paper under the aegis of the London School of Economics, which
I am sure that you have seen, about how to get a global agreement.
What he says is that the developed countries have got to go ahead
first; the developing countries would come in in 2020 and meanwhile
the developed countries should commit to reducing their carbon
dioxide emissions or carbon dioxide equivalent of emissions by
between 80 and 90 per cent by 2050 over 1990 base line, which
means at least 90 per cent compared with where we are now. Do
you believe that that is realistic and if it could be achieved,
how could it be achieved and at what cost?
Dr Constable: I am a lapsed academic
and in my previous life I worked in Japan for a number of years,
had many Chinese students and I have some feeling for the way
the Chinese see the world; these were very able people. They taught
me that the characters for China, a box with a stroke through
it and another box with a king inside it, are often translated
by western Sinologists such as Joseph Rock, as "Middle Kingdom"
which makes it sound rather Tolkeinesque and Hobbity and huggable.
They told me that it means very literally "country at the
centre". They have a very strong sense of national destiny
and it became very clear to me that the only argument that really
would affect China was economic and it seems to me that is true
for emissions reduction. I cannot imagine the Chinese Government
or its people paying any attention to an emissions strategy which
was not an economically compelling example. If they look this
way and see that we have spent a great deal of money on emissions
reduction, they will congratulate themselves and proceed on their
own way regardless. So I would be very doubtful about the geopolitical
likelihood of securing international agreement unless it were
economically compelling, and at the moment I would be pessimistic
about finding a way to produce an economically compelling example.
It would be very difficult; perhaps impossible.
Mr Dunford: I happen to have in my bag
a statement from Vsevolod Gavrilov, the official in charge of
Russia's Kyoto obligations. If I may, I quote "Energy must
not be a barrier to our comfort, our emerging middle class demands
lots of energy and it is our job to ensure comfortable supply.
We do not plan to limit the use of fuel for our industries; we
do not think this would be right". This is the official in
charge of their Kyoto obligations. The Russians have no intention
of doing anything that does not suit Russia. I would be surprised
if the Chinese, who are quite bright, would imitate us if we were
to do something which was not economically compelling. There is
no reason for them so to do, they all have emerging middle classes,
they all have coal, if we do not come up with technologies that
make it attractive, they are going to burn that coal anyway. I
am not a politician, God knows, but I really do not see how the
UK, or indeed Europe, disadvantaging itself is somehow going to
persuade other countries to change who are desperate to raise
their living standards, which means energy. I really do not understand
how that could be.
Q133 Chairman:
May I bring us back from the Middle Kingdom to the United Kingdom
just for a moment? We touched on heat and transport earlier on
and you said that heat was something which could do with a good
deal more emphasis than it has had so far. Are there other things
that the Government should be doing to support renewables in the
heat and transport sectors?
Mr Dunford: Certainly we believe that
there has been a vast over-emphasis upon electricity generation
in renewables which has not served the interests of other areas
at all well. Heat is the obvious area to go for, not least because
it is within our technical grasp to do something; it will save
fuel and imports for the country, but it will also make a material
difference to individual households which some of the stuff we
have been talking about is rather remote from. We believe that
measures to encourage the take-up of heat saving and heat generation
measures within the household are fundamentally good. Again, we
would argue for a very simple system of capital support grants
or taxation, not subsidies, not targets and, above all, if we
may put in a plea, let us not focus on microgeneration of electricity;
we believe that is a very false canard. Would you like to talk
about this week's report on that matter?
Dr Constable: On Monday a large study
into the uptake of microgeneration was published. REF was co-funder
with BERR and the main regional development agencies on this.
One of the conclusions of that study was, yes, you can drive in
a lot of microgeneration, but the cost is very high, but with
rising fossil fuel prices you will get quite a lot of spontaneous
uptake. There is a general principle here which we would extend
to other parts of the industry where doing less is more and where
if the Government did less more will actually happen. Targets
are probably not necessary to drive in microgeneration. Let people
make up their own minds about it. We are very sceptical of the
idea that such complex decisions can be made effectively by civil
servants, politicians, however gifted; it means as many brains
working on a complex scheme as possible. Therefore doing something
simple, like further reducing VAT on microgeneration technologies,
might actually be very helpful. At the moment it is five per cent,
but why not knock it down a few more points and take it off effectively
altogether? Doing less may well mean doing more.
Q134 Lord Moonie:
Proposed European emissions trading scheme, cost of carbon, how
are they going to affect relative costs of renewables and other
sources of energy? If we had a more efficient carbon trading scheme,
would it remove the need for special support of renewable energy?
Mr Dunford: We would like to argue that
yes, it would; we would like to believe that it would and it is
certainly preferable in terms of market development than any form
of artificial subsidy. Yes, we do think it would be preferable.
You focus on the ends rather than the means; you let the market
do things for itself so the market will choose the most effective
route to reduced emissions. A tax could be fine tuned, it has
that advantage as well and—this probably does not go down
terribly well—the tax could also be removed if no longer
needed. I am not sure that ever happens but it is possible. Yes,
we prefer carbon trading to support.
Dr Constable: And we would note the peculiar
incoherence in EU policy on this matter. On the one hand we have
commitment to the EUETS, which is a least-cost mechanism, and
then on the other hand you have these extraordinarily ambitious
renewables targets. If you believe that renewables are a very
effective way of reducing emissions, then they would be incentivised
by the ETS and they would be brought in by least-cost means. This
conflict between these policies has been noted and it was revealed
in leaked BERR documents last year but it is getting insufficient
attention within the EU itself and more people ought to be paying
attention to it. We would certainly back a carbon tax or the ETS
over direct income support mechanisms. Of the two, I would prefer
a carbon tax since it can be fine tuned very readily, and you
have certainty about the cost, if not about the emissions saving
that is achieved.
Chairman: Well thank you again for your time,
thank you for answering our questions and we look forward to seeing
your written submissions. Thank you very much indeed.
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