Examination of Witnesses (Questions 540-559)
MR CALLUM MCCARTHY, MR JOHN NEILSON, MR NICK SIMPSON AND MR JOHN SCOTT
TUESDAY 30 APRIL 2002
540. So the coal powered filthy generators of the North did not have to pay these charges but the wind power of Scotland will have to pay?
(Mr McCarthy) This proposal will apply to all generators and will apply to generators which are wind powered generators which are situated close to demand as it will apply to coal fired generators a long way away or vice versa.
541. Will you charge retrospective charges?
(Mr McCarthy) No. We would propose that it would apply to all generation, not just new generation.
542. Thank you. If most of the renewable energy, as the ambitions of Scotland are, is going to come from large offshore wind farms, are we going to need significant investment in both local and national networks? Does the Government need to develop a strategic approach to kick start these developments?
(Mr McCarthy) The answer is that I think there will be very significant changes in both transmission and distribution, and I referred a moment ago to the very significant effect in terms of the scale of embedded generation within distribution systems. I think that a lot of the work that Ofgem has done has been to develop economic signals. One of the purposes of the transmission access proposals that we are developing is to ensure that there is a means for people who wish to build new generation to have firm rights of access to the transmission system so that they will actually be able to get their electrons to where those electrons are needed. I think there are systems which are being developed which will ensure that you get the transmission investment to go alongside the generating investment.
Mr Jones: Thank you.
543. Just following up on that. Does this not in effect mean that you are proposing a double-whammy for renewable energy, particularly wind energy? You will know that the main sources of wind energy are in the less populated areas of Wales and Scotland, that is where the developments are and that is where the interest is. The current playing field that you seem to be suggesting seems to be not only will these generators have to pay a deep connection, albeit over a number of years which the nuclear, coal fired, whatever, larger generators do not have to pay, but also that they will pay a proximity charge because they are further away from the centres of population. The whole suggestion of your evidence to me during this afternoon seems to be that you are trying to maintain what you call a level playing field, although I think we have had some evidence that it is not that level, and then you expect the Government to come up with the tax incentives or the tax breaks, or whatever, to put on the extra sub on the renewable side. Surely it would be better, I would suggest to you, that you work hand-in-hand with the Government on this and that, in fact, we use the market instruments that are there in order to encourage the growth that everyone says we need of renewables, energy efficiency, CHP and so forth. In fact, you are an obstacle, are you not, as a regulator to that growth?
(Mr McCarthy) I think you will not be surprised if I do not agree entirely.
544. I was not expecting you to agree. If you could just respond. In responding and in disagreeing with me could you explain why you think what you are proposing for, say, offshore wind energy paying a deep connection charge and a proximity charge helps renewables?
(Mr McCarthy) If you take renewables, there are instances where there is a choice as to where you put your renewables. It is possible to put wind in the Thames Estuary as well as in places in Scotland and Wales and indeed, I think, the majority of the places
545. Some people in Wales would want it in the Thames Estuary I can tell you.
(Mr McCarthy) If that happens that has the benefit that we lose fewer electrons and therefore manage to meet the demand for electricity at both a lower cost to the community, which I think is good in terms of one of the elements of sustainable development, and lose fewer electrons by burning them up as we transport them, which is also environmentally good.
Mr Thomas: That is a good point. You said two per cent were lost overall in the transmission system but if the energy that you can get from the wind in Cardigan Bay is 50 per cent more or whatever it might be, even ten per cent more, than the energy you can get from the wind in the Thames Estuary because you have more consistent wind speed, because you have better access to the energy there, then notwithstanding the two per cent loss in transmission surely it is better, more efficient and a better contribution overall to our CO2 targets to put it in Cardigan Bay or off the west coast of Scotland or wherever. I am not against developing wind farms on the Mendips and in the Cotswolds, I think everyone should share in the siting of wind farms and offshore.
Mrs Clark: And East Anglia.
546. Nevertheless, it seems to me your argument about this two per cent loss is important but you are putting too much emphasis on it and that is going to override some important renewable developments.
(Mr McCarthy) I do not think it is going to override important renewable developments. If there are significant advantages in a wind farm in Cardigan Bay or anywhere else in the country over the ones in the Thames Estuary I expect those to prevail. There is absolutely no difficulty in that whatsoever. It does seem that one of the good things to do is to give the relatively small economic signals that when there is a choice between two things which are equal, one of which will result in less waste which is involved in transporting electrons a long distance, there is some incentive to actually use the generating choice which involves less waste. That seems environmentally good as well as economically good.
547. For clarification, it is two per cent on average so if you shift to a system where there is a lot of wind generation from places like Scotland and West Wales, it will not be two per cent any longer, it will go up.
(Mr Neilson) It is about reflecting the costs also of building that extra transmission capability to move the electricity long distances. In calculating whether the development proceeds in Cardigan Bay or the Thames Estuary, what the transmission losses proposal involves is taking account of the extra costs that are incurred in having a greater degree of long distance transmission. That seems a reasonable thing to do in terms of deciding whether there is a commercial advantage in building one way or the other which will be counteracted by the stronger winds or whatever in Cardigan Bay.
548. If we are going to see significant offshore wind development then the suggestion has been that we need an interconnector and the DTI has produced a paper on this and so forth because there are costs involved, there are the deep connection costs, the infrastructure is not there. Do you have a view in Ofgem as to an interconnector and do you have a view as to whether that should be an additional lane put on a motorway at public expense or something that is put on at the wind developer's expense, for example?
(Mr McCarthy) Is the interconnector the offshore Scottish
549. The offshore, yes.
(Mr McCarthy) I do not have a view on that particular proposal. What we have been trying to do is to establish some very clear signals so that there will be reinforcement of the transmission system in the places where there is real demand for it.
550. Who pays for that?
(Mr McCarthy) That would be paid for by NGC who would be responding to the signals and demands that come from individual generators. We believe that if we get those signals we will get the investment in the places which are the real bottlenecks at the moment and as the system changes, therefore, we will be able to get the degree of transport investment needed where it is needed, whereas if one decides a priori that we are going to invest between A and B there are dangers that investment might prove wrong, particularly if, for example, planning permission does not come through to put the generation at A or B that is predicted.
551. Do you think the Government will be able to meet its objectives on renewable energy if you continue to take your present view with your present regulatory remit?
(Mr McCarthy) I believe, Chairman, that the biggest obstacle to the Government's meeting its target is actually the planning permissions that will be required to get the scale of investment. I think that is going to be the biggest obstacle to ten per cent in 2010.
552. Far bigger than the effects of the NETA regime or the problems with embedded generation?
(Mr McCarthy) Far bigger. To put it in scale, the achievement of the renewables and the CHP target by 2010 means something like three installations being commissioned every day between now and 2010 and the planning permission involved in that I think is going to be a major problem.
553. But it is interesting to note that the Germans have managed to achieve some rate similar to that and the Scots are achieving a rate similar to that, so it can be done.
(Mr McCarthy) Yes.
554. If the planning problems, which we would all agree are severe, did not exist, would the Government still achieve its renewable energy objectives with the regime in its present form with your present remit operating the way you are now without any further change?
(Mr McCarthy) Yes, I think so, because if you look at it at the present time renewables generators are receiving very significant sums under the Renewables Obligation even under the present low level of generating prices available for all generators, not special to renewables, and the combination of the two makes it profitable to invest in renewables.
555. Why are they so unhappy?
(Mr McCarthy) In my experience it is relatively rare for people to say that we are doing well.
Chairman: You mean they are always like the farmers, they are never happy.
Mrs Clark: Whingeing.
556. With respect, is that not a rather over-cynical view?
(Mr McCarthy) I do not think I wish to be drawn any further, Chairman.
557. Do you think you are being too cautious? Caution was a word used, and reasonably so, I do understand your concern not to have a California here, I can well understand that, and maybe there are problems in Denmark which we would like to know more about. Nonetheless, one has a feeling looking at what Germany has done, what France has done, what Denmark has done and other countries have done that as a country, and I am asking you to step aside from your specific role as regulator to perhaps comment more generally, we are rather overcautious and perhaps indecisive, rather keen to have more consultation than to take action and this may defeat the Government in its objectives.
(Mr McCarthy) I think it is slightly ironic to ask me the question because if that is the view it is in your hands and those of other elected representatives to change it in a way which it is not in our hands.
Chairman: That is technically correct but it is not an answer.
Mrs Clark: A very cautious answer.
Mr Thomas: Should we?
558. I am asking for your views.
(Mr McCarthy) All I would say, Chairman, is that under the present system in Britain we have got greater diversity of energy supply than we have ever had in our history. If I look, for example, at the French position with very heavy reliance as a result of a series of central state decisions on a nuclear solution, I personally favour the position that we have rather than the position that the French have.
559. Do you think energy is too cheap in this country if we are to achieve the environmental and climate change objectives which the Government has clearly stated?
(Mr McCarthy) If you look at it in terms of the basic economic analysis the problem of energy is a problem of identifying and pricing externalities. Going back to one of the very first answers I gave, I do not believe it is the job of a group of appointed individuals to make those really important decisions.