Examination of Witnesses (Questions 460
- 471)
TUESDAY 8 JULY 2008
Mr Steve Read, Ms Coralie Laurencin and Dr Karsten
Neuhoff
Q460 Lord MacGregor of Pulham Market:
Through Clean Development Mechanism projects, rich countries can
partly meet their carbon emission targets by investing in "green"
projects in poor countries. Does your experience of such projects
offer any lessons about the scope for international trading in
renewable energy?
Dr Neuhoff: The CDM projects are a success
in terms of creating incentives for private parties to take projects
forward in new countries and push the regulatory frameworks to
really allow for that to happen. The first challenge is that the
marginal abatement costs for different projects types are very
different but all projects receiving the same payment. The second
challenge is the uncertainty of the future price. What does that
imply for renewables trading in the European context? On the European
side we need a trading arrangement or a sharing arrangement because
the Commission effectively had to find a way of sharing the 20
per cent renewable target across Europe. Sharing can be based
on the renewable resource basis of countries or it can been done
according to the economic strength of the countries. It was not
politically possible to go for the resource base because a lot
of the new Member States that are weakest economically would have
to deliver a lot of the renewables. Therefore new Member States
have lower targets and countries like Belgium have quite an ambitious
target. For example the Belgium target might be more difficult
to deliver domestically. To address this concern there needs to
be some arrangement for cooperation among member states. The initial
approach discussed last year for the directive envisaged a European-wide
trading arrangement of green certificates with guarantees of origin.
Various people including myself were rather unhappy about that
approach because it would have implied that all the countries
that currently are very happy with their feed-in support scheme
would have to shift to this other scheme. Then the directive as
was presented in January offered two options. It allows countries
to opt out and say we will continue with their national scheme,
but it also allowed countries to say we will work together with
European wide trading. The challenge then was whether that actually
is legally robust or whether it will be subject to challenges
of market participants that say wait a second why did our government
opt out of international trading? We want to sell somewhere else.
My sense is that the discussions at a European level converged
to a situation without international trading between installations.
That is something which I think has come out already in the UK
context—all the documents that you see in the UK suggest
that there was no trading really envisaged in terms of moving
to one ROC price across the UK and across Europe, it is something
which very few countries really support. That raises another question
of how to co-operate to deliver renewables in another country
and count these against a national country target. That is something
where target sharing is possible across Europe, countries can
work together and if, for example, Poland delivers more renewables
than its national target then these can be counted against the
target in Belgium or the UK. It will be important to base this
cooperation on long term arrangements between two countries to
give early clarity for grid expansion and various complementary
measures. Over the next one or two years countries need to discuss
whether and how many renewables we want to share; for example
whether Belgium wants to work together with Bulgaria and deliver
some of their renewables in Bulgaria. This offers the opportunity
to sign a long term agreement between countries that allows co-operation
across TSO and different administrative levels. Both parties have
a strong interest in this cooperation, because it offers benefits
for both countries by leveraging the better renewable resources.
The big challenge that remains is compliance. I think the European
directive in the end requires very firm compliance mechanisms,
such that every country knows if it signs up and has to deliver
against that target to be fair to other countries.
Q461 Lord Macdonald of Tradeston:
In terms of marketing green projects in poorer countries, how
much concern do you have about abuse and corruption and so on?
Dr Neuhoff: Given where we seem to be
moving right now I am not very concerned because at the end there
will be co-operation between governments. Governments will work
together and say we pay you something if we get two additional
percentage points of renewables from your country. The government
money in the UK will probably come out of retail tariffs but it
would not go directly into private hands. I am fairly confident
that it will not directly lead to corruption.
Q462 Lord Griffiths of Fforestfach:
I have three related questions. What are the key considerations
in the UK energy policy? What role should renewables play in that
and, thirdly, how is their role likely to be changed in the medium
term (to 2020) and the longer term (to 2050 plus)?
Mr Read: Can I answer this question in
two parts? If I understand the direction of your question, it
is shorter term goals and medium to long term goals, and it is
important to establish the linkage between the two in so far as
encouraging the deployment of renewable energy technologies to
establish the stepping stones to longer term goals, and as longer
term goals we should be focused on the greater deployment of non-wind
technologies. It is also important to recognise that to get to
the deployment of non-wind technologies there already has to be
in place the right framework of policy and economic incentives
to encourage the technological skills and know-how and manufacturing
base into the UK market, so clearly at the moment there is a substantial
reliance on wind as the dominant and closest to being cost-effective
technology to deliver on the short term renewable energy targets.
Something that the previous panellists (Ofgem) said was in terms
of creating the environment for the pull-through of non-wind technologies,
which at this particular point in time require a substantially
higher level of tariff support to be able to encourage the manufacture
and deployment, so in the UK context in the short term I think
that the wind industry and a greater deployment of wind, together
with its visual impact and its cost of grid, should be seen as
a short term almost pact with the devil as it were to encourage
the right environment for the manufacture of non-wind technologies
and create a breathing space for non-wind technologies to come
through. Certainly in the period 2020 and beyond—you mentioned
in your question 2020 to 2050—we can see that over that
sort of time horizon, so over a 10 to 15 year horizon from now—a
greater deployment of wave and tidal technologies, potentially
energy from waste technologies and biomass technologies that have
a closer proximity_not in the case of wave and tide but in the
case of biomass and energy from waste—between generation
and point of usage which reduces reliance on further grid reinforcement
beyond what is required for short term and medium term wind.
Q463 Lord Best:
How do the costs of generating electricity from renewables compare
to fossil fuel and nuclear generation? I think you said earlier,
Dr Neuhoff, that the capacity for nuclear was strictly limited
and I was not quite sure why you said that. How likely in your
view are these relative costs to change in the future and how
robust do you think your estimate are? What are the main cost
drivers for renewable energy?
Dr Neuhoff: I have to admit I am not
a nuclear expert and therefore I cannot really make good judgments
in terms of where nuclear costs are. The numbers on the table
vary very much and it is difficult to see real market prices in
the current pricing. The concern I have with nuclear is based
on the open cycle. If you continue to use nuclear on the open
cycle and you really want, on a global scale, to deliver 20 or
30 per cent energy from nuclear then we are running against resource
constraints eventually. At that level of global contribution to
energy supply, therefore, you would have to move to a closed cycle
system and this raises all the issues about plutonium and proliferation—a
lot more countries would have access to plutonium with a closed
cycle system including reprocessing. There were various suggestions
on the table which speak about open cycle but that limits the
volume of energy delivered globally. Given that the new climate
policy in the UK and the European context is not only to satisfy
our own happiness in Europe but to contribute and perhaps take
a leadership role on a global scale, we have to do that in a way
that is compatible with a mechanism that we can also suggest to
other countries. If we use a technology here which we would not
want other countries to use to deliver their emission reductions,
that does not really make very much sense. In terms of where the
costs are, in Germany the prices of feed-in tariffs are currently
in the order of between £50 and £60 per megawatt hour
and 22 gigawatts of wind were delivered against these feed-in
tariffs. They will be increased by 10 per cent next year, mainly
because of bottlenecks in the supply chain. We have observed in
the last year a significant increase in the global deployment
of wind power, solar power and various other renewable technologies,
and the deployment usually was quicker than was anticipated by
market participants, so there was insufficient investment in the
production capacity. That is from my perspective one of the main
objectives for the European Renewables Directive, to create a
clear trajectory for the volume of renewables investment over
the next 10 or 15 years and commit to this trajectory. This will
allow technology companies like ABB to invest in sufficient cable
production capacity and wind turbine producers to invest in sufficient
capacity to produce wind turbines. They need the certainty that
there is going to be the demand and government policy is usually
the most uncertain thing that there is out there.[8]
I would assume that onshore wind as the potential for at least
10 to 20 per cent cost reduction. On this topic, we have been
doing studies on onshore wind where that is pretty much on the
table, and it was the constraints of the production line that
pushed up the prices. If you go, for example, for photovoltaics,
the German feed-in law that was passed last week suggests annual
reductions of the tariff by nine to ten per cent, starting in
2010. This reflects cost reductions which have not been passed
on to final prices because of supply constraints. There is an
expectation that prices will go down to costs. For marine energy
technologies it is more difficult to make price estimates. The
UK has a good resource potential, and being right now quite committed
to renewables, so I think that is one of the areas where there
could actually be a commercial benefit for the UK economy by developing
this technology. The main challenge is that we have a lot of small
developers who focus on their next demonstration project. They
have designed it such that it is going to survive, to get money
for the subsequent demonstration project. There is, so far, no
one with a big strategic interest and a long term vision in terms
of getting a few gigawatts out there. Without that there is not
sufficient expectation of profits and you will not get any of
the engineering people to shift their expertise from offshore
oil, where there is a lot of money on the table right now, to
this new technology. There needs to be more commitment, therefore,
if we want to develop those technologies.
Mr Read: I agree fully with what Dr Neuhoff
said there but there are just two other observations that I would
like to add. On the question of how the cost of generating electricity
from renewables compares to fossil fuel and nuclear generation,
there are obviously a number of price signals in the market. I
always think that the question is a very difficult one to answer
because you have to ask the question first of all what do you
factor into the cost, and particularly when you think of fossil
fuel generation and nuclear generation you have to try to put
some kind of quantum figure on the long term environmental liabilities
associated with those technologies. Clearly, renewable energy
technologies by their very nature are not polluting and have a
lower environmental impact, and also in the case of wind they
have a very low long term decommissioning liability. For example,
onshore wind turbines can effectively be taken down in the space
of a day and the hillside can be restored very close to a virgin
condition. Clearly, offshore is a slightly different category
of engineering capability but as a broad rule of thumb the long
term decommissioning liabilities and the long term environmental
liabilities associated with renewables are sufficiently lower.
Therefore, to compare the cost of generating from renewables and
the cost of fossil fuel, one does have to give some consideration
to the wider environmental cost associated with the latter. I
would also just make an observation at this point, although it
is relevant to a number of other answers as well, in terms of
the significant rises in the cost of plant, particularly for wind
turbines. The fund that I manage at Climate Change Capital purchases
wind turbines for installation in the UK market and we have seen
a 25 per cent rise in the price of onshore wind turbines in the
space of a year, driven fundamentally by the cost of underlying
raw materials—steel and core metals—and also critical
supply chain constraints in the global market. It is important
to bear in mind that clearly the UK does not operate in a vacuum
and, therefore, while UK planning has various constraints in there,
larger manufacturers are deploying their turbines in larger volumes
in other global economies such as China and the States. The final
point I would mention there is that because there is no manufacturing
capacity in the UK for wind turbines, everything is imported so
exchange rates have been, unfortunately, very sour cream on top
of the supply cost increases that we have seen over the course
of the last year.
Q464 Lord Turner of Ecchinswell:
Just on the cost increase, a lot of those cost increases, which
are cost increases in steel and engineering, are also what is
driving an increase in the estimated cost of deploying nuclear.
Mr Read: Correct.
Q465 Lord Turner of Ecchinswell:
Indeed, increases also in the cost of building new coal power
stations and increases in the desktop calculations of the cost
of doing carbon capture and storage. Have you seen any analysis
which suggests whether the relative cost of these different technologies
is actually changing as a result of these supply chain limits,
or have we just got supply chain limits across the board and everything
is going up, there is no particular change in the relative cost?
Mr Read: I think you are absolutely right
and I have not seen any analysis that compares technologies by
technologies and clearly wind turbines are not the only technology
that uses rolled steel for its processes. The point I was really
trying to make was that because the UK for wind technology does
not have any manufacturing capacity—and that is primarily
because the UK's tariff support mechanisms in the mid 1980s, the
early 1990s were not as high as other jurisdictions' support mechanisms,
therefore the manufacturing base is Germany, Denmark and Spain
and those core firms have set up operations in the United States
and China. It is a useful pointer for other non-wind technologies,
for example the marine technologies—wave and tidal—and
potentially biomass and energy from waste technologies where the
UK can, with the right policy frameworks, secure the manufacturing
price as it were and the technological know-how to be able to
manufacture in the UK economy for a number of wider benefits.
Q466 Lord Layard:
I wanted to ask you about the role of basic science in promoting
technical advance. Is there a whole set of issues where there
is a real problem—I think it was hinted at before—for
companies in terms of getting a return on some of the research
which would be the most rewarding at the social level in terms
of solving this whole climate change problem? You mentioned some
of them and I would also think of harnessing the energy of the
sun. My question is, is there a case for some much more concerted,
publicly financed and maybe internationally co-ordinated research
effort, on the scale of the Moon Shock programme or something
like that, to try and tackle this problem? There seems to be a
very fragmented approach quite frankly when I listen to the witnesses
that we have had to a problem of this scale and a lack of a very
strategic approach when, surely, there must be some basic scientific
discoveries which could really contribute to the long term solution.
Dr Neuhoff: We analysed this question
in a project on photovoltaics with various research institutions,
to ask: is it basic research that we have to support or is it
the deployment of new panels that we need to support. Talking
to various other companies I get the sense that a lot of the expertise
on how to reduce costs is actually in industry nowadays. Across
various sectors the research departments know how to do their
specific component of the production process, they know the specific
material and how to handle that. Production incentives create
an incentive for companies to offer their specific technology.
For example, a laser producer from medical appliances cuts silicone
for PV production at higher precision. A lot of companies can
thus transfer their know how from other sectors and contribute
to cost reductions. That then raises the question: do PV manufacturers,
when they build a new production line, experiment with these new
technologies and take them on board? Some of the technology companies
say it is hard to get them to actually try out a new technology
because obviously the production line is going to be down for
a longer period at the beginning, so I think there is a role for
government subsidies to support experimental methods of production.
We need continued strong deployment incentives that also give
companies an incentive to explore more different approaches in
terms of how you produce a PV panel, how you produce a wind turbine.
Basic R&D is a good idea and I do not think it will waste
money, but in the end we need to know exactly what configurations
are working in the market so that we can produce a scale and reduce
the costs.
Q467 Lord Layard:
There was a very interesting survey in The Economist which
raised all sorts of scientific possibilities which have not been
mentioned at all so far. All the discussion we have witnesses
here is about cost reduction of known technologies but this is
a huge world problem and we may not be able to solve it with the
known technologies within the timeframe in which it needs to be
solved. Is it not quite possible that there is something that
we do not yet know of that will actually turn out in 50 years
time to be the main thing? If it is, ought we not to be spreading
money wider across the board to try and tackle the basic research
problems, such as the issues that were raised in The Economist
article, which have not been mentioned by any witness?
Mr Read: I read the same article fairly
recently and there was a strong focus on certain things such as
smart grids and, if I am reflecting on the same article, it also
mentioned certain philanthropy groups that are offering substantial
financial prizes for the inventor that can bring forward the technology
that will turn the renewable energy and sustainability world upside
down. The founders of Google have launched such an initiative
and I think Richard Branson was also sponsoring an initiative
under the Virgin brand some time ago. In the area of industry
and finance that I invest we are focused primarily on fairly mature
technologies rather than the pure R&D stage so I am not best
placed to answer that question, but it is entirely possible. Because,
clearly, that level of activity is going down at currently a sub-market
level and at such a fragmented level it is entirely feasible that
there could be tomorrow or even 20 years from now a technological
solution that could come through—for example, ultra-efficient
PV panels would be the most obvious place so that compared to
current PV panels they were a hundred or a thousand times more
efficient than what we already have, which clearly reduces the
manufacturing costs but reduces the reliance on the land expanse
requirements and really turns the economics of these sorts of
things upside down and makes the physical deployment that much
more efficient. If you are looking for parallels you might look
at the step change in technology that has taken place in the microprocessor
in a 20-year period and the power of computing that has gone very
low when IBM launched their first module to palm pilot type devices
that are available now. It is therefore entirely possible and
the technocrats and technological companies are heavily involved
in the renewable energy space and would lead that drive.
Q468 Lord Turner of Ecchinswell:
You have each of you suggested that we cannot just rely on the
carbon price to achieve what we need to do in terms of decarbonising
energy and in particular electricity. I just wanted to work out
why that is the case because it strikes me that you could be arguing
either that the present carbon price is too low and uncertain
or that the market is too illiquid. This then has an influence
on whether this is a fixable problem or an inherent problem. You
could be saying our renewable energy targets in Europe reflect
what we really need to achieve, the EU ETS was too mild an objective
and if only we had set 1500 million tonnes or 1720 million tonnes
for 2020 we would have a higher price and that would be fine,
so the price is too low and the quantitative target is restrictive.
The second argument could be it is too volatile and uncertain
and whatever the price is, it is moving around so the renewable
energy guy thinks I will build my windmill, the gas and coal guys
will in 2020 have to buy carbon permits at €15 per tonne
but I cannot rely on that, therefore I do not go ahead because
I might be undercut by people who give a lower carbon price. That
then relates to the issue of liquidity because of course if I
was a Chicago school, pure market theorist, I would say that such
a renewable energy person could enter a sell contract for permits
in 2020 and if the price was lower they would make so much profit
on this futures contract that it would offset their insufficiently
economic wind farm. That is where a pure market theorist would
end up, as long as things are sufficiently liquid it will produce
the right result. Do you have a point of view as to whether any
of these problems are solvable? If we had tighter targets, longer
set in advance, would you be willing to rely more completely on
a carbon price or do you think there is something inherently not
doable about relying entirely on a carbon price so that we will
always have to have alternative policy instruments such as a renewable
energy target?
Dr Neuhoff: I have spent the last three
years mainly on the carbon trading schemes, so you would expect
me to support them. Market participants will always look at government
policy uncertainty that influences the value of the carbon allowances
and their low carbon projects. To get a more stable basis for
a long term decisions, the government can guarantee that the price
will not drop below a certain price level. Such price floors helps
to address risks of very low prices and thus supports some low
carbon projects if they do not find the counter party for their
long-term contracts because of policy risk. But a reserve price
is not the carbon price for 2025 we do not know the fuel prices
and we do not know the technology prices. Too low is one of the
issues but politically it is difficult to push up the carbon price
right away to the level that would perhaps be required in the
long term. One reason is that the transition including changing
relative prices has a lot of equity implications across society.
I guess we agree that the cap and trade scheme does therefore
offer the benefit of adjusting the price to do this trick. On
your second point, some of the new technologies would require
a really high carbon price to get them cost competitive until
they reduce costs with market experience, for example of PV. I
do not know whether we want to have a price that first goes up
and then after five or ten years starts to drop again, especially
given that we are talking about a portfolio of technologies. If
the carbon price first spikes to facilitate investment in the
first technology and we then realise we need the second technology,
then the carbon price has to spike again. The market based approach
can work in markets where market participants can internalise
this learning investment and say we invest now although we know
our technology is not viable for the first five or ten years,
but in ten years time we will get the technology costs down the
early investors benefit from their know how and market position.
This does not work for renewable energy technologies, among other
reasons becausee they are very complex and a lot of different
companies are working together to develop a PV panel with all
the supply chain components. How would they share the learning
investment and how would they share the benefits in the future?
I think it is difficult to co-ordinate that one really. The final
point is a concern about timing. For companies it is very difficult
to make big investments if they do not know when your product
is going to be ready or when there is going to be a market. If
a product is ready and the market is ready five years later the
company is bankrupt, so in a way you need to have quite a close
coordination between when the market opportunity emerges and the
time when the product is ready, and that again implies that governments
have to step in a bit further than they did in the past to guarantee
these opportunities and then test whether the technology performs.
The nice part with renewables is that we have a clear market interface,
there is a price at which technology companies sell their product.
We do not have the close interaction that we observed for past
energy technologies where people at the industry ministry were
effectively running the technology and had a hard time to step
back. The final concern about a carbon price only approach is
governments need to implement complementing policy, whether it
is regulation, whether it is grid excess, whether it is market-designed
components. There needs to be a clear signal to market participants
that governments will take that forward and have a commitment
to do that. Again, I think the carbon price by itself does not
imply the UK Government is going to do the 15 things it has to
do, but specific targets can.
Q469 Lord Macdonald of Tradeston:
A quick question to Dr Neuhoff just on the basis of the efficiencies
that might be gained from the present system given your pan-European
research. If Brussels were able to break down the resistance of
France and Germany to unbundling and the creation of more market-based
systems, have you any sense of what the efficiency gain would
be inside the present distribution systems in Europe?
Dr Neuhoff: It is a beautiful question.
One of the things I hope to do when the new PhD students start
in October is try to quantify how much money we can save in terms
of transmission investment or in operational expenditure by making
better use of our systems. Across Europe I do not see any country
that has really an efficient market design that is tailored for
large shares of renewable energy technologies. They were all designed
for large shares of conventional generation technologies where
you had stable despatch and you knew what was going to happen
the next day and you do not need much liquidity over the last
24 hours. With wind you want to readjust four hours before despatch;
all technologies can do that but the market currently does not
provide all the information exchange to really allow for that.
In the first discussion it was discussed do we currently create
locational signals for the right incentives for plant location?
That is a long term question and I think the answer is to some
extent. The second question is, whether locational signals create
the right incentives for the despatch of the right plant at the
right moment? I would say no, and I think the transmission review
did not really come out with a solution that is going to ensure
that either, so at the end we have an inefficient despatch but
unfortunately I cannot quantify the costs this creates.
Q470 Lord Paul:
There have been suggestions that renewable obligations should
be replaced with the feed-in tariff system as used in Spain and
Germany. Would a feed-in tariff be more effective at deploying
renewables?
Mr Read: I think the proposed banding
of the renewables obligation in the UK, which is currently going
through its final reading, is already tending the UK towards a
style of feed-in tariff as the previous nature of the renewables
obligation being technology blind clearly appeared to be, in most
industry views, unsustainable in the long term given its over-reliance
on wind and not encouraging the pull-through of non-wind technologies
and in particular not providing the level of economic support
required to deliver the volume of offshore wind that was desired.
What I would say is that at this particular juncture in the UK's
renewable energy market development further significant structural
changes would not be welcomed by the finance and investment community.
The renewables obligation has only really been live since 2002
so we are through the fifth and into the sixth compliance period
renewables obligation and I think what the vast majority of the
finance and investment community would like to see would be a
period of continuity. There has already in the short life of the
renewables obligation been a welter of consultation and policy
debate which, as a financier, is extremely difficult to stay on
top of and actually decipher into what the medium to long term
economics are likely to be. The renewables obligations banding
has been broadly welcomed but my overriding feeling is that there
should be a period of stability to allow the UK to be able to
get on and start delivering on the technological deployment.
Dr Neuhoff: That is probably the one
area where we disagree. I am happy that we sit together on this
one but I am not 100 per cent sure of my position here. In terms
of a feed-in tariff type approach or long term take-or-pay contracts
they offer a stable price over the project for the investor and
I think that produces financing costs of two to four per cent,
as the rate of return required, which feeds through into 20 per
cent cost reductions from that. The second aspect comes in in
terms of resource grants. If you go to offshore locations, some
of them are close to land and some are far offshore and that has
quite a big impact in terms of what the costs are. If you want
to subsidise all of them by the same amount and you only want
to subsidise one or two plants then a ROC-type approach is good
because it gets the cheapest plant offshore forward. If you want
to take forward all of these offshore plants or onshore plants
then in a way we have to put the ROC price high enough to get
the least suitable plant forward to deliver our target and all
the other plants infra-marginal rents which increases the cost
for consumers. The third part is that you hinted already at the
complexity of the scheme right now. The complexity implies that
only big investors can actually take projects forward and even
big investors tend to look for a long term contract with utilities
to finance their project. This limits the opportunity for entry
of third parties into this market. If we could create a very simple
scheme so that you can look up what is the feed-in tariff you
will get if you commission a plant in 2009, so you can go to your
local bank and tell them that that is what you are going to get
for the next 20 years, in a way that then facilitates that and
allows entry and the opportunity for entry. Even for incumbent
utilities, however, they have not really worked up to the scale
of the challenge. If we are talking about 30 per cent renewables
the volume of investment required is far bigger than any of their
balance sheets which implies that they are going to have to leverage
the capital on their balance sheets a lot more than they are looking
for right now. Then they will start to look at it in terms of
how can we get a more stable revenue stream in the future which
is currently not on the table? I think, therefore, that the ROC
scheme is moving in this direction, the reviews are looking at
ski slope and headroom which effectively stabilises the ROC price
and puts it into this kind of premium scheme. Spain has this premium
scheme and they have noticed if the wholesale price goes up or
the premium goes up, eventually the rents for project developers
get so high that it has to be changed. It was changed such that
effectively it was cut and the premium was cut as soon as the
price exceeded a certain level. This suggests that also for the
ROC scheme the next change is coming up already and various changes
will continue to be necessary if we continue to use this mechanism.
I share the concern that we want to retain the interest of the
big utilities to take renewable investment forward and that therefore
changing the UK scheme from ROC to feed-in-tariff is, like any
change, tricky. But on the other hand if there is a strong commitment
from the UK Government, across Parliament and across parties,
to deliver against the renewable target then it is clear for everyone
that they need utilities and project developers to take these
projects forward. So no one would want to annoy these investors
and say if you invest it now we will not have a favourable transition
approach for old investments under the new scheme. Also the European
human rights legislation created property right protection which
guarantees that existing investment can not be expropriated under
a new scheme. If you look at Denmark, they at some time changed
to a scheme which did not offer as high profits as the previous
one and, as a result, before the change to the new scheme, every
investor was pushing to finish projects to be covered by the old
scheme. This shows, that if you design a transition arrangement
cleverly and try to move quickly it can actually accelerate investment
in renewables rather than create an investment delay during a
transition, which some people are concerned about.
Lord Lawson of Blaby: I have one question
of clarification to Dr Neuhoff in relation to your answer to Lord
Turner. I must say that the hugely elaborate extent of government
intervention which you were saying is going to be necessary appals
and alarms me because the cost of detailed intervention is tremendous.
I understand what you are saying, that the alternative would be
a very high cost of carbon in many cases which would not be very
popular, but my question is this: you said in the case of nuclear
there was a resource constraint. If you mean uranium then I am
afraid I do not believe you. I remind you of for how many decades
we have been told that the world is running out of oil and it
always looks as if it is, but it is not. One day it will but it
is not now or in the foreseeable future. It is exactly the same
with uranium, there is no evidence whatever that the world is
likely to run out of uranium or economically-mineable uranium
in the foreseeable future, and of course uranium is a much smaller
proportion of the total cost of nuclear generation than oil is
of conventional generation. I am afraid that unless you can give
us some evidence to support your assertion I would not find it
credible.
Q471 Chairman:
I am not sure that was a question, it was rather a challenge,
but if you would like to respond to it by all means do, either
now or in writing later.
Dr Neuhoff: On the second one I am happy
to respond in writing. On the first one my sense is that if you
use market-based instruments like the CO2 trading scheme in the
policy area they have to be very simple to be effective, otherwise
they can start to be abused and can have a lot of provisions which
makes it difficult to handle them. If you want to have policy
on other areas it is easier to clearly define your objective and
then use a very simple approach, like a feed-in-tariff, which
is transparent enough and can be handled in the political process.
With clearly defined objectives and simple policy instruments
I am confident that we can address the climate change challenge.
Chairman: If you would like to respond
to the other one in writing that would be very helpful. May I
thank you all three very much for spending time with us this afternoon;
it has been very helpful.
8 Otherwise, because of uncertainty about government
policy capacity expansion, learning by doing and costs reductions
are slow Back
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