Select Committee on Trade and Industry Second Report


Future fuel mix

50. One of the key issues which we have considered is that of diversity of supply. "Diversity" can mean several things: it could refer to the mix of different fuels, or it could mean various sources of supply for one type of fuel. The first meaning took us into questions such as: Is there an ideal fuel mix? If so, will market forces produce this, or should Government intervene? And if intervention is necessary, how prescriptive should Government be and what instruments should it use? The second meaning raised issues not only of which countries held the main fuel reserves and whether imports from them could be relied on,[52] but also of how easy it would be for the UK to obtain access to those fuels.

51. As outlined in Paragraph 8 above, the current mix of fuels for energy generation cannot continue long-term: unless circumstances change, coal and nuclear power will have been largely phased out in about twenty years' time, leaving only gas and renewable power (with the additional consideration that some renewable technologies are at present at a fairly early stage of development).

52. Most of our witnesses were of the view that, in the absence of any action to promote alternatives, gas would become the dominant fuel for electricity generation;[53] although higher gas prices might limit this development: there had already been some signs that electricity producers were prepared to revert to coal-fired generation where economic.[54] There were different views about how anxious people should feel about such dominance. Ofgem and some gas and electricity producers were not worried; they believed that, provided the market was functioning properly, gas would find a sustainable level.[55] The Gas Forum and BP argued that, as long as there were enough different sources of gas and sufficient traders in the market to ensure competition, there would be security of supply — though prices could fluctuate.[56] Representatives of large industrial consumers and of other generating interests were more concerned about a possible lack of alternatives to gas.[57] One witness, Coalpro, was concerned that the monopoly position of the Russian company — Gazprom — could jeopardise supplies from the largest single source of gas, Russia.[58]

53. The Government's view on future fuel mix was clear: it was for the market to determine.[59] Most of our other witnesses also stated firmly that they were opposed to the Government's trying to dictate a fuel mix, and they evaded the question of whether there was a desirable mix of fuels for the purposes of supply security.[60] Even those interest groups faced with possible extinction — coal and nuclear power — while arguing that the current mix was probably the best one for achieving security of supply, did not suggest that the Government should impose that mix. Instead, they pleaded for Government intervention to keep options open, while leaving the final determination of fuel mix to the market.[61] We agree with the view that it should not be the role of Government to dictate the appropriate mix of fuels for electricity generation, although that need not prevent intervention by the Government and the Regulator to ensure that long-term security of supply is maintained. Furthermore, we consider that security of energy supply can be improved by retaining a capacity to use a variety of different fuels to generate electricity. Even if the exact mix of fuels is left to market forces, it is arguable that the Government should at the very least take no action that closes off options, and perhaps should be prepared to make adjustments to its policies to keep options open.

54. Apart from the environmental lobby, who were confident that energy efficiency, renewables and CHP together would more than cover any deficit,[62] witnesses were reluctant to predict how the gap left by coal and nuclear power after about 2020 would be filled. This is not entirely surprising, given the notorious difficulty in making predictions over such a period (commentators usually cite the claims made by the CEGB to the planning inquiry into the Sizewell B nuclear power station in the early 1980s to prove the unwisdom of such prophecies); but the gap will be so significant that some strategic view and some contingency planning ought to take place. The market is unlikely to provide this. The PIU review is intended to fulfil that function at present, but, once it is complete, the team will be disbanded, and Departments will return to normal modes of planning. As far as we could ascertain, the timeframe for energy planning adopted by the Department was "at least 7 years", this being the longest period ahead for which accurate estimates of fuel supplies could be made and measures taken to bring forward any necessary changes to supply-chains and infrastructure.[63] This is not an unreasonable timeframe for fairly detailed planning and for triggering smooth and effective intervention where required — for, in effect, tactical planning — but it does not provide a really strategic overview. We agree that changes in energy markets over longer periods are difficult to predict, but given the long lead-time necessary to provide new infrastructure and the apparent short-termism of markets, it would be prudent to try to take a twenty year or longer view. This would not necessarily mean the establishment of a "futurology" section in the DTI; it might simply require a commitment to revisiting the sorts of questions considered by the PIU on a regular basis with ad hoc teams from all relevant Departments, say every five to seven years.

Exploitation of UK gas and oil reserves

55. Whether or not they felt concern over dependence on imported gas, our witnesses were unanimously of the view that it would be prudent to ensure that the UK's own oil and gas reserves were exploited to the greatest extent technically possible.[64] The UKCS is a relatively 'mature' region, meaning that the oil industry has been extracting oil for some time and the larger fields and those moderately easy to tap are reaching the end of their (economically) productive lives. At present, faced with increasing difficulty and cost in extracting oil and gas from relatively small pockets in the UKCS, oil companies sometimes take the view that they would achieve a higher return on their capital investment by concentrating on other regions of the world. An example of this was provided in some evidence that we received on the difficulties of locating small pockets of oil and gas. We were told that although these difficulties could be overcome technically,[65] no single big oil company would make the necessary investment to develop the technology when other reserves were cheaper to exploit, and the smaller companies that specialised in extracting oil and gas from marginal sites could not afford the investment.[66]

56. PILOT, the joint industry and government body examining the question of developing the UK's reserves, has concluded that across the industry, the average recovery rate from oil fields is only about 40%. The UKOOA told us that PILOT was playing a significant part in such areas as the sharing of best practice and the development of new technology to increase recovery rates, but they were labouring under the difficulty of tightening time constraints. The problem was that when fields ceased to be economic to exploit, the infrastructure was removed and was therefore not available for extracting oil and gas from small remaining pockets or adjoining small fields that did not themselves warrant the expense of building new infrastructure.[67] The DTI was robustly optimistic about the work being done by PILOT. The Minister told us that there was no evidence that the low price of oil was curtailing exploration and exploitation of the UK's reserves, and he was encouraged by the amount of new investment being announced, which he attributed to a degree to PILOT.[68] He mentioned the decision to open up the Clair field (which had previously been regarded as uneconomic to exploit), and said that he was now more optimistic about the potential for greater exploitation than he had been a year ago.[69] He did, however, sound a note of caution about the area known as 'West of Shetland', which would be very costly to develop, and required a 10 to 20 year perspective for investment. [70]

57. Some witnesses raised concerns about whether there were fiscal disincentives to full exploitation of the UK's reserves. Both the Gas Forum and Centrica suggested that, as fields approached the end of their lives, high tax rates discouraged the new investments necessary to prolong those lives.[71] We asked UKOOA whether the tax regime did act as a disincentive to exploration and further development of mature fields. The UKOOA said that the fiscal regime did not cause much concern, and noted that under the present arrangements it had been possible for an operator to negotiate relief from royalty payments in order to make the extra investment necessary for greater exploitation of reserves. The UKOOA was happy for this system to continue, though it did suggest that a greater use of case-by-case consideration of fiscal relief might be helpful.[72] Of far greater concern to the oil and gas producers was regulatory uncertainty, in particular the proposals for shorter balancing periods and greater metering of the flow of fuel offshore, and the capacity constraints at St Fergus.[73]

58. We are pleased that PILOT appears to be contributing to the exploitation of the UK's gas and oil reserves. However, we are concerned that there may still be gaps in the approach, as shown by the difficulty in developing better seismic imaging equipment and techniques. We hope that PILOT will be able to remedy any such deficiencies before long. We also support the UKOOA's comments on the desirability of a flexible approach to the taxation of the UKCS oil industry if reserves are to be used to their full potential.

The effect of trading arrangements on security of supply

59. Since the privatisation of the gas and electricity industries, the policy of both governments and regulators has been to encourage competition in the provision of electricity and gas to customers. A significant number of companies are now involved in energy supply, ranging from the quasi-monopolies owning and operating the transmission systems to electricity generators, from gas and oil producers to the trading and supply companies that operate as middlemen in the market. Many companies now encompass several different functions and a number have interests in both the gas and the electricity markets. The situation is complicated and may become more so as the market develops, with foreign companies becoming increasingly involved in the UK and with frequent acquisitions and mergers.

60. One of Ofgem's main responsibilities is to ensure an efficient system of trading electricity and gas so that the market can operate effectively, competitive pressure will hold down prices, and security of supply within the UK will be maintained by ensuring that there are no barriers to meeting demand. In the case of electricity, after privatisation an arrangement for balancing supply and demand was created: the Electricity Pool. However, the Pool was widely considered not to be an efficient and effective way of balancing supply and demand — there were concerns that in practice it guaranteed fairly comfortable minimum prices to generators and therefore did not provide sufficient incentives for competition. As a result, the Regulator devoted considerable time and attention to devising a new system that is more sensitive to market signals: the New Electricity Trading Arrangements (NETA).[74] NETA came into operation on 27 March 2001.

61. The provisions of NETA are very complex, and it is not necessary to describe them in detail here. Broadly, NETA is intended to promote bilateral contracts between generators and suppliers to cover most foreseeable demand for electricity, leaving only a minority of peaks in demand to be met from a sort of spot market. However, to manage the grid second by second requires fine adjustments. Companies engaged in trading electricity are required to estimate levels of demand and generation as little as three and a half hours ahead, and they have to pay penalties if they get "out of balance" by supplying more, or less, electricity than they had predicted.[75] These provisions are intended to decrease to a minimum the amount of electricity that the system operator (in this case, NGC) has to buy on the spot market at the last moment in order to meet demand.

62. Gas trading arrangements have a similar rationale to those for electricity: balancing supply and demand efficiently, and encouraging competition and therefore downward pressure on prices to consumers. Ofgem introduced reforms to the gas trading arrangements in October 1999, including establishing a new on-the-day commodity market for trading gas and incentives to Transco to balance the National Transmission System (NTS) efficiently. There are further proposals to tighten the arrangements by providing for a shorter (within day) balancing period, along the lines of NETA. Like their counterparts in the electricity market, wholesale gas suppliers are liable to out-of-balance charges. The arrangements for gas differ from those for electricity, however, as there are comparatively few access points for gas to the UK market: as explained in Paragraph 25 above, there are only seven pipelines bringing gas into the UK from the UK Continental Shelf oil and gas fields, plus the gas Interconnector to Continental Europe that runs from Zeebrugge to Bacton. There is therefore considerable competition among gas traders and shippers for access to the key pipelines bringing gas ashore. As a result, capacity at these entry points is allocated by means of auctions.[76]

Advantages and disadvantages of NETA

63. There is broad agreement that NETA has reduced electricity prices. Although it is difficult to disentangle the direct effects of NETA from other competitive pressures, it is noteworthy that since the introduction of NETA wholesale electricity prices have fallen by between 20 and 25%.[77] Consumers have not all benefited equally from this: we received evidence that some large users, who used to manage their demand and received repayments for doing so, no longer receive such payments and consequently have gained little or no benefit from the new arrangements.[78] It quickly became apparent that NETA as currently constituted is causing major difficulties to small electricity generators, both in the renewables area and those operating Combined Heat and Power (CHP) systems. The difficulties arise partly from the small scale of the operations, which make it very difficult to cope with the administrative demands of 'balancing',[79] and partly from the unpredictable nature of electricity generation from CHP and from some forms of renewables, especially wind power. There appears to be agreement that a problem for both the renewables generators and the CHP producers is the spread between the System Buy Price and the System Sell Price in NETA, the effect of which is disproportionately to penalise smaller generators for being 'out of balance' (ie not supplying as much electricity as predicted).[80] A further problem that affects the CHP producers is only partially attributable to the effects of NETA. About 60% of CHP is gas-fired at present.[81] The combination of rising gas prices with falling electricity prices has made the use of gas to generate CHP far less attractive, to the extent that it is now more economical for some CHP producers to continue to buy the gas which they are contracted to purchase and to sell it on rather than use it for electricity generation themselves.[82]

64. The result of these difficulties with NETA has been a dramatic decline in the income and in the output of small generators. There was some dispute about the exact degree of decline. Ofgem estimated a drop in output overall of 44%.[83] The Renewable Power Association told us that a survey of its membership showed a 40% decrease in income and a 14-17% decrease in output.[84] There has been an even more severe decrease in output from the CHP sector: according to Ofgem's figures there had been a drop of about 60%. The Combined Heat and Power Association (CHPA) disputed these figures on the grounds that they omitted one particular plant, and if that were included, the decrease was about 80%.[85] The promoters of CHP and renewables said they had warned that NETA would have these effects while the new arrangements were under construction.[86] But there is no dispute that something should be done to arrest the decline.

65. As soon as these consequences of NETA became apparent, the DTI asked Ofgem to report on the scale of the problem, and then, on 1 November 2001, launched a consultation paper suggesting changes to NETA to try to counteract it. Various 'fixes' are under discussion. From its evidence to us, it is clear that Ofgem did not wish to see major changes to NETA: the Regulator feared distorting the system, and causing further serious upheavals to the market which, it was widely thought, needed a period of calm after the disruption caused by the introduction of the new arrangements in March 2001.[87] Ofgem believed that consolidation, so that the administrative costs and the financial risks of balancing could be shared, would counteract most of the disadvantages suffered by small-scale generators, and it wished to concentrate on promoting this rather than making alterations to NETA. Moreover, the Regulator believed that the problem of the spread between the 'buy and sell' prices was declining: the spread had decreased by two-thirds between the inception of NETA in March and November 2001, partly — in Ofgem's view — because operators were becoming more familiar with NETA and learning how to manage the new system, and partly as a result of adjustments made to NETA by Ofgem itself.[88]

66. Those involved in renewable power and CHP were less optimistic than Ofgem that experience and consolidation alone would offset the harmful effects of NETA.[89] The Renewable Power Association (RPA) acknowledged the decrease in the price spread over time, but argued that the spread was still too great for small operators to cope with it.[90] As for consolidation, the Association said that in effect renewables generators already pooled risk because, unable to deal with the expense and complexity of trading themselves, the majority of producers contracted with suppliers, generally (but not always) outside the central NETA structure, and it was the suppliers who bore the balancing risks (though the cost of these was passed back to the generators in the form of lower prices or higher charges).[91] Further attempts at consolidation would only result in real (administrative) costs to generators and suppliers without actually providing any economic benefit to either the companies involved or to the customers: indeed, Mr David Milborrow of the British Wind Energy Association estimated that "even if you aggregated wind over the whole of the country you would still get a significant penalty [for imbalance risk] in the order of three to five pounds per megawatt hour".[92]

67. Both the Renewable Power Association and the Combined Heat and Power Association supported the argument that those who cause imbalances of supply should pay for them, but they still believed that NETA unfairly discriminated against small-scale generators, who had not caused the problems of the Pool in the first place. "The reforms have been based around trying to address a large generator problem. The inevitable casualty of that seems to have been that the impacts upon the smaller generator have been somewhat overlooked in the process of implementation."[93] As well as putting forward arguments about whether any individual wind farm affects the balancing of the system, the RPA stated that in practice NGC ignored the output of small generators (of less than 50MW) in trying to balance the system, both on a de minimis principle and because if it tried to take into account predictions from so many small market participants it would suffer from "information overload". Instead, it "forecasts demand net of embedded generation and utilises the information provided by large generating units in planning for system operation".[94] NETA made small generators comply with complicated and expensive administrative arrangements designed to keep the system in balance when in practice their contribution was ignored by those actually planning how to balance supply and demand. The RPA concluded that it would not disrupt the balancing of the grid if NETA were adapted to relieve the burden on small generators.

68. The renewable power and CHP industries' preferred solution to the problems posed by NETA was more radical than anything proposed by Ofgem: to change the system by setting a single cash-out price rather than the current dual one, with further adjustments to NETA to take fully into account and allocate fairly system support costs (which, in the RPA's view, would include not only any costs imposed by intermittency of generation but also those imposed by the need to cope with unchangeable base load in periods of very low demand, and the fact that security has to be ensured by holding in reserve spare capacity to cover any failure of the largest single generator — that is, Sizewell B). One of their reasons for supporting this option was that it would apply to all participants in NETA and therefore could not be considered discriminatory. An alternative supported by both the Combined Heat and Power and the Renewable Power Associations was the introduction of a 'deadband', which would in effect exempt small imbalances from penalties (there are several different ways in which this could be achieved). Other options were exempting renewables either from the most harmful effects of NETA, the dual pricing system, or from NETA altogether (by allowing them to sell their output to a central purchasing agency which would itself be responsible for dealing with NETA); ex post trading; and access to the imbalance revenue surplus.[95] An additional complication was that it would be some time before some of the proposed adjustments to NETA could be made, because some software changes could be made only once a year, in October.[96] The CHP witnesses emphasised that the solutions they put forward would not undermine the fundamental goals of NETA.[97]

69. NETA appears to have delivered its main objectives of encouraging competition and providing a mechanism to balance supply and demand in the transmission system, but it has had unintended — though predicted — harmful consequences for two sectors, CHP and renewables, that the Government is committed to promoting. The problems with NETA epitomise the conflicts inherent in trying to achieve an energy policy that simultaneously guarantees security of supply, delivers environmental objectives and combats fuel poverty. They also encapsulate the dangers of trying to deliver a broad, balanced energy policy solely by means of a Regulator whose chief objective is to promote low prices through competition. As presently constituted, NETA poses a major disincentive to the commissioning and operation of small-scale generators. It is clear that urgent action must be taken to ameliorate the effects of NETA if the Government is to meet its environmental objectives.[98]

70. We do not advocate specific amendments to the NETA regime. We understand that there may be legal reasons why renewable operators cannot be treated as a special case within NETA, and that it may be desirable to avoid significant disruptions to a system which has itself required market players to make considerable adaptations and which is still bedding in. However, a 'wait and see' policy does not seem likely to stem — let alone reverse — the dramatic decline in both the output and the profitability of small scale generators. We are pleased that the Department acted swiftly once the problems with NETA became clear, and we agree that the best way to tackle them is to have a widespread consultation about the options available. The Minister assured us that there should be no great delay in the Department's reaching conclusions from the consultation.[99] We look forward to the outcome of the consultation process, and we trust that in its reply to our Report the Department will be able to outline what measures it is taking to ameliorate the situation.

Gas auctions

71. The gas industry has also expressed considerable reservations about the arrangements for gas balancing, and, in particular, for allocating capacity at the entry points to the National Transmission System.[100] A particular criticism of the system has been that, far from providing signals encouraging offshore operators to exploit gas reserves on the UK Continental Shelf, the requirement to balance gas supplies in the short term and the resultant difficulties in ensuring that gas could be released onto the National Transmission System have caused producers to conclude that it is not worthwhile fully utilising gas finds, developing new finds or even exploring for more gas. If this is so, the lack of transmission capacity may make the UK dependent on gas imports earlier than necessary as fields are abandoned, while others remain undeveloped and undiscovered.[101]

72. Ofgem was fairly sanguine about gas auctions. Mr McCarthy admitted that currently auctions were limited to short-term capacity, and therefore gave very little indication to the market about future demand and the need for further investment; but the intention was to develop the system to auction longer-term capacity, which would enable both the offshore operators and potential investors in onshore capacity to judge future demand better.[102] He assured us that Ofgem was aware of the concerns about the exploitation of UK reserves, and that both the onshore and the offshore costs to producers were being taken into account in amending the gas balancing proposals.[103]

73. We welcome the Regulator's assurance that offshore costs were being taken into account when Ofgem was considering gas regulation. Clearly, investment in maximising the exploitation of UK reserves will delay the time at which security of supply becomes an issue for this country. We understand that the Regulator is about to publish amended proposals for gas balancing and express the hope that they do not damage offshore investment.

Investment in generating capacity

74. We have already discussed whether market forces provide the incentive to invest in sufficient transmission and distribution capacity,[104] but the same question arises in relation to generating capacity. The DTI stated that one of the key aims in developing the new electricity trading arrangements was "to provide a strong incentive for generators to maintain some spare capacity and to make existing generating plant available if capacity is short".[105] The Association of Electricity Producers was of the opinion that NETA gave at best one day ahead signals of problems. [106] This contrasts with the minimum of five years necessary to plan and build even small renewable generating plants, and longer for larger power stations.[107] But, as the AEP said, historically no company depended on the signals given by the Electricity Pool to decide whether or not to invest in new plants: the trading arrangements were irrelevant; such decisions were based on general assessments of the market.[108]

75. We were assured that at present there is no problem with lack of generating capacity: in fact, there is around 30% more capacity than demand, a large margin of reserve.[109] A number of generating stations have been mothballed and could be brought back onto the market to counter any short-term capacity problem.[110] However, this margin might decrease: in addition to the anticipated closure of nuclear plants, other generators might decide to take capacity either temporarily or permanently out of the system depending on fuel prices, electricity prices, or even such aspects as redevelopment values for sites of ageing plants. In the past, market developments — particularly the decrease in gas prices — had provided strong signals to invest in new generating plant; but some witnesses claimed that at present there was very little financial incentive to invest in any type of generation: electricity prices were so low that no fuel was profitable enough to warrant building new plant.[111] The DTI implied that at present there was no cause for concern; the recent Seven Year Forecast made by the National Grid Company predicted that generating capacity margins would remain in excess of 25% over the period to 2007-08, taking into account the withdrawal of the Magnox plants "as well as other closures".[112] Ofgem pointed out that the margin had been lower than 30% many times without causing any significant problems in meeting demand; and it was confident that if the margin did fall, market forces would come into play: "as that capacity margin comes down we would expect the forward price for electricity to increase and to give people an incentive to invest".[113] However, Innogy argued that, as currently designed, NETA did not provide sufficient reward for spare capacity that was used only for short periods. Because such "bursts of generation" could not be guaranteed to cover both the fixed and marginal costs of the plant plus an allowance for a reasonable profit, it was increasingly unattractive to invest in such spare capacity.[114] Moreover, currently owners of power stations have to give the NGC only six months' notice of plant closures and no notice of mothballing.[115]

76. Some witnesses suggested that market signals — and particularly the premium which NETA places on flexibility — were leading to inefficiencies and harm to the environment. Mr Byers of the Renewable Power Association said that there was probably five gigawatts of spinning reserve,[116] so that generators could quickly meet any expected imbalance in the system. "Before NETA we had about one gigawatt, now we run five gigawatts just in case."[117] Mr Milborrow attributed this excess to the fact that NETA forced operators to run mini-balancing systems, "mini national grids almost, ... each with their own standby plant to balance out when supply does not meet demand".[118] Mr Latif of the Gas Forum expressed concern that because NETA was requiring generators to be switched on and off more frequently to balance the system, the life of generating plant was being physically reduced.[119]

77. The DTI told us that: "Following the introduction of [NETA] there are no longer any security standards relating to generating capacity". However, it also noted: "A margin in excess of 20% is usually considered to be healthy".[120] We asked the Regulator whether Ofgem had any target, however loose, for the margin of capacity over demand. We had in mind that one of the requirements on the Regulator is to ensure security of supply, and guaranteeing a comfortable but not excessive plant margin would seem to be an element in fulfilling that duty. We were rather startled to learn that Ofgem has no such target: it regards its task as being limited to monitoring generating capacity and publishing this information for the benefit of the market, so that the market can then act to meet any shortage.[121] Ofgem clearly did not believe that it should take a view as to when capacity might be so low as to run the danger that demand would not be met in the event of a breakdown of large generating units.

78. This relaxed attitude is acceptable in many markets, where alternatives to the desired products exist and where shortages can be met quickly, but we do not accept that electricity falls within this category. It is too important to both domestic and business customers; practicable alternatives do not exist for many people; there is no guarantee that the current level of mothballed plant will continue or be employable;[122] and new generators require a considerable lead-time for planning, construction and commissioning before they come into use.[123] At the very least, any shortage in capacity could lead to quite severe short-term price shocks, especially if UK suppliers had to try to meet demand by buying electricity on Continental spot markets. We have not yet heard any evidence that leads us to believe that the market is sufficiently far-sighted to guarantee enough reserve generating capacity without some element of planning by Government or one of its agents. This does not mean that we believe that Government should try to dictate to the market; simply that someone, whether the Department (which we would prefer) or Ofgem should take a strategic view about what level of reserve capacity is necessary — presumably, slightly more than 20% — and should be prepared to use market mechanisms to encourage the construction of extra capacity if necessary.


79. There was widespread agreement that one of the major difficulties faced by many would-be electricity generators was the planning system.[124] The specific problems of the nuclear industry are widely known: we address these and the industry's other difficulties elsewhere in this Report.[125] The planning system was cited as being one of the reasons why it was difficult to develop gas storage facilities in the UK, and as the main obstacle to the full exploitation of the UK's coal reserves.[126] In particular, a number of witnesses forcefully argued that the delays, uncertainties and inconsistencies of the planning system were a major obstacle to the achievement of Government policy to promote the renewables sector, being a particular problem for wind power and biomass plants.[127] When asked to explain the somewhat disappointing results of earlier Government attempts to encourage the development of electricity generation from renewable sources — under the scheme of Non-Fossil Fuels Orders and the Non-Fossil Fuels Obligation (NFFO) — the RPA named the planning system as one of the two chief obstacles to renewables developments.[128] A Planning Policy Guidance Note (PPG 22) on renewable energy was issued in 1993. However, according to the Renewable Power Association, PPG 22 was not always adhered to by planning committees, and did not solve the problem of reconciling national need with local amenity considerations.[129] One of the chief objections made by communities to renewable generating plants, especially wind farms, was visual intrusiveness, and the consequent damage to local amenity and — in some areas — tourism.[130] But the problems are not limited simply to the construction of generating capacity: the Institution of Civil Engineers, for example, pointed out that transmission and distribution networks also require planning consent, and there is often considerable opposition to the construction of the pylons and other infrastructure necessary to connect new generating plant to the grid.[131]

80. We asked our witnesses how long it would take to get a new energy facility from the design stage to operation. Answers varied. We were told about five years for smaller renewable projects (of which about one year would be occupied with procurement of plant, construction and commissioning, the rest with planning and financial arrangements), and longer for larger power stations. If a major public inquiry was needed, the time taken at the planning stage was longer still.[132] For nuclear power stations, the British Nuclear Industry Forum estimated that the preparatory stage (site preparation, seeking planning consents, arranging finance) would occupy between three and five years while, after consent was given, it would take about another five years for ordering the equipment, construction of the plant and commissioning, including safety tests.[133] Building on the sites of existing generators did not provide a shortcut, as the experience of the Sizewell B inquiry showed.[134] We were told that planning problems arose for both new shafts for deep mining and for open cast mines.[135] Coalpro said it would probably take three years to carry out the full environmental review necessary to obtain planning permission for a deep mine; Lattice/Transco judged it would take the same time to undertake all the planning processes and to build additional gas pipes or compressors.[136]

81. We know that the Government is considering substantial changes to the planning system in England and Wales to reduce delays and uncertainties for major schemes.[137] However, most on-shore renewables schemes are not large-scale and do not raise so starkly the question of general public interest versus the rights of local people as to fall under the revised planning system currently under discussion.[138] The problem is cumulative: no individual planning refusal for a renewables scheme has a substantial effect on the achievement of Government policy, but the fact that at present approximately 30% of schemes[139] in England and Wales are refused planning permission has a huge effect, not least because it appears to have a major disincentive on schemes being brought forward.[140]

82. Witnesses had differing views about how to cope with the problem, some more prescriptive than others. The Association of Electricity Producers suggested that Government should either set regional targets for renewable generation developments, which county councils would be required to take into account in their planning of land use; or require councils to produce separate renewables or general energy plans during the structure plan process, in a similar form to minerals planning.[141] The RPA was more cautious, and stated that it did not advocate a dictatorial approach. Its preferred option seemed to be to provide clearer planning guidance to local authorities (though it did not state how the guidance should be enforced).[142] A number of witnesses commented enviously on the situation in Denmark where, they suggested, renewable developments were seen by local communities to be a good thing, as their own source of 'green' energy. These witnesses conceded that, for historical and cultural reasons, it might be impossible to reproduce this sense of community ownership in the UK, but they felt that more might be done to explain to local residents the advantages of renewable developments.[143] The RPA believed that Government public information campaigns about renewable power would be helpful.[144]

83. To date only 11% of planning applications for schemes under the Scottish Renewables Order (the Scottish version of the NFFO) have been denied. This is similar to the average rate of refusal for all planning applications, but a large proportion of those rejected have been wind farm proposals. In response, the Scottish Executive has introduced National Planning Policy Guidelines (NPPG 6), intended to support an increase in renewable energy (RE) development in Scotland. This document details the steps to be taken in gaining planning permission. NPPG 6 policy is based on "the principle that RE developments should be accommodated throughout Scotland where the technology can operate efficiently and environmental impacts can be addressed satisfactorily". This means that the onus of making a case has now shifted from the developer to the objector.

84. Planning problems so strongly recurred in the evidence given to us that we conclude that the planning system currently forms a major obstacle to the Government's achieving its energy policy in respect of both security of supply and environmental objectives. We concur with those who thought that formal requirements to plan for energy developments would be over-prescriptive, would potentially cause local hostility, and might even be counter-productive in terms of raising land prices if certain plots of land were identified for development. We believe that a better way of proceeding would be considerably to strengthen planning guidance in favour of granting permission to energy developments, and for the Government to be prepared, if necessary, to call in more planning applications to enforce the guidance. We are aware that the Department for Environment, Food and Rural Affairs (DEFRA) has been engaged in public consultation on planning guidance (PPG 22), and we look forward to learning the outcome of that consultation and any amendments that the Department may make as a result.

Security of supply

85. Earlier in this Report, we have dealt with physical security of supply — whether the transmission networks and generating capacity will deliver supplies of gas and electricity to customers — but there are other elements in maintaining security: the price and quality of supplies. We have suggested that market forces may not by themselves be sufficient to guarantee that the transmission and distribution networks will be sufficiently robust to provide security, and have made recommendations about the strategic roles of the Government and Regulator in ensuring security. However, such security has a cost to it: if the operators have to invest more in infrastructure, then these extra costs are likely to be passed on in some form to consumers. In addition, ensuring diversity of supply does not come free. Greater reliance on home-produced energy, whether in the form of promotion of renewables or of more systematic exploitation of the UK's fossil fuel reserves, could be more expensive than leaving everything to the market.[145] On the other hand, complete reliance on the market could leave consumers exposed to the risk of sudden price shocks (as overseas supplies are disrupted or diverted to other customers willing to pay a higher price).[146]

86. We hoped to obtain some evidence during the course of this inquiry about the likely attitude of domestic customers about the balance of risks: whether they would be more willing to run the risk of price shocks or would prefer to pay higher fuel bills to achieve greater security of supply. However, very little evidence has emerged about the views of this group. We put the question to Energywatch, whose main remit is to defend the interests of those suffering from fuel poverty, and — not surprisingly — the response was that they were opposed to energy price rises for any reason but felt that consumers probably would be willing to pay rather more to ensure security, provided that the issues were explained to them clearly.[147] Energywatch's main concern was that consumers should know the reasons why prices were rising, whether for security or for environmental reasons.

87. Of course, domestic consumers are to a degree insulated from the effects of short-term price shocks, as domestic tariffs and bills are adjusted only periodically; and the fact that electricity and gas prices have been extremely low recently means that energy issues are not yet to the forefront of public consciousness.[148] We also suspect that Government may be disinclined to bring 'bad news' to public attention. However, it seems to us that both consumer representatives and the Government should be promoting awareness that the recent favourable combination of circumstances that have led to low gas and electricity prices is very unlikely to continue, and that there are also policy reasons (environmental obligations, requirements for security of supply) why price rises may be necessary. We hope that both this Report and that from the PIU, when it is made public, will help to inform public debate about these issues.

88. For a significant number of consumers, the quality of electricity supply is almost as important as continuity and security: for example, unpredictable changes in voltage may cause sensitive equipment to malfunction; significant changes in voltage are potentially dangerous and may lead to fail-safe mechanisms disconnecting individual customers or, indeed, shutting down parts of the network. Quality of supply is also measured in terms of frequency control and harmonic content.[149] The system operator (in this case, NGC) has to operate the transmission system so that voltage, frequency and harmonic content remain within specified limits. We understand that recently the limits have been relaxed for all three measures of quality control.

89. Ofgem measures quality of supply in terms of the number and duration of involuntary interruptions to supply.[150] Such interruptions are, of course, of considerable concern to consumers, and we do not dispute the importance of this criterion. But we note that at least some electricity distribution companies believe that this measure shows up only short-term defects and does not reveal any longer-term deterioration in network performance.[151] Furthermore, there has been criticism of Ofgem's approach to network price controls on the grounds that it takes no account of the possibility that some customers, particularly businesses with a lot of sensitive IT equipment, might be willing to pay extra to increase quality and security of supply. London Electricity Group has suggested that "many customers in London would be prepared to pay more for a world-class electricity network, on a par with other developed-world capital cities such as Tokyo or Paris".[152] On the other hand, as Mr Bucknall of the Electricity Association pointed out, "You might want a lower quality of supply, but I am next door to you and I would like a higher quality of supply; how can you deliver that down the same piece of wire?"[153] Both witnesses felt that it would be worth researching into whether consumers would be willing to pay higher prices for more reliable electricity supplies. More worryingly, we understand that some users are already experiencing difficulties with the relaxed performance measures for voltage, frequency and harmonic content.[154]

90. Many large energy-users have back-up facilities, in the form of their own generators, to cover any disruption to electricity supplies; but this is not an option for most smaller-scale consumers to whom, however, reliable, high quality electricity supplies may be equally vital. The evidence of difficulties is anecdotal so far, but how many people would be able — even if they thought to try — to distinguish between an equipment malfunction caused by a fault in the equipment itself and one caused by a variation in the electricity supply? Also, some of the business sectors most likely to be affected because of high IT use — banking and financial services, for example — are unlikely to wish to publicise any difficulties they may have had for reasons of security and public confidence, judging by their public statements on problems like credit card and ATM fraud and computer hacking. We consider that the effect of variations in the quality of electricity supply is an area worth some investigation; and we would welcome the Department's comments on whether any research is being carried out at present, and where it might best be directed. We also note that, even if the problem is too small to cause concern at present, any growth in embedded generation and increase in the number of generators on the network[155] will add to the complexity of the network and possibly to the difficulties in maintaining quality of supply. These factors have to be taken into account now in considering what investment is necessary to maintain a secure, reliable electricity supply.

Impact of fuel prices on industrial competitiveness

91. Many witnesses expressed concerns that both the volatility of energy supply and any measures taken to promote security of supply might raise fuel prices in the UK and thus harm industrial competitiveness.[156] The Minister told us that one of the Department's objectives had as its aim to maintain energy prices at below the average level for prices in the EU and G7 countries in order to support the competitiveness of UK industry.[157] Although the picture was complicated, because some UK sectors experienced higher prices than others, overall the Department was meeting the target. The Minister acknowledged that economic competitiveness was only one of the objectives of Government energy policy, and security of supply was the overriding one; but he assured us that, in the balancing of sometimes conflicting objectives, competitiveness was awarded an extremely high priority.[158]

92. We took oral evidence from the Chemical Industries Association (CIA), as being representative of a group of large industrial users. The Association explained to us that, although it was difficult to obtain accurate information to make comparisons and, because of the large number of factors affecting prices, the situation changed frequently, it appeared that at present UK electricity and gas prices were broadly in line with those of competitor countries.[159] However, the Association's members were clearly worried about the volatility introduced into gas prices because of closer links between UK and Continental gas markets (which they thought might be attributable to the operation of the gas Interconnector between Zeebrugge and Bacton).[160] They argued forcefully that, for prudential as well as environmental reasons, they had already taken the strictest possible energy efficiency measures and had reduced consumption to the minimum, so there was little likelihood that they would be able to reduce consumption further in the face of rising prices.[161] Despite the possibility of price shocks, on balance the Association preferred to rely on the market to maintain security and diversity rather than look to Government to do so.

93. The CIA expressed concerns about the impact on competitiveness of the Government's various environmental initiatives. The cumulative effect of the Fossil Fuel Levy, the Climate Change Levy, and now the Renewables Obligation was too much for the industry.[162]

94. The CIA also thought that in the UK large industrial users of energy were discriminated against in the pricing system. Their argument was as follows: peaks in demand are often caused by domestic customers (the classic example being people switching on electric kettles to make tea at the end of a popular television programme) rather than by the predictable demand of industrial customers; the energy delivery system has to be engineered and maintained in such a way as to meet these peaks in demand, which incurs extra cost; but these costs are shared among all consumers rather than just those causing the peak. The CIA suggested that on the Continent, pricing was more cost reflective (the cost of meeting peaks was attributed to domestic consumers); and that UK taxation (in the form of VAT on fuel) also favoured domestic as opposed to business consumers.[163] The Association suggested that such discrimination should be ended, and that the effects of the resulting higher prices on domestic consumers should be tempered by measures to tackle fuel poverty, such as improving the housing stock and encouraging the use of energy-efficient appliances and other energy saving techniques.[164]

95. Although we agree that fuel poverty must be tackled through measures other than low prices, which may not be sustainable in the medium to long term, we do not consider that it would be feasible or desirable to re-allocate the costs of electricity production in the way suggested by the Chemical Industries Association.[165] However, we do understand and share the Association's concerns about the effect of energy prices on the competitive position of UK industry. We are pleased to note the high priority that the Minister gives to the Department's objective in this regard; we do not underestimate the difficulties he and his officials will face in continuing to meet that objective. A number of other factors, such as the Climate Change Levy and the situation of the CHP sector, have a significant impact on industrial consumers and we draw the Department's — and, indeed, HM Treasury's — attention to our comments on these issues elsewhere in this Report.

Liberalisation of European markets

96. While there are few concerns about the availability to the UK of reliable and relatively cheap overseas supplies of uranium and coal, and while the political and economic problems associated with the global oil trade are well known and need not be discussed here, there could be considerable uncertainty about gas imports in the long term.[166] The areas with the greatest gas reserves are Russia, North Africa and the Middle East. Even setting aside political questions, the transportation of gas from these areas to the UK poses problems of long pipelines and (in the case of liquid gas) inadequate port and storage capacity in the UK. There are also questions of price: unlike the UK, most of our European neighbours have no gas reserves and are already heavily dependent on imported gas, much of which is supplied on the basis of long-term (10 or 20 year) contracts.[167] We do not intend to address here the question of whether the transmission infrastructure within Europe has the capacity to carry all the gas likely to be required by European countries,[168] but we do underline the effect that competition for capacity may have on price.

97. Those witnesses who argued that security of energy supply would best be achieved if left to market forces did, nevertheless, almost universally agree that these would not operate effectively without greater liberalisation of Continental European markets.[169] Indeed, some argued that even if the UK were to reverse its policy and seek to meet all needs from indigenous supplies, energy prices in the UK would still be influenced by gas and oil prices elsewhere in the world.[170] As it is, energy prices in the UK have been increasingly affected by prices in neighbouring countries: the gas Interconnector between Zeebrugge and Bacton means that gas can flow out of Britain to higher-priced Continental markets as well as inwards to meet domestic demand;[171] gas prices on the Continent have historically been linked to oil prices (though with a time lag in changes); and, with the 'dash for gas' to generate electricity in recent years, electricity prices within the UK may be increasingly influenced by gas prices here and elsewhere. The UK cannot be immune from conditions prevailing in Continental markets.

98. The advocates of market forces were in agreement that the difficulty with the present situation was that, although the UK is a highly liberalised, competitive market for energy, many European countries — and in particular such important neighbours as France and Germany — still have largely public-owned, protected energy companies, often encompassing both supply and transmission, some with extremely rigorous public service obligations, many severely curtailing access by other companies both to their domestic market and to their transmission networks. As far as security of supply is concerned, the main obstacle is that UK suppliers find it difficult and expensive to trans-ship electricity and gas from sources beyond the EU to the UK.[172] The Gas Forum described the problems: first, the integrated supply/transmission companies common within Europe (like the old British Gas) were reluctant to give other competitors access to their network; secondly, the companies did not publish access prices so it was often impossible to tell in advance how much it would cost to bring gas across their network; thirdly, trans-shippers had to pay charges at each border; and fourthly, there was a danger that any gas being trans-shipped might be siphoned off and used en route, as there was no real recognition that national networks could be used simply as a transit system.[173] We understand that there are also technical problems to greater interconnection of national networks (though these appear to relate largely to standards).[174] Clearly, it is impossible to remove the supply and cost problems posed by the UK's geographical position (although the provision of more interconnectors to the Continent would at least ease the situation), but the difficulties in transparency (over physical access, prices and ownership of gas in transit) would all be eased by liberalisation of the European transmission systems.

99. The need to liberalise European markets is widely acknowledged: the European Commission has been pressing for greater liberalisation for a number of years and, indeed, the Lisbon European Summit in March 2000 resulted in a pledge by the EU Heads of State and Government to speed the opening up of energy markets across the EU.[175] In March the Commission published a report stating that the first targets of liberalising 30% of the electricity market and 20% of the gas market by 2000 had been met. The Commission has taken further action by bringing forward a draft Directive, requiring third party access to transmission and distribution systems on the basis of published tariffs, requiring the legal separation of network and supply companies, and setting dates by which internal markets must be liberalised; and by proposing a draft Regulation on conditions for access to the network for cross-border exchanges of electricity.[176] The UK Government believed that insufficient progress had been made to date, but the Commission's proposals represented a big step forward.[177] The Minister doubted the wisdom of setting higher targets at present, before it was certain even the existing ones could be met. Commentators have expressed considerable doubts about whether those countries that have not liberalised their markets really wish to do so: public opinion is fearful about leaving such a vital product as energy to market forces, and the large energy companies with substantial vested interests in opposing liberalisation wield considerable economic and political influence.[178] The Minister described these obstacles as "timetable" difficulties experienced by France and "structural objections" by Germany.[179] The result of these problems is that many witnesses to our inquiry, even though they applauded the efforts of the Commission and the UK Government in pressing for change, felt that progress was at best likely to be slow and halting.[180]

100. As far as security of supply for the UK is concerned, the key element in European liberalisation is demolishing the barriers — whether financial or administrative — to using transmission networks.[181] We asked witnesses whether, if full-scale liberalisation of European markets (including access to domestic consumers) was impossible to achieve, partial liberalisation in the form of simply opening up the transmission networks was feasible. The responses differed: Mr Porter of the Association of Electricity Producers believed that liberalisation of the transmission system could not proceed without liberalisation of the rest of the market because only consumer pressure (when offered the option of more choice in supplier, greater competition and cheaper prices) would bring about the political will to open up the market.[182] Dr Miller, also of the AEP, on the other hand, was more optimistic: the crucial aspect for UK companies, cross-border trading arrangements, was under discussion in the EU and, by implication, there was a possibility of progress on these.[183] The Minister agreed with Dr Miller.[184] Some witnesses felt that opening up the supply market in Europe would help to break the link between oil and gas prices: once consumers were able to choose their supplier, they would desert the old monopoly companies that were tied to long-term (ten or 20-year) oil-indexed contracts.[185]

101. Our specialist adviser, Professor Odell, struck a contrary note in a paper on the issue of liberalisation. He maintained that the lack of enthusiasm of some European partners for liberalisation need not be as detrimental as some witnesses suggested. He went on to recommend a closer relationship with Norway, whose gas supply, he argued, would be sufficient to supplement any shortfall in UKCS indigenous resources. He further pointed out that any additional challenges posed by peaks in demand could be met by LNG imports from reliable alternative suppliers.[186]

102. Liberalisation within Continental Europe would enable the UK market to function more efficiently and effectively, but there are grave doubts as to how quickly and completely it can be effected. Both the UK Government and the European Commission appear to be doing all in their power to speed matters up, but, in a body like the European Union, sovereign states cannot be forced to give up what they regard as vitally important national interests against their will: argument and example are the only weapons. In these circumstances, it would be sensible to concentrate efforts on the most important areas: liberalisation of transmission systems should take precedence over opening up domestic markets, if the former is feasible without the latter. But for the short term, it would also seem prudent for the UK's policy on energy security to be based on the assumption that liberalisation is not certain. The Government must take a view as to whether this means that there must be a greater reliance on indigenous sources of supply than may be either necessary or desirable in the longer term; if so, then the recommendations we make elsewhere in this Report about maximising the exploitation of UK fossil fuel resources and removing barriers to the development of non-fossil fuel energy become all the more urgent.

52   See Paragraphs 14 and 16 above. Back

53   Qq 126 (Gas Forum), 330 (AEP) and 657 (Lattice). Back

54   Q 332 (AEP), Appendix 27 (Centrica). The DTI told us that average industrial gas prices in the UK rose by 51% in real terms in the year to the second quarter of 2001: Appendix 24 (DTI's Supplementary Memorandum). Back

55   Qq 489 (Ofgem), 95 and 126 (Gas Forum) and 330 (AEP); and Appendix 18 (BP's Memorandum), passim. Exxon Mobil was of a similar view (ENG 68) (not printed). Back

56   Qq 87 and 113-5 (Gas Forum); Appendix 18 (BP), paragraph19. Back

57   Qq 147 (Coalpro); 376 and 419 (Chemical Industries Association); Q 635 (Energywatch) and Appendix 23 (Innogy's Memorandum), paragraph 2.2. Back

58   Q 147. Back

59   Q 278 and DTI's Memorandum, paragraph 2.26. (Leaving to one side the fixing of targets for environmental reasons). Back

60   Qq 418 and 376 (Chemical Industries Association) - though they did qualify this by saying that they did not wish the proportion of gas to be too high; Appendix 13 (Shell) and Appendix 23 (Innogy), paragraph 2.6. Back

61   Eg Qq 143, 149, 175-6, 182-3 and 195 (Coalpro).  Back

62   Greenpeace's Memorandum, passim. and Memorandum of the WWF (not printed). Back

63   DTI Memorandum, paragraph 1.8; Qq 276-7. Back

64   Estimates of remaining reserves varied markedly: see, for example, UKOOA's Memorandum and its Supplementary Memorandum (Appendix 33) and Appendix 13 (Shell International Ltd). Back

65   By means of better seismic imaging technology. Back

66   Appendix 40 (Professor Anton Ziolkowski). Back

67   Q 228.  Back

68   Qq 262 and 273. Back

69   Q 272.  Back

70   Q 262. Back

71   Qq 96 and 137 (Gas Forum), and Appendix 27(Centrica). Back

72   Qq 215 and 216. Back

73   See Paragraphs 71 and 27. Back

74   NETA currently operates only in England and Wales. However, Ofgem has recently announced its intention of introducing a similar system to Scotland, known as BETTA (British Electricity Transmission and Trading Arrangements). Back

75   There are, of course, constant fluctuations in supply and demand, but calculations as to balance for the purposes of NETA are made on a half-hourly basis. Back

76   See Paragraphs 71-73 below. Back

77   Qq 242 (CHPA), 294 (DTI), 490 (Ofgem) and 715 (NGC). Back

78   Q 417 (Chemical Industries Association). Back

79   The Renewable Power Association describes NETA as requiring operators to have "access to an active trading operation which involves considerable cost in the initial set up, in staffing, in credit arrangements, in transactions, and so on": Appendix 12 (RPA's Supplementary Memorandum). For other comments on the difficulties faced by renewable power generation, see Qq 93 and 94 (Gas Forum) and Appendix 11 (British Wind Energy Association). Back

80   See, for example, Qq 242 (CHP Association), 290 (DTI) and 490 (Ofgem); and Appendix 12 (RPA), paragraphs 1.5, 2.1-2.4. Back

81   Q 240 (CHPA). Back

82   Qq 290 (DTI), 390 (Chemical Industries Association) and 490 (Ofgem). Back

83   Report to the DTI on the Review of the Initial Impact of NETA on Smaller Generators, August 2001. Back

84   Q 360 (RPA). Back

85   Q 241. Back

86   There was a feeling that Ofgem had ignored the warnings on the grounds that NETA was not a means for delivering the Government's environmental targets: other Government policies should do so: Q 246 (CHPA). Back

87   Q 491 (Ofgem); also, on the desirability of a period of calm, Q 351 (AEP) and Appendix 27 (Centrica), paragraphs 32 and 33. The British Nuclear Industry Forum warned that the liberalisation of the European market, when it occurred, would also probably have an impact on NETA, as other EU member states were unlikely to adopt the same mechanisms as in NETA and there would have to be a degree of harmonisation: Q 31. Back

88   Q 490. Back

89   Consolidation, they felt, addressed only the symptoms, not the fundamental problem: Q 244 (CHPA). Back

90   Appendix 12 (RPA), paragraph 3.13. Back

91   Ibid., Appendix 2, and Q 360. Back

92   Q 362; see also Q 244 (CHPA). Back

93   Q 242 (CHPA). Back

94   Appendix 12, paragraph 3.6. Back

95   For more detailed discussion of all these options, see ibid. Back

96   Q 246 (CHPA). Back

97   Qq 242 and 243; see also Q 599 (Energy Saving Trust). Back

98   The Chemical Industries Association, for example, acknowledged that there was a real danger that some of its members would not be able to meet the requirements of their Climate Change Agreements because reducing emissions depended significantly on CHP, and the economic viability of CHP was doubtful: Qq 387, 388 and 390. Back

99   Q 295. Back

100   Qq 234 (UKOOA), 670 and 671 (Lattice), Appendix 34 (UKOOA); the point was also made by Exxon Mobil (not printed). Back

101   Qq 137 and 138 (Gas Forum), 234 and 236 (UKOOA), 670 (Lattice), Appendix 35 (UKOOA). See also the concerns expressed by Energywatch (Q 633). Back

102   Qq 499 and 500. UKOOA suggested that a complete revision of the basis for allocating capacity was necessary: Q 234. Back

103   Q 503. Back

104   See paragraphs 43, 45, 48 and 49 above. Back

105   DTI's Memorandum, paragraphs 2.3 and 2.8. Back

106   Q 343. Back

107   Q 342 (AEP). Back

108   Qq 343 and 344. Back

109   Q 494 (Ofgem). Back

110   Q 102 (Gas Forum). Back

111   Qq 38 - 43 (British Nuclear Industry Forum) and 150 (Coalpro). Back

112   DTI's Memorandum, paragraph 2.8. For the Seven Year Forecast, see Qq 716 and 717 (NGC). Back

113   Qq 494-6. Back

114   Appendix 23, paragraph 2.9. Back

115   Appendix 27 (Centrica). Back

116   Ie: capacity that is on 'hot stand-by', ready to generate electricity at short notice but which is not producing electricity for the grid. Back

117   Q 361. Back

118   Ibid. Back

119   Q 127. Back

120   DTI's Memorandum, paragraph 2.8. Back

121   Q 495. Back

122   See Q 136 (Gas Forum). A significant proportion of the plant currently 'mothballed' is coal-generated, and increasingly severe environmental restrictions will make such plant either incapable of being used or usable only after extensive and costly modifications. See also Appendix 23 (Innogy), paragraph 28 (b). Back

123   See Paragraph 80 below for a discussion of lead times for the construction of new plant. See also the comments on the limitations of market forces in Appendix 25 (Supplementary Evidence from Lattice/Transco). Back

124   In addition to those cited below, see Q 378 (Chemical Industries Association). Back

125   See Paragraphs 130-3. Back

126   Q 96 (Gas Forum) and Appendix 28 (United Kingdom Onshore Operators Group). Back

127   See, for example, Q 345 (Association of Electricity Producers), Q 471 (Electricity Association); Appendix 11 (British Wind Energy Association). Back

128   Q 358; the other major obstacle was the high charges for connection to the grid: see Section III above. Back

129   RPA's Memorandum, Part 1. Back

130   Q 596 (Energy Saving Trust). Back

131   Appendix 15; see also Q 471 (Electricity Association), and Appendix 31 (Scottish Power). Back

132   Q 342 (AEP). Back

133   Q 7. Back

134   Qq 12 and 13. Back

135   Qq 155-9 (Coalpro). Back

136   Qq 159 (Coalpro) and 682 (Lattice/Transco). Back

137   See the Planning Green Paper, Planning: Delivering a Fundamental Change (12 December 2001). The consultation period on this will run until 18 March 2002. Back

138   Unlike nuclear power schemes. Exceptions are some new wind farms, for example the proposed developments in the Outer Hebrides, and possibly major new electricity power lines (Q 688 (NGC)). Back

139   Excluding those for use of landfill gas, which have a much higher success rate. Back

140   See the paper by Gaynor Hartnell, for the Confederation of Renewable Energy Associations, attached to the RPA's Memorandum; see also Appendix 31 (Scottish Power). Back

141   Q 345. This suggestion was also put forward to the PIU by the British Wind Energy Association: see their submission on the PIU's website. Back

142   Q 359. Back

143   Qq 374 (RPA) and 597 (Energy Saving Trust). Back

144   Memorandum. Back

145   Q 459 (Electricity Association). Back

146   Qq 455 and 456 (Electricity Association). Back

147   Qq 634 and 649. Back

148   Although the public is already becoming aware that the era of very cheap gas seems to be ending, as shown by the recent price rise announcement by British Gas. Back

149   See paper by Professor Whittington annexed to this report, p 78.  Back

150   "Involuntary" because some business customers with very predictable demand opt for their supplies to be interrupted at certain specified times in return for lower tariffs or other cost-saving measures. Back

151   See London Electricity's response to the PIU's review, section 7 (available on the PIU's website: see footnote 4 above for details). Back

152   Ibid. (section 6). Back

153   Q 464. Back

154   Private communications. Back

155   For example, the connection of significant numbers of large windfarms or wave or tidal generators. Back

156   The effect of fuel price rises on domestic consumers is considered in paragraph 86 above. Back

157   Q 313; "[To] Ensure competitive gas and electricity prices in the lower half of the EU/G7 basket, while achieving security of supply and social and environmental objectives": Performance Target 8, under the heading of Objective III ("to develop strong competitive markets within a regulatory framework which promotes fairness and sustainability") of the DTI Public Service Agreement 2001-04: The Government's Expenditure Plans 2001-02 to 2003-04 and Main Estimates 2001-02, Department of Trade and Industry, published March 2001 (Cm 5112). Back

158   Qq 314-6. Back

159   Appendix 41 (Supplementary evidence from Chemical Industries Association). Back

160   Qq 412-5. Back

161   Memorandum. See also Section VI of this Report, on Energy Efficiency. Back

162   Q 384. See Section V below for a discussion of environmental policy. Back

163   Qq 399 and 400. Back

164   Qq 401-4, 404-6, 423-5 and 429. Back

165   See the reaction to this suggestion from Energywatch (Q 640). Back

166   In the medium term, as mentioned in footnote 6 above, gas imports to the UK would be likely to come from near neighbours such as Norway. Back

167   See the concerns expressed by, among others, the Gas Forum: Qq 90-2. Back

168   We expect this issue to be covered in the forthcoming report of the European Union Committee of the House of Lords. Back

169   See, for example, Qq 212 (UKOOA), 288 (DTI), 331 (Association of Electricity Producers), 487 (Ofgem), 659 (Lattice/Transco), UKOOA's Memorandum and Appendix 27 (Centrica), paragraphs 21, 22 and 24.  Back

170   Appendix 16, passimBack

171   See, for example, Q 103 (Gas Forum). Lattice (Q 668) said that the Interconnector meant that there was no longer such a steep drop in demand for gas during the summer months in the UK because gas was being exported via the Interconnector to be put into storage on the Continent.  Back

172   Q 436 (Electricity Association) and Appendix 30 (Total Fina Elf). Back

173   Qq 91 and 97-9. Back

174   Appendix 18 (BP), paragraph 20. Back

175   See the Presidency, Conclusions on the Lisbon European Council, 23 and 24 March 2000, paragraph 17 ( Back

176   For a comprehensive description of all three documents, see Third Report of the European Scrutiny Committee, Session 2001-02 (HC 152-iii), paragraph 1 (31 October 2001). All three documents - the draft Directive, draft Regulation and Report - together with the Commission's Green Paper on a strategy for energy supply, were debated in European Standing Committee C on 28 November 2001. Back

177   Qq 279-80 and 283-4 Back

178   As shown, for example, by the position of Electricité de France. Back

179   In practice the political impossibility of being seen to move on this issue until after the National Assembly and Presidential elections due in the summer of 2002: see Qq 279-80 and 283-4. Back

180   Qq 88 (Gas Forum) and 331 (AEP). The DTI was more optimistic, stating that there was now genuine momentum in the negotiations, and citing the eagerness of the Spanish, who will hold the Presidency from January to June 2002, to make progress on this dossier: Qq 283-5. Back

181   Q 97 (Gas Forum). Back

182   Q 339 (AEP). Back

183   Ibid. Back

184   Q 285. Back

185   Q 109 (Gas Forum) and Appendix 18 (BP), paragraph 19. Back

186   This paper is annexed to the Report at p 72. Back

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