Picking winners
19. It is reasonable to ask how the Government
can have an energy RD&D policy that does not embrace a vision
of which technologies should be backed (paragraph 65).
20. The Government has the option of creating
a framework of incentives, such as tax credits for RD&D, which
will devolve the responsibility for picking winners (and inevitably
some losers) to industry; but it also has to make choices and
take risks too, especially in its support for RD&D, where
it cannot avoid setting some priorities. The Government has an
important role in identifying those of Britain's strengths that
are consistent with the industrial environment and the market.
It should provide a clear and unambiguous focus. (paragraph 65).
21. The Government seems nervous of being accused
of picking winners. As a result tough decisions have been avoided.
We should be selecting all of those research projects for funding
which we have the capacity to execute and which have a reasonable
chance of delivering solutions and significant benefit for UK
society (paragraph 67).
The planned Review of Renewables Innovation Spending
will consider this issue.
The Chief Scientific Adviser's Energy Research Review
concluded that it would be unwise to attempt a prescriptive forecast
of 'winning' low-carbon options for the future and to concentrate
Government expenditure on those alone. There would be a grave
risk of foreclosing other options which may turn out to be winners
in time. The Review did, however, identify six key areas in which
the degree of technological potential (or 'headroom') indicated
that enhanced research effort was especially likely to yield step-change
benefits. This approach has been endorsed in the Energy White
Paper. The Chief Scientific Adviser's High-Level Group on Energy
RD&D has been examining how the six key areas are being reflected
in current funding programmes.
Renewable Energy Authority
22. Britain's energy structures are too complicated.
As a result, efforts to stimulate RD&D are fragmented and
directionless. No public body or Minister is taking responsibility
for driving forward technological innovation and deployment (paragraph
68).
23. Much bolder action is needed to make non-carbon
technologies play a significant contribution to the UK's energy
mix. For this reason, we recommend the creation of a Renewable
Energy Authority. It should emulate the function of UKAEA in driving
the nuclear industry after the World War II. The Authority would
subsume the UKERC and the Carbon Trust, the DTI's energy programme
and the energy policy unit. It would:
1. conduct applied research and development in
selected technologies;
2. conduct demonstration programmes, usually but
exclusively in collaboration with industry;
3. provide a fast-track planning service to non-carbon
energy applications; and
4. supervise infrastructural modifications to
the grid and distribution networks to facilitate the connection
of distributed generation (paragraph 68).
69. Given the importance of reducing UK carbon
emissions, we propose a Renewable Energy Act at the earliest opportunity.
The Act should include the following provisions:
1. The establishment of a Renewable Energy Authority
(REA) with UK-wide responsibility for co-ordinating and promoting
RD&D in renewable energy and disbursement of funds for that
purpose.
We agree that there is a need to improve the strategic
direction, cohesion and co-ordination of the UK's energy policy
making and the delivery of the UK's energy research, development
and demonstration programmes. We believe that the best way of
securing this is through the new Sustainable Energy Policy Network
and a National Energy Research Network. The recently established
Policy Network consists of departmental policy units and key outside
organisations (including the Carbon Trust) responsible for delivering
the Energy White Paper. It will ensure that the Government as
a whole pursues effectively policies and programmes that are needed
to ensure that the Government delivers its objectives including
those related to technology and innovation. The DTI's Energy Strategy
Unit acts as its hub. The Policy Network reports directly to a
Ministerial Group chaired by the Secretary of State for Trade
and Industry and the Secretary of State for Environment, Food
and Rural Affairs.
A principal responsibility of the new UK Energy Research
Centre will be to establish and co-ordinate a National Energy
Research Network which will assist in establishing interdisciplinary
teams with expertise in scientific, technological, social and
economic and health impacts of energy. A new UK Energy Research
Centre will act as a hub for this Network.
The Government has also established a new Renewables
Advisory Board- comprising representatives of the relevant industries,
the Government and the Devolved Administrations—to provide
expert independent advice to the DTI on renewable issues.
The Government does not believe that reorganisation
is necessary. Rather it believes that it should focus on establishing
well-designed policy instruments, transparent monitoring, securing
commitments and above all in ensuring delivery of outcomes through
the new Networks. The proposed renewable energy authority risks
diverting effort into the creation of structures and possibly
new silos separate from the main stream of energy policy rather
than into the delivery of programmes and commitments.
The Government therefore has no plans to create a
Renewable Energy Authority and will co-ordinate and promote renewables
RD&D through the Sustainable Energy Policy Network currently
being established across government.
24. We are puzzled by the Government's assertion
that privatisation and liberalisation has not led directly to
a decline in energy RD&D—it has led to a dramatic decline,
by far the largest decline in all OECD countries. The forces that
drove innovation in the past are at least as strong as they ever
were and it seems hard to believe that the Chief Scientific Adviser's
energy group and several of our witnesses are so ill-informed.
We are concerned that the Government is poorly placed to stimulate
energy RD&D investment in industry if it is in a state of
denial over its causes (paragraph 71).
The Government recognises that RD&D and innovation
more widely has an absolutely key role in bringing forward low
carbon technologies needed to achieve emission reductions over
the long term. The Chief Scientific Adviser's Energy Research
Group was unable to determine precise levels of spending on energy
research across industry. It recognised, however, that there had
been an apparent decline since the privatisation of the previously
nationalised energy industries which had been an important source
of research effort.
The Energy White Paper sets out a strategy for the
long term to give industry the confidence to invest to help us
deliver a truly sustainable energy policy. It is intended to send
out long-term signals to the energy sector regarding the need
to reduce carbon emissions. By setting the UK on a path a 60%
reduction in emissions by 2050 the Government is seeking to create
a framework in which RD&D in the energy sector can be encouraged.
25. The fall in private sector RD&D expenditure
has been higher than would have been expected from simply improving
its focus. We conclude that there has been a real and damaging
reduction in the amount of private energy RD&D spend since
privatisation and liberalisation of the market (paragraph 72).
It is the effectiveness of the expenditure which
matters. The UK can also benefit through technology transfer from
other countries. The Chief Scientific Adviser's high-level group
comprising representatives of the Government Departments and other
bodies, such as the Research Councils, responsible for public
funding of energy research, will help co-ordinate and set a strategic
direction for research, reflecting the ERRG's priorities.
Detailed proposals for a new Energy Research Network
and Energy Research Centre are currently being developed by the
Research Councils, who will present them in due course.
It is intended that, through the Network, they will
establish interdisciplinary teams with expertise in the scientific,
technological, social, economic and health impacts of energy,
providing much needed coordination and cohesion.
The new Energy Research Centre will play a key role
in co-ordinating research, facilitating collaboration with industry
and UK participation in international projects, as well as being
a centre of excellence in its own right.
26. We recommend that the Government establish
demonstration projects to establish how distributed sources of
electricity generation can be incorporated into local networks,
in particular the development of metering systems to allow domestic
generation to export power to the network (paragraph 79).
The Government is anxious to assist industry in the
development and demonstration of new technology. Through the New
and Renewable Energy Programme, the Government is currently funding
a range of R&D and demonstration projects, including the demonstration
of the Regenesys storage technology (Little Barford) as a means
of integrating renewables into the electricity networks and the
application of voltage regulator technology (North Wales) to enhance
the capacity of local networks to accommodate increase levels
of renewable generation capacity. In addition, the Government
is working with industry to mount field trials to demonstrate
the benefits of advanced metering systems to the integration of
micro scale renewable generation and CHP and to demonstrate a
number of techniques for the intelligent operation of distribution
networks.
Funding is available to do more in this area however
it is currently difficult to involve industry in developing viable
demonstration projects. The reasons for the reluctance of utilities
to innovate are not entirely clear but probably reflect concerns
about their ability to recoup the costs of R&D. Given the
need to transform the electricity networks to facilitate the achievement
of the Government's targets for renewables we shall be urging
Ofgem to allow the distribution network operators (DNOs) to recover
the costs of R&D work. The opportunity to do this will arise
through the current price control review.
The Government is also funding a range of projects
to facilitate the integration of distributed generation, through
its involvement in the Distributed Generation co-ordination Group.
27. United Utilities rightly recognises the value
of non-technical research into commercial and regulatory initiatives
for distribution networks. We recommend that the Economic and
Social Research Council make provision for such studies (paragraph
80).
Along with the NERC and BBSRC, the ESRC collaborated
in a supplementary call under the first Phase of the EPSRC's SUPERGEN
Programme. As a result of this, a new inter-disciplinary research
consortia on Future Network Technologies is being supported and
will be addressing the impact of economic and regulatory structures
as a key element of its broader programme on the future evolution
of power networks. The joint Research Council Tyndall Centre is
also supporting relevant research on these issues. Social, economic
and regulatory issues more generally will be a key focus of research
under the cross-Council 'Towards a Sustainable Energy Economy'
Programme.
28. We appreciate the commercial constraints on
companies and recommend that the Government and the regulator
work to create a better environment for RD&D (paragraph 82).
The Energy White Paper has addressed the issue of
how to ensure that distributed and renewable generation has the
appropriate incentives to enable it to be connected to the electricity
network. There are a number of commitments in the White Paper
in these areas and the Department is working with OFGEM to ensure
that they are achieved thus helping to create a better environment
for RD&D. The Department recognises the regulatory arrangements
are crucial to our ability to deliver infrastructure which will
permit the development of renewable generation, especially in
peripheral areas, so as to support our environmental objectives.
29. It is disappointing that the UK's experience
in the North Sea oil and gas industry is not being employed to
develop new marine energy technologies. Clearly the incentives
for oil and gas companies are insufficient, a situation which
the Government should remedy (paragraph 85).
We are determined that wave and tidal technologies
should be given the opportunity to play the fullest part they
can in the expansion of generation from renewables. We are supporting,
along with the Scottish Executive and others, the establishment
of a marine test centre off the coast of the Orkney Islands. This
centre, a first in Europe, is expected to open later this year.
The Government has recognised the synergies between
the emerging offshore renewables sector and the development of
North Sea oil & gas and is aware of a number of oil and gas
companies that are seeking opportunities to develop offshore wind
farms. That is why Renewables UK was created in 2002 to apply
the same concerted, strategic approach which was applied to oil
& gas to renewables, in order to reap very substantial benefits
for the country.
Renewables UK is a team whose role is to help secure
maximum benefits for UK industry from the rapidly growing worldwide
renewables market and to assist in overcoming barriers to renewables
projects in the UK via the Renewables Advisory Board. This means
optimising the benefits of renewable energy to the UK in order
to maximise opportunities in manufacturing, services, exporting
and jobs.
Renewables UK is working closely with individual
companies, regional support agencies, other government departments,
trade associations and the devolved administrations to:
maximise UK content in projects in the UK and overseas
communicate opportunities
overcome barriers to developments
disseminate information
co-ordinate the continued development of and support
for the UK supply chain.
30. We are pleased that the UK Government supports
an EU target of 3% of GDP invested in RD&D but given the strong
link between investment and productivity, we are disappointed
that it has not adopted this "aspiration" for the UK.
We recommend that the Government does so (paragraph 87).
The 3% target is part of the EU's R&D action
plan, which we broadly welcome. Momentum now needs to be maintained
through implementation by the Commission and Member States of
actions appropriate to their national circumstances. We would
emphasise the importance (recognised in the action plan) of framework
conditions, for example the pursuit of a more dynamic and competitive
business environment. In terms of public spending, the focus should
be on where spending is most effectively directed to address market
failures, and how public spending can have a greater impact in
levering in greater private funding of R&D and therefore lead
to improved productivity and economic prospects.
31. The Government should recognise that even
companies not regularly making a profit need to think long term
and invest in RD&D and should consider introducing mechanisms
that provide that incentive (paragraph 91).
The Government recognises that an increasing number
of companies undertake R&D before they have any sales or profits
to cover their costs. Under the SME R&D tax credit, introduced
in April 2000, loss-making companies can surrender unused tax
relief to the Exchequer, receiving in return a payment of 24p
for every pound of qualifying R&D expenditure. This recognises
the particular difficulties that small and especially new companies
have in raising finance.
The R&D tax credit for larger companies, introduced
in April 2002, does not include a payable element because more
established larger companies do not generally face the same difficulties
in accessing external finance as SMEs.
32. The existence and nature of R&D tax credits
are not well understood by companies—particularly the smaller
ones—and the rules of the R&D tax credit seem to be
too complicated or inadequately explained. The Government should
remedy these problems, since if energy RD&D is to be resuscitated
in the UK in the field of low carbon technologies, a clear and
significant tax incentive is much needed (paragraph 92).
The Government consulted widely on the design of
both the SME R&D tax credit and the extension to larger companies.
In designing the credits, the Government sought to maximise the
incentives for companies to undertake additional R&D, and
recognised the need for the credit to be:
stable, so that companies can rely on it;
transparent and predictable, so that companies can
build the tax savings into their investment decisions; and
simple in design, to minimise the costs of administration.
Introduction of the tax credits was supported by
a series of national roadshows designed to promote take-up and
by a Press campaign in Autumn 2002. The roadshows were attended
by R&D businesses from across the country, and interest and
take-up both continue to increase. Building on the feedback received
during the roadshows, Budget 2003 announced a package of measures
to improve the R&D tax credits—allowing more businesses,
particularly small and medium sized enterprises, and more types
of expenditure to qualify.
Budget 2003 also announced that the Government would
consult with businesses on improving the definition of R&D
to ensure that it remains consistent with technological developments
and competitive internationally.
33. The Government has failed to encourage an
environment that encourages technical innovation, to provide sufficient
direct investments and to make any significant response to the
scale of market failure (paragraph 93).
The Government recognizes the importance of innovation
to economic prosperity and the role which R&D plays in the
innovation process. This includes the ease with which knowledge
developed in academe can be transferred to the business sector.
That is why the DTI and Treasury launched a review of innovation
policy last December and why Richard Lambert has been asked to
conduct an inquiry into university business relationships. The
outcome of these reviews is expected in the autumn.
34. The proposed UK Energy Research Centre and
Network should play a crucial role in bringing forward the next
generation of skilled people for the energy sector. We recommend
that it adopt this as a key part of its mission (paragraph 98).
A stated requirement for UKERC is that it will "Support
the development of interdisciplinary research capacity (e.g. postgraduate
training)".
35. We recommend that the Government recognises
low and non-carbon energy as a shortage area, recognising its
importance in combating climate change (paragraph 99).
Government recognises the importance of the provision
of skilled people in all aspects of the energy agenda. The Energy
White Paper outlines a number of actions to address this issue
at all skill levels. The additional funding provided to the Research
Councils for energy research will enable a significant increase
in the provision of PhD training associated with the new research
programmes. As examples, EPSRC has funded over 40 PhD posts as
part of the first tranche of Research Consortia under the SUPERGEN
Programme in future networks, wave and tidal energy, hydrogen
generation and storage and biomass generation. The UK Energy Research
Centre will also provide new opportunities to enhance PhD training
through increased networking and opportunities for wider skills
training. We are working closely with employers to ensure that
as soon as possible all parts of the energy industry are included
within the emerging sector skills councils network which has recently
received a substantial increase in Government funding.
36. It is hard to imagine the nuclear skills situation
improving, since the Energy White Paper has all but ruled out
new nuclear build. Even with no new nuclear build, nuclear engineers
will be needed for many years to come to deal with decommissioning
and storage but few graduates will be inspired to join an industry
in its death throes (paragraph 105).
EPSRC recognises the training need in these areas
and is looking to address it in a variety of ways including the
identification of these areas as priorities for universities when
they develop their Collaborative Training Account bids. These
accounts, which are complementary to Research Training Accounts,
aim to put collaborative postgraduate education and training on
a more strategic footing, reflecting both EPSRC's priorities as
well as those of individual universities.
The report of the "Nuclear Skills Group",
published in December 2002, concluded that although the nuclear
industry is not facing an immediate skills problem unless action
is taken soon problems could arise over the next 10-15 years.
Following the report, DTI has been exploring the possibility of
establishing a Sector Skills Council (SSC) to cover the nuclear
industry. Good progress is being made in discussions with an existing
SSC to expand its coverage to include the nuclear industry. If
all goes well, the new enlarged SSC could be up and running early
next year.
37. We argued in our report on Science Education
from 14 to 19 that science education needed to be made more relevant.
There are few better examples of a subject that could enthuse
our schoolchildren than non-carbon energy, which has the power
to tackle the potentially catastrophic effects of climate change
(paragraph 107).
There is currently room in the Science Curriculum
at 14-19 to teach and enthuse young people about the importance
of non-carbon energy and the potentially catastrophic effects
of climate change. At Key Stage 4, students are taught about the
efficient use of energy, the need for economical use of energy
resources, and the environmental implications of generating energy.
They also learn how the carbon cycle helps to maintain atmospheric
composition and how energy is transferred from power stations
to consumers.
More generally, the Government is working to ensure
that the science curriculum at Key Stage 4 provides a core of
learning that is relevant and exciting for all learners. The Qualifications
and Curriculum Authority (QCA) are reviewing the programme of
study at Key Stage 4. They have given final advice to Ministers
and a consultation process is now underway. We are also piloting
a new GCSE "Science in the 21st Century" from September
2003. The new GCSE aims to provide a sound and stimulating science
education for all students whether they become consumers, users
or producers of science.
38. We consider CO2 sequestration to be a necessary
part of the transition to a non-carbon fuel economy. Nevertheless,
it is important that its use should not act as a disincentive
to the elimination of carbon-based fuels (paragraph 110).
The Government accepts that research into CO2 sequestration,
although it has significant potential for mitigating emissions
of CO2, cannot act as a disincentive to the elimination of carbon
based fuels. The Energy White Paper sets out our target of the
UK putting itself on a path to a reduction in CO2 emissions of
some 60% by around 2050. We are pursuing this target by a range
of different measures including greater energy efficiency, increased
use of renewables, use of biofuels for road transport and the
EU carbon trading scheme.
39. We commend the Government's positive approach
to CO2 sequestration. There is a real opportunity in the North
Sea with enhanced oil recovery as the initial economic driver.
Policy mechanisms are needed to ensure that it happens and that
there is an agreement on the legal and environmental issues of
CO2 storage (paragraph 111).
The Government recognises the opportunity that enhanced
oil recovery (EOR) represents as an initial driver towards CO2
sequestration. As the Energy White Paper recommends, we will set
up an urgent implementation plan in co-operation with the developers,
generators and oil companies to establish what needs to be done
to get a demonstration programme project up and running. This
study will reach conclusions shortly to enable decisions on funding
to be taken as soon as possible thereafter.
With regard to the CO2 sequestration issue, the DTI
is currently reviewing the feasibility of CO2 sequestration in
the UK and we expect to publish a report of our conclusions shortly.
The results of this work will determine if any R&D work in
the area of CO2 separation and capture is necessary. The Government
accepts that there are outstanding issues about the environmental
risks and perceived risks of storing CO2, and about the legality
of storing it under the seabed. These are issues that need to
be resolved and we are currently giving this attention.
40. We believe that the UK should play to its
strengths and exploit its natural resources. As such, the continued
use of coal has a role in the UK's energy mix provided that CO2
emissions are substantially reduced. We therefore support investment
in clean coal technologies, for export as well as UK use, in tandem
with CO2 sequestration (paragraph 114).
The Government is funding a Cleaner Coal Technology
programme worth £25m over 3 years. This programme has two
elements:
a) Support for R & D into new cleaner coal
technologies, including: support for 40 R & D projects covering
coal gasification, higher boiler efficiencies. This work is focussed
on increasing efficiency so that there are less emissions per
kWh of electricity produced.
b) Facilitating the transfer of UK cleaner coal
technology to other countries (eg India and China) and promotion
of UK technology.
We are also considering providing support for the
retrofit of a supercritical boiler to an existing power plant
as a demonstration project. In effect this involves the replacement
of a boiler in an existing coal-fired power station with a new
much more efficient "supercritical" boiler. The effect
of this would be that the new boiler would operate at much higher
steam temperatures and pressures with the result that less coal
would be required per Mw of output and hence there would be lower
emissions of CO2.
41. The Carbon Trust's RD&D budget is not
very large and we dispute the Government's assertion that it has
the funding to make a significant impact on energy efficiency
RD&D (paragraph 119).
The Government agrees that innovation is essential
if we are to deliver a low carbon economy. We believe that the
Carbon Trust, through its Low Carbon Investment Programme, is
making a real and significant difference by bringing together
researchers and private sector investors and venture capital to
bridge the gap between RD&D and investment that prevents low
carbon technologies coming to market. LCIP has already announced
projects which will be worth £70m in total with the Carbon
Trust attracting private sector gearing of over around 3:1.
As the White Paper makes clear (paragraph 7.28) the
Government is also prepared to fund innovation where this can
achieve best results in terms of delivering our policy objectives.
The Carbon Trust is uniquely placed to understand how the private
and public sector can best work together to stimulate the investment
needed to drive innovation in energy efficiency in the UK and
we are encouraging them to play an active part in the government's
innovation review.
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