[Mr. Peter Atkinson in the Chair]

EN 01 Jon Gibbins and Stuart Haszeldine

EN 03 Greenpeace, Friends of the Earth and WWF

EN 04 Consumer Focus

EN 05 Macmillan Cancer Support

EN 06 WWF and UK Green Building Council

I thank the panel for coming. May I ask you, for the sake of the record, to introduce yourselves with your title?

Jeff Chapman: My name is Jeff Chapman and I am Chief Executive of the Carbon Capture and Storage Association.

Professor Jon Gibbins: My name is Jon Gibbins and I am Professor of Power Plant Engineering and Carbon Capture at the university of Edinburgh.

Tony White: I am Tony White and I have a company called Ytilitu, which is “utility” spelt back to front. [Hon. Members: “Oh.”] Well, companies have to be customer-focused rather than production-led. I was also a founder director of Climate Change Capital until I retired last year.

It took me some time to work that one out, but I got there in the end.

Q 7575

The carbon capture and storage competition was launched way back in 2007 and we were told that it would be at least 2014 before a plant was up and running, even as a pilot. Why is it taking so long to get the technology to a usable stage?

Professor Jon Gibbins: We haven’t really started getting the technology to a usable stage; we have been trying to get the funding to a usable stage. I think that the main point is that you can only start developing the technology seriously once you get the money to do a feed. We are just about to do that. You then have to go through the feed stage and actually build your plant, so the clock has not really started ticking properly yet.

Tony White: My point of view as somebody who has come from the financing end is that, by wanting people to do carbon capture and storage, you want them to do something for which the market will not reward them at the moment. It is therefore important to get the funding mechanism sorted out first before people will lift a spanner.

Jeff Chapman: It is a great pity that it has taken such a long time to get to the point that we are at now. We could have got here more quickly. The Energy Bill is extremely welcome from that point of view. We need to  learn the lessons associated with the competition on the first project and not make the same mistakes in regard to timing. Time is not on our side.

Q 76

If we had introduced the same Bill five years ago, would we have been at a disadvantage because we did not have the technology or the know-how, or would we just have saved ourselves five years?

Jeff Chapman: No, we would not have been disadvantaged by technology. There have not been significant strides in technology in that period, so we would have been further ahead than we are now.

Q 77

Who is leading the race? I can remember meeting you five years ago when we were doing a Select Committee report on carbon capture. At that point we were ready with the technology, but we had no funding in place. Who in the five years since then has started to get a lead on us?

Jeff Chapman: There are a number of countries. The USA certainly has extensive plans with support arrangements already put in place for a number of projects. Canada has three projects which were between the time that the funding was announced in total, and the projects were selected through competition and allocated. It took less than a year, so compare that with the time scale that we have just been talking about and obviously we are slipping behind. The first commercial size power project in the world may well be in China. The second one may well be in Abu Dhabi. This Energy Bill is an opportunity for the UK to regain the lost ground. We must seize this opportunity and move on with it.

Q 78

So you don’t believe that it is a lack of investment by the Government over the last five years in R and D that has held us back; it is purely a lack of policy direction.

Jeff Chapman: I very often say that the only thing that is holding up the development of CCS is policy. Policy falls into two areas: one is regulation and that has already been addressed by the Energy Act 2008 and the other is the financial incentive to do it and that is being addressed by this Bill. I am sure that Jon would have more to say on R and D.

Professor Jon Gibbins: R and D really gets a stimulus once people start to think about serious projects. You can think about them in a vacuum, but there is nothing like having to do a real design to stimulate real development.

Q 79

With about 240 years of energy requirement beneath our feet in coal seams, this carbon capture and storage was a great opportunity for this country, yet Professor Stuart Haszeldine has described the CCS competition as “dead on its feet” with only ScottishPower potentially being able to deliver by 2014. How feasible is the Government’s target of having a genuine demonstration model up and running? Should we have done much more earlier to have a more competitive scenario than we appear to have?

Professor Jon Gibbins: Part of the problem is that it is competitive. The competition has been very limited in that, for example, the various contestants cannot collaborate. They cannot talk to each other. They cannot share  information. That certainly is a problem. If we had been able to go for a single project that was run by a consortium of utilities, then we would have moved faster. But equally you have to look at things in perspective. CCS really only hit the ground at the Gleneagles conference in 2005. In some respects things have moved slowly. But how fast do things move in politics? Most people I guess in this room had not seriously thought CCS was on the table until 2005. We have come on quite a way—keep things in perspective a little bit there.

Tony White: I think there is something else missing here which is addressed in the Bill and that is a realisation that the market by itself as it is currently designed will not deliver a low-carbon economy with sufficient speed. If we are willing to say, “Okay we’ve got to interfere in the market in some way,” we can get over that problem that Mrs. Thatcher gave us where we believed that market forces were the best thing since sliced bread. When we realise that markets can do some things, but they are not very good at doing others we can start to move. But until we get a financeable arrangement whereby people can be confident that they will be rewarded if they make their plant and it works, carbon capture and storage will be dead.

Professor Jon Gibbins: Can I just add something? On the market, it is interesting that the idea that you needed something beyond the carbon price to support renewables got there a little bit earlier. You have exactly the same issues with carbon capture and storage. It is new, it costs more money. The carbon price does not support renewables, although it goes to help support them, and it does not support CCS in the same way. Because it said “carbon” and people thought of capturing carbon dioxide, they equated the carbon price with support for CCS. That took a while to work through the system.

Jeff Chapman: What is being proposed by the Bill and the associated policy documents, is probably one of the best proposals that exist—probably the best for financial support in the world. Every other support mechanism in the world is a kind of sticking-plaster support. It is usually capital support but on a project-by-project basis.

The mechanism of a levy on electricity and the return of the levy, probably by a contract for differences, has the potential for a support mechanism that can be rolled into the future and be self-adjusting, because it is a contract for differences. As the price of CO2 in the marketplace firms, the cost of the levy will adjust itself accordingly. We have an excellent proposal, and the Government should be congratulated on dreaming it up. It could be rolled out into the future beyond four projects. We are really pleased to say that there are four projects; there will be four projects in the UK and the sooner we get on and build them, the better.

Q 80

But if it is such an excellent proposal, why have we got only two bidders for four projects? Why do we not have more bidders?

Professor Jon Gibbins: Because the proposal has not been there. The proposal is being developed. Once people say, “We have had the Bill; we have had the secondary legislation,” then people will start bidding.

You think more people will come forward.

Professor Jon Gibbins: Oh yes. Do not forget that we had nine bidders for one project in the first place. That is a demonstration that industry is keen and ready to get moving in this area.

Q 81

We had a series of representatives from companies this morning, as you are probably aware. You made reference to E.ON and ScottishPower, but the others said they have turned their backs on this and have moved their interests elsewhere. It did not sound at all like they were willing to see the Bill passed into an Act of Parliament and then be knocking on the doors of the Department trying to sign up.

Professor Jon Gibbins: They have left the competition. Maybe Jeff will say something, but my anecdotal experience is that if you tell people that it is going to be the competition all over again, they get a bit worried. If it is a market-based mechanism that extends to a wider range of projects—that does not have this anti-collaboration clause in it—it starts to make a lot more sense.

Q 82

Can I just come in? That is an important point because there is a difference between our witnesses this morning and what you are saying. It is important to stress that. One of the big issues that we were given this morning was that pre-combustion was ruled out of the competition, which therefore affected a number of people who were particularly interested. I declare an interest in pre-combustion, as I personally think capture post-combustion is madness. Do you think that was the real reason that they pulled out or were they just not prepared to make the investment in the technology?

Jeff Chapman: Yes, half of the nine that were put forward were pre-combustion projects. In the main, they still exist. There were four, and at least three of them still exist. You can expect at least three pre-combustion projects coming forward. They still exist on paper as development projects.

Q 83

I am confused as to what we are talking about. [Interruption.] I’m sorry, but this is important. My understanding was that the competition basically ruled out pre-combustion. What you are saying is that once the competition is over and company A has won it, the other three projects—the Government want to have four altogether—could all be pre-combustion.

Professor Jon Gibbins: The other important difference is that the competition was for 300 or 400 MW—this is a little confusing—whereas the Bill talks about demonstration projects and additional CCS at the demonstration plants. That is an important difference.

Jeff Chapman: You could envisage a situation where the two projects which are currently finalists in the competition may be built, one as the competition project and one as one of the other three, and then the other two of the four could be the two out of the three or more pre-combustion capture projects that are presently on the drawing board.

Q 84

Is it important that we have both?

Jeff Chapman: Yes.

Thank you. John Robertson.

Q 85

Why do you think ScottishPower and E.ON are still in the process of competing for the No. 1 place?

Jeff Chapman: There have been elements of selection and attrition in the competition process, and those two are certainly survivors as well as winners.

Q 86

Where does that put the other companies? They are all big companies. Do they have their eyes on other things in other places?

Professor Jon Gibbins: They might have their eyes on the results when the Bill comes through. Would you necessarily want to go through the hoops of the competition, which are quite restrictive, or would you rather wait for a market mechanism and let someone else be on the bleeding edge, sorting out all the regulations and things like that? Being a strong follower is often better than being a leader. However, being a leader, you get some kudos as well.

Q 87

I am a bit confused as well. How do you choose the other three, if you don’t choose them through a competition?

Professor Jon Gibbins: There are different rules for the competition.

Q 88

Are you saying that the Government should be put in a position of using selective powers to choose who they want for the other three? That is the kind of thing we really don’t want. We want this to be open, and to take the best.

Professor Jon Gibbins: You may well not want it to be open. We have already talked about wanting a range of technologies. There could be reasons to have a range of technologies. There could be reasons to have a range of fuels, not just coal. I think you have to keep it in mind that this is not pure market forces coming in. It is an assistance to the market, and it is doing several things, so you might restrict competition within certain areas.

If you want to analyse where the competition has gone wrong, one of the biggest areas where it went wrong was that it seems to have precluded collaboration between the utilities, yet one of the most effective ways of getting some of these plants built and of transferring information would be to allow several UK utilities to take a share in a project and to share the risk and the learning.

Jeff Chapman: The Government would do well to take a lesson from Alberta, where the competition selection process has taken place so much more quickly than it has here in the UK. It is obviously over-complicated.

Professor Jon Gibbins: That may have been necessary because of EU rules. That is possible.

Q 89

So if you were advising the Government today—and you can, because they are sitting with us—how would you get them to change the rules for the other three projects?

Jeff Chapman: Well, certainly it should be a much more streamlined process in respect of the projects. The essence of the first project is that it has been treated as a public procurement exercise rather than as an energy sector programme, like the renewables obligation or  something like that. It was treated in the same fashion as buying a submarine, which obviously entails a completely different process. That was probably the mistake. I am not really qualified to speak on the subject, but that is my view.

Tony White: If I can add something there, I do not think you should underestimate the amount of collaboration that it would be important to allow. Also, do not underestimate the negative impact it had by the as-perceived change of rules in the competition. Some companies had set themselves up as a single company to do a project: they raised money from their shareholders and had a certain burn rate as they were working. Then all of a sudden the rules changed and they were effectively out of business. So they are no more.

Q 90

The problem that I have with collaboration is that it can also be seen as manipulation, in that it is unfair competition if you have a collaborative view.

Jeff Chapman: I think it is very important in the early stages of the development of the CCS industry that there is the maximum degree of collaboration. Most of those in the industry would agree with that. Most of the industry players would be unhappy when they lose the competition, but they would be happy to see that projects were being developed, even if it was by someone else, to get the show on the road. I am sure that the whole industry is behind the concept that the most important thing is to get the show on the road as quickly as possible.

Professor Jon Gibbins: Maybe the problem there was that if you only have one project you cannot have competition between projects—to keep everybody honest. Once you have multiple projects, if the same consortium is not bidding for every one, automatically you have competition.

Q 91

I am confused, as other Committee members are. We heard this morning that there was much concern on the part of all the companies that considered, or were successful at putting bids in, about the selection process and so forth. The impression I am getting from you is that you seem to imply that this is an effective mechanism for funding CCS demonstration projects, but perhaps that the process of going through a competition and selection—we are now dealing with the aftermath of that, with those people who deliberately avoided the competition now able to jump on the bandwagon—has not been a success story at all. Would that be fair, without putting words into your mouth?

Professor Jon Gibbins: It has been a learning exercise, hasn’t it?

Very delicately put.

Professor Jon Gibbins: No, it has. Look, basically the country thought that it would get us where we wanted to get by having one demonstration project and by learning. At that point we were being advised that our target for 2050 was a 60 per cent. reduction. Since then we have been advised that the target ought to be 80 per cent. That changes things dramatically. This is not about CCS in a vacuum, but about hitting emission targets. Now our target for 2050 has changed significantly. It is not really a change from 60 to 80; it is 40 per cent. emissions to 20 per cent.—it is halving the emissions: it is a big deal. And it has changed from 2030.

Jeff Chapman: But actually it is more than that, because we are now talking about total decarbonisation of the power sector by 2030. That means not just CCS on all the coal-fired plants: it means CCS on all the gas-fired plants by 2030 as well. If you start working backwards from 2030, we have an awful lot to do to fill in that gap.

Q 92

With that in mind, those who are reading or watching this might not necessarily know their E.ONs from their National Grids and will be wondering why, given that we have just had this huge summit in Copenhagen—there will another one in Bonn and in Mexico next year—there is not more collaboration across the world to try to get CCS sorted. We seem to be reinventing the wheel here.

You said at the beginning that the US, Canada, China—I was surprised to learn—and Abu Dhabi are all pushing forward with this and are five years ahead of us at the moment. Why is there not some form of—

Professor Jon Gibbins: I do not think they are five years ahead. I think you assume—

That came about because of my perhaps—

Professor Jon Gibbins: We are maybe five years behind where we could be, but we would have then been very clearly ahead. There is plenty of collaboration. I am working very closely with people in China on CCS, but what we are talking about is not a scientific exercise. This is an exercise in demonstrating and exploring a commitment to full-sized plants. It is not about inventing things, but about demonstrating and learning by doing. That is a very different problem.

What you have to show for the likes of China is not that we know how to build a plant—they know in principle that we do know how to do that—but that we have done it, we have the conviction to do it and we’re prepared to pay the price for decarbonising fossil fuel, for no other reason than climate change. That’s really what it’s about. It’s about large-scale commitment, not some scientific exercise.

Jeff Chapman: There is huge international collaboration going on, on a technical as well as a policy level. As testimony to that, we had the carbon sequestration leadership forum, the ministerial meeting here in London chaired by Ed Miliband. We had Steven Chu from the USA, along with a lot of other Ministers from around the world. There was tremendous consensus about what needs to be done to get CCS under way. We also have the Global Carbon Capture and Storage Institute, which is at the moment looking at all the barriers to investment in CCS throughout the world.

There is collaboration on trying to ensure that all the different technologies are covered all around the world. There is collaboration in Europe—at a European level—co-ordinated by the Commission, although there are some faults in that area, which I won’t waste time in going into. But yes, there is an awful lot of collaboration. Why should we be there? We should be there because this is going to be a massive market in the future and we need to be part of it.

Q 93

I do not doubt that at all. You actually make my argument for me—the fact that this will be a massive market—but it feels as though we are  the tail-end Charlies here. We are actually coming behind these other countries. You say there is collaboration. Why isn’t there evidence of that, with those companies perhaps working in a collaborative process—which I think is something that you wanted to see anyway—and participating in this competition, to see that we get, rather than just four, the nine projects that you talked about before?

Jeff Chapman: At an industry level, there certainly is collaboration. All the members of the CCSA are collaborating at all levels. We should bear it in mind that many of these organisations are multinational. Obviously, the power companies are multinational; the oil and gas companies are multinational. Shell, for example, is developing a project in Canada and is also part of the Longannet team. E.ON is developing projects in Germany and elsewhere. All these people are collaborating in their own sector and working with one another, especially in the research sector.

We need to move on. Mike Weir.

Q 94

We have talked about pre and post-combustion, but Professor Gibbins, you said that the Bill needed to be extended to cover natural gas and other fuels. Can you tell us why that is; and, given the discussion that we have had, is research and development already going on into CCS with natural gas in the UK?

Professor Jon Gibbins: The reason why the Bill needs to take in natural gas is that it seems likely that because we now have these quite stringent targets for 2030, we will have to fit a significant amount of natural gas plant with carbon capture and storage in the 2020s. To be able to plan for that, you need to have demonstrated the technology and to have the reference plants to look at and say, “This is how it’s done,” and to be absolutely clear about what you’re doing. That’s why you would work on gas.

As regards the research and development, there’s never enough research and development. In fact, it’s very, very hard to do it without large-scale plants being built. That is to say you don’t get meaningful R and D without any practical examples of the problems that are coming up, so that will come. We’re in a position of knowing how to get started in trialling CCS on natural gas.

Q 95

But one of the reasons given for concentrating on post-combustion on coal was to create an export industry basically in CCS technology. Are we in danger of effectively having to import natural gas technology to meet needs in the 2020s?

Professor Jon Gibbins: The most important thing to export from a post-combustion on coal demonstration is the idea. China is not going to decarbonise its industry with technology imported from the UK. It might well decarbonise its industry if it tries to emulate what we do as an exemplar country. It is not the technology per se. Yes, there will be some export, probably, but the main thing is to export the concept.

That was why it was brought in. Although China is experimenting with pre-combustion capture—partly, I think, because it is emulating FutureGen in the States and that was just a good project to do—it has a great amount of very new, quite advanced pulverised coal  technology that will have to be retrofitted with some sort of capture. It will not be closed down. That is the only way that we will decarbonise China.

It makes sense, but think about ideas rather than just necessarily physical designs. Coming on to the Bill, it is about developing technology and learning, but it is also about demonstrating commitment to spend the money to generate gigawatts of power decarbonised by carbon capture and storage.

Q 96

Can I ask some questions about the levy system and the assistance scheme following from it? You have said, Mr. Chapman, that it is a very workable and sound mechanism. How do you think it might best be implemented in terms of fairness to the sector? Do you favour simplicity in terms of market share, carbon intensity or other mechanisms for levying money across the sectors?

Jeff Chapman: We still have a lot of work to do on that. I ought to say that it has the potential to be a very workable system, provided that it is made simple and practical. I would expect that we would spend quite a long time with DECC and Ofgem in the near future—I certainly have a meeting with both of them in the next couple of weeks—to begin putting some flesh on the bones about how it will work.

Q 97

So what would you say at that point about renewable supplies, for example? Should they be in or out of the levy?

Jeff Chapman: I think that they should be in; it would be a shame to eliminate any particular sector. In effect, renewables is a levy on the whole of electricity consumption anyway, because the cost of the renewables obligation gets passed through to all consumers. It would not be fair on fossil fuels to apply the levy only to a particular sector of electricity production. I do not think that that would be equitable; it certainly would not be a level playing field. Bear in mind that fossil fuel power generation is already penalised by having to buy allowances under the EU ETS, so it already carries a cost burden.

Q 98

Most of the assistance scheme will be determined by secondary legislation, but how do you think it can best be organised to ensure that assistance goes to schemes in the best way—for example, for building oversized pipes for future development? Would that be in the assistance scheme, or would it be beyond it?

Jeff Chapman: We ought to consider something beyond the assistance scheme. Bearing in mind that we are potentially talking not just about power stations but about cement plants and steel works, we should not be applying a levy on electricity consumers to support infrastructure for other industries. That would not be right.

On the other hand, as things are at the moment, we would like to see the Bill passed and get the show on the road as quickly as possible. We can discuss the other things at some point a bit later. We might need another amendment to an Energy Bill at some later date, but I do not think that we can take that into account at the moment. I think the Government needs to come out on the matter of infrastructure because that has not been  properly thought through—well, it may have been properly thought through, but it certainly has not been properly pronounced upon.

Tony White: There is the rub. The problem is that if we had the proposed system, we would end up having every pipe built just to the right size, as opposed to economies of scale being taken account of. Those could flow from having a series of hubs—let us say four in the UK—and optimising the way they work.

Jon and I have just been on a committee brought together by Lord Oxburgh on how to do carbon capture and storage. I believe that you have all received a copy of our proposal. We said that you need to go a bit further and recognise that the market price of carbon will not deliver carbon capture and storage in the long or short terms because it is a very capital-intensive technology. We proposed taking the levy idea a step further and having a monopoly buyer of carbon. It would be a carbon capture organisation that worked in the same way as the non-fossil fuel obligation used to work. It would pay for carbon, or companies would pay it for taking the carbon away. It would be assured of always having sufficient income to pay for the capital that it had to buy through the levy on customers.

Unless you can reduce the risk of investing in very capital-intensive bits of plant, you will be dealing with really high prices. By having the ability to guarantee the income to service the debt that you incur by building the large plant, you can get costs down for the customers. An overall organisation could take the judgment that a nine-inch pipe would do for one plant, but that if there is another plant nearby that will come on later, a 14-inch pipe should be used. By being able to anticipate where the demand will come from, such an organisation would not fall into the problems that the National Grid has had of being unable to anticipate where generation will come forward. It is able to respond only to people wanting to build power stations. We now have the situation where it cannot connect to all the power stations around the country.

Q 99

That underwrites the idea, which I imagine you would endorse, that the levy should essentially be a public good outcome with knowledge and infrastructure sharing for the future on the basis of the investment of the levy, and not a particular advantage to one company or another.

Tony White: Exactly. But that is why it would pay private sector people to do various things for it. It would effectively be a kind of public good. The trouble is that we are all kidding ourselves about the value or price of carbon and saying that the market is giving a price for carbon. That is just not true. The market in our EU ETS sets the price of carbon based on the abatement costs at the margin. That is why we have quite low prices at the moment. The value of carbon to future generations has nothing to do with the marginal costs of coal and gas, which set the price now. We should not be scared of having to intervene in some way. The market cannot deliver what I would call the proper value.

Jeff Chapman: There is a tendency to regard the levy as something like a tax or public subsidy. We ought to think about this as starting to generate an added-value kind of electricity. Just as we buy organic potatoes, we will buy carbon-free electricity and pay a bit more for it.

Tony White: Yes, but in paying a bit more for it and having this quasi-monopoly, you lower the cost to the customer. That is the important point.

Q 100

You were talking earlier about gas and coal and about decarbonising the whole power sector by 2030. How transferable in reality and in practice is the CCS technology from coal-fired to gas-fired power stations?

Professor Jon Gibbins: There are some specific differences in the technology in the sense that when you are dealing with gas, as it stands, you have a much lower concentration of carbon dioxide in the flue gases from which you are trying to capture the CO2. So you would want to design your plant in a different way. You might also want to modify the gas turbines themselves by sending the combustion products around again to get more CO2 added to them. That is something that is specific to natural gas plants.

Q 101

What I am interested in finding out is whether we need completely different kinds of demonstration projects or whether the demonstration projects that we are planning on—whether it is post or pre-combustion—will be sufficient to give us the answers that we need on gas.

Professor Jon Gibbins: Just stand back a little bit. For example, if you are going to tell people in the 2020s, “Hey guys, we’ve got to start fitting progressively more gas-fired power plants with CCS,” people will need to see a gas-fired power plant that has had all the problems ironed out and that actually works. They need to be able to kick the post-combustion capture unit or do whatever they want with it and go and talk to the people and say, “Is this working reliably, guys? Does it start up every Monday morning when you want it to?” You cannot legislate to do that because you know you may get all sorts of problems when you come to do it.

The electricity industry has to be very conservative. It has to have reference plants—they really do mean something—and a reference plant has to be what you actually want to build. Yes, in principle, things are transferable—there is some interplay—but there are specific considerations for a natural gas plant where you want to see a natural gas plant.

So the answer is yes—you would want a separate demonstration project.

Professor Jon Gibbins: Correct. May I also say that I think there has been some confusion between pre and post-combustion in terms of whether they are on coal or gas? There seems to be some conclusion that there is not a lot to choose between pre and post-combustion and oxy-fuel on coal—there seems to be pretty much a balance. As far as we can tell at the moment, in terms of actually producing electricity from natural gas, post-combustion seems to be ahead. The International Energy Agency’s greenhouse gas report shows that quite clearly, so there is good reason to do that. The only reason to go to pre-combustion on gas is that it was a very defensive use of existing technology for hydrogen production. But it was not really a power production technology that was used.

Q 102

Finally, and very briefly, on the urgency of all this and the very tight deadlines to which we are working, what if that jump from R and D  to a practical demonstration project that is working on a massive commercial scale fails or does not work? What happens then?

Jeff Chapman: I don’t think we should even entertain the concept of failure as in abject, total failure.

I was thinking about having a plan B, rather than about total failure.

Jeff Chapman: The fact is it will work. It remains to be seen just how efficient and cost-effective it can be made into the future. That is what we really need to get building the plants for. The plants will work.

Tony White: This is not like building fusion power on ZETA back in the ’50s. We know we have got plants where we have burnt coal in gasifiers; we know we have taken carbon dioxide and squirted it underground; and we know we can separate CO2. It is just a question of putting them all together. Yes, it will work. How well it works at large scale is what we will want to find out.

Q 103

If it is not on a commercial scale, will the Government have to put money in, because it cannot be done at a profit?

Tony White: You are putting in money in any case because you are asking people to do something that is uneconomic.

Q 104

I understand that, but what about afterwards? You are talking in terms of development, taking it forward and taking the risks and so on. But what happens if it is still not making a commercial profit in 20 or 30 years’ time?

Professor Jon Gibbins: It depends on what you are up against. There is an implication that if you are, for example, up against offshore wind, you will be competitive with CCS. If people do not care about having decarbonised electricity, yes, of course, it could not possibly be competitive. But, compared with what we know about alternative forms of decarbonised electricity, it does appear that it will be competitive.

Q 105

May I ask your view about whether you would like carbon capture and storage for gas turbines to be included in the Bill?

Professor Jon Gibbins: Yes. There are two points here with regard to different fuels. It would send a pretty useful message to the electricity industry if natural gas was included in the Bill. It could well be that after some deliberation about energy policy in the 2020s—and the Committee on Climate Change is just having a look at that at the moment—we decide that we want a natural gas demonstration. That could make a big difference, because it is very hard to legislate, to tell people to fit CCS on natural gas, if you have not got a reference plant. It really does not work.

There is also a technical point that power plants burn a range of different fuels. I believe that the wording of the Bill at the moment might be construed as meaning that people who have burned a bit of oil to start their plant up cannot claim for the CO2 that was captured from the oil—and that is just trouble. So I think that it should allow for any CO2 that is captured. On biomass, you want people to work on biomass with CCS. I  should say that at the moment, with the existing capture-ready legislation, we have got the—I do not know whether it is an anomaly or what it is, but we have people building biomass-only power plants that are 5 MW under the 300 MW limit. That does not seem to be in the spirit of encouraging carbon capture and storage. You get negative emissions from biomass.

Q 106

If the Bill goes through and becomes an Act, I can imagine the conversations that will take place in the boardrooms in Germany, Spain and elsewhere. People in them will say, “Right, the situation has changed—there is a lot of money there, what do we do now?” They would be told, “If you build a 1.6 GW plant, you will get 400 MW of CCS on that. You will get the levy that will support the funding on that.” The people in the boardrooms will ask, “What will happen after that—will we then be required to retrofit on the other 1.2 GW of capacity?” The answer would be, “Well, possibly.”

Those in the boardrooms would then ask whether they could get any funding. Actually, the Bill does not say whether they would or not; it says that the Secretary of State has the power to decide whether he will give some. And so there is no guarantee that the companies will get support further down the line for retrofitting the rest. From you have been saying, Professor Gibbins, by 2030 one would expect all of our plants to be retrofitted. How do you get round that issue and does there need to be a greater clarity in the Bill for the support mechanism which might be available in due course for retrofitting?

Professor Jon Gibbins: I do not think that there needs to be greater clarity in the Bill as primary legislation. My understanding is that the Secretary of State has powers to pay for additional CCS at demonstration sites. I think it will come in under secondary legislation and also in the contracts when you actually close the financial support for your demonstration project. I am sure that any prudent consortium investing in that would make sure that they had their position covered to extend to full capture.

It depends on what the overall process is in the 2020s, because you cannot look at these plants in isolation when they have to go to full capture; you have to consider what is happening in the rest of the industry. For example, if you tell coal plants that you have to go to a standard beyond natural gas, then obviously that is one situation. If you say that you have to decarbonise to a gas standard, then that is something else. I do not think that you could look at them without the rest of the market.

Jeff Chapman: I would agree with that. I would just add that we have got to hand it to the Government. They at least listened to the point of view of industry when we said to them that if you leave it open-ended like this you will not get anything built at all. That still pertains—if it is not in the secondary legislation and then in the contract, as Jon said, then you will not get anything built at all. It has got to be all or nothing here.

Q 107

What about the intellectual property? If the taxpayer, through a levy or some other form of subsidy, is putting a lot of money in, should the Government expect to have their share of the IP? Or would the companies walk away if they were not going to keep their own IP?

Professor Jon Gibbins: You are opening up a can of worms with IP. That has a lot of established legislation. One of the interesting things here comes back to whether these are R and D projects, or demonstration and deployment projects. For example, offshore wind is probably going to get more subsidy than a megawatt hour of decarbonised electricity and CCS projects. I do not think I have heard any discussion at all about whether offshore wind builders should share their IP with everybody because they are getting paid for it. What we are paying for here is decarbonised electricity. Incidentally, yes we are getting very useful demonstrations and very useful learning, but I think it really is more about paying for the product, in a sense, than paying for the technology.

Q 108

One of my concerns is that these are old technologies, by your own admission, all of which have been used extensively elsewhere, particularly in the United States for enhanced oil recovery and things of that nature. Post-combustion is a relatively tried technology and is relatively easy to do—I say that in relative terms. Putting them all together I accept is a big challenge. Has anyone factored in, or should we factor in and make part of the Bill, producing hydrogen as part of the pre-combustion process to incentivise the hydrogen economy at the same time, so that Britain is not only leading the world in CCS but also in producing the next generation of hydrogen plants?

Professor Jon Gibbins: I would say that hydrogen technology is better established than post-combustion technology on flue gases. Hydrogen technology is very well established. The other thing that I would say about hydrogen is that if you want to get to a lot of the endpoints that you want using hydrogen—electricity, decarbonised transport and decarbonised heating—studies that we have done suggest that even if you have decarbonised hydrogen, you should convert it to electricity. I am not sure that there is a significant advantage in going via the hydrogen route when the end product is decarbonised services.

Jeff Chapman: There is a potential advantage in that it may well be possible to decarbonise existing gas-fired power stations remotely by supplying them with hydrogen as an alternative fuel to natural gas. There might have to be a refit of equipment but it would not be that expensive.

Tony White: I would be very wary. That would be for a public good, is that what you are saying? The companies would not generate hydrogen just for the sake of its maybe having a use in transport some time in the future, when there is the risk of electric cars becoming the norm rather then fuel-cell-driven cars using hydrogen, I would argue. So, is it a good use of a public good to get them to do it? Possibly, but I would rather these guys just go and build their power stations and get them to work and get the experience, as we have been hearing, rather than complicating matters further. What we want are kilowatt or megawatt hours operating as soon as possible rather than trying to do two or three things at the same time.

I thank the three witnesses making up our panel for coming here today and for the very valuable contribution that they are making to the debate. Thank you gentlemen.

Q 109

Good afternoon. Before we start may I say that the hon. Member for North Southwark and Bermondsey would have been here but for the statement on Copenhagen? The Minister of State is also in the Chamber for that particular statement. It is rather sad that these two things clash but that’s life.

I welcome our panel for this afternoon and ask you to introduce yourselves for the record and say who you are and what organisations you represent.

Kirsty Clough: I am Kirsty Clough, I work for WWF in the climate change team.

Stephen Hale: I am Stephen Hale, I am the Director of Green Alliance, a think tank, and we have done a considerable amount on carbon capture and storage in particular in recent months and years.

Thank you both for coming here.

Q 110

A very simple question: are the Government right to focus on CCS?

Kirsty Clough: I certainly think it is right that they take it into consideration, and the finance mechanism proposed by the Energy Bill is likely to be necessary. We are concerned that it is not currently matched with a proposal to mandate coal-fired power stations to limit their emissions. The Government are currently proposing that the levy will be paid for by the consumers but not matched by some form of guarantee that ensures that the CCS demonstrations take place within the correct parameters to ensure we can tackle climate change.

Stephen Hale: I agree with much of that. I think that the Government are right to focus on carbon capture and storage. We have obviously had a policy framework for renewals in particular, but for other technologies too, for some time. Over the past two years—certainly this year—we have seen a transformation in the Government’s approach to coal from the position under the previous Secretary of State, John Hutton, which effectively encouraged energy companies to come forward with proposals for unabated coal-fired power stations, to the current approach where no coal-fired power station can be built without CCS. We also have the Bill’s proposals.

I think that is a tremendous step forward and that it is a gap in the framework. I think we could decarbonise the UK’s energy generating system without carbon capture and storage, but, from a global perspective, it is a critical technology and it is important that we in the UK play our part in the cost discovery, which, as previous witnesses have said, is going to be critical in identifying what role and contribution the technology can make. However, I entirely agree with Kirsty that we must have both the financing mechanism and the regulatory framework. A number of amendments making that proposal have been tabled.

Q 111

Moving on to the regulatory framework, which you have commented on, we have a detailed memorandum from WWF, Greenpeace and Friends of the Earth about the need for statutory limits on emissions from power plants. I take it that we are talking about all forms of power plants. Can you expand on why you think that is necessary and who it applies to if we are already going down the CCS path?

Kirsty Clough: I will put it into context. The Climate Change Committee has recommended that we need to decarbonise the power sector, or very nearly decarbonise it, by 2030. Alongside that, it said that there should be no unabated coal in the system by the mid-2020s at the latest. Clearly, carbon capture and storage is one technology that could help us get there, but it is currently in its demonstration phase and has yet to be tested on a commercial scale. We therefore feel that it is entirely reasonable to ask that, if you have a finance mechanism for CCS, you should also match it with a regulation that mandates coal and other fossil fuel plants to reduce their emissions in line with what the CCC has recommended in case CCS does not prove to be workable for whatever reason within the Government’s time scale.

Stephen Hale: I agree with much of that, but slightly differently in terms of some of the debate and some of the Government’s thinking about regulation as the safety net. The regulation is primarily designed for the if-it-doesn’t-work scenario, which was mentioned earlier. I think that you must have a finance mechanism, because companies will not come forward with investment in CCS plants without a financing mechanism. What we have to do is create a policy framework that not only gives investors confidence, but that gives the public confidence in the climate impact of the technology and that also gives investors absolute clarity about what the Government want to see and what the trajectory must be for emissions reduction from the power sector and the plants. The danger is that at the moment we have something that makes it very clear how the financing support will come forward, but, from the public’s point of view, it is not clear how potentially up to £9.5 billion will deliver against the Government’s climate change objectives. Therefore, from our point of view, the overall framework has to be designed so that it does bring forward CCS, but in a way that gives investors and the public confidence about the emissions impact of that investment.

Our previous panel, which I think you witnessed, were quite robust at the end about the expectations that CCS would work and the fact that all the elements were there. As you said in your memorandum, the Government have said that, if for any reason the technology does not work or proves too expensive, they would then look at contingency safeguard measures, which I assume would be in line with the sorts of things that you are talking about in relation to statutory limits on emissions. Why wouldn’t that work? Why is it so important to have that in place now? Would you actually put the limits in the Bill, or would it just be a provision that regulation could be introduced in certain circumstances?

Stephen Hale: I think it is very important that the financing and regulation elements have parity of treatment. The financing mechanism is going to be the subject of primary legislation, and then the details of how that is going to work, precisely who will pay, whether it will be levied by carbon, and so on—issues I know the energy companies had views on this morning—will be defined in secondary legislation. In our view—I think I can speak for both of us—the regulatory mechanism should be the same. Certainty that there will be a regulatory mechanism and certainty about the time scale within which that will be introduced should both be in the Bill—in primary legislation—but the details of precisely what the level of that should be is something that we obviously need to take time to get right.

Q 112

So you wouldn’t be talking about introducing statutory limits now for existing power plants, but about there being a framework in the Bill for doing that in secondary legislation.

Stephen Hale: In my view, the ideal scenario is that the Bill would require the Government to bring forward that regulatory framework and to do so within a specific time scale, within which we could get this right. We could then ensure that we design an emissions performance standard that gives investors clarity and something against which they can make investment judgments—as you said, boards in other parts of Europe will be involved in that discussion—but also something that gives the public certainty about the financing mechanism and about what the money they will be paying through their energy bills is going to deliver in terms of the UK’s climate change obligations.

Q 113

I think that Judy Mallaber asked you about a specific date for that. Do you feel that there ought to be a specific date in the Bill by which, for instance, not only new plants but existing plants are retro-fitted to ensure that they are zero carbon?

It wasn’t just zero carbon. You were talking about being in line with the reductions that have been put forward by the Climate Change Committee. Can you clarify that as well?

Kirsty Clough: Amendments have been tabled on this already. There is a Labour amendment—

Q 114

What’s your view?

Kirsty Clough: I was just going to explain. What we would like to see in the Bill is a piece of enabling legislation, which—

So you don’t even want a date?

Kirsty Clough: New clause 5 proposes that the measures come into force within 12 months of the Act being passed, but that does not—

Q 115

New clause 5 does not give a specific date, other than that the Secretary of State shall within 12 months produce a timetable. That could be in 100 years’ time. Would you be happy with that?

Kirsty Clough: That new clause also sets the parameters for the discussion. It says that CCC recommendations should be taken into account. But you are right, it is an enabling power, which obliges the Government to bring forward an EPS. However, the NGOs do have a position on timing and level, which has not gone into this amendment at this point because we want to have this debate.

Q 116

Are you saying that as NGOs you are happy with having an open-ended situation whereby we can pass an Energy Bill in which the Government can give an indeterminate time for dealing with the issues?

Kirsty Clough: I do not think that that particular amendment is open-ended because it does set within 12 months—

Forget this amendment. Are you happy that we could have the Bill go through Parliament without there being specific end dates?

Stephen Hale: I will comment on that. It would be easy to—

Sorry, why can’t WWF answer that?

Kirsty Clough: You are right, I don’t think that we are happy with the Bill as it currently stands, which is why we would want to see some form of amendment in terms of getting an emissions performance standard taken forward. In terms of the numbers and the specific dates, that would be a quite detailed discussion, which it would be hard to get into a Bill of this nature at this point in time, when there is an election coming up, etc. We NGOs do have a clear position on what the level and timing should be, which I am happy to talk about now, or I can give you our position paper at the end of this session.

Stephen Hale: We could all suggest a date, and we could all suggest a level for the EPS, but I think there would be a significant risk that we would get it wrong if we were to force that debate now, and attempt to close it out within the time scale within which the legislation would be discussed. From a Green Alliance perspective, we are interested in not just choking off unabated coal but also in securing CCS investment. The design of the EPS is something that we have to get right. So, being clear on the face of the Bill that there will be an EPS, but giving 12 months to ensure that we get the decision right, is, for us, a sensible approach.

Q 117

We have been talking a lot about dates. We have had quite a lot of evidence about the technology of CCS and how far it has advanced—some of it contradictory as far as I can see—but can you tell us how feasible the Government’s target is of having a CCS demonstration project up and running by 2014?

Kirsty Clough: I think that it is feasible. The Longannet power plant in Scotland has stated that it is confident that it can have a CCS plant up and running by 2014. The date is quite important, because, as we have all heard, the competition has been running since 2007. In order for it to maintain some sort of credibility we need to start doing stuff on the ground now to see if the technology can work. The additional benefit of testing it on an existing plant means that there is a net reduction in emissions immediately. You do not need to build a brand new power station and fit CCS to 20 or 25 per cent. of it, which would still result in 80 per cent. of emissions going into the atmosphere. That is quite important. There is another plant in the pipeline—the Hatfield plant—which has been awarded money from Europe. That is potentially another option, too, which could be one of the pre-combustion plants.

Stephen Hale: Nobody involved in this debate would have invented the competition and designed it in the way in which it has evolved over the past three years, because the Government have been changing their mind through the evolution of the competition about what they wanted to see. We can get the first plant up and running by 2014. For the reasons that Kirsty gave, it is very important that the public see a result, see something built, and we begin to get the cost discovery. One of the things that we have been doing in the various events that we have run, bringing together people from the private sector and from the NGO to look at what shared territory or common ground there is over how we can engineer a CCS industry in the UK, is being clear that if we pursue purely a competition-based approach, it will probably be 2020 before we get the second plant, and we need a rather different approach  to procuring and identifying and securing construction of the second, third and fourth plants that we can add to this first one.

Q 118

When E.ON was here this morning, its view was that 2014 was a date but it could slip a few years. It was not the important point; it was one of a range of factors. I take it that you do not accept that, that something must be up and running by 2014 or it endangers the use of CCS of meeting our climate change targets.

Stephen Hale: I think everybody in this room is aware of the urgency of climate change. We have waited much too long to get serious investment behind CCS. I went to an event held in the UK that brought together stakeholders from all over the world to talk about carbon capture and storage. I think that that forum has been running for six years, and we do not have anywhere in the world a significant large-scale CCS plant. So, 2014 is not soon enough in my view, but it is probably as fast as is practicable.

Q 119

Do you think the levy system of underwriting the development of the further three projects after the initial competition is a wise way of proceeding? I mean the levy to industry in order to fund the allocation of money for the CCS projects.

Stephen Hale: I am not sure I would have framed it in that way. There needs to be a share of the risk between the private developer and the state that represents the consumer who may be putting £9.5 billion into those private investors. We are not underwriting without any constraints or without a share of the risk—I certainly hope that we are not—the investment activity of the private sector.

Kirsty Clough: My concern would be that given the way the Bill is currently drafted, I do not see the private sector taking on much risk. The current proposal is that the Government will pay in full for the four demonstration projects, and that that is now potentially extended to cover the payment for retro fit as well with no guarantee that they will be operating within the climate change remit that the Government have set themselves, or within the Climate Change Committee 2030 recommendation. I am concerned about the way the Bill is drafted if something like an EPS amendment is not made.

Q 120

The Bill creates a CCS levy across industry. The proposal is that the levy be based on the market share of various suppliers. Would there be alternatives, such as grant systems or requiring an industry pool for such underwriting, or is the levy a reasonable way of proceeding? If so, how might it best be apportioned? Should it be apportioned on market share, or should it perhaps be apportioned on the carbon intensity of those suppliers? Should there, for example, be any wayleave for renewables suppliers within such a levy system?

Stephen Hale: There are two different issues, aren’t there? How do you share the contributions between the companies? Who pays? Where do you levy it from? The Green Alliance does not take a view on that question. The second question is where does that money go and how is the risk shared between the state and the private  sector in relation to the demonstration plants? That is a very important question. I agree with Kirsty that saying up front “We will cover the capital cost and build the pipes, and if it doesn’t work don’t worry because we have written you a blank cheque” is not a very effective way to incentivise the private sector. There is risk and reward for both sides. It needs to be properly shared.

Q 121

Are you implying that industry ought to take a greater degree of the risk in the development of CCS, or do you think, certainly in terms of getting the four projects up and running, that a levy system, followed by an allocation system, provided that the results are public property and are shared out, is a reasonable way to proceed?

Stephen Hale: No, I’ve got no objection to the levy system in principle, although, as we’ve been saying consistently, there needs to be a regulatory framework alongside the levy. When you determine what you’ve got in that pot and what you want to do with it, you need to make sure that you maximise the benefits for UK plc, for the taxpayer and consumer and for the cost discovery for CCS. That is about the state deciding where we want CCS clusters and where we think there is most economic opportunity. We therefore should be putting demonstration plants into those parts of the country where there is likely to be industry investing and wanting to store the carbon. We should be paying companies on the basis of the carbon that they have saved, not on the basis that they are building something that may store carbon. We need to share the risk and the state should ensure that there is access to the intellectual property. So there are issues there about risk.

Q 122

So you would favour a fairly high degree of regulation through secondary legislation in things such as the sharing of knowledge and the building of pipes and the infrastructure?

Stephen Hale: On the building of pipes, one of the problems with our debate over the past couple of years has been that the argument has been focused on how much carbon is going to be abated and how much unabated coal there is going to be. In reality, we need to work out much more clearly, and only the state can do this, what plants we want in the UK and how many pre-combustion plants and how many post-combustion plants. Where do we want them to be? We should work that out from an industrial perspective and from a carbon perspective and then we should design a policy regime that delivers that, because the market is not the best determinant of which parts of the country are best suited to investment in CCS. The market is not going to deliver you an infrastructure where the pipes are of the right size to ensure that clusters of companies can come together. We cannot leave this to the market.

Q 123

I can probably guess the answer to this, but should the Bill provide for the contingency of CCS not being technically and/or economically viable, and how would you do that?

Kirsty Clough: Yes, to repeat what I said before, we think this should be done by the establishment of clear limits on emissions. You are setting the parameters within which your CCS demonstration programme can operate. As Stephen has already said, you are keeping  your regulation and your finance on the same legislative footing. The problem we have at the moment is that the Government have come at this from the point of view that we need to commercialise CCS. That is not a bad way to come at it, but we need to do that within the context of decarbonising our power sector, in particular decarbonising emissions from coal. That is what is missing at the moment. We would try to amend that by including something like an emissions performance standard in the Bill.

Q 124

How would that work?

Kirsty Clough: An EPS of the type we are talking about would place a specific limit on emissions from individual power plants.

Q 125

How would you know the limit at which it would have to be set? How would you calculate that?

Kirsty Clough: Speaking on behalf of WWF, we consider the limit should be set on new plant at around 300g of CO2 per kWh. That is the level of emissions that could be met by a new gas plant with some form of heat recovery. We propose that this should be scaled down to about 100-150 by the mid-2020s, in line with the recommendations from the CCC, and at that point existing plants should also be covered. That is where we are coming from.

Q 126

Allowing for the fact that that could add cost to the projects, how would you cover that?

Kirsty Clough: Establishing those parameters allows you to have the conversation with the power companies about sharing the risk and about sharing the costs, which we mentioned earlier. We do not think that consumers should be picking up the full cost of all of this.

Q 127

So, does this go back to the levy we were talking about earlier?

Kirsty Clough: Yes.

Stephen Hale: The two things have got to be designed in tandem. If you do not have the financing mechanism and the regulation, then the regulation might choke off the investment, or the financing mechanism might get them building something you wish they were not. You have got new plant up and running that is not consistent with your climate change targets. We need to see the finance and the regulation designed together.

Q 128

Usually, when you go into a project, things get better as you go along. Are you going to allow for the fact that the initial start up might not hit your target? You do not want to close it off and say that is the end of the project—you want to keep it going. Where is the flexibility in what you are saying?

Stephen Hale: The standard will evolve necessarily over time, so that you can tighten the EPS, as Kirsty has already said. Coming back to what we want for the UK, we want a mix of pre-combustion and post-combustion. The first plant that could be got away clearly by 2014 is on an existing power station, the Longannet plant. That would only reduce emissions because it is not new energy-generation. After that you can quickly build pre-combustion, which will have very high emissions reduction because of the nature of the technology. In a  sense, this discussion about the limit and the EPS bites in particular on the Forth’s plant; it bites on large, super-critical post-combustion technology. That is where the EPS is most pertinent, and that is where it is important to get the policy framework right.

Q 129

You commented on clusters and the involvement of Government in those issues, yet the market is already talking about clusters; we heard that this morning. We heard evidence the market sees three as being initially viable, and it has a pretty realistic view of this. Can I understand your balance? Where do you see the balance between the market and regulation in this process, because I am not sure I understand?

Stephen Hale: At the moment, as I understand it, the companies cannot build a regional pipeline infrastructure, for Kent, the Humber, the north-east or anywhere else. They are barred from doing so, under the constraints under which they operate. Therefore, somebody has to impose on the market framework, first, from an industrial perspective, an identification of which parts of the country would most benefit from CCS clusters and, secondly, a mandate to get that infrastructure built, whether that is by giving a company a lead role in a particular area or getting Ofgem or someone else to play that role. Only the Government can set that investment in motion and create the clusters. At the moment we have not moved as quickly on that as we ought to have done. We effectively have a competition approach that is basically asking, “Who can build a cheap CCS plant?”, without any consideration of where in the country it would be smartest to build such a thing. That is the shift we need to see when looking at the second, third and fourth plants.

Q 130

Surely the word is “partnership” in that respect, but I did not hear much about partnership in what was said.

Stephen Hale: What has been happening since the Government said they wanted to see a cluster-based approach is that companies with potential investment in particular areas have come forward to explain that there are other companies in the area and what their cluster might look like, and that is all right and proper. Clearly, there could be a bidding process in which people say that the case for a cluster in one area is this, and that the case for a cluster in another area is that, and then the Government will have to come to a judgment. They should make sure that the demonstration plants are in areas where we see strategic advantage and where we want clusters.

Kirsty Clough: I think we have to be a little careful with clusters as well, because the cluster E.ON is proposing is based on it building its new plant at Kingsnorth and on a new plant being built at Tilbury, so there is an element of self-fulfilling prophecy. You build the plants so they become a cluster, but there is not necessarily a cluster there at the moment. A lot of the plant there will actually be closing in 2015-16 due to the large combustion plant directive, so there is an element of that going on.

Q 131

On the subject of clusters, would it be fair to say that the entire project has very much had an east of England focus, or would that be naive?

Kirsty Clough: I think the discussion on clusters is valid, but we need to treat it quite carefully.

Q 132

The CO2 will be going towards the North sea and other such areas, so to have any of those clusters or coal-fired power stations with carbon capture and storage in any way near the west coast would mean that moving the captured carbon across would be cost-prohibitive, would it not?

Stephen Hale: I think there may be interest in Liverpool and the north-west, but I am not certain about that. I do not want to foster an east-west divide over the CCS consumer levy, but by and large you are correct.

Kirsty Clough: It does make sense to look at it strategically, so you do not have each plant having its own pipeline, which would obviously add tremendously to the cost.

Q 133

I wonder whether we are talking about the same Bill, because I do not see anything in it at all that relates to what we have just been talking about. There is nothing in the Bill about that, as far as I can see, but perhaps you can point me to the bits that do refer to it. We understand the demonstration, and that has happened, I think, so there is no point going over that ground, but I do not see anything in the Bill dealing with creating clusters or the whole idea of creating a balance between Government and industry, or between the taxpayer and industry, or indeed between individual consumers and industry. Nor do I see anything in the Bill that gives the Secretary of State the power to intervene on where he or she will place projects in future. There is nothing in the Bill, as far as I can see, that says we will have a balance between pre-combustion and post-combustion, or indeed about oxy-fuel combustion capture, which might be a third prospect. None of that is in the Bill, so where is this? Have I missed something in the analysis?

Kirsty Clough: I think you are right. It is not in the Bill. The announcement in November about the framework for the development of clean coal, which was made by Ed Miliband, stated that there will be up to four CCS projects, and it has now been confirmed that there will be four—

Q 134

I understand all that. Just to cut things down, you agree that there is nothing in the Bill about that at all. Would you like it to be amended to create the sort of climate that you are talking about?

Stephen Hale: The question, which may come in due course to the Government representative, is whether they need primary legislation for any of those things. Do clusters need primary legislation? Does getting the right balance in the sharing of risk between Government and industry need primary legislation? My answer to both questions would be no. Our big concern about what is or is not in the Bill is that regulation is not in the Bill, and in our view that critically weakens the pubic confidence and the climate confidence in the Government’s strategy.

Q 135

There seems to be a transformation in the way in which the green NGOs are operating now. They seem terribly compliant. I thought you were looking for all sorts of exciting challenges ahead of us.

Stephen Hale: It’s got a bit less exciting since the Government ripped up the old policy of wanting to build unabated coal-fired power stations and started going for a CCS policy. The risk, though, is that the CCS policy does not deliver against climate change objectives, and that is why we need the EPA.

Q 136

Just for my clarification, because I am a simple creature, do the green NGOs now support CCS?

Kirsty Clough: I can only speak for WWF. We support it being demonstrated and considered, but we would like to see that, as we have said, within the context of it delivering for the climate from day one—so, set within strict emission limits.

Q 137

So, Kirsty, do you think that the Bill should be extended to include natural gas and other fuels as well?

Kirsty Clough: Certainly, CCS will likely need to be applied to natural gas in the 2020s if you want to meet the 2030—

Q 138

Should the Bill be amended as it goes through?

Kirsty Clough: To be honest, we do not have a specific view on whether natural gas should be covered in this levy. It seems to make sense that the first CCS projects are on coal, as the most carbon-intensive form of fossil fuel.

Q 139

Stephen, should we get that legislation in now or should we leave that to secondary legislation and to Ministers’ discretion—all these nice Ministers—in future?

Stephen Hale: I thinkthe decision to extend the levy to gas would be rather expensive for consumers and therefore would require primary legislation rather than secondary legislation. But we have been focused, like WWF, on coal.

So we will continue burning gas. That will be all right for us.

Stephen Hale: That isn’t what I said and that isn’t our view. But our primary focus has been on coal.

Q 140

What is your understanding of the Government’s position on those power stations not fitted with CCS retrospectively after 2020? They will just burn—

Stephen Hale: My understanding, although the point is poorly defined, is that between 2020 and 2025 they will either be fitted with CCS or they will no longer be allowed to operate.

Is that your understanding too, Kirsty?

Kirsty Clough: They are proposing waiting until 2018 to decide this. If in the meantime we have built one, two or three more big coal-fired power stations, the risk of a Government in 2018 demanding that they are closed is pretty unlikely—it’s not going to happen. That is why we think we need something in place now to prevent that from happening in the first place. You cannot put a contingency measure in 10 years’ time: it is not a contingency measure; it’s an afterthought.

Stephen Hale: There is an analogy here with the Waxman-Markey Bill in the US, where both the finance and the regulation have been taken forward in tandem. One of the things we did at the Green Alliance was to bring over a group of policy makers, both industry and  NGO, to the UK to meet different political parties and to come here to the House of Commons, as we did a few months ago, to share the US experience of how they work together and why they feel that both finance and regulation are essential parts of the mix.

Q 141

Changing the subject to Ofgem, clauses 16 and 17 impose on the regulator a requirement to take account of carbon emissions and security of supply. Do you think that will have an impact on the way in which they work?

Kirsty Clough: This is not an area that we have specifically focused on. However, we welcome this clarification of their remit in tackling climate change and ensuring security of supply. Our concern would be that they now have a three-pronged remit: affordability, climate change and security of supply. It is unclear how those three will be traded off against each other, so we still think there is a clear need for Government intervention—not necessarily in Ofgem—to put in place clear policies and measures that guide Ofgem’s decision-making process.

Stephen Hale: Maybe I could put our view on that. It is not unhelpful, but is this reform affecting Ofgem anything like as significant as we need to see if we are going to get a low-carbon energy objective system? Absolutely not. We saw an announcement in the pre-Budget report by the Chancellor that there is going to be a review of the structure of the energy market and there was discussion about whether the incentives in that structure are right and whether the system we currently have can deliver our low-carbon objectives.

We need to look pretty radically at the structure of the market, at the policy framework for the market and at the role of Ofgem, because the history of its role and the way that the market has operated so far suggests that it has prioritised security of supply and low-cost objectives in the short time over climate imperatives. I am not convinced that the reforms in the Bill will change that position materially.

Q 142

So you do not envisage Ofgem suddenly deciding that it wants to push customers to use more renewable energy, rather than invest in more traditional types of energy.

Stephen Hale: As Kirsty said, Ofgem is the regulator and the Government are the Government. If the Government want to see that, it is for them to mandate that the companies do it, whether directly or through Ofgem. In the end, the political direction and the decision about the balance of investment that we want to see in different technologies has to come from the Government, not from the regulator. The regulator has to have the role and the incentives so that it supports those objectives.

Q 143

Yes, but how the regulator operates has a huge impact on how renewables access the grid. You will be aware of the huge problems over the years with grid access and transmission charges. Do you see these new powers or obligations as something that will or should impact on that area? Will you make representations along those lines?

Stephen Hale: Like Kirsty, this is not my area of expertise. From reading it as a layman, it seems that it will help. Whether it will be sufficient is another question and I cannot comment on it.

Q 144

Can I be clear on where we are on the EPS? We have had quite a discussion about it and I am keen to get more clarity. Kirsty Clough has said that she would like to see it introduced at 300 grams per kWh for all new coal plants. Would that be the Green Alliance’s view of an appropriate level?

Stephen Hale: I think we would probably support that. I say that carefully because we are supportive of the 12-month deadline for setting an EPS because, as I said, this has got to give climate confidence and investor confidence. We need the finance and the regulation to be developed together. You need to understand how the financing mechanism will work, how much it will raise and how the risks will be shared. We must make sure we have a framework on both sides that gets the plant built, but delivers our climate objectives. My answer is a cautious yes.

Q 145

To get to that level on coal, it would mean that about three quarters of the capacity of a plant would need to have CCS from the outset. Some could argue that that moves beyond the scope of the demonstration project. That is almost commercialisation of the project. How do you see an EPS at that level tying in with the demonstration work?

Kirsty Clough: Our proposal for 300 covers new plants so it precludes existing plants. The demonstration at Longannet, for example, would fit within that concept. For pre-combustion plant, the Government have already said that pre-combustion CCS will be at 100 per cent. full scale from day one. The whole generation capacity of a pre-combustion IGCC plant would be CCS, so that would fit within that context.

For a new post-combustion supercritical plant, you are right that it would require about 60 per cent. of the emissions to be covered. I do not think it is necessary, but if the Government wanted to build a supercritical plant, they could consent to a smaller plant. It does not have to be a 1.6 GW plant, as is currently proposed by E.ON at Kingsnorth.

Stephen Hale: The only thing I would add is that in terms of what we want for the UK, there is a sequencing. By the time we come to build a large supercritical plant, which is likely to be the fourth in the four, we will probably know rather more about the cost and viability of CCS than we know today. That kind of ambition is right, but we will probably be sitting here in 2012 and 2015 when we are operating the first one and we will know much more about this technology. I hope we will have the confidence at that point so that we can build a large plant that has a much higher proportion of abatement. I see this as an evolution, and the demonstration programme should take us on that journey.

Q 146

But the amendment that you are supporting requires that to be set within 12 months.

Stephen Hale: Yes.

Q 147

You are saying that it could be two years before we understand what is practicable. Are you comfortable about the speed with which you are looking to move in this direction?

Stephen Hale: Investors need clarity. They need clarity over whether there is a financing mechanism because they will not build anything without it. They also need  clarity on what the emissions trajectory is. The Government should be able to provide that and we should be able to make an informed judgment on a shorter time scale.

Kirsty Clough: It is also important that the EPS is set by the science. The EPS is not about CCS technology per se, but about what is required in terms of tackling climate change. To make that point clear: if you determine your EPS by what you think CCS can deliver, that is not likely to be necessary in the next few years.

Q 148

But surely energy policy has to take account of the climate change issues, affordability and security of supply. If one puts in place a policy that drives away investment and we therefore start getting power cuts and power outages because we are not getting a new plant built, that will not provide a balanced energy policy.

Kirsty Clough: That is why we always talk about regulation and finance in conjunction; you certainly need finance to incentivise CCS, but you need to operate that within your climate change targets.

Stephen Hale: I don’t think that any of us want to choose between those objectives, but the question is what approach gets the best chance of achieving them all. The danger of the current approach is that you do not have regulatory clarity. People are encouraged to build plants, but there is no clarity on how they might finance the retrofit. They then turn around and say, “You’re going to have to let us run these things now, because they’re up and running and are rather expensive.” We therefore get forced to choose between security supply and climate change, so our argument is that we should invest 12 months in devising a framework that can do both.

Q 149

Slightly separately, the Government have put in place a road map on nuclear, so each month we know who is supposed to be doing what and that the first nuclear plant is to open by 2017-18. There is no road map for carbon capture. Do you think there should be a requirement on the Government to put in place a road map so that we know whose responsibility it is to do what? What has come out clearly from our conversations with you this afternoon is that an awful lot needs to be done but nobody actually knows whose job it is to do it. A road map would provide much greater clarity. It is helping to drive the investment in nuclear, so should we also have it for carbon capture?

Stephen Hale: I totally agree. I actually wrote jointly with some of the energy companies to Ed Miliband making that analogy, and I think that that, among many other things, contributed to the announcement that there will now be an office of carbon capture and storage in the same way as we have an office of nuclear deployment and an office of renewables. Those offices are creating the road maps.

It is a legacy of how carbon and capture storage coal policy has evolved in the past few years that we have nothing like that kind of clarity. Again, that is because we do not actually know yet what we are trying to build and when. When we know what the mix of plants is, what the sequencing is and where we want the clusters to be, we can have a road map to deliver it.

Kirsty Clough: May I add something? I think there should be a road map, which we are currently lacking, for the power sector. The Government are yet to accept  the CCC recommendation for a close-to-decarbonised power sector by 2030. If they were to adopt that, it would go quite some way to giving some certainty to power companies about what they should be investing in.

Fine. If there are no further questions, may I thank Kirsty Clough and Stephen Hale for coming today and making a valuable contribution to our debate?

I welcome Sarah Harrison. Thank you for coming. For the sake of the record, could you please say who you are and who you represent?

Sarah Harrison: I am Sarah Harrison and I am the Senior Partner for Sustainable Development at Ofgem, the energy regulator.

Q 150

On social tariffs, does the inclusion of the mandatory social tariff in the Bill indicate to you that the voluntary agreement has failed?

Sarah Harrison: No, I don’t necessarily believe that it does. I think the importance of the mandatory social tariff is that, given the scale of support that is envisaged and that the Government plan to introduce, it is really much more appropriate to be putting it on a statutory and mandatory footing. It will move from something like £6 per energy customer that the voluntary arrangements currently incur, to approaching £11 per energy customer.

Given the scale, it is simply more appropriate that it is put on a statutory and mandatory footing. That also provides a better opportunity to deal with the issues that the Government envisage—the issues around targeting and eligibility, making judgments on who should be eligible and putting in place the reconciliation mechanism that will ensure that the cost is borne fairly across energy suppliers and, ultimately, customers. The move to a mandatory approach is right, given the scale of support that is envisaged.

Q 151

This morning I asked a similar question of our panel. Do you think there is enough clarity in the Bill to ensure that the targeting you have just referred to is correct? Could it be expanded? Do you feel that the system will be sensitive enough without being over-complex?

Sarah Harrison: On targeting, subject to regulations passing through Parliament, a very important trial of data sharing is about to be undergone. That is going to be very important in helping to provide the right mechanisms to ensure effective targeting. Targeting is going to be very important to help get the support to those who most need it. We have been great supporters of the Department for Work and Pensions data sharing trial, as it is dubbed, and have encouraged it. So we are very keen to see that happen. Hopefully, we will then see the benefits from that trialling being applied, as the real detail of how the social price support mechanism is going to work is subsequently developed.

Q 152

But are you happy that enough people have been included in the targets? Are they accurate enough? Quite often it is the elderly now. This  morning we talked about people with chronic and long-term illnesses. Are you happy about the direction targeting is going or do you think it could be improved?

Sarah Harrison: In terms of eligibility—and this is why we see the value of putting this on a statutory footing—those judgments about who should be entitled to the support and, by definition, who should not, are properly for the Government. So we think it is much better that the Government now make those decisions. What is important, given that this is a cost that will be borne by all energy customers, is that people can be confident that those measures are going to be received by and targeted at those who are most in need. That is why things such as the data sharing trial will be valuable to see how it works in practice.

Q 153

That all sounds as though it could be quite expensive as well, if it expands the number of people who are now included, as some would like to see. What steps does Ofgem take to monitor the amounts spent by companies on tariffs?

Sarah Harrison: If you are talking about social measures, I should say that under the voluntary arrangements we produce an annual report, as we have been asked to by the Government. The first, which has just been produced, is on the first year of the voluntary arrangements. We look at what the suppliers have been spending and at the measures they have invested in. That is not a qualitative report; it simply makes sure that the voluntary agreement that the Government have secured with suppliers in relation to social measures is being fulfilled. Certainly our first annual report suggested that suppliers are collectively exceeding the first year’s targets.

Q 154

So how are your responsibilities going to change now with this new arrangement?

Sarah Harrison: Under the new arrangement, we will move through Ofgem E-Serve, the delivery arm of Ofgem, to administering the levy. There is a power in the Bill to enable Ofgem also to have a role in administering the reconciliation mechanism. What is very important—and we have been clear with the Government about this, as with other environmental and other schemes that Ofgem administers on the Government’s behalf—is that the rules and the arrangements are set by Government and by Parliament, and that Ofgem’s role in those circumstances is to fulfil the official administration of those. We would see our role going forward with the social price support mechanism really very much mirroring the role that we currently perform in administering the renewables obligation, the CCL exemption and other schemes.

Q 155

And you feel that the Bill makes this clear enough or is there more that you would like to see included?

Sarah Harrison: I think that the Bill is an enabling power, as you know. Obviously there is a lot of detail to be worked through, which we are working through with the Department of Energy and Climate Change to ensure that Ofgem is going to be in a position to fulfil its administration function efficiently.

Q 156

Can you give us an idea of the sort of detail that you are talking about?

Sarah Harrison: In particular, we have made it very clear that we want to see detail about the scheme that is clear about eligibility and the functions that Ofgem should perform. It is really the flesh on the bones of those arrangements, in exactly the same way as we sought that detail in fulfilling the role that we have to administer other Government environmental programmes.

Q 157

Do you have any concerns that that detail will not be there?

Sarah Harrison: There is no sign at present that that is the case. Obviously, there is a way to go in getting the details of the arrangements in place, and that will not happen in practice until after the Bill has passed through and all the work is ongoing. There is no evidence or sign that that will not be the case. Our message is very clear to the Government: we expect as much clarity as possible from them on how the arrangements will work, so that we can fulfil our administrative function clearly.

Q 158

Can I just pick up on this? Like many, I am not a great supporter of Ofgem. I think that in many ways it has been a toothless tiger, particularly in dealing with the socially deprived. It worries me that on clause 10 you are waiting for the Government to design in detail the equalisation mechanism, because some companies clearly will be hugely disadvantaged if they have a large number of customers eligible for social tariffs unless there is a very effective scheme. Are you saying that Ofgem will have no role whatever in designing that scheme? Will you simply wait for the Government to hand you down something?

Sarah Harrison: No, I am sorry if I created that impression. I hope that I have made clear that we have been working very closely with DECC to ensure that the role that Ofgem is going to be invited to perform in administrating the social price support mechanism is one that we are able to play.

The reconciliation mechanism is a very important one. In answer to a Member’s question, I made the point that ensuring that the costs of the scheme are borne fairly across suppliers is going to be fundamental to ensuring that there are not distorting effects that that bear out on the market—effects that mean, for example, that suppliers will not have the right incentives to target support to those customers. We care deeply about that and therefore we will be working with DECC to ensure that that reconciliation mechanism achieves its end and also allows Ofgem to do its job effectively, if Ofgem is to be chosen for that particular function.

Q 159

One of the perverse problems is that for those companies that are very successful in attracting the poorer customers that we are talking about, whose energy uses make up a significant part of their budget—the fuel poor—the costs of the administration of the schemes may not be included. The companies would have to bear a disproportionate cost. Do you see that as a problem or is that something that can be waved away?

Sarah Harrison: I think that that is certainly an argument that some companies are making in relation to the recovery of administration costs under the DWP data-sharing trial.

Q 160

But that is going to be the basis of this new scheme, is it not?

Sarah Harrison: Not necessarily; that is one set of arrangements but obviously there is going to be a new scheme set in place, although the lessons, I am sure, will need to be learnt. In many respects, what I am saying is that all of those details are ones that will need to be worked through carefully with DECC to ensure that it is equitable and not distorting—not just for companies but, critically, for their customers.

Order. May I interrupt the hon. Gentleman for a moment? I think that the Minister has a point that might clarify the situation.

Not necessarily.

If the Minister is willing to speak, I shall be happy to sit back.

Q 161

Ofgem’s view was prayed in aid this morning by E.ON. When it comes to calculating the reconciliation between the energy companies, the main choice in terms of equality is kilowatt-hour or number of customer accounts. E.ON recommends kilowatt-hours and prays in aid that Ofgem has the same opinion. I think that Ofgem’s opinion is on a different point from this one, so I would be interested in your view on this particular scheme. Which is the fairer way of making the reconciliation calculation?

Sarah Harrison: Sure. I am sorry; I had not appreciated that that was your angle. We do have thoughts on that. It doesn’t just apply to the social price support mechanism. If you look at the range of environmental programmes—the programmes to support CCS and other mechanisms, including this one—I think there is a question going forward about whether a more equitable way of recovering those costs, ultimately from customers who bear the costs, would be to base it on a kilowatt-hour basis as opposed to a per-customer-number basis, because that would be more reflective of actual consumption.

We have set that out in a policy paper and have discussed it with industry, the fuel poor and consumer groups. The reason why we have been debating this is that we know that lower-income households tend to—not exclusively, because of poor housing conditions—use less energy. Therefore, is it right that the overall costs of these schemes could be more fairly distributed across customers if they bore more relation to the actual consumption in different households? That is a position I think E.ON picked up on this morning, and we have set that out in a policy paper.

What I was particularly pleased to see was that when the Government published their own consultation on the CERT extension just before Christmas, they raised that very issue in relation to the extension and asked the question: “Would it be fairer, particularly for lower-income customers, if the costs of these schemes were based on consumption rather than on simple flat per-customer number?” That is something we would argue, largely because we see there are—as you rightly point out—significant impacts for customers, particularly lower-income customers, in respect of some of these schemes. Therefore it is right, with our principal objective of protecting the  interests of existing and future customers, that we think about ways in which those costs could be more fairly distributed.

The Minister’s intervention has been incredibly helpful.

Excellent!

Q 162

Thank you. [Interruption.] No, there is no “but” to it at all. I think what you, Sarah, are saying is that there is no need for this level of detail to go in the Bill, and I think that the Committee would agree with that. Would it be helpful, however, if when we came to clause 10 in particular, the Minister in his helpful fashion brought forward the draft regulation that would go with the clause, so that he cleared up the issues that he has so kindly brought forward this afternoon?

Sarah Harrison: That really is a matter for the Minister.

I asked you if it would be helpful.

Sarah Harrison: Let me make my point. I have already said to you that Ofgem thinks that there may be a more equitable way of distributing the costs in relation not to just this scheme, but other schemes as well. Let’s face it—

This Bill is only about this scheme, so—

Sarah Harrison: Of course it is. The point that I have made is not specific to only this scheme; it is a general point that given that the overall cost of consumers’ bills is, and will increasingly be, attributed to two support mechanisms to meet proper carbon targets and also social targets, it might be more equitable.

Q 163

So, is the answer yes?

Sarah Harrison: I think that really is a matter for the Minister. What is important though, with the reconciliation mechanism—

You are Ofgem, and I am asking you whether it would be useful when we discuss clause 10 for the Minister to produce—

Order. I do not think that is a fair question for the witness.

Why not?

It is a question for the Minister, and we are here to hear Ofgem’s, not the Minister’s, points. I suggest we move on.

Q 164

I think the answer, Mr. Atkinson, anyway is that there is a consultation out at the moment on whether the current voluntary scheme should have its basis of reconciliation changed in any event. Presumably, if a change is made in the current scheme, that would follow the new scheme.

Sarah, I want to ask you about clauses 16 and 17, which will obviously make a considerable difference to your perceived and actual remit. What difference do you think that will make, in terms of the way you will  operate? There is potentially a real conflict between Ofgem’s previously regarded remit of keeping customer prices as low as possible and ensuring competition, and the two new requirements placed on it in clauses 16 and 17. Do you have a view on that?

Sarah Harrison: Yes, let me deal with both of those. First of all, we very much welcome the proposed changes to Ofgem’s remit in the Energy Bill. In particular, if you look back over the last year or 18 months to some of the practical decisions that Ofgem has taken in the context of the existing set of duties, we have made some significant decisions on increased investment on electricity distribution and transmission networks—another 40 per cent. over the next five years to build our electricity distribution networks. On the energy supply probe, we have taken some very clear and specific actions to regulate and provide additional protection for customers from unjustified price differences. That, incidentally, was a change advanced by Ofgem that was not without controversy and did not have unanimous support in the stakeholder community. Had we been doing that in the context of the duties that are envisaged in the Bill, the path toward that change might have been an easier one.

However, there are other things that Ofgem has been doing over the last year. In particular, I would cite initiating two really fundamental reviews: the approach taken to the regulation of monopoly networks, and the approach taken to the way in which the existing market arrangements operate and how well they are capable of meeting some of the significant challenges we have. Overall, if you look at the context of things we have been doing over the last 18 months under the current set of duties, we reasonably welcome the changes coming forward. We see those changes as really bringing more clarity and legitimacy to some of the developments that Ofgem has been pushing and pursuing. They give us more flexibility in addressing those issues, and also more clarity for the wider stakeholder community. So we very much support the changes.

On your second point—and I hope that the examples I have given you bear that out—Ofgem’s focus has been increasingly towards meeting our sustainability duties. That is not just about reducing prices no matter what. It is not just about advancing competition. I have given an example of where we have very specifically, in the retail market, acted to regulate because our view is that while we want to make changes to how the market works for retail customers, they are not going to happen quickly enough to provide the protection that is needed now. That is why we have taken the particular action to put in place that licence condition to guard against unjustified price discrimination.

I think that we have already been addressing some of the issues, but the changes to the duties really do provide further legitimacy and further flexibility.

Q 165

Would you say, in answer to some people who have observed Ofgem’s arrangements concerning competition in the past, that the culture change concerning those additional responsibilities has already taken place in Ofgem? Or do you think that the responsibilities set out in clause 16 and 17 would entail a cultural change in the organisation in their own right?

Sarah Harrison: I think that we have already been moving towards, in those very specific decisions that I have described to you that we have taken, putting more investment into energy networks to help meet our carbon targets and help meet our sustainability objectives, and tackling some of the problems in the operation of the market. All of those signify a movement, recognised in our existing duties, toward meeting those objectives. However, the importance of the changes is that it gives further support and allows further emphasis toward those changes. Therefore, that is why we welcome them.

Q 166

Do you think that there is a congruence between what the Chancellor announced in the pre-Budget report, which is essentially a review of how the energy market as a whole might well work in the context of decarbonisation of the energy economy, and the new duties?

Sarah Harrison: Sorry, did you say “conflict” or “confluence”?

Q 167

I am referring to the context of the decarbonisation of the energy market and the extent to which the existing energy market as a whole is fit for purpose, bearing in mind those changes that are required. Now you have—or you will have, I hope, should the Bill become law—those two new duties as a part of Ofgem’s remit. Does that extend to that fundamental review of how the market might work?

Sarah Harrison: Let me just give a specific answer. One of things that Ofgem has initiated in the last year to 18 months is something that we call our Project Discovery. That is really a review of the adequacy of the current market arrangements to meet very significant challenges and changes that we face in the shift towards reducing our carbon output and moving toward a more low-carbon economy. The specific reason why we initiated that review in the context of our existing duties is that we were concerned about the scale of the challenge—the particular issues facing us in terms of the economic situation and the extent to which that might have a bearing on investment—and, looking out over the next decade or decade and a half, the impact that would have on security of supply. We have initiated that review under our existing set of arrangements. The reason why we welcome potential changes to our duties is that they give further legitimacy to the work that Ofgem is advancing and further emphasis on the importance of that work, given that our overall duties are to protect the interests of existing and future consumers. I think the changes will complement the work that Ofgem has already initiated through its Project Discovery.

Q 168

The other major change is the market power licence condition in clauses 18 to 25. Can you tell us what powers Ofgem currently have to deal with the problem that you seem to believe exists here with energy companies balancing transmission-related constraints and exploiting the price in some way?

Sarah Harrison: Ofgem has powers that are concurrent with the Office of Fair Trading under the Competition Act, and so those are the existing powers that we have. I will talk in a minute about how we have tried to use those, and what the issues have been in doing so. It is important to understand the context in which we are  operating. We have asked the Government to look at introducing the arrangements for the market power licence condition in this Bill. There is the need for significant investment in transmission assets. We also have significant increases in demand for new energy and generation connections—new renewable connections. Until that investment fully comes on stream, we will be operating on a network that suffers from severe constraints in some parts. Therefore, in those situations, it may be possible for generators to take advantage of those, to unduly exploit the situation. The impact of that falls on costs—the costs of having to take action to keep the system in balance—which are borne by customers. Our own analysis of that, looked at in 2008-09, was that £125 million of costs could be attributed to the grid having to take such actions. So, those are the particular circumstances that we are facing.

The Competition Act is available, and we have looked at trying to use it. One of the things you have to do when prosecuting under the Competition Act is to establish a position of dominance. You have to do that before you can establish whether or not there has been an abuse of that dominant position. Our efforts to use the Competition Act have been challenged in the sense that it is quite difficult to establish dominance in our electricity markets, which are temporal markets, and, therefore, to establish abuse. We began a Competition Act investigation, but our conclusion was that the chances of a successful prosecution under that Act were quite difficult, and, therefore, it was more sensible for us to use our resources elsewhere.

I know that there is some concern about the MPLC. We have been working with the Department of Energy and Climate Change on this, trying to develop a very targeted and tailored approach that will deal with a very specific set of issues. It will also have, wrapped around it, some additional protections, which is why, for example, primary legislation is important because one of those protections is to give generators, which might be subject to an investigation or finding by Ofgem under this new condition, the right to appeal to the Competition Appeal Tribunal. We cannot confer that right through the ordinary licence route; that can only be enabled by primary legislation. We think that that is an important protection that should be there. The proposal is, as you will no doubt be aware, that this is a time-limited power. So, it is very focused and targeted on a particular set of circumstances or situation as I described at the outset of my remarks. The other protection is that we will provide guidance on how we propose to enforce this condition if and when it is developed. Those measures combined push towards what we believe is a proportionate measure to tackle what could be a real issue for customers in this period when we face increased investment, but a constrained network in the interim.

Q 169

You mentioned the figure of £125 million. For clarity, is that what you think has been lost through companies abusing their position, or is that the constraint charges that have been paid?

Sarah Harrison: That is the cost of the actions that have had to be taken by the National Grid to keep the system in balance. Those costs pass directly to customers.

Q 170

If I understand you correctly, these balances are needed because of a failure or a lack of investment in certain areas in the past. That is why the  charge is required now. I am not quite following. I understand the need to upgrade and I think that companies will follow that and understand it as well. What seems to be suggested by some companies is that this will turn out to be very costly for them in particular areas—the Cheviot gap being the obvious one in the Scotland-England interconnector. I am not quite following why it is necessary to introduce this for something that might happen. Do you have any evidence that this has happened up to now with existing systems?

Sarah Harrison: I have given the figure of £125 million, which is the cost of having to take that action. I have also given the example of where we have tried to pursue a case under the Competition Act.

Q 171

I want to be clear about this. You said that the £125 million was the cost to the National Grid of the constraints. Is that correct?

Sarah Harrison: It was the cost of having to take the balancing actions to manage the constrained situation.

Q 172

But that is a natural part of the grid as it exists at the moment. If I understand you correctly, that is part of the balance in the existing grid. It is not necessarily an exploitive action by the companies. The grid will have to do that balancing anyway. It just seems a disproportionate act for something that may happen and that is due to lack of investment in parts of the grid up until now. It seems to be pushing it on to the companies and putting evil intent on them, when there is no evidence of such evil actions taking place. I do not want to be too dramatic about it.

Sarah Harrison: If there is any further information I can provide for you on this issue, I will do so. It is important to remember that we had a series of concerns about behaviours by certain generators in spring 2008 and commenced a Competition Act investigation. As I explained, we did not feel that it would be a proportionate use of our resources to carry on prosecuting under the Competition Act, given the problems it presents, so we closed the investigation. We continue to have concerns about the behaviour we observed so the case is made for this measure.

It is important to think ahead. In a world that envisages a connect-and-manage approach to transmission access, those opportunities for constraints on the network are going to get even greater. Therefore, there is the risk that undue exploitation can be exercised. It is important that a regulator with the principal objective of protecting the interests of consumers is armed with the appropriate powers to investigate those examples and, if appropriate, take action. We were talking about putting in place a licence obligation that would allow us to investigate if certain circumstances emerged—I emphasise that we envisage specific circumstances. There would then be a period of investigation and the finding of a breach or otherwise. It is important for us to put ourselves in a position to protect consumers. I emphasise that a number of other protections are envisaged, not least a right of appeal, a time limit and, of course, the commitment I have explained to set out our likely approach to enforcement.

Q 173

I do not think that we are going to agree on this. Finally, if the problem is with the grid, is the correct solution not to speed up the investment for the parts of the grid where the problem is? Is it not part of the regulator’s duties to push that forward?

Sarah Harrison: It is very important that there is investment in the grid. We are very clear that we do not want to see investment being the issue that stands in the way of the development of the grid, and therefore of the development of opportunities to connect new generation and new renewables. Just to give you an example—to put some fat on the bones of that, if you like—that is why we have put out proposals for an additional £1 billion-worth of investment in the grid and the transmission network. That is in addition to the allowances that already sit in existing price controls. It is also a proposal for additional investment outside of the price control period.

We think that that goes a long way towards meeting what the industry estimates will need to be around £4.7 billion of investment between now and 2020 in order to get the national grid and the transmission network into the position that we need, given the new renewables and other generation connections coming on-stream. So it is absolutely proper that the regulator makes sure that investment is there to respond to that demand. That investment, of course, needs to be developed in an efficient way, given that it is customers who are picking up the cost of that.

Q 174

You mentioned the market power licence condition and the problems there were or are. The problems are obviously on the side of the utilities. Do you have a problem with it?

Sarah Harrison: I am not sure I understood you.

On the MPLC, the utilities don’t like it. They see it as being counterproductive in terms of investment. How do you see it?

Sarah Harrison: We very much support it. We put the case to Government for a MPLC, because we think it is an important tool to have in our toolkit to help protect the customer’s interests.

Q 175

So do you see your position as being to protect the customer or to help with investment, or are you somewhere in between?

Sarah Harrison: The customer’s interests are served by upping our investment. But, it is important that that is not investment at any costs. It has to be efficient investment because it is customers who pick up the bill. Both of those issues are really central to our role of protecting the customer’s interests.

Q 176

I do not want to put words in your mouth, but would you consider that the utilities are basically crying wolf in what they are saying, and they just do not want any kind of legislative powers given to the MPLC that can curtail their activities of misuse? Would that be a fair statement?

Sarah Harrison: I am not going to let you put words in my mouth. Let me be clear: the companies have raised concerns about the MPLC proposal. We are strong supporters of it; we are advocates of it; we suggested to the Government that we need those extra powers. Having said that, as I explained, there are issues. That is why, through working with the DECC, we have put together what we think are a set of additional protections around this power. That was done in recognition of those issues, but it does not mean removing our need for the power that this Bill hopefully will enable.