Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 440-459)

MR BRUNO LESCOEUR, MR ROBERT ARMOUR, MR SIMON BUCKNALL AND DR DAVID PORTER

TUESDAY 20 NOVEMBER 2001

Mr Djanogly

  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 a role.

  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 in it?

  (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 in early.

  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.

Mr Hoyle

  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 out?
  (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.

Mrs Lawrence

  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 said—we 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 way.

  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.

Mr Lansley

  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 through—we 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 your experience?

  (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 issue—and I think perhaps you are touching on this—which 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 of electricity.


 
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