Examination of Witnesses (Questions 460-467)
Mr Jeremy Nicholson
9 JUNE 2008
Q460 Lord Paul: In the last 20 years,
steel industry and aluminium industry has done a lot of things
for energy efficiency, to reduce their energy consumption per
tonne, would you be able to say what kind of reduction they have
been able to make per tonne? If you do not have the figures offhand,
you can write to us.
Mr Nicholson: I do not, but I would be
very happy -- in fact, I will probably get told off by my boss,
because I know there is a very good little leaflet produced by
UK Steel on the subject which is sitting on my desk at the moment
which has a chart that shows just that, and a comparable one in
my filing system for the aluminium sector, and I would be pleased
to provide it for you. One thing I would say is that some of these
sectors, not just in the UK but elsewhere in Europe, are already
getting secure low carbon supplies, those that are fortunate enough
to have access to hydroelectricity, Scandinavia being an obvious
example, but also those that have a direct relationship with nuclear
producers. I am thinking here of firms like Anglesey Aluminium
within the UK; they are already doing their bit by procuring low
carbon supplies from a local nuclear power station, which unfortunately
will be closing by 2010. None of this is an anti-renewables comment,
but we would question why, if a business is already doing the
right thing by procuring a low carbon energy supply that suits
their business, even if other options may be viable for other
sectors of the economy, they should be forced to pay a premium
to subsidise other businesses and other consumers that are not
doing the same thing, and perhaps an unnecessarily high premium,
because there has been too much of an emphasis on renewables within
that low carbon mix. That is the point we would raise. We fully
understand the need to decarbonise baseload energy supplies, actually
we have a number of alternatives available there from the industrial
sector, but they may not necessarily be the ones that environmental
campaigners or, dare I say it, politicians chasing votes or playing
to the green gallery, would necessarily choose as being an easy
sell. Nonetheless, if we want those industries to survive in Europe,
we have to recognise that renewables will not always be the ideal
source of energy for them.
Q461 Lord Bradshaw: I am going to
change my question a bit, because you have more or less told us
the targets' named are not what we should be focusing on. I would
like you to talk a little bit about security of supply, and the
volatility of energy prices, and how that will affect your industry.
I have some assumptions that were produced last week which have
the BERR forecasts for 2008, they are just hopelessly wrong, I
mean many orders wrong, and obviously I would have thought it
was more sensible to talk about $200 a barrel of oil, if you are
thinking ahead. What can you say about security of supply and
volatility?
Mr Nicholson: Firstly in terms of pricing
of fuel, before answering that part of the question, none of us
knows with confidence what the future price of energy is going
to be, and if we did, we would doubtless be making a lot of money
out of it on the markets instead of sitting in this room. However,
I think our group and others have expressed concern that until
recently, BERR, and DTI as was, was taking a rather optimistic
view, particularly on gas prices, and indeed the ability of the
gas market to disconnect from the price of oil. Now I was giving
evidence last week to the Business and Enterprise Committee on
this very subject, so I will not repeat it again here, suffice
to say that even if we have a theoretically perfect market within
the UK, or indeed across the whole of the rest of Europe, and
we have far from that at the moment, we are still at the mercy
of international markets, and the Russians and others are not
keen to price gas on anything other than an oil index basis, and
we have all seen what has been happening to oil prices recently.
Even if we take the view that there is an element of a bubble
going on, in addition to the supply/demand situation, it is hard
to see oil prices going back to anything like the level that consumers
enjoyed a few years ago. We are all going to have to live with
higher prices there. That does two things, it means that it makes
it more difficult for the economy to absorb additional costs of
transition, but also actually it makes a strong case for diversification
away from oil and gas anyway on commercial grounds to some extent.
Now the question of security of supply, the simple answer to that,
which others I know have already given you, lies in having diversity
of fuels, and also in respect of those fuels having a diversity
of supply routes and countries of production. So to the extent
that renewables will help with that, it is obviously beneficial.
The problem comes, I think, when there is an over-reliance on
a particular form of renewable energy that is either inherently
expensive, and one thinks of the example of solar in the German
market for this, it is not a particularly cost-effective way of
providing your energy or indeed your carbon reductions, and in
particular wind, which we all recognise has a growing role to
play, and on a seasonal basis can contribute significantly in
terms of reducing fossil fuel demand over a period of time. However,
on an instantaneous basis, the reliable output from any given
wind turbine is effectively zero. Unfortunately, given the sort
of climatic conditions that can prevail over the whole of the
British Isles and indeed north-west Europe, there are occasions,
not all the time, but with a certain statistical frequency, when
the output from that entire wind resource is depressingly close
to zero as well, which means that back-up has to be maintained.
We have seen not just theoretical evidence or scaremongering from
those who might have a different agenda, but empirical evidence
from network operators in Germany and elsewhere about what the
practical difficulties are of managing fast drops in output from
wind turbines over a large supply area or indeed large increases
in power. I think we need to be realistic about how difficult
that is going to be to manage. It may not be impossible, it will
certainly be easier to manage if we have a more liberalised market,
with more flexibility in the transmission systems, because they
are not physically constrained and so on. So there are a number
of things we can do to make it more manageable, but to suggest
that it is straightforward or an issue we need not confront is,
I think, naive. I suspect the Government is very well aware of
that, but like many things, it is constrained on what it can say
in public at the moment on this subject.
Q462 Lord Bradshaw: So the disconnect
which people had hoped for between oil, gas and electricity and
other prices is something which is not going to happen?
Mr Nicholson: Not in the immediate future.
Q463 Lord Paul: What effect would
a well-functioning Guarantees of Origin scheme have on industry
and users? How do you envisage the scheme working in practice?
We have had some very mixed views on this.
Mr Nicholson: This is the Guarantee of
Origin idea; well, before answering the practical question, from
a theoretical point of view, it would be a great thing if there
was free trade in renewable energy across the European Union,
and to the extent we might wish to subsidise it either on its
own merits, or because it is a low carbon source or support it
otherwise, that it would be done on a consistent basis that does
not distort the markets and act like a series of blatant trade
restrictions, which is what frankly national policies do at the
moment. However, I think there are a number of practical issues
with this. Even if it could be done with the agreement of 27 Member
States, which is problematic, to put it mildly, there are potentially
quite high transaction costs associated with doing this, and tracking
the energy and so on, which I do not think should be underestimated.
They may not be insurmountable, but they are not necessarily going
to be trivial either, and it is certainly true that if we were
going to move towards such a scheme, we could not do it overnight,
and therefore our progress towards this renewables target over
the next few years would have to take into consideration existing
schemes and modifications of those existing schemes before we
even thought about moving to an overarching single support mechanism
or something close to it for the European Union. On a more pressing
matter, of course, this simply will not happen if Member States
do not wish it to happen, and Member States have constructed their
renewable support programmes with a view to supporting indigenous
renewable energy, and those forms of energy that are considered
more popular within their national boundaries. Well, they are
not going to dismantle those schemes in a hurry, and I think the
Commission is well aware of this. Where that leaves us, I am not
sure, but as you will have heard from other evidence, not least
from Ofgem, and indeed from the Pöyry report to BERR, without
that flexibility of trading, there really is not the remotest
chance of the UK even getting near to the 15 per cent target or
35-40 per cent electricity figure, we simply could not move anywhere
near to that internally. Now even if we had a theoretically perfect
trading system for renewable energy within the European Union,
would there be enough surplus for someone else to sell us commensurate
with a deficit relative to our target? I think that is highly
questionable. Before perhaps even considering what can be done
between now and 2020, it is worth reflecting on the fact that
virtually every European country has failed to achieve its existing
renewable electricity target for 2010. We are not there yet, I
suppose a revolution could happen in some of those states in the
next year and a bit, but it does not seem very likely, and this
has happened during a period of rising fossil fuel prices, relatively
generous fuel subsidies, plenty of public goodwill in the main,
even if planning systems and other things are not perfect, and
so I think it is highly questionable whether the other Member
States, you know, those who have looked at it in sufficient detail,
are going to get anywhere close to these targets. If others do
not exceed it, there cannot be a surplus for anyone else to purchase.
Q464 Lord Paul: Do you think it is
an excuse for not doing anything?
Mr Nicholson: I certainly would not advocate
that we do not do anything, indeed our group does not. What I
would question is whether we are doing things in an intelligent,
cost-effective and realistic way, and I do worry personally that
there is going to be something of a backlash here against the
green agenda. I think we have seen some aspects of it with green
taxation, which governments may pursue for a number of different
motives on occasions, and even if their motives are pure, it does
not stop suspicion arising in the minds of those who have to pay
the bills. It is one thing expecting people to give governments
the benefit of the doubt on this when energy prices are low, oil
is $15 a barrel; it is quite another when it is nudging $140 and
issues of competitiveness for us and fuel poverty for others are
very pressing. So I am concerned, and I think our members are
concerned, that despite these ambitious targets, as some people
describe them, the market actually will decide that they are not
tenable, and will not invest accordingly, and what will this do?
It will mean that the prices of things such as the Renewables
Obligation are likely to spike even higher, and there will be
general dissatisfaction all round. I go back to the point I made
earlier, it does no one any favours to be in pursuit of a target
which no one seriously believes can be achieved. One last word
on that: I was most encouraged by the measured remarks of Paul
Golby from E.ON in the press recently on this. It is not an easy
thing for a large energy company, let alone one that has an interest
in coal-fired and potentially nuclear power stations as well,
to say publicly what I know he and his colleagues in other firms
have been saying in private possibly to some of you and others
as well, but to be open and honest about the likely cost implications
of this, the need to move in a measured way, that brings the public
with us, and allows those of us who are working in industry to
say, well, it is a pain to be paying a bit more, but it is something
we can live with, and we can stay operating in this increasingly
low carbon economy; that is really important. I hope that this
Committee's report, when it is published, might encourage those,
as I say, in Government and elsewhere to have the confidence to
say that without fear of criticism from others, because I do not
think anyone should be afraid ultimately of speaking their mind
on these topics.
Q465 Lord Whitty: You have clearly
spoken your mind on these topics, you have had a few sideswipes
at the green agenda. On the other hand, you have said that there
is a need to have a lower carbon economy. Two things arise from
what you have said: one, other countries have achieved or are
on course to achieve a higher level of renewables than we are.
They may not hit the target, but they are very significantly higher
than the UK. Have your fellow industries in those countries suffered
from that process? Or if not, what is so unique about either the
natural heritage, which I can understand hydro power in Scandinavia,
say, or the terms of the government policy in those countries
which makes that more acceptable to your equivalent members? The
second thing, just briefly: you in passing said we ought to be
focusing on other technologies for achieving a low carbon economy;
did you just mean nuclear power or are there other technologies
you had in mind which may not be acceptable to public opinion
or politicians but which you think we should be pursuing which
would be rather more cost efficient than renewables?
Mr Nicholson: Certainly nuclear is essential
within the context of baseload power supplies to industry, no
question about that. That is not the only answer, of course, either.
I think it is vital that we pursue carbon capturing storage as
an option. I think the jury is out about how expensive that is
going to be, but it is certainly likely to be less expensive than
some of the renewable options, though not necessarily all, and
given the scale of the task ahead of us, it seems astonishing
that more has not been agreed at a European level on this. There
was much talk about 15 demonstration plants, I think, across the
European Union. Of course, this is not just relevant to power
generation; for primary steel production, absent carbon capturing
storage, or indeed for the cement industry, there is no low carbon
solution. You can decarbonise your energy supplies as much as
you like, but you cannot produce the stuff without producing CO2,
and as the world needs both commodities, and the developing world
needs it in very large quantities, I think it is essential that
we move forward on that front too. There is also, I should say,
in the environmental lobby, a predisposition against large scale
hydro. I am not quite sure why this is. I am sure it is appropriate
in some instances and less so in others, but there seems to be
a view that if a project is large and delivers energy at competitive
prices, it must therefore have something wrong with it environmentally,
which I think is not always very helpful. You asked the question,
Lord Whitty, about whether members in other parts of Europe are
similarly concerned about this agenda or not. The nature of the
support policies is very different in different Member States,
just as the energy mix is. We are part of an international federation,
IFIEC Europe, and I spend a certain amount of my time as a UK
board member of that organisation discussing this with colleagues
in Brussels and elsewhere, and indeed with the Commission. It
is true that one or two states have taken quite a different line
in terms of exempting intensive users altogether from the cost
of directly subsidising renewables; of course they get the knock-on
costs of carbon through their power supplies, if they are exposed
to it, Sweden being an obvious example, and to a lesser extent,
Germany too. There are some qualifying criteria there, you have
to be a user over a certain size and a certain amount of value
added associated with energy spend, but for some of those more
intense, more exposed to international competition, there has
been a realisation there that the renewable subsidies need to
be tempered, not necessarily removed entirely, but levied at a
different level. I think this is analogous to what we have in
the UK with the climate change levy. I am not saying there is
a free ride on this, you still have to pay an element of the tax,
but you have to undertake energy efficiency improvements through
the climate change agreement, which I think have worked reasonably
well. I cannot see why in principle the same thing could not be
done with renewable subsidies; in other words, if the costs reached
the level where they would threaten the viability of some intensive
industries, and that is the last thing we want, because we are
hardly going to persuade China or anyone else to go down this
route if we cannot sustain those industries within our low carbon
economy; in fact, it would provide an absolute disincentive for
them to follow. This could be a way of mitigating some of the
impact, if it was felt that some classes of consumer could absorb
this and others could not, so I think that is something we hope
the Government might pursue here when consulting on how to move
forward, beyond the current level of costs.
Q466 Lord Mitchell: When we have
taken evidence and been speaking to various officials, one of
the things that I thought has come out of it is that certain countries
have made pretty significant progress in this issue, and the countries
that have been cited are the Scandinavian countries, Germany in
particular, Spain and Portugal. There have been various reasons
put forward, one of which, and that is certainly true in the northern
countries, is the fact that planning permission is much easier
to obtain, and it would seem to me, when we come to do this report,
that is going to be an issue we have to think about a lot, because
if planning is one of the major inhibitors on this, this is significant,
and I wonder if that is your view.
Mr Nicholson: It most certainly is, and
not just incidentally with respect to renewable facilities, but
everything that goes with it. The transmission lines and so on;
we have had an example of this within the UK, even where it is
possible to get the generation through planning, there is an objection
ironically sometimes from the same people who want more renewable
energy to the transmission lines to hook it up to the grid. Well
plainly, you cannot have one without the other, and indeed, as
I have mentioned earlier, and I know others will have done too,
we are going to need an expansion of grid capacity to cope with
greater amounts of intermittency, and indeed a different distribution
of renewable energy across the European Union, so that I think
is vital. While we would certainly welcome a more responsive planning
system here and everywhere else in Europe, it is not in the interests
of consumers, whether in industry or anywhere else, to have undue
barriers to new capacity coming onstream. Those barriers are unhelpful
from the point of view of security of supply, just as they are
from the point of view of carbon reduction. So we think that the
renewable industry has a valid point in complaining about the
non-responsiveness of the planning system here and elsewhere,
and indeed the lack of equitable access to the grid. Now we might
part company with them in arguing for preferential terms for grid
connection, but it is certainly true that the tardy response from
grid operators here and elsewhere in Europe is unhelpful to them
and indeed to consumers generally, and that is somewhere where
we think, you know, improvement is due. When people talk about
progress in renewables, they mean different things depending on
which perspective they are coming from, and what commercial interests
they have in the market. I am somewhat surprised sometimes when
people talk about the great success of renewables in Germany.
It depends what you mean by success. If by success you mean making
energy more expensive and no more secure than it was before, I
would argue it has done quite a good job. It has not necessarily
diversified towards the more secure forms of renewables or certainly
the more cost-effective. I heard a presentation from a member
of the UK's climate change committee the other day, who shall
remain nameless, to avoid his embarrassment, who was talking about
the great commercial opportunities of solar power, and look what
a success it was in Germany. I did point out, and he agreed with
me, that they are receiving seven times the market rate guaranteed
for the next 20 years. Well, most things would be successful if
you gave them that. I would like to earn seven times the market
rate for the next 20 years, and I am sure that most of my members
would love to for their products too. So I think we need to be
quite careful what we mean by success. To me, and this may be
a few years away, but is not unimaginable, success is when renewable
industries can compete with the minimum of subsidies subject to
internalising the carbon cost of their competitors and can do
so without artificial support, and indeed are the market choice.
That would be success to me, and it is not clear that the support
policies we have in Europe or elsewhere are making that more likely.
Q467 Lord James of Blackheath: Mr
Nicholson, towards the end of your response to my earlier question,
you were saying that there was an expectation that gas would have
to reduce in significance, or I think words to that effect. In
the event that it became possible to increase the resource of
gas on comparable terms as at present, would this materially alter
your ability to achieve a better distribution and utilisation
of overall energy resources to extend the time in which to introduce
the new renewables?
Mr Nicholson: I am sure it would. Incidentally,
not just in the UK but elsewhere in Europe, we are locked into
a certain amount of growth in gas consumption in power generation
in the medium term at least, until other scale alternatives become
available, so that gas dependency is likely to grow unfortunately
for a while before there is a possibility of diversifying away.
There are all sorts of views about the -- I am hesitating, to
avoid using the word peak gas because peak oil is a controversial
subject; we are certainly a distance away from that. Unfortunately,
if you look at the location of gas resources internationally,
much of it is in some of the less stable states.
Chairman: Thank you very much indeed,
Mr Nicholson, for coming.
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