UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1065-iii

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

The UK's Energy Supply: Security or Independence

Wednesday 15 June 2011

Dr Gordon Edge, Gaynor Hartnell and Graham Meeks

Jonson Cox, David Brewer and Dr Jeff Chapman

Evidence heard in Public Questions 171 - 249

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 15 June 2011

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Dr Phillip Lee

Albert Owen

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Dr Gordon Edge, Director of Policy, Renewables UK, Gaynor Hartnell, CEO, Renewable Energy Association (REA), and Graham Meeks, Director, Combined Heat and Power Association, gave evidence.

Q171 Chair : Good morning and welcome. Thank you for coming in. You have probably seen what we have done so far in this inquiry. Could I start with a general question about how big a contribution you think distributed energy can make to the total generation need in this country?

Graham Meeks: Thanks very much, Chairman. Thanks very much for the opportunity to give evidence to the Committee. My name is Graham Meeks; I am representing the Combined Heat and Power Association, so I can speak for Combined Heat and Power and perhaps my colleagues can give a better perspective on some of the renewable technologies. We have been very much guided by the analysis that Government itself has done on this over time. The last official communication, which was a statutory obligation to the European Commission in 2007, estimated something around 16 GW-16,000 MW-of combined heat and power capacity was economically viable in the UK. That pretty much equated to analysis that Pöyry, the consultants, had done for Greenpeace looking at CHP or major industrial installations.

A couple of conditions around that figure; if we were to have something like far more widespread use of district heating in the UK providing heat into urban concentrations, then that would give the potential for a much greater CHP capacity that wasn’t really modelled because it was highly conditional upon that other factor. I think the other thing that that analysis did not take into account was the potential for micro CHP, which, at the time the analysis had been done, had not shown up and proven itself as a potential customer proposition. There is now something like 750 units in the field and the Carbon Trust have estimated that micro CHP may be suitable for something like 8 million homes in the UK. I would say that the potential from combined heat and power in its various forms is fairly significant. We are talking there of something between 10% and 20% of UK electricity supply on that sort of data.

Gaynor Hartnell: To answer the question in terms of electricity-and correct me or say if you want to elaborate on other forms of energy-a study was just published for the renewables obligation banding review, which is quite helpful. They had three scenarios there and the scenario with the constraints lowered shows that we could have well more than 30% of our electricity from renewables by 2020 with those constraints removed. So I think the answer is that we are not resource restrained. It is really a question of how much we get the policies right to encourage investment, how much that investment may be there and so the outlook is good provided there is the right framework for the industry to respond.

To put that in figures: this study was done by Arup, and we may feel that some of it is underestimated anyway, but it estimates that around about 200 TWh of renewable electricity could be available with constraints relaxed by 2020, and to meet the 2020 renewable electricity element of the target, which is 30%, would require about 120 TWh, so it could well exceed that.

Dr Gordon Edge: To add to that; essentially the amount of distributed renewables you can get is not limited by the resource. It is merely a matter of timing and, for instance, we estimate that the small wind scale, there may be as many as 4 million properties in the UK that could host a 10 KW scale wind turbine. We may get 600,000 of those at most by 2020 but there will be a further growth beyond that, so "when?" is an important question when you ask the question about the amount of distributed resource you can get. It also depends on where you draw your line. If your line is generation that is connected to the distribution system in England and Wales, 132 KV or below, that can be some very significant generation. Some offshore wind farms are connected at the distribution level for instance, so it kind of depends what you mean. Of the numbers that Gaynor was talking, it is only large offshore wind farms and large wind farms essentially in Scotland onshore that will be connecting at the transmission level and therefore would not be counted in those numbers.

Q172 Chair : If we have lots and lots of distributed generation, are there any difficulties about the distribution networks at that point? Obviously we have talked about large ones but we have lots and lots of small ones. Does that pose any problems?

Dr Gordon Edge: We need to invest in smart grid, the control architecture at the distribution level. I think there is an argument for having distribution system operators in the same way as we have the transmission system operator, the national grid. It takes that role for the high voltage networks. The individual DNOs, I imagine, in the future, when we have much more distributor generation connected, when we have more demand response on those systems that they will need to take that role as well as having major investment, both in the hardware and the software with which to run it.

Gaynor Hartnell : There is an issue in terms of infrastructure on the distribution network being needed. I understand the estimation is about 8 billion, estimated by Ofgem till 2020, to meet the environmental expectations and targets. That is a small component of the overall 200 billion that is often mentioned.

Graham Meeks: I think what I would say is it depends, and it very much depends upon the nature of the generation capacity that is connected to the network and, to some extent, where it is connected as well. You have a mix of types of plant connected to a distribution network that have different operating characteristics. You may have plant that is quite readily despatched to be able to manage constraints on the network. You may have other plant that has less flexibility but certainly disconnects if it is required to do so. What I would say is that if we look at other international examples: if you look at Denmark, for instance, which at the moment has 21% of its electricity generated from wind, of which a major proportion is onshore and I guess analogous to distribution connected wind here in the UK. Denmark also has 50% of its electricity supplied by co-generation CHP plant. A large amount of that is connected to district heating networks where they have that infrastructure. That combined heat and power plant is now despatched to help manage any impacts from that higher penetration of wind, and the system operator deliberately operates despatch strategies and incentives; puts the incentives in place to permit that type of flexible operation. So it is looking at the resources that it has available to it and the synergies that exist between those different parts of the system, and is operating to make sure they are complementary rather than conflicting with the needs of the system and, indeed, the attributes of the different technologies themselves.

Q173 Chair : Do you think, if we have more distributed energy, that is going to improve our security position?

Dr Gordon Edge: I think when we talk about security in this context we need to be very careful that we take apart two separate concepts. Security is the macro security level: do we have enough of these resources to meet our anticipated demands? Then there is reliability, which is more technical, which is about: when I flick the switch will the light come on? Obviously, there is some relationship. If you are insecure, there may be a situation where you flick the switch and it doesn’t come on because you have not planned ahead far enough, but there may be situations where you have an unreliable supply when it is perfectly secure in that kind of political macro sense. So it may be that having more distributed energy allows you to have more security in the first sense of the term, but if not carefully managed it may impact on the reliability, where we think the reliability is perfectly manageable but you need a different approach; it is a different thing that needs attention on a different scale, but you can have both.

Gaynor Hartnell : I would add or answer it in maybe a very slightly different way and say that if the question is partly about intermittent renewables or variable renewables, by definition, adding more intermittent renewables to the system can only make it more secure. The thing that makes it less secure is if you then take off other despatchable plant thinking that you are safe because you have more intermittent plant added. So it is a question of what you choose to take away rather than what you add to the system that impacts on security.

Q174 Laura Sandys : The issue about security is also about price too, and in your responses none of you has mentioned affordability. I think that is obviously crucial to the security from the UK consumers’ perspective.

Graham Meeks: Absolutely and I think part of the issue-and I am sure we don’t need to tell the Committee this-in addressing the question of security of supply, there are many different pictures of what security of supply is in people’s heads; it is the people who you ask the question of. I think it is one of the things we have been focusing on, in the discussion about reliability of the electricity system, in some of the comments that my colleagues have made. Of course, security of supply is a much bigger question than that and part of that is around the amount of resource that we import, the amount of imported energy that we have, and then with that the quantum of the exposure that we have to international energy prices, which then leads into this question of price.

One thing I would say is that if we are employing a far higher degree of energy efficiency-resource efficiency, if one likes-then of course we are mitigating the overall effects of any energy price movements. Certainly, talking parochially from a combined heat and power point of view, that is why customers invest in combined heat and power plant because it is a more energy efficient process; it reduces their overall consumption of electricity and, therefore, their exposure to energy prices. It doesn’t remove them, it doesn’t take them away entirely but it mitigates that because they are reducing the amount of energy they consume. If we then extend that to talk more broadly about renewable energy source as well, then of course the more energy efficiency we have, the more renewables we have employed, whether at a transmission connected or at a distributed level, that is less exposure that we have to imported or to fossil fuels; and what we are importing is a price. So we are mitigating our exposure to that. So I think the energy efficiency benefits of distributed generation, as well as the diversity and diversification away from fossil fuels, help to provide the sort of security benefits that you are inquiring about.

Dr Gordon Edge: I think it is also worth noting that prices will not go down; they will only go up, whatever route we take. If we take the renewables route, which is the distributed generation route, then, yes, what we will buy is a stable price. It will increase our security through being maybe slightly higher than you might otherwise pay, but it is one that you know is going to be at that level. You are not exposed to volatility of global fuel prices, which will be increasingly so going forward as well as increasing over time.

I was quite frustrated recently; Scottish Power raised its prices and suddenly everybody was talking about the price of renewables and I thought, "Hang on a minute; that is to do with the price of gas. Why isn’t everybody jumping up and down about the price of gas and how volatile it is?" So I do express some frustrations around that.

Gaynor Hartnell : I would like to add that we must not overlook that some of the sources of renewables can be despatchable and they can be low cost. Some of the cheapest forms of renewables do tend to get overlooked, like energy from waste, and we have the domestic waste arisings and some time ago, we looked at the contribution that residual waste could make to energy, and that is if you do all the recycling you can and you deal with what is left. We worked out that it could meet 17% of the UK’s electricity requirements by 2020. That was total; that wasn’t just the renewable element, but the renewable part was about 50% of that. There are a whole family of renewables and some of them are at the cheaper and less glamorous end of the spectrum.

Q175 Chair : I think we are all familiar with the problem of retrofitting existing buildings with more efficient systems or lower carbon systems. It is easy enough when you are doing a new development to specify. How much of the district or the micro CHP renewable energy is going to help, in terms of making our existing housing stock more low carbon and energy efficient?

Graham Meeks: Maybe if I take that one first, Chairman. When we talk about a lot of the existing energy efficiency initiatives, those are pretty much addressing the thermal properties of buildings, of houses and office buildings and buildings such as this, so the focus has very much been on reducing the thermal demand that those buildings present. A lot of the challenges I think that we are looking forward to, in terms of the future low carbon electricity system, are problems around electricity demand and supply and the interaction of the two. I think it is certainly the case that energy efficiency efforts focusing on the electrical consumption of buildings have not had the degree of focus from successive Governments, successive policies, as they probably should have done. As I say, most of the effort is focused upon the fabric and the thermal properties of the building. So I think, looking forward, there is probably huge potential to start to address energy efficiency in terms of the electrical energy performance of buildings, and the appliances and systems that we use within those buildings. In that respect, combined heat and power is part of the story but I would not pretend that it is the whole story; building controls, more efficient heating, ventilation systems, lighting systems, a whole suite of building energy management systems are available and we probably have not had the right incentives to operate or to invest in them up until now.

Q176 Chair : Yes; that is a rather separate agenda we can address at a different time. Is there any justification of the claim that a distributed energy system is more resilient than systems that are based on large centralised power stations?

Gaynor Hartnell : I would say you definitely need both. Often proponents of a more distributed generation system would seek to diminish the importance of the large scale interconnected centralised network. You need both, and at the moment the cards are stacked in favour of the large centralised players, so it is important to build up and make a level playing field for distributed generation to come through.

Q177 Sir Robert Smith : You mentioned earlier about district heating being a way of unlocking more CHP. This Committee, in a previous Parliament, went to Copenhagen and saw large scale district heating that had been rolled out across a whole city. Is there anything in this country that could unlock district heating?

Graham Meeks: Thanks very much. Just as a matter of interest, later today we are taking a DECC official and others to Copenhagen and Malmö , so that they have the opportunity that you have enjoyed. On that point, I think it is very encouraging that this heat directorate is going to be formed within DECC, which I think is a big step forward. Are there things that can be done? Certainly, it needs to start with a much more bottom-up analysis and understanding of what energy-and particularly thermal energy-requirements exist within built environments in particular: where the demand is, what potential sources of supply exist, in order that one can then build up a picture and a map of what the energy profile is of a particular region or urban centre. That then helps to identify the opportunities. Most of the heating requirements that exist within a city such as this are relatively low grade heat. It is a simple commodity that one can easily transport through pipeline networks, so the understanding is one of the things that has to come first. The co-ordination then between different parties to be able to make sure that, in aggregate, they begin to present the economic case, because it is a major capital investment to put in place the district heating infrastructure that is necessary to make it a viable proposition.

Thirdly, there needs to be the investment models that allow it to make sense. I think this where we do need to plan for the future. We are seeing district heating going into UK cities; there is a tender for Leicester that closed in the last few months, so they are moving down a pathway with Southampton, parts of London and Nottingham. Sheffield has already moved down that pathway, and we know that there are major plans now in place for some form of district heating in most of our major cities. The problem is the model that is then going to be used to adopt them. The difficulty that most development has is you are talking about an infrastructure investment; district heating is pipes in the ground. It is a long-term, low return, unexciting infrastructure investment. At the moment, it is being asked to effectively compete in a market where it needs to provide the sort of returns that investors would expect from a different class of asset, from power stations and the like, which are a very different asset. What we need to do is to make sure that district heating is recognised for what it is, which is infrastructure investment that has a lifetime of 50 to 60 years, which presents a pathway to decarbonisation and energy efficiency and put in place the investment framework that allows people to invest at lower rates of return. Once that happens, then it becomes a much more economically viable proposition that then exists to provide a pathway for renewables to be used in urban concentrations but also to provide the sort of system security benefits that we are seeing in countries like Denmark.

Q178 Sir Robert Smith : The other issue that was raised earlier, everyone nods very sagely and says, ‘Yes, before we worry about more supply, let’s reduce demand; let’s have more energy efficiency". Everyone says it is a no-brainer. I have been saying it for years and I have been going out to speak every year trying to put some insulation in houses, but the reality is, we haven’t achieved anything like the potential that could be physically done. What do you think the barriers are?

Graham Meeks: I think that much of the problem is the economic analysis that we apply to it. Energy efficiency suffers from the problem that it pays for itself; through the energy savings, it offers a positive economic return. Once something is put into that category, then it becomes very difficult for Government economists to then justify public expenditure to support energy efficiency investment, if indeed it has been demonstrated to show an economic return to the beneficiary. The problem is it is the "£5 note on the pavement" story. Most people have probably heard the story, you are walking down the street and there is a £5 note on the floor and you point to it and say, "There is a £5 note on the floor" but the person next to you is an economist and says, "No, there isn’t, because if there was a £5 note on the floor someone else would have picked it up already". I think energy efficiency suffers from the fact that, yes, it does offer the £5 note on the pavement but over here there is a £20 note, and the person walking down the street only has the opportunity and the time to pick one of those notes and they will pick up the £20 note. So, if I am an industrialist and I have a choice between making an investment that offers a 20% rate of return over here, or an energy efficiency investment that offers a 5% rate of return and I have scarce capital, I am going to make the investment that offers me a 20% rate of return. So if energy efficiency offers the benefits but isn’t attractive enough as an investment proposition, because of the hassle factor and all the other elements that go into that-and I think one of the problems that we have had, is the economic models that we have used to try and make those assessments have ignored the fact that people have other options to use for their capital and the hassle of making energy efficiency investment is too high. I think that is the biggest failing we have.

Dr Gordon Edge: I think there is also an issue around who is making which investment. Investors in large scale energy infrastructure; we are talking about 20-year project lifetimes and rates of return of a certain amount. People investing in energy efficiency are homeowners or businesspeople, whose hurdle rates and other approach to these investments is completely different. If they were the same companies coming at the same opportunities, then maybe the energy efficiency ones would be taken up a lot quicker, but I can’t speak in a terribly expertise way, I focus on the supply side.

Q179 Dr Lee : In terms of driving energy efficiency, do you think energy is too cheap?

Gaynor Hartnell : Certainly higher energy prices do focus the mind on energy efficiency measures.

Q180 Dr Lee : Is there any evidence, any work being done on how high the price has to go per unit to be able to drive it?

Gaynor Hartnell : Again, it is not an area of expertise for us. We just hope that it gets sorted because it is very important.

Dr Lee : Any other comments?

Dr Gordon Edge: Certainly there must be research out there on the elasticity of energy demand to the price signal. The trouble is with most people, it is very inelastic. You could raise the price quite highly and people are just going to go, "Well, I just have to pay it" because the hassle factor of dealing with their energy usage is pretty high, even if the more you increase the price the better return on an investment in an-

Q181 Dr Lee : That would then drive the infrastructure changes that you want. You should get more money coming in.

Dr Gordon Edge: Yes, but-

Q182 Dr Lee: I am playing devil’s advocate here because we talk about fuel poverty all the time. I personally don’t like to talk about fuel poverty. I talk about the poverty of insulation. It is the case of that I would rather the state gave money to people who are poor to insulate their homes rather than giving them a winter fuel allowance to pay for the fuel.

Gaynor Hartnell : Yes, I think the thing is it is about consumer uptake. It is not my area of expertise but you have to help people to do this; you have to have a street by street approach, have a concerted effort and make it easy for people. If policy can unlock that, that is good and the Green Deal sounds like it could, possibly. I don’t know a great deal of detail about it but I think that is the aspiration and it is a good aspiration.

Dr Gordon Edge: Your point about prices is quite interesting because we are in a competition for capital to invest in our energy systems, particularly in renewables, and contrasting now with Germany, or even Italy now that the people have spoken there about nuclear, increasingly there will be a competition for the resource to build and operate renewable sources of energy. If we make the UK more attractive, make the income greater, the return greater, then maybe we will win that competition but you would not want to be overly competitive because then the price goes up and up and that could be a real problem.

Q183 Sir Robert Smith : On the economics of individual decision-making, because of all the other factors that are not following the economists pure model, in a sense do you think you have to accept that more has to be done through the regulatory approach of setting standards that have to be met and, therefore, you can get the whole street done?

Graham Meeks: A recent experience that we have seen in the new build housing market has demonstrated that a regulatory approach is certainly starting to work there, in terms of the move towards zero carbon-in fact, towards zero carbon is probably a better expression-but in terms of moving that forward, and certainly within that part of the CHP market, it has certainly been very strongly stimulated by that market. Probably something like around 50% of sales in that particular market sector are now driven by the zero carbon buildings’ conditions, and the fact that they are now being adopted ahead of time by certain planning authorities. So there is certainly evidence that a regulatory approach works.

I would also say that we should not necessarily turn our backs on incentivisation, coming back to your point. There is a great danger, sort of a carbon tax problem, of raising price so high to achieve a certain benefit here that you are imposing costs that have no impact, and there is no response over here, so it is a difficult move. So we do target incentives. What we have done, and we have recognised that in low carbon power generation by targeting incentives against a certain class of actors who we want a response from. We have offered the renewables obligation and feed-in tariffs, and now we are looking at some form of extended feed-in tariff arrangement to target investment from that class of actors.

What I find quite strange is that we haven’t seen fit to apply the same approach to investment in energy efficiency measures, when fundamentally the problems are the same and perhaps every more acute. Often we are looking at a capital investment that needs to be made in the system, whether it is a CHP plant or a building management system or even insulation. We haven’t seen fit to make those same targeted incentives, which are sufficient to allow those individuals to make a return on their investment. Quite often, in terms of carbon savings, we might find that we were seeing far greater efficiency in terms of capital spend, spending public money or consumers’ money, if we were to apply that approach to energy efficiency as well as generation technologies. So hopefully that has answered both your questions.

Sir Robert Smith : I should remind the Committee of my interest, in the Register of Members’ Interests for this inquiry, as honorary Vice President of Energy Action Scotland, a fuel poverty charity, and a shareholder in Shell.

Q184 John Robertson : Some of us have been jumping about ScottishPower, believe me. I was interested in some of the things Gaynor Hartnell said. I wonder if she could clarify what she means. You talked about the viability of power and then you said that some were unreliable sources. What do you mean by "unreliable sources"?

Gaynor Hartnell : Did I say "unreliable"?

John Robertson: Yes.

Gaynor Hartnell : I said "intermittent and variable".

John Robertson : Okay but you also talked about the reliability of-

Gaynor Hartnell : The reliability of the system. I was talking about the reliability of the system and the point that I was making was: if you add a variable generating station, like a wind farm-or intermittent; the word "variable" tends to be used now more-if you add that to the system you cannot, under any circumstances, make the system less reliable. You are adding the potential for electricity generation. It is really a question of taking things away. If you have the same other baseload despatchable power generation infrastructure on the grid, by adding more variable renewables on to the system, you are not going to make it less reliable. It is only if you then take away other generating stations, on the assumption that the variable renewables will be there to provide when required that you may possibly have a problem. All those things are fed into an evaluation. That issue is not often understood. One assumes that if you have more wind on the system, the system will, therefore, be less reliable and that is just not a logical conclusion to make.

Q185 John Robertson : You will never get less reliable but what you might not get is you will not get more reliable. It does not matter how many wind turbines you have in the system, if they don’t go round you don’t have any power.

Dr Gordon Edge: I think there are a couple of things going on here.

John Robertson : You will never get less. You can’t talk about less. If it is zero, you don’t go below zero. Let me give you an example and you can comment on it. In Scotland, during the coldest winter that we have had, we had 1% contribution from renewables in Scotland, which I think was supposed to be running something like 17% at the moment. I would call that unreliable, 1% did not hit the mark. It brings me on to another bit that I wanted to talk about. I am disappointed that you don’t understand cost. When you talk to people in the nuclear industry, they have to tell us exactly when a break even cost comes in, and they always say, "Something over $100 a barrel of oil, then we are in the profit area". How much would it be for renewables to be profitable? I mean taking away any kind of money that is supplied by the Government, how much would you have to get for a barrel of oil to break even and make you profitable?

Dr Gordon Edge: We tend not to talk about barrels of oil,

John Robertson : I know, but in relevant terms to power.

Dr Gordon Edge: Only if the link between gas prices and oil prices continues and that is increasingly coming apart, so it is a case of at what point of gas prices would you break even? We can give you-

John Robertson : Well, gas is linked to oil.

Dr Gordon Edge: I am not saying it is oil but it is what you would compete against in that gas is what is generated-

John Robertson : I know that. Forgive me, but you have to deal with what you have, not what you don’t have. At the moment we know what we gain good service on, I am asking you to do the same.

Dr Gordon Edge: I haven’t done the analysis in terms of the price of oil because-

Q186 John Robertson : Well, could you do that and maybe write to us because I am really interested. It is not that I am against renewables. I am just against paying more money than I have to, because I do care about fuel poverty and I do care about the people that can’t afford to do the improvements to their homes.

Dr Gordon Edge: I understand that, but I am not sure if it is a meaningful analysis when the price of electricity, which is what wind generators produce, is not directly related to the price of oil. I am not quite sure what the nuclear industry does to make that kind of calculation because it is not one that I would see as particularly useful, certainly against the price of gas, which has some link to the price of oil but increasingly less so. We have numbers in terms of what our generation costs are and are very happy to share those with you if you so wish, but if it is a case of: what is the relative cost of generating electricity? I would argue that the nuclear industry are being very disingenuous. I would say a lot of their numbers are not borne out by the experience of people building nuclear power stations. Whereas, we build wind farms: we can see the costs, we know exactly what they are.

Gaynor Hartnell : May I answer the question, in terms of no longer needing subsidy. I will just answer it for one renewable technology, as an example, and that is solar photovoltaic; PV. There have been a lot of studies recently looking at all European countries, looking at the trend of electricity prices and the dramatic reduction in terms of PV prices. At various stages before 2020, PV should reach what is known as grid parity, which means that it costs the same to generate a unit of electricity from a solar panel as it costs to buy a unit of electricity from an electricity supply company. In other words, it should no longer need subsidy at that point, and it is estimated that may occur in the UK somewhere about 2016, 2017.

Q187 John Robertson : Can I ask, is that a solar field power? What is a solar power-

Gaynor Hartnell : No. It is on the roof of a house or a building because that is the right comparison. You are purchasing electricity off the supply company using it right at the source or generating it at that source.

Q188 John Robertson : Does that include the cost of the panel and fitting on the roof?

Gaynor Hartnell : Yes, absolutely everything, and it is surprising, which is why I wanted-

John Robertson : What was the date, sorry?

Gaynor Hartnell : The date?

John Robertson: My wife is really interested in this, she wants these things.

Gaynor Hartnell: The date occurs in different countries at different times, but for the UK it may be around 2016 or 2017.

Q189 John Robertson : Can I ask one other question, Chair, about basically the fitting out of houses and trying to make them more effective. Have you considered new technologies and what the trend will be as a result of, say, electric cars? I know we always talk about efficiency but technology would suggest that we are going to use more electricity, not less.

Graham Meeks: I think that is an interesting one. There is a certain line of thought that underpins quite a bit of the thinking that certainly DECC seem to be doing, which suggests that the pathway to decarbonisation is going to be one that sees much more use of electricity for heating and for mobility. My own feeling is that there needs to be a lot more comprehensive understanding of what the system implications of that are likely to be. Certainly, if we do not have properly insulated buildings then the widespread use of heat pumps is going to present enormous strains on the electricity system. A typical domestic house has an average load of around about 1 KW. Most of our electricity distribution networks have been designed through the wires in the ground, the transformers, the substations, and so forth, to deal with an average load of 1 KW. When you are then talking about putting in place a heat pump, which is asking the system to give it 3.5 KW, and you are then asking for an electric vehicle, which might be asking for a similar amount, you are going to put enormous strains on the electricity system.

Certainly our understanding is that, within the £200 billion figure that is widely used by Ofgem and others to characterise the cost of investment in energy infrastructure, the discrete cost relating to those new demands have not been fully incorporated into that analysis. You are then talking about tens of billions of further investment that is going to be required if we are going to accommodate those technologies on the system, and then you are talking about the degree of insulation that is going to be required to make those work effectively in the home. So I think you are right to ask those questions. I don’t have all the answers I am afraid.

Q190 Dr Lee : That figure about the 2020 solar power, does that include the significant subsidy that has taken place to that point? You say that the power in 2020-

Gaynor Hartnell : No, it does not. That money has been spent and it is then looking forward. That money has been effectively an investment to bring the cost of generation by PV down.

Q191 Dr Lee : Yes and that has been a significant sum of money, hasn’t it?

Gaynor Hartnell : It has been, compared to the amount of electricity generated. Take Germany, as an example, it has been a significant amount. They are paying something now for PV and other countries will reap the rewards of that, but I am just talking about the generation cost that has been arrived at as a consequence of investment. Let us not forget, all forms of energy generation have had significant investment behind them and subsidy till now.

Q192 Laura Sandys : I would like to come back in some ways to the energy demand and our response to that. Mr Meeks, you talked about building regulations. You also explained that we could be looking at a sixfold increase in electricity usage, with pumps and electric cars. Do you believe that we are looking broadly enough at how we respond to energy consumption, that is: are we investing enough in technologies that are beyond just building regulations and the energy sector, i.e. white goods? Are we investing and focusing enough on our consumption right across the board? In many ways, we mainly talk about energy generation. We sometimes talk about energy efficiency, but we don’t really talk about what I would call "low carbon living", which is a very different mind change, needs possibly to be incentivised by new technologies that excite change in behaviour. I would like to understand from you whether you feel that we are meeting and getting the opportunities, that those new technologies-in many ways, a revolution in how we live-are being addressed?

Graham Meeks: I would say almost certainly not. I think the current drift towards trying to present a solution to the decarbonisation problem by the simple route of saying, "Let’s build more low carbon power stations" has an attraction. It certainly has a political attraction, because it takes it away from interfering with the everyday lives of people and I guess Governments don’t want to be doing that, particularly not the present administration. So it is a convenient approach to try and push the problem elsewhere.

Personally, I don’t think it is viable. I think it is a systemic problem that we have to address and we can’t put off the evil day when we are going to have to ask consumers, voters, householders and businesses to behave in a very different way. We need to begin to be preparing and, as you say, putting the investment signals right across the economy that enable that innovation to happen; not focusing the incentives and the investment signals into one corner of the electricity problem. I was going to say "electricity supply", but it is energy as a whole. It needs to be reaching into every corner because it is a comprehensive solution that is going to be required, not one that we can deal with hundreds of miles away on the coast of East Anglia or Somerset.

Gaynor Hartnell: I just know that whatever is put in place in terms of white goods, say, has to be easier on the interface with somebody. You know, you have to have a button that you can press on the washing machine that says, "I don’t care what time it is done, I want it done by the time I get back from work", and just making it easier for people to use. I look forward to those kinds of appliances happening. So they are appliances that allow people to be even fairly dumb in their use of things; they just say, "Okay, you do the clever thinking, machine. I will just say that I am happy for you to do that on my behalf". So you need a combination of those kinds of appliances and a smart grid to send the signals to those appliances to take those decisions.

Dr Gordon Edge: Investment is going on in those kinds of appliances, but you do need the infrastructure to integrate them with the grid.

Q193 Laura Sandys : Do you see that we might need to go further than that? As we have building regulations that say to us exactly what sort of level of insulation and energy efficiency, should we be putting a change in the incentives; not just the incentives to generate but the incentives on sorts of white goods, energy-using products?

Gaynor Hartnell: I think we certainly should and I think we should also check that the things we think we are doing, in terms of high building standards and all that, are being used by people in the house to deliver that; because the way people use buildings can undermine quite a lot of the clever decisions and energy efficiency measures that have been put in, and sometimes these things just are not gone back and checked. There is an assumption made that the carbon savings are going to be delivered.

Q194 Laura Sandys : In some ways you are saying that possibly Government has a role in education as well as incentives, but the incentives are all on generation; they are not on usage, and I think-

Graham Meeks: We can look elsewhere and certainly in the US, in a number of the electricity markets there, there are significant demand-side programmes that equate and effectively open the market, equitably, to both generation and demand-side action. If one takes the New England market, there is about 32 GW of capacity in that particular market; so two-fifths of the UK. Around about 10% of that capacity is provided by demand-side action; be that energy efficiency, just reducing the absolute level of demand, demand response, which I think accounts for about 6.5% of that 10%, and distributed generation. They have come forward and are able to access that market on an equitable basis. So that is around 10%. In the PJM market, a much bigger market-about 1.5 times the size of the UK market-about 6% or 7% of capacity is provided by demand-side actions because it has been able to enter the market and play by the same rules. So there is the opportunity to do that.

There are mechanisms to put those incentives in place that are already here, and one of the things that we have been arguing strongly is that the electricity market reforms, which the Government is putting in place, should begin that process of bringing demand-side into the market, which hopefully will provide the sort of incentives that we are looking for to make the actions that you are talking about. The encouraging factor is a lot of them are a lot cheaper. The analysis suggests that by bringing demand-side into the New England market, costs of providing the security and the reliability on the system are about 15% lower than if they had gone wholly for generation, assets and facilities to provide that security.

Q195 Laura Sandys : Have there been any comprehensive studies on behaviour change; what mechanisms change behaviour and how that would work within the United Kingdom market?

Dr Gordon Edge: I believe the Sustainable Development Commission was doing some of that before it was disbanded, but I would also perhaps point at some work that was done with people who had micro-generation, micro-renewables, in their homes. They became much more aware of their own energy use and ended up having a positive impact on their demand levels there. It is arguable that the early adopters of micro-generation might be the ones who would be more aware, but if that was replicated that could be a very important impact of having solar panels on your roof or something similar.

Q196 Dan Byles : I would like to come back to energy security and the impact of increased renewable production on the UK’s energy security. I would also like to probe a bit further something two of you have said, which I take issue with. Dr Edge, you made a distinction between energy security and energy reliability, and you seemed to imply that we could consider ourselves to have energy security even if power doesn’t come on when we turn the switches. I understand perhaps there is a subtle distinction between the cause of the fact that you do not have that power, because either you are not getting it in from abroad or because there is a problem with your internal distribution or something, but I would argue the ultimate result is the same. We need to be able to turn on the lights and know that power comes through, and I would argue that anything we do that impacts on that has an impact on our overall security.

Ms Hartnell, I am interested in this idea that you can add more and more variable power to the system without influencing the reliability of the system. I sort of understand what you mean, but I would suggest that it is not a case of taking other sources away. It is the fact that other sources are coming to the end of their lives and we have to make decisions about replacing them or not. We have a very limited investment pot and there is an opportunity cost. In every extra wind farm we invest in is potentially a nuclear power station we don’t build or a gas-fired power station we don’t build. So I don’t think it is quite as simple as saying there is no link at all between adding more variable power to the system and not potentially having a less reliable energy system. I would like us to tease a bit more the real impact on energy security to the UK of increasing our reliability on potentially variable renewable power.

Dr Gordon Edge: If I can take the first of those in my example, I point back perhaps to the situation a couple of years ago where Sizewell B fell over and large parts of the country had blackouts. There is no question that we had plenty of resources available. Our security of supply in that sense was completely fine, but we had unreliability in the power supply because we had a technical problem with one nuclear power plant and a kind of cascade effect.

Q197 Dan Byles : I do understand that distinction, but I am saying at the end of the day it is about outcomes not process. It is about: when we flick the switch is there power, and is moving towards renewable energy going to increase or decrease the likelihood that when we flick that switch there is power?

Dr Gordon Edge: What it will do is it will increase the whole security bit, because you are importing a lot less fuel because you are using a lot more domestic renewables. I think what you are focusing on is the reliability bit and you can have a perfectly reliable system with a large amount of renewables at a reasonable cost. The analysis that Pöyry did, for the Committee on Energy & Climate Change recently for their renewables report, indicated-even with a 65% penetration of variable renewables on the system-that would only add one pence per KWh to the cost. So you can do this and you can have the same amount of reliability with renewables at a reasonable cost.

Q198 Dan Byles : I would suggest that you are confusing energy security with energy independence, people use these terms in slightly different ways.

Graham Meeks: It is a cost issue, isn’t it: how much are we prepared to then pay for the insurance policy that comes alongside the investment in the variable renewables? Gordon picked up one figure. UKERC, the UK Energy Research Council: their study on intermittency was talking about something between £5 and £8 per MWh of intermittent renewables that are supplied. The cost is around £5 and £8 per MWh of that. So I think it comes down to pounds, shillings and pence at the end of the day, and how much insurance we need to buy at the same time. I guess the trade-off that Gordon is making is what we are getting is a benefit of reduced imports of fuel and energy independence.

Q199 Dan Byles : We have to increase our energy independence, but that is not necessarily the same as energy security if it is not reliable.

Dr Gordon Edge: You can get that reliability. It can be done. We are into a new paradigm.

Q200 Dan Byles : It is different risks; the risk of shifting from not being able to import gas or coal to making sure that we can make our domestic power keep the lights on. Is that right?

Dr Gordon Edge: That is fair. I think what we are doing is moving from a kind of 20th century electricity supply, which is about uncontrollable demand and controllable supply, to one where you have a partially controllable demand through the smart grid and smart response and a partially uncontrollable supply. That is not better or worse; it is just different and it requires different challenges and a different system operating across Europe, particularly responding to that. So, for instance, you have Spain, which is badly interconnected with the rest of Europe; they can cope with over 15% of their electricity coming from wind power and that is going to basically double in the next 10 years. So people can do this and still have reliability.

Gaynor Hartnell: You clearly do have to have a certain proportion of totally despatchable power that you can rely on. Even with despatchable power stations that you think you can rely on, sometimes they fall down too, as Gordon mentioned. Yes, you need to have a portfolio of things and that is important and some renewables are despatchable: biomass power stations, for example, thermal, energy from waste and also baseload. So you need a combination of things. You can add variable renewables to a system, provided you have enough despatchable power there to cater for what you need, and you can also make it more cost-effective by adding into the mix interconnection with other countries. You can add in demand management, peak shifting; all these things. They are all an important part of the mix. The only point I was trying to make was the mere act of adding variable renewables on to the system does not, by definition, make that system less reliable. It depends on the whole package of things you do. I take your point about: it is also a question of looking at what you might be replacing, because my point-

Dan Byles : There is an opportunity cost element of where you put your investment going forward.

Gaynor Hartnell: Yes but having enough despatchable power in the system is a very important element.

Q201 Dan Byles : Do any of you on the panel take a view on what the ideal proportion of renewable energy on the system is, to maintain energy security in particular; not so much looking at the emissions targets-obviously the emissions targets are hugely important-but balancing that with energy security? Is there an upper limit, for example, on the amount of offshore wind beyond which you would feel uncomfortable?

Gaynor Hartnell: We have not looked at it individually, but there is an IEA study that has looked at intermittency recently that has concluded very significant amounts can be added to the system and it looks at these three components: interconnections, demand management and storage as well. Storage is important. We haven’t even talked about storage.

Dan Byles: No, that is true.

Dr Gordon Edge: I don’t think it is a technical issue. It is an economic one. It is: how much are you willing to pay for in order to get it? I would argue that you should be willing to pay quite a lot because the benefit side of the equation with renewables is very high: an industry in offshore wind, the amount of the imports you will be able to not have, keeping the domestic energy pounds within the UK economy. I think these are all positives. Tax-take for the Treasury goes up. If you do that analysis and you do add up all those benefits, you would be willing to spend quite a lot of money to achieve those renewables.

Q202 Albert Owen : You mentioned about imports and, quite rightly so, in terms of energy security. Isn’t there also some imports that are needed for renewables to work as well and the risk applies equally to them? For example, there are some rare metals in the offshore wind industry and I know biomass-the project they are talking about within the United Kingdom now-rely quite considerably on imported timber. Forget about the carbon footprints, I am talking about security. Isn’t there an issue there for renewable energy in the same way there is for nuclear and various others?

Dr Gordon Edge: To address the rare earth issue specifically, not all wind turbines need rare earths.

Albert Owen: So that can be overcome?

Dr Gordon Edge: It can be overcome, and also the fact that, despite the name, they are not that rare. The reason why China has a stranglehold on them is because they drove the prices down and all these other mines went out of business, and now they are being reopened because they have driven the price back up again. So it is just a matter of time and it will be-

Q203 Albert Owen : That is a very real threat, isn’t it; that other countries will develop that technology themselves or they will control the price?

Dr Gordon Edge: There is demand for rare earths for many uses: iPods, mobile phones, any form of efficient electric motor or generator. There are many uses. Electric vehicles will need quite a lot. So the demand is there and people know where there are deposits to be found. It is just a matter of time before those mines are re-opened. I don’t think that is a particular issue in terms of security of that, and we would be looking to manufacture quite a lot of these technologies in the UK, certainly offshore wind, and that is a major export opportunity as well; so increase our security through trade.

Q204 Albert Owen : So there is the R&D. Can you also deal with the biomass? Again, a big proportion of it will be coming from-

Dr Gordon Edge: Pass on me then.

Albert Owen: I am not pointing just at you.

Dr Gordon Edge: Okay. We don’t deal with biomass.

Gaynor Hartnell: To address the biomass question; first of all, I will do the carbon footprint-although you will not want it-just to knock it on its head. If you bring biomass even halfway across the world in a very large cargo ship the emissions from it add a very tiny amount to the overall emissions from power generation. I think it is about 36 grams of carbon per KWh. So that is not an issue. Of course, if you build a power station that relies on imports you become reliant on imports, but that is not a unique situation. The UK is importing a lot of energy at the moment anyway and biomass power generation is never going to be a hugely substantial part, such that the biomass imports will threaten security of supply. It will be part of a portfolio of technologies.

Q205 Albert Owen : Sure, but the question is: it does apply to renewables in the way that it does with other forms of energy generation?

Gaynor Hartnell: Indeed. Renewables are not unique in many aspects, but biomass and biofuels are globally traded commodities.

Q206 Albert Owen : Sure, but my supplementary to that is are we moving towards a place where we will have greater independency, because the research and development will come on stream here in the United Kingdom and we will be able to produce those? I think that is what you are alluding to. Yes?

Dr Gordon Edge: Certainly. If you look at resources like wave and tidal, we are by far the world leaders in the technology side. Therefore, we would hope to be establishing ourselves; as Denmark is to wind, the UK should be to wave and tidal and, similarly, that would be an enormous boon to our energy independence.

Graham Meeks: The other dimension-following on from that and relating back to biomass-is how we capture the indigenous bioenergy resource that exists in the waste stream. There is certainly a lot more that needs to be done technologically, perhaps more importantly, in terms of the organisation of the waste management infrastructure, so that we are able to capture that and use that energy resource that we are producing and retaining that resource locally. Certainly that is something that Birmingham have done a lot of work on, and it is happening how in London. It is a resource that we are exporting out of communities into remote waste facilities, which are very difficult to deal with politically, when in fact the resource is something that should be there for communities. It may make much more acceptable to use that energy resource if people can understand the link between something that they are producing and then something that they gain a benefit from. So there is lot more that needs to be done to focus on that part of the resource and to make sure we are making the best use of it.

Q207 Albert Owen : Then a final point with regard to renewables and imports. Of course, DESERTEC is talking about Europe getting some 15% of its energy from renewable sources in North Africa. With the current and potential threat to security there-with geopolitics, in the same way with oil in the Middle East-isn’t this, again, a difficulty that we have to deal with, and it does apply equally to renewables as with oil and gas?

Dr Gordon Edge: Just on DESERTEC, we would be at the far end of the wire and I think other countries-most notably Italy-would be more interested. I personally would flip it slightly on the head, in that one of the best ways to ensure stability in North Africa would be to tie them, economically, more closely into the European Union, and this would be a pretty good example of that. On the other hand, I am a bit suspicious of DESERTEC technically because if you have large amounts of concentrated solar power, thermal generation, that needs a lot of water and we are talking about the Sahara here. So I am not quite sure if it is that feasible.

Albert Owen: Sure. Okay.

Gaynor Hartnell: Nevertheless, there are companies looking into that seriously.

I want to make a very general point about renewables and security. We didn’t send in written evidence, but had we have done we would have pointed out that generally you improve security by having a more diverse energy supply. Generally you benefit from having your eggs distributed in many more baskets, and by bringing in renewables you are talking about a whole family of different technologies. Many of them use domestically produced fuel. Others you are importing; but generally you are having more import routes, more different types of fuels coming in. Some of these fuels deliver themselves to the power station and there is nothing you can do to stop it; talking about wind or wave or tidal. They come at different times of the day, different times of the year, the month. It all helps; you just have to think about how to integrate it all together.

Q208 Dr Whitehead : I think we covered some of these thoughts earlier, but we have heard previously that there is a general lack of evidence about the extent to which more than 20% of generation from intermittent sources could securely be accommodated on the UK’s grid system. National Grid has just published a report, "Operating the Electricity Transmission Networks in 2020". Have you looked at that and are you able to give us any thoughts on what that might-

Dr Gordon Edge: I haven’t personally had a chance. It was only published a few days ago and I have been occupied with the Arab report instead, which is 300 pages in itself. What I would say is I think there is more evidence, not necessarily from systems that have gone that far-though there are areas, in places like Schleswig-Holstein in Germany, where you have extremely high penetrations of wind power, admittedly very highly interconnected-but would I point towards the All-Island of Ireland Study, which underpinned their objective of heading for 40% renewable electricity by 2020, and that indicated that is very doable and, again, Spain where they are moving beyond 20% wind in the very near future. So there are definitely examples of systems that are going that way and which are confident that they have the tools with which to manage it.

Q209 Dr Whitehead: The National Grid report posits something like 27% to 28% wind by 2020 as part of a 100 GW installed capacity resource. It appears to say that a combination of demand management, smart grid switching, and indeed storage, would be perfectly manageable. In terms of what you know about other studies elsewhere-and I think you have partly answered this-is that something that you would think is in the right region?

Dr Gordon Edge: The short answer is yes. We think National Grid has come a long way in terms of understanding the nature of these resources and how they might be integrated into our system. We think they can go further, but certainly that is a good point to continue this conversation about how we manage the system in 2020 and beyond is part of the process. I think it is the second report in the series where they have been thinking about these issues. Certainly we don’t see there being a major problem with that level of wind generation in our system.

Q210 Dr Whitehead : The National Grid report and other reports also emphasise that the question, in terms of security of the system- and Gaynor Hartnell has emphasised this, I think-of the interaction and the different variability between renewables. To what extent do you know from studies, or from direct experience, of the extent to which those renewables, to some extent, provide security between themselves in combination? Could you envisage a circumstance where it would be feasible to have getting on for a 100% renewable electricity power supply system in the UK, based on that sort of analysis?

Dr Gordon Edge: We have one specific one. We did a piece of work a couple of years ago, where we commissioned Redpoint to do a bit of modelling for us; a mixture of supply of wind, wave and tidal. There was a kind of sweet spot of about 20% marine against wind where you brought down the cost of balancing that system. I think it was in the region of £400 million. It has been a while since we did that piece of work; I will quite happily supply it to you. So having that mix, for the same proportion of energy you would have a considerably lower cost of managing it. So there is some direct evidence of that from that modelling.

Graham Meeks: If one is looking for the real world demonstration of that, and I raised the experience in Denmark earlier, which has 21% wind at the moment and I think the objective is to move to something like 40%-50% is their target-and they probably have the greater experience in terms of understanding what the capability of the system is. As I said, their system operator recognises that on their district heating system there are large amounts of thermal stores. So when you have an excess of power on the system, rather than paying someone to be constrained off the network, and imposing another set of costs, effectively you buy that electricity at zero cost, use the energy to charge the thermal store, which you are then using to provide the heating for businesses and homes.

So you are able to effectively manage the surplus; at the same time you have a flexible generation plant that is then able to run when the wind isn’t blowing and compensate for that. A lot of that is renewably fired and in Denmark a lot of it is still fossil-fired, but they have been progressively decarbonising that cogeneration fleet to use increasing amounts of biomass, biogas and energy from waste as well. So you do have, through the infrastructure that exists in the heating network, in the thermal storage, the ability to effectively arbitrage between those different markets, so the infrastructure is giving them that ability.

We talk a lot about storage-we haven’t necessarily done so much today-but in terms of costs of thermal storage, the US studies suggest that the cost of thermal storage is in tens of cents per KWh compared to electrical storage, which is hundreds of dollars per KWh. So there are major opportunities.

Q211 Dr Whitehead : Presumably electrical storage would be one of the factors that would be necessary in order to balance the system? Certainly some of the suggestions in the National Grid report point in that direction, and also the Pöyry study of "Pathways to 2050" looked at things such as battery storage but said these were only tenable over a few hours or a few days. Is that your understanding? Do we need more research perhaps into that?

Dr Gordon Edge: The problem with electricity storage, in terms of going beyond the "within day" management of energy, is the sheer quantity of it. We don’t have an energy storage technique, which gives you gigawatt hours or even terawatt hours of storage. It is in the megawatt hour level. That gives you an opportunity to regulate and to delay, but it does not deal with a situation where you may have a low of wind generation for a few days, in which case you have to be falling back on imports through interconnectors, flexible plant or demand response; demand response is mostly within there as well. You would have to be thinking about shutting things down at the extreme, but you wouldn’t want to get anywhere close to that. So I think there is more to be done in terms of storage, but there are difficulties in getting us into that gross amount of electricity storage. I think the heat point allows you to arbitrage between two systems, which gives you some more capacity, but electricity back to electricity: I think we are going to struggle in terms of large scale gross electricity storage.

Gaynor Hartnell: I would just say that, given we have about 10% of renewable electricity in the UK at the moment and we are not hitting these difficulties yet-I mean a combination of storage, interconnection, demand management; a combination of variable renewables: some of them will not be variable, some of them will be-I think we could go a long way. We are more concentrating on the shorter term; getting the Government’s policy framework right so we can make progress. I would rather look at the shorter term, get on with accelerating deployment, because these issues are a long way away and are definitely manageable.

Chair: Thank you. I think we are running out of time. We have more witnesses to come. So thank you very much for covering a lot of ground this morning. We much appreciate you coming in.

Examination of Witnesses

Witnesses: Jonson Cox, Executive Chairman, UK Coal Mining, David Brewer, Director General, Confederation of UK Coal Producers (CoalPro), and Dr Jeff Chapman, Chief Executive, Carbon Capture and Storage Association (CCSA), gave evidence.

Q212 Chair : Good morning and welcome. I think you have heard most or all of the previous session. As ever we are driven by time. Mr Cox, I think you wanted to make a brief opening statement. Is that right?

Jonson Cox: Very, very brief; 60 seconds, thank you, Chair. My name is Jonson Cox. I am the Chairman of UK Coal. I am new to the coal industry. I arrived six months ago with a view to try and rescue UK Coal from its near bankruptcy and near closure last year. I don’t come here as an expert on coal and I just wanted to say very clearly that, although I am here representing coal, I have a full understanding of the importance of climate change and I spent six years as a founder member of the Prince of Wales’s Climate Change Group. So I want to be able to put forward the arguments of coal having a place in the mix and the immediate consequences for coal, and I hope you will accept it in that spirit.

Q213 Chair : Fine. Okay, that is understood. One of the things that may help coal have a place is CCS. I would like to start with some questions about CCS. When do you think CCS for full-scale coal and gas pipelines might be commercially available?

Dr Jeff Chapman: When will it be available?

Chair: When it might be available. It certainly isn’t available at the moment; so when do you think it might be available?

Dr Jeff Chapman: The first thing I have to say is in the UK we had our first demonstration; hopefully we’ll be signed up by the end of this year. Incidentally, the call went out for tenders for that first demonstration on 9 October 2007. So if it happens to be 9 October when it is signed up this year, it will have taken exactly four years to get it signed up and that is not adequate. We now have a commitment to a further three projects and we need those three projects underway as quickly as possible. We cannot wait until those three projects are built before we start developing the next round of projects. That will take us up to a capacity of 1.6 GW, or thereabouts. They should be operating by the late part of the decade, and we need to be bringing on a lot more than that by then if we are going to meet the Climate Change Committee’s commitments.

Chair : We know what we need to be doing, and it is quite clear the progress so far doesn’t give us the remotest change of getting to where we need to be by the time we need to get there. Can I repeat the question? When do you think we might have commercially available CCS for coal and gas pipelines?

Dr Jeff Chapman: I think we have it now and I think, to the extent that we could build attractively, competitively priced power plants with CCS now, then we have it now. We will have to optimise that and make it a lot more attractive as we go on and build, but there is no doubt that the technology is available. It can be built and it can be built at commercial sizes. It needs optimisation.

Q214 Chair : In other words, do you mean it costs far too much to be viable; that is a polite way of saying it is nowhere near being economic?

Dr Jeff Chapman: No, no. I have a graph in front of me here that comes from the Climate Change Committee’s study, prepared by Mott MacDonald, and if you look at the cost in 2011 of gas with CCS or coal with CCS, gas is between 6p and 15p per KWh and coal is between 8 and 15 pence per KWh. That is a lot, but when you compare it with other low carbon technologies it is on the lower end of the scale as time goes on and in 2040 that drops down, most especially with gas.

Chair: In 20-

Dr Jeff Chapman: 2040.

Chair: 2040?

Dr Jeff Chapman: Yes.

Chair: Twenty-nine years from now?

Dr Jeff Chapman: Yes. They track it through 2011, 2020, 2030 and 2040.

Chair : We can all pluck things out of the air and say what is going to happen in 2040, that is-

Dr Jeff Chapman: Yes, sure.

Q215 Chair : If it is so tremendously attractive, why is there only one entrant in the competition?

Dr Jeff Chapman: There were nine entrants in the competition in the first place. The competition was-

Chair: Eight of them have dropped out.

Dr Jeff Chapman: No, five of them were discarded in the competition process. A shortlist was drawn up of four and I can easily say that, of the four, three of them did drop out but for various good business reasons.

Q216 Chair : I can’t understand how they can be good business reasons. If the viability of CCS is as close as you claim and the world desperately needs this technology-not just the UK but other countries with big coal reserves-why on earth would three companies drop out of a competition, give up £1 billion to do something that was going to be viable

Dr Jeff Chapman: One good business reason would be the unreliability of decisions coming from Government. Another good business reason would be the fact that, during that time, the relative prices of coal and gas moved against one another and perhaps made it uneconomic to build, for example, at Tilbury and Kingsnorth.

Q217 Chair : What are the decisions that DECC have made that have put all these people off?

Dr Jeff Chapman: I am sorry?

Chair: What has DECC done? You said it was the unreliability of decisions made by Government that caused the 75% drop out rate.

Dr Jeff Chapman: Well, it is just been a very slow and very laborious process, as witness the four years-and we are not there yet-we expect it will take to come to completion.

Q218 Chair : Perhaps I could ask the other witnesses: do you agree with DECC when they say they are going to require a new coal plant to have CCS fitted from the outset?

Jonson Cox: I cannot represent to you whether CCS has a viable future or not. My concern is the UK-and if you take my own company-has access to 200 million tonne of coal reserves. Under current immediate short-term policy initiatives the company will not survive. The proposition I would put in front of you is: the survival for a slightly longer period of the coal industry under current technology is an option price to keep those reserves open while we establish whether CCS does or does not have an economic future. The failure of operators will sterilise mines and sterilise reserves.

If I understood your question, Mr Chair, "What is Government doing that is a hindrance?" I think the hindrance is immediately around the carbon support price, which perhaps we will be coming on to. We absolutely accept the need for the burning of coal in the UK to be under far cleaner technology. I am not here to make any other representation on that. I am concerned about how we move from today to that cleaner future, without relinquishing the ability to exploit the domestic reserves that we have.

Q219 Sir Robert Smith : Do you think the current competition at £1 billion is enough to cover the project?

Dr Jeff Chapman: I honestly can’t comment on that, Sir Robert, but I would refer you back to the time of the Energy Act 2010, which created the CCS levy. I think the impact assessment at the time said that for the four projects there would be needed, over the lifetime of the projects, £9 billion to £11 billion. So £1 billion seems to me to be a part of the cost but not the whole cost.

Q220 Sir Robert Smith : Is there more that Government should be doing to maximise the chances that CCS will take off when we need it, because all the calculations see CCS coming to the rescue, are they doing enough to get us there?

Dr Jeff Chapman: No, not at all. Referring back to the Energy Act, it was a pity that we had to drop the CCS levy. It has caused yet another delay. I can understand the reasons for it. There are very good reasons for electricity market reform and we hope that the electricity market reform-and, of course, we are talking to DECC all the time about this-will be sufficient incentive in the long run to drive CCS when it becomes business as usual, but at the moment it isn’t.

The projects at the moment are required to be 400 MW or less, and that is not the size of a large coal or gas-fired power plant. So they are inherently expensive because of being lower than the normal size. They are inherently expensive because they are the first and, therefore, suppliers of equipment and contractors will build in contingencies. They will over-engineer, and those things have to be driven out of the system by getting on, building the plants and gaining the experience. They are also inherently over expensive because of the infrastructure. I am afraid, so far the Government has not properly tackled the issue and the cost of installing CO2 pipeline infrastructure and the cost of developing stores. These costs will be a great burden to the first projects and will make the first projects appear very expensive. The ensuing projects will be able to capitalise on those costs later on.

Q221 Sir Robert Smith : More should be done early on in the pipe network to make sure that they can be shared in the future?

Dr Jeff Chapman: Well, for example, on Humberside a lot of analysis has been carried as to what sort of pipe network could be planned around the Humberside area. It has been done elsewhere but it has been done most extensively at Humberside. There are about 60-plus million tonne a year of CO2 that can be collected from large point sources around Humberside, and it would be daft not to put in place appropriately sized pipe work in the first place to be able to collect this CO2 as time goes on.

Q222 Sir Robert Smith : At this stage, is there any sort of sense of which of the three basic technologies for CCS-pre-combustion, oxy-fuel combustion and post-combustion-is the most optimal?

Dr Jeff Chapman: No. I think we have to live with an open mind on that situation for the moment. There are advantages and disadvantages to the three different technologies. The oxy-fuel and post-combustion are attractive to conventional power station operators because they use the kind of power stations that have been in existence and in use, and they have become very comfortable with, over a very long time. Pre-combustion is more of a completely process engineering concept, but brings with it enormous other opportunities in terms of the ability to produce hydrogen for a possible hydrogen economy; in terms of the ability to remotely decarbonising lots of different power plants from one central gasification source; and not just power plants but also communities, vehicles and industry.

Q223 Sir Robert Smith : Finally, how much of a role is there in altering the economics for using the CO2 to enhance oil recovery in our remaining fields in the North Sea?

Dr Jeff Chapman: It would certainly be of benefit in your part of the world. Let me say, to begin with, enhanced oil recovery has been practised in the USA for 40 years. At the moment they have probably taken at least a third more oil out of Texas than otherwise they would have done if it wasn’t for enhanced oil recovery. Just like Texas was an easy win for exploitation of oil in the first place, it has also been an easy win for enhanced oil recovery. The same doesn’t apply to the North Sea, but the North Sea will come along marginally later on. So at the moment obviously it is going to be expensive to develop EOR in the North Sea.

The next thing I would like to say is that EOR is already practised in the North Sea by the injection of natural gas and other residues from oil production. So it is no stranger in the North Sea, it is just that you don’t use CO2, but CO2 is a better material for enhanced oil recovery than is natural gas. For example, if you take the business case for the CCS project in Abu Dhabi, which is a clone of the original Peterhead proposal, the business case for that is partly predicated on using CO2 for enhanced oil recovery, saving the natural gas and selling the natural gas as a fuel. So there is some potential for that.

The kind of companies that screw out the last drops of oil from oil reservoirs are not the large mainstream oil companies. Their business plan specialises in this kind of area, and I don’t think we have listened sufficiently hard to those people who think that they can make business out of EOR in the North Sea. I think there is a lot more to be done because the benefits of it, of course, are: making better use of UK reserves, more tax-take, more employment and the reuse of existing assets that we would have to spend money on to decommission at an earlier stage. So there are tremendous benefits and we should look at it a lot more closely.

Q224 Barry Gardiner : Mr Cox, you talked about taking an option on the future, in effect. Where do you think that 200 million tonnes of coal is going to go if UK Coal Mining does go into liquidation?

Jonson Cox: Those that are accessed through current mines will disappear because a mine cannot be mothballed and kept closed for very long. It has to be sealed by the shaft being filled. So my concern is: we sit here at the moment where, if we take last December, 42% of electricity in the UK was generated from coal; 42% through December. It does not have to be UK-produced coal, of course. It can be imported coal, but there is a security of supply issue. That was a very practical issue last December with the inability to move coal out of ports, let alone from a more national security point of view.

I suppose I speak for the largest producer of coal in the UK. If we fail to make it through the next investment decision that comes in 2013, which is exactly the time that I worry that the carbon support price is going to make it-both by the level, and by the unpredictability of the level-not viable to make that investment decision, that coal is largely closed to future exploitation, because the cost of sinking the shaft and the infrastructure underground to access the reserves is closed once and for all. Of course theoretically it is possible to re-open it, but the costs of that become even more prohibitive.

Q225 Barry Gardiner : What is the cost of the subsidy that you are requesting and what is the alternative cost of reopening?

Jonson Cox: I am not here asking for any subsidy, as such. The company may be on the edge; it may be struggling to survive. My job is to try and make it survive on its own feet in a commercial market. I am not here to argue for subsidy.

Q226 Barry Gardiner : Sorry, I thought what you said was that the Government, through the regulatory framework, had to ensure that the floor price for carbon was sufficiently high so that you could maintain commercial operations. If that is not subsidy I don’t know what is.

Jonson Cox: Sorry, I may have balked slightly at the word "subsidy". What I am asking for is an approach to the carbon support price, which is different. I am concerned about it because it has-

Barry Gardiner: That is a subsidy, isn’t it?

Jonson Cox: It is a subsidy to others. It is a subsidy to non-coal generation. Yes, that is correct. It is not a subsidy that the coal producers benefit from.

Q227 Barry Gardiner : No. Basically you want the Government to regulate the market in such a way that coal gets a relative advantage vis-à-vis its competitors.

Jonson Cox: I would put it another way to you: I believe the carbon support price is regulating the market to the disadvantage, at a particularly critical time, of the coal industry. I am not asking that we be advantaged by it. I am asking that we are not disadvantaged in the way the current proposal gives a subsidy to the existing fleet of nuclear and renewables at a time when it is not going to bring forward a future investment decision. I completely understand the need to incentivise future capacity, but it seems to me the time for that subsidy to be given is the time at which, realistically, that new capacity could come on stream, which I would put three to four years later than 2013.

I would also put it to you that the level of it particularly disadvantages UK-produced coal because, unlike the way the ETS works in Europe, this will operate per tonne and it has a particular disadvantage on UK-produced coal compared to imported coal. That would be the second point about it. The third point is: I think the interaction with the European market mechanism, or what I frankly see as a tax in the carbon support price, may produce some perverse effects. So I am absolutely not asking that anything is given as a subsidy to the coal industry-I couldn’t bring myself to do that-but I am asking that the subsidy being given to new generation is not set up in a way that quite so blatantly disadvantages UK coal production, particularly at a point in 2013 when the investment decision will be made about the next three to four years, which secures the life of the mines. I hope that-

Q228 Barry Gardiner : No, that is very helpful and you have been very clear. So what you are saying is that the Government’s decision on the carbon floor price, you believe, prejudices the future of a viable coal production in the UK in the short to medium term. Thereafter, you would be happy to see the carbon floor price put back to levels that they are at now, or even more, as long as it did not have a disparity. It would be better to do that within the ETS and within the European-wide framework?

Jonson Cox: Absolutely. The four-year period is absolutely critical. I am not here in any shape or form to argue for long-term subsidies for coal. I think that is not the right way to go. I could run all those arguments about the 10,000 jobs that are critical at the moment. I do not want to do that. I just want to argue that the introduction of this mechanism and the level of it, in 2013, comes at a crucial time that, frankly, will kill UK production, particularly out of the more sustainable deep mines.

Chair: Okay. Mr Brewer.

David Brewer: Thank you, Chair. We all know that the existing fleet of coal-fired power stations will close. The rate at which it closes depends upon the interaction of a number of different things; particularly European legislation, but also the influence of any UK Government policy initiatives that may be put in place, such as carbon price support, because that may affect the investment decisions for the existing coal-fired generators; the extent to which they are prepared to invest in that fleet to meet the requirements of those directives.

Notwithstanding that, the fleet of existing coal-fired plant in the UK is on the decline. It is old. It is ageing. It may be capable of having its life extended but it will, over a period of time, close. It will be replaced by new CCS-equipped coal-fired plant, again at some point in time. As electricity demand throughout the 2030s and on into the 2040s perhaps increases, and as low carbon electricity, from whatever source, replaces fossil fuels used for residential, industrial, heating demand and motive power, then we believe that coal with CCS and gas with CCS-not without it-will play an important part in that future.

So we see a decline in coal burn now; a rise in coal burn from new power stations. The problem is that that low point, which may occur in the mid 2020s, may be insufficient to support the capacity of the UK coalmining industry, which is on the increase. We are increasing output in the UK for the first time for many years. As an industry we have set ourselves a target of reaching 20 million tonnes a year. It is an output that can be reached without any kind of subsidy and the reserve base is there to sustain it for many years.

Bearing in mind that our customers will not wish to totally forego the import option for commercial reasons, if that level of demand is not there at that point in time then it threatens UK capacity. The way that that will manifest itself: first, will be the advance long-lead investment decisions in replacing mining capacity that have to take place and-as Mr Cox has referred to-those are likely to take place over the next three to four years, mainly for our deep mines. Similar considerations affect the surface mines. They are less acute but they do, and there may be a permanent fall in UK surface mine output if, for example, individual producers find themselves without sites to operate and they elect to withdraw from the business.

Chair : I might just mention that our report on electricity market reform recommended that the carbon floor price be introduced at the nominal level.

Q229 John Robertson : A couple of things. If my memory serves me right, the coal that we have in the ground in the UK is not good for power stations compared to the coal from other areas. Is that not true?

Jonson Cox: From a different point of view, the criticism made of coal in the UK as to higher sulphur content, but that is capable of being addressed by technology. The counterview that could be put, of course, of the current fleet, which I accept is a shorter lifetime, is designed around UK coal and it is one of the things our customers talk to us about benefiting from; that the coal that we produce is the coal their station were designed for.

Q230 John Robertson : You will appreciate that environmentalists talk about it as well and that these coal-fired power stations are the problem.

Jonson Cox: They are, but may I make the point that if the UK-and, please, I am not in any way trying to argue this about not decarbonising the UK-if we set up a mechanism through the carbon price support, which incentivises the import of coal-produced electricity through an interconnector from the Continent, we are merely exporting our problem. We are not dealing with it; we are just encouraging others to transmit to us electricity that has been produced under a slightly different economic regime than the rest of Europe.

David Brewer: UK coal’s sulphur content is relatively high on average. A state-of-the-art coal-fired power station, equipped with flue gas desulphurisation and other emissions control techniques, can burn UK coal and meet the requirements of the large combustion plants and industrial emissions directives, no problem. If the UK power stations invest to meet the requirements that are there anyway under European legislation, it can burn UK coal with no problem.

Q231 John Robertson : Can I just ask something else. Going back to the very first question that the Chairman asked about the time it takes to have a commercially viable CCS power station. Two years ago, when we first looked at it and this Committee first came into operation-I think, Dr Chapman, you were one of the people that we spoke to-my recollection is that a viable, fully-operated power station working on CCS and coal was not likely to be happen before 2025. I listened to what you said about the pilot and how we are already a few years behind where we should be, and the pilot was never to be the operative power station. All it was was a pilot, and while it might contribute something it was never going to contribute the size that we wanted-now I could be wrong-and therefore it was the next power station that we were really talking about in relation to what would be a commercially viable power station. Is that right, or have I misunderstood it?

Dr Jeff Chapman: If I can pick up on the wording slightly, the Longannet Power Station is called a demonstration, not a pilot. For example, a pilot would be the kind of equipment that Longannet had on site as a kind of experimental plant in advance of that, and the kind of equipment that is currently being built at Scottish and Southern’s power station at Ferrybridge at the moment. The concept of a demonstration-and it is a difficult word because in a sense you are not demonstrating the technology because we know the technology works, in a sense you are demonstrating the concept and getting experience from it-is to do it at a scale that is commercial. You can’t perhaps afford to do it at the full scale such as, for example, Kingsnorth would have been 1,600 MW, the full output. I think Longannet is about 2,200 MW or 2,400 MW, or something like that, the full scale. So you don’t want to spend that much money but at least you are getting a commercial size of operation at this level.

Incidentally, I think the idea of what is commercial and what is not has to be compared with other low carbon technologies. I come back again-and I would like to share this with the clerk, it is not our paper, it is the Energy & Climate Change Committee’s paper-to the comparison between CCS now and other technologies, which is very favourable indeed. The fact is that you need fossil fuels. Another thing that the Energy & Climate Change Committee will say is that if we have to decarbonise power by 2030, then we have to build about 70 GW of baseload equivalent, between now and 2030, of low carbon power, and of course at the moment fossil fuels, coal and gas, produce 70% of our requirements. Now you can, as you said earlier, Chairman, you can make all sorts of speculations about what the technology will be that fulfils that in the future but I think as far as fossil fuels are concerned, they are here to stay. They are needed for the flexibility, and a big proportion of that 70 GW is going to have to be built as fossil fuels with CCS, so we have to crack on and start doing it now.

Q232 Dr Lee : The question I have is with regards to: if we can CCS to work, do you see coal playing a significant part in the future energy security of this country, and for how long? I mean, you talk about for how long the reserves will last, if we can get it to work, is it in our interests to increase coal production in terms of energy security?

David Brewer: Coal produced from the UK will replace imports one way or another. They will either replace imported coal or they will replace imported gas. It is unlikely that coal production in the UK will ever reach the level again at which it can replace all the fossil fuel that we require for electricity generation. So maximising UK coal production, increasing it as much as possible and for as long as possible, will result in economic benefit to this country, compared to economic benefit overseas. We will reduce imports of fossil fuel, be it coal or gas.

Q233 Dr Lee : Is it your belief that if CCS works coal should play a significant part?

David Brewer: I think then that depends upon the way the market plays out. If CCS works, it has to work for both. It is no use just putting CCS on coal, CCS has to apply to gas as well because if we don’t get CCS on gas there is no way we were going to achieve our climate change objectives, so our reduction in carbon emissions of 80% by 2050. CCS has to be there on gas too, just as much as on coal. Our problem at the moment is that the Government is requiring CCS on new coal-fired plant but not CCS on new gas-fired plant. So why would you do anything else other than build an unabated gas-fired power plant? If CCS applies to both coal and gas, then the market plays itself out and we will be in competition for a price at which we can sell our fuel with the price of gas.

Jonson Cox: I wonder if we should widen the answer beyond CCS. It seems to me, if I just look at the company I chair, we have 25 years of reserves, taking known technology for exploiting it, and that technology for exploiting it, traditional as it is, is inefficient. Very large amounts that could be accessed are left underground. Some members of the Committee have visited some of our deep mines, and have seen that it is not the best way we could do it. Over 25 years, I think we have to take the view that if it is seen as a critical part of the energy mix, that technology will improve. It may improve not just towards CCS. That is great. There may be other ways of exploiting the calorific value underground from that coal. I am not yet myself sufficiently briefed to be able to come and argue that in front of the Committee. I am too new to it, but there are clearly parties who are coming to us with other ways of exploiting that coal underground in a cleaner method, and getting a larger amount out of the existing reserve than current technology allows, which of course would then extend the 25 years.

So it just seems to me-and I can only argue it at the common sense level-we have that reserve. It is in the UK. It looks like there are ways we can exploit it, for which CCS is top of the list but there are others. Why wouldn’t we just slightly modify this impact in regulation, which I believe is a distortion to the market-we have had that discussion-in such a way we secure the survival of this industry through the next few years of critical technology development and market development. I don’t know if that helps.

Dr Lee : Yes. I guess what I am trying to say is: is there a danger that, in our attempts to try and reach rather tough targets by 2020 or 2030, we are shooting ourselves in the foot. I mean, the technology comes through after the mines have closed.

Jonson Cox: I think it would be completely shooting us in the foot. We have a mine that is temporarily mothballed, and we are going to have to make a decision on that within the next 12 months because we can’t keep it mothballed, and under the current rule it needs £200 million of investment and it has 40 million tonnes of coal. That is a very significant resource. We can’t sit on that any longer than the last couple of years we have been doing that. We are getting very interesting approaches from companies who have either CCS or other ways of exploiting that underground, and not using quite such conventional mining technology. I am afraid, based on the carbon support price at 2013, I could not go to the equity investors from whom I would have to raise 200 million, or more, to ask that we continue to exploit that reserve, and that just seems to be a loss to the UK.

Q234 Dr Lee : A small point. In your memo submitted to us, you say that Norway cannot be seen as a long-term secure supplier. Are you comfortable with that assertion?

Jonson Cox: It is an assertion in the brief that my company has submitted. I don’t particularly want to sit here-and I remind you I am new to this-making any assertion about gas because I don’t think that is my business to do so. The argument is there. It has been properly researched and put together, but I think I should take the line sitting here that really I am concerned about a level playing field. I am very concerned CCS goes on gas as well as coal. Of course I worry, as I hope you all do, about the security of supply, physical and national, but I don’t wish to go further on commenting on gas.

Dr Lee: Yes, it is based upon an announcement at the start of the year, since when there has been the large discovery in the Barents Sea, and their hydroelectric power is only 60% of their capacity utilised. It just concerns me that that statement is there. I think you have a good case, so as not to shoot ourselves in the foot as you said earlier, but I don’t think it helps to make an assertion that-

Jonson Cox: I can only plead: I have arrived. I am managing the survival of a company that has nearly fallen over. I think my team have made that with good arguments but I don’t wish to go any further in putting that argument forward.

David Brewer: Can I just say that the threat that we see is not from low carbon technologies, it is not from the late development of CCS for example, it is not from an expansion in nuclear, it is not from renewables, it is from the free ride that unabated gas is going to have under the present scenario as we see it. It is that that will drive coal burn low and will prevent investment in coal-fired plant. Why would you invest in coal-fired plant and have to do a lot of these things when you can invest in unabated gas plant? That is the threat, not from the low carbon technologies.

Q235 Albert Owen : On that point, what you say in your own sense is that there is an unfair advantage that unabated gas has, but as you will know the title of our inquiry is "security and independence". What you are saying is that makes us less secure in this future, a second dash for gas that is less secure. You are not sure about the Norwegian thing but you are talking in general about imports from other countries making us less secure than the resource of coal that we have.

Jonson Cox: Less secure and less independent.

Sir Robert Smith: But in the short-term lower carbon.

Jonson Cox: In the short-term lower carbon, I guess, is a corollary of that, but we are dealing with generation facilities that last 40 to 50 years and I am sure you would take the view in setting the policy to support the right decisions being made for a 40-year time frame, not for a few years. I understand how critical it is to get us down to a lower CO2 emission.

Q236 Albert Owen : Before that intervention, what I was going to draw the argument onto was: Dr Chapman, you mentioned the fact that to have the baseload we need to have either fossil or nuclear, and obviously the plans for the UK nuclear industry is to replace like for like, the older ones, so are you saying we need a major expansion in coal-fired in the short-term?

Dr Jeff Chapman: Again, it is very difficult to predict what the mix will be, but whatever happens in nuclear it can’t be flexible like fossil. We don’t know what the penetration of renewables will be but what we do know is that fossil will be needed to complement renewables. Indeed, the amount of renewables that can come on stream to a large extent will depend upon the amount of flexibility that is provided by fossil fuels. So fossil fuels will have to be there whether it is coal or gas. So we inevitably face a future towards this Energy & Climate Change Committee’s target of decarbonising by 2030, where we must have a large proportion of the output based on fossil fuels and it will have to be decarbonised. So the compelling argument is that we have to develop CCS on both gas and coal and we have to get on with it as quickly as possible so that we know what we are doing, and we drive down those costs and equip ourselves to supply a massive export market.

Q237 Sir Robert Smith : Is there any potential that CCS will become a flexible operation? Because my understanding is that for a CCS plant to work efficiently, the term used, "baseload always on" rather than-

Dr Jeff Chapman: Yes, I was hoping you would ask that question because it is true that the first plants that come on stream will look more like baseload. Generally the first plants that you build of any kind of fossil fuel plant go on baseload, because you have just invested a whole lot of money and you want to recover that money as quickly as possible. That has been true of both coal and gas-fired power stations in the past. They have gone on the bars as baseload and later on they have slipped down the merit order, which is fine.

The other thing about CCS is that it is an industrial process and it will prefer to run under steady, safe conditions as much as possible. So we have to find ways of engineering into the system the flexibility that we already enjoy with fossil fuels, but that is not the first requirement. The first requirement is get some CCS power plant on the bars and then start looking at how we can make it flexible. It is a matter of process engineering. It can be done. There are various ways that it can be done. For example, with the hydrogen production I was telling you about before, we can store intermediate hydrogen. There is, for example, under Billingham, a store of 800 tonne of hydrogen. Not many people know that. It is stored in salt domes, and there are other salt domes in the country. It is limited but it can be done. In other ways, in post-combustion capture you can store reactant and there are ways. Unit sizes can be made such that you can turn the whole plant on and off. So it is an engineering problem that is there to be solved.

Q238 Laura Sandys : I would like to come back to Mr Cox’s point. One of the things that you are saying, and making a strong case about, is that we need to ensure that we have coal capacity into the future and that there is this interregnum period where we have problems, and that that in some ways offers us the opportunity to invest in CCS but also to ensure that we have long-term independence of supply. At the same time you say we have only 25 years’ coal reserves in the UK. So are we not building a technology that will in the future be extremely dependent on imports from countries where insecurity and price volatility will create some problems?

Jonson Cox: I hope I did not mislead you. The 25 years was my reference to taking UK Coal PLC-we represent about 40% of the UK industry-what we have. I fully understand the point but were it only 25 years, your point-

Q239 Laura Sandys : Are you not just looking for a short-term subsidy rather than building in long-term security and independence?

Jonson Cox: Can I comment on this: while I am absolutely not arguing for a subsidy. I am asking not to be penalised by a subsidy given to other technologies. The 25 years is: under current run technology and the current low mining technology, which is evolving-if we reopen a mine it will be under a completely different technology-does not exploit that reserve as efficiently as new investment could do, so that would extend the 25 years. Having been in a survival state, this company has not gone out to look for further reserves and of course there are further reserves in the UK we could exploit. I was merely making the point on the 25 years that that is just what we have today in our books, but it has a considerably longer term potential.

Q240 Laura Sandys : All I am saying is that if we are building and supporting technology that will subsequently become extremely dependent on imports, I think that is an interesting point; not necessarily to dismiss it but it is an interesting issue about what sort of technologies we are wanting.

Jonson Cox: It is a very good point and I would like to put some more evidence in, if we may, about the length, taking some projections about technology of the reserve.

David Brewer: This country has very substantial coal reserves. We having something like 3.3 billion tonne in identified, named prospects, and there is something like 700 million tonne of coal that can be extracted from the surface economically. There are environmental challenges in doing so, but it is there and it is available and it can be extracted economically. Of the rest, it may be that under current world coal prices, investment in sinking new deep mines is not impossible. We have an example at Margam in South Wales. The steel company Tata is looking very seriously at opening a new underground coalmine. That is a special case because it is coking coal and therefore the world prices are higher, but the world prices for steam coal are pretty high, as they are for all fossil fuels, and there are very significant reserves of coal left in this country. I said that we were increasing output now and we expect it to get to 20 million tonne a year and to maintain that level for many years.

Dr Jeff Chapman: I would like to say I still think it is worthwhile investing in developing this technology in the UK for coal or gas, not the least because of the export potential that it gives us. Coal has proven itself over the years on international markets to be generally a quite reliable resource. So we would probably expect to be importing coal for quite a long time to come, and then it is down to the gentlemen on my left and right to be competitive in that market. That is over to them.

Q241 Dan Byles : I am aware we are very short of time. I am a bit concerned, Mr Brewer, about something you just said there. Are you suggesting that if we do end up with CCS working and a new generation of coal-fired power stations that you would expect the majority of the domestic coal to be coming from surface mines rather than deep mines?

David Brewer: The majority of domestic coal comes from surface mines now-

Dan Byles : I mean going forward with extra exploration, getting on board-

David Brewer: -and has done for some years. Going forward, we are in a competitive market. If there is a market for our products there, producers will produce according to their own abilities and their own costs in competition with each other, but either way whether the coal is produced from deep mines or from surface mines or, as is most likely, some combination of the two, going forward for many decades, then what it will be doing is replacing fossil fuel imported from elsewhere.

Q242 Dan Byles : Just coming back to the investment challenge that UK Coal have, I mean I have visited Dormil a number of times. I have been down and seen the operations. It is fascinating I have to say. So carbon floor price is an issue. Although you dismissed it a bit, the uncertainty over CCS must be a bit of an issue because at the moment we don’t know whether CCS will ever be a long-term viable competitor. I know that we had a discussion that it could do but it is not yet the case that it is in production anywhere in the world commercially. There must be some uncertainty going forward over how much you invest in coal, if we don’t know if coal-fired power stations are going to be built in the country or not. Charles Hendry is on record telling this Committee that if CCS does not work there will be no new coal-fired power stations built in this country.

Jonson Cox: I think this comes back to my concept of an option price. There are two cycles for investment in coal as I see it. There is a three to five year cycle of reinvestment in existing mines or mines that can be accessed-I mentioned the one at Harworth of 40 million tonne-where the investment cycles open new power with a three to five year cycle. I see that as a cycle that we could go through and make the investment that would secure us production into the 2020s, on the basis of current prices if we did not have the carbon floor price. That is the real problem, the level of it and the disadvantage to the UK.

Dan Byles : That remains the No. 1 stumbling block.

Jonson Cox: That is number one. That would buy us the three to five year option to be able to secure future coal output. I think you are absolutely right when you take the longer term investment decision of opening new deep mining. That is a 10 to 20 year investment cycle, and that certainly would not be made absent CCS or another exploitative technology of which there are others put before it.

Q243 Dan Byles : Very briefly on that: underground gasification. That is something that has been mentioned as another possible outlet. What are the economics of that? Is that significantly more expensive?

Jonson Cox: To be honest, we are not at the stage of fully understanding that. We are receiving inquiries and interest from people who wish to do that. We are looking at it. I will put into the Committee what we know so far about it.

Dan Byles: Yes, that would be helpful.

Jonson Cox: I apologise, my role in the short-term in the industry is to try to get what we have working okay.

Dan Byles: Yes, of course. Okay, I know we are short of time.

Q244 Chair : You talked about gas once or twice. From the point of view of people concerned about decarbonising electricity generation, what is wrong with another dash for gas?

David Brewer: Because all it does is make some reduction if it is at the expense of coal-fired power. What it does is make some reduction to CO2 in the short-term. It does not get you where you need to be in the longer term. So there are two risks-well, multiple risks-there is security of supply risks, in our view, to an overdependence on gas, but secondly there is a risk of long-term carbon locking. I don’t have a problem with gas. What I do have is a problem that says, "You have to have CCS on coal but not on gas" because that is not a level playing field.

Q245 Chair : Suppose we have emissions performance standards, for example, on any kind of fossil fuel generation that might be introduced progressively tighter so you don’t destroy all the existing assets straight away, but by 2025 you would not criticise a policy that was based on an even playing field between coal and gas, assuming hopefully CCS might be available for both at that time?

David Brewer: It depends on the level at which you set your EPS because if you set it at a level that is the Government’s initial level, it requires CCS on part of a coal-fired plant but not on gas. If you tighten it gradually, the risk is that over time you will end up by requiring CCS on the whole of a new coal-fired power plant but only on half of a new gas-fired plant. So that again why would you build coal rather than gas, unless you had an absolutely clear signal that in the future there was going to be no fossil fuel without total CCS by sometime in the 2030s.

Q246 Chair : Yes, I mean you could have that signal but is there not also the possibility that you could have this progressively tightening EPS for both coal and gas but, because of your concerns about security, you can reserve some capacity, which might be coal, which would only be brought in when needed?

David Brewer: Yes, and I think that expresses itself through the existing coal-fired fleet. We are not expecting the existing coal-fired fleet to continue to run on baseload. What we want to avoid is this transition from old coal to new coal, at which the existing fleet just finds itself closed with not an adequate replacement.

Q247 Chair : In answering questions, you will soon be competing with the Prime Minister in the Chamber but we have one more topic that Robert is going to deal with.

Sir Robert Smith: Just very quickly. The threat of the large combustion plant directive and the emissions directive, how serious a threat are they?

David Brewer: How serious a threat?

Sir Robert Smith: Yes.

David Brewer: Well it depends where you are. They are not a serious threat in Germany because in Germany the large coal and lignite powered plants are investing, and have invested, to meet the requirements of both of those directives. It is only a threat, a greater threat, in this country because certain other policy instruments are in play, which make investment in the existing coal-fired fleet very difficult to justify compared to Germany, say.

Q248 Sir Robert Smith: You mentioned in your submission from Coal Pro that the industrial emissions directive was being interpreted flexibly by the UK Government. How are they being flexible?

David Brewer: Yes. In the negotiations over the IED itself, the UK Government and Defra developed some job for the generating industry, at least in managing to get built into the IED maximum flexibilities, of which there are two, basically speaking. One is an opt-in/opt-out alternative, so if you opt out of meeting the requirements of the directive you can continue to operate until 2023. The other flexibility is a Transitional National Plan, which gets you beyond 2015 and through to 2020 before you close. The UK Government is saying that it doesn’t apply just to coal-fired power plants, that there is some gas plant here that we will need to invest in NOx abatement with. As I understand it, the view of the UK is that you don’t have to decide to meet the new emission limits required by the Industrial Emissions Directive. You can go into the Transitional National Plan but you can swap between one and the other, right through until 2020 and then come out at the other end. There is another provision in that you can continue operating, via that Transitional National Plan, beyond that period at a very low level of 1,500 hours a year, which sounds a low level, but that is 60 days, 60 plus days.

The Transitional National Plan has to be ratified by the Commission. Defra seems to be taking the view that the directive does not say you can do this but it doesn’t say you can’t either, so they seem to be interpreting it as you can have this flexibility, which delays the investment decision that is necessary. It delays the time at which it might need to be taken, but when they put that National Plan to the Commission for ratification, the Commission might say, "We didn’t mean this at all. You are going beyond the spirit of the thing here", in which case that will mean earlier and more closures than might otherwise be the case. Does that make sense?

Q249 Sir Robert Smith: Just finally, phase 3 of the EU ETS?

David Brewer: Yes, well the EU ETS is a shadow price at the moment; the carbon price. Allowances are issued for free but there is a cost because they are traded at the margin. So I think generators are building the shadow cost into their decisions, but from 2013 that becomes real money in that the allowances are going to have to be purchased. So that is a real cost; pound notes as opposed to some kind of shadow cost. Looking here at the existing opt in/out plans, under the LCPD, which will continue until the end of 2015, if they have to shell out real money from 2013 they might decide it is not worth doing so and again you will get earlier closures.

Dr Jeff Chapman: The Treasury’s options allowances in the EU ETS, and is also granting itself, through the carbon floor price tax, a contract for differences between the price of allowances and the fixed price. So it gives itself a fabulously stable income derived from fossil fuels, which is sufficiently high to be able to pay for any programmes involved in support of CCS.

Sir Robert Smith: If it were not for the fact there was a huge deficit.

Dr Jeff Chapman: Well-

Chair: Thank you very much for coming in and giving us your evidence. It is very helpful to us.

Prepared 1st August 2011