Examination of Witnesses (Questions 412
- 419)
TUESDAY 8 JULY 2008
Mr Alistair Buchanan and Mr Stephen Smith
Q412 Chairman:
Welcome to Mr Buchanan and your colleague Mr Smith from Ofgem
and thank you for giving up some of your time this afternoon to
answer our questions. Thank you too for your written submission,
but as it only reached us yesterday afternoon you will probably
find that most of the members of the Committee have not had a
chance to read it, if you could bear that in mind. If you could
speak up, please, that is helpful, it helps with the recording,
and if you could be reasonably succinct in your answers that is
also helpful. Do you want to say anything by way of introductory
remarks or go straight into questions?
Mr Buchanan: We are very happy to go
into your questions and thank you for inviting us here today.
Q413 Chairman:
Perhaps you could outline Ofgem's role with respect to renewable
energy. We have received evidence which suggests that most sources
of renewable power generation are more expensive than conventional
generation; given your statutory duty to protect consumers, does
the move to increase the level of more expensive renewable energy
cause you any concerns?
Mr Buchanan: I will split the answer
if I may into three and try and answer that succinctly and then
come back on the individual parts. In terms of our role in a way
we have a multi-faceted role: we have a leadership role with regard
to setting network prices and with regard to setting out the offshore
regulatory framework, we have a facilitation role which is that
we very much seek to understand what is the desire of the Government
with regard to the renewables targets—and some of the decisions
we have taken, particularly in 2004 where we broke the normal
five-year price control cycle to step forward and agree nearly
£600 million spend on the grid is a good example of that
facilitation role. We have an advisory role, we seek to advise
both Defra and BERR on elements of both energy efficiency (with
regard to Defra) and renewable policy (with regard to BERR). We
think we are listened to but sometimes, as you can imagine, with
the critical attention we feel a little but like Nelson at Copenhagen,
but we try to make an impact. A very important though often less
newsworthy aspect of our job is that we administer nearly all
the schemes, so we administer the ROC scheme, we administer the
Energy Efficiency Committment and CERT scheme, we administer the
Climate Change levy, and that is a very large part of our business,
becoming an increasingly large part of our business. We are therefore
very much involved, to answer your question, My Lord Chairman,
in this. As regards the expense of renewable energy, in a way
this will take us when we go into discussion on to various subsidy
mechanisms, but the figures that I have seen most recently come
from Frontier Economics from June of this year. They are very
interesting figures because in terms of a megawatt hour what we
are looking at at the moment—these are their figures—is
onshore wind between £40 and £75; offshore wind between
£40 and £85 and then we take a step up and a barrage
at the low end of their charging range would be £140, photovoltaic
is £275, which is at the top end of the range, and fuel cell
is in the middle at around £175. Those are the latest figures,
but what is interesting then is if you slip nuclear in, which
is broadly in the range of £60 to £80, and if you slip
coal and gas in, which at the moment is broadly in the range of
£70 to £80, you have quite an interesting spread of
values there. For me the interest is that you have got onshore
wind arguably starting to compete with the traditional fuel sources,
and that is quite interesting. The final part of your question
if I may is our statutory duty, which we take extremely seriously.
Clearly, as we look into this winter with wholesale prices going
through the roof we are particularly concerned with regard to
the fuel poor. An alarming statistic that is always worth hanging
onto is that every one per cent increase in power prices that
you see is 40,000 people going onto the fuel poor lists. We do
take this very seriously and, clearly, one of the features of
the renewables strategy is that of a £1,000 bill currently
for the average household, £80 is environmental connected—it
is the EU ETS, it is the energy efficiency charge and it is the
renewable subsidy. I am afraid that is only going to go one way
and that is up; therefore we are minded to try and ensure that
consumers are very much considered within this debate. It may
interest you that we carried out a survey with Henley Associates
last year to find out what consumers thought about environmental
issues and only 11 per cent of them thought that the environment
was not worth worrying about, which in a way was a very encouraging
statistic. Certainly, we have to stay very much attuned to consumers
and we have just set up both a specialist consumer panel to advise
Ofgem and a broad consumer panel so that we can make sure that
we are very much attuned to what consumers' appetite is towards
in particular environmental spend going forward.
Q414 Chairman:
Could I just ask you just two quick follow-ups then? One is that
in the figures that you were quoting for renewables with wind,
did those figures include the back-up that is required to deal
with intermittency, did they include incremental costs if any
of the grid and did they include potentially any loss of power
through transmission over long distances?
Mr Buchanan: To the best of my knowledge
it is no, no and no on those.
Q415 Chairman:
The second question is on the first point of your role. Is your
role in Scotland and Wales precisely the same as it is in England
given that a lot of renewables are expected to come from Scotland
and indeed Wales?
Mr Buchanan: We have a responsibility
to all consumers in Great Britain so we do not discriminate regionally
either within England or between Scotland, Wales and England.
Chairman: Thank you. Lord Lawson.
Q416 Lord Lawson of Blaby:
I would like to follow up what My Lord Chairman has just been
asking because it is clear that you were asked the question whether
these costings that you gave include system costs or back-up costs
because of intermittency and the answer was no to both and no
to something else too, which means that really they are not worth
the paper they are written on as a guide to policy although they
may be of some intellectual interest. In light of that I would
like to refer to something that you say in your very interesting
written evidence, which I have not had time to read very thoroughly
because it came a little bit late, but you say "We are unlikely
to hit a limit on the amount of renewables and intermittent generation
that can be absorbed given sufficient time and money. However,
there could be technical challenges in the medium term, for example
to 2020 [which of course is the target date] and the costs may
be excessive." Can you elaborate on what you mean by these
excessive costs—because that is a very strong statement—and
if possible can you quantify them?
Mr Buchanan: Yes. Could I just start
with an apology which I should have given to My Lord Chairman
with regard to the lateness of the document? We had been wanting
to see in particular what the Government's renewable strategy
was going to be before we responded and I suspect we are going
to come on to talk about that. With regard to intermittency costs,
you have seen National Grid, they have signalled that intermittency
costs from their perspective could be as high as £1 billion
extra per annum with regard to the wind targets that have been
set and clearly there may well be additional balancing and system
costs that may be included if the EPR design were to be used for
the nuclear power stations, so you have got these costs potentially
coming through and affecting the consumer. What we do say—and
you rightly point to our document—is that broadly the advice
that National Grid has provided to you is what we can buy into
which is that if the funding is there—and National Grid
used a figure of £9 billion to you and the kind of figure
that we have seen is six to nine and the kind of figures we have
put in our document which you have seen already is that for the
offshore £2.5 billion for the first eight gigawatts of power
would be the kind of scale, so these are very large sums of money.
In addition to that there will be large system, balance and reserve
charges, which again National Grid has given to you. It is worth
stepping back and saying can National Grid handle that technically?
They believe they can and we do have the advantage of starting
with an exceptionally strong network, a network that handles at
the moment some quite significant swings; it does handle 20 per
cent of the power broadly coming from nuclear which at times can
be very large base load chunks, we have got nearly five per cent
of renewables already, they have quite a large flexibility within
the system for voltage reduction so we are starting from quite
a strong position, but that is not to deny the question which
I think you are driving at which is this is going to place pressure
onto the system. Technically in a way the demand is now out to
see can we develop forms of storage and battery, can we take that
forward, and in terms of cost is this a cost that consumers are
going to be prepared to meet. Those are the challenges but it
would be wrong to suggest that because of this issue the 2020
target would not be met.
Q417 Lord Lawson of Blaby:
When you say the cost may be excessive—
Mr Buchanan: The costs will be very large.
Q418 Lord Lawson of Blaby:
Excessive was your word.
Mr Buchanan: Yes.
Q419 Lord Lawson of Blaby:
You imply also in your written evidence that the costs of, say,
nuclear may overall be less than that, you do not say whether
they would be or not, you say they may be, and in your opinion
it would be much better if the Government had not got a nap on
wind power—supported by the Opposition I may say—but
let the market decide which was the better. That seems to me to
be what you are saying.
Mr Buchanan: What we try to do—and
you will not be surprised to hear me say this—is not to
get into Ofgem intimating that we want to pick winners. One of
the concerns that we originally had with the renewable obligation,
a subsidy approach, was that there was an element of picking winners
there by the Government. Certainly with regard to, let us say,
balancing and system support costs, the National Grid have given
you that figure, which is up to £1 billion; the figure that
when I have spoken to National Grid they have discussed that the
additional new nuclears may cause to the system is substantially
lower than that figure.
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