Examination of Witnesses (Questions 213
- 219)
TUESDAY 17 JUNE 2008
Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor
Q213 Chairman:
Good afternoon and welcome to Mr Taylor, Mr Sambhi and Dr MacLean.
Thank you very much for giving up some of your time to be with
us this afternoon. Thank you very much for the written submissions
that each of you has given us in advance. Whether we will have
been able to read all of them I am not sure; I think two of them
were late runners, if I can put it that way. Before we move into
questions I do not know whether you would like to make any preparatory
or introductory remarks. No. In which case let us go straight
into questions. I will start by asking you how do the costs of
generating electricity from renewables compare to fossil fuel
and nuclear generation? What are the current estimates for the
costs of greener fossil fuel generation with carbon capture and
storage and how do those costs compare to renewable generation?
Mr Taylor: Firstly we have shared some
costs in the evidence in this regard. Before I go into the detail
of answering the question, energy investments of course are long
term investments and the basis of the analysis to come forward
with these costs takes long term judgments about the relative
commodity prices for fuels, in addition to some other costs. In
our evidence you will see that we are showing costs for offshore
wind—these are long run marginal costs—of around £107
per megawatt hour; the costs for onshore wind of around £75
per megawatt hour. That compares to coal, assuming 40 euros a
tonne for carbon price, of around £70 per megawatt hour.
Broadly you can see that if you make some assumptions around the
cost of carbon you can see the cost of coal with the cost of carbon
approaching the cost of onshore wind. As soon as you move away
from the carbon price and just take the basic underlying costs
you get different figures with fossil fuels being much cheaper
than the cost of renewable generation. When it comes to carbon
capture and storage our view is that the cost of coal with carbon
capture and storage, once carbon capture and storage is commercially
proven, will break even at the order of 40 to 50 euros per tonne,
so you get a cost for coal plus carbon capture and storage of
around about £70 a megawatt hour. That is sharing with you
the information given in our written evidence.
Q214 Chairman:
Just coming back to wind for a moment, you were talking about
long run marginal costs, does that include the impact on standby
facilities, given that there is intermittency in the wind, and
does it include the impact on the grid?
Mr Taylor: No, this is purely the long
run marginal costs of the renewable investment, the wind investment
itself. It will assume a certain cost of connection charge in
the economics and the capital cost of that investment, but it
does not include any costs associated with supporting the intermittency
of wind on the system.
Q215 Chairman:
In order to make decisions presumably one would have to look at
the total systems. This is perhaps not for you.
Mr Taylor: Exactly. We are looking at
these as individual investment decisions, but it is important
when you are looking at the overall generation mix to consider
the holistic economics of operating the system. Going forward,
as we move from two gigawatts of wind on the system to 20 or 30
gigawatts of wind on the system then there are other issues to
take into account and maybe in other questions we can address
these issues and other colleagues can also comment.
Q216 Chairman:
Are there any further comments or do you both agree with your
colleague?
Mr Sambhi: On the comment on the long
run costs of generation I would add the word of caution that it
really does depend on what you assume the long range prices are
for the input fuels. If I took, for example, today where we have
very high gas prices and very high coal prices, building a coal
fired station or a gas fired station looks very expensive; if
you use today's commodity prices, the cost of gas would be over
£90 per megawatt hour and coal above £70. They are pushing
to either at least or above the cost of offshore wind which does
not have any fuel exposure. However, if you assume that prices
are half of what they are in the long run the picture does look
different. On your question around the cost of intermittency,
I think that that point could be overplayed because we have to
remember that in the future if we do have a lot of offshore wind
in the power system in the UK, the role of our existing plant
changes—the existing plant being the existing fossil fuel
plant—and they change to become backup plants; they have
longer lives because you are using them for less hours and therefore
the new investment cost may not be prohibitive.
Dr MacLean: A further point on that,
I think it is important to underline the fact that once the investment
has been made in the renewable forms that we are talking about,
they are then independent of the fuel price going forward, whereas
one of the big issues that we are facing at the moment is not
only the high price but the volatility and uncertainty of the
price, but also the difficulties with availability that will increasingly
have in the prices. It is slightly difficult to do a comparison.
In our written evidence—which I think was amongst the later
papers—you will see that that we have tried to show a graph
which compares the price dependency of gas generation versus renewables
and it can be seen from that that the curve for gas goes up very,
very steeply depending on the oil price, whereas for renewables
it is a much flatter curve. With regard to the back up issue,
I think it is wrong to think that it is only renewables that have
to have backup. We currently have a system that is made up of
generation that is best suited for doing different things. Peak
lopping, for instance, is not something that nuclear does and
we already have to have things on the system which will do that.
As you rightly said, the capital costs of many of the backup measures—which
need not be generation, they could be storage, they could be demand
side measures as well—if those are, as with coal or gas,
relatively low capital cost then the overall cost to the system
is still relatively small because the main cost will then be incurred
only when they are having to run to provide that backup capacity.
That is an economic reality that we already face with the mixed
portfolio of generation that we have and we are just changing
the balance of that situation by moving to a higher renewables
penetration.
Q217 Chairman:
Previous witnesses have suggested to us that the degree of intermittency
associated with wind is of a different order than for any other
form of generation; is that correct?
Dr MacLean: It is a different type. If
you look at the situation we had a couple of weeks ago when Sizewell
B and Longannet both dropped off the system at the same time,
that was a massive intermittency of gigawatts. That is something
we would never have with that single point of failure with renewables.
The system has been built to be able to cope with that sort of
change. It must also be remembered the biggest intermittency on
the system at the moment is not on the supply side but actually
on the demand side. The change from the summer trough to the winter
peak is absolutely enormous and the system has been designed to
be able to cope with those ups and downs, minute by minute, hour
by hour, month by month. We are altering the balance but we are
not fundamentally introducing a situation that we have not been
dealing with for many years already.
Q218 Chairman:
Is there not a difference between intermittency which is a failure
of plant and intermittency which is a failure of the source of
power?
Dr MacLean: The durations are certainly
different and I am not saying that we will not have to modify
the system to cope. All I am saying is that we already manage
these issues within the current system; the technical means are
there and we believe the economic model that we currently have
will probably cope with that change as well.
Q219 Chairman:
Is there a point at which there is so much wind generated into
the system that the costs then flip into being significant? You
are suggesting at the moment that it is done on the margin. Perhaps
your colleague would like to answer that.
Mr Taylor: I do think there is a difference
once we start going to the extreme levels that we aspire to in
order to meet the renewables target. At the moment we are able
to cope with that on the system and, as my colleague mentioned,
National Grid operate enough spinning reserve to cope under most
circumstances with a major plant coming off the system. If we
look at the load factors, and in particular here we are talking
about wind as the main part of renewables investments, we are
looking at onshore load factors of around 30 per cent, a little
higher towards 40 per cent for offshore. If we look at the inherent
variability compared to the running variability of a conventional
plant, then the running capability available of a conventional
plant suffers up to five per cent forced outages resulting in
an average technical running capability outside of planned outages
of 95 per cent. When we analyse the data from our real wind farms
that exist now—we have 21 geographically dispersed wind
farms across the UK—and we look at that data, that data
clearly demonstrates that in particular during the winter peak
periods (which are some of the most essential periods for capacity
on the system) the firm capacity of our wind portfolio is somewhat
under 10 per cent, around eight per cent. In the longer term we
will aspire to solve some of that through energy storage, through
demand side management and indeed through very significant interconnection
between the system. If we look at northern Germany—of course
our company is present there—there are some 20 gigawatts
of wind and there are lessons to be learned from how the system
operates and the impact there. Some of the submissions we have
made elsewhere have demonstrated that we could require the capacity
to be increased from around 76 gigawatts (which is the current
total capacity on the UK system) to beyond 100 gigawatts, possibly
up to 120 gigawatts, in order to support up to 40 gigawatts of
wind and towards 50 gigawatts if we go even further. So I think
there are some differences and it needs to be addressed and thought
through. There are differences technically and differences commercially.
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