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.
| 
