The Economics of Renewable Energy - Economic Affairs Committee - Contents


Examination of Witnesses (Questions 220 - 239)

TUESDAY 17 JUNE 2008

Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor

  Q220  Lord Layard: Could you tell us how much capacity is held in reserve to cope with fluctuations in the wind and how much more reserve capacity will be needed as the proportion of wind within the system increases? Does the backup have to come from fossil fuel?

  Dr MacLean: The answer to that is partly what we were saying before, that there is already currently somewhere between ten and 15 gigawatts of capacity that is kept in reserve over and above what is technically needed to meet the absolute peak in the system. It is over 20 per cent at the moment but that number is coming down rapidly as plant closes and is not replaced. Our companies have all worked together on a report from the UK Business Council for Sustainable Energy and I am happy to give the Committee a copy of the paper or a link to that. We have calculated that we will need an extra 17 gigawatts of capacity in order to balance the increase of renewables from about five gigawatts to 55 gigawatts, so 17 gigawatt increase in the backup. That can be in the form of generation or storage or demand side measures which will allow either the peaks to be met or the other situation that we have that if, for instance, in the middle of the night a gale is blowing, it is raining very hard, the tides are all doing what they are doing very well, we are quite likely in a high renewable penetration world to be generating far more energy than we have actually got demand for at the time and that will make storage as an element of that 17 gigawatts much more important in order to be able to harvest all of that energy. That is 17 gigawatts over and above what would be held at the moment.

  Q221  Lord Lawson of Blaby: Have you got any figures on the cost of storage?

  Dr MacLean: The cost of storage at the moment is relatively high. I am not a great expert in that area but there is a lot of work being done at the moment, for instance in Scotland, looking at what more we can do with storage and what we can do with the existing hydro plants that are there in order to be able to better use them for those sorts of purposes. We are talking about an order of magnitude of change but one which we think, by 2020, could play a significant role in that overall one, but it will not replace the need for a big proportion of that 17 gigawatts to come from some form of despatchable generation.

  Q222  Chairman: I think Lord Lawson was asking whether you had anything on paper that you could give us.

  Dr MacLean: No, I do not have at the moment. We are currently commissioning some work on that and we will have to share that at a later date.

  Q223  Lord Moonie: Have you done any modelling work on, for example, charging batteries as a means of looking to the future or production of hydrogen?

  Dr MacLean: One of the very interesting measures that is being considered at the moment is to use peak capacity for the charging of batteries for electric hybrid vehicles. In carbon terms, even using current grid electricity and the carbon intensity of that, it is actually preferable to charge the battery of a hybrid vehicle from the mains than by doing it through the inefficient internal combustion engine of the car itself. As we move to a situation of 30 or 40 per cent renewables it then becomes much more attractive to use electricity for batteries for vehicles and for heat storage as well through immersion heating. You are then actually looking at the much wider picture of heat and transport as well as electricity in order to make the best use of the resource that you have.

  Q224  Lord Layard: I do not quite understand the return to the individual company that is supplying the wind energy. Is there some linkage between the wind capacity and the backup capacity?

  Mr Sambhi: Today the requirement for backup for wind is relatively small because wind as a percentage of the generation mix is tiny. To answer the question of whether today we hold backup generation the answer is no because the grid has enough reserve capacity in the system to cope with fluctuations in supply from wind farms in the UK. Fast forwarding to the future where the share of wind is much bigger, then there will be a requirement almost to create a new market which is a backup market and so your last question about the incentive for companies, today in the current market design there is limited incentive and that is one of the things that the industry is discussing at the moment: how should this backup plant be rewarded? Is there a regulated mechanism? Is there a market for backup that is created amongst the generators? So we have not solved the problem; we know what the problem is but there are different solutions.

  Mr Taylor: If you think about it at the moment, we have some 76 gigawatts of capacity on the system. Over the next 12 years a third of that will close out anyway, that is the old coal plant and the old nuclear plant. We have the challenge of potentially supporting some 40 gigawatts of variable renewables capacity which can vary between being 40 gigawatts and four gigawatts and that will require us to replace and invest in capacity to support the renewables capacity that will be coming on the system. That is a very significant challenge and one that needs to be thought about holistically in terms of the costs of running a system with that mix.

  Q225  Lord Macdonald of Tradeston: When you come to the need for backup sources for your wind farms if it is not required yet, what do you think the net effect will be on carbon emissions? As the amount of wind capacity rises can you help with the equation of how the carbon emissions will decline?

  Dr MacLean: All of the calculations are based on energy rather than capacity and I think it is important that we split out the two issues. Let us take, for example, one of the scenarios we are working on that we reach a penetration of renewables of 40 per cent, it means that 40 per cent of the electricity will be generated by fuel free means and the remaining 60 per cent will require us to burn fossil fuels or to use nuclear plants in order to provide that. The carbon equation is based purely on that energy; it is only in a tiny, tiny way impacted upon by the amount of capacity that we have sitting there in the system. In a world where we expand the system that we have at the moment of 70-something to 120-something then that increase in capacity does not have a significant impact on carbon. It is only when you actually start running the plant that the big benefit of renewables is that it displaces the need to burn fuel in order to create that energy. That displacement is what is giving us the carbon saving and it is unaffected almost completely by the capacity that we have sitting there.

  Q226  Lord Macdonald of Tradeston: It is quite a simple reduction.

  Dr MacLean: Yes, absolutely simple, based on that penetration level.

  Mr Sambhi: Let us say we went to 40 per cent renewables and let us say we had 20 per cent nuclear and the balance of electricity being provided by fossil fuels—so the balance is 40 per cent—that is nearly half of what we have today. In simple terms you are halving the amount of carbon emitted.

  Q227  Lord Lawson of Blaby: Lord Macdonald has a point because if, to take an extreme case, you went to 100 per cent renewables there would still not be 100 per cent reduction in carbon emissions because you still require the backup.

  Mr Sambhi: You could not go to 100 per cent renewable energy because there will be days where the wind does not blow.

  Q228  Lord Lawson of Blaby: Exactly, that is the point.

  Dr MacLean: Even if you did get to a very high penetration the only carbon there is in the system comes from the embodied carbon that you have because you have built the thing and for any fuel that you burn as you run it. That is the simple equation and the embodied carbon is so much lower than the carbon from the combustion process that it can be pretty much ignored for the purposes of that calculation.

  Q229  Lord Paul: What have been the main obstacles to building more renewable power stations? Is it the money? Is it the planning permission? Or is it the connection to the network? Does it make any difference who owns the network? Have you done any studies that if you built a brand new fossil fuel plant and then at the same time if you are asked to supply 20 per cent of renewable energy, what will be the difference in cost to the consumer?

  Dr MacLean: There are a lot of points there; I will take the first part. The two main blockers that there are to progress are planning and grid. It is not the availability of money; it is not the support mechanism. The Renewables Obligation has created a lot of interest; it has created a lot of backing from investors. Our problem is that there is a queue of projects waiting to get on to the system and either they cannot get planning permission or, when they do get planning permission, they cannot connect to the network. All of us are very supportive of the Planning Reform Bill and the ideas in there to speed up decision making. We do not expect every decision will be a yes; we want quick "yeses" and quick "nos". The decisions are not better but if they can be made in months that is better than years as we have at the moment. Grid access must be reformed to allow renewable generators to connect to the system when it is technically possible for them to do so. At the moment that is not happening. We must also, on the planning side, ensure that we are building what new network needs to be built in order to accommodate the renewables in those areas where they are going to be developed. That is going to be particularly true of the offshore wind where we are going to have to ensure that there is a lot of investment not only in the wires to bring the power in but also onshore to make sure it gets to the right places once it is there. Those are the two things and I hope one of my colleagues will come up with an answer to the second part.

  Mr Sambhi: Lord Paul, could you please clarify your second question because I am not sure I fully understood it?

  Q230  Lord Paul: If you have to build a new plant for fossil fuel generation and if you have to supply along with that 20 per cent of renewable energy, what will be the cost to the consumer?

  Mr Taylor: Assuming that the figures I quoted a little earlier on which were of the order of £100 a megawatt hour for offshore wind versus the base costs of coal without the cost of carbon which is around £50 a megawatt hour, if you were doing 20 per cent by offshore wind and displacing the coal you would incur a 20 per cent increase I think of the overall cost. That is just a quick calculation that can be done from the figures that we quoted in the evidence. I would just like to add to the comments from colleagues. I fully agree with the issues of the grid, planning and supply chain. I think, given the scale of investment that we are now talking about here (if we go to 30 gigawatts of offshore wind we are talking about £60 billion plus investment just in the actual plant itself without other investments in new support capacity and transmission) one of the things that of course is an issue is the attractiveness of the market for investors that have a choice across a whole range of countries. We have seen some examples of that most recently.

  Q231  Lord Paul: I was not asking the question about your costs; I am talking about delivery to the consumer which includes connection and storage backup.

  Mr Taylor: I am sorry I am not able to answer that. My answer was really just an implied increase in the wholesale cost.

  Q232  Lord Moonie: Shell has recently pulled out of the London Array offshore wind farm project in which E.ON is an investor, citing unfavourable economic factors. Could you expand a bit on the economic problems facing offshore wind compared to onshore projects and other forms of renewable generation? Do you think this is going to change over time?

  Mr Taylor: In a sense I have to leave Shell to make their own comments, but the comments they have made are that they are reviewing their investment options including opportunities to invest in onshore wind in the US and they have concluded that they wish to dispose of their share as was announced. Everything is relative and they were looking at other options for their investment. The investments in offshore wind are significant. London Array is £2 billion-plus for one gigawatt of offshore wind and therefore these are big investments. We are now looking at that in the light of what has happened with Shell and of course reviewing that project to understand the economics and to work with the supply chain to try to make sure that the economics work for that project. I cannot really go into too much more detail really on that, suffice to say that there is bound to be a delay as a result of Shell—who had a third of that project—deciding to sell their share. We hope to resolve this as quickly as possible so that we can determine whether that project goes ahead or not.

  Q233  Lord Moonie: Is one gigawatt the headline figure or the 30 per cent figure?

  Mr Taylor: That is the headline figure, so its contribution will be of the order of 38 per cent of that on average.

  Q234  Lord Moonie: Is the winter profile any better than for onshore?

  Mr Taylor: I do not have the exact figures but on average over a portfolio of wind farms we actually have an average contribution during the winter peak periods of around eight per cent. I cannot quote what we expect during that period specifically for the London Array project.

  Dr MacLean: Perhaps in contrast we have just made an announcement in recent weeks of a big offshore project which will be the biggest in the world—assuming we are there before the London Array—of half a gigawatt and that is an even higher cost per gigawatt than Bob was talking about there. It is 500 megawatts for £1.3 billion. We are putting our money where our mouth is; we believe that we can make the economics of that project work. We would be delighted if the capital costs were lower but we still believe in the environment we are investing in at the moment that that makes economic sense for us to move ahead with what is a very, very significant investment. I just want to reinforce the point, it is very difficult to compare capacity and energy. We are building the project because we get money for providing energy not providing the capacity. The capacity is almost an irrelevance. As with a car the capacity of the engine is actually far less of interest than the acceleration, the fuel consumption and the top speed, depending on which particular one you are interested in. You can get a lot of power out of a low capacity. It is really a misleading comparison. The renewable world is a different one. We have looked at hydros with capacity factors of less than 20 per cent quite happily and they do a good job for what they are designed to do, which is to provide energy at particular times. Wind and tide and wave will do exactly the same. Let us see the energy rather than the capacity.

  Q235  Lord Griffths of Fforestfach: I would like to ask you questions about carbon capture and storage. One is what are the challenges to making it commercially viable? Secondly, in terms of your own company, what is the potential of CCS for cutting your own carbon emissions? Thirdly, how advanced, if at all, are the plans of your own companies to install these facilities in plants? Fourthly, is there anything the Government should be doing to enable this technology to be developed more rapidly? Fifthly, in the chart we have from E.ON the marginal cost of coal compared to coal plus carbon capture seems at first sight to be almost negligible; I just wondered if you could comment on that.

  Mr Taylor: On the last point, the reason why it looks comparable with coal is because if you have carbon costs at 40 euros a tonne then when you add the cost of carbon on to an unabated coal plant you see it approaching a similar kind of cost.

  Q236  Lord Lawson of Blaby: Where do you get that figure from?

  Mr Taylor: It is based on some of our own analysis plus other publicly quoted figures for a view of commercially proven costs of carbon capture and storage.

  Q237  Lord Lawson of Blaby: The cost of carbon?

  Mr Taylor: In our information you can see we have quoted it at 20 euros a tonne, we have quoted it at 40 euros a tonne, and this is basically looking at future scenarios of carbon costs dependent on the European Emissions Trading Scheme and the decrease in caps.

  Q238  Lord Lawson of Blaby: So it is pretty contextual.

  Mr Taylor: It does make some assumptions about the price of carbon as a result of the European Emissions Trading Scheme. That is why you see the figures aligning when you assume a certain cost of carbon. I have just a few comments on carbon capture and storage and then I will offer it across to colleagues. The importance of carbon capture and storage probably cannot be understated. Coal, whether we like it or not, is a very important part of the energy resource both in the UK but particularly elsewhere in the world, in China and India. As you know, in China in 2006 they built 90 gigawatts of coal plant—a modern coal fired plant—but of course unabated coal plant in terms of carbon emissions. I think if we are serious about solving and reducing carbon emissions from generation plant then carbon capture and storage is a fundamental issue to be addressed. In terms of the technology, in essence the components of the technology exist today and are used at a smaller scale and in their various parts across aspects of the energy industry today. You can see examples of carbon being sequestered and stored underground, whether that is for enhanced oil recovery or into depleted gas fields elsewhere. There are three or four fairly sizeable examples of that.

  Q239  Lord Griffths of Fforestfach: In the UK?

  Mr Taylor: Not in the UK, in Norway, Algeria and Canada. If you look at transporting CO2 over long distances through pipelines there are a lot of examples of that particularly in the US where they do pipe CO2 over quite long distances—1000 kilometres plus—as part of enhanced oil recovery processes as well. When it comes to the capture part, how you capture CO2 from either post-combustion, combusting coal and then treating the flue gases and separating out the CO2 from the flue gases, there again some of that technology exists but it is smaller scale at the moment. For pre-combustion there are examples of other aspects of how you capture carbon. One of the issues is that there needs to be a major initiative to establish a large scale demonstration project. There are number of initiatives for the pre-combustion process and the US are trying to get some of that off the ground. The UK Government has come forward with its competition for a demonstration project for post-combustion carbon capture and, as you will see in our evidence, we submitted an application to compete for funds to be able to demonstrate large scale carbon capture and storage in the UK. The main issues to be sorted are scaling issues—scaling up this technology—integration issues, so operating it as an integrated chain, as part of a power station as well, and also research and development to make the process more efficient because at the moment there is a sizeable amount of power and energy that is needed in order to operate the process itself. There are issues to be solved and the next decade should really be about the demonstration and commercialisation of that technology.


 
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