Examination of Witnesses (Questions 440
- 452)
TUESDAY 8 JULY 2008
Mr Alistair Buchanan and Mr Stephen Smith
Q440 Lord Turner of Ecchinswell:
This is how the £20 billion or so capital ended up as £1
billion or so.
Mr Smith: Yes.
Q441 Lord Turner of Ecchinswell:
I just wanted to ask a question about the regime on connection
for offshore wind generators because at the moment it is an individual,
competition-based process.
Mr Smith: Indeed.
Q442 Lord Turner of Ecchinswell:
Some people have argued that we need a more co-ordinated approach
to offshore wind, perhaps giving a bigger role to National Grid
rather than to the individual operators. What are your thoughts
on that?
Mr Buchanan: Our starting point will
not surprise you, it sits with statute where within section 3
of the Utilities Act we have to seek the best route forward through
competition and markets wherever appropriate, so it is worth bearing
in mind that that is our starting point and, equally, we want
to ensure as we discussed in earlier parts of today value for
money for consumers. The best example I can use here is the Government
of Tasmania which built a substantial link—it was the best
part of 300 kilometres—using Pirelli, Siemens and our own
National Grid. They were the winning tender out of 13 tenders
to build that undersea cable and they felt it was highly successful
in terms of cost, it gave them what they wanted and, consequently,
looking at both international examples and looking at our remit
we believe this is the right way to proceed for now but that does
not deny the proposition that if at some stage in the future we
feel that we need to have more of a grid structure in the oceans
then that has not been denied.
Q443 Lord Turner of Ecchinswell:
The Tasmanian thing sounds like it is one large project where
the nature of these offshore developments may be a number of different
things, so the choices between each link of that being subject
to competition versus somebody as it were competing to build the
total grid.
Mr Buchanan: Yes, it is a 600 megawatt
link from memory and at the moment we are looking at substantial
wind farms. The London Array is one gigawatt, the scheme off Margate
which was Warwick Energy and is now owned by fund managers is
300 megawatts, Walney in Morecambe Bay is a sizeable project,
around 400 megawatts, but we will have to check that, so these
are sizeable projects in themselves that would have that kind
of megawatt capacity to take on shore, but this is a very important
part of our position. If it transpires that we need to develop
a grid then that is something that we would not rule out.
Q444 Lord Paul:
Do you support the move to band the Renewables Obligation? Have
you considered the case for a feed-in tariff, at least for smaller
renewable generators?
Mr Buchanan: We broadly do support the
move to banding ROCs. We were pretty noisy about not being thrilled
about the concept of ROCs originally, but one of the reasons that
we like the banding is aspects like landfill, now receive a very
reduced ROC. It is worth bearing in mind that of that increase
in renewables from 1.8 to four per cent in the first five years
of the ROCs, 70 per cent was landfill and small hydro. Consequently,
I think banding does send an element of a message here. As I say,
our support of banding is in with an overall slightly negative
approach to the ROC scheme. I think the question as to whether
we have considered the case for a feed-in tariff is that what
we have recommended to the Government in the past are schemes
that have a link to a market mechanism which the original ROC
certainly did. The ROC then slightly got changed and was not going
to have that, it was going to have ski slopes put into place effectively
capping the price going down and we are pleased that that has
been changed in the current recommendations. Our broad advice
is that wherever you can try to link this scheme to the market
price, we would feel comfortable with that but we have not actively
promoted the feed-in tariff, rather we felt that that would be
coming from BERR if that was what they wanted to do. Steve, do
you want to add to that?
Mr Smith: As administrator of the scheme
we have clearly set out to Government that the ROC scheme was
not designed with the idea in mind that someone in their house
has put a turbine on their roof, so we have said to them clearly
this a bit mad because we will end up having thousands of people
somewhere in an office handing out these pieces of paper that
are worth less than it costs us to process them, so I think the
Government has to think about that. As I say, the ROC scheme was
set up in anticipation of big turbines, so whether you do it through
a feed-in tariff or some other mechanism we certainly say as an
administrator it does not make any sense to be handing out these
pieces of paper that will be worth a fraction of what it costs
us to do that.
Mr Buchanan: Just to add to that, as
I mentioned earlier we administer this. Only 185 of 10,000 potential
individual applicants for a ROC before the aggregation scheme
was introduced very well under the Climate Change and Sustainability
Act ever bothered doing it because the complexity and cost of
the admin just swamped the attraction of doing it.
Q445 Lord Paul:
You said you had this survey and people were concerned about climate
change and were happy with renewable energy, but once they know
that the cost might be higher would they have the same opinion?
Mr Buchanan: There are two surveys that
I look at to try and stay abreast of this. The first was a survey
that Electricité de France gave us, and there the most
important issue for consumers was energy price at 38 per cent
and environment came in at 15 per cent. That was a year ago and
I think if EDF did that survey again today the gap would be bigger
between those two. The Financial Times did a survey—and
I am happy to go and dig it out for you—about three months
ago that showed that the appetite for the environment had fallen
from something like that 15 per cent to something like seven per
cent, so you are right, price is certainly an issue in everybody's
mind.
Q446 Lord Lawson of Blaby:
Of course, when people say they are concerned about the environment
a lot of them will mean they do not want these wind turbines and
they do not want these power transmission lines.
Mr Buchanan: That may be the case, I
have not seen the breakdown of the numbers. The other interesting
set of numbers came from the MEUC which is our industrial body.
They did a survey of British companies and the numbers there that
stand out for me are that 67 per cent do not believe that we can
reach our 2020 target and 71 per cent feel that the greatest concern
they have is that across Europe the 27 Member States are all doing
different things and, therefore, you ultimately just play each
state off against the other, Again, I am happy to send you the
details of that survey if you would like.
Q447 Chairman:
Could I come back just for a moment to the banded ROCs and bring
you back to the point that you were making about the relative
costs of wind. If you are right then onshore wind is now competitive.
Are there ROCs for wind though, a zero ROC or what?
Mr Buchanan: It is a very, very interesting
question and I think the NAO were driving towards this in their
report. It is almost worth stepping back because when the ROC
was introduced in the early part of this decade electricity had
fallen from about £30 per megawatt hour to £14 and therefore
you needed a ROC of about £30 then to get your return, so
you were in your mid-40s. Effectively what we are looking at now
is that you have got your electricity price and your ROC which
will take you up to about £110 to £120 and your onshore
wind is £70 to £80—it is a very fair question
to raise but of course prices are volatile and they will maybe
go down.
Mr Smith: This is why we have consistently
argued that if you are going to have support, link it to the wholesale
price so if the wholesale price rises the support falls, and that
is all you need to do. It may well be the case if you have that
sort of scheme at the moment then for onshore wind the support
price will be zero, but you are saying that at today's carbon
prices and fossil fuel prices there is no need to provide any
support.
Mr Buchanan: I went back and dug it out
because it is such an interesting report; it is page 41 of the
NAO report on this, because the NAO were so concerned they hired
Oxera to do a quick run of the numbers. Oxera did a quick run
of the numbers and said wind is viable on £15 not £30—that
was at the time of the review—and they also went on to say
that by 2026/27 in the NAO's view, this is their view, a third
of the profits that are being earned are effectively super profits.
Q448 Baroness Hamwee:
You have already talked about the bureaucracy associated with
domestic micro generation but what changes do you think are needed
to the industry's code to improve the process and what are you
doing to encourage the industry?
Mr Smith: It is exactly that. The whole
arrangements were set up with the idea of large power stations
centrally despatched, so if you are a brave consumer who thinks
I would like to look at doing something locally you just find
yourself bogged down in a set of tariffs and you would require
a PhD and an awful lot of time to work out which of the suppliers
is offering you the best deal and you would get caught in a requirement
to be told you need two meters, one to measure your imports and
exports and the second---
Q449 Baroness Hamwee:
It is putting me off entirely.
Mr Smith: Exactly. The simple answer,
what we are saying to the suppliers, is this all needs to be simplified.
We did a review for the Treasury that looked at whether the actual
prices being offered were fair, and interestingly we concluded
that if anything they were probably on the generous side and there
was probably an element of either a loss leader or a desire on
the supplier's front to be seen to be doing the right thing, and
therefore if you did get massive take-up of those tariffs they
are offering they probably would not be sustainable. What we said
we need is a single one-stop shop that if you want to do this
it says right, here is what you need to do, here is who can sort
it out for you in terms of getting a meter, here is what you will
get paid and here is how much you will save. We suggested to Government
that if it was particularly keen given its micro generation strategy
then some limited funding to one of the existing price comparison
websites to enable them to provide a simple service to customers,
that may cut through this complexity, is probably the best way
to go.
Q450 Baroness Hamwee:
This is something that Government would have to do. You are, in
shorthand, the consumer's friend here, is your remit limited to
that sort of advice?
Mr Smith: We felt it was more appropriate
for Government because it had this micro-generation strategy.
As I said, we were asked to look at whether the market was working,
and our conclusion was the prices are fair but it is a question
of complexity. Obviously we have something called a Microgen Forum
where we try and use our brand and our influence to cajole or
encourage the suppliers to make things simpler but we do not actually
have formal powers or the ability to commit funds to these sorts
of things.
Chairman: I am afraid we have run out
of time but I know that a couple of members would have liked to
ask you a question. Lord Macdonald.
Q451 Lord Macdonald of Tradeston:
Slightly tangential to what we have been discussing, given the
rapid increase in prices have you noticed any slippage in demand?
Mr Smith: Yes, we have and quite significant.
If you go back to the first gas price spike of 2005 and even adjusting
for weather, demand on the gas network was down about 8 per cent
year on year and gas demand is still very depressed and we will
probably see a further reduction. The thing that has not been
done yet is to really unpick that at a level to understand whether
that is things that would worry you, which is people actually
turning their thermostat down, with all that that could bring
in terms of the social problems, or whether that is actually people
investing in energy efficiency measures so that they can continue
to heat their houses. Electricity networks have been declining
year on year in peak demand for about three years now which is
just unprecedented. You could bet your house from the Seventies
to 2000 that electricity demand would rise by between one and
one and a half per cent year on year, but as I have said you have
actually had the local distribution networks reporting year on
year reductions in peak electricity demand of the order of two
to four per cent for about the last three years. As I said, I
know there is a lot of work going on in the companies and amongst
the suppliers to understand what is driving that.
Q452 Chairman:
As I was saying, I know that there are a couple of questions that
members would have liked to ask and if I could ask you perhaps
to drop us a note on them, the first was are there any lessons
that we can learn from the Danish experience, given the high proportion
of renewables in the Danish network and the second was could you
enlighten us on the regime for back-up or standby generation that
would be required for wind and other renewables? Who pays for
it, is there a requirement for an incentive and so forth? If you
could do that, that would be very useful.
Mr Buchanan: I would be very happy to
do that.
Chairman: May I thank you both again for your
answers this afternoon and your written evidence; thank you very
much indeed, it has been very helpful.
| 
