Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 340-355)



  340. If Europe did open up, would there be adverse consequences to the United Kingdom, such as energy supplies diverted from the United Kingdom for commercial reasons?
  (Mr Porter) If you mean fuel sources such as gas, that is something that needs to be watched. The more liberal the market is the lower the risk of that. The problems at the moment are largely the ones that Dr Miller just mentioned, cross-border trading and access.

  341. You mentioned that NETA does not need any further adjustments, is there a simple mechanism by which future infrastructure needs could be taken into account?
  (Mr Porter) I doubt whether there is a simple mechanism. There was a mechanism in the previous trading regime, a capacity mechanism to send a signal about capacity availability. In NETA that would not be quite as straightforward, but the concern that some of our members have is that the present market, although largely working well, does not have something of the kind that you mentioned to make it obvious to the parties that new capacity is needed. You might say that most markets do not have such a mechanism, I would agree with that. There are concerns that in the electricity market you, perhaps, should not allow gluts and shortages to occur quite as readily as you might with apples or pears. Some of the members of the Association are looking quite hard at that because it takes time to get a new power station on the ground should one be needed. The question of how long between the signal that a power station is needed and the time that the power station is actually operating is a very good question, it can take many years to go from a concept to a producing plant.

  342. Depending on the fuel too. What sort of range of forward indicator is needed in that sense?
  (Dr Taylor) With regard to, if you like, the life cycle of a project, a rule of thumb that one of our colleagues who specialises in smaller renewable projects came up with was from the identification of a windy hilltop to the first generation of an aero-generator so that you can get money from it, in round terms five years. Of that probably about one year is the procurement, construction and commissioning process. That is quite a long cycle time to get from concept to operation or contribution to the energy needs of society. Clearly for larger power stations the larger CCGTs, the big issue, I think, is whether or not you are into a local public inquiry, and that, again, can add quite significantly to the front end time.

  343. In terms of the market and the commercial side your answer, basically it is unlikely to be a simple mechanism, in an ideal world there should be some kind of mechanism?
  (Mr Porter) I think we said in the paper we thought it was worth looking at that and that is still our position.
  (Dr Miller) Can I make a comment on that particular subject? I think we should remember that both NETA and the pooled trading arrangements give probably, at best, day ahead signals. They give very little signals in advance of that. That is like a lot of other commodity markets. Investors in plant however will forecast the future and my belief is that electricity is no different from other commodity markets, where people make investments from signals they get in terms of the whole economy and historic performance. The one per cent growth we talked about earlier—people who built power stations over the last 10 years have not been based on signals from the market but based on their forecasts. The successful generating companies have continued to make those irrespective of other signals.

  344. You may be more optimistic that the market can cope?
  (Dr Miller) History has said that the market has done extremely well over the last 10 or 11 years and we see no reason why it should change going forward. People have not made investment decisions based on the pool capacity mechanism. They are based on what they expected the market price to be and the growth of demand in the country.

Mr Lansley

  345. Can I take you on further to the planning issue, in your memo to us you raised a number of issues, the implication of what you are saying is renewable projects have encountered particular difficulties and you would like to see some enhancement and inside planning systems for renewable projects to be approved more quickly or readily. Can you illustrate what sort of things you think that might have been and why focus on renewables?
  (Mr Porter) Starting with the end of your question, the reason we focussed on renewables was that in that area we actually did do a study a few years ago and we found that in the list of obstacles the problem of planning consent came very, very high. Some of the planning applications have been well known, well publicised and subject to a great deal of controversy. As for what might be done, we wonder whether possibly targets might be considered regionally to give a steer to county councils through their own land use planning as to how renewables might be treated and also whether we simply acknowledge that the building of renewable projects is sometimes controversial and that if the government is intent on meeting its target for renewables there will be more of them and, therefore, more controversy, and whether it might be appropriate for, perhaps, county councils in the development planning process to be required to put forward a separate plan for either renewable energy or for energy generally. They do this for minerals, for example, which can be really controversial, people do not always take readily to the idea of having a quarry or a gravel pit, or whatever, near them and some people react similarly in the case of power stations.

  346. Do you think the parallel with minerals is really an accurate one? With renewable projects there is some degree of discretion, some choice, should that not be made through the planning process rather than overriding the planning process?
  (Mr Porter) We are not suggesting that it should be anything other than the democratic process. I have personal experience of representing minerals' interests in the distant past and I found some really quite interesting parallels between that and electricity.

  347. One more, if I may, it does seem to me that trying to use the structure plan process to pre-empt the question of whether these projects are going to come forward seems to me, on the face of it, quite difficult, at the moment. Would it not be better to respond to projects as they emerge rather than to try and predict them in advance, structure plans, with a relatively few exceptions, and try and predict where housing developments are going to occur and how predictions could be made about where renewable projects might be. Why use that end of the process? Why not look at the questions of the legislative framework, the guidance which is given to planning authorities and how they address renewable energy policies?
  (Mr Porter) Planning guidance plays a part, and it should. In the dim and distant past I also spent many years working on the structure plans. I think drawing on that experience it is true that structure plans do not define precisely where housing will go. In fact in the office where I worked we had to be extremely careful not to identify particular areas of land for commercial reasons. Indeed, when you take this to its logical conclusion if you were to identify particular areas of land for renewables it is rather likely that that may have an effect on the price. It is not simple, but we come back in the end to the difficulty that the renewables industry has faced, and if the government is serious about its renewables targets somehow the planning issue has to be addressed.

Mrs Lawrence

  348. I take on board the point you make about the difficulties associated with securing local consent, I understand in most planning applications 85 per cent go through but with renewables 85 per cent are rejected. You have mentioned in your evidence consideration might also be given to steps which enable local communities to secure direct benefits from energy projects. Can you outline what you mean by that? Is it the Danish system you were thinking about?
  (Mr Porter) Yes, it was.

Richard Burden

  349. What are the changes you think are really needed to the network to ensure more embedded generation projects are able to come on stream effectively?
  (Mr Porter) Can I answer that by, first of all, explaining how the network is arranged today, it is arranged on the basis of central production supplying a grid, then distribution down the lower voltages to homes and businesses. The distribution systems were not designed, either technically nor in a commercial sense, to accept large amounts of generation connected to them - they were the points of the system where the power was actually supplied. There are one or two things that do need to change. One is the distribution businesses need somehow to be incentivised to make the production connected to their systems economically worthwhile to them, technically they may have to alter some parts of the physical system. Picking up on what you have asked, Mr Burden, and what Mrs Lawrence asked earlier this morning, there is also the issue of how much the perspective generator has to pay to connect to the system. This can be a huge burden, in fact it can stop projects in their tracks. At the moment they are likely to pay under what is known as deep connection, that means that they pay not only for the obvious cost of connecting where they are but for the knock-on effects of connecting, which can be quite considerable and may not be immediately obvious. They pay the whole bill. This is under review at the moment and the Association is fully involved in it. Those conducting the review are looking at the possibility of changing that process to one which is called shallow connection, where the producer would pay a much smaller up-front cost and then a charge for using the system and being connected to it is spread over a longer period of time. That, on the face of it, looks more attractive but, of course, it does not deal with the history that we have, it does not deal with the issue that a neighbouring plant may well have to pay on a deep charge basis. As many of these things are it is never quite as straightforward as it sounds. Dr Taylor has been quite involved in this and he may want to add something.
  (Dr Taylor) I would just like to applaud Ofgem, they are in the midst of consultation exactly to do with this issue as we speak and they are doing it as a result of the DTI/Ofgem Working Group that the Minister referred to earlier and report from that working group. They are doing it ahead of the next price review round for distribution companies, which is late 2005, which we think is another good thing, because it means that gives us an opportunity to make progress on this issue ahead of 2005 and, therefore, get within a shout of achieving the government's targets for a new generation. There are issues of a more detailed nature, some of which David has just alluded to, but the principle is excellent.

  350. You have alluded to some changes that NETA would need to set up to allow those things to happen?
  (Dr Taylor) It is not quite NETA, it is the connection and use of systems rather than the trading costs per se, it related to the totality.

  351. Do you think there would need to be any work or changes, or do these need to be changes on NETA to meet the objectives of encouraging more renewables and greater take-up of CHP?
  (Mr Porter) There needs to be change of some kind in order to overcome the difficulties that especially small intermittent plants face in the trading environment. I do not think our membership at large would be very pleased to see the NETA trading arrangements in the round changed radically. They would be keen to see a bit of stabilisation because they put such an enormous amount of money into this and a great deal of effort into making NETA work, something which the industry does not get a lot of credit for, but I think it really should. On the other hand, they do not want radical change so early in the lifetime of NETA but they do recognise that there is an acute difficulty for certain smaller players. One of your members this morning asked the Minister, I think, why was this not recognised earlier. It jolly well ought to have been recognised earlier because this Association and the Combined Heat and Power Association and others like us were raising this question years ago when the shape of NETA was described to us. We knew that there would be difficulties for small players. We told every Energy Minister that that was the case, we told Ofgem as well and because the process was so hell bent on getting NETA into place and keeping the lights on, the problems that we have described were swept aside as something that could be dealt with later. They were absolutely obvious to virtually everyone involved in the generating industry.

  352. Now we are at NETA it would have been good if some of the problems had been recognised or addressed earlier, but that is now passed and we are now where we are. Are you in a position where you want to see some changes in order to address those problems but also you do not want to get involved in radical change? What I am having difficulty with is what the changes are that you do want to see that would be effective and that would not be radical?
  (Mr Porter) We have not been specific about that. Just off the cuff, one is the issue for CHP about the Climate Change Levy, that might be helpful. There is a consultation paper out on this from the Department of Trade and Industry and we have not responded yet. I think it is fair to say that these are quite difficult issues. It is quite unfortunate that they are having to be picked up now and they were not dealt with much earlier.

  353. One last question, the renewable issue, you say in your paper that you are in favour in principle of the renewables obligation, could you, perhaps, just say a little bit more about the concerns you have about the way you think that it will work?
  (Mr Porter) The Obligation?

  354. Yes.
  (Mr Porter) It is actually something that we put forward ourselves a long time ago when we could see that the Non-Fossil Fuel Obligation was a bit time limited and we felt that the renewables industry had done an amazingly successful job in turning itself into a purposeful, business-like industry. We also felt that the time had come when it was not quite so appropriate for the government to be picking technologies which were going to be winners. That may have been useful in the early days of NFFO but we believe that with the market maturing it was better to go for a percentage obligation, which would not distinguish quite so clearly between different technologies. We also felt that the way to get the projects on the ground was to allow that obligation to operate with full market force. In other words, the obligation would be put on the supply companies and it would be up to the renewable industry to deliver what those companies needed. The government has intervened in that somewhat by actually, in effect, capping the price that the supply companies have to pay. That is not necessarily a very good way of getting renewables on to the ground quickly. We felt when we put this forward that there should not be a price cap. If there was a shortage of renewable energy the price should reflect that. As new plant was built it would fall again. That was not something that the Department of Trade and Industry seemed to be able to live with.


  355. Thank you very much, that has been very helpful. Perhaps when you have your response to the consultation document out in the next couple of weeks you would send us a copy of it.
  (Mr Porter) We would be pleased to, Chairman. Thank you very much

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