Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 1-19)

MR DAVID GREEN AND MR GRAHAM MEEKS

WEDNESDAY 30 JANUARY 2002

Chairman

  1. Welcome to our session this afternoon and thank you very much, indeed, for the memorandum you put in, which was very interesting, we enjoyed reading it. Before we start the questioning on that, would you like to add to your memorandum briefly?
  (Mr Green) There is not an awful lot to add, some of it will come out in discussion later. Just to introduce myself, I am the Director of the Combined Heat and Power Association and Graham Meeks is the Deputy Director. Graham Meeks has been involved in detail in the working parties with the DTI and Ofgem on NETA, which is one particular issue we highlighted in our evidence, he will be in a good position to update us on that. I had hoped that by now we would be in a position to be able to outline to you the proposals that Ofgem are putting to the DTI, hopefully tomorrow, about some of these issues, but at the time of leaving our office the draft report had not arrived. I am afraid I cannot bring you completely up to date but there are likely to be further developments this week which, no doubt, can be brought to your attention.

  Chairman: Thank you for that.

Mr Challen

  2. Good afternoon. The Ofgem Report August 2001 last year said that power exports for CHP had fallen by 61 per cent and the price of that had fallen by 13 per cent, the price of sales. Could you say whether that is entirely due to NETA or is it, perhaps, due to the fact that the price of gas rose in that period and that it was better for CHP generators to sell gas directly rather than CHP?
  (Mr Green) That tends not to happen with CHP. Most CHP schemes are developed on industrial sites, urban areas or in leisure centres or other facilities and they are under contract to the customer on that site to deliver energy. It is not the case, as with very large CCGT power stations, where the developer will sometimes have a choice as to whether or not they put the gas through the power station to produce electricity or if they wish to export the gas to Europe to take advantage of the higher gas prices in Europe, which have been prevailing for a while—CHP schemes are contracted for their electricity and similar heat output to the customer. There are two CHP schemes in this building, Chairman, but for the CHP scheme in this building you would be without heat, light and power. There are contractual issues that govern how they run and you have to meet certain performance specifications.

  3. Are you saying last year the fall was entirely due to NETA, are there any other factors involved?
  (Mr Green) It is the case that there has been an impact on gas prices. From the information we have given, both to the DTI and Ofgem, the significant impact has been the change in the demand for electricity from CHP schemes as a result of NETA, some of which comes about because of the fact that CHP schemes are not very focussed on the customer's needs. Clearly the customer's needs change from time to time, if you are producing an industrial product those needs will change, therefore electricity output will sometimes change and that causes problems for CHP under NETA, which was designed to reward firm generation, not intermittent generation. By and large NETA has been the biggest affect. The other issue that I imagine the Committee will be aware of—I know the work you have done on the pre-Budget statement—is the other issue we have certainly been working on with the Treasury, the DTI and DEFRA, that is to make sure that CHP is fully excluded from the Climate Change Levy. The issues that have affected CHP in the last year have been, number one, NETA, number two, the absence of full exemption from the Climate Change Levy and number three a range of other issues, including the impact of gas prices.

  4. Since August have you any update on the figures in the forms of CHP or are Ofgem's figures still fairly accurate, would you say?
  (Mr Green) We have no formally updated figures. All we know from informal discussion with our members of the Association is that their output continues to fall because of the commercial conditions created by NETA. We do know, just as evidence, that it is now the case that all of the major developers of CHP in the United Kingdom have either dispensed with or put their CHP teams on hold. That has had a knock-on effect to the manufacturing sector for CHP in the United Kingdom. The evidence is the lack of activity in the marketplace. As a matter of interest, there was a meeting of the Parliamentary Environment Group last night where the British Paper Federation were explaining to Brian Wilson that their members had to put on hold at least three CHP plant that was due to go ahead under the negotiated agreements as part of the Climate Change Levy. They are now having to go back and enter into discussions with DEFRA about what the implications of that will be for the exemptions they have under the Climate Change Levy because of their inability to develop the plant in the current market circumstances.

  5. You state in your memorandum that Innogy and Powergen have ceased the development of new CHP plant, is anybody else stepping in here at all? You seem to be in rather a pessimistic situation if nobody is developing new plant? Do you see any good prospects in the near future?
  (Mr Green) Not in the immediate future. Although, if the Chancellor is minded in April in the Budget to grant CHP full exemption for the Climate Change Levy that will lead to some rebuilding of confidence. I think it is fair to say the industry is feeling very bruised by the gap between the government's rhetoric on CHP and its delivery over the past three or four years. I think it will take a while until the major companies feel confident to really commit to re-entering the market. If you look at it from the companies' perspective, particularly the major generators, the Government has said that renewables are extremely important and, therefore, they place legal obligations on companies to do things in relation to renewables, the same with energy efficiency. For a variety of reasons the same degree of priority has not been given to CHP despite the existence of the government's CHP target.

  6. Can I ask how this is comparing with mainland Europe?
  (Mr Green) It is a variable picture across Europe, historically a number of countries have had a very high take-up of CHP, namely Denmark and the Netherlands. The country which has been most interesting in the last year is Germany where with the liberalisation of the energy market in Germany, CHP operators are very concerned about the impact that will have and the need for transitional arrangements. The German Parliament just this week finally concluded the legislation which will provide special support prices as a transitional arrangement for CHP operators in Germany. Parliament just passed the relevant legislation this week, I believe.

Mrs Clark

  7. Just very briefly, taking you back, you mentioned so far partial exemption for CHP, maybe my memory is playing me wrong but I seem to recall in either a Budget or a Pre-Budget statement that the Chancellor of the Exchequer, Gordon Brown, actually went out of his way to say CHP would be exempted. Is that, (a) your recollection of events and, (b) if it is what representations have you made to the Treasury and to the Chancellor to challenge him on this?
  (Mr Green) We strongly supported the statement the Chancellor made on the floor of the House on 8 November in the relevant year, where he said unequivocally that CHP and renewables would be exempt from the Climate Change Levy and we were extremely pleased by that announcement. The difficulty has always been that the way in which Customs & Excise have interpreted the Chancellor's statement as being the Climate Change Levy is applied on export for licensed suppliers and in the market place most CHP schemes, in order to export, have to be a licensed supplier.

  8. What has he said when you have gone back to him on his statement in the House of Commons?
  (Mr Green) What the Treasury have said and the ministers in the Department said specifically—

  9. What has he said?
  (Mr Green) In the latest statement he said in the Chancellor's Pre-Budget Review they are going to be reviewing the situation, they are mindful of the situation that CHP is in, they are going to be reviewing the situation and they have set up an interdepartmental group with DEFRA and the DTI to review it.

  10. At the end of the day he has said one thing in the House of Commons and another thing has appertained. He has not been able to square that to you?
  (Mr Green) He personally has not. To be fair, his relevant ministers have attempted to explain the issues, and it is to do with the way in which the priorities the Government wanted to give to different forms of sustainable technology, some assistance in some areas in one way and differences in different areas. What we have been keen to do is to make sure that the statement he originally made is the one that is acted on.

  11. Finally on that, I trust before the Budget—which we now know is going to be slightly delayed—you will be going back to him on this, lobbying it and demanding something definitive, clear and precise about that?
  (Mr Green) You can be assured that we will be doing that. We are meeting Paul Boateng, the Minister, in two weeks' time.

Chairman

  12. How much manufacturing capacity is there in the United Kingdom for CHP?
  (Mr Green) There are a number of sites that manufacture CHP in the United Kingdom, the two larger ones are Centrax, which is a family owned business in the South-West in Newton Abbot, where up until recently they employed 1,000 people on the development of the turbine blades and the packaging of CHP schemes. The larger site is Alsthom, which was originally GEC.

  13. Is that in the Midlands?
  (Mr Green) That is based in Lincoln. I do not know what the total employment on the site is because they do more than just CHP, those committed to CHP schemes in the United Kingdom and overseas is 1,200 staff.

  14. How does that compare with Germany, are there any comparisons?
  (Mr Green) The main manufacturing company in Germany would be Siemens. I do not know off hand the employment levels of Siemens of CHP in Germany. I am sure I can find that out.

  15. It would be useful to find out how big this industry is.
  (Mr Green) That is at the gas turbine end of the market, there are a number of smaller companies in the United Kingdom who assemble and manufacture small-scale CHP schemes, such as the one used in this building. There are a number of small companies, each one employs between 50 and 100 people, there are about four or five in the United Kingdom.

  16. Presumably they are just assemblers?
  (Mr Green) There is some manufacturing work, what they do is they have a basic engine which they re-engineer to get the efficiencies up and they add on board the on-board electronics. They are classically high-tech companies that are importing the electronics on to the engines, and that has been the development for small-scale CHPs so that systems such as the one in this building are not run from here, they are run from a plant room 50 miles away.

  17. Do you potentially see a big growth in manufacturing capacity in this area?
  (Mr Green) Potentially, we would hope that. Both in Centrax and Alsthom they export extensively into mainland Europe. It is unfortunate that Centrax have had to layoff 25 per cent of their staff because of the downturn in demand for CHP. I gather from Alsthom one benefit of gas prices increasing is it has increased demand in the North Sea and, therefore, those people who were producing CHP equipment for use in the United Kingdom and Europe are, by and large, being redeployed to producing offshore turbines that are used in the North Sea.

Mr Gerrard

  18. You said in your memorandum to us, "As experience of NETA grows there is growing cause to question its validity as economically efficient or fair means of operating the electricity network." Are you suggesting that NETA is absolutely fundamentally flawed? Do you think that there are things that could be done to make it work or should we be starting again?
  (Mr Green) I do not think it would be realistic to start again because NETA is operating for a vast number of companies who are mainstream generators in the United Kingdom, they have done a lot of work to deliver it and it has delivered real benefits in some sectors. The particular difficulties that small-scale suppliers and small-scale operators of CHP have, and I am sure you will hear the same from other colleagues of other technologies, is that, by and large, NETA was created to take account of large producers of power. CHP schemes, apart from one or two examples, are, by and large, not large-scale producers of power, large-scale producers of electricity, they are small-scale producers on local industrial sites. The issues, to a certain extent, are to do with size and what the original intentions were in the design of NETA. In the original days we were very heartened by the fact that the Government asked the energy regulator to make sure that one of the outcomes from the NETA process should be encouragement for CHP renewables and one of our frustrations is that has never been fully delivered in the gap between what Ministers were seeking to get and what resulted. There are specific changes we would like to see, although increasingly our view is that certainly at the lower end of the CHP range the most optimum solution would be to take various forms of sustainable energy and technology, CHP and wind, out of the NETA process altogether and deal with them in some other way. A lot of this is about the transaction cost. A large company has enough staff to have 365 day trading rooms, 7 days a week, 24 hours a day, they are very, very good at that and they are doing a very good job. The trouble is that small players, for example British Sugar and the energy manager in this building, they do not have the capacity to have that kind of trading, that is the fundamental problem, it increases the economic cost. There are concerns about how cost effective the overall process is because of that.

  19. If we were to go down that road of taking small-scale producers out, where would you draw the line? What sort of size of scale of production would you look at?
  (Mr Green) You would probably look at where the boundaries fall for licence holding. We have made representations to the DTI to increase the threshold for licence holding for supply licence. If that threshold was increased further for generation licences between 50 and 100 megawatts, if you were to move up towards that, you might have a cut of about 50 megawatts, that would take a lot of CHP schemes out of it. Some CHP schemes are very big, they can cope with this, they can deal with NETA, they have problems but they are big enough organisations to deal with it. The problem is those companies which do not have that capacity, which is where the majority of CHP schemes are, they are not large, they are much smaller. Setting a threshold through the licensing regime that removed them may well be, at the end of the day, the easiest solution.


 
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