Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. So do we!
  (Dr Count) Let us take some examples. The Government now wants the industry to make massive capital investments, and over the last decade its main objective has been fragmenting the industry. You do not make £5-10 billion of investment with small companies. It does not happen. If you look what has happened on Europe, what you have is large companies, strong companies, who can access capital markets more cheaply than smaller companies can. We have a dilemma: on the one hand the coal industry, on the other hand the environmental objectives. We live within that. It is not for us to set the rules. It comes down to political will and a political framework in setting the rules. It is not for us to set the rules of the market. We are happy to respond and we are innovative in that response. Can we just mention the planning issue?

  161. Yes. I was going to come on to that in a moment. Could I just press you a little more? In your judgement would you say that with this Government the political will is somewhat lacking?
  (Dr Count) That is a difficult thing for me to say. I have now shut down all investment in co-generation plant. Government has an objective for us to build co-generation plant. It has now been talking for months and months on what support it is going to do. We have to wait for that but ultimately it seems to take a long time to come to fruition of those issues. It does not seem to me to be rocket science in what needs to happen. We live within those constraints. Having worked nearly 30 years on this, yes, we are still talking about it and now perhaps is the time for some action.

  Mrs Clark: Master of tact!

Mr Barker

  162. Obviously over the last 30 years it has gone from science fiction to reality. There have been huge technical advances to make it commercially viable. In your PIU statement you said very boldly, "Offshore wind alone could readily fulfil the UK's average annual electricity demand", and, "The UK has the largest wind resource in Europe". You also say that the projects have short lead times and can be on line in less 12 months. Yet in your objective for 2020 you still only have renewables in totality as having 24 per cent versus nuclear which is still at 18 per cent, although nuclear generation will largely, without new generators, be finished by 2025, I think it is commonly accepted. That seems extraordinary. I accept that there is a slow lag but, given this very bold statement about the potential, given the quick lead times, why are we still at 24 per cent of all renewables?
  (Dr Count) Because one is a technical resource. If all of the UK's production were supplied under a Renewable Obligation Scheme then we would have to experience some 40 per cent increase in power prices. Is that an acceptable position for the economy? That is not for me to judge but ultimately our judgement is what will be economically exploited will be much less than the technical capability. That is an issue for wider economic and political considerations.

  163. On the economics, the comparison with nuclear power, it is generally accepted that nuclear power costs five times gas electricity on an even playing field. Where do renewables sit alongside nuclear energy?
  (Dr Count) That is not a judgement we have done because we are not a nuclear generator.

  164. What would you say?
  (Dr Count) I do not know. You would have to ask British Energy on the economics. What I can say is that clearly if you judge against gas fired combined cycle generation, and we see sustainable sources as gas at sustainable economic prices, albeit gas has risen somewhat over the last year or two but is still at an economic level, then renewables are much more costly, so we would see a continuing large gas component of it. I think you will have to interrogate British Energy on what the economics of nuclear are. We know the economics of the conventional side.

  165. For political reasons obviously there will be a diversity of supply and there is concern that in the longer term we could be dependent on gas coming from politically unstable parts of the world with North Sea gas likely to dry up within five to seven years, certainly by 2020, so very different geo-politics there. We cannot be totally dependent on gas. There has to be something else.
  (Dr Count) I would only point out that we have always had about ten years of gas supply and just when the next year comes new gas reserves are found. There is a huge intercontinental pipeline system now for gas, so you are not dependent on one source. Fields are now opened up as technology advances. We use the same argument for renewables, that technology advances, but let us not forget that gas field technology advances mean that smaller fields which were less economic are now very economical. I do not think it is apparent that gas does not have a considerable longevity in terms of its ability to produce. Let us not say there is one solution. There is a mix of solutions and our submission recognises that for diversity you do not want all one technology, you do not want all one fuel and you do not want to eliminate one technology or one fuel particularly. That is our judgement, that the mix of renewables is what we think will economically be exploited. Other people may have different views.

David Wright

  166. You mentioned briefly CHP and clearly it is not classic renewable technology, but it has got significant potential energy savings and associated carbon savings. The Government has set targets for doubling CHP capacity by 2010. Where do you think the main potential is at the moment for CHP? Is it just large companies, big industrial users, that could draw benefit from CHP?
  (Dr Count) The primary market is large CHP. When Mr Thomas asked about technologies I should have mentioned that small CHP may well have a role in that and therefore at the domestic level I do not rule out micro CHP. I know that some of the major companies are developing that; BG for one I am aware of. From Innogy's focus it would primarily be at the large end. We would see a retail end perhaps developing as well.

  167. But you have decided as an organisation to stop investment in developing CHP generally?
  (Dr Count) Yes.

  168. Why have you taken that decision if you see it as a future technology? What drove you to that decision? What impact does it have on your broader business?
  (Dr Count) In the current market environment there would not be a sensible return. To put that capital on the ground would not lead to a sensible equity return to our shareholders. That is simple.

  169. What about the CHP Obligation? What is your position on that? If that was brought in how could it be constructed?
  (Dr Count) If it was an Obligation which commanded a premium price then we would reconsider our investment strategy on that. CHP is a small part of overall Innogy business and there is a market growth opportunity out there but broadly speaking it needs some incentivisation. The renewable certificates have been given primarily, as we have discussed, to wind and therefore the majority will be wind incentivisation. In my view, if the objective is carbon reduction then I believe CHP merits some support because it is more cost efficient at reducing carbon compared to offshore wind.


  170. Four or five times?
  (Dr Count) Yes.

David Wright

  171. What about other European experiences? Is there a different perspective in other European countries on this or indeed worldwide? Any good practice examples?
  (Dr Count) It is always difficult to speak on Europe because ultimately they are not open markets across Europe. We would like to see them more liberal. There is still considerable development on the industrial side of CHP, but again it is something on which, since we are not investors in those countries, I do not think I could claim to be an expert. You would have to see whether they have particular incentive structures that make them happen.

  172. Ofgem have suggested that the fall in CHP output has been due to the rise in the price of gas. Is that a reasonable assessment?
  (Dr Senior) Over the last 18 months or so gas prices have risen almost 50 per cent. Power prices in the same period have fallen by around 20-30 per cent. The combination on something that converts gas to power is fairly devastating, as Brian has mentioned. It is both. We look at the difference between gas and power. It is as simple as that. It does not matter from an economic point of view whether it is gas prices that have risen or power prices that have fallen. Over the last 18 months both have happened.
  (Dr Count) So the answer is unequivocally yes.

  173. Do you think there is an opportunity for a sector approach here? You talk about big business. Is it more sector based? Do you think particular parts of the economy ought to be trying to assist in taking a lead? You seemed to indicate in your response that it is very much a broad brush here and we need to incentivise generally.
  (Dr Count) I think ultimately my view is that sustainability should be an integral part of energy policy or industrial policy. To segment it and say that we will have a segment that deals with the sustainability and another sector that deals with something else is a less good model in my view. We have a number of segments. If we can try and bring them together in a more integrated manner I think there is a real opportunity for business to embrace that. The consumer I think will find that an attractive proposition. Ultimately I would say from the Government side, let us look at the objective; let us look at the outputs you want to achieve and leave us to worry about the inputs and processes and so be clear on the objectives rather than say, "I will back technology winners". Technologies will have these habits of coming through when the incentives arrive.

Joan Walley

  174. You said just now that sustainability should be an integral part. Given the way in which new guidance has now been issued to the regulator how adequate do you think the powers of the regulator are, particularly compared to previous powers of regulators? I am thinking particularly perhaps of Mrs Spottiswoode when she did that job previously.
  (Mr Bowden) I think it is generally accepted that the primary duty of the electricity energy regulator at Ofgem is to promote competition and we have seen significant impacts of that duty being exercised in the fragmentation of the whole structure of our industry. The secondary duties, as I think they are in legislation, are social and environmental. We see the social duty coming through and we have a number of initiatives, some that are simply complying with obligations upon us and others just commercial choices. We see commercial opportunity in partnership with the laudable policy to reduce and hopefully eliminate the fuel poor. I think it would be fair to say that on the environmental side we see less of the exercise of that secondary duty from Ofgem and inevitably see a good deal more from the explicit environmental agencies. It is not always clear to us that there has been joined-up thinking in the approach and we sometimes find ourselves in something of a difficulty with an apparent ambiguity or conflict between perhaps the social and competition policies brought about by the primary legislation on the electricity energy side and perhaps conflicts on the environmental side.

  175. Are you saying that you would put a tick in the box in terms of competition, a tick in the box in terms of social responsibility, but that when it comes to environmental issues you cannot square the circle? What would you suggest if that is what you are saying?
  (Mr Bowden) We respond to the policy initiatives that are set primarily by legislation and then implemented by gentlemen like Callum McCarthy and his equivalent in the other agencies. I do not think we have a particular view as to what is right and what is wrong. We operate within the framework that is laid down.

  176. But Dr Count said just now that sustainability should be an integral part of everything. I am asking you whether or not the way that Ofgem is interpreting the guidance, which is a secondary requirement and not in primary legislation, is sufficient when it comes to squaring the circle environmentally with respect to sustainability?
  (Dr Count) I do not think we have frameworks that integrate it. We believe that the purest framework would be an emission trading world where carbon had a price or carbon reduction was imposed across in the industrial landscape and industry traded between themselves to find that. The regulator would not have to segment environment or competition. He would just make sure that competitive elements prevailed in order to meet those common objectives. When I talk about an integrated approach, if you could get an emissions traded world that would suddenly integrate demand side management, production management and reduce carbon. It would certainly meet that objective. It may stimulate more co-generation than wind power; so be it. That may be the right outcome.

  177. By that would you be saying that you would be advocating a carbon tax?
  (Dr Count) I think a carbon tax is an inefficient mechanism. There is a cost of producing carbon and we will all do our best to try and avoid reproducing carbon. Somehow there is a cost to the consumer in reducing carbon. You cannot avoid that. Taxation is a blunt instrument.


  178. I am not quite sure how you would put the carbon element into your ideal proposal.
  (Dr Count) Let us try and make it simple. You could say to the industry, not the power industry, "We will reduce our total carbon emissions by 20 per cent"—those are the rules of the game—or, "We will have carbon targets. We will put sensible targets in. Industry: you go away and find the best ways of doing it." If that means that we can do it more efficiently in the automotive industry then that is where we should do it and we buy carbon certificates from the automotive industry. If the power industry can do more and the automotive industry less, then they buy from us. What you will find is a very efficient development of technologies by market mechanisms to reduce that carbon. If that is the output you want that is a very integrated world.

  179. Do you think you would get agreement between these various independent parties like the motor car industry and the energy industry?
  (Dr Count) If they work out they are winners they win; if they work out they are losers they will lose. Ultimately if you are seeking agreement from a structure that creates winners and losers you will never get agreement. What you have to do is decide what you want to do and do it. My view is that you will progressively move to an emissions trading world.

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