Select Committee on Trade and Industry Second Report


V ENVIRONMENTAL POLICY

The Government's objectives

103. We have not examined in detail, nor do we propose to question, the Government's environmental objectives: that is not part of our remit, and we are aware that a number of our colleagues in this House and the House of Lords are undertaking, or have just completed, inquiries into issues such as policy on renewable energy and the disposal of radioactive waste.[187] Instead, we have sought to find out to what extent the Government's stated environmental objectives and targets are compatible with the aim of security of energy supply. The achievement of environmental objectives forms the main exception to the Government's view that fuel mix is best left to market forces: the Government has targets for the use of renewable power, and of energy-efficient Combined Heat and Power. We have taken evidence on a number of Government initiatives, including the target of achieving 10% of electricity generated by renewable sources by 2010 (and any development of that target) and the operation of the Renewables Obligation, the mechanism for achieving that target; the effects of the Climate Change Levy and Climate Change Agreements; and Government support for research and development into non-fossil fuel technologies. We have also taken evidence from and on specific sectors, such as coal, renewable power and the nuclear industry.

104. As already explained, there was widespread agreement among our witnesses that the delivery of environmental objectives would cost money: renewable energy, clean coal technologies and nuclear power were all judged to be more expensive than gas-fired generation at its cheapest level, and any attempt by Government to encourage the use of any or all of them would be bound to raise prices to consumers.[188] There was far less agreement about how much it would cost, because there was no common basis on which the witnesses judged the costs of different power sources: with recent fluctuations in gas prices, and with different assumptions about internalising external (that is, environmental) costs, the estimates about even the current — let alone the future — costs of different forms of energy varied widely.[189] Evidence to date of consumer commitment to and willingness to pay for environmental objectives is mixed; for example, only about 20 - 25,000 domestic consumers have signed up with suppliers for 'green' electricity schemes, a number which the Energy Saving Trust agreed was disappointing.[190] However, from the point of view of strategic security of supply, all the alternative power sources mentioned to date (renewables, nuclear and, to a significant extent, coal) are either entirely UK-based or are likely to be less dependent on imported fuel stock in the medium to long-term than gas generators.[191] Moreover, most renewable sources are insulated from fuel price changes: the cost of electricity generated from wind, water, sun and tides is largely fixed by the capital costs of constructing the generators.[192]

The Renewables Target and the Renewables Obligation

105. The issue on which we concentrated was whether the Government would be able to meet its target of securing 10% of UK electricity supplies from renewable sources, excluding non-biodegradable waste, by 2010. There was some disagreement about this. At present, renewable sources of energy provide only 2.8% of electricity generated in the UK[193] and we were told by some witnesses that it was unlikely that this total would rise sufficiently fast in the present circumstances.[194] The disincentive to renewable power offered by NETA has already been mentioned; as have the difficulties with the planning system, the costs and technical difficulties of connecting small and intermittent generators to the distribution and transmission networks, and the general complaint that electricity prices are too low to warrant investment in any forms of new power plant. There were further suggestions that Government policies such as the Climate Change Levy and the Renewables Obligation were failing to support environmentally-desirable developments or even, in some cases, actively hindering them.[195] In contrast, other witnesses were more confident that the 10% total and even higher targets could be met. The Energy Saving Trust suggested that small-scale wind and biomass plants could, on their own, probably generate about 10% of the UK energy supply by 2020; and in the long term technologies like micro-CHP and fuel cells had the capability of delivering the whole of the electricity supply for the domestic sector (which it estimated as 30% of total demand).[196] The WWF cited the recent study published by Forum for the Future which estimated that, even with a number of constraints, by 2020 30% (148TWh) of electricity could come from renewables generation at less than 4.5p per kWh.[197] Mr McCarthy of Ofgem implied that he was cautious about the potential for renewable power in the short-term. However, he noted that the position of renewables would be revolutionised if the proposals for electricity storage now coming forward could be implemented practically.[198] While not questioning the Government's commitment to increasing the share of electricity generation provided by renewables, we do not know how the Government reached a figure of 10% as the target for 2010 and we would like the reasoning clarified.

106. Since 1990 UK Governments have tried to encourage the development and use of renewable sources by means of the Non-Fossil Fuel Obligation and successive Non-Fossil Fuel Orders.[199] The success rate has been disappointing: although the contribution thereby made to the development of different technologies has resulted in significant cost reduction between 1990 and 1998 for electricity generated from renewables, the actual commissioning rates for renewable generators varied widely, and many proposed developments (especially wind farms) were not actually built.[200] From 2002, the Non-Fossil Fuel Obligation will be replaced by a Renewables Obligation, which requires electricity suppliers to obtain a growing percentage of their electricity from renewable sources, with a target of 10% by 2010. Electricity companies unable to meet the target will have to pay a levy (known as the buyout price) to cover the shortfall, the cost of which has been fixed at £30 per MWh. The proceeds of this are then redistributed amongst the renewable generators, to encourage the construction of more plants. As the Electricity Association told us, the Obligation is really aimed at providing market entry assistance to a range of renewable power technologies.[201]

107. Some commentators have questioned whether the electricity supply system can physically cope with a load of 10% power supplied from renewable sources. The reason they have given is that at present the most promising technology for widescale development seems to be wind power, which is intermittent and — more importantly — comparatively unpredictable. This potentially poses a number of problems: whether a sufficient output from renewables can be guaranteed,[202] either from the counter-balancing effects of having a number of geographically scattered wind farms, so as to create an integrating effect across the country and exploit to the full whatever wind there is, or by providing reliable output from other forms of renewable energy (biomass, for example); whether the distribution systems (to which most renewable generators are connected because of their small-scale and lower voltage output) can cope with the intermittent nature of renewable supplies and with its potential impact on power quality; and whether the transmission/distribution network is at present capable of operating with a greater number of small power generators rather than the comparatively small number of large generating plants for which the system was designed. The key players — the National Grid Company and the distribution companies as represented by the Electricity Association — seemed confident that a 10% target would not cause insuperable problems for the network.[203] Unsurprisingly, the promoters of renewable energy were even more confident.[204] The DTI suggested that longer term a higher target could be accommodated: technological development, consolidation of generators and the mix of types of renewable generators would all help. The Minister's only caveat was that a greater dependence on wind power would be an issue; though this too could be solved by the development of energy storage, but that was a much longer term possibility.[205]

108. The evidence given to us indicated that, although not ideal, the Renewables Obligation was an improvement on the Non-Fossil Fuel Obligation in that it was more compatible with market forces: it was not designed to 'pick winners' by promoting specific options, but applied to a broad range of renewable technologies; and it placed the onus on suppliers to meet the obligation in whatever way they considered most cost-effective.[206] However, the Renewables Obligation was criticised on several grounds. Some witnesses expressed regret that the Government had tempered market forces by instituting a cap on the price of renewable power under the Obligation, thus both excluding certain more expensive technologies (such as solar power) and breaking the link between a possible shortage of renewable power and price which should have provided the incentive for more renewable plant to be built.[207] These witnesses recognised that, if there had been no cap, prices to customers would probably have risen, and they noted: "That was not something that the Department of Trade and Industry seemed to be able to live with."[208] Others welcomed the cap as necessary protection for consumers.[209] Some witnesses said that their particular industry (nuclear, energy from waste, CHP) should be included in the Renewables Obligation as it was carbon-free or otherwise environmentally desirable.[210] The Renewable Power Association regretted the fact that the more expensive technologies, such as photovoltaics, would be disadvantaged while acknowledging that any attempt to discriminate between renewable technologies by providing differing degrees of subsidy would have caused considerable conflict within the sector. The RPA suggested that grants for research and development might help the disadvantaged technologies.[211] The Chemical Industries Association was concerned that the proportion of power to be generated by renewable sources — and therefore the cost of the obligation — would increase over time (at worst, from about £15 million per year cost to the chemical industry initially to about £45 million by 2010);[212] and that although there was a mechanism for increasing the buyout price of £30 per MWh (the price cap), there was no mechanism for it to be decreased.[213]

109. Opinion was also divided as to whether the Renewables Obligation would work in encouraging the development of renewable power generation, given the other disincentives to such investment at the moment. The Chemical Industries Association seemed doubtful that the incentive to development would actually force down the price of renewable power, while the Electricity Association was more optimistic that over time the cost (which it estimated as £172 million by 2010, equivalent to a rise of 4.9% in the price of electricity to consumers)[214] would decrease as renewable power became more cost-effective.[215] In practice, it is almost impossible accurately to estimate the costs of the Renewables Obligation to consumers, because of the significant variation in factors such as predicted underlying electricity prices and possible changes in the costs of generating renewable power.

110. A target of 10% of power generation from renewable sources, if achievable, would be a very helpful contribution to achieving greater security of supply, as well as meeting environmental objectives. Renewable sources could provide a useful alternative to imported fuels, and we take comfort from the assurances given by the National Grid Company and others that the intermittency of certain types of renewable power — principally wind, but also wave and solar — would not cause supply or balancing problems for the transmission and distribution systems at the 10% level. We note that some proponents claim that renewable sources have even greater potential to meet energy requirements. We are not in a position to judge such potential, but welcome the fact that the feasibility of higher, longer-term targets has been investigated by the PIU. We look forward to learning its conclusions on this.

111. As far as the scope of the Renewables Obligation is concerned, it seems perverse that some industries being promoted by the Government for their environmental benefits should be excluded from support under the terms of the obligation. The Government appears to be taking away from the deserving to give to the (arguably) even more deserving. We understand that if sectors are exempted, then that means the Obligation bears more severely on those left. We are not in a position to judge exactly who should and who should not be required to share the burden. The Combined Heat and Power Association told us that Ministers are considering the possibility of introducing primary legislation to remove the anomaly from that sector. We are well aware of the constraints on the legislative timetable, but we believe this issue should be addressed promptly. We recommend that a Bill be brought forward as soon as possible, and that Ministers should take the opportunity of that legislation to review the position of other sectors.

112. It is too soon to predict whether the Renewables Obligation will achieve the Government's target. It appears to be better adapted to promoting renewable power generation than earlier instruments, but it is doubtful whether it can succeed unless the other problems currently facing all potential investors in new power plants are addressed. In particular, we think the costs of meeting the target in the current market may well be higher than the Government hopes. This is critical because the 10% target is subject to the proviso that the costs to consumers "are acceptable". The Government must take other measures, such as amendments to the planning law and direct assistance with research and development costs,[216] if the renewables sector is to meet the 10% target by 2010, let alone any higher target by 2020.

The CHP target

113. CHP, though largely dependent on gas for generation, has been identified by successive Governments as a desirable growth area because of the environmental benefits of its energy efficiency.[217] CHP makes a significantly greater contribution to power generation in countries such as Denmark, Germany and the Netherlands. There are, of course, marked differences in housing arrangements between the UK and other European countries, with a higher percentage of owner-occupiers in the UK and, to varying degrees, a larger proportion of individual houses as opposed to apartments. We were told, however, that the growth of CHP in these countries was to some extent attributable to the greater involvement of their municipal authorities in promoting it.[218] The UK Government has a stated target of 10GWe of CHP generating capacity by 2010. Currently, there is 4.6 GWe of capacity in use and, as already mentioned, far from increasing, this figure seems likely to decrease.[219] We have already commented on the CHP sector's pleas for amendments to NETA,[220] and the somewhat perverse operation of the Renewables Obligation; and we discuss below the effects of the Climate Change Levy on that industry.[221] The Combined Heat and Power Association also brought to our attention the powers in the Utilities Act 2000 to introduce support mechanisms — possibly along the lines of the Renewables Obligation, but at a lower level — for CHP. The Association told us that it was in discussion with DEFRA and the DTI about the circumstances in which the Government might make use of these powers.[222] We simply take note of this reserve power. Any such obligation would, of course, add to the costs of electricity for both domestic and industrial consumers, as well as distorting the market further; and, if the other changes sought by the Combined Heat and Power Association are introduced, it may prove unnecessary to impose such additional costs.

114. The CHP sector clearly has a long list of measures it would like the Government to take. When quizzed about this, the CHPA told us that the difficulty was that to date the Government had concentrated on short-term promotional measures, but while it was doing so market circumstances had deteriorated so drastically that such measures were no longer enough to achieve the 10 GWe goal.[223] One of the fundamental problems was the lack of a clear Government strategy for CHP: "We have the target but not the strategy" for achieving it.[224] DEFRA Ministers had indicated that they would be publishing a strategy shortly, but even 18 months ago the industry was becoming so frustrated with the delay that it produced a draft strategy which it submitted to the Government. An updated version of this has been sent to the PIU. We trust that the Government's strategy will be produced very soon: firm priorities need to be established in the industry's 'shopping list', and a clear indication from Government as to how it intends to assist the industry would in itself be helpful in restoring confidence.

The Climate Change Levy and industry

115. The Climate Change Levy operates in two ways to lower greenhouse gas emissions: the Levy itself acts as an incentive to reduce demand, and the provision for Climate Change Agreements encourages certain sectors actively to cut emissions. Our predecessors reported on the proposals for the Climate Change Levy in July 1999.[225] We did not attempt to repeat the range of that inquiry, nor are we re-opening the arguments on the merits and disadvantages of the arrangements which the Government finally chose. We are commenting on the operation of the Levy only insofar as our witnesses have raised questions about potential or actual conflicts between the provisions of the Levy and broader Government policy on promoting environmentally desirable fuels.

116. The Climate Change Levy came into effect on 1 April 2001 (at about the same time as NETA). We asked the Minister whether any estimate had yet been made of the costs of the Levy. The DTI's statisticians provided us with some interesting estimates. On average, the CCL is estimated to have increased the price of fuel to industry in the second quarter of 2001 by 13% for coal, 8% for electricity and 7% for gas. Meanwhile, however, average industrial electricity prices including the effect of the Climate Change Levy fell by 4% in real terms in the year to the second quarter of 2001.[226] Although figures were not available when we considered our Report, in mid December the DTI did not expect the picture to have changed much in the third quarter of 2001.

117. Greenpeace suggested that the Levy would be most effective if the Government used an escalator to increase prices year on year. The Levy should not be increased, they said, in years when electricity prices had risen for other reasons, but should be used to keep up the pressure on industry to reduce emissions by ensuring a continuous, planned, gradual rise. They maintained that such an increase would not have the same harmful economic impact as price shocks, like the oil crisis of the 1970s, because a gradual known increase would encourage company managers to plan rationally and effectively to reduce consumption.[227]

118. A number of sectors felt that they were dealt with unfairly under the Levy. The nuclear industry continued to make the point that, since it did not cause greenhouse gas emissions, it should not be taxed at the same rate as generators using fuels that did.[228]

119. More detailed criticisms came from a sector which has received firm support from the Government: Combined Heat and Power. It was thought that the Government had intended to exempt CHP from the Climate Change Levy: the industry certainly believed that that was the import of the scheme outlined by the Chancellor of the Exchequer.[229] In practice, however, as it has been implemented by HM Customs and Excise, CHP used on site or sold direct to a specific customer is exempt from the Climate Change Levy, but excess power sold into the general distribution system is not. Given the other problems currently experienced by CHP producers (the effects of NETA on small generators, plus the squeeze produced by higher gas and lower electricity prices), this fiscal disincentive was felt by the sector to be particularly unhelpful. In oral evidence, the Minister indicated as clearly as could reasonably be expected that both the DTI and DEFRA wanted CHP to be given far more support through fiscal measures, perhaps including complete exemption from the Climate Change Levy, but the final decision was for HM Treasury.[230] We note that in the pre-Budget report, the Chancellor of the Exchequer announced that — subject to legal and other constraints — the Government will consider the environmental case for providing more favourable treatment for CHP within the Climate Change Levy.[231]

120. We welcome the Chancellor's statement, and give our support to the case for exempting CHP completely from the Climate Change Levy. The industry considered that such an exemption, and the changes to NETA, were the minimum necessary to support this sector. We are aware of the other measures adopted by the Government to assist CHP (enhanced capital allowances for purchased — though not leased — equipment, partial exemption from business rates, the two-year Community Energy Scheme). But if the Government's target of 10GWe of CHP production by 2010 is to be met, more radical action needs to be taken. Adjustments to NETA, even if they are eventually agreed to, will take some time to implement: changes to the Levy would be quicker to introduce and would provide a useful signal to the market.

121. As for the pleas from other sectors for exemption, we revert to our conclusion that, even while not prescribing the fuel mix or picking winners, prudence may dictate at the least that the Government does not unnecessarily or simply by default close off options. We therefore recommend that the Departments involved give further consideration to whether the provisions of the Levy could and should be changed in favour of these sectors.

122. Climate Change Agreements, which are the responsibility of DEFRA, at present cover about 13,000 facilities in 39 industrial sectors.[232] They provide for a rebate of a proportion of the levy in return for a commitment to reducing emissions, but this scheme is limited to industrial plants that fall under the so-called Integrated Pollution Prevention and Control regime,[233] which omits a number of potential beneficiaries. We are aware that this issue was a major cause of contention before the Levy was introduced and, although sympathetic to the views of those who claim that the restrictions on eligibility bear unfairly on some industrial sectors, we do not press the case here. However, we were told that, because of the restrictions, the Levy was proving a bureaucratic nightmare for some companies, with even parts of sites being ineligible for rebates.[234] The Levy is a very controversial mechanism for achieving environmental goals. We believe that it would be useful to monitor how it is working in practice. Accordingly, we recommend that the Government review the operation of the Levy after it has been in force for a year and, in particular, that the review team look closely at the arrangements for Climate Change Agreements to ensure that they are as fair as possible and that bureaucracy is minimised.

Emissions trading

123. Later this year, the Government is to launch a pilot scheme for emissions trading.[235] Again, we did not examine this scheme in detail. However, several witnesses commented favourably on emissions trading in principle, on the grounds that it was a market-based incentive and therefore less likely to cause disruption than other environmental measures.[236] We look forward to the implementation of this scheme.

Transport

124. So far, we have discussed energy supply without mentioning the transport sector. It is clear that, if the Kyoto targets for emissions reductions are to be met, transport — which forms a very large proportion of total energy use in this country[237] — has to make a significant contribution. The Government's policy on encouraging alternatives to road transport is well known, and the effectiveness of the measures it is taking is not for us, as the Trade and Industry Committee, to judge. However, there are steps that can be taken to reduce pollution from transport, apart from demand reduction, and some of these fall mainly within the responsibility of the DTI.

125. There was general agreement that, in the long term, hydrogen might be a "key transport fuel".[238] However, first solutions had to be found to such practical problems as safe storage (both on-board and on a larger scale) and the development of a distribution infrastructure to make widespread conversion to such a fuel feasible. Greenpeace thought that government and industry needed to co-operate to solve the on-board storage problems and that the best way to promote the use of hydrogen was to convert some city bus fleets to it, which would encourage the development of infrastructure.[239] In the shorter term, attention focussed on improvements in energy efficiency (which, it was agreed, motor manufacturers were making, but which environmentalists thought should be made compulsory rather than voluntary),[240] on electric vehicles and on things like road fuel gases[241] and biodiesel (which had advantages over petrol and diesel).[242] Greenpeace noted that take-up of the road and fuel gases LPG and CNG was limited by the fact that proposals for storage facilities were often refused planning permission.[243]

126. We are encouraged that the Government is showing strategic thinking on the issue of alternatives to petrol- and diesel-driven road vehicles. We commend the work of the Alternative Fuels Group of the DTI's Cleaner Vehicles Task Force[244] on road fuel gases and biodiesels and the commitments made by Ministers to promoting these fuels. We are also pleased to note the recent publication (in December) of a draft Government strategy for the promotion of newer technologies, such as fuel cells, entitled Powering Future Vehicles, produced jointly by the DTI, Department of Transport, Local Government and the Regions, Department of the Environment, Food and Rural Affairs, and HM Treasury. The publication of this document represents a welcome step forward in the area of strategic planning of energy requirements, and a good example of inter-departmental co-operation.

127. We asked about co-ordination on energy policy between Government Departments more generally. We were told that individual issues — mostly technical questions — were discussed, mainly at official level.[245] Most of the DTI's contacts seemed to be with DEFRA, although we were informed that economists from both these departments and DTLR discussed transport energy demand and energy efficiency improvements. We were concerned that the DTI was giving insufficient attention to the key role played by transport in, amongst other things, security of energy supply issues.[246] The Minister conceded that co-ordination in this respect could be strengthened.[247] We return to questions of inter-departmental co-operation later in this Report. Here, we recommend that Ministers ensure that vital issues such as the role of transport in energy policy are not neglected because they fall between Departments.

Sectoral interests

128. A number of interest groups suggested to us that Government action or inaction unfairly penalised them, making them unattractive to the market. We now turn to the cases put by these groups.

Nuclear power

129. We do not intend to canvass the merits or disadvantages of nuclear power, simply to note what is likely to occur without any change in Government policy, and what changes have been suggested to us.

130. In 2000, nuclear plants generated about 23% of electricity in the UK. However, no new nuclear power stations have been built since the construction of Sizewell B, and the existing plants are coming to the end of their operating lives. Within the current decade, all the Magnox stations will close (they generate 7 - 8% of the country's electricity at present), and by 2025 it is probable that all seven Advanced Gas-cooled Reactors (AGRs) will also have closed, leaving only the UK's sole Pressurised Water Reactor, Sizewell B, in operation.[248] No new nuclear power stations are under construction at present. Some witnesses welcomed the imminent end of nuclear generation; others were fearful that the loss of such a significant percentage of generating capacity could not be made good by the renewable power sector, and would mean reversion to more polluting forms of generation such as coal, or an even higher dependence on gas.[249]

131. Although there is no moratorium on the construction of new nuclear plant, in practice there are a number of reasons why it is not practicable to raise the considerable sums necessary to do so. The British Nuclear Industry Forum (BNIF) summarised the problems as follows:

    "The principal drawbacks [the City] see are the very large up-front capital costs, lengthy and uncertain periods of planning and construction, uncertainties about back-end issues like waste management, anxieties about public opinion and regulatory risk, relatively low levels of profitability at present UK electricity prices, and over-capacity in the generating market"[250].

    Many of these[251] are, of course, problems shared by all forms of generation, but the BNIF explained in more detail the scale of the problem for the nuclear industry. Their chief concern was prices: these were currently 30% lower than they were when British Energy was privatised, a totally unexpected level of decline. (The witness pointed out that even a fall of 5% had been sufficient to reduce British Energy's dividend.)[252] Although British Energy's plants were operating at a cost of about 1.8 p per kWh,[253] which was competitive with the cost of gas-generated electricity, the waste liabilities inherited by the older Magnox stations added to their costs and converted nuclear-generation from being profitable to loss-making.[254] New types of nuclear plant currently being licensed and which would be ready for commissioning in about ten years' time would have generating costs of between 2.2 and 3p per kWh, the difference depending on whether the station was a one-off project (in which case the higher end of the range would apply) or, say, the eighth in a series, when the price would be lower (because development and licensing costs would be spread over the series, and there would be economic benefits from experience in construction, etc). We were told that these prices included the cost of management of radioactive waste produced by the new plant, and any extra costs associated with modifications designed to protect against terrorist attack.[255] However, despite these comparatively low costs, the industry still felt that nuclear power was at a disadvantage compared with other fuels, particularly gas. Even after the recent rises in the price of wholesale gas (to about 20p per therm in mid-November 2001), gas-fired power stations could still produce electricity at about 2.3p per kWh. In the view of the BNIF, it was likely that the lower cost and greater ease of constructing gas-fired stations would encourage a continued 'dash for gas' whenever electricity prices rose sufficiently to warrant further construction of generating capacity.[256]


132. According to the BNIF, the industry was maintaining pressure on the capital costs of new plants. We were told that the estimated price of electricity from new nuclear plant reflected improvements in design and construction techniques (fewer components, a reduction in construction times and a dramatic reduction in the volume of buildings) which reduced the overall capital costs to maybe half of those of Sizewell B.[257] They also reflected the smaller quantity of nuclear waste produced by modern designs of reactors.[258] Further savings could be expected if the industry achieved the cost benefits provided by building a series of reactors of a standard design.[259]

133. The planning problems common to all energy developments have been discussed above,[260] but it is widely agreed that these are more acute for highly-controversial developments like nuclear plants. This issue is therefore tied to that of public perception, mentioned by the British Nuclear Industry Forum in its submission to the PIU, and also to that of waste management. The industry's view was that storage of radioactive waste no longer presented any technical problems (techniques such as using concrete blocks and vitrification were suitable methods of storage for centuries, if need be, and for ultimate disposal); the difficulty therefore resided in public reluctance to accept the safety of these techniques and to permit suitable sites to be found and used.[261] The industry's view was also that changing public perception required Government action: a statement in favour of nuclear power, together with some practical assistance in paying for the establishment of rock laboratories to prove the reliability of storage techniques, were required. If these resulted in an alleviation of public anxieties about nuclear power, financiers would be more likely to invest in new plant.[262]

134. We asked the witnesses whether reforms to the planning system, Government pronouncements in support of the nuclear industry and other confidence-boosting measures (such as minimising regulatory pressures and risks) would, on their own, be sufficient to encourage the market to build new nuclear plant. The answer was a rather equivocal "No". The industry pointed out that all these sorts of disadvantages simply increased investment risk: if the financial reward were great enough, that would largely counterbalance planning difficulties and so on.[263] The irreducible problem was the gap between the electricity price of 1.8p per kWh and the cost of new nuclear generated electricity of about 2.5p per kWh.[264] What was required was some sort of financial assistance to bridge that gap, preferably one that would provide a subsidy of about 1p per kWh. They justified such financial assistance as a premium to reflect the benefits of nuclear power as a carbon-free energy source, and as a cheaper means of replacing the 25% capacity lost when the old nuclear stations closed than renewable power would be.[265] They would not specify the mechanism for this: it could be done by means of some kind of levy or tax, or by way of emissions trading.[266] They did, however, state that exemption from the Climate Change Levy would not be enough, because it would reduce the unit cost of generation by only 0.4p per kWh.[267]

135. The British Nuclear Industry Forum gave evidence to us before the recent announcement by the Secretary of State about the transfer of the historic radioactive waste management liabilities and the proposed setting up of a Liabilities Management Authority.[268] According to the evidence given to us, this transfer should decrease the cost of nuclear generation, at least as far as the British Nuclear Fuels fleet is concerned. It remains to be seen — and will doubtless take some months to become apparent — whether relieving the industry of these liabilities will actually change public perception of the industry and encourage investment in it.

136. For reasons of security and diversity of energy supply, many witnesses referred to the desirability of retaining the option for nuclear generation. They said that action needs to be taken in the short term if a commercial option to build new nuclear plant is to be sustained. The Government's announcement on nuclear liabilities management may boost confidence in the industry. Changes to the planning system and any future amendments to the Climate Change Levy to exempt a greater variety of non-carbon producing generating technologies may also increase confidence in nuclear generation. However, there are other considerations outside the remit of this Committee which are fundamental to any decision to change government policy on nuclear power.[269] It is essential that there be no further delay in government decision-making; the Government should make a clear statement on the future of nuclear energy as quickly as possible.

Coal

137. In mid-November 2001, when we took oral evidence from the Confederation of UK Coal Producers (Coalpro), coal-fired plant was generating the cheapest electricity on the grid, and had, we were told, done so throughout the 'dash for gas'. The proportion of coal-fired generation was rising. The reasons for this were that coal was the cheapest fuel to buy, coal-fired plant had benefited from the introduction of NETA, and the end of the contract for the supply of electricity from Electricité de France also helped.[270] Coalpro said that although the UK imported about one third of its coal requirement, the fact that coal reserves were large, widespread and many were in relatively stable countries should reduce anxieties about imports. The industry said, moreover, that indigenous reserves were substantial, would last for 50 years or so and could currently match the price of imported coal (though prices of imports were very volatile). It would also be feasible to increase production on a limited scale.[271] Coal was very easy to transport, safe to store and could be — and was — stockpiled at power stations, thus enabling extra generating capacity to be brought into use quickly.[272] The recent increase in the percentage of electricity produced by coal-fired stations proved the value of such a cheap and flexible fuel.[273] However, coal was unlikely to contribute as much as it could to security of electricity supply because of measures to reduce pollution.[274] In fact, Scottish Power estimated that after 2008 (by which date flue gas desulphurisation must be fitted) only four or five major coal-fired stations would remain in operation, and from 2016 the nitrogen oxide limits would make these also no longer competitive.[275]

138. Coalpro described the various technologies already being adopted to make coal a cleaner generating fuel, ranging from those designed to reduce emissions of specific gases (like Flue Gas Desulphurisation, which, we were told, has either been fitted or is under consideration for much of existing plant, and selective catalytic reduction for nitrogen oxide removal) to those intended to increase the efficiency of electricity production (such as fluidised bed boilers).[276] Plants not fitted with such equipment would be forced to close under anti-pollution legislation.[277] Even these technologies were very costly. More expensive still would be the move to cleaner coal technology, involving the removal of carbon dioxide. The Integrated Gasification Combined Cycle process involves, as its name implies, converting coal to a gaseous fuel; the carbon dioxide can then be removed (leaving hydrogen for a clean burn) and sequestered.[278] The only outstanding question was where to store the carbon dioxide. One use of the sequestered carbon dioxide could be to improve the recovery of oil reserves from the North Sea.[279] Work is continuing on technical problems with such clean coal plant, but the coal industry was of the opinion that what was really needed was the construction of a full-scale demonstration plant and this would require financial assistance from Government.[280]

139. We explored both the expected environmental benefits and the financial viability of clean coal technology. A lot of research into gasification has been going on elsewhere, notably in the United States and the Netherlands. We asked why the Americans were not adopting this technology rapidly and why electricity producers in the UK were not demanding more development work on it, if it was so effective. Coalpro responded that in the USA, both energy prices and environmental standards were lower, so that there were fewer regulatory disincentives to coal-fired generation and the economics were against the adoption of more expensive technology. As for generating companies in this country, Coalpro replied that they usually owned a number of generating plants using different fuels, so they simply adapted to the market without taking a strategic view.[281]

140. Our predecessors twice recommended extra support for clean coal, in 1993 and 1998.[282] In 1998, they concluded that: "The longer the Government delays finalising its policy for the financing of clean coal research, development and demonstration[283] programmes, the less assistance these programmes can provide to the continuance of the UK deep-mined coal industry". Although progress has been made on research and development, it appears that little has changed in relation to demonstration plants. We are aware that the DTI is currently conducting a review of the case for such a plant. There is no doubt that unless urgent action is taken to sustain it, coal-fired generation will end in this country. As we have said before, we think it would be unwise to allow any fuel source to disappear by default. Moderate Government investment in a demonstration plant — as recommended by our predecessors — might help to sustain coal-fired electricity generation, at a comparatively low cost to the Exchequer. At the very least, it might encourage those electricity producers currently considering investing in Flue Gas Desulphurisation for either existing or new plants to go ahead.[284] We therefore endorse the recommendations of the previous Committee.

141. Even if proved to operate effectively, clean coal technology would not, we were told, address the basic problem that all types of new plant would produce electricity at a higher cost than existing plant.[285] For example, IGCC plants would, Coalpro estimated, produce electricity at 3p per kWh as compared with the current market price of 1.8p.[286] If coal-fired power stations were to continue to be economically viable, they would need to be subsidised. Coalpro suggested that a mechanism for doing this could be either a 'clean coal obligation' or a 'low carbon obligation'. The low carbon obligation would encompass the present Renewables Obligation, treating clean coal in the same way as renewable power. A clean coal obligation could be set at 1p per kWh; a low carbon obligation at the same rate as the Renewables Obligation, 3p per kWh.[287] The coal producers argued that the environmental benefits of clean coal were great enough to justify its being treated on a par with renewable power. They cited published figures that put the cost of carbon captured from clean coal at about half that from the Renewables Obligation (in round figures, £150 per tonne as compared with £300 per tonne); and they pointed out that the increased energy efficiency produced by clean coal technology would make coal-fired generation as efficient as gas-fired, and, they thought, efficiency would improve as the technology developed.[288]

142. While not doubting the capability of the technology to capture carbon, we questioned whether it was yet certain that the captured carbon could be effectively dealt with. Greenpeace had reservations about whether stored carbon dioxide would gradually seep out. Coalpro had no such doubts.[289] Other witnesses pointed out further practical difficulties related to the need to construct infrastructure to enable the carbon dioxide to be stored, and — for undersea storage — for Government to define the planning and licensing rules to be applied.[290] It seems that a full examination of the international research on carbon storage should be undertaken as part of the process of deciding about the long-term future for coal-fired plant.

143. If clean coal technology works, then coal could continue to make a useful contribution to electricity generation in the UK, at least from 2010 to 2020 and possibly even until renewable power has been developed sufficiently to substitute fully for it. We note Coalpro's view that any financial support for clean coal technology — such as the suggested obligation — may need to be only temporary, as rising gas prices may make clean coal economically viable.[291] However, a mechanism like the proposed obligation would raise electricity prices until then. The Government must take a view about whether the benefits to security of supply arising from continued coal-fired generation would be worth the cost.

144. Even if coal-fired generation continues, that does not necessarily guarantee a long-term future for coal production in this country. Existing pits are becoming exhausted; new deep mines are expensive to sink and the move to short-term supply contracts since electricity privatisation does not give the confidence necessary to make such a long-term investment. The only economic option at present is open-cast mining: this raises significant environmental and planning issues, and so may not be possible in practice.[292] We have not taken evidence specifically on this important subject, and here we merely note in passing that some of the recommendations we have already made may be of some benefit to UK coal producers.

Biomass

145. Biomass (varying from things like straw and waste vegetables to specific energy crops like willow) appears to offer substantial potential for both electricity generation and as a supplement or alternative fuel for vehicles. It also has advantages for agricultural diversification and may provide a very useful source of support to the rural economy.[293] The Government has recognized its potential: it is granting £29 million for support to energy crops through a rural development programme; and the National Lottery Fund is also providing £36 million for developing the use of biomass for electricity generation.[294] But we were told that there are limitations on the use of biomass. We have already mentioned the planning problems faced by those wishing to use biomass to produce energy: as with many renewable technologies, this appears to be the principal barrier to development. We were told there was a lack of co-ordination between Government Departments: for example, DEFRA had been considering a scheme to award electricity from biomass two 'green certificates' per kWh — one for its renewables content, the other to recognise its agricultural benefit (a "rural development certificate"): but this had failed because of a divergence of approach between DEFRA and the DTI.[295] Also, the capital subsidies granted to renewable technologies were of less help to biomass than to other technologies because biomass required less capital investment than, say, wind and hydropower but, unlike them, had to pay for its fuel.[296] We have already commented on the need for greater co-ordination between Departments on transport issues. Biomass is another case in point. We also note that some forms of Government support like capital grants are not of equal assistance to all renewable technologies. We draw the relevant Departments' attention to this problem and recommend further discussions on measures that might be taken by them to ensure an even-handed approach to assistance.

Other technologies

146. Much of the evidence we received focussed on the potential and problems of wind power and CHP (which although not, strictly speaking, a renewables technology is generally regarded as a useful intermediate means of achieving environmental gains). However, the term 'renewables' covers a wide number of technologies, at different stages of development, with varying degrees of potential for the UK and posing a variety of problems. One potentially promising source of energy is marine technology, but this requires more work — it has not yet moved fully from the research to the development stage.[297] It also, of course, poses similar problems of connection to the distribution/transmission network as offshore windfarms,[298] and its technical and economic viability may depend on whether the undersea transmission cable can be built.[299] A number of renewables technologies are unlikely to benefit much from the Renewables Obligation because of the high cost of the electricity they produce. Among these is solar power, or, to be more precise, photovoltaic (PV) power. A joint Government-industry group has made a number of recommendations on the promotion of photovoltaic technology, and BP brought to our attention one particular recommendation for a market stimulation programme by the Government costing about £150 million over ten years, in the form of grant schemes to fit PV to roofs of both houses and larger non-domestic buildings. In contrast, the PIU recently recommended Government investment of not much more than £10 million for PV over the next three years.[300] We agree that the Government should not try to 'back winners' among renewables technologies, but we believe that it should display commitment to helping with the launch of those technologies unlikely to benefit from the Renewables Obligation. This might include help with development costs and with market stimulation programmes.[301]

147. There were also, as might be expected, differences of view over whether some technologies should be classified as renewables, in particular energy from waste incineration (which the CPRE believed should not be supported as 'renewable' but which was arguably the technology that benefited most from the Non Fossil Fuel Obligation).[302] While the Renewables Obligation originally excluded from support all energy from waste (in accordance with the Government's — and EU's — policy to promote a hierarchy of waste disposal methods according to their comparative environmental benefits), certain types of advanced waste incineration technologies, including pyrolysis and gasification, are now eligible for assistance from the Renewables Obligation.[303] Greenpeace was concerned about the environmental impact even of these technologies, and believed that the 10% target could be achieved without the inclusion of waste incineration, if other technologies were given enough support.[304] Another such technology was coal mine methane, which we were told was excluded from support under the Renewables Obligation (unlike methane from landfill and sewage sites, which is included).[305] We understand that a minimum of 600,000 tonnes of coal mine methane (which has a global warming potential 21 times that of an equivalent amount of carbon dioxide) is escaping into the atmosphere from abandoned coal mines in the UK every year.[306] It seems to us desirable on these grounds alone to explore whether some form of support could be extended to encourage the use of this gas.[307] Least-cost options to the tax payer would be an extension of the Renewables Obligation and/or exemption from the Climate Change Levy.


187   The Environmental Audit Committee is conducting an inquiry into the former, a sub-committee of the Environment, Food and Rural Affairs Committee into the latter; the House of Lords Science and Technology Committee has recently published its Report on Managing Radioactive Waste: The Government's consultation (First Report of Session 2001-02, HL 36), having reported on Management of Nuclear Waste in 1999 (Third Report of Session 1998-9, HL 41), the House of Commons Science and Technology Committee in the last Parliament reported on Wave and Tidal Energy (Seventh Report of Session 2000-01, HC 291).  Back

188   See also, for example, Qq 383-5 (Chemical Industries Association). Back

189   For example, British Energy estimated from its experience of wind farms that this form of energy was likely to result in costs of between 3 and 4p per kWh (Q 70). See also Appendix 11 (British Wind Energy Association). The Renewable Power Association cited a Cabinet Office estimate of a cost of about 1.5 to 2p per kWh for onshore wind in 2020, and of 2 to 3p per kWh for offshore wind, both of which would be cheaper than coal-fired or nuclear power (Q 374). Greenpeace claimed that renewable power could meet 50% of UK demand at a cost of 4p per kWh (Q 533). Figures prepared by ETSU in 2000 ranked photovoltaics as most expensive, followed by wind and biomass, then clean coal, then hydro, then gas: cited by Coalpro, Q 157.  Back

190   Qq 616-9. Back

191   Only a small amount of uranium is needed to keep the nuclear power stations operating, the UK has supplies equivalent to between two and four years of operation, and the UK's main sources of uranium are politically stable and friendly countries such as Australia and Canada (Qq 8 and 9 (BNIF)). About a third of the coal required by UK power stations has to be imported, but it is widely available, and most imports come from countries such as Poland, Canada, South Africa and Australia (Q 164 (Coalpro)). Back

192   RPA's Memorandum, Part 2. Back

193   DTI's Memorandum, paragraph 2.21. Back

194   Qq 69 and 70 (BNIF), Appendix 4 (Memorandum of Progressive Energy Limited, the Northern Energy Initiative and Wansbeck Energy Company). Back

195   See Paragraphs 108 and 118-21 below.  Back

196   Qq 590-5. For a discussion of whether micro-CHP can achieve these targets, see Paragraphs 157-9 below. Back

197   The study is Ekins, Cotton, Russell, Hargreaves (2001), Sustainable Energy for the UK: The Economic and Environmental Implications to 2020 of a Sustainable Energy Strategy for the UK (Forum for the Future). Back

198   Q 518. These comments were amplified in the full and helpful Supplementary Memorandum from Ofgem which argues that a breakthrough in electricity storage may be imminent: Appendix 38. See also Appendix 23 (Innogy). Back

199   The Non-Fossil Fuel Obligation (established under the Electricity Act 1989) required the twelve regional electricity companies to buy a certain amount of electricity from renewable sources at a premium price, with the difference between this premium price and the average monthly wholesale price being reimbursed from a levy on fossil fuels. For further details of the operation of the Obligation and the Orders, see Fifth Report of the Trade and Industry Committee, Energy Policy (HC 471), Session 1997-98. Back

200   Q 358 (RPA) and its Memorandum, passim. The RPA attributes this failure partly to inadequate understanding of financial schemes and partly to planning difficulties. Back

201   Q 457. Back

202   Termed 'firmness'. Back

203   Qq 297 (DTI) and 719 (NGC). Back

204   RPA's Memorandum. Back

205   Qq 296 and 297. Back

206   Qq 94 (Gas Forum), 354 (AEP) and 457 (Electricity Association), Appendix 23 (Innogy) paragraph 2.6; Appendix 31 (Scottish Power). Back

207   Qq 354 (AEP) and 367 (RPA). Back

208   Q 354. Back

209   Q 457 (Electricity Association). Back

210   Qq 77 and 78 (BNIF), and 249 (CHPA). The argument being not only that they were denied the benefit of being given a portion of the proceeds but also that suppliers would be less inclined to buy to buy their electricity because it would not count towards the 10% obligation. Back

211   Q 367. Back

212   Representing a rise in electricity prices of 3.3% in 2002 and a total of 10% in 2010: Appendix 41. However, these figures are based on an assumption that the full buyout price of £30 per MWh would be in addition to the wholesale market price for electricity, so suppliers would be paying £50 per MWh. The DTI assumes a total of £30 per MWh, giving costs of £4.5 million in 2002-03 and £15.6 million in 2010.  Back

213   Q 386. Back

214   The DTI estimates the rise as 4.4% (Q 315). Back

215   Qq 381 (CIA) and 457 (Electricity Association). Back

216   See, for example, the comments made by Scottish Power (Appendix 31). Back

217   About 60% of CHP is currently gas-fired, but other fuels used include geothermal energy, biomass, energy from waste and - the fuel on which CHP historically relied - coal: Q 240 (CHPA). Back

218   Q 259 (CHPA). Back

219   See, for example, Appendix 22 (British Sugar's Memorandum). Back

220   See paragraphs 63 to 70 above. Back

221   Paragraph 119. Back

222   Qq 247 and 248. Back

223   Q 257. Back

224   Q 255. See also the comments made by BP (Appendix 18, paragraph 28). Back

225   Trade and Industry Committee, Impact on Industry of the Climate Change Levy, Ninth Report of Session 1998-99, HC 678. Back

226   Appendix 23, DTI's Supplementary Memorandum; see also Section 3.3: Fuel price indices for the industrial sector, in the DTI's publication, Quarterly Energy Prices, September 2001, p23. Back

227   Qq 571, 572 and 576. Back

228   Appendices 3 (British Energy), and 29 (British Nuclear Fuels plc). Back

229   CHPA's Memorandum, paragraphs 31 and 32, and Q 246. Back

230   Qq 290 and 291. Support for such a change to the Climate Change Levy also came from the Association of Electricity Producers (Q 352). Back

231   Pre-Budget Report, paragraph 7.19. Back

232   Q 323. There are 43 such Agreements. See also Q 387 (Chemical Industries Association). Back

233   Which applies to a wide range of sectors (from combustion plants and refineries to waste disposal, intensive farming and food industries). Back

234   Qq 391-3 (CIA). See also Qq 522-5 (Ofgem). Back

235   See A Summary Guide to the UK Emissions Trading Scheme

at www.defra.gov.uk/environment/climatechange/trading/pdf/trading-summary.pdf. Back

236   Qq 391 and 432-4 (CIA) and 522-5 (Ofgem). In contrast, Coalpro expressed fears that such a scheme would encourage even more the switch from coal to gas as a fuel for electricity generation: Memorandum. Back

237   34.1% of total energy demand in 2000 (estimate based on statistics from the Digest of UK Energy Statistics, Table 1.13 for 1999 and the first three quarters of 2000 in the Annex to the PIU's Project Scoping Note). This estimate of 34.1% compares with 29.1% for the domestic sector, 23.3% for the industrial sector, and 13.5% for "others" (including public administration, commercial, agricultural and miscellaneous). Back

238   Qq 265 (DTI) and 583 (Greenpeace). Back

239   Qq 583 and 585. Back

240   Q 581 (Greenpeace). This would require agreement at EU level. Back

241   Liquid Petroleum Gas (LPG) and Compressed Natural Gas (CNG). Back

242   Qq 265 (DTI) and 582 (Greenpeace). Back

243   Qq 586 and 587. Back

244   Whose Report was published in 2000: An Assessment of the Emissions Performance of Alternative and Conventional FuelsBack

245   Qq 266 and 268 (DTI). Back

246   Qq 268, 274 and 275. Back

247   Q 266. Back

248   Qq 3-5 (BNIF). However, some witnesses believed that, with refurbishment, the lifespan of the AGRs could be extended: Appendix 23 (Innogy), paragraph 24. Back

249   See, for example, Qq 533, 548, 553, 559 and 564 (Greenpeace), and, on the other side of the argument, Qq 11 and 22 (BNIF), 381 (Chemical Industries Association), and 448-9 and 453 (Electricity Association). Back

250   In its submission to the PIU review, p17. Back

251   Planning problems, regulatory risk, low electricity prices, over-capacity. Back

252   Q 51. See also Q 20. Back

253   Qq 38-43. Back

254   Qq 31 and 55. Back

255   Qq 38-43 (waste) and 25 (terrorism). Back

256   Q 38. This view was supported by Coalpro (Q 165). Back

257   Q 41. Back

258   Qq 66-8. Back

259   Qq 38 and 41. Back

260   Paragraphs 79-84. Back

261   Qq 58 - 60. Back

262   IbidBack

263   Qq 80-3. Back

264   Q 62. Back

265   A 1p premium for new nuclear power would, they said, cost 0.25p per kWh per customer, whereas to fill the gap by means of renewable power supported by the Renewables Obligation would cost each customer 0.75p per kWh (Q 62).  Back

266   Q 65. Back

267   Q 64. Back

268   Official Report, 28 November 2001, cols. 990-1005. Back

269   We expect that these considerations will be discussed in the forthcoming Report of the Environment, Food and Rural Affairs Committee on Radioactive Waste Policy. Back

270   Qq 149 and 190. Back

271   Qq 152-64 and 188.  Back

272   Q 166; see also Appendix 23 (Innogy). Back

273   Qq 143 and 183. Back

274   Q 144. Back

275   Appendix 31. Back

276   Q 191; see also Appendix 2 (Coalfields Community Campaign). Back

277   The National Emission Ceilings for Certain Atmospheric Pollutants and the Limitation of Emissions of Certain Pollutants into the Air from Large Combustion Plants Directives fix limits for the emission of sulphur dioxide and nitrogen oxides. Back

278   Qq 167, 174, 184; and Coalpro's Supplementary Memo. Back

279   Q 171; and Appendix 14 (Coalpro's Supplementary Memorandum). Back

280   Qq 144, 167 and 199 (Coalpro) and Appendix 2 (Coalfield Communities Campaign Memorandum). Back

281   Qq 168 and 169. Back

282   First Report of Session 1992-93, British Energy Policy and the Market for Coal, HC 237; and Fourth Report of Session 1997-98, Coal, HC 404. Back

283   Our italics. Back

284   Appendix 2 (Coalfield Communities Campaign). Back

285   Q 150 and Appendix 4. Back

286   Q 196. Back

287   Q 192. A Clean Coal Obligation was supported also by Scottish Power (Appendix 31). Back

288   Costs: Q151 and Appendices 4 and 14. Energy efficiency: Q 173. They said that the efficiency of existing coal-fired plant was 38%, and clean coal technology could add a further 15% to this, while gas-fired plant was 44%. Back

289   Greenpeace's Memorandum and see also Q 210 (UKOOA); Q 198 (Coalpro) and Appendix 14 (Coalpro). Back

290   Appendix 4. Back

291   Q 176 and Appendix 14 (Coalpro Supplementary Memorandum). Back

292   Q 165 and Appendix 36 (Memorandum from Yorkshire Coal Task Force). Back

293   Q 366 and Appendix 37 (British Biogen's Memorandum). Back

294   DTI's Memorandum, paragraph 3.5. Back

295   Q 368 (RPA). Back

296   IbidBack

297   Qq 540-2 (Greenpeace). Marine technology encompasses both wave and tidal power. Back

298   See Paragraphs 42-45 above. Back

299   See Paragraph 44 above. Back

300   Renewable Energy in the UKBack

301   For possible measures, see, for example, Appendix 39 (Memorandum from Solar Century). Back

302   CPRE Memo (ENG 51) (not printed), paragraph 28 and Appendix 21 (Brightstar Environmental's Memorandum). Back

303   Appendices 21 (Brightstar Environmental) and 20 (Environmental Services Association). Back

304   Qq 577 and 578. Back

305   Appendix 1 (Memorandum from the Association of Coal Mine Methane Operators). Back

306   IbidBack

307   In this context, we are pleased to note the work of DEFRA, DTI and HM Treasury on the use of coalmine methane to generate electricity: Official Report, 23 November 2001, col. 516W.  Back


 
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