Examination of Witnesses (Questions 520-539)
MR CALLUM MCCARTHY, MR JOHN NEILSON, MR NICK SIMPSON AND MR JOHN SCOTT
TUESDAY 30 APRIL 2002
520. You set out a programme, and I have the dates here, on the first five milestones and four of them were to be completed in January 2002. Those have not been completed or were only completed this month, is that correct? I am talking about the connection process guide, the review of engineering recommendation P2/5, the identification of any short-term changes to price controls and the format for provision of information by distributors.
(Mr Neilson) We can go through those now if that would be of assistance to you. Connection charges is the first one, which I have already discussed. The third one was the P2/5 process, which is the first core task of one of these work groups. There is very active discussion about what changes are needed, and that discussion is well under way, it is not yet completed. There are no short-term changes to the price control per se but nevertheless the distribution companies have been willing to accept this change in connection charges to a shallow up-front payment instead of a deep one, which clearly has an impact.
521. What about format for provision of information by distributors?
(Mr Neilson) I already referred to that. John's team have already published detailed requirements about what in future will be required.
522. So we are a little behind there but work is proceeding?
(Mr Neilson) Some things were done some months ago, they have not all been done very recently.
523. You have referred in your memorandum to the DTI/Ofgem Distributed Generation Co-ordinating Group which exists to monitor progress.
(Mr Neilson) That is the one I co-chair.
524. Has that produced a report yet?
(Mr Neilson) It has had three meetings. The first meeting was last November, it is going to produce annual reports and that is the group that will have an active website which is going live in the next few weeks.
525. British Gas want to begin to produce domestic CHP by the autumn. Do you think we are going to get there?
(Mr Neilson) It is up to them to say what their timetable is. I do not think I quite understood their timetable was as rapid as that. That is what one of these work streams is about, all these arrangements, regulatory and technical and commercial which are required for micro-CHP to happen. Absolutely, the objective is a simple standardised arrangement for all these domestic CHPs, and there is a great deal of work which I think is consistent with the timescale of the manufacturers in terms of actually moving to a commercial basis. These things are already being piloted, there are already pilots of domestic plants in individual homes around the country, there are a couple of pilots already running. What is obviously important is whether commercially that is an attractive proposition for companies to spend millions on a major roll-out, and I think the companies are a little way off from making those final decisions, but it is certainly our objective to make sure they are in a position to make those commercial decisions.
526. Mr Scott, can I take you back to an answer you gave to Mr Thomas. Could you send the Committee some sort of paper to explain the technical difficulties that Denmark have encountered, because I think it is extremely important for the report we will be preparing? As I understood the broad definition of technical difficulty, it was to do with the proportion of electrical generation which Denmark has now reached. At the present rate of progress, how many years will it take Britain to reach that sort of capacity level?
(Mr Scott) Can I respond in two parts. We would be pleased to send you a note. It is, of course, secondhand information.
527. Yes, but better than no information at all.
(Mr Scott) You are very welcome to that. It is conference material from the Danish Transmission Company. We will be happy to provide that. In terms of the amount of generation, the view that I have formed at the moment from hearing the opinions of different parties in the industry is that we do not as a sector see difficulties in achieving 10 per cent of renewables. At the 10 per cent level we are still well below the Danish threshold of approaching the minimum demand on the system. That might not look so straightforward at 20 per cent, which the PIU made reference to. I think that will need to be looked at most carefully.
528. So in answer to the amount of time, if we were to meet the Government's target, we are about 17 years away from getting to the difficulty that Denmark face?
(Mr Scott) For the total make-up, we will have to watch very carefully, even as we approach the 2010 target. The best information is that that should not be a difficulty operationally in the way Denmark is experiencing.
529. I see you are a cautious man, Mr Scott.
(Mr Scott) I will take that as a compliment!
530. Take it as you wish. Back to embedded generation. Your recent consultation document on embedded generation suggests that embedded generators might be able to spread charges over a number of years but they will still have both shallow and deep charges. Did you consider more radical options than that?
(Mr Neilson) Yes, we considered all the range of options in relation to connection charges and in particular we considered what was appropriate half way through a five year price control period for the distribution companies. This was a point that the Embedded Generation Working Group very much recognised in the report that they prepared last year. What we have come up with at the moment as the way forward is that there should be an option for distributed generators if they choose not to pay the deep connection charge up-front, which was the previous requirement, but an option instead only to pay the shallow charge up-front and then to pay the difference between the two on an annualised basis over the lifetime of the equipment. I think for many plants that will be, if they are small entities and struggling to find the requisite amount of capital finance at the beginning of the project, an important change which will facilitate more of these projects starting up.
531. When you tried to make those decisions about charging, I can understand quite a few conflicts but how do you balance the desire to be fair to all generators withand this may not be within your remitwhat at least we might consider ought to be in your remit the desire to promote and encourage new forms of generation?
(Mr McCarthy) What we try to do is to identify any barriers which we think are unreasonable barriers. What we do not try and do, and indeed would have some difficulty about doing, is to set out to tilt the playing field in one direction. What we are very concerned to do is ensure there is a level playing field. One of the things we are sometimes urged to do is to say, "You should do things which would favour renewables at the moment because renewables at the moment are so small it does not matter if they are favoured". I confess it is an argument we have resisted, I think correctly, because our concern is not to encourage an infant industry to develop on the wrong foot. If renewables are going to be a significant part of the British energy scene, as is the objective, it is important when it gets there they should be efficient and effective renewables.
532. But they will not get there, will they, if you do not help them, if we do not have a system which helps them?
(Mr McCarthy) There are things we can do to eliminate barriers which we work at very hard. There are other things which the Government can do which in relation to renewables is actually operating very successfully at the moment, because the renewables obligation means instead of the £30/MWh nominal amount people are at the moment receiving something around £45/MWh.
533. You can answer, as you answered Mr Francois earlier, that you should not tilt the balance towards one form of generation or another, but it is quite clear from the Government's statement and the Government's target and the PIU Report that is precisely what the Government intends to do. If you set yourself targets and the targets mean one form of generation must go up enormously, and therefore other forms of generation must go down, the Government clearly wants to tilt the balance.
(Mr McCarthy) Absolutely, and it is open to the Government to make those decisions and it is open to the Government to use the tax system and a whole range of other measures to achieve those. I said a moment ago how much I welcomed the fact that the Government in the Budget had actually given some direct assistance to CHP, because one of the problems about CHP up to then was the Government had a target for CHP and no actual mechanism for delivering it. I think it is entirely appropriate for the Government to make a decision that CHP or renewables should be favoured. The contribution that Ofgem can make is to ensure there are not artificial barriers to any particular objective and also to help identify how any particular environmental objective can be met at lowest cost, because it must be in everybody's interest that is done. That is what we try and do.
534. Can you confirm that major generators connecting to the transmission network only have to pay shallow connection charges?
(Mr McCarthy) I am terribly sorry, would you mind repeating the question to make sure we have it right.
535. Do major generators connecting to the transmission network only pay shallow connection charges?
(Mr Scott) I think that is correct.
(Mr McCarthy) Why?
536. That was my next question, you are anticipating me.
(Mr McCarthy) Can you explain that?
(Mr Scott) It may be because of what sometimes is called the lumpiness of transmission investment. There is a significant difference between the character of distribution and transmission. It is like motorways and minor roads. If you have to take a step to reinforce the deeper network on transmission it is equivalent to perhaps building an extra lane on a motorway, you are on a significant scale of investment which is shared across all the users at the moment.
537. I am afraid I am going to ask you for another paper on that.
(Mr Scott) That is fine.
538. On the face of it that looks like bias against the embedded generators, but we will read what you say. We understand that you are suggesting the possibility of some form of zonal charging in Scotland so that generators would pay more the further away they are from population centres. Is that right, and if so why?
(Mr McCarthy) We are proposing, and it is something which has been a proposal for a long time, that there should be some degree of locational pricing, initially in England and Wales. A proposal which we believe is an example of where both economic efficiency and environmental concerns go in the same direction. Indeed, I think it was a previous incarnation of this Committee which supported that proposal some years ago. At the moment on average two per cent of all the electrons that are generated are lost in transmission and it is neither economically efficient nor environmentally good that people should situate
539. The further electrons have to travel the more is lost, I am aware of that. I asked this question of proximity to the Minister last week. I understand the logic but what I do not understand is why it has not been applied in the past. Why did we not charge more for northern power generators transporting energy down south. Why?
(Mr McCarthy) Because Offer, which was the predecessor of Ofgem in this respect, tried to implement a proposal a number of years ago, was judicially reviewed and was prevented from doing so. It also was part of the rather sclerotic corporate governance of the Pool at the time that made it very difficult to make these changes. I think it is a source of regret that these changes were not made a number of years ago.