Examination of Witnesses (Questions 140-148)
Professor Catherine Mitchell, and Mr Phil Baker,
University of Exeter; and Professor Goran Strbac, Imperial College,
London
21 APRIL 2008
Q140 Lord Whitty: Chairman, on that
point, in a sense, it is the estimated price of carbon 10 to 20
years down the line. Clearly, supply and demand for the basic
product would be better, but the differential price for renewable
energy would become more and more attractive in purely price terms
as we internalised the price of carbon into other sources. Where
is the cross-over so that we might invest more heavily in renewable
sources? What sort of price of carbon would we have to hit before
that became more attractive, and by when? When I was speaking
to Lord Oxburgh, he was saying that if we pushed the date back
we could probably get more investment in other sources than wind
for renewable energy, but also, if we brought the higher price
forward, would that have the same effect or a similar effect?
Professor Mitchell: There are endless
studies about the costs of doing this and they are very diversified.
If you look at a straight price of carbon now, then most renewables
are nowhere near as effective as energy efficiency measures, for
example, and where the price of carbon is $20 a tonne or whatever
it is now, it is not in any way helpful to delivering renewables
forward. I prefer to look at it from the Stern point of view.
The Stern Review, which came out in November 2006, said that the
cost of inaction would be five times as great this year and for
ever into the future of the cost of not taking action, so the
cost is roughly equivalent of 1% of GDP, and 5% of not doing so,
and that it could go up to 20%. I know there are huge discussions
around those figures but I was recently at a lecture by him and
he said that he would have been much tougher about what those
costs of inaction would be. So given that the EU's targets, even
as enormous though they may be are not equivalent to the 80% cuts
in carbon by 2050 that we expect we have to make to get to 450
parts per million, I think the important question is how we start
moving forward quickly across the board, across these technologies
which are out there with what we have, rather than worrying about
the kind of costs of doing so, because we know that we in the
UK are more or less at the bottom of the table in delivering renewable
energy compared to the rest of Europe. We have no choice at the
moment but to deploy the renewable energy technologies which are
available to us. So the best thing that Britain can do is put
in place a policy which delivers these renewables in line, whether
electricity, heat and transport, and tries to fit in with demand
reduction measures and with our current agricultural policy and
so forth, with what we have. We know that, not for all the renewable
energy technologies but for technologies that are supported both
through the RO and the with the feed-in mechanism, such as onshore
wind energy, that we in the UK pay more per kilowatt hour than
Germany does within the German mechanism. So we are in the situation
whereby we have the Stern, we know the cost of moving to a sustainable
energy system is going to cost us far more if we wait and do not
do anything; we know that there is evidence from up to 20 years
from all sorts of countries about the best way to move forward
to actually deliver it; and it seems to me that, really, the UK
has to stop worrying about the costs of the mechanism, which are
permanently being disagreed with by different people, because
we know that the only technologies we have in front of us are
those that we can afford and we really have to get going on them.
That is not to say, of course, that costs are not important and
we should want to try and reduce them but really we know that
we are doing it in a more expensive fashion than other countries
are doing it, and that, I think, is one of the important points.
Q141 Lord Bradshaw: I agree with
you about energy efficiency. There is a lot to be done. I have
taken the point about ROCs. I have taken the point about feed-in
tariffs and planning. The question is, will the market ever provide
the capital necessary to put in place the necessary network to
bring renewables on stream?
Professor Mitchell: It certainly will
not with the Renewables Obligation because the point about the
Renewables Obligation is that it is an exclusive mechanism. Where
you have feed-in mechanisms, which is an inclusive mechanism,
anybody can become involved in them, so if you look at the figures
for investment in, say, Spain, it is about 50% from large companies,
50% from not the energy companies. In Germany it is something
like 20% from large companies and 80% from other people. In Sweden
and so forth it is about half and half. One of the most straightforward
ways of getting hold of that investment and giving certainty to
the market is to reduce the risk and broaden the pool from which
investment can be obtained. Yes, it is a big ask to imagine that
all that investment is going to come forward, but it is certainly
more likely to come forward with a feed-in tariff, particularly
one which is available in parallel to the RO at the start. Large
companies may feel threatened by new entrants. At the moment they
are completely in control of the renewable market and they can
deploy renewablesat the rate they wish to fit in with their other
portfolios. I might add that people do not necessarily agree with
me here, so you should listen to them.
Professor Strbac: Was your question about
transmission, whether the market would deliver transmission or
whether the market would deliver renewables?
Q142 Lord Bradshaw: No, the market
will deliver renewables if we have a feed-in tariff—I have
taken that point—and we sort the planning system out, but
will the market pay for the grid network which will actually collect
and distribute the energy generated by the various renewables
producers?
Mr Baker: I think National Grid would
certainly want to develop the network to do that and they would
probably do that and make quite a modest rate of return on it.
I think the slight concern is that before National Grid are confident
that they will be able to recover their costs of putting that
infrastructure in, Ofgem is likely to insist that the cost is
covered by user commitment, in other words, the people that are
actually causing the need for that reinforcement make some financial
commitment to make sure end users, customers, do not get landed
with the costs of stranded assets. One of the problems with technologies
like wind is that they are probably unable to give that financial
commitment until they have planning consents and they achieve
financial closure, which does not normally happen until about
three, four or five years maybe before they want to operate. That
is a bit inconsistent with the timescales necessary to develop
the infrastructure.
Q143 Lord Bradshaw: I am sorry. I
am not understanding you. I have said we have accepted the planning,
we have accepted the feed-in tariff, we assume that the renewables
generators will come on line if we fix these things. Can the grid
be provided by the market to service these people?
Mr Baker: Yes, I think once Ofgem allow
National Grid to recover the costs of that through their use of
system tariffs, National Grid would go ahead and develop the infrastructure.
Lord Bradshaw: That is the answer I wanted.
Q144 Lord Whitty: Before I make the
heroic assumptions that my colleague has just made about accepting
the feed-in tariffs and the planning system, could you be clearer
on what you think the changes that will be required from Ofgem
to speed up this process would be? The feed-in tariff is part
of it, as I understand it, but could you say what demands you,
between you, would place on Ofgem to change their approach, and
secondly, on the planning system, what changes you would want
to see in the planning system and do you think the Bill that is
heading our way at the moment goes any way towards meeting them?
Professor Strbac: If I can start on this,
the area which I would like to address is the question of the
integration of these renewables in the overall system operation
development, which is fundamentally a transmission issue, given
that we currently have, you may be aware, about 12 GW of obligations
in Scotland and more than 10 GW offshore. There is quite a lot
of commitment out there to develop this. I think we are, in that
respect, not doing too badly. We have conducted quantitative assessments
to analyse how much transmission we need to cost-effectively accommodate
this generation, and that analysis points out very clearly that
we would need to fundamentally change the way in which we think
about the transmission system. Phil has mentioned that a key element
of that is the need for conventional plant and renewable plant
to share transmission, and our technical, commercial and regulatory
framework does not support this concept. I can briefly give you
an example which will clarify this, hopefully. If we have about
60 GW peak demand in the UK—just round numbers—we
have 72 GW of conventional plant to meet that demand, because
there is obviously a capacity margin to make sure the lights stay
on and the risks of outages are small. If you add on, let us use
the number of 25 GW, which is currently the amount of interest
for wind, given that this wind is now going to be located in a
relatively small geographical area, again, the first approximation
is that this wind has a very small capacity. It is going to displace
energy but not the capacity of plant. What do you do in Scotland
when there is a number of days per annum where there are clear
skies and not very much wind blowing? Broadly speaking; it is
not exact but just to get the feel what it is. You would need
to maintain conventional power generation as it is. 72 plus 25
is 97, so you are heading towards 100 GW of generation to meet
60 GW of demand. Our present transmission access philosophy is
that the transmission system must be able to accommodate maximum
output of all generators, if a firm access to grid is to be guaranteed
to all. In this case, National grid would need to build the network
which would accommodate 100GW of simultaneous output of generation
to meet 60GW of demand. That is clearly inefficient because, even
if we built this transmission, we would never be able to take
advantage of it because there is only 60 GW of demand. The fundamental
phenomenon is that on windy days transmission systems will be
occupied by wind, and on and non-windy days we burn organics in
a conventional plant. As I say, the present technical, commercial
and regulatory framework would not support this. That is why we
are having a transmission access review which is reviewing these
arrangements. The problem with that is what has not been done.
We do not know what is broken that needs to be fixed. Ofgem has
not listed explicitly the weaknesses of the present arrangements
so that we can make sure we fix the ones which we have identified
as wrong, and in that respect what I would criticise Ofgem for
is not having a vision as to the framework we need to facilitate
the fundamental economic behaviour of the system which would lead
to least cost operation and least cost development of the system.
I am very concerned that we have provided lots of evidence as
to where the problems are but we have not seen from this access
review process a clear identification of what the problems are.
We are now jumping into solutions without previously identifying
clearly what issues there are at present which we need to fix.
The change is material as we are moving from central investment
planning into decentralized decision making process in transmission
and although the overall direction is absolutely right, we need
a long term vision for the new market based access arrangements.
Q145 Lord Bradshaw: I think I understand
that. Are we seeing Ofgem? We are. What about the people doing
the access review—are we seeing them? Who is doing this
access review?
Mr Baker: It is a joint exercise between
BERR and Ofgem.
Chairman: We have questions for Ofgem.
Q146 Lord Bradshaw: Yes, quite a
lot, I think.
Professor Strbac: We can debate the details
but maybe I can send you the list of concerns and then maybe you
can try to use that and get a more informed discussion, if that
is helpful.
Mr Baker: I entirely agree with Goran.
The only additional point I would like to make, at the risk of
repeating myself, is although we do need to share existing capacity,
we will need to build additional infrastructure to connect renewables
and resource in remote areas, offshore, and I just have a concern
about whether that can happen quickly enough given the regime
we have at the moment. Although National Grid would love to build
this infrastructure, and probably build too much of it, it can
only do that when it has sufficient users financially committed
to that additional infrastructure. That is very difficult at the
moment because of this issue about getting consents.
Q147 Lord Whitty: This may be moving
to a different subject. One of the other differences, apart from
the tariff structure and the planning structure, that we have
between Britain and Germany, say, is that there is far more decentralised
energy in Germany. In other words, there is far more localised
generation which may have an intermittent connection with the
grid but is actually not primarily focused on the grid. There
is a school of thought that says if we shifted to more decentralised
energy, and a high proportion of that was renewable energy, we
could achieve it faster than focusing on getting the renewable
energy into the grid, to put it crudely. Do you think there is
anything in this?
Professor Mitchell: I certainly think
the way that the UK is being channelled is towards large scale.
Some things are going on in terms of micro generation, a certain
amount of money and so forth, but it is dwarfed in relation to
the large-scale stuff.
Q148 Lord Whitty: I am not really
talking about what we normally call micro generation. I am talking
about things like community heating and middle sized provisions
like, for example, they have in Berlin.
Mr Baker: Distributed generation clearly
has a big role to play but, no matter what voltage you have to
connect the generation to, you will have an impact on the transmission
system. If you happen to build that renewable generation in Scotland,
for instance, it would still add to the power flows in the transmission
system coming south. So there are still transmission implications
which would have to be addressed.
Professor Mitchell: Just in relation
to your question about planning, there is planning for the future
coming through, and the idea is that that will help in some way
the planning difficulties but that is for sites greater than 50
MW, so it is not going to help anything below that level. I think
one thing that would help enormously is if there were more people
working in the planning system. There are very few people who
deal with these projects. There are quite a lot of requirements
on planning that happened after PPG22 went through a few years
ago, which are, for example, that these projects have to be looked
at, say, within eight weeks but what happens is there are not
enough people working in the planning departments to look through
them, so at eight weeks minus a day they just say, "We have
looked at it and we are putting it off, and then another eight
week requirement sets in" and these things roll on If you
think that there needs to be a strategic long term energy policy
plan which includes infrastructure, planning and demand reduction
and so forth as a way forward to the sustainable future then,
yes, the Government is moving in some ways towards that but it
is not opening up all those technologies which may—we do
not know which will—be helpful in the future.
Chairman: Thank you very much. I want to ask the
Committee to remain behind for ten minutes so we can go into private
session and take stock of where we have got to. Thank you very
much indeed. When you read the draft transcript, if you have any
clarifications or any further points to make, please do so in
writing. We are very grateful to you. Thank you.
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