Examination of Witnesses (Questions 440-459)|
TUESDAY 20 NOVEMBER 2001
440. Coal is relatively cheap at the moment,
flexible, reliable, secure, but many say that it is going to disappear
from the fuel mix because of the environmental considerations
that you have with it. You said in your submission that the Government
should not implement the EU environmental requirements on coal-fired
power stations early, but you have not suggested anything else
that should be done as an alternative. Do you think that it does
not matter if coal disappears as an alternative?
(Mr Lescoeur) The Electricity Association as a whole
is very much in favour of keeping all the options open, and, given
the role of coal in the generation of electricity in this country,
it matters for the members of the Association about what could
happen to the coal in the future. And this is the reason why it
seems inappropriate to implement, by anticipation, some measure
which could increase the cost of using coal, and clean coal, mainly.
441. So you are saying that market forces will
come to the rescue, market forces will rescue it, the price mechanism
will ensure that coal survives?
(Mr Lescoeur) It is a long-term problem, and, seen
from now, it is very important to keep the possibility for coal
to play a full role it will have to play in the economic condition
which will prevail in the long run.
442. So what would you like to see Government
doing to ensure that that is the case?
(Mr Bucknall) I think there are a number of issues
here. I think there is the status of existing coal-fired power
stations which are economic, and you referred to the fact that
Powergen are bringing back on coal-fired plant, and they do have
an advantage at the moment; so that clearly has a role to play
over the short to medium term, but they will need to be cleaned
up in terms of meeting the Emissions Directives from Europe. And
I guess where the Government could help with that is in terms
of supporting technologies for cleaning existing coal plant, such
as the Gas-Reburn project, which Scottish Power has been involved
with, in Scotland. In the longer term, you are looking at clean
coal technology, for coal to have a continuing role to play, that
is in two or three decades' time, and that is really where support
for demonstration plants for clean coal would play a role.
443. Clean coal has been discussed in several
other discussions that we have had, and indeed over the years,
but it has not happened yet; why do you think that is?
(Mr Bucknall) I think there is work going on, on clean
coal, in other parts of the world, I think in the US, I think
in continental Europe and elsewhere, there is some initial work
being done particularly by the chemical industry. Because I believe,
and I am not an expert, that it does involve chemical processes
and issues which can be dealt with through some of the other processes,
which the oil and gas industries already deal with. But it needs
further work and further investment and further understanding
of the technologies that might actually be reliable, or robust,
economic for the longer term, to allow coal to continue to play
444. And are you concerned at possible costs
to consumers as a result of that?
(Mr Bucknall) I think we are getting into slightly
different territory here. The question is what costs consumers
are going to have to pay for a secure and reliable and sustainable
supply of energy over the next 50 years, and I am not saying that
coal will necessarily be the economic solution, but I think, as
Mr Lescoeur has already said,
445. Sorry; then why should Government invest
(Mr Bucknall) I was going to say, I think
it is one of the options that needs to be kept open, and over
the next medium term, in terms of keeping existing coal going
and in terms of looking at the possibility of clean coal technology,
because coal has a number of advantages as a fuel for power generation,
I do not think we should foreclose that at this point in time.
Sir Robert Smith
446. What sort of environmental controls do
you think should be rejected though, what European controls are
coming in that you think should not apply to coal, what sort of
emissions would that mean people are having to put up with?
(Mr Bucknall) I do not know that we are saying they
should be rejected. I think the point was they should not be brought
447. So what would that mean for people living
round and about coal-fired power stations?
(Mr Bucknall) It is going to mean that, as far as
I understand it, sulphur and nitrogen emissions are going to be
drastically reduced, to a point where only a handful of power
stations are going to be able to continue to operate in the next
10 to 15 years.
448. On that point, in your statement you do
mention you believe in a mix of supply, and within it you have
mentioned fossil fuels, nuclear power and renewables. Do you want
to see nuclear expanded?
(Mr Lescoeur) Before I let Robert expand on that,
clearly, there is a consensus within the industry to be sure that
the nuclear option is still open.
(Mr Armour) Yes, I think, from an Electricity Association
point of view, we recognise that there is a major importance in
having a balance of fuels, there is a role for coal, even with
LCPD, and the fact that the surviving coal plant will be subject
to flue-gas desulphurisation, we believe there is a significant
role for indigenous coal going forward, just as we see there is
a role for gas and there is a role for nuclear and there is a
role for renewables. And I think even the nuclear industry, which
is a major component of the Electricity Association, is saying,
`Look, we're not trying to say nuclear is the be all and end all,'
it is a replacement of the current mix that it has been advocating,
rather than an expansion. But there is a balance here; the important
thing is not to have any one fuel mix dominant, it is to get a
diverse spread which gives you greater robustness.
449. Can I just follow that through; if you
do not see it as an expansion, do you see or support new nuclear
stations coming on stream to replace the ones that will be going
(Mr Armour) The Association's view is that we should
keep the nuclear option open, that there is going to be a very
large gap if the current stations close, and therefore considering
seriously the question of replacement is now an important part
of the equation.
450. What is the view of the Association though?
(Mr Armour) The Association represents a variety of
interests, of coal, gas, nuclear, etc., and finds it very difficult
to come out and say, `we must support one particular fuel mix.'
The view that it has come to is that all of these power sources
have a part to play, including an ongoing nuclear role.
451. Just to follow on from that, given the
stance of Germany and their decision to do away with nuclear and
concentrate more on renewables, why then have you come to a different
decision, why do you think Germany is wrong in their approach?
(Mr Armour) I do not think we have saidwe are
not experts on the German policy. I am sure they have thought
through the implications of their policy mix, both in terms of
fuel diversity and environment. Sometimes, looking from outside,
it is difficult to see how they are getting those parts of the
equation to come together. But they are facing a different set
of decisions and a different set of fuel choices from ourselves,
they are positioned differently in Europe. So, to some extent,
I think we leave them to decide their policy, within the ambit
that the European Commission is trying to say a balance for Europe
is important as well as a balance for the individual States.
452. Can I just push you a little bit further
and ask if you think that perhaps Germany has taken note of concerns
on environmental issues with nuclear, and that has been the issue
for them, rather than looking at the current mix, before deciding
to not develop nuclear further?
(Mr Armour) I think there is a huge debate
in German politics as to what is the right policy going forward
there. I think we believe it would not be the right policy for
the UK, and that the one that we are advocating is a better balance.
453. But you are not prepared to say specifically
why, in specific relation to the nuclear, particularly bearing
in mind the timescale?
(Dr Porter) One of the reasons that the Association
wants to keep the options open on nuclear and other sources is
because with the imminent closure, or the expected closure, of
nuclear stations it is very unlikely that we will be able to meet
our Kyoto targets. And, given that we have a very proud record
of delivering, for instance, against the Rio targets on climate
change, which was largely due to a combination of the way in which
electricity generation became more efficient, through the use
of gas generation, through more efficient coal generation and
through improved output from nuclear, so all those components
have gone into achieving the UK's environmental objectives. With
the closure of nuclear power stations, we see that it is going
to be extremely difficult to continue to meet those environmental
targets, and that is why the Association's position is simply
that we need to keep those options open, we would not want to
close it down. So you mentioned Germany's environmental objectives
there, and those are a balance, of course, between the environmental
implications of nuclear and the climate change environmental implications
of nuclear; so we are interested in maintaining that option to
keep the balance right.
Sir Robert Smith
454. You are arguing that the current market
is not going to give us security of supply and we cannot rely
on the market, but we need to keep alive coal and nuclear, that
the market will not keep them alive. What sort of level of investment,
over and above the current market, would you be looking at to
achieve that security, roughly?
(Mr Lescoeur) I am not sure that the
view of the Association is that the market is not able to deliver.
We were just saying that, with the example of coal and nuclear,
it is important to keep all the possibilities to answer to what
will be the market, or the cost of energy supply, in a general
455. So do you think the market may be able
to sustain the nuclear replacement and the clean coal without
additional investment coming from outside the market?
(Mr Armour) I think it rather depends on the framework
of the market. The current policy, the review, is looking at how
the market is framed and how you deal with the issue of the Climate
Change Levy or instruments, what is the holistic picture against
which you decide energy policy.
456. So reframing the market, bringing extra
costs, or do you think just redistributing the current costs to
produce a different outcome?
(Mr Armour) I think, in order to get a robust system,
there may be an implication of some price to pay, in order to
get that mix; you are seeing that with the Renewables Obligation
as it stands at the moment. These instruments will flow through
to consumer prices, but they may well also insulate consumer prices
from spikes and shocks that you might get from overdependence,
let us say, on one particular fuel in the longer term.
457. Actually, if I may, can I just follow up
precisely that point and take us on to the points relating to
demand reduction. Because, of course, as you were just saying,
there are some measures already, as it were, built into the system,
the Renewables Obligation, or the Climate Change Levy, or enhanced
efficiency targets, and, as you said, people are paying a premium
for that. Now what do you estimate that impact will be, because
in your paper, in paragraph 19, you make it clear that this is
going to be coming through by the end of the current year; what
sort of impact do you see that having?
(Dr Porter) In terms of the Renewables
Obligation, let me say first of all that the Association welcomes
this as, if you like, the acceptable face of intervention, because
we welcome the fact that it is very much a market-based mechanism,
which would encourage renewables and which also, I think, protects
the consumer by putting this £30/MWh buyout price on the
Obligation. So the impact of this on prices is slightly difficult
to estimate, but if you take the Government's figures, they estimated
that by 2010/2011, I think it was, there would be a maximum of
an extra £872 million, which corresponds to 4.9 per cent
on customers' bills. Now I say a maximum because, in our view,
the Obligation, being a market-based mechanism, should encourage
renewables, by virtue of the fact that they are now in the competitive
market, to develop throughwe see this really as market
entry assistance, if you like, and should encourage them to become
more competitive. So, hopefully, the price of renewables will
come down, and therefore the impact on customers' bills will not
be that 4.9 per cent, it may be less than that, it may be zero,
it may even be negative.
458. Taken together with other changes in the
market-place anyway and the impact of the New Electricity Trading
Arrangements, are you actually anticipating an increase in prices
paid by domestic customers, because the implication of your note
is that these changes will have political and regulatory consequences,
yet, of course, if they are part of a mix of changes, where other
changes might lead to a reduction in price, they may not actually
have those political consequences?
(Dr Porter) I do not know. I would not like to predict
the market. I think, in the short term, the likelihood is that
they may well have an impact on customers' prices, but it is a
competitive market, so it is difficult to predict what will actually
happen to the final bill as seen by the customer.
459. What can you tell us about the price elasticity
of demand anyway, as prices have changed, broadly speaking, reduced,
or if prices were to rise, as a consequence of some of the environmental
obligations that were being met? Is there a further additional
benefit associated with that from demand responses, or not, in
(Mr Bucknall) I think, basically, our
domestic sector is largely price-inelastic, but if you look at
the experience in California you will have seen where prices have
gone extremely high, that customers have responded, and there
was quite a significant reduction in demand in California in response
to those high prices. Of course, whether that is the kind of price
shocks that we want to see here I would very much doubt. But I
think there is a wider issueand I think perhaps you are
touching on thiswhich is the extent to which prices will
have to increase in the future if we are to meet our obligations
in terms of meeting emissions limits, in terms of investing in
new plant, and indeed meeting all the other demand reduction measures
that we want to look at. I think one of the issues which the review
needs to think about is where do prices go from here, because
I would say they cannot necessarily stay at the level they are
at the moment if you want to have a sustainable, secure supply