The Economics of Renewable Energy - Economic Affairs Committee - Contents


Examination of Witnesses (Questions 240 - 247)

TUESDAY 17 JUNE 2008

Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor

  Q240  Lord Griffths of Fforestfach: How far away are we from realising this?

  Mr Sambhi: If I look at what we are doing we set a target to reduce the carbon intensity of our generation fleet, so that is the grams of CO2 emitted per unit of electricity produced. How do we get there? The main driver is by investing in more offshore wind which clearly has zero CO2 emission. There are other initiatives aimed at reducing carbon that we emit in the normal course of business, but for utilities the biggest impact that they can make is by reducing the carbon intensity of their fleet.

  Q241  Lord Best: How effective is the UK's system of support for renewables compared to other countries that your companies are working in? For example, would a feed-in tariff be a more cost-effective way to boost renewable generation than the Renewables Obligation?

  Dr MacLean: I think I mentioned in an earlier question that we believe that the Renewables Obligation has been very effective. In contrast to other countries the problem has been that they have introduced support mechanisms; they have also supported running applications and they have made sure that good access has been possible so that projects can be built and do not get stuck at one or other of the stages. Our problem with the Renewables Obligation has not been that it has not generated the projects; we have had gigawatts and gigawatts in the queue. That has then made the Renewables Obligation do what it was designed to do which was to further increase the financial benefit to those who are able to produce in the short term. This is why we have had a lot of criticism of the system because it appears to be over-rewarding those who are coming through and to an extent that is true, but the way to sort it is to remove the blockage in the system so that we get the planned number of projects being built and generating the electricity that they need to. That will then reduce the price down to where it was designed to go in the first place. We certainly do not believe that feed-in tariffs will be more effective. We have lived for a number of years under the Non-Fossil Fuel Obligation and other approaches which were very similar to feed-in tariffs and they were totally ineffective in bringing forward projects. The first thing that has really ramped up the market's interest and investors' interests in renewable energy in the UK has been the Renewables Obligation and it is far better matched to the liberalised electricity market that we actually have in the UK. One final point, if you look at the example that is often quoted of the success of feed-in tariffs in Germany for solar photovoltaics, I would just remind you that the level of support in Germany under the feed-in tariff was 40 pence and in the UK under the RO it has been four pence. I think we would probably come to the same conclusion, that 40 pence is probably the reason that it has happened rather than the delivery mechanism that was chosen for giving that to the generator.

  Mr Sambhi: If I look at other markets in terms of renewable support a lesson that I take away from countries like Germany where they have introduced feed-in tariffs is that they selected a mechanism and they stuck with it. That is very important for the UK because the RO is a relatively young mechanism and I think we are now seeing utility and investor confidence to put in more capital to meet the Government's targets.

  Q242  Lord Lawson of Blaby: So far as carbon capture and storage is concerned this is obviously completely speculative because it does not exist on a commercial scale at the present time and it is certainly not going to be introduced on a commercial scale for a very long time and might never happen. I am all in favour of research and development but this is completely speculative. It is probably going to be very expensive indeed not least because the idea of getting some return using the carbon dioxide and enhanced oil recovery not only is it not possible to be done on a large scale but also the plan is to phase out oil, coal and gas altogether. Clearly there is no market there so this is pretty dicey altogether. I will not ask any further questions about that because we are running out of time and because it is so expensive. I would rather focus on wind power because wind power is the here and now whereas carbon capture and storage is just a twinkle in the eye. I entirely accept that your companies are seeking very hard to produce wind power in the most economic way you possibly can; I accept that unreservedly. However, the fact is that all your projections are mere wishful thinking. As Dieter Helm has pointed out, "There is little doubt that wind has turned out to be so far much more expensive than forecast by the politicians and the wind power lobby". It is very striking, is it not, that when the Government put out its original Energy White Paper in 2003 it expected wind power to be economic as against conventional power in the near future. The price of oil then was 25 dollars a barrel; the price of oil now has increased by more than five times and yet you still need government support, you still need taxpayers' support. This is without taking into account that the costs, as you pointed out, of technology, of the spinning return and the connection costs. Is it really not the case that in fact what you are doing is something which is totally uneconomic by a huge margin, is likely to continue to be uneconomic which you are doing, as I said, in the most efficient, low cost way that you possibly can and working very hard at that, but basically the business case is that the Government has made its particular targets, the European Union has its particular targets, you have this great confidence in politicians—bless you!—and therefore you feel that whatever it costs there is the commitment to give you whatever support is required?

  Mr Taylor: You are right in that to a certain extent this is predicated on wanting to de-carbonise our generation infrastructure but to do so in a secure and affordable way. That must be the objective. Renewables is part of the answer—a very important part of the answer—if you are seeking to de-carbonise our energy infrastructure. I do believe, for all the reasons of uncertainty which you have pointed out over the various other fuels and other parts of the mix, that a diverse energy mix is important, including a strong and material role for renewables as part of that process.

  Mr Sambhi: There are two points I would like to make, Lord Lawson. The first point is that the costs have gone up in terms of offshore wind. That is not because there is a misunderstanding of the technology and it is a more complex product to deliver; it is because the input cost and the supply chain components have become more expensive. Oil has gone up but so have steel and copper which are a big component of the costs of building an offshore wind farm. Will the costs come down? I think they will. I am not betting on steel or copper prices coming down but I am looking at the supply chain for delivering these large infrastructure projects coming down. An example would be moving manufacture closer to the source of demand. We know that wind turbine manufacturers are already considering this given the future demand in EU and the US. The second point is what is the alternative? You have already said that carbon capture and storage is a long way further ahead. In terms of other options on the supply curve for reducing carbon emissions, offshore wind is the next best alternative; it is expensive but it is proven.

  Q243  Lord Lawson of Blaby: If I may I would like to get at this question a different way. What you are talking about is what is the cost of cutting carbon emissions? I think that is something we would like to know. Clearly there is no case for doing any of this unless you want to cut carbon emissions because the conventional stations are clearly very much cheaper. The question which we need to find out is in these various different fields what is the actual cost of cutting carbon emissions?

  Dr MacLean: I think there has been quite a lot of work done on that. There are the carbon abatement curves which show the whole range of different measures. What is interesting from that is that a lot of the very low cost measures are actually on the demand side rather than the supply side, things that could be done in terms of energy efficiency in reducing the amount that we actually consume.

  Q244  Lord Lawson of Blaby: You are quite right, but this inquiry is about renewables.

  Dr MacLean: The point I was wanting to make from that is that despite the fact that some of these things, when you actually have a very positive business case, they do not happen automatically and they require intervention, they require subsidy or some sort of money to make them happen. That is no different to what we have seen with mobile phones or the internet; they did not happen naturally, they required a lot of marketing and input. We will get to a stage at some point if the oil price continues to rise where wind is actually comparable with the fossil fuel plants, but that does not mean that all the investment that needs to be made will happen and will happen fast enough. That is why, at the moment, there needs to be an intervention and a subsidy to make sure that these things are happening and are happening quickly enough. It is not simply the difference between one or the other and whether that makes it worthwhile doing, whether that is the measure of the price of carbon. You have to add into that the cost of actually making it happen and of accelerating the process to make it happen quickly enough. At the moment that is the big challenge for the 2020 targets to make the investment decisions on nearly all of these things in the next two or three years otherwise they will not be there for 2020.

  Q245  Lord Lawson of Blaby: That is a completely arbitrary date.

  Dr MacLean: The 2020 date is, yes, but it is an arbitrary date which the Government will be bound by and will face sanctions if it misses the target. That is the reality of the situation we are moving into.

  Q246  Lord Lawson of Blaby: That is what gives you the confidence to invest in something which may be totally uneconomic.

  Dr MacLean: We believe that there are good reasons for the investment beyond simply the carbon. We believe, as I said previously, decoupling ourselves from the need for imports and the uncertainties of that, decoupling ourselves from what seems to be the inexorable rise in the price of fossil fuels and of the volatility and the uncertainty that that creates has a value which we do not actually have a way of calculating into the system at the moment. It makes it very difficult to compare one thing with another and the difference that is required to make these things happen is not just the price of carbon and waiting for that or establishing the value of that and then using that will not be enough to make these things happen on their own.

  Q247  Lord Macdonald of Tradeston: Could you give us a reckoning on what the total annual cost of public subsidy might be once the system is fully developed under the Renewables Obligation?

  Dr MacLean: I do not have that figure. I believe it will be published next week in the Renewable Energy Strategy as part of the analysis that the Government has done. It is not a number that we have access to at this stage.

  Mr Taylor: I think it is essential that as we respond to the consultation on the green package that there is absolute transparency about how much investment and how much this is going to cost customers so that they can understand the trade-off—there is a genuine trade-off here—being made between carbon security and cost. There is considerable investment and although there are obligations on companies and we seek to use those obligations and make investments, it is important at the end of the day for customers to understand the full underlying costs of these choices.

  Chairman: Thank you. We have traded upon your time rather longer than either you or we were expecting, but thank you very much indeed for spending your time here and answering our questions.





 
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