The EU’s Target for Renewable Energy: 20% by 2020 · Ms Kathryn Emmett 202 Energy Networks...

HOUSE OF LORDS

European Union Committee

27th Report of Session 2007–08

The EU’s Target for Renewable Energy:

20% by 2020

Volume II: Evidence

Ordered to be printed 16 October 2008 and published 24 October 2008

Published by the Authority of the House of Lords

London : The Stationery Office Limited

£price

HL Paper 175–II

CONTENTS

Oral Evidence Department for Business, Enterprise and Regulatory Reform Oral evidence, 17 March 2008 1 Supplementary evidence 11 Shawater Oral evidence, 31 March 2008 17 Ecotricity Oral evidence, 31 March 2008 23 Good Energy Oral evidence, 31 March 2008 26 Lord Oxburgh Oral evidence, 21 April 2008 31 Professor Catherine Mitchell, Mr Phil Baker, and Professor Goran Strbac Written evidence (Energy Policy Group, University of Exeter) 36 Oral evidence, 21 April 2008 47 National Grid Written evidence 55 Oral evidence, 28 April 2008 58 Supplementary evidence 62 Energywatch Oral evidence, 28 April 2008 64 Supplementary evidence 66 Ofgem Written evidence 69 Oral evidence, 28 April 2008 76 Supplementary evidence 79 Lord Dixon-Smith Oral Evidence, 12 May 2008 83 Centre for Sustainable Energy Oral Evidence, 12 May 2008 87 British Wind Energy Association Written Evidence 92 Oral Evidence, 12 May 2008 98 Supplementary evidence 102 E.ON Climate and Renewables, npower Renewables and Centrica Written evidence (E.ON) 105 Written evidence (npower Renewables) 110

Written evidence (Centrica) 115 Oral evidence, 19 May 2008 121 Supplementary evidence (E.ON) 131 Supplementary evidence (Centrica) 132 Department for Business, Enterprise and Regulatory Reform Oral evidence, 2 June 2008 134 Friends of the Earth Europe and Greenpeace Oral evidence, 5 June 2008 143 Ms Eluned Morgan MEP Oral evidence, 5 June 2008 153 The European Commission Oral evidence, 5 June 2008 161 Council of European Energy Regulators and European Regulators’ Group for Electricity and Gas Oral evidence, 5 June 2008 170 Energy Intensive Users Group Oral evidence, 9 June 2008 175

Written Evidence British Energy 183 Mr Giles Chichester MEP 187 Confederation of British Industry 189 Drax Power Limited 191 Ecotricity 193 EDF Energy 195 Ms Kathryn Emmett 202 Energy Networks Association 209 Professor Dieter Helm 212 Dr Karsten Neuhoff 214 PB Power 218 Re-generation Partnership 222 Renewable Energy Association 224 Renewables Advisory Board 228 Scottish and Southern Energy 235 Scottish Power Limited and Scottish Power Renewable Energy Limited 242 Sussex Energy Group 246 UK Business Council for Sustainable Energy 251 UK Energy Research Centre 264 Welsh Assembly Government 268 NOTE: The Report of the Committee is published in Volume I, HL Paper No 175-I The Evidence of the Committee is published in Volume II, HL Paper No 175-II

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Minutes of Evidence

MONDAY 17 MARCH 2008

Present Bradshaw, L Ryder of Wensum, LFreeman, L (Chairman) Walpole, LPaul, L

Examination of Witnesses

Witnesses: Mr Tim Abraham, Director of EU Energy Policy, Mr Chris Barton, Director of UK RenewableEnergy Strategy Project, and Mr Duarte Figueira, Director of Renewables Deployment, Department for

Business, Enterprise and Regulatory Reform, examined.

Q1 Chairman: If you are happy, gentlemen, we willstart the formal proceedings. There are one or twoprocedural matters. Can you see all the nameplates ofthe members of the Committee? There may be othersjoining or leaving during our session. In a minute Iam going to ask you to describe your specificresponsibilities for the record, but may I thank youfor coming. I do not know in which order you wantto go, but could you just describe yourresponsibilities, please?Mr Abraham: Yes, indeed. My name is TimAbraham, I am the Director of EU Energy in BERR.As such, in particular I have responsibility for thenegotiation of the draft Renewables Directive.Mr Figueira: My name is Duarte Figueira and I amresponsible for Renewables Deployment in BERR asDirector responsible for the RD team. Essentiallythat is about putting in place regulation to make thathappen but also about trying to remove barriers.Mr Barton: My name is Chris Barton. I amresponsible for the Renewable Energy StrategyProject within BERR which is aiming to identify howbest the UK should aim to meet its share of the EU2020 target.

Q2 Chairman: Thank you. I am going to leave youthree gentlemen to decide who leads oV in answeringeach question. I am going to kick oV, if I may, byasking the first question. How achievable are both theEU’s general 20% and the UK’s national 15%renewable energy targets?Mr Abraham: I will start oV and talk about the EUand Chris may want to talk specifically about theUK. It was clear from the agreement at last year’sEuropean Council that the targets as a whole were, toquote an oft-used word, ambitious and this certainlyseems to be the case as we in the UK and, indeed,across Europe start looking in detail as to what a 20%renewables target means in practice. The level of EUrenewables energy in 2005 was about 8.5%, so for theEU as a whole there is an increase of more thandouble over a period of something like 12 or 13 years.

Clearly the achievability of the targets will vary fromcountry to country but that has partly been takeninto account in terms of the individual targets set foreach country. I would say that whilst at one level adoubling, or a little bit more than that, perhaps doesnot seem all that great, about a quarter of the currentlevel within the European Union of renewables islarge hydro which on the whole, with one or twoexceptions, has already been secured. We are largelytalking about wind, both onshore and oVshore, solarand more advanced technologies. In the initialdiscussions about the Directive in the WorkingGroup and, indeed, in the Energy Council, MemberStates have, perhaps inevitably, all emphasised thediYculty of meeting these targets and clearly therewill be those, like the United Kingdom, who have gota comparatively low amount of renewable energy atthe moment for which this will be a big change in thebalance and challenging for that. There will also be anumber where, to take a couple of examples, maybeLatvia and Sweden, the targets are extremely highand they have already used a great deal of their ownrenewable energy. There will be challenges ofdiVerent types for diVerent countries.Mr Barton: If I may just add, from the UKperspective it is clear that the proposed 15% targetwill be very ambitious: the equivalent 2005 figure isabout 1.5% renewable energy in the UK, so we arelooking at potentially a 10-fold increase over the nextten years or so. The analysis by Poyry, which wepublished in line with the impact assessment lastweek, does suggest that this is possible but it will bedependent on having suYcient financial support, andPoyry estimated that the cost to the UK could be inthe region of about five billion pounds per year by2020. We will need to address some of the key barrierswhich are blocking renewable deployment at themoment, for example some of the diYculties inrelation to grid and planning. We also will bedependent on there being a suYcient supply ofsustainable biofuels. Subject to those issues beingaddressed, the initial analysis, at least from Poyry,

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2 the eu’s target for renewable energy: 20% by 2020: evidence

17 March 2008 Mr Tim Abraham, Mr Chris Barton and Mr Duarte Figueira

suggests that the target will be achievable and whatthe Renewable Energy Strategy Project is about istrying to work out how best to make that achievableso that we hit our targets and get the maximumbenefits from it.

Q3 Chairman: Could I just ask you to comment onthe Cambridge Econometrics report which wasreported on Friday, 14 March, saying that the targetfor the United Kingdom was—I forget the exactdescription—pretty challenging is a modestdescription of their conclusion.Mr Barton: Thank you, my Lord Chairman. I have toconfess, I have not read the whole report but I dounderstand that it was casting doubt as to whether wewould achieve that target. It is fair to say that oncurrent policies we will not hit that target and theEnergy White Paper was explicit that we would haveto come up with further measures beyond what iscurrently planned. Our expectation is that on currentpolicies we would hit about 5% renewable energy by2020, so if the 15% target were to be agreed thatwould be a three-fold increase. In one sense, I am notsurprised if they are saying that on current policies wewould not hit 15%. The challenge, and what theRenewable Energy Strategy Project is about, is tryingto come up with the policies to ensure that we do hitthat target.

Q4 Chairman: Perhaps I might just ask MrAbraham, what is the formal position at the momenton the targets of 2020 and the 15% allocation to theUnited Kingdom?Mr Abraham: The formal position is that they are aproposal from the Commission. They came out inJanuary. The first detailed negotiations in the EnergyWorking Group start tomorrow. The FrenchPresidency are very keen to try to agree the whole ofthe energy and climate change package, so not onlythe Renewables Directive but the other connectedDirectives, during their Presidency, or at least get anagreement in Council amongst the Member States forthe good reason of hoping to get the whole packageagreed and through the European Parliament beforethe European Parliament elections next summer. Wesupport that aspiration if it can be done, but that isquite an ambitious target.

Q5 Chairman: Can I just ask one question forclarification. You talked about one-quarter ofrenewable energy being generated from large hydrofacilities at present, but I think you implied there wasnot very much more to come from hydro in thetimeframe we are talking about. Is that the correctinterpretation?Mr Abraham: That is my understanding, my LordChairman, that most of the easy fruit in terms ofhydro across Europe has been secured already.

Mr Figueira: From a UK perspective we are doing alittle bit of work to try to identify the possibilities formore hydro in the UK, but we believe them to besmall.

Q6 Chairman: Have you widened the scope toinclude the Severn Barrage, for example?Mr Figueira: No, the Severn Barrage is not includedin that particular project.

Q7 Chairman: Could you just tell us, for the record,what the position is in terms of your Departmentlooking at the Barrage.Mr Abraham: Yes, indeed. We feel that the Barrage,or the potential for the Barrage, if it can be executed,is enormous and very much in the spirit of what weare trying to do in terms of encouraging renewableenergy across Europe. As you may know, my Lord,if the initial calculations are to be believed it couldprovide up to 5% of the whole of the UK’s energysupply. We are looking very carefully and havelaunched a feasibility study into that project.

Q8 Chairman: By 5%, that is almost a third of thetarget for the UK.Mr Abraham: It is actually 5% of the electricity, I amsorry, so it is less than that, I am afraid, but it is stillpretty significant.Chairman: Splendid. Thank you very much.

Q9 Lord Walpole: Before I ask the question, can Ijust say, as you touched on the tidal Barrage, it doesseem there is an enormous amount of power outsidethe window over there, is there not. When you lookat the Thames and the tide coming in and out,millions of tonnes of water are moving backwardsand forwards each time. Is there any suggestion thereare other rivers that one could do that sort of thing toother than the Bristol one?Mr Barton: As far as I am aware there has beenconsideration of whether there might be potential inthe Mersey. I have not heard of considerationspecifically on the Thames, but I am not in a positionto say why that is. The Mersey is the other river thatI have heard people speaking about that has tidalpotential.

Q10 Lord Walpole: What I was really going to askyou was how important do you thinkmicrogeneration is in achieving the target, or are wejust playing games? Expensive games at that.Mr Barton: Certainly our view, my Lord, is thatmicrogeneration will be an important part of theoverall answer. Exactly how important is one of thekey issues that we are looking at in the Strategy. It isimportant in at least two ways. One is in terms ofabsolute generation. Certainly on the heat side, themajority of renewable heat, if not micro, will be

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3the eu’s target for renewable energy: 20% by 2020: evidence


distributed generation, so the great majority ofrenewable heat is likely to be micro or at least notmacro, if I may put it in those terms, distributedenergy. On the electricity side, it is fair to say thatunder the definition of microgeneration at 50kw it isunlikely to be a large percentage of the overallrenewable electricity but there is an increasinginterest in the distributed electricity above 50kw, sonot the large scale generation but on-site electricitygeneration. How significant, the honest answer at thisstage is we are not sure. We are conducting someanalysis of that and, indeed, I expect that will be oneof the questions we will be seeking views on in theconsultation. The other area in which I think it isimportant to pick up microgeneration is in thepotential it has for changing attitudes and engagingpeople in the climate change debate and potentiallyfor renewables more generally. Again, there aresuggestions that it may help in encouraging peopletowards energy eYciency and more general supportfor renewables although, again, as far as I am aware,that is largely an expectation rather than detailedstudies suggesting that is the case.Lord Walpole: That is a helpful suggestion. I cannotget people to recycle paper here, let alone anythingelse. It is quite extraordinary how some people arenot able to take on board the fact that there is aproblem, it is as simple as that, or they think thereis one.

Q11 Lord Paul: To what extent are these targetscapable of improving the EU’s security of energysupplies? What diVerence, in real terms, wouldachieving the target make?Mr Abraham: I think we and the Commission see thistarget as containing both an element of the climatechange campaign and as helping the security ofsupply. If we look at where we are in Europe, in 2000our import dependency on imports of energy wasabout 40% and that is expected to increase to about65% come 2020. Some of the figures of importdependency, in Central and Eastern Europe,particularly on Russia, are very high indeed. The ideaof being able to have perhaps up to 20% of energythat is clearly domestically produced must increasethat security of supply. To answer your question, itwill certainly do that. There is another issue which issecurity of supply in a slightly diVerent sense, whichis in terms of the intermittency of electricity inparticular when a country is dependent on renewablesources, particularly those renewable sources that aredependent on the weather and climatic conditions.Although there are then issues about how youbalance the network, we are looking at that issue atthe moment, and Chris may be able to say a little bitmore about that, essentially our initial findings arethat up to certainly 20–30% of renewable energy inelectricity, those sorts of issues are containable.

Q12 Lord Walpole: You did start to touch on theintermittency problem. How will the EU deal withissues of intermittency? What measures will be takenat an EU and national level to ensure reliability ofsupply? The other thing I am not clear about—I amnot the right sort of scientist, that is the trouble—is ifyou are transferring energy around the countryside,is by gas pipes not the most eYcient way? In otherwords, I am very, very suspicious that conductingelectricity around the place by wires is an extremelyineYcient way of moving energy. Would you like tocomment on that?Mr Barton: Thank you, my Lord. Can I take yourfirst question first on the intermittency issue, just tobuild a little bit on what has already been said.Clearly one of the potential issues with increasedrenewable generation, particularly if it is from wind,is this intermittency problem. As has been suggested,certainly our initial analysis is that is a resolvableissue essentially through requiring back-upgeneration, more flexible use of that back-upgeneration and operation of it, and potentiallythrough increased demand-side flexibility. Using thatrange of options our analysis is that the intermittencyissue is not an insurmountable problem, albeit thatsurmounting the problem comes with a cost so, forexample, there will need to be greater overallgeneration capacity in the UK as you introduce moreintermittent generation, but it is resolvable.

Q13 Lord Walpole: As you probably know, GreatYarmouth has got the remains of an oil-firedelectricity production capacity which is not used. Inother words, there is a power station there that is inmothballs and, instead of that, the amount ofelectricity that will hopefully come down that bit ofthe grid will come from oVshore. Should that powerstation not be mothballed but kept, not absolutelyready but ready to go within 24 hours if there is aserious problem, or should it be mothballed andforgotten?Mr Figueira: That is a very interesting question whichwe are pondering ourselves. What we believe is thatas the proportion of renewable generation grows itwill not replace conventional generation on a one-for-one basis, there will be a need for back-up flexiblegeneration to cope with the generation of theserenewables, so the chances are that we will requireflexible generation in order to cope with changesprincipally in wind power which will be the dominanttechnology in terms of renewables. Whether that isexisting generation operated more flexibly or whetherit is new flexible generation is a matter which will bediscussed as part of our Renewable Energy Strategywork, so it is possible that as a result of morerenewable generation on the system we will bring onboard conventional generation which perhaps has




been mothballed in the past. What happens in anindividual instance will depend on the economics.

Q14 Lord Walpole: You have not answered thequestion whether it is ineYcient to pass power downpower lines.Mr Figueira: I do not know the answer to that.Mr Barton: I do not have the figures for the relativeeYciencies but my suspicion would be that you wouldneed a variety of diVerent approaches. Unless you aregoing to power all generation through gas you couldnot rely solely on the gas grid, but I have to confess Ido not know about the relative eYciency point.

Q15 Lord Walpole: I fear that we lose too muchelectricity down these grid wires.Mr Barton: That is a potential attraction, I think, ofsome of the distributed electricity and distributedenergy approaches, that there is less scope fortransmission losses.Chairman: I think it would help the Committee if youcould reflect and perhaps let us have a note onintermittency, in particular if we are to meet the 15%target in the United Kingdom, and what that impliesfor both reserve and generation capacity, particularlyin terms of generating electricity from the diVerentsources, wind and water. It is clearly an issue of someimportance for us because the cost implications ofproviding that reserve generation capacity we willprobably wish to look at further. Whilst I am askingfor further notes, can I just jog back to the Barrage,if you could send us a note, whether this is public ornot it would help if you could indicate to the Clerk,on the commissioning of a feasibility study and alsowhat the potential is particularly from the SevernBarrage. We have taken some evidence on that but itwould be helpful to have that on the record.

Q16 Lord Paul: Concerns have been expressedrecently in some quarters about “supply chain”bottlenecks. For example, the availability ofappropriate oVshore engineering facilities. The EUtarget will increase demand further and could lead tocompetition for resources and capabilities. Whatsteps are the Government and the Commissiontaking to assess these issues?Mr Figueira: We are very aware of this as an issue. Webelieve that the Renewables Obligation, which hasprovided the driver for renewable generation, is anextremely important instrument and, as a result, webelieve that creating the right sort of financialinstrument will create stability for the right sort ofinvestment to take place. Also we will be consultinglater this year on proposals in the Renewable EnergyStrategy and will take that opportunity to see whatwe can do to promote investment in the supply chain.In addition to that, as part of our Renewable EnergyStrategy work, we have also commissioned a specific

piece of work trying to identify what the impact onthe supply chain would be by looking at the capacityin the UK, in Europe and more widelyinternationally and then to see what the gaps are interms of supply chain to help us deliver the sort ofrenewables investment that is required. We expectthat piece of work to make a contribution towardsthe Renewable Energy Strategy work and to bepossibly published alongside it. Finally, the Secretaryof State, John Hutton, has asked for the RenewablesAdvisory Board, which is an independent NDPBwhich provides advice to him on meeting renewablestargets, to do a specific piece of work this year ondeveloping government and industry strategy for thesupply chain and how it might advise him on how wemight reach the target in terms of industrial capacityrequired. There is quite a lot therefore that is alreadyin train which will feed into the Renewable EnergyStrategy backing on to the fact that we believecreating the right sort of investment climate will bringforward a supply chain. I do not know whether Chriswants to add anything to that.Mr Barton: If I may just add a comment, my LordChairman. We see the positive way of looking at asupply chain bottleneck as identifying there aresignificant business opportunities surrounding thistarget and the increase in renewable generation thatwe want to see. Key parts of the Renewable EnergyStrategy will need to be considering how we make thebest use of those business opportunities. In terms ofpolicy, key issues are likely to be giving that clear,long-term and predictable signal as to what the policyis for support of renewables so there is the certaintyto invest there, and also identifying any specific gapsand potential businesses filling those. An importantpart of the strategy will be to see the benefits of thebusiness opportunities here as well as the costs.

Q17 Chairman: Will these incentives be UK orEuropean Union, or both?Mr Barton: It would certainly be at the RenewablesObligation and the financial incentives generally at aMember State level rather than at an EU level. Therehas not been a proposal at this stage for EU levelsupport schemes.

Q18 Chairman: Can you tell us now, or perhaps byway of a note, the membership of the RenewablesAdvisory Board?Mr Figueira: Yes, of course.

Q19 Chairman: How long has that been in existence?Mr Figueira: The Renewables Advisory Board wascreated in 2002 and until recently it was chaired bythe Minister for Energy, but towards the end of lastyear the Secretary of State decided that he wanted tochair it, and in fact is chairing the first meeting of thatrenewed Board on 27 March. The Board consists of




around 25 diVerent individuals who were appointedin a personal capacity who provide the Secretary ofState with advice on how to meet the renewabletargets and they work in a number of diVerent areasincluding input to the Renewable Energy Strategy tohelp us meet the EU target. The focus this year isgoing to be very much on streams of work where theycan assist in providing an industrial perspective onhow we can meet those targets. One of the 20-oddwork streams they have taken on this year is, forexample, supply chain work which I referred toearlier. There are all sorts of other streams that willbe supporting Chris in the delivery of the strategy andputting it together.

Q20 Chairman: Have any of these studies beenpublished or is this advice directly to the Secretaryof State?Mr Figueira: It is advice to the Secretary of Statewhich is normally in the form of quarterly meetings,and I should say that the Renewables AdvisoryBoard has a series of sub-groups which are chaired bymembers of the Renewables Advisory Board butwhich other stakeholders, like interested tradeassociations and others, may attend. For example,they have a sub-group to advise on grid issues, andadvisory groups on diVerent types of renewabletechnologies. They generally make a presentation tothe Secretary of State every quarter—the Minister inthe past—and they raise issues from an industrialperspective which they think would be useful adviceto him.

Q21 Chairman: My question was, is the advicepublished?Mr Figueira: The advice is published, yes. The reportsof the RAB groups are published.Chairman: I am going to ask the Clerk to pursue thismatter to see whether the published work can becirculated to the Committee and to the SpecialAdviser.

Q22 Lord Bradshaw: Good afternoon. Ofgem is inthe process of reviewing its rules for gas andelectricity grid regulation, with a view to facilitatingyour investment. In part it appears this is in order tofacilitate the growth of renewables. However, it doesnot expect to make regulatory changes until 2015. Isthe Government assessing whether earlier changesare needed? The timescales which are set here aboutmaking regulatory changes will be in 2015. What youjust said was about the Renewables Advisory Boardhaving met since 2001, which is seven years ago, andyou are talking about another seven years here, yetyou are talking about reaching a target by 2020. Itseems to me that what I have called the bureaucraticprocess of agreeing all this is quite out of kilter withactually reaching a target. I would like some

reassurance that somebody is putting some energybehind bringing these timescales forward, becauseotherwise there is no hope of reaching the target.Mr Barton: First of all, just to acknowledge, yes, thatthe time pressure is clearly very significant and, as wewere saying earlier on, potentially it is a tenfoldincrease in little more than ten years, which is a verychallenging one. I would just make a couple ofcomments, if I may. One is that although, clearly, weneed to accelerate much faster, good progress hasbeen made over the last few years. You mentionedsince 2001; in 2001 I believe renewable electricity wasabout 1.5% of the total generation; today it is over4.5%, so we have seen over a tripling in that time and,even on current measures, we expect another triplingby 2015. So good progress is being made but we areabsolutely clear, and indeed, that is why this wholeRenewable Energy Strategy project is being set up.Within BERR we have reorganised so that allrenewables is brought within one directorate. JohnHutton, our Secretary of State, has taken over thechairmanship of the Renewables Advisory Boardand we have this cross-Whitehall working to ensurethat we do deliver on what we recognise is anextremely challenging timetable. I cannot hide thatthe challenge is there but we are very much trying torespond to it.

Q23 Lord Bradshaw: Do you include the possibilityof some new nuclear generation within therenewables target?Mr Barton: We are not envisaging that nuclear will beincluded within the renewables target, no. In a waythat it is defined within the draft Directive, nuclearwould not count towards the target.Lord Bradshaw: Even though it would actually saveCO2. It does seem a little strange to me.

Q24 Lord Bradshaw: If major changes are to bemade to the way renewables are generated, is it notthe case that it cannot be left simply to financialinstruments? Does it need more regulatoryintervention?Mr Figueira: Perhaps I should just clarify that theOfgem regulatory review is due to be completed in2010 and therefore it will have an impact on thetransmission price control which will be brought in in2012. It is meant to be a far-ranging review of acomplex topic, particularly in terms of price control,but renewables is only part of the issue it isconsidering. It is considering price control across thepiece. What we are doing is assessing what we need toachieve the target in terms of the Renewable EnergyStrategy and, while we work closely with Ofgem in anumber of areas, the review they are carrying out isnot strictly linked to the Renewable Energy Strategy,which Chris leads on. That is a separate piece of




work. But it will have an impact in terms oftransmission price control, for example.

Q25 Lord Walpole: To what extent does grid accessremain a significant barrier to increased consumptionof renewable energies? Is it consistently a problemacross all Member States? Previous EU legislation setout various grid requirements to promote renewableenergy. Has this been consistently implementedacross the EU27, or have some Member States bemore successful than others? In parts of Britain,renewables developers can face long delays insecuring grid access. How significant are these delaysin the light of the new targets? What steps is BERRtaking to address such delays?Mr Figueira: Perhaps I can just say a few words aboutthe way in which the grid access regime is run, tocreate the right back-cloth. The current grid accessregime in Great Britain, it has to be said, has beenhistorically quite successful, in that it has led to theconnection of around 25 GW of electricity in the last15 or so years and, obviously, while it has beenoperating, we have seen significant growth inrenewable generation as a result of the incentivesprovided by the Renewables Obligation, and thatlevel of renewables introduction is speeding up. Thefirst gigawatt of wind power took something of theorder of 14 years to become operational, which isobviously not the sort of timescale we are talkingabout now, but the second gigawatt has only taken 20months, and we have seen a speeding up the process.Having said all that, we do consider that grid access isa barrier to the deployment of renewable energy andrenewable generation of electricity, and it is true tosay that in some congested parts of the grid we areseeing oVers of connection from the National Gridwhich approach 2020, which clearly is not the sort oftimescale we can possibly work to. What we are doingis working very closely with Ofgem, with NationalGrid and with the industry to make sure that the gridis fit for purpose going forward. I should make clearthat, in terms of grid access, the Government’s role isto set the policy framework for the industry to bringforward changes to codes and licences which aresubsequently approved by Ofgem. The key issuesthat we have tried to identify are the times that areneeded to connect new infrastructure; to look veryclearly at the sorts of planning standards that arerequired for renewable generation so that we canidentify the way in which renewables, which typicallyhas a lower load factor than conventional generation,drives transmission investment compared toconventional generation; how we make more eYcientuse of the grid infrastructure in terms of ensuring theright sort of access rights exist so that when the windis blowing, wind can connect and so on, and thatmeans changing the access rules; and also, how wemake sure that we have the right sort of confidence

from generators and investors in the connectionprocess. We have been doing a number of thingsalready which pre-date the Renewable EnergyStrategy and will be taken forward by us. The firstthing we are trying to sort through is the GreatBritain queue. You may be aware that in Scotlandthere is a queue of generation which is trying to getconnection to the grid, and some of that potentialgeneration may even have planning consents but isfurther back in the queue than other generationwhich is less well developed. So what we have beendoing is encouraging National Grid to come forwardwith solutions to speeding up the grid queue. It theEnergy White Paper last May we announced that wewould launch a transmission access review, which wekicked oV in July, and we have now produced aninterim report in January, with the intention ofproducing a final report in May. That looks at thegrid access rules in the way that I described earlier. Ittries to identify ways in which we can improveinfrastructure development so that it is deliveredmore quickly, and we try to improve developerconfidence by moving to a situation where, throughfirm connection dates being oVered by the grid, wecan therefore also provide incentives to NationalGrid to give developers greater confidence that theywill get a grid connection which is more or lessconsistent with their development programme. As Isay, we have published an interim report in Januarywith the intention of producing a final report in May,which will give us some answers about the sorts ofaccess rules which we think are necessary goingforward and the way in which we might actuallyspeed up the deployment of the grid. There are twoissues going on here. One is how we use the systemand one is how we build it, because we certainlybelieve that more grid will need to be built. As part ofthe Renewable Energy Strategy that Chris is takingforward, we will have to look at the rules of accessand infrastructure and see whether any further workneeds to be done. We are presently analysing howmuch more we need to do in the light of the largertarget, so what was appropriate when we launchedthe transmission access review may not necessarily beenough, taking into account the sort of percentagesof electricity we may need to deliver in order to meetthe 15% energy target. That is the way we are takingthe work forward at the moment. I do not know ifthere are any further questions.

Q26 Lord Walpole: I am still not happy about therebeing the right electricity in the right place. I am stillnot happy about that, mainly because you cannot seeelectricity. That is the main problem. You can see gasand you know what it looks like the, if you knowwhat I mean. I just do not have confidence in theelectricity grid in this country being able to achievewhat we expect it to achieve when we start trying to




dribble bits and pieces into it in all sorts of places. Forinstance, I know that outside Norwich they are goingto put up a vast thing to get rid of all our rubbish byburning quite a lot of it. They are going to try and sellthe heat as well, which will be a good thing. Will thegrid at Norwich be able to take that if it is running atfull speed the whole time, which it probably willbecause we make an awful lot of mess in Norfolk?Mr Figueira: I must confess that my area ofresponsibility is principally the electricity grid withinthe renewables deployment work.

Q27 Lord Walpole: But it is the electricity grid theyare going to have to put it into, is it not? There is noother way they can get rid of the power they are goingto generate there?Mr Figueira: I think that is right. The way in whichwe are trying to develop the thinking on the grid isessentially to come up with a set of access rules whichwill enable renewable generation to connect, when itis able to do so, and will allow us, taking it forward,as was said earlier, the fact that, as we get very highlevels of renewable generation on to the system, wealso have to deal with the fact that on occasion wewill have to balance it with conventional generation.The sort of problem we are thinking about is how wedevelop the grid in such a way that renewablegeneration can connect but at the same time we retaina market and we retain the reliability of the grid.

Q28 Lord Ryder of Wensum: Good afternoon. Isthere a tension between the aim of encouragingrenewable energy generation and locational pricing?Mr Figueira: It is true to say that in the UK, in termsof the grid, we have a system of cost-reflective pricingin terms of use of system charges. That means thatthose generators that are furthest away from demandwill pay higher charges, and those reflect the costs ofproviding the additional transmission infrastructure.The Government believes strongly that costreflectivity in transmission charging is the bestapproach, because it reflects our energy policyapproach and also it means that there is a diVerentarea, if you like, the financial support, where thingsare taken into account in terms of the supportrequired for getting renewable generation toproduce. We do not believe that cost-reflectivecharging represents a barrier to investment inrenewables and we note, if I can refer back to thequeue, that there is up to 10 GW of wind in aconnection queue in Scotland which we are trying toresolve through the National Grid process Idescribed earlier, which is seeking to connect to thesystem, which does not suggest that transmissioncharging per se is the main factor there, and thatactually the grid, or the lack of availability of it, is themain factor. I should say that the Government hasrecognised in section 185 of the Energy Act 2004, that

it is possible that transmission charges may be abarrier to the development of renewable projects onthe Scottish islands, and that followed a piece ofwork that was done by the Department in which theGovernment came to that conclusion and it isconsidering whether a scheme should be made toadjust transmission charges under section 185, andthat work is being taken forward at the moment.When it did that work, the evidence was thatadjusting transmission charges on the mainlandwould not bring forward significant amounts of newrenewable generation. So the Government’s positionon transmission charging is fairly clear, that it shouldbe cost-reflective.

Q29 Lord Ryder of Wensum: What impact do thevarious systems of reinforcement planning and workhave on encouraging renewable generation? Shouldthe UK adopt a “connect and manage” approach?Mr Figueira: They are slightly diVerent issues. If I candeal with the first question first, as I understood it, weare clear that the way in which the grid is reinforcedat the moment is not totally satisfactory. There areclearly a number of upgrades which have been takingplace in recent years which have taken far too long tobring forward. Just as an example, the NorthYorkshire upgrade, which was very important for thesecurity of renewable supply in the UK, took 96months to secure planning permission, which isclearly not the sort of timescale we should be workingto. There is also a very important upgrade at themoment in Scotland, the Beauly-Denny upgrade,which is undergoing a planning inquiry at themoment. One of the things the Government is doingis trying to improve the situation through planninglegislation. The Planning Bill at the moment will helpbring both large generation projects forward on aquicker timescale because they will be dealt withthrough an Infrastructure Planning Commission,and that applies to onshore generation projects over50 MW and oVshore generation projects over 100MW. It will do so using a National Policy Statement.I should make clear that that will also apply to largenationally significant elements of grid infrastructure.The Government is addressing that through itsPlanning Bill which will apply to England and Wales.The Committee suspended from 4.52 p.m. to 5.00 p.m. fora division in the House.

Q30 Chairman: Would you like to pick up whereyou left oV?Mr Figueira: I think I will, yes, if Lord Ryder willbear with me. I think I had finished talking about thePlanning Bill and the way in which the Governmentwas proposing to improve the planning system inorder to allow both generation of suYcient size andgrid infrastructure to be consented more quicklythrough the use of a National Policy Statement




approach. I should say that, in terms of transmissioninfrastructure spend, Ofgem agreed unprecedentedlevels of investment in terms of transmissioninvestment in its last price control review. Havingpreviously agreed £560 million through theTransmission in Renewable Generation Investmentexercise, it has approved more than £4 billionthrough the transmission price control review mostrecently, which takes us up to 2012. The issue is notthe availability of money to spend; the issue is abouthow we speed up the consent and the delivery of theinfrastructure. What we need to consider is how wemay need to do more work than is presently doneunder the existing systems, for example, morepreparatory work may be a possibility as we goforward through the RES process. I notice that therest of this question talks about the UK adopting a“connect and manage” approach. Perhaps I can goon to that. The way in which the UK handlesinvestments in transmission infrastructure is throughwhat is called an “invest and connect” approachwhere when the grid knows that enough generatorshave prepared to invest in generation, it then investsand all the works carried out for the connection totake place. When people talk about “connect andmanage”, they are talking about a situation wheregenerators are allowed to connect in advance of thetransmission reinforcements having been done butpossibly after local works have been done. The waythat is handled is through a very complicated processcalled a balancing system, which eVectively enablesgenerators who cannot in fact connect to the systemfor security of supply reasons to be constrained oV. Icertainly will not go into the complexities of thatbecause you would wish the bell was ringing! Whatwe are doing in the transmission access review, we arelooking at a number of access arrangements. One ofthe ones we are looking at and one of the ones we dida call for evidence back in August of last year on wasthe “connect and manage” approach. So we arelooking at the “connect and manage” approach in thecontext of the transmission access review. When wepublish our final report in May, that will set out theview of the most viable access models for discussionwith industry. A lot of the renewable energy industrydoes favour a “connect and manage approach” but,as I said, the costs of running that through thebalancing mechanism could be quite significant andwe will need to think about ways in which those costscould be managed as we take that model forward forconsideration.

Q31 Lord Ryder of Wensum: It has been drawn tomy attention in the interval that we may not beentirely clear in relation to the earlier question,whether locational transmission charging is nobarrier or just relatively unimportant. I wonderwhether you could just clarify that briefly, please.

Mr Figueira: The Government does not believe thatlocational pricing is a significant barrier in respect ofthe deployment of renewable energy. I could not saythat it was no barrier at all, certainly, given that it hasbeen accepted that it may be a barrier in respect ofScottish Islands.

Q32 Lord Ryder of Wensum: Do you believe that thecurrent regulatory system, the current regulations,inhibit access to the grid, and, if so, it is it aspecifically UK problem? Could you please cast a bitof light in this context over the remainder of theEuropean Union?Mr Figueira: I am not sure I can do the EU27 as asummary. Clearly, some of the countries we havelooked at are the ones which are regarded as being inthe lead in terms of connecting renewable generationto the grid. I have already said that we believe that thegrid is a barrier to the deployment of renewablegeneration. It is a barrier which the Governmentrecognises, trying to address through thetransmission access review, and it will address itthrough the Renewable Energy Strategy. We have anindication of the sorts of areas which we areexamining which show the way in which access ismanaged and the way in which the grid is developedin terms of delivering and operating theinfrastructure. Is it a UK-specific problem? I think itis fair to say, as the proportion of renewablegeneration on the system grows and as each countrytries to meet its share of the EU target, we will findthat a number of countries will find that grid is anissue in terms of renewables, particularly in countrieswhere the sources of renewable generation are someway from the centres of demand. That is clearly thecase in the case of the UK, where onshore generationis heavily located in Scotland in terms of wind, andoVshore, as we are developing the present and futurerounds of oVshore wind. That has to be conveyed tothe centres of demand and that is an issue which hasnot been an issue historically because of the way inwhich large conventional generation was organised.Is it the same throughout the EU27? There areobviously other countries which have similar types ofprofiles to us. Perhaps I could take Portugal, where,again, it will be using the Atlantic for its renewableoVshore generation. It has plans for wind and wave,and a lot of its wind is probably located in the North,where it is mountainous and so on. There will becountries and that will vary across Europe. In termsof how they are handling it, I am by no means anexpert in the way in which other countries have dealtwith the existing regulation through the RenewablesDirective 2001 on the way in which they are doing itdomestically but certainly the lead countries, likeGermany, Denmark and Spain, which have very highlevels of renewable generation, have adopted slightlydiVerent approaches. They have similar approaches




in terms of invest and connect and the delivery of theinfrastructure but they have slightly diVerentapproaches in terms of giving priority access, forexample, to renewables on to the grid. The way itworks for them is because the existing RenewablesDirective gives each Member State the discretion onhow to implement the Directive. We haveimplemented the Directive in a particular way andthey have implemented it in a diVerent way.Essentially, to answer your question, grid is clearly abarrier. It is not a UK-specific problem. It is probablya problem which will become much more apparent aswe increase the proportion of renewable generationthroughout Europe and diVerent countries deal withit in diVerent ways with the discretion provided in theDirectives.

Q33 Chairman: Perhaps we ought to ask MrAbraham to comment on the EU perspective.Mr Abraham: Indeed, I think I would echo whatDuarte was saying, because I think, as the diVerentmembers of the EU actually tackle the issue ofincreasing their renewables coverage, and they comeacross a number of these issues, both about gridaccess but, more particularly, going back to thequestion on predictability of the amount ofelectricity, there is going to need to be much greatercross-border co-operation and cross-border passageof electricity in order to balance the whole system,and indeed, this should encourage greater inter-connectivity between Member States. To do that,their national regulatory authorities will need tocollaborate, arguably, further than they do at themoment and we have, quite conveniently, in theThird Package—we will come to this later—of energyliberalisation, which is the other big energy issuegoing through the EU at the moment, a proposal foran agency to bring together the national regulatoryauthorities dealing with cross-border issues. That hascome from the wish to move towards a singleEuropean market in energy but, actually, it will bevery useful and, I would suggest, necessary, to meetthe renewables Directive as well.Chairman: Can we move on to support schemes now?

Q34 Lord Bradshaw: Can the existing RenewablesObligation deliver the level of expansion ofrenewable electricity that the target for the UKimplies? The EU states which have been mostsuccessful in developing their renewables industriesall use fixed price support schemes such as feed-intariVs. Should the UK not consider doing the same,given the scale of the challenge and the speed withwhich we will need to act? Has the Governmentassessed the impact and eVectiveness of the variousschemes in operation across the Member States onencouraging renewable energy? How have theseschemes aVected take-up both by producers and

commercial and domestic consumers? TheRenewables Obligation does demand a verysignificant expansion in what we are doing, and Ithink this question really aims at asking you first ofall whether a fixed price support scheme such as feed-in tariVs should be adopted rather because of thescale of the challenge and the speed with which weneed to actually move. Have you actually done anysort of work in looking at how some of the moresuccessful states in the EU have brought this about?Mr Barton: I think this is a very important point, thewhole way in which we incentivise the renewableelectricity. If I can start oV with the question as towhether the RO could deliver the levels of renewableelectricity which we are likely to need, which yousuggest could be 35% plus, depending on what isachieved and heat and transport, we do not see anyreason why the RO could not incentivise that level,although clearly it would need some modificationbeyond what is currently proposed. Most notably, itwould need the end date to be extended beyond 2027,which is the current end date; the level of the supportto be increased; and possibly the level of the buy-outprice to be increased. With those changes, there is noreason why the RO could not provide the level offinancial support needed, clearly needing to bebalanced by tackling some of the non-financialbarriers too. However, we are aware there is a lot ofinterest in the question of whether feed-in tariVs orsome other support scheme might be more eVective.There are a few points I would make, if I may. Thefirst is to say I think both feed-in tariVs and theRenewables Obligation are eVective mechanisms.The RO has, as I mentioned before, already deliveredeVectively a tripling of renewable electricity and isdue to do that again by 2015, so it is a powerfulinstrument and it is working. Likewise, feed-in tariVshave been successful in a number of other countries.We are certainly looking at what we can learn fromother countries. I think it is very important to do so,though making direct comparisons between diVerentcountries I think has to be treated with a certainamount of caution, for a variety of reasons, includingthe fact that diVerent Member States have startedfrom diVerent points. There is a variety in non-financial barriers that are being faced. There is avariety in the level of support as well as the type ofsupport and therefore it is very diYcult to attributedirectly what in the diVerent progress that has beenmade by diVerent Member States is as a result of thetype of mechanism chosen and what is as a result ofsome of these other measures. Also, if you do directprice comparisons, they measure slightly diVerentthings. For example, grid charges are subsumedwithin feed-in tariVs and not the RO. You are notalways comparing like with like. However, we arelooking carefully at what else we can learn. A coupleof other points I think it is worth bearing in mind if




you are thinking of any change to the system is thatwe would be very nervous about doing anything thatcould disrupt investor confidence. A lot ofinvestments have been taken on the basis of thecurrent support mechanism, so a wholesale changecould potentially be hugely disruptive. Also, giventhe 2020 timescale, the amount of time it would taketo introduce a whole new scheme, to get everyone tounderstand it, to get it working eVectively and soforth, would probably cause years of delay. So thereare a number of issues that I think need to beconsidered before a decision were taken. Therefore,where we are coming from at the moment is that weare absolutely committed to the RenewablesObligation and to the reforms we are taking, but onearea where we think that there may be potential forfeed-in tariVs, and we are committed publicly toinvestigating this, is specifically in themicrogeneration field, where a number of peoplehave suggested that a change to a feed-in tariV mightbe beneficial, not least because of the certainty that itcould give. We are looking at that, though, again,there are a number of interrelated issues: as well asthe type of support—and even within feed-in tariVsthere are a variety of diVerent types of feed-in tariVand, indeed, other support mechanisms, so it is notRO versus feed-in tariV; there are a variety ofmechanisms,—the level of support diVers, as do theadministration of the support and the non-financialbarriers. It is a complex piece but we are certainlylooking at whether, and if so, how, feed-in tariVscould play a role in what we are trying to do, and alsocertainly trying to learn from EU counterparts.Chairman: I should tell the Committee that I am surethat the Special Adviser will be circulating tomembers of the Committee details of supportschemes throughout Europe, in particular in theUnited Kingdom,. Without inviting you to answermy question now, perhaps you might discuss withyour colleagues which three countries you wouldrecommend to this Committee where we should lookat support schemes, incentives, provided by MemberStates to their local industries, which three countrieswe should look at in particular. I think our SpecialAdviser has a pretty shrewd idea but, without askingyour opinion now, it would be helpful.

Q35 Lord Bradshaw: How do you envisage theGuarantees of Origin certificates scheme will work inpractice? To what extent would the enhanced use ofGuarantees of Origin certificates require theharmonisation of support schemes? The origin of thisquestion about Guarantees of Origin is a great worryto anybody who is concerned with a resource. It willbe very important in emissions trading, wood forfurniture and things. How do we know that anyGuarantees of Origin are genuinely related tocontinuing careful or reduced use of carbon wherever

this happens? I really feel that there will be peoplewho will be selling certificates of origin to the marketbut actually are not very concerned about whathappens.Mr Abraham: May I try and answer that question?Let me have a go. There are two issues here. Yes, theGuarantee of Origin was something that wasestablished in the last piece of European legislationon renewables, and that was very much a voluntaryscheme to enable Member States, and indeed theCommission, to assess how Member States weredoing. In the draft Renewables Directive theproposal is to enhance that, in particular, to enablesome sort of trading mechanism to take place. Thereason for the trading mechanism is to enable or toincrease the cost-eVectiveness of meeting the 20%overall target by allowing countries under certaincircumstances to support projects outside their ownnational boundaries, in other Member States, whereit is cheaper to do so. That raises various issues, thefirst of which is, yes, how can you believe what is said?This has to be part of the Commission’s andindividual Member States’ robustness of actuallyapplying this, and no doubt the Commission willhave ways of checking on this very issue. TheGuarantees of Origin essentially say “I, a company,have produced so many gigawatt hours of electricitythrough renewable energy” and that will need to bechecked from time to time. I am not sure I have anymore assurance than that the Commission andindividual Member States will have to monitor this.

Q36 Lord Bradshaw: One small follow-up: is thetrade using Guarantees of Origin entirely within theEU or can you buy them from wherever you wish,say, somewhere in Africa?Mr Abraham: The current proposal is that the tradingshould be in the EU and with any country that youcan actually physically connect to the EU, andindeed, has some sort of Guarantee of Originscheme—again, back to your original point. That isthe current proposal.

Q37 Chairman: Let us just conclude, if we may, byputting in context what you have been talking about.You have been talking about renewable energy interms of EU-wide energy policy. Perhaps we can askMr Abraham to comment. How coherent are theseproposals in the context of the EU’s energy policies ingeneral and the Third Energy Package in particular?Mr Abraham: We go back to the European Councilyear ago, where a European energy policy wasagreed. The three main objectives of that were tosecure sustainable, secure and competitive energy.There are a number of elements in that, of which themain three are the climate change and energypackage that we have been talking about; the furtherliberalisation of energy markets, gas and electricity,




within the EU, the so-called Third Package; and anenhanced external voice of the EU with thirdcountries. I think the renewables package, as we havetouched on, contributes to two parts of that in termsof moving towards a low carbon economy but also tosecurity of supply. I think if you look at the packageof measures for greater liberalisation, they shouldhelp the renewables package. If, as we are trying toprovide by the liberalisation package, in particular,to ensure that access to grids, to networks, is free andis non-discriminatory, that should help theintroduction of new players in the market, and inparticular those producing renewable energy. So Ithink there is a synergy there; there is a synergy in thearea that we touched on before about MemberStates’ domestic regulatory authorities comingtogether, and I think there is a synergy between theexternal and the Renewables Directive in the sensethat both are aimed at improving security of supplyessentially by increasing the variety of sources ofenergy. The external dimension is in terms offacilitating the import of energy from countries

Supplementary memorandum from the Department for Business, Enterprise and Regulatory Reform

Intermittency

First, it might be helpful to clarify the terms that are used in relation to the characteristics of renewablegeneration such as wind. All generating technologies are to some extent variable ie output may move up ordown and intermittent ie output may stop altogether. We generally use “intermittent” to express both thesecharacteristics. The key issue in relation to wind and some other renewable technologies is that thisintermittency is relatively unpredictable (although suYciently predictable in the short term to allow “on theday” balancing of the system) and relatively uncontrollable (whilst output can be curtailed, it cannot beincreased in response to changes in the supply-demand balance).

1. What implications does the problem of intermittency have for conventional generation?

Increase in generation capacity margin

Wind generation has a low capacity credit—ie the extent to which it can be relied on to meet demand in systemplanning timeframes is low, generally estimated to be between 10%-20% of the installed capacity. This meansthat the deployment of wind is largely to displace fuel rather than generation capacity. Responsive (thermal)generation capacity (largely fossil fuel, but could include renewable biomass) must be maintained (ie notretired) to support system reliability. This does not have to be on a full one-for-one basis, but the low capacitycredit of wind generation means that even with a large amount of wind capacity, our need for conventionalcapacity is unlikely to reduce much below the levels we now have and the capacity which is soon to close underthe Large Combustion Plants Directive will still need to be replaced.

A consequence of this is that with significant penetrations of intermittent generation some thermal plant willhave to act solely as “back up” capacity, running principally at peak demand when there are low wind speeds.This plant will, therefore, have very low load factors and be able to recover its investment and fixed operatingcosts only at limited (and unpredictable) times throughout a year. In the near-term, it is likely that older plantwill be relegated to operating in this way as the level of wind penetration grows.

around the world and, as we have touched on, theRenewables Directive will, amongst other things,increase the level of self-generated energy. With thosethree aims in mind, that is how those three elementsfit in together.Chairman: Thank you very much indeed. I am goingto end the session in a second, but I want to thankyou. I think we are wiser. You can see we have beenstruggling a bit in a brand new subject. I am going topropose a rather novel procedure in order to get themost out of your evidence. When you have seen thetranscript and corrected it, I am going to ask theSpecial Adviser to lead in private session of theCommittee a discussion of the half a dozen issues thathave arisen so that we can be educated and get ourheads around some of the issues that you raise. ThenI will ask the Clerk perhaps to write to you forclarification on certain points, rather than ask you topursue a number of points that it has been suggestedI ask you now. Let us wait until we have had ourdiscussion, distilled our points down, and then wewill ask you for further written advice. The meetingis closed. Thank you.



Balancing: increase in need for flexibility and reserves

An increased penetration of variable and diYcult to predict renewable power will place an additional duty onthe remaining generating plant with respect to balancing supply and demand. Increased variability willincrease the need for flexibility required from conventional plant, while increased uncertainty in wind outputwill increase the need for various forms of reserve services, generally provided by a combination ofsynchronised plant operating part-loaded, demand and standing reserve.

The cost of this additional flexibility and reserve will be driven by conventional plant flexibility and planteYciency when operating part loaded. However, non-generation solutions, such as demand response andinterconnection technologies may be used to provide balancing services. Analysis of alternative options interms of their costs and benefits in diVerent systems requires more work.

2. What differences, in terms of intermittency, are there between different sources of renewable electricity?

There are a number of technologies that are classed as renewable: these include wind, hydro, tidal, wave,biomass, solar PV and landfill gas. Each has diVerent characteristics in terms of its intermittency andpredictability.

Wind turbines are intermittent being dependent upon the wind blowing at a minimum speed to enableoperation. Similarly, waves are generated by the wind and so the availability of waves suYcient to enablegeneration will vary over time. Solar PV is dependent on sunlight so will vary over the year and with dailyconditions. Hydro is dependent upon levels of precipitation so will vary, though in a more predictable mannerthan wind.

Tidal technologies (both stream and range)—are also intermittent but are totally predictable.

The ability of these technologies to generate at any given time will vary, as will the level of output that can beachieved as a percentage of total rated capacity as these both depend upon the available resource at that time,which is variable.

Biomass and landfill gas are controllable and able to respond in a similar way to other forms of thermalgeneration.

3. It has been suggested that to achieve the target of 20% of final energy it will be necessary to achieve between 35-40%of electricity generation from renewable sources. In evidence we discussed intermittency being a containable problem upto around 20-30% of renewable electricity generation. What would be the impact of a higher percentage of renewablespenetration?

There is good evidence of the impacts of renewable penetration at 20-25% levels. The UK Energy ResearchCentre produced a helpful synthesis of this evidence. They found that there were no technical barriers toaccommodating this penetration of renewable generation and that the costs of maintaining system reliabilityand system balancing were relatively modest (0.1-0.15 p/kWh spread across all demand).

However, this analysis was based on the assumption of a highly flexible generation system and is valid forrelatively small levels of penetration. In relation to higher levels of penetration, such as 40%–50%, we need todo further analysis. The indications are that the challenge is an economic rather than technical one, ie ensuringthat suYcient capacity of all technologies has the right incentives to remain on and join the network to supportthe deployment of intermittent renewable technologies and ensuring the economic and eYcient operation ofthe balancing mechanism.

Looking further ahead there are measures that may mitigate the eVects of intermittency eg:

— Demand-side measures:

— flexibility: there are a number of aspects to this, including dynamic demand providing remotelycontrolled short-term response (eg in fridges or air conditioning) and longer-term responsethrough shifting demand in response to price and/or weather conditions.

— Increasing electricity demand: moving non-electricity demand into the electricity sector (egusing electricity to supply demand that has been traditionally supplied by gas).

— In a system characterised by high penetration of intermittent (eg wind) and inflexible (eg nuclear)generation there is an increased requirement for flexible generation capacity to maintain the balancebetween supply and demand. To ensure its availability as reserve, many of these flexible generatorswill have minimum output limits. A combination of these factors (intermittent and inflexiblegeneration plus high levels of reserve generation) will result in significant periods of power surplus;



when low demand coincides with high wind output causing power prices to drop to near zero. Athigh penetrations of intermittent generation this may occur during a significant proportion of theyear and could represent a sizeable amount of total output. Increasing electricity demand (beyondjust peak shifting) during these periods not only creates a market for the surplus (low-carbon) powerand prevents spilling / constraining-oV of renewable plant, but also facilitates cost-eVective switchingof energy services away from other (more polluting) energy vectors (eg gas).

— Geographical diversity. As deployment of renewables increases we will see greater geographicaldiversity that could mitigate some of the eVects of intermittency; for example there is likely to be ahigh level of on-shore wind in Scotland combined with oV-shore wind installations further south.

— A greater degree of inter-connection. The larger an electricity system, the greater the scope forfluctuations in the total supply-demand balance to smooth themselves out. A greater degree ofinterconnection with the Continental mainland and with Ireland may therefore help to address thechallenge. New interconnectors to the Netherlands and to France are already in the developmentprocess.

— Energy storage: BERR has supported the development of flow battery technology through theTechnology Programme and its predecessors, ie Regenesys and more recently with Plurion. Successhas been limited so far but the technology does seem promising, largely because it is scaleable toutility size (tens of megawatt hours) and its energy storage can be separated from its power output,unlike a conventional battery.

Understanding the impact and eYciency of these measures under various future development scenarios willrequire further work. However it will be diYcult to make an appropriate selection of the above technologysolutions a priori, given the uncertainties in a number of key driving parameters (cost of alternative measures,dynamic and cost characteristics of the future generation mix, level and responsiveness of demand etc). It maythus be appropriate to ensure that the market framework is able to facilitate the emergence of the most costeYcient portfolio of solutions.

Severn Tidal Power

4. The Committee would appreciate further information on the forthcoming feasibility study into the Severn Barrageproject. What issues will this study look into?

Tidal range technologies—barrages and lagoons—have the potential to make a significant contribution to ourenergy needs. They work by making use of the height diVerence between high and low tides to generateelectricity by creating a diVerential in the water levels either side of the structure and then passing this waterthrough turbines. The Severn Estuary has the second highest tidal range in the world at roughly 14 metres ona spring-tide.

The feasibility study (which was announced in September 2007) aims to enable the Government to decidewhether, and if so, on what terms it could support a tidal range power project or scheme in the Severn Estuary.

The terms of reference were published in January 2008 and are attached at Annex 1. The study will cover alltidal range technologies, including barrages and lagoons. It will assess in broad terms, engaging stakeholdersand the wider public, the costs, benefits and impact of a project or projects, including environmental, social,regional, economic and energy market impacts.

It will run for roughly two years and will be a two stage process with a decision point at the end of each. Ahigh level work plan for the feasibility study is attached at Annex 2. The first stage work, likely to run untillate 2008, will focus on high level issues and reach a first view on whether there are any fundamental issuesthat mean the project can not proceed. Subject to the decision at the end of the first phase, the second phasewill look at the issues in more detail and culminate in a full public consultation in early 2010.

The study will include a Strategic Environmental Assessment (SEA) to ensure a detailed understanding of theEstuary’s resource; there will be a consultation on the scope of the SEA in the autumn following the first phasedecision on whether to proceed.

A Parliamentary Forum has been set up, chaired by the Secretary of State for Business, Enterprise andRegulatory Reform, John Hutton, to provide all interested MPs, members of the House of Lords, WelshAssembly Members and MEPs the opportunity to engage with the study. This forum first met on 20 Februaryand meetings will take place on a quarterly basis. Details of the next forum will be placed in the libraries ofthe House of Commons and the House of Lords once a date has been arranged.

Further information about the study (including regular updates) will be available from www.berr.gov.uk/energy/severntidalpower



5. What is the estimated impact of the Severn Barrage project on the UK’s renewables target?

Estimates from previous work suggest the CardiV-Weston scheme would have a generation capacity of some8640 MW and an annual electricity output of 17 TWh/y or some 5% of UK annual electricity demand andwould take five to seven years to construct once planning consent had been granted. The SustainableDevelopment Commission report Turning the Tide, published on 1 October 2007, estimates that the RussellLagoon concept could capture around 6.5TWh of energy a year from lagoons totalling 2,835 MW. However,it is diYcult to estimate how much energy lagoons can produce as there are diVerences of opinion on whetherthey are able to achieve a higher load factor as a result of ebb-flood generation, rather than ebb-onlygeneration and as there are no existing examples of tidal lagoons. We will be gathering further evidence onboth barrages and lagoons as part of the feasibility study.

A Severn Tidal Power scheme would be a way of helping meet the renewable energy target and the SevernTidal Power feasibility study is being considered in the context of both the development of the UK RenewableEnergy Strategy and the UK’s wider climate change and energy objectives.

Article 5(2) of the proposed European Directive on the promotion of the use of energy from renewable sourcesis helpful for the UK as it gives partial credit to very large renewable projects with long lead times andsignificant risks. The Government supports this measure as we see one role of the 2020 renewables target asbeing to encourage large innovative projects as part of a long-term move to a low carbon economy. Whetherlarge projects are in operation by 2020, or a little later, is secondary to our long-term goal. We expect theCommission to take into account how near to 2020 the actual generation takes place, or is expected to do so,when assessing the amount of credit that partially built projects receive.

Support Schemes

6. The Committee would be grateful if BERR could suggest two or three Member States’ support schemes that it wouldbe useful to study

The 27 EU Member States all operate diVerent national support schemes for the promotion of renewableenergy using a wide range of market based instruments. The diVerences reflect Member States’ individualapproaches to both renewables and their electricity markets in general.

For interesting case studies of Member States’ support schemes, we suggest it would be useful for theCommittee to study the diVerent systems in place in Spain, Italy and France. These are all large Member Statesbut provide diVering schemes and levels of support for renewable energy and have had varying degrees ofsuccess in facilitating growth in the renewable sector. They also represent examples of a feed-in tariV regime(Spain and France), a green certificate scheme (Italy) and a tendering approach (France). The Germanapproach to feed-in tariVs has also been much studied recently.

Issues which the Committee may want to consider in looking at the alternative support schemes might include:how network costs are treated by the various schemes and how the schemes work within a competitiveelectricity market.

There is more information available on EU Member States’ support schemes in the Commission’s workingdocument, The support of electricity from renewable energy sources published alongside the 23 January draftrenewables directive. This can be found at:

http://ec.europa.eu/energy/climate actions/doc/2008 res working document en.pdf

Annex 1

Severn Tidal Power Feasibility Study—Terms of Reference

Building on the work of the Sustainable Development Commission and earlier studies, the feasibility studywill:

— assess in broad terms the costs, benefits and impact of a project to generate power from the tidalrange of the Severn Estuary, including environmental, social, regional, economic, and energymarket impacts;

— identify a single preferred tidal range project (which may be a single technology/location or acombination of these) from the number of options that have been proposed;

— consider what measures the Government could put in place to bring forward a project that fulfilsregulatory requirements, and the steps that are necessary to achieve this; and



— decide, in the context of the Government’s energy and climate change goals and the alternativeoptions for achieving these, and after public consultation, whether the Government could supporta tidal power project in the Severn Estuary and on what terms.

The work will be carried out by a cross-Whitehall team led from the Department for Business, Enterprise andRegulatory Reform, including representatives of the Welsh Assembly Government and the South WestRegional Development Agency, taking external advice as necessary and engaging stakeholders and the widerpublic. The study is expected to last roughly two years.

The study will look at the range of options for power generation from the Severn Estuary tidal range, includingbarrages, lagoons and other technologies. It will include a Strategic Environmental Assessment of plans forgenerating electricity from the Severn Estuary tidal range to ensure a detailed understanding of itsenvironmental resource, recognising the nature conservation significance of the Estuary.

The feasibility study team will report to the Secretary of State for Business, Enterprise and Regulatory Reformsupported by ministers from DCLG, Defra, DfT, Treasury, Wales OYce, the Welsh Assembly Governmentand the Minister for the South West.

If the outcome of the feasibility study is a decision to proceed, extensive and detailed further work would beneeded to plan and implement a tidal power project, and secure the regulatory consents that would berequired.



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MONDAY 31 MARCH 2008

Present Bradshaw, L Rowe-Beddoe, LDykes, L Ryder of Wensum, LFreeman, L (Chairman) Walpole, LPaul, L Whitty, L

Examination of Witness

Witness: Dr Tom Shaw, Managing Director, Shawater, examined.

Q38 Chairman: Well, Dr Shaw, a very warmwelcome to the Committee, thank you very muchindeed for coming. As you know, we are conductingan inquiry into the EU’s renewable energy target,with specific reference to the UK target. We haveonly just begun, we hope to publish in July to perhapsoVer our views to not only the Council of Ministersbut also to the Commission and Parliament in duetime. I think it would help the Committee if youwould be very kind and just describe your ownbackground, and perhaps help the Committee with adescription of the projects that you are both aware ofand involved with. Dr Shaw?Dr Shaw: Thank you, My Lord Chairman. It iscertainly a privilege, of course, to have theopportunity to make a presentation to yourCommittee. Water engineering is what I call mydiscipline, which is civil engineering with a biastowards water, but my career has been spent reallythroughout in the hydroelectric power sector of waterengineering. By water engineering, it is often thoughtthat it is something to do with water supply, in mycase it is only water supply to turbines for powergeneration purposes. There are two scales to thistoday. In the 20s, 30s, 40s, 50s, we have been throughthe scale of generating some megawatts from hydroschemes dependent upon dams and water storage.That era, for a number of very good technicalreasons, as well maybe as environmental too, haspassed; not totally, because Scottish and SouthernEnergy commissioned a large hydro scheme inScotland, of course, only a few weeks ago, butnowadays the emphasis is on smaller schemes, whichare environmentally more friendly, I believe, andmore easily integrated into the network, of whichthere is a very large opportunity, mainly in Scotland,also in Wales, but elsewhere as well. At the other endof the scale there is, as you will be aware, My LordChairman, a serious interest by the Government,again, not for the first time, in the proposed tidalpower barrage in the Severn Estuary. I have beeninvolved with that scheme for some, dare I say,decades, since it became of interest to me in 1965. Wehave played, both me personally in other guises, aswell as my small company, a role in moving thatscheme towards the serious consideration which it isnow receiving. My company, Shawater, is obviously

named for reasons which I do not need to explain, butmy business is exclusively hydroelectric powergeneration. That is what I do, and I hope that is whatI know about, and I do not know about much else,but I am very happy to tell your Committee what Ican about the issues that interest you.

Q39 Chairman: We know that the Department hasalready commissioned or is in the process ofcommissioning a further study into the SevernBarrage. Could you just describe what a possiblescheme might be and the sort of order of magnitudeof cost, and where it would be built?Dr Shaw: Well, that, to an extent, My LordChairman, is what the study is about.

Q40 Chairman: Of course.Dr Shaw: Shall we say, we all have views as to whereit might or indeed in some cases might not be. Analignment for the barrage, which has been nowfavoured for some decades, is just seaward of CardiVto just seaward of Weston-super-Mare on theSomerset coast; in other words, seaward of those twolocations. How far seaward is, of course, for debate,and there is also, of course, a school of thought thatsays it should be landward further up the SevernEstuary, to, one might say, lesser eVect from the pointof view of power generation. The issue of energy—Iwill not say it frightens me, but I am daunted, this Iknow is one of the purposes of your Committee, I amdaunted by the fact that at the moment, in the UK,we generate, as you will be well aware, just 1% of ourtotal energy—energy, not electricity—fromrenewable sources. The Severn Barrage, for example,would double that. All of the hydro which was builtin those earlier decades and all of the wind power thatwe have now come to depend upon over the pastdecade would produce roughly 1% of our energy. TheSevern Barrage is equivalent to that much. At astroke—I often say it only requires one planningapplication to double it. But that is 2%, and the EU,as you are aware, is looking to generate 20% by 2020.Even with the barrage, that is still a twenty foldincrease on where we are at the moment. It is adaunting prospect.



31 March 2008 Dr Tom Shaw

Q41 Chairman: Could I just clarify that, because theunderstanding of the Committee was that the UK’starget would be 15%.Dr Shaw: 15%, yes.

Q42 Chairman: Even so, that is a very significantincrease?Dr Shaw: Why there is a distinction between theearlier figure of 15% from the UK Government and20% in January of this year from Brussels I do notknow, but those two figures are on the table.

Q43 Chairman: Could you just say a word aboutwhat you describe as smaller schemes in Scotland?Dr Shaw: Well, they are smaller; bordering oninsignificant in national terms because if you have100 or 1,000 of them, you would see a diVerence, butwhen one Severn Barrage, with a generating capacityof nearly 10 million kW, makes only a 1% diVerenceto our total energy consumption, you would, MyLord Chairman, require an awful lot of smallerschemes, whether they be hydro schemes or windfarms, to achieve a significant change in generatingcapacity. Hence my comment that I find it somewhatdaunting—not impossible, but daunting.Chairman: I am going to ask colleagues now to joinme. Lord Paul?

Q44 Lord Paul: I am less than impressed with whatyou say about these smaller schemes, but what kindof a cost diVerence comes between a big scheme anda small scheme, because the general impression is thatthey are not cost-eVective at all. You can impresspeople with a lot of these schemes, but it does notsolve your problem.Dr Shaw: We tend, Lord Paul, to use the ratio ofpounds per kilowatt of generating capacity as anindicator of viability, and £1,000 per kilowatt, intoday’s renewable obligations business, will give avery viable project. The Severn Barrage, the latestfigures that are referred to, would give about £1,500per kilowatt as the unit cost. Hydro schemes that weare involved with, many, many of them, tens of themin Scotland, in fact, I am pleased to be able to say,work out slightly cheaper than that, around about£1,000 a kilowatt, and that is a very goodproposition. I was interested to see only in thismorning’s Financial Times that there is up for sale alarge tranche of wind power generating capacitywhich, if the figures in the FT are correct, and I do notknow whether they are or not, are up for sale at over£3,000 per kilowatt. So a Severn Barrage at £1,500per kilowatt appears to make sense.

Q45 Lord Paul: That is fine, but the question oftransmission, the costs are basically the same whetheryou have a smaller unit or a bigger unit, so how doyou spread over the delivery to the consumer?

Dr Shaw: It is not maybe surprising, Lord Paul, thatmuch of the community in this and other countriesdoes not live where renewable energy is most intense,and it is only where people live in large numbers thatwe have such services as grid transmission facilities.If we look to the UK, to the north-west of Scotland,for wind power as well as sea wave energy resources,we do not find indigenous at the momenttransmission capacity. If we look to the SevernEstuary as it happens, in contrast to what I have justsaid about people living near high energy locations,people do live close to the Severn Estuary, where thetides are, I stress, to my knowledge, the third highestin the world. They are often said to be the second, butthey are not. But people do live there in largenumbers, and the transmission infrastructure aroundthe Severn Estuary, and for some distance, of course,away from the Severn Estuary, is relatively strong. SoI am not dismissing transmission as an issue, but inthe investigation that was carried out into the SevernBarrage in the 1980s, where one of the partners wasthe Central Electricity Generating Board,transmission was not raised as a serious concern fromthe Severn Barrage, not in the way it is being raisednow for wind power in Scotland.

Q46 Chairman: Could you just estimate for us orderof magnitude—I appreciate that the Departmentnow has consultants or is likely to appointconsultants to estimate the cost, but what sort ofcapital cost are we talking about for the SevernBarrage, order of magnitude?Dr Shaw: The figures that were quoted, My LordChairman, they started oV with a comprehensiveinvestigation, and here, I have to say, it is the onlycomprehensive investigation that so far has to myknowledge been carried out in the late 1980s, thesame as I have just referred to in the context of theCEGB, put a cost of £8 billion to the barrage, and allthat has happened since then is inflation escalatorshave been used to reach an oft-quoted now figure of£15 billion, and the scheme has never been put out topublic tender. I hope that will come, but even at £15billion, at 10,000 MW nearly, £1,500 per kilowatt is acompetitive price for the product.

Q47 Chairman: Again, to construct a barrage fromseaward of CardiV and Weston-super-Mare, order ofmagnitude of capital cost?Dr Shaw: £15 billion.

Q48 Chairman: And length of time?Dr Shaw: There is an interesting answer to that, MyLord Chairman. It is estimated that the time it wouldtake would be about nine years to build, but from anearly stage, like with any power station, you have thecapacity to do something, to generate something, andby the time the nine years are up, because turbines are




being installed over much of that period, and can beused from the end of year five, by the end of year nine,about three years’ worth of full generation will havebeen achieved. So the answer to your question, in asense, is six years, although I suppose technically it isnine years, but the importance of being able togenerate pre full commissioning is, I think, extremelyimportant in economic terms.

Q49 Lord Ryder of Wensum: Do those figures takeaccount of delays from planning or other inquiries?Dr Shaw: I do not know how one does that, my Lord.No, they do not. If you have a formula, I am sure thatmany people would be pleased to know.

Q50 Lord Ryder of Wensum: I can only oVer aformula that we endured over Sizewell, and a greatdeal of that came from environmental interests, andI have no doubt that any inquiries over this notionwould take as long, if not longer, bearing in mind thelessons that people have learned from the extensiveamount of time that they were able to prolong theSizewell inquiry for.Dr Shaw: If I may, My Lord Chairman, theGovernment’s stated aim now is to build on what hasbeen done already, which is considerable, with a viewto reaching a position on a barrage by 2010, and thento carry out detailed investigations of that preferredproject for a further four years, with this issueforemost in mind, and the building programme thenwould be from 2014, ie the other side of the Olympics,which is, I think, significant from the constructionalpoint of view, for six or seven years. Now I am notanswering your question, forgive me, as to whether ornot there will still be objections beyond 2014, but thatis the stated aim.

Q51 Lord Walpole: Yes, I want to know, what doyou physically think is going to be built to achievethis? I know the highest tides in the world, which Ibelieve are the Minas Basin in Nova Scotia, and Ihave seen them coming in and out, and they arefantastic. You are only about seven feet less thanthat, are you not?Dr Shaw: Yes.

Q52 Lord Walpole: But do you put a dam across thewhole thing, 40 feet high, or do you put individualtide mills in relevant places, or are there options ofdoing diVerent things? Are we going to end up with adam right the way across?Dr Shaw: That is the intention of a barrage. Thedefinition of a barrage, as I understand it, is that ithas water on both sides, as against a dam, which doesnot; that is the technical diVerence.

Q53 Lord Walpole: Is that necessary?Dr Shaw: Yes, but the diVerence in energy potentialbetween a current and actually generating adiVerence in level across a structure, in energy terms,is huge. Pressure is really what hydroelectric power isall about. If you do not have pressure, you have gotwindmills, and windmills, to be viable, are big,because they have to capture area or flow, whereas ifyou have pressure, under the pressure you can passthat flow through a smaller area. So pressure is reallywhat a barrage or a dam is all about. Otherwise youare left with, as you say, tide mills. That is a verydiVerent order of proposition from the point of viewof the energy realised from the same line across thebarrage. If you only had devices capturing thecurrent, you would be left with less than 10% of theenergy potential of actually having a barrage.

Q54 Lord Walpole: But if for a second we talk aboutmicrogeneration, are tide mills using the flow anygood at all?Dr Shaw: Oh yes. In the UK alone, in the 11th and12th centuries, there were thousands of them,extraordinary, that is the information I have, and stilla few survive from that time, but yes, of course, theywill make a contribution. Microgeneration will makea contribution; I think in national terms, it is reallyvery small. I am not saying it is insignificant at all, butin an estuary with a tide range of the strength andheight of the Severn, I think that would not be whereyou would put your tide mills. There are many others,like the Pentland Firth around the top of Scotland,Orkney, where the current is strong but the tide rangeis small, which are well suited to watermills. So yougo with those where you have the current, but whereyou have the range, then I think you go with abarrage for most economic eVect.

Q55 Lord Walpole: Basically, there is nowhere elsein this country that is probably worth doing it?Dr Shaw: Solway Firth would be second. The tidecomes in along the south coast of Ireland and thenorth-west facing coast of Cornwall, and is focusedinto both the Bristol Channel and Severn Estuary,and up the Irish Sea. That is the area, for simplytopographical reasons, geographical reasons, withthe highest tides in the UK, so to an extent, anywherein the Irish Sea, or south of the Irish Sea in the BristolChannel, there is the potential for barrages. I think Iam right in saying that Solway Firth would have thesecond highest energy opportunity, power-generating opportunity of the UK, with the Merseyand that part of the Dee Estuary next. Those are WestCoast opportunities. On the East Coast, there hasbeen talk of an Outer Thames Barrier, installingturbines for power generation, and of course that




could be done, but the tide range is relatively modest,and so the economics would be relatively lessattractive.

Q56 Lord Walpole: That does answer the otherthought that I have about the Thames, as to whetherone could do anything. The sheer amount of waterthat goes down there is very great, but it does nothave the potential to run turbines.Dr Shaw: The range is vital.

Q57 Lord Whitty: I am agnostic on the SevernEstuary, but I have heard a lot of arguments against,which suggest that in addition to the £15 billioncapital costs, there are significant environmentalcosts, and also some economic costs in relation to theports in the Bristol Channel and so forth. Let us saythat takes the cost up to an equivalent of £20 billionor so. If we are getting 1.5% final energy use from aSevern Barrage, can you conceive of any other way inwhich that £20 billion could be spent to achieve asimilar (a) contribution towards the renewablestarget, and (b), rather more important, acontribution towards carbon reduction?Dr Shaw: Of course, if we are going to meet the 20%target or even the UK’s 15% target, the SevernBarrage is a relatively small element in the total, sothere must be many other ways of achieving the bulkof what is being sought. In terms of value for money,at £1,500 per kilowatt or thereabouts, the SevernBarrage must be a good proposition, must be acontender. Yes, I too am well aware of environmentalarguments, which I disagree with, but that is adiVerent matter, against the Severn Barrage, but that,I think, My Lord Chairman, is the purpose of theGovernment’s current investigation, to say: what isthe substance behind these notions of environmentaldisadvantage? I am very much sympathetic withasking the question because I am not sure that Inecessarily accept what is said. In terms of answeringthe question, other means of generating at themoment large amounts of energy, there is only oneother means that I am aware of of generating largeamounts of energy, and that is wind power. On thetimescale of this side of 2020, there are only twosources, it is either tides in the form of barrages or itis wind. All the other technologies which are beingdeveloped, and one is delighted to see themdeveloped, have, I think it is commonly said,something like a 25-year commercialisation periodbetween proving the technology and actually havingthem at a large enough scale to make a meaningfulcontribution to our national requirements. 25 yearstakes us far beyond 2020, of course. So I think thereare only really two source areas: the tides, in the formof hydropower, and wind.

Q58 Chairman: Just before turning to Lord Rowe-Beddoe, could you just clarify the calculation of the£1,500? Does that include capital amortisation?Dr Shaw: Yes.

Q59 Lord Rowe-Beddoe: Dr Shaw, can I just pick upon from one question Lord Whitty asked you aboutthe Bristol ports, could you tell us what the positionis there? Because we have all heard grumblings ornoises. As you live in that part of the world, I assumethat you are aware of it.Dr Shaw: Yes, the Bristol ports certainly have aconcern of access by not just the vessels that use theport at the moment—and I think the same would gofor Newport and indeed to a lesser extent nowadaysfor CardiV, because the barrage would be seaward ofall of them, and Sharpness, and thence Gloucester.So there is a requirement, and this was recognised Ithink fairly adequately in the earlier 1989investigation I referred to, Government and CEGB,and the Severn Tidal Power Group, by the inclusionof two locks of a significant size in the barrage. In themeantime, ships, of course, have grown only oneway, larger, and the Bristol ports are looking tocomplement their existing facilities by constructing,for larger ships, a larger facility to accommodatelarger ships than they have at the present time, tocomplement the general world trend in shipping. Sothe barrage would need, on that basis, to include evenlarger locks than were advocated in the 1980s, andthe Bristol ports are, of course, concerned that theircommercial position could be prejudiced by thethought that there are barrage investigations goingon which might not recommend or conclude thatsuch locks should be included. So I think there is anunderstandable commercial concern by the BristolPort Company that their business or the expansion oftheir business is in some way under threat. If I amallowed a view, My Lord Chairman, my own view isthat here is an opportunity to consider the possibilityof the UK having a facility such as the Dutch arebuilding at Maasvlakte 2 and Dubai ports arebuilding at Jebel Ali, to build a port of truly nationalsubstance where it needs to be, out there facing theAtlantic, which is after all where the ships come from,wherever they come from, on the seaward side of thebarrage. But that is a notion of mine, it is notwelcomed by the Bristol Port Company as you canimagine, but it would seem to me to be a situationwhich, on the timescale of the barrage, which is post2020, ought to be given serious consideration.

Q60 Lord Rowe-Beddoe: Thank you. I would like tobe educated, if it is not the second largest, then whatis the second largest?Dr Shaw: The second largest is an inlet on theHudson Bay in north-west Canada. Ungava Bay hasthe second highest tide range in the world, following




the Bay of Fundy. The Canadians are first andsecond.

Q61 Lord Rowe-Beddoe: Well, there has been a lot ofmisinformation on that score, thank you. The twothings I would like you to comment on, if you would:the economic benefits to the south-west and to Wales,manifested by the diVerences, as I understand it, inwhat was the 1988/1989 plans, namely both a roadand a rail link that will go across the barrage, whichwill obviously obviate traYc having to go all the wayup into Bristol and so on, so perhaps you couldcomment on that. The other thing iscomplementarity, if you have a barrage, you can stillutilise the tide and the wind further out, as Iunderstand it, is that correct?Dr Shaw: That is correct.

Q62 Lord Rowe-Beddoe: So it is not either a barrageor an underwater turbine, it can be everything.Dr Shaw: Yes, the currents anywhere in the estuaryare dependent on where in the estuary one isconsidering, and how much of the estuary, in terms ofthe movement of water, is reduced by the presence ofthe barrage. So the further seaward in the BristolChannel, for example oV Swansea, I think the eVecton currents would be minimal oV Swansea, so that farseaward, there would be little adverse interactionbetween the two. In terms of economic implications,I find it a terribly diYcult issue to grasp what theresponsiveness of commerce and society in generalwould be if there was such a facility, albeit built forpower generation, but with the transportopportunities to which you refer. How would werespond to this? The 1989 investigation gave someguidance on that, with advice from a number ofconsultants professional in that sector, and theopportunity is very, very considerable. This may beflippant, forgive me, My Lord Chairman, but to thepoint that one says, well, when you build a barragefor all these other reasons, do not forget to put in theturbines! They will help too. I think there is anelement of significance in that, but the balancebetween the two, I think, is still open to debate.Lord Rowe-Beddoe: One more?

Q63 Chairman: Please, yes. I think just before thatquestion, could you, for the neophytes on thisCommittee, just explain the diVerence between thebarrage and the turbine?Dr Shaw: Oh, sorry, apologies. Well, a barrage, perse, is essentially a dam with holes, through whichwater flows to the propellers, which are the turbines,and the turbines in this case are like wind turbines,only they have very wide blades, four or five on arotor. These rotors may be, in terms of the height ofthis room, a radius of almost twice the height of thisroom. I mean, they are big, they are typically 10

metres in diameter, not twice the height but pushingtwice the height of this room. They rotate quiteslowly, not surprisingly, because of their enormoussize and very wide blades. They are very standardmachines, and what is proposed for the SevernEstuary is not the biggest by any means in the world,they have been built to that geometry and size now, Isuppose, for the past 50 years. The Rance Barrage inBrittany, near St Malo, has 24 machines of this type,smaller than would be appropriate for the Severn,and they were installed from 1965-7. The samemachines, working in seawater, of course, are in placetoday, they have not been changed, the blades are asthey were originally after 41 years and a bit, and whatis almost uncanny, but I think it is true, is that thepredicted annual energy output from the RanceBarrage when it was being designed in the late 50sand early 60s is what has been achieved almost everyyear since then, and is still being achieved. It is verysimple technology, My Lord Chairman,hydroelectric power is not very demanding, and it iscertainly not demanding in the context of tidalpower, now that the issue of salinity, which was anissue, does not seem to have arisen, it has been dealtwith through cathodic protection.Chairman: Thank you. The Committee either hopesto visit St Malo or at least take evidence from EDF,I think it is, who is responsible. Lord Rowe-Beddoe?

Q64 Lord Rowe-Beddoe: Yes, just leading on froman earlier question, the concerns of theenvironmental bodies. I believe the SustainableDevelopment Commission reported on this quiterecently, and is it correct that on balance, theycame—I will not put words into your mouth, how doyou think that they reported?Dr Shaw: Well, I think they reflected the concern thatwas put before them by organisations like theEnvironment Agency and the RSPB, and I think thatwas their job, to report on what they had been told.But there is, Lord Rowe-Beddoe, to me, a key issuehere, and it is one which has not really seriously beenaddressed, but I am sure it will be now with thecurrent Government investigation, and that is: ifthere is real justification for concern, can somethingbe done to ameliorate it? That interaction has reallyyet to take oV. The Sustainable DevelopmentCommission and the Environment Agency andothers now frequently quote the need forcompensatory habitats, or in some cases theimpossibility of providing compensatory habitats,because of the scale of the compensation that thebarrage would require. That is one side of theargument. But there is a counter argument that saysthat the habitats that would be created as aconsequence of the Severn Barrage are such that the




barrage could be used as a means of oVsetting otherdevelopments, for example oV the coast of Norfolk,where compensatory habitats would be required tocounter so-called managed retreat of the coastline,that the benefits that the barrage would bring to thehabitats of the Severn Estuary could be used in thatcompensatory way. So here are diametricallyopposite views, and I think to me the significance ofthe fact that there are diametrically opposite views isbecause the truth has not been established, at leastnot convincingly established.

Q65 Lord Dykes: Coming back to the comparisonwith Rance, and I appreciate there are many physicaland other diVerences between them. We are told ongood authority, I think, speaking from memory, thatthe water movement is only one way now. They didintend it to be two ways at the beginning. Are youimplying that the Severn Barrage would be two-wayand therefore would increase the generation capacityfrom that point of view? Do you still think that wouldbe so?Dr Shaw: The French, when they designed Rance—Iwill not say they did not know which to favour, butRance was built as a pilot scheme for a project on thescale of the Severn Barrage, at the les de Chausey onthe west coast of the Cherbourg peninsula. It was amodel, a big model, but it was a pioneeringdevelopment which needed to sort out such issues asone-way generation, ebb or flood, or both ways, ebband flood, going in both directions; together withanother, to me extremely important, feature as well,the opportunity to use those same turbines as pumpsaround the time of either high tide, when you increasethe basin level by pumping a large amount of waterthrough not much height, or lowering it, around thetime of low tide, and so the Rance Barrage includesall four modes of operation. Those modes were testedfor maybe the following ten years, through the 1970sand even the 1980s, but now it is almost totally ebbgeneration. It generates in one direction, from highbasin level, following high tide, it generates seawardonly, and it pumps around the time of high tide toraise the level of the basin. Forgive me, My LordChairman, I am trying to avoid a lecture on this:there is a fundamental issue that in generating, thelevel of the basin, if I can call it the basin, on thelandward side of the barrage, what you are left withis inevitably that much higher than the lowest level towhich the other side falls, so if you only generate inthe ebb direction, your basin level at the lowest is onlyabout mid tide level now. If you generate in any otherdirection, your highest level is only about mid tidelevel now, if you generate on the flood direction. Sothe issue of consequential water levels in the basinarea to me is absolutely crucial. Whether it is theenvironment or whether it is shipping or whatever it

may be, all of these consequences of the barrage andthe way it is operated will need to be given veryserious consideration. The Rance Barrage is now ebbgeneration almost entirely, with flood tide pumping,and that, to me, environmentally, is the preferredsolution. Can I just, forgive me, disagree with what Iunderstood you to say in your opening comments? Ithink there is very strong similarity between theRance Estuary and the Severn, very strong. In fact, Isay it is very, very strong, so much so that thecomparisons that have been made between the twoare really quite powerful.

Q66 Lord Dykes: May I, My Lord Chairman, justvery quickly? You mentioned the optimal locationalsuggestion as being west of Weston-super-Mare andwest of CardiV. Are there still members of the pro-barrage lobby who are also advocating that one doesthat, as well as a much smaller one at the top end, thebeginning of the river itself, rather than the estuary,to actually have double the opportunity, even thoughit is not double the capacity?Dr Shaw: No, sadly, as I understand it, it does notwork that way. As I said just now about the residualwater level that is left in the basin area followinggeneration, whatever form of generation one uses,that is all that the other barrage further upstreamwould have available to it. If you build anotherbarrage, a smaller one, further up the estuary, so tospeak, then you will be denying the larger one someof its generating potential, and you will gain less thanyou lost by having a second scheme. So there is, Ithink, no merit that I can see from having two in thesame estuary.

Q67 Lord Dykes: Thank you very much indeed. Andfinally, may I, My Lord Chairman, very quickly? Onthe putative economic matters, would there be anypossibility of spectacular visitor and touristinfrastructure on top of the barrage being soconsiderable and enormous that it would actuallyoVset some of the initial building costs?Dr Shaw: My Lord, that was rather the gist of mycomments earlier, how enormous is this enormous tobe? The Rance Barrage is said, I believe it is true, tobe the most visited industrial facility in France. TheSevern Barrage, wherever it is, would be on or veryclose to popular tourist routes up and down the M5,and to the west on the M4, west of CardiV, and to me,it is incomprehensible to imagine that it would not bepopular, if it was properly presented, which surely itwould be. But the Rance visitor facility, if you havenot seen it, is worthwhile. It is impressive, eventhough the scale is relatively small. I should say, MyLord Chairman, if I may, that the diVerence betweenone barrage and another barrage is essentially length;




not height or width, but length. The Rance Barrage ishalf a kilometre long, and the Severn Barrage wouldbe roughly 30 times as long, but it would be just moreof the same, 15 kilometres.Lord Dykes: Thank you.


Witness: Mr Matt Thomas, Ecotricity, examined.

Q68 Chairman: Mr Thomas, thank you very muchindeed for coming.Mr Thomas: My pleasure.

Q69 Chairman: It would be helpful if you could, forthe record, just tell us a bit about your background,and then perhaps you would like to guide us with anyopening comments that you have, and then mycolleagues around the Committee will ask youquestions.Mr Thomas: Of course. Well, as I say, my name isMatt Thomas, I work for Ecotricity as the head ofprojects. I have been in the renewables industry foraround about eight years, working on both the retailsupply side and also the project development side,which is where most of my work is concerned at themoment. I think in general, we at Ecotricity arehappy to see these targets in place. Clearly, it isgenerally good news for our business. Overall, as Isay, we are happy with that. We are also veryconcerned at the moment with the Government’slack of what we see as a coherent energy policy,certainly one that incorporates renewables at its core.We are also very worried at the mentions that we seeat the moment around new nuclear build, so really wewould like to see as a company a very coherent energystrategy and policy put in place for the forthcoming10-15 years at an absolute minimum.

Q70 Chairman: Could you tell us something aboutthe organisation?Mr Thomas: Yes, of course. Ecotricity is a companythat is about eleven years old now, it started oV reallyas one man, the current owner, who put together asingle wind turbine in the Gloucestershirecountryside, and from that, has developed a businessthat is based on not only generation of renewableenergy but also the sale of renewable energy tobusiness and domestic customers.

Q71 Chairman: And order of magnitude of size?Mr Thomas: Around about 60 megawatts installed ofonshore wind power, and around 35,000 retailcustomers, the bulk of those are domestic.

Q72 Chairman: Sorry, I did not catch the number ofdomestic customers.

Chairman: Forgive the pun, but I think you havewhetted our appetite to visit the Rance Barrage, sothank you very much indeed. We are going to take apause now, but the Committee is indebted to you.Thank you.

Mr Thomas: Around about 35,000. We have 35,000customers in all, most of those will be domestic,probably 34,000.

Q73 Chairman: If I could start, and just ask yourpresent opinion about the targets that the UK mayaccept when the Council of Ministers comes to aconclusion later this year, which is that 15% of ourenergy generation should come from renewablesources, whereas at the present time we are aboutsomewhere between one and 2%: first of all, yourjudgment as to whether these targets are attainable;and secondly, what role companies or organisationslike Ecotricity can play.Mr Thomas: I think overall, the targets are extremelychallenging, given that we are at this sort of late stagein the process. That is not to say that they areunachievable. Broadly speaking, the renewablesindustry is held up by serious regulatory constraintsin the planning system, and to a slightly lesser degree,hold-ups in the grid connection side of the business.Like I said, I do think that if the Government decidedto pull out all the stops, and rapid changes to theplanning system were implemented, then thosetargets are just about achievable, but we are runningvery short of time. Certainly insofar as the UK 15%target by 2015 is concerned, that is lookingincreasingly unlikely, given the slow rate of changecertainly in the planning system, and I can elaborateon that if you like.

Q74 Chairman: Well, if you just cover those threeareas, planning, access to the grid, and also thetechnical problems in terms of—I think we are goingto have to adjourn for ten minutes, but can I just giveyou those three questions again, which my colleaguesmay wish to amplify? The planning system, the gridsystem, and the tariVs, what regulation Governmentmight oVer to provide an incentive. We will resumeagain in 10 minutes’ time.

The Committee suspended from 5.10 pm to 5.20 pm fora division in the House

Q75 Chairman: I apologise for the fact that somemembers have either left because of other business orwill be rushing to other business, but of course, thepurpose of this session is for the record, so when we



31 March 2008 Mr Matt Thomas

come to draft our report, we can rely on the wisdomof your evidence. So I think for the record, if youcould just deal with those three issues? It might behelpful if I remind colleagues on the Committee, ifyou could just dwell on the problems that smalleroperators like yourselves have encountered and arelikely, in your judgment, to encounter in the future onplanning, on connection to the grid, and treatment bythe Government, the regulator, in terms ofincentives.Mr Thomas: If I start with planning, we have a hugeissue with planning at the moment. I talk obviouslyof wind farms mainly, but we are looking at allrenewable developments: anything under 50 MWgoes through to decisions made by local planningauthorities, and quite often, the problem with that iswhilst it is within the democratic process, and wewould not seek to remove planning from thedemocratic process, it is essentially planning byappeal, because probably in 95% of cases, a planningapplication is lodged, and the authority then has 16weeks in order to make a decision, and quite often, itis our opinion that the people sat on the planningcommittee of that local authority do not have therequisite skills to make that judgment on thatapplication. What they probably do not have is reallya full understanding of the strategic importance ofthe developments that are being proposed. Now I donot wish to sound overly critical of local authorityplanning committees, but essentially, they would bethe same people who would be granting consent foryour conservatory, for example, in your back garden,who are also looking at what we believe are issues ofnational strategic importance, when it comes toenergy supply and security. Quite often, as I say, 95%of the time, those applications are turned down, theapplication then goes to appeal to be judged by aplanning inspector, so it is completely removed fromthe democratic process. Essentially, we believe thatthe local authority planning committee reallyabdicates its responsibility and pushes thatresponsibility to the planning inspectorate, and thenit is down to one person to decide whether or not thatapplication is successful or not. That has clearlycaused us a huge problem, it is not just us, that is therenewables industry in Britain as a whole. I cannotremember oV the top of my head, but it is hundredsif not thousands of megawatts that are currentlylodged in the planning system, I think it is just shy of2,000 MW currently lodged in the planning systemawaiting decisions, and clearly that is a huge barrierto achieving these targets.

Q76 Chairman: Could you just clarify, does thatrelate to water, wind?Mr Thomas: That is onshore wind. I think it is just shyof about 2,000 MW.

Q77 Lord Walpole: Do you have trouble with theMoD as well?Mr Thomas: That is a problem, from our ownperspective, we do have MoD issues. They aresignificant (though not so much as the planningsystem), and there is evidence that the MoD isstarting to soften in its approach slightly. We havejust put an application in for three 2 MW turbines inNorfolk, and initially, the project was turned down atthe local authority level, and the MoD had raisedsome issues. The MoD have now withdrawn thoseobjections. That does not mean that the applicationwill get the go-ahead, but in this instance the MoDhave softened their approach. What we propose, andwe have proposed it in a number of papers, is that byway of planning system reform, the planning decisionis pushed away from the local authority to the countylevel, and we feel that that is a good workablecompromise, because the decision still rests withthose who are accountable to the electorate, so it isstill within the democratic process, but the decisionwill be taken, we think, by people who have a muchstronger strategic view on that development. At themoment, the county level planning function really isremoved from that process, it goes straight from locallevel to inspectorate, and we would like to see a midlevel where we think it would just be morerepresentative as a whole; still within the democraticprocess, but more strategic.

Q78 Chairman: And then with an appeal.Mr Thomas: Potentially, if need be, beyond that, butI think there would be a much higher qualitydiscussion at a county level planning meeting thanthere would at a local level, because quite often withthe local level—you can see why it happens, the localplanning committee, say for a small village, is quiteoften made up of village members, and they are goingto be lobbied by fellow residents who do not wantthat development to go ahead. So quite often, it is anemotional response that is given by the planningcommittee, not necessarily a strategic one, or one thateven falls within planning legislation. So we feel thatif it is removed from the very local level to a countylevel, we would bypass some of those problems whilestill keeping the democratic process alive in thedecision.Chairman: Can we move on to connections to thegrid?

Q79 Lord Bradshaw: Yes, if I could just ask youabout that last point: if the process of applicationwent to a County Council, and I have been for a longtime a member of a County Council, it would seem tome that it is essential to give guidance, becauseactually, the members are not really expert almost onanything, if I might say, but they are not expertpeople.




Mr Thomas: I would agree with that.

Q80 Lord Bradshaw: That is at county level. Wouldnot a better method of dealing with these actually beto turn the planning process on its head from beingan adversarial system to being an inquisitorialsystem, where an inspector was appointed to conductan inquiry, and he asked the questions, not lawyers,and he presumably would be well briefed to actuallybring out the answers.Mr Thomas: I think that is a very good point, and itis one that we have debated as a company. To behonest, we have pushed forward with the CountyCouncil level argument because we felt that that wasthe one that was more likely to be accepted if therewas a planning system change, but I certainly wouldnot dispute that that arguably, if you wanted to reallyshake up the planning system, that would be one wayof doing it. I mean, we are mindful of these targetscertainly and whether or not that kind of shake-upcould happen in the required space of time, I do notknow. But it is certainly something that we wouldlook at if that was mooted, and I think we couldwelcome as an organisation.Lord Bradshaw: I suggest you would have toadvocate it, not look at it, because if these largeprojects, and I am not saying yours particularly oranybody’s, but if large projects are to progress, thensomething has to happen to the planning process,because if things are going to take 15 years tomaterialise, then we are all dead really, because wewill not have any energy.

Q81 Lord Rowe-Beddoe: Does your company haveany oVshore wind farms?Mr Thomas: It does not. We are a relatively smallcompany, we have just built our largest onshoreproject, which is 16 MW, 20 turbines.

Q82 Lord Rowe-Beddoe: Thank you. That leads meto my next question: to your knowledge, what is thelargest installation in the United Kingdom in termsof number of turbines?Mr Thomas: There is one going up in Scotland at themoment, I think by Scottish Power, which I think isabout 320 MW, so presuming a 2 MW turbine, it willbe about 150 or 160 turbines. That is a huge onshorewind project, and I would imagine that would be oneof the last very big onshore wind projects in the UK.I would be surprised to see an onshore project of thatscale being developed again. Going back to your firstquestion, making a jump for us from small tomedium-scale onshore to oVshore is probably at themoment a jump too far, and if we as a company gotinto oVshore wind, it would arguably be as part of aconsortium, rather than strictly oV our own backs.

Q83 Chairman: Now grid.Mr Thomas: Grid, there has been a lot of talk ofintermittency and certainly the wind power naysayersoften bring intermittency into the problem. We donot believe, certainly within the context of thesetargets, that intermittency is going to be an issue. Thework done a couple of years ago by the UK EnergyResearch Centre looked at about 200 diVerentrenewable energy studies, and concluded thatintermittency was not going to be a problem certainlywithin a 20% renewables threshold. So that kind offits very nicely with the targets we are working withhere. From a small grid perspective, modern turbinesare fitted with a number of voltage regulation systemsand suchlike which can actually support andstrengthen weak grids, so I would argue with anyonewho said that wind turbines were a problem on asmall grid. So I do not think we have that issue. Asfar as costs go, again, the ERC calculated that I thinkabout 0.1 penny per kilowatt hour would be theincrease in cost due to the intermittency, which whenyou look at a current tariV of something like 10–15pper unit, is very small, it is less than 1% that thecustomer would actually pay in addition. So I do notthink intermittency is either a technical problem,certainly within 20%, or indeed a cost pass-throughto customer issue either. Where we have grid issues isactually securing the connection in the first place, andcurrently even for small projects, the lead time forgrid connection is easily nine months, possibly inexcess of twelve; that is from Ecotricity’s perspectiveof small to medium-sized projects. I do not know howmuch waiting Scottish Power with their 320 MWproject had there, but certainly remote sites,particularly in Scotland, grid issues I think arebecoming very, very serious. The lead time for juststandard kit for grid connections is also increasing, sojust the very basic switchgear—and this obviouslyleads on to supply chain issues, but it is very muchgrid-related; even basic switchgear, you are lookingagain at 12 months’ lead time, plus an increase incosts. A lot of that is down to raw materials,especially the increase in the price of copper, which isfeeding through to the energy industry. So that iscertainly an issue that we have.

Q84 Chairman: But it is not a technical problem. Ifthere were more resources or there was a change inpriorities within the grid authorities, presumably that12-month delay could be shortened?Mr Thomas: Potentially, I mean, as a wind developer,I would say that the grid should be socialised, andclearly, I do not think that is going to happen in theshort-term, but looking beyond the size of ourcompany, if larger scale, more remote wind sites wereto be developed, then having a socialised grid wouldcertainly ease that problem. If it was deemed to be apolicy worth following, whether it could be




implemented within the timeframes that we aretalking here, I think is questionable.

Q85 Chairman: Could you just define socialised, youmean nationalised?Mr Thomas: Yes, essentially. At the moment, eachdeveloper will pay its own grid costs, and a gridconnection will cost in the region of about half amillion pounds per kilometre, so that obviously has ahuge eVect on the commercial viability of a project.Small projects, certainly the type that Ecotricityspecialises in, have to pay their way as far as the gridconnection goes. So if you only have two 2 MWturbines, for example, that are a couple of miles fromthe nearest grid point, the cost of the connectioncould well outweigh the feasibility of putting thoseturbines up.

Q86 Chairman: We only have a few more minutesbefore we turn to our final witness, but would youjust dwell on any incentives that the Governmentcould provide?Mr Thomas: At the moment, we are reasonablyhappy with the Renewables Obligation as it currentlystands. Clearly, there are some modifications thatwill be made next April, and it is obvious that that isto make oVshore wind power commerciallyattractive.

Q87 Chairman: For the record, could you just defineor describe the Renewables Obligation for us?Mr Thomas: Of course. The Renewables Obligation isa financial obligation on suppliers to source a certainproportion of their electricity from renewablesources or pay a buy-out penalty. As developers, wecertainly welcome the support that the RenewablesObligation provides. Without going into too manytechnical details, the Renewables ObligationCertificate that we are awarded for each megawatthour of renewable power that we generate iscurrently, I would say, an adequate incentive for usto continue to build renewable energy projects. There


Witness: Ms Juliet Davenport, Chief Executive, Good Energy, examined.

Q89 Chairman: Ms Davenport, thank you verymuch indeed, I am sorry that you were delayedcoming through security, it is one of the moreonerous burdens that are placed on those visiting us.We are aiming to finish at 6.00. Perhaps you would bevery kind just to introduce yourself and yourorganisation, and then make any opening remarksthat you may wish to, and then my colleagues thatremain will be asking questions.Ms Davenport: My name is Juliet Davenport, I amchief executive of a company called Good Energy, weare a renewable electricity supplier in the UK,

was some uncertainty last year when there were somechanges mooted to the Renewables Obligation and Ithink we were pretty alarmed as a company thatpotentially onshore wind could receive less support. Ithink there is a school of thought that says onshorewind is now becoming a mature technology, and assuch, on its own is commercially viable. For some ofthe reasons I mentioned earlier, certainly increases inraw materials costs, we would dispute that, and weare very glad that the current support of oneRenewable Obligation Certificate or ROC permegawatt hour remains with onshore wind. OVshorewind will get, next April, 1.5 ROCs per megawatthour, and marine technology will get 2 ROCs permegawatt hour. That brings me on to—there iscertainly a note here on feed-in tariVs, and we as acompany are not currently convinced, we havelooked at some marine technologies for deployment,and we are not convinced at the moment that twoROCs per megawatt hour will be a suYcient level ofsupport for marine renewable technologies, and insuch an instance, rather than, say, having a capitalgrant awarded, if a specific limited scope feed-in tariVwere pushed towards those technologies, then I donot think as a company we would have an issue, solong as it did not overly advantage that technology.The Renewables Obligation has had a number ofcriticisms levelled at it, and one of those is it treats allrenewable technologies exactly the same, regardlessof their state of commerciality, and I think the newRO regime will go some way to alleviating that.

Q88 Chairman: I am going to stop you there becausewe have run out of time, but by marine, I assume youmean wind turbines at sea?Mr Thomas: No, I mean, sorry, wave and tidaltechnologies, as opposed to oVshore wind, whichwould be wind turbines.Chairman: Mr Thomas, thank you very much indeed.Perhaps you would remain there, and if we couldinvite Ms Davenport to be our last witness, and wewill aim to finish at 6.00.

specialising really in the end of the market where weare trying to reintroduce energy to individuals, that isto reconnect how you generate energy with how youactually use it. A lot of our work involves looking atthe microgeneration end of the market, the muchsmaller end. We do do some development of largerwind farms that we are working on at the moment,but I would say probably our specialism really is inthe micro end of the market. In terms of an openingcomment, I would say that the EU targets that havebeen outlined in the papers that have come throughare very ambitious. I think what is going to be



31 March 2008 Ms Juliet Davenport

interesting is there are not only going to be some biggesture political moves that are going to be needed,but also a lot of very small technical details. One ofthe comments I may come to at the end, aboutgovernance particularly, I think, is regulation isgoing to be extremely important in making sure thatthis goes through the whole heart of the energymarket, because if you are introducing such anextreme target, and it is an extreme target, then youneed to make sure that you do not have policiesconflicting with each other.

Q90 Chairman: Could you just define for the recordmicrogeneration?Ms Davenport: Well, they are very diVerentdescriptions of it, but we define it as under 100 kW,so that ranges from solar panels on people’s roofs tosmall community wind turbines and small biomassunits and small hydro units as well. So it is a kind ofrange, we have about 380 of these generators that wesupport at the moment, and we have been putting alot of eVort into trying to simplify the administrationprocedures to get the costs down in terms of servingthose particular generators.

Q91 Chairman: By support, you mean simplypurchase contracts?Ms Davenport: Purchase contracts, but we haveactually put a particular structure together. We havea tariV where we can define how we prove what iscalled environmental additionality against our tariV,so essentially we do something called retiring ROCs,I think we talked about Renewable ObligationCertificates earlier, to prove that we actually do morethan just supply green electricity in the market thatgoes above and beyond Government targets, we haveto use some kind of mechanism. We use a mechanismcalled retiring ROCs, but also we use a mechanismwhere we issue two ROCs to our generators ratherthan just the norm of one, so we have precededGovernment policy in a tester environment.

Q92 Chairman: How do you finance that?Ms Davenport: We ask our customers to, so we arevery transparent in terms of what we support, and wetell our customers why they pay a premium, and thatis how they accept it.

Q93 Chairman: Are your customers domestic orindustrial or both?Ms Davenport: They are a mixture of really domesticand commercial, we do not really have any largeindustrial customers.

Q94 Chairman: My colleagues? I am going to askyou, if I may, following Mr Thomas’s very helpfuladvice, could you give us some comments fromexperience about the planning process? We have had

a fascinating piece of evidence, I think you were in theroom, when the evidence was we ought to look atrecommending a change to placing planningauthority at county level, and then one of thequestions from Lord Bradshaw mooted the pointthat perhaps we ought to turn the whole process onits head and start from an inspector, centrallyappointed, I guess, asking questions about how theenergy on a renewable basis could be supplied. Whatare your views on the planning system, can you giveus some practical examples?Ms Davenport: Yes, we have had experience fromdeveloping wind farms similar to Mr Thomas, butalso to the experience of our generators, our smallergenerators, who have gone through the planningprocess, and for microgenerators, traditionally theplanning process has been a big barrier, in terms ofyou want to buy a wind turbine, it is an expensivething anyhow, you have made that decision, and thenyou have to go through the planning process, and thereal problem is the planning oYcers have no ideawhat these technologies look like. They have no ideawhat they can possibly achieve. So the tendency is toreject because they do not have suYcientinformation. So I think the idea of trying to improvethe information levels at all levels within planning,whether you go to a county level or use a diVerentformat, but our view is that you do have to provideresource at that level, whether—if you leave it in thelocal district, particularly for microgeneration itmight work better, but provide an expert at a countylevel who can provide this information. Because ourexperience has been that nobody really knows whatthey are talking about. In fact, we were very close toNorth Wiltshire District Council oYcers, we actuallyworked in the same building, and the informalconversations we had with them were really aroundthe fact that they had very little information on thistechnology, and therefore, it tended to get pushed toone side because they did not have the resources todeal with it. Our experience in terms of wind farmdevelopment has been repowering, where there isalready an existing site where we are taking down theold turbines and putting up new turbines. What isinteresting about this is this site has had a wind farmon it for nearly 20 years, yet we have to go throughthe same environmental impact assessment as wewould for a completely new site, so we know what thebird strikes are on the site, we know what the bats areon the site, but we still have to go through the sameprocess. So our view would be, particularly for sitesthat have already had wind farms, there should besome kind of streamlining process, so there can besome acceptability of historical evidence on the site.

Q95 Chairman: Would you go so far as to suggestthat there should be either regional or nationalinspectors, skilled in and experienced in wind farm




operation, and planning applications and the issuesthat arise, so that you are not having to ask the samebasic questions, if you are the inspector or thecouncillor, and learning as you go?Ms Davenport: Yes, I would. I think particularlyaround new issues like noise issues, where there arenew EU areas around this, I think are veryinteresting, because we are getting diVerent viewsfrom diVerent local planning authorities about thesepoints, diVerent interpretations, and then as soon asyou have a diVerent interpretation, you are puttingtwo diVerent types of environmental impactassessments in.

Q96 Lord Bradshaw: Yes, I am very interested inthis, because it appears to me the opinions, oftenquite—well, not very well-founded opinions ofpeople on planning committees actually areinfluencing the thing enormously. If there werespecialist planning inspectors, would you tell uswhether you think some of them should actually beexperts in energy supply, so that they were notdiverted on to other building matters anddevelopment matters, so they actually knewtechnically what they were talking about?Ms Davenport: From a point of view of implementingrenewable energy, I would say yes, of course. It reallycomes down to resource, but I think it would be thenumber of planning applications that are likely to gothrough, if we start moving forward, particularly onmicrogeneration as well, will increase significantly,and I think not being able to have the resources todeal with those, we have already found that problemon the regulatory side, with central regulation, letalone local regulation, and I can see the same logjamscoming through again.

Q97 Lord Walpole: Could I just say that my localauthority was good enough to lay on ademonstration of microgeneration. I have notnoticed them going up all over the place, but therewere actually a very substantial number of peoplethere, 70 or 80 of them, looking at little wind things,you know, tiny ones. I have not noticed them goingup everywhere, but at least they are taking aninterest.Ms Davenport: The issue for us is that some localauthorities are excellent, and they have a lot ofinformation, and they have a particular planningoYcer who has taken a real interest in this, so you getgreat quality from that side; and then you go to otherareas where they are not. It is the fact that the qualityis so diVerent across the country. If you are lookingat a national programme, which is what we arelooking at, to roll out information, grants and sort ofsupport systems for microgeneration, it is verydiYcult to do it unless you just do it on a very smallarea.

Q98 Lord Walpole: When you talk about a normalwind turbine, is there a normal size? Actually, Ishould have asked Mr Thomas, I suppose, when hewas in full flow, but is there a normal one?Ms Davenport: I suppose in terms of the largeronshore wind turbines, there is a movement towardsa 2 MW type, which is round about 100 metres in tipheight. With the small ones, no, there is not, yet. Thatis still quite a disaggregated market, in the sense thereare lots of new technologies coming in and there isnot a standardised one yet. I think we will see somemarket convergence in the next five to ten years,depending on how fast the market moves.

Q99 Lord Rowe-Beddoe: Thank you, My LordChairman. Ms Davenport, if I may say, you havebeen extremely cautious, when you actually referredto the EU target, as indeed was Mr Thomas, but Inoted with you it was extremely cautious. All I amreally saying to you is basically, could you honestlytell me whether you think, from your viewpoint, wehave a chance in the United Kingdom to actuallyachieve it, assuming that we accept the EUproposals?Ms Davenport: Well, we are very far behind. If youlook at the comparison in terms of the targets foreverybody else and our targets, we have had our ownoil and gas and nuclear programme in the UK whichhas tended to mean that we have not developedrenewables. In fact, it is not just us, there are aboutfive northern European countries where other fossilfuels and other energy sources were important, so itis a very stretching target. For me, it is going to comedown to what is happening on renewable heat, andthat is an area that really has not been addressed verywell yet, if at all. Everybody is sitting there going,”We really do not know how to do this”, but the heatpart of this is going to be very significant. Transportagain is an area where people really do not knowwhat the possibilities are for the transport side of it.On electricity, I think it is very stretching, and I thinkthere are some issues on intermittency, in the sensethat you have to look at what the rest of the grid isdoing on a European level, not just in the UK,because after all, we do balance France’s nuclear forit quite nicely, as everybody else does, and it dependsnot only what renewables you have got in the system,but also whether you have got coal, gas or nuclear.The problem with the question is it is not just aboutwhat you are going to do on renewables, it is aboutwhat you are going to do on energy eYciency, andwhat you are going to do on the rest of investment inyour infrastructure. If I could put my hand on myheart and say you could make sure you have got theinfrastructure in Scotland, to make sure you can getthe wind farms in Scotland on, you can get thebalancing position from very good up-to-date coal,which is what you are going to need, I believe, and




you could make sure that you have got energyeYciency really coming through very strongly, andyou keep energy prices high, which is a real conflictfor fuel poverty, I know, but it is really what is goingto be needed to deliver, then I think you have got achance, but I think you really have to look at it. It isnot just one answer, you cannot just respond to thiswith a renewable energy policy, it is an overallenergy policy.

Q100 Lord Rowe-Beddoe: Thank you. Referringthen or coming back to the micro end of the marketwhich you described yourself to be involved with, andobviously I am interested in, first of all, two things:could we do more to ensure that the public at large ismade aware of microgeneration? And two, if we aregoing to drive it, I heard you mention the word grant,I prefer to use the word incentive perhaps, but Imean, what are we doing? We hear horrendousstories about how much some solar panels cost to puton a roof, and therefore, unless there is some, Isuppose, incentive to do it, relatively few of thepercentage of the population will either be interestedfinancially to do it—well, financially, largely, to do it.So what can we do, to publicise it, drive aprogramme, and let everybody see that theGovernment is going to put some economic cloutbehind your end of the renewable business.Ms Davenport: From my point of view, I thinkpublicising it would come oV the back of doingsomething properly in the area, because it is actuallyvery easy to publicise, in the sense it grasps people’simagination: my house is my castle, I generate myown power, it is a thing that people move towardsquite easily, in terms of communications. I think ifyou were to do anything on communication, it wouldbe around explaining how it can be a risk oVsetterrather than just a payback period in terms of energy,because that is how it is generally pitched from anengineering point of view.

Q101 Lord Rowe-Beddoe: A risk oVsetter, excuseme?Ms Davenport: In the sense that you are buying aninsurance policy for the future against future energyprices, and I think that could be quite a significantpitch into the—we like insurance policies generally,so I think that is an important point. In terms ofincentives, I think you have to create an incentivethat works on a micro level, and one of the issues forus is it is very diYcult to put the metering in, it is verydiYcult to get these things accredited; there has to bea streamlined process in all of this, because it isincredibly hard to do, unless you are reallycommitted, you have got several degrees probably inlaw, it is very hard to get accredited in terms ofgetting ROCs for these sites. We do it for ourcustomers, but it is not a straightforward process, so

you have to get rid of some of the red tape for thesmaller generators, and you also have to look at whatother issues aVect it from the wider energy sector; themetering, the regulation side. So I think from thosepoints of view, in terms of incentives, our incentivesat the moment are a form of grant, they are anupfront capital grant.

Q102 Lord Rowe-Beddoe: Is the public generallyaware?Ms Davenport: Well, they are sold out every time,because there is a certain amount allowed eachmonth and they are just completely oversubscribed.So I think you really have to look very carefully, froman economic point of view, what is the best way to dothis? My view would be if you wanted to incentivisemicrogeneration, there is a proposal to give it twoROCs per megawatt hour; put three or four ROCs onper megawatt hour, make sure there is a decentincentive to do it. Finally, one of the things we haveseen in other countries that have been successful isgovernment has underwritten loans initially, so thatbanks will actually loan against this technology.There are green mortgages being oVered, but peopledo not necessarily want to remortgage their house,again, it is more red tape. What they want to do is goand sign up to a normal payback loan where they canjust get some form of non-backed up loan—I amtrying to avoid mentioning any particular names ofcompanies. Just like you would if you bought a boilerin your house.

Q103 Lord Rowe-Beddoe: A finance company?Ms Davenport: Yes. It is very diYcult to persuadethem to do this right now. So there needs to be someunlocking, there is small unlocking all the waythrough the process basically.

Q104 Lord Rowe-Beddoe: Forgive me, My LordChairman, last question from me anyway: if you wereto set an industry objective for microgeneration,what would you think? You are writing the businessplan for the industry: what would you say your fiveand then ten-year objective would be formicrogeneration in the United Kingdom?Ms Davenport: Well, I think the first thing would beto get a standardised test technology that is provenacross the UK where you should implement it, so wedo not have these stories of trying to put micro windturbines in Central London where they do not work;you do put them in the appropriate technologyplaces. That is number one, because you get bad newsstories, it is like the double glazing market, you haveto be really careful about this, public perception isvery, very important. So you make sure that thesethings are accredited properly, and then in terms oftrading standards and all these types of things, very,very well policed, that is number one. Number two,




you put in a long-term incentive programme; as Isaid, my view is you use an existing system, I knowthere are talks about new systems to be used, but I donot think you should throw away the existing ones, Ithink it works perfectly well if you just increase it. Soyou say three to four ROCs per megawatt hour forthose, you look at the banking system, you say theGovernment will support this in terms of some kindof interest-reduced loan for individuals, they willunderpin this process. So, I think those three wouldbe significant movement forwards. I think if you aregoing to look at any other areas, you look at R&Dinto solar, you look at basically giving incentives forcompanies to come into the UK, invest in renewableresearch and development in these technologies,taking them to the next stage of eYciencies, becausewe have the basic technology, we just need to move itforward now, as against more changes.

Q105 Lord Rowe-Beddoe: So with this clean sheet ofpaper, we now know the building blocks, what wouldbe your objective in terms of the percentage of thecurrent electricity take-oV in the United Kingdomyou think you could or would want to generate frommicroprocessors in ten years, let us say?Ms Davenport: I think it would be 5%, but I thinkwhat you would also get from that would be areduced energy usage in those places, so there is a

double whammy almost. I think you would startlooking at intelligent technology that would switchyour washing machine on when it is windy.Chairman: I think we are going to have to stop there,but I would like your co-operation and help in a slightinnovation in how we produce reports. I think theCommittee would like you each to suggest amicrogeneration installation where we could visit,hopefully not too far from London, so that we could,for the benefit of our colleagues, take photographs,perhaps, with diagrams of where the installation issited, what it is supplying, and also, as and when, if itis possible, when we come to visit you, to explorefurther some of the incentives, the feed-in tariVs, thesubsidy for the loans, the renewables obligationmultiples, et cetera, et cetera. The reason I say that isthat although both of your pieces of evidence havebeen extremely clear, if I might say so, and veryhelpful, I think for the benefit of all our colleagues inthe House of Lords when we report, I think todemonstrate what a microgeneration example is, ortwo or three examples, would be very helpful. I thinkwe can all visualise what the Severn Barrage will looklike, all 15 kilometres of it, but I think it would helpus if you could, in consultation with the clerk and ourspecialist advisor, pick examples, and we will comeand visit, if we may. It is bang on 6.00, thank you verymuch indeed for coming, the session is closed.



MONDAY 21 APRIL 2008

Present Bradshaw, L Rowe-Beddoe, LFreeman, L (Chairman) Ryder of Wensum, LJames of Blackheath, L Walpole, LMitchell, L Whitty, LPaul, L


Witness: Lord Oxburgh, a Member of the House, examined.

Q106 Chairman: Lord Oxburgh, thank you verymuch indeed for coming. You were the distinguishedChairman of the House of Lords Select Committeeon Science and Technology, on which I briefly servedas a co-opted member. Lord Oxburgh, I understandit might be possible, as far as you are concerned, andhelpful to us if you could make some openingremarks, and then we have allocated one or twoquestions, but other colleagues will come in duringthe course of proceedings.Lord Oxburgh: Thank you. Maybe I should declareinterests, in a sense, as is the custom. I chaired theScience and Technology Committee inquiry intorenewable energy, which published its report in thesummer of 2004 and at that time I became sointrigued by renewable energy that I havesubsequently become chairman of a small windcompany, a bio-diesel company, and anothercompany which I think has a totally novel form ofrenewable energy, which is going to be the leastcontroversial of any. Looking at renewable energy inthe context of your inquiry, it does strike me that theEU has done something exceedingly important,exceedingly bold and also exceedingly challenging.The timescale which has been set really means thatthe main renewable technology as far as electricitygeneration is concerned really has to be wind. Thereare going to be massive requirements for investment,both in generation and in the grid infrastructure. It isnot often realised that the investment in the gridinfrastructure is of the same order of magnitude asthat in the generating capacity itself, and both arepretty slow to build and slow to change. In terms ofincreasing the proportion of wind in the generatingportfolio, up to about 10% mixed in withconventional generation does not really present aproblem. Obviously, wind has a diYculty: the winddoes not blow all the time, and there was a ratherstark analysis of the diYculties of operating orsupplying electricity when you have a significantwind a fraction in the annual report of the chairmanof E.ON about 18 months ago, when theyexperienced a massive drop in generating capacityover something like 24 hours from Christmas Eve

through to Christmas Day. It made it exceedinglydiYcult for them to manage supply. All of this can bedone but, as the proportion of wind in your portfolioincreases above 10%, it actually becomes more andmore challenging. It means that you have to havevery good interconnectors between diVerent parts ofyour system and that you have to be able to manageyour grid with a level of sophistication which reallyhas not been customary or necessary in the past. Italso means that there have to be significant amountsof co-ordination, and within Europe transfer ofelectricity between diVerent generating countries,and indeed across the Channel. I very much tosubscribe to the views of Dieter Helm on this, that tomake all this work it needs system thinking. It needsa systems approach with a degree of planning and co-ordination which is, I have to say, not entirelyconsistent with leaving everything to the market. Youreally have to set out rather more carefully theparameters within which the market operates andthis must be EU-wide, otherwise, if we achieve thislevel of renewable generation without that co-ordination, we shall suVer diYculties over thesecurity of supply. So I think it is essential. The UKwithin that system worries me quite a lot. I returnedto the conclusions of this report and I do not think wewould want to alter any of them. I think some of thepredictions that we made have unfortunately come topass. The first point to perhaps draw your attentionto is that the Renewables Obligation Certificates, theROCs, which operate by setting an increased targetfor renewable generation each successive year, have abuilt-in diYculty. They are fine from one point ofview but, because the value of the ROC declinesduring the year as the target of that year isapproached, so does the incentive to invest. Wepointed out in this report that this meant thateVectively the year’s target is not so much a target asa cap, and the ROC system really means that nevermore than around 70 to 75% is ever likely to beachieved, because once that amount of the target hasbeen achieved in any one year, the incentive is too lowand too risky for anyone to want to invest. Thesecond problem is one which can be fixed relatively



21 April 2008 Lord Oxburgh

easily, and that is that the present arrangementsreally only extend to 2015. Beyond 2015 there is noincentive for anyone to invest simply because thearrangements are not yet clear. That can be done, andI suspect will be done, but it is important that it bedone in a timely fashion, because achieving theobjectives we are talking of here depends onsignificant new build in the post-2015 period, 2015 to2020. Finally, we have a bizarre arrangement in thiscountry, where the success of the national renewablesplan really depends on the decisions of a series oftotally independent and unco-ordinated thirdparties, none of which has the achievement of thenational plan among their objectives. I am thinking,for example, of Ofgem, which has an important role,which has certain obligations; I am thinking of thegrid owning and management companies; and thenthe enormous diversity of planning authoritiesaround the country—and bear in mind that normallyplanning has to be achieved for the generationcapacity and then a separate planning application forthe connection, for the transmission lines and what-have-you, and these will be diVerent authorities inmany cases working to diVerent timetables. It isworth bearing in mind that although I think there isa statutory requirement that planning authoritiesreturn a result within 16 weeks or something like that,I am told by people in the wind business that theaverage time in reality is not much short of threeyears. This is a major problem. I do not knowwhether that is enough to set the ball rolling,Chairman?

Q107 Chairman: It certainly is. Could I just pressyou a little bit further on whether you think theUnited Kingdom obligation, if it turns out to be 15%as opposed to 20%, within the European Union isachievable? I think you have indicated one or twofactors that need to be addressed but is it achievable,realistically, by 2020?Lord Oxburgh: It is achievable if we attack some of theproblems that I have mentioned. I think it is a littlehumiliating that we have to be given a lower targetthan everyone else, than most others, but be that as itmay, yes, I think it is achievable.

Q108 Lord Rowe-Beddoe: Can I come back to that?The humiliation is because we could not do 20%;there is no way we can actually achieve 20%?Lord Oxburgh: It would be pretty diYcult. I will notsay there is no way, but it is a matter of what prioritywe give it. For those of us who were brought upduring the war, when you have to do things and youmake it your absolute priority, you can do it but,without that kind of commitment, no, we probablywould not have made 20%.

Q109 Lord Rowe-Beddoe: May we talk a little bitabout supply? You have mentioned the security ofsupply. What is your view of our dependency on thirdcountry suppliers?Lord Oxburgh: Are you talking of general security ofsupply of our electricity supply in the UK?

Q110 Lord Rowe-Beddoe: Yes.Lord Oxburgh: As we look forward, we are going tohave to replace somehow or other the nuclearcapacity which is going to go out of service over thenext ten to 15 years. Whether we do that isinteresting. Obviously, there is a political andbusiness side to this but what people should recogniseis that there is an enormous waiting list for nuclearreactor vessels, which are massive castings. I am toldthat Areva, a French supplier of these, but they arenot very diVerent from anyone else, has a waiting listof ten to 12 years at the moment. It does not meanthat it is not possible to buy someone else’s place inthe queue, but there is limited capacity globally tobuild new nuclear reactors. Something is going tohave to be done for that. The resource which is likelyto be least politically sensitive and most widelyavailable is coal. Coal power stations, even with themost modern power station technology, if you gasifyit and so on, is not very eYcient and it is, of course,very dirty from a CO2 point of view. Of course, thecurrent concern is whether we can develop carboncapture and storage to capture the CO2 at the powerstation and do something with it to prevent it goinginto the atmosphere. I regard this as one of the trueinternational priorities because—and this is a slightdigression, I am afraid but if you look at the world’scoal, really two-thirds of the world’s coal is in threecountries: the United States, India and China. TheUnited States is going to burn that coal for reasons ofenergy security; India and China are going to burn itbecause they do not have much else. Really, finding away to manage those coal emissions is almost thehighest priority, in my view, in managing climatechange, because their mass is so great that if wecannot do that, a lot of the other things we do are notgoing to count very much. I put that as a very highpriority and I am disappointed that the Governmenthas somewhat backtracked on its commitment tosupporting this. So coal is likely to be an importantaspect here. Our gas supply is, fortunately, lessdependent on Eastern Europe than the rest of ourEuropean neighbours because we have a goodsupply, and we have a strong supply from Norway onwhich we can rely. Gas will also come in in a liquefiedform into new terminals which are being built. Alongwith that, of course, we have renewables, and on thetimescale we are talking about here, wind is the onlysignificant contributor here, along with a certainamount of hydro. Its leaves in the background thewhole question of the Severn barrage and things of




that kind but I would say probably not too bad if youwant an overall assessment of our security of supplyuntil 2020 but we have to see beyond that.

Q111 Lord Rowe-Beddoe: The concern of thenuclear reactor, which was something that I wasunaware of, does give rise to the question of the gapwhich we hear people talking about. Obviously, asyou said, I thought perhaps a little optimistically,some of the nuclear energy would be there foranother 15 years—I was thinking it was more like 10or 12—if that goes and is not replaced, although weare told that it is likely to be replaced, if we do nothave the methodology with coal and we arestruggling with 15% renewables, we could have a verydangerous situation.Lord Oxburgh: We are going to become progressivelymore dependent on gas, and gas-fired power stationsare the quickest to build. They are roughly one-thirdthe cost of coal-fired power stations or maybe half thecost of a coal-fired power station of equivalentcapacity, but of course, you are vulnerable for yoursupply and in terms of the cost of your supply. So youare quite right.

Q112 Lord Rowe-Beddoe: What are theenvironmental concerns with gas?Lord Oxburgh: They are less than those of coal butthey are significant, and although the people with thereal incentive to develop carbon capture and storageare the coal people, gas will benefit from it as well. Ishould have mentioned at the beginning that what isgoing to be important, and we have not really got tolive with yet, is the European Emissions TradingScheme as it comes in after 2012, because that is likelyto be quite tough. A number of the allowances forpower generators are going to be auctioned and thatwill put non-emitting power sources at a competitiveadvantage.

Q113 Chairman: Could I just clarify something?10% of our total energy generation coming fromwind—is that because of the intermittency problem?Lord Oxburgh: I said until 10% there is not really aproblem, because normally you have a significantamount of slack in your generating capacity. Youhave your maximum notional requirement, which forthis country is something like 60 GW, and we havesomething under 80 GW of capacity at the moment,and this is for when things are oZine and so on, beingrepaired or suddenly break down. Within thatcushion, as it were, you can cope with theintermittency of around 10%—you should not takethat figure too rigorously. Eleven is probably okayand in some circumstances nine might be diYcult, butit is around 10%—but when you get above 10%, thatis when you really have to begin to manage things alittle bit more carefully.

Q114 Chairman: Understood, but we are less thanhalf a per cent at the moment for wind.Lord Oxburgh: Yes, we have a long way to go.

Q115 Lord James of Blackheath: I would like to asksome questions concerning the extent to which thereare issues resulting from the accessing of new energysources, present energy sources by the existing gridsystems, and the compatibility particularly of thesystems by which that access is achieved, whether thechange to diVerent forms of energy are going in theirown turn to invalidate the existing accessinfrastructure and require a huge investment in thechanging of that infrastructure to be able to use it.Lord Oxburgh: I think that is a very good point. Tosome extent I have referred to this in what I have saidso far but it certainly means much more sophisticatedmanagement of the grid on a local basis. As you arewell aware, our electricity system at the momentlargely is based on the concept of a small number oflarge-capacity generating sites with radialdistribution of electricity, and what we are going togo through is a system with much more distributedgeneration. You will find electricity flowing inopposite directions down your distribution systems.To avoid trip-outs, and consequently local black-outs, you have to be quite clever. You may also wantto have local back-up capacity associated with thisdistributed system. It is going to require a diVerentapproach to electricity generation in the country, andI come back to this general view that we cannot justleave this to the unbridled market; it is going torequire a significant amount of thought andplanning.

Q116 Lord James of Blackheath: Can I twist thequestion on to another aspect, please? Could youdefine the diVerences between the infrastructuralissues in the United Kingdom and those incontinental Europe, where much resourcing of fuelresources may be coming from outside continentalEurope, other countries, and where there has to betherefore considerable storage, and talk a little aboutthe compatibility of those storage systems for inter-relating the distribution networks within the grids ofother countries, particularly where we in Englandhave to turn, say, to France for resourcing?Lord Oxburgh: Let me begin by saying I am not veryfamiliar with some aspects of this. When you aretalking of storage, what do you mean?

Q117 Lord James of Blackheath: I have understooda lot of the resourcing is coming out of France viaRussia—I wish I knew, because I have been askingthis question here as to what the storage resources arefor Gazprom and in other places and what securitythese have and what certainty of provision they canachieve on redistribution when required by other




countries. It seems to me that there has been verylimited flexibility in distribution equipment in thepast. I speak as somebody who was in at thebeginning of the North Sea oil development, whichwas really the most fundamental thing. It was just atube down which you poured the petrol. It is verydiYcult to conceive of that being diverted now if youfound a huge excess of gas capacity, to divert thesame infrastructure into gas resourcing, which wouldbe a very quick fix for a lot of problems if it could bedone. How in the same position can you rely upon asource for electricity generation in the UK which hasbeen driven by oil in the past and converted to a gasresource coming out of Europe, or anything else ofthat sort in future?Lord Oxburgh: I understand. In principle, conversionfrom oil to gas is not too diYcult. It can be done and,of course, much more provision is being made forstorage of gas within Europe. Storage is generally inabandoned reservoirs, oil reservoirs and gasreservoirs but ideally gas reservoirs, and indeed,other situations can be found for sub-surface gasstorage as well. I have not reviewed that situationrecently but certainly this is fairly high up on theEuropean Union’s agenda, because if we were to seeinterruptions of gas supply from Eastern Europe forwhatever reason, political or otherwise, at themoment we would be in considerable diYcultieswithout such store.

Q118 Lord James of Blackheath: I have a nightmarevision that France corners the market in resourcingthe entire gas requirements of Europe and then says“Oh, what a shame. We cannot get it to you so we willhave to keep it all for ourselves.”Lord Oxburgh: An interesting nightmare!

Q119 Lord James of Blackheath: An interestingnightmare which I venture to suggest is not entirelyimaginary.Lord Oxburgh: That may be so.Chairman: A fascinating point but I do not think wewill go down that path at the moment.

Q120 Lord Paul: Can the existing RenewablesObligation deliver the level expansion of renewableelectricity that the target for the UK implies?Lord Oxburgh: The answer is no, for the reasons Igave earlier in fact. One has to have an extension ofthe system and, frankly, with an ROC system youhave to aim oV. If you keep the incentives as they areat the moment, the target of the ROC system has tobe somewhat higher than that which you actuallywish to achieve, otherwise you will not get there.

Q121 Lord Paul: Is there any benefit from usingfeed-in tariVs?

Lord Oxburgh: This is an entirely diVerent approach.This is an approach which was used in Germany andin Spain, but I do not think it is really feasible to shiftat this stage to a feed-in tariV. We have set up oursystem. I am not sure I would have set it up this wayin the first instance but it is what we have. Above all,when you are talking about people investing verylarge sums in new generating capacity, you have tomaintain confidence, otherwise people find betterways of using their money or safer ways of using theirmoney. I think fundamentally we have to stick by thearrangements that we have had so far. Whether itwould be possible to use feed-in tariVs at a later stageI have not really thought through. It might be, but mygut reaction is that it is probably better to stick withwhat we have, even though it may be a less thanideal system.

Q122 Lord Walpole: What I was going to ask you isthe most reasonable way of transmitting energy. Iwas brought up with a grandfather and uncle in thegas industry, so I am rather biased, I think, but whenNorth Sea gas was discovered, it was definitelyworthwhile piping it miles inland and I asked myuncle why on earth they did not put up a largegenerator on the coast and take it down wires and hesaid, “Why do you think? Because you lose 15%down the wires, and they look dreadful and the gasis underground.” What I really want to know is howwasteful is an electrical grid system really? I still donot quite understand how it works.Lord Oxburgh: No. One of the most informativestudies on this was done by the Scandinavian energycompany, Vattenfall, which works now throughoutEurope. Their estimate on transmission losses fortheir whole system, if I remember rightly, wassomething around 7%. Those losses occur in twoways: partly in the loss associated with heatgeneration down the cable, and the other associatedwith the voltage transformation that you get, andprobably more is lost in transformers than intransmission. If you go to high voltage DCtransmission, you lose almost nothing over verylong lines.

Q123 Lord Walpole: Really?Lord Oxburgh: Yes, it is very small. When I say almostnothing, less than 1%, and that indeed in the future—and one is not talking about 2020 now –one thinks ofconcentrated solar power perhaps coming from theSahara, that will almost certainly come via a DCroute. It would not be sensible to do it any other way.It is simply a matter of investment analysis. In somecases it is more sensible to move gas around but thereis another part of the economics that comes in here.Traditionally, it has been viewed, and it probablywas, most eYcient to operate big, central powerstations because there are big savings of scale there. I




think those arguments may be weaker today thanthey were at the time that the Central ElectricityGenerating Board of happy memory was set up, butthat is the thinking behind. I think you probablycould quite usefully distribute gas more widely atpresent but it is not clear-cut; it is not clear that allelectricity transmission is bad. The Chinese do anawful lot of trucking of coal, which wastes anenormous amount of energy, moving coal to theirpower stations, which is almost certainly not sensible.You really want to build your power stations on topof the coal mines, and electrons are a lot cheaper tomove than coal.

Q124 Lord Whitty: Two interrelated questions.When you were replying to Lord Paul about thepossibility of having another system of feed-in tariVs,as he suggested, you replied by relating this to large-scale investment and needing certainty about theROC system. It has been suggested that althoughthat may be true of large-scale investment, as far asmedium and small-scale investment in renewables isconcerned, a feed-in tariV would be rather moreeVective. That is my first question, and perhaps youcan try and answer my second question. Right at thebeginning you said wind is the only real contributorto the 2020 target. Given that, if the target were 2025,in your judgement, would it be possible for significantinvestment in other forms of renewable energy tomake a contribution? Otherwise by choosing the2020 date, we may be going for a sub-optimal target.Lord Oxburgh: I think 2025 would open the doorprobably to more wave energy, maybe to tidalcurrent energy and maybe some solar. On thequestion of feed-in tariV, perhaps I should have madeclear that when I gave the answer I did, I was reallyreferring to large-scale generation but small-scale,when you are talking of individual house owners orbuilding owners generating some electricity for theirown needs and then selling it to the grid, a feed-intariV would be very sensible.

Q125 Lord Bradshaw: If you are going to look forDC transmission over long distances, is it possible torectify that to AC at the end user point?Lord Oxburgh: Yes. That is what is done. It is just thelong-distance transmission that is DC and locally it isall AC.

Q126 Lord Bradshaw: Without significant energyloss?Lord Oxburgh: Rectification has an energy lossassociated with it. Voltage change has an energy lossassociated with it but your long-distance heating justis not so serious.

Q127 Chairman: Could I just, in the remainingminutes, ask for your views on the planning regime,which you touched on very briefly, the very lengthydelays. Do you see the Government’s proposal totake certain large infrastructure projects into morecentral control as the way forward?Lord Oxburgh: I see no alternative, but I do think alsoone has to take the regulatory role of Ofgem, look atthat very carefully and look at the role of the gridowner and operating companies, because at themoment these are almost floating independent. Thereis obviously a degree of informal connection betweenthem but, frankly, without proper co-ordination ofthese and, I think, a central overview of the planningquestions, we will not make it.

Q128 Chairman: Presumably, you are notsuggesting we are going to drift into Soviet stateplanning systems?Lord Oxburgh: No, not at all, but I do think that weneed to decide what our national priorities are. Ipersonally believe that we are in a diYcult situationbecause in terms of global warming, I think we arebeing asked to make an investment which will be ofno benefit to any of us here, I suspect, looking aroundat the grey hair. What we are being faced with ismaking an investment which will make the country agreat deal more liveable and the world a great dealmore liveable for our children and our grandchildren,and it is diYcult for governments to persuade peopleof the seriousness of this situation and to persuadepeople that the kind of privation, almost, that peoplemust experience is comparable to that which wemight experience in war.

Q129 Chairman: Lord Oxburgh, thank you verymuch indeed. I have asked the clerk to circulate to allmembers of the Committee a copy of the report thatyou referred to.Lord Oxburgh: Read the conclusions andrecommendations, if nothing else. Thank you verymuch, Chairman.



Memorandum by the Energy Policy Group, Department of Geography, University of Exeter

Introduction and Context

It is with great pleasure that we submit our written evidence to the Inquiry. We have answered a number ofquestions below which were set out in the Inquiry Call for Evidence. However, there are a number of otherpoints which we would also like to highlight.

The EU 20% renewable energy target relates to energy consumption in 2020. Because of this and the widerange of projections for energy use at that time, it is diYcult to be exact about what amount of renewableenergy will be required to meet the UK’s 15% target. In very general terms, BERR’s Updated EnergyProjections estimate 2020 demand at 137 mtoe. This excludes international aviation. If the demand reductiontargets of the EU Directive are included, the 137mtoe falls to around 110 mtoe. The 15% renewable energytarget would therefore be around 15 mtoe. There are two key points:

— if energy demand falls, the required renewable energy component will also fall. In this way,instituting successful demand reduction and renewable energy policies is vital, are firmly linked andare of equal importance as energy supply policies; and

— the UK has delivered around 1.5 mtoe (according to Eurostats set out in Table 1) between 1994 and2005. Germany has delivered about 10 mtoe in that time. The UK therefore has to do ten times aswell as it has done over the last ten years and even better than the Germans.

Fundamental Requirements to Achieve the 15% Target

The UK’s record of delivering renewable energy is very poor. Eurostat figures in Table 1 and Figure 1highlights the UK against the best performers in Europe (Germany and Spain). It could be argued that thisis an unfair comparison since the UK is ranked 8th in the world (and 5th in Europe) in terms of adding newwind capacity in 2006,1 although it doesn’t make it into the top 10 for any other technologies. However, itclearly is a dismal record in terms of absolute amounts of renewable energy, coming 12th in Europe accordingto Energy Trends in terms of consumption of renewable energy; and 26th out of 28 countries in terms ofpercentage share of final energy consumption from renewable sources.

This poor record occurs despite the UK having a wonderful set of renewable energy resources. This is a directresult of the UK’s renewable energy policy, which in turn is part of the UK’s innovation policy. We areconvinced that more renewable energy can be delivered more quickly, and with additional benefits, if therenewable energy policy in the UK is changed.

This renewable energy policy requirements are taken to comprise four areas:

— a new direct support policy (ie a move from the renewables obligation to a feed-in tariV combinedwith other mechanisms such as capital grants);

— changes to the rules and incentives within the economic regulatory arena to improve grid access forrenewable energy and to implement a strategic plan for infrastructure development;

— making the planning process more streamlined and eYcient; and

— implementing a supply side strategy, to include an eVort to improve our manufacturing ability ofrenewable energy.

The key to successful renewable energy delivery is to “make it easy”, thereby attracting as wide a number ofinvestors (of any size) as possible. “Making it easy” requires unravelling the inter-linking hurdles andconstraints at play in the UK for renewable energy deployment while at the same time doing this quicklyenough to make a diVerence to meeting the challenges of climate change.

There are disagreements about why renewable energy deployment is so poor in the UK. However, it is clearthat policy; planning; infrastructure and access; and skills development all have to change, improve and worktogether. No one area is to be blamed and no one area can overcome all the diYculties. However, some policiesreduce the diYculties of the other areas. It is in this way that the UK has been so poor. Despite evidence since1990 of what policies have been successful in terms of deployment (or not), the UK has so far (including therecent 2007 EWP) only taken limited steps to try and incorporate those factors.1 http://www.ren21.net/pdf/RE2007 Global Status Report.pdf



The Renewables Obligation

We were asked in our oral evidence session to clarify why it is that the RO has been as unsuccessful as it hasbeen. This section is therefore rather longer than the other sections. We argue for a sensitive change from therenewable obligation to a feed-in tariV as the main mechanism of support for renewable energy which is soldor re-enters a grid in the UK.2 We argue that a move to a feed-in mechanism will reduce diYculties in thethree other key areas set out (planning; infrastructure and supply side). These areas still need to be worked onand these issues are discussed in the various answers to Inquiry questions below.

It is our view that the RO is a poor mechanism which is unfit for purpose. This has been written widely aboutelsewhere3 but in brief this is because:

— it is an inflexible mechanism which places all the risk of development on developers; it cannot be usedas the basis for obtaining finance, which minimises new entrants; and

— it benefits the incumbent suppliers by placing them in a powerful market and political position as theexecutors of UK renewable energy policy.

The RO is inflexible because of the incentives created by the RO rules, but in particular relating to the recyclingpayment. The obligation is placed on energy suppliers. They can meet their obligation either by buyingrenewable electricity directly from a renewable energy generator; by buying a renewable obligation certificatefrom someone else; or by “buying out” out of their obligation. The “buy out” payments go into a fund whichis re-distributed to the energy suppliers in proportion to the percentage that each energy supplier has met theannual obligation. So if an energy supplier has met 5% of the annual obligation, they will receive 5% of thebuy-out fund. The energy suppliers eVectively count this payment as part of the payment they expect to receivefor their investment in renewables. This incentivises companies to keep a close track of new renewable energydeployment in order to know what percentage of the annual RO will be met; what the recycle payment willbe; and hence what the ROC value will be in future. Any change to any rule or incentive within the RO altersthe percentage of the RO which will be met; in turn this alters the ROC value as well as the revenues of allparties involved. This establishes a preference for no change, which is far greater than the normal businesspreference for certainty.

The RO is a risky mechanism because, unlike any other of the 40 or so obligations that exist in the world,4

the only requirement of the RO is the obligation on suppliers to purchase a certain percentage of their previousyears total energy supply to their customers. There is no requirement on the suppliers to buy the renewableelectricity at a minimum price or to provide a minimum contract length and so on. Suppliers tend to buy fromtheir subsidiaries; or from large competitors. Suppliers are in a position of market power with respect to newentrants or small companies. Not only is the RO contract unsuitable for raising finance but it has the knockon eVect that there have been very few new entrants entering into the renewable energy industry in the UK.It is exclusive in its mode of operation: and it is hard to become part of it. The suppliers are in a very strongpolitical position with respect to the Government, since they are the primary executors of not only therenewable energy policy, but also other sustainable energy policies, such as the Energy Eficiency Commitment(EEC) and now Carbon Emission Reduction Target (CERT). The companies are able to develop renewablesat the pace which suits their wider energy portfolio.

However, for those companies which are involved in the RO, it is an acceptable mechanism. The renewableenergy projects tend to be developed by corporate finance on the basis of corporate assets. The suppliers areable to work out in a reasonably risk free manner what profit they will receive after having bought and soldtheir electricity; and new entrants—potential competitors—find it hard to enter. The energy suppliers are ableto “buy out” if they wish, hence their ability to deliver the renewable energy at their preferred pace at no extracost to themselves. It is customers who finally picks up the bill.

It is not an innovatory mechanism because, in general, it is new entrants that can be expected to provideinnovation. Large energy companies are providing energy to very large numbers of customers. In a perfectworld, those large companies will not only provide their millions of customers with secure energy butincorporate new technologies which improve the eYciency of their supply and de-carbonise the energy system2 Others renewables, for example renewable energy from solar water heaters should be supported through capital grants and other

regulated mechanisms. By sensitive we mean that a feed-in has to be implemented alongside the RO, which has to remain in place longenough for those currently involved not to feel economically threatened.

3 C Mitchell, 2007, The Political Economy of Sustainable Energy, Palgrave, UK.C Mitchell, D Bauknecht, et al. (2006). “Quota’s versus Subsidies—Risk Reduction, EYciency and EVectiveness—A Comparison ofthe Renewable Obligation and the German Feed-In Law”. Energy Policy 34 (3): 297–305.C Mitchell and P Connor (2004). “Renewable Energy Policy in the UK 1990–2003”. Energy Policy 32(17): 1935–1947.

4 http://www.ren21.net/pdf/RE2007 Global Status Report.pdf



while at the same time increasingly connecting individuals to their energy use, thereby encouraging thoseindividuals to be more responsible about their sustainability footprints. Not only would these energy providersincorporate those technologies but they would do so quickly, in tune with the planetary needs of theenvironment.

However, in general, innovation or change tends to occur through niches or by new, nimble, usually small,companies. Those companies may develop into large companies or, as is often the way, the large companiesin that field buy them out and roll out the new innovation. This is the more “typical” way for large companiesto innovate. However, because the RO does not encourage new entrants, this type of innovation is blocked,or at the very least undermined (and this can be argued for energy eYciency and energy network as well). Thisis extremely serious at a time when we, as the UK, needs to rapidly change our energy system to meet thechallenges of climate change.

The RO is complex, and it is getting more complex as it incorporates banding. So far, the RO has notsupported diversity—whether of technologies, size of plants, types of investors, new entrants to the energyindustry; or use of geographical resource. Banding has been introduced to overcome this accepted fault.Banding is when the generation from diVerent technologies is assigned a diVerent ROC value. In theory, if thevalue of the diVerent ROCs is set at the right level, it will incentivise the suppliers to buy electricity from agreater diversity of renewable energy technologies. Even if this works, and that is not certain, the otherproblems of the RO being an exclusive mechanism remain.

The RO is also expensive to administrate. Moreover, while the UK spends considerably less in total thancountries like Germany on renewable energy5, the RO pays more per kWh of wind electricity than theGerman equivalent, the feed-in tariV.

The Government has to make it easy to invest in renewable energy

The EU target is a huge challenge. If there is any hope of getting anywhere near meeting it, the Governmenthas to make it easy for all investors to become involved—in other words, it has to reduce the risk for investorsby taking that risk themselves. The renewable energy policy has to become inclusive, as opposed to theexclusive nature of the RO; it has to be straightforward to be involved with; and it has to by-pass areas whichenable delay to creep in. We argued it has to do this in 4 key areas:

1. Policy. We support a move to feed-in tariV, in conjunction with capital grants for micro-generation.Evidence shows that its inclusivity attracts investors from all walks of society; all sizes of developments; alltechnologies and all geographical resources.

2. Infrastructure Access. A feed-in tariV by-passes the access diYculties related to grid and infrastructure,enabling the economic regulatory arena to continue to work through the access issues. Arguably, this will leadto a quicker delivery of a network suitable for a sustainable energy future. Both Denmark and Germany arenow discussing system change to a sustainable future because so much renewable energy has been deployed.We, in the UK, are still talking about to regulate our electricity system in the most eYcient way for thissustainable future, without having moved forward in any meaningful way to the wider energy system.

3. Planning. A feed-in mechanism helps with obtaining planning permission because:

— there is more local involvement by investors;

— it involves more people and more companies it creates a tier of mentors for renewable energy. Thesementors are a powerful support for renewables and begin to be able to counteract the inbuiltmomentum of the conventional energy system;

— it enables more diversification and therefore a wider geographical resource is used, therebyminimising pressure on the better resource sites; and

— it broadens the incentive to go to the best resource sites. The incentive is still to go to the best resourcesites since the payment is per kWh and the best resource sites maximise those kWhs. However, if adeveloper does not go to the best resource site, they still know they will receive a payment, whereasthey may not be able to obtain a contract within the RO if their costs are too high.

4. Skills. Finally, diversifying renewable energy deployment will promote more jobs and skills both in, andacross, the UK, thereby reducing the supply side problems. The extent to which we maximise those jobs andskills will depend on the extent to which we develop a domestic market. Denmark, while having an almostcomplete decline in their domestic market since 2000, are still successful in the global market on the back oftheir domestic successes in the 1980’s and 1990’s. Germany and China are increasingly dominant in the globalmarket because of the great strides with their domestic markets in the 1990’s and 2000’s.5 See www.ren21.net



There are also three other areas which the Government has to be mindful of if it is to be easy to invest inrenewable energy:

— Establishing a long-term, low-risk strategic plan to deliver a sustainable economy, of which energyis just one part.

— Make sure that their policies enable, rather than constrain or channel, all developing technologiesnecessary for the sustainable economy.

— Be mindful of the big, long term picture when assessing the costs of moving to a sustainable energyeconomy.

A strategic approach: renewable energy has to be linked in with grid and infrastructure needs, planning, waste resourcepolicy, food policy and wider sustainable development criteria

Long-life equipment such as infrastructure clearly requires a strategic approach. However, the broad move toa sustainable future has to be part of a much more integrated and strategic approach. The UK had a WhitePaper in May 2007, which hardly mentioned the EU Directive which it had signed up to in the previous March.The UK then had a Nuclear White Paper in January 2008, and then immediately (at the end of the month)announced a Consultation on the Renewable Obligation, including the place of renewable heat. A RenewableEnergy Strategy Consultation is expected at the end of June 2008. However, there are now suggestions thatthere will be a Consultation on Energy EYciency and Heat in the Autumn of 2008, with the output of bothbeing published in 2009. None of this gives any confidence that a long term strategic energy policy capable ofmeeting the challenges of climate change is evolving.

The importance of enabling rather than channelling or constraining technology development

The transition to a sustainable future is made more diYcult by a combination of inter-locking constraintswhich arise from such issues as regulation not keeping up with technical developments; technologicalimmaturity; not understanding why individuals consume and behave as they do; poor economics of certainrenewable energy technologies; and so on. As the UK attempts to remove those constraints, it may be easierfor some technologies to develop rather than other ones. For example, the RO was put in place to enablerenewable energy technologies to develop but it has eVectively enabled onshore wind technology. This is anexample of a policy enabling and channelling a technology while constraining others. Any future policy mustenable all technologies. It therefore has to be an inclusive mechanism which does not pick winners but enablesthem, as much as any other technology and leaves it up to investors to choose which they prefer to invest in.Feed-in tariVs, in practise, allow more choice because only those investors who wish to be involved have to be.

The cost of moving to a sustainable energy future

There have been a great many estimates of the costs of the renewable energy policy. We would argue that thecentral points to keep in mind is the planetary environmental imperative of moving to a sustainable energyfuture, and the cost of not doing so. This was thoroughly set out in the Stern Review. The Review argued thatthe cost of not taking action was about five times greater now, and for every future year and possibly as muchas 20 times higher. Moreover, Sir Nicholas Stern recently gave a lecture at the University of Exeter where hesaid that he thought that the Review was, if anything, conservative about the costs of inaction.

INQUIRY INTO THE EU’S 20% RENEWABLE ENERGY TARGET

General

1. How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target? Will otherEU energy policies facilitate the EU achieving its target?

This is a very challenging target. The UK (meaning the mechanisms in England and Wales, Scotland andNorthern Ireland) has been trying to promote renewables since 1990. In that time, the UK has added slightlyunder 3% of electricity and about 1% of energy. The UK Energy Research Centre has submitted evidence tothe Inquiry which shows that the UK’s 15% target can be translated roughly into 40% of electricity demandprovided by renewables; as well as 10% of both heat and transport demand being provided by renewables.



The percentages from electricity, heat and transport can be argued about but the key point is that the targetis challenging and will need a significant increase in renewable energy support policies, which are both strageticand directed in order to make them more cost eVective in terms of speed, and success, of delivery. Thesepolicies will have to reduce risk significantly to attract investment and bring in new entrants into the industry.As discussed above, the RO is not capable of this. There is no hope of the UK meeting it’s EU target unlesschanges its primary mechanism of support.

Table 1 and Figure 1 at the end of this evidence uses Eurostat figures to compare UK renewable energydeployment against Spain and Germany in millions of tonnes of oil equivalent. As discussed above, the 15%renewable energy target is the equivalent of at least 15 mtoe by 2020. Germany has added about 10mtoe since1994. The UK has added about 1.5 mtoe in the last 10 years. Thus, the UK has to do better than that ofGermany in about the same length of time.

The UK Government should not be looking for “quick fixes” but should be putting in place a set of low risk,long term mechanisms which are inclusive (thereby bringing in as many people or companies as possible asinvestors or new entrants), which stimulate innovation within companies and the energy system, and whichchange the relationship of individuals to energy so that they take more personal responsibility. This has beencalled positioning themselves as a country on the right side of the innovation fault-line6.

The discussion of the how to make the move to a feed-in tariV as the primary means of supporting renewableenergy has been dealt with above and in Question 8.

2. How important do you believe micro-generation will be in meeting the targets? What additional measures should beconsidered to support small scale technologies such as PV, small wind and renewable heat?

Micro-generation could be very important for meeting the UK’s renewables target but also in the move to asustainable energy system. The Energy Saving Trust study (2005) indicates that micro generation (includingheat and power from fossil micro-generation) could make a significant contribution in reducing UK CO2

emissions (up to 7%) and meeting electrical energy requirements (up to 14%) by 2030. By 2050, micro-generation may provide about 25% of UK domestic electrical demand, thereby reducing carbon emissionsfrom the domestic sector by around 30%.

The EST report highlighted that diVerent policy mechanisms had very diVerent outcomes. The most successfulpolicy they had found was net-metering (where the value of the electricity per kWh exported to the grid fromthe micro-generator was the same as that paid for each kWh imported to the house). Net metering is a morecomplex version of the feed-in tariV discussed below.

The Government’s 2006 Microgeneration Strategy7 also points out that “microgeneration” has a widercontribution to make in helping to win the battle for hearts and minds that is crucial in terms of encouragingpeople to change their behaviour and move towards reducing their overall consumption of energy. They citea recent Sustainable Development Commission publication in support of this.

The barriers to micro-generation set out by the EST and DTI publications are those related to the high cost ofavailable technologies and the need for support measures to allow economies of scale to reduce costs, planningconsents, technical standards for grid connection and commercial issues around export reward, metering andinterfacing with the energy markets.

In terms of technical standards, the DTI Microgeneration Strategy sets out a need to consider extending theprinciples set out in Engineering Recommendation G83/1, which applies to devices with an output of less than16A/ph, to larger installations, in order to reduce the cost and complexity of connection.

Commercial issues are related to the modest output of micro generation technologies and the diYculties ofinterfacing with an electricity market designed to accommodate big players and high-volume supply. The lowlevel of revenue produced by micro generation make the costs of metering and supplier-involvement diYcultto support. Means need to be found of supporting deployment or by improving the economics of microgeneration.

We support a combination of capital grants and either net metering (which would recognise the value ofproducing energy at the point of demand) or, our preference, a feed-in tariV. In the short term and at a smallscale, net metering may be the easiest way forward. Ofgem has reviewed the payments made to domesticgenerators for the electricity they inject back in the grid. This has shown a huge diversity.6 C Mitchell, 2007, The Political Economy of Sustainable Energy, palgrave, UK.7 DTI, 2006, Our Energy Challenge Power from the People, DTI Microgeneration Strategy, p8.



However, our preference, while more complicated in terms of administration, is a feed-in tariV for all injectedelectricity and capital grants. This is because a feed-in mechanism enables the cost to be socialised, therebyreducing supplier concerns that they will be competitively disadvantaged if micro-generation is particularlysuccessful in their areas. It also allows a more formal mechanism which is not at the whim of the privatecompanies and which reduces the risk for investors. Again, encouraging innovation in this area and thedevelopment of new entrants will be central to the opportunities and skills available to carry it out.

The current micro-generation policy reflects the glacial pace at which Government policy proceeds. Asimportantly, Government policy is in the process of “channelling” renewable energy development becauseGovernment primarily supports large scale, currently cheaper, technologies via the RO, although there havebeen recent moves to make it more accessible to smaller generators. Arguably, micro-generation has as greatpotential as nuclear power. It has the additional value of involving individuals with their energy andsustainability decisions. Individuals are responsible for about 42% of carbon emissions which result from theirchoices if transport, food and energy consumption. Involving individuals may be a key tool in enabling themove to a sustainable energy system. Micro-generation appears to be one step in stimulating a new connectionwith energy.

Not only does the UK not support micro-generation suYciently but it does so in a stop and start manner,which further aggravates the diYculties.8 In early 2007, the £0.5 million grants from the Low CarbonBuilding Programme for March ran out after the first half an hour, showing the level of demand. BERR hasrecently extended the end-date (it was end 2008) to June 2010 or until funds run out, but have reduced themaximum payment. Those funds sum from various pots of Government money to around £85 million. TheUK needs to build on this by increasing the amount of grants available, ensuring they are big enough to bemeaningful, and ensuring their continuity. These grants should be given in combination with a feed-in tariV.

3. Is intermittency likely to be a significant issue if the EU achieves its renewable energy target? What measures willneed to be taken at an EU and national level to ensure reliability of supply?

Intermittency will clearly be an issue with the deployment of technologies such as wind, particularly for GB,which has limited interconnection with mainland Europe. However, the costs seen by the electricity customerof providing additional spare capacity to deal intermittency and ensure that standards of security aremaintained are likely to be relatively modest. For example, having reviewed available evidence UKERCconclude that the intermittency and additional reserve costs seen by consumers of accommodating around20GW of wind generation in the UK would be around 0.1 to 0.15p/kW, some 1–2% of retail energy prices.Although low, these estimates could be considered higher than may actually occur as other non-intermittantrenewable technologies are likely to make a significant contribution to the achievement of EU and GB targets.

On a European scale there is an increased opportunity to take account of geographic diversity to mitigate theimpacts of intermittency and, for example, to use hydro storage capacity in Scandinavia to smooth variationsin supply and demand. However, this would require adequate interconnection between national systems,market arrangements that allowed trading close to real-time and enhanced operational coordination betweennational electricity networks.

4. Concerns have been expressed recently in some quarters about “supply chain” bottlenecks. For example, theavailability of appropriate offshore engineering facilities. The EU target will increase demand further and could leadto competition for resources and capabilities. How should the Government and Commission seek to address these issues?

We highlighted in our introduction to this written evidence that supply side issues is one of the four areas thatGovernment has to work on to enable a rapid increase in renewable energy delivery. We would argue that theGovernment has the wrong “direct” policy; is trying to do things on planning, although not enough; has atleast recognised that grid access is a problem, although again is not doing enough nor is going down the rightpath; but seems to be doing very little at all on the supply side.

Although, there is little hard data around, from our own experience we can say that the UK used to producethe majority of things needed in the UK- turbines, cables, switchgear etc. However, now the UK has to importthe majority of inputs to exploit our huge renewable resources. For example, wind blades are manufacturedin the UK, but the “high-tech” content of a wind turbine such as generators, gearboxes, convertor-rectifierunits etc, are sourced abroad. The UK is generally restricted to competing in areas such as steel, construction,oVshore expertise and so on.8 See Low Carbon Building Programme, BERR; or Brenda Boarman, 2007, Home Truths, Chapter 6, pages 58–69.



At the end of the 1980s and early 1990s, the UK was competitive in the early stages of wind development,certainly in no worse a position than Germany. The Non Fossil Fuel Obligation (NFFO), the UK’s firstrenewable energy mechanism, allowed other countries, such as Germany to overtake us.9 In the case ofelectrical equipment, most manufacturers had a hard time in the 1990s, but the eVects of the economicregulation of our energy industry as a result of privatisation in the UK were very undermining of our domesticindustry. The overseas manufacturers who survived those years, ie ABB, Seimens, Areva, are now doing verywell because investment in infrastructure is now strong but it is not primarily UK companies which arebenefiting.

We would support a policy intended to increase UK’s capability within renewable energy technologies. Whilecompanies like Rolls Royce might be “obvious” targets for such a capability, at root, an important parallelpolicy is the strength of the domestic renewable energy market. If that domestic market is strong, thendomestic companies are more likely to succeed. It is no surprise that the UK has fared so badly in terms ofsupply issues given both its poor deployment record and the competitive basis of the NFFO10 and RO.

Grid Access

5. To what extent does grid access remain a significant barrier to increased consumption of renewable energies in theUK and across the EU? How can access be improved?

Grid access clearly presents a significant barrier to increasing output from renewable sources in the UK, asevidenced the connection dates out to 2020 being oVered in congested parts of the system (ie Scotland). Wehave been asked to answer a number of inter-related questions: grid access arrangements; locational pricing;and reinforcement planning. These are addressed in the following three answers but are all related to the needfor a strategic policy for renewable energy—whether in terms of direct policy (such as feed-in tariV); planningrules; strategic market and infrastructure development; and supply issues.

We also highlight that in our view network and market development have to occur along two parallel andconnected lines. Firstly, we support a feed-in tariV and this is described in more detail below. However, thisworks by ensuirng connection and priority access to the grid and, in the short-term, avoids to some degreethe diYculties for renewables within our economic regulatory framework. However, in parallel that economicregulatory framework has to evolve to be complementary to renewable energy generation (and heat). Ouranswers reflect these two parallel concerns.

Article 7 of the existing EU Directive on Renewable Energy does allow priority to be given to renewablegeneration in gaining access to the grid. It is notable that member states, such as Germany, which give priorityto the connection of renewable projects, have connected much higher levels of renewable generation than hasthe UK. It is also noted that the draft EU Renewable Directive proposes that priority access should bemandatory, rather than optional.

Article 14.2 says “Without prejudice to the maintenance of the reliability and safety of the grid, Member Statesshall ensure that transmission system operators and distribution system operators in their territory guaranteetransmission and distribution of electricity produced from renewable energy sources. They shall also providefor priority access to the grid system of electricity produced from renewable energy sources. When dispatchingelectricity generating installations, transmission system operators shall give priority to generating installationsusing renewable energy sources insofar as the security of the national electricity system permits”.

In parallel, access to the grid could be improved by moving away from current access arrangements, whereaccess is permitted only when any necessary grid reinforcements have been completed, to an arrangementwhereby any renewable generation project could connect prior to reinforcements being in place, with the costof any consequent constraint cost being either socialised or targeted on the connecting generators.

All the proposals that are currently being considered in terms of access reform, ie connect & manage, tradingaccess rights, auctions, would allow earlier access to some extent. These possibilities within the regulation ofaccess to networks are generically known as “early access”. Early access to the grid should be aVordable—ieattractive to developers—however their costs could be very high to renewable energy developers. It is likelythat the non-locational element of Transmission Network Use of System (TNUoS) charges will be paid bythose obtaining early access plus any local TNUoS (to cover the cost of local connections). In addition, it islikely that some or all of the resulting operational costs will be targeted on generation connecting early, unlessthat generation is able to purchase access rights from incumbents. In either case this is likely to be expensive.9 C Mitchell, 2000, The Non-Fossil Fuel Obligation and its Future, Annual Review of Energy and Environment, Vol 25, pages 285–312;

C Mitchell, 1995, The Renewable NFFO—A Review, Energy Policy, Vol 23, No 12, pages 1077–1091.10 For Information, the May 2007 Energy White Paper said in para 5.3.20, page 148 that the NFFO was a feed-in scheme, This is totally

incorrect. Please see papers referenced above.



Operational costs as calculated by the British Electricity Trading and Transmission Arrangements (Betta) arearguably higher than necessary and this will be reflected in the value of purchased rights. This could all addup to early connection being a very costly option, which might deter renewable investment.

It should be noted that connecting generation ahead of reinforcements being completed will have no impact onsecurity of the energy system, it will just mean National Grid having to constrain plant more often. However, ifthe constrained plant is conventional, then that is what we are trying to achieve. If, on the other hand, allowingmore renewables to connect just results in other renewables being constrained, then there is not much point.

6. Is there a tension between the aim of encouraging renewable energy generation and locational pricing?

In GB, locational pricing principles are applied to charging for use of the transmission system. This results inhigh charges for renewable generation connecting in Scotland (circa £20/kW) but lower or even negativecharges for renewable generation connecting elsewhere. The fact that there is currently a queue of some 12GWof renewable generation wanting to connect in Scotland suggests that locational pricing can be accommodatedwithin the economics of most renewable projects. However, it may well be a significant issue for projects sitedon the Scottish islands, due to the particular costs of reinforcing or establishing connections to those islands.We understand that the Government is considering whether a scheme to adjust transmission charges in thoseareas should be made under section 185 of the 2004 Energy Act.

It should also be remembered that locational use of transmission pricing helps many renewable projects inE&W and that the principle should ensure that those projects that have the best economics overall, areprogressed first.

7. What impact do the various systems of reinforcement planning and work have on encouraging renewable generation?Should the UK adopt a “connect and manage” approach?

The GB electricity energy market assumes a “commercially infinite” transmission system, in other wordsenergy is traded without any regard to the physical capability of the system. To be able to trade in the energymarket however, a generator must have transmission access rights (TEC), which are only awarded oncereinforcement has taken place and the transmission system is compliant with industry planning standards (theSecurity and Quality of Supply Standards or SQSS). The operational costs that arise from the need to reconcilethe generation schedule delivered by the energy market with the finite capability of the transmission system inreal time are “socialised” and ultimately borne by electricity customers.

Due to the time required to gain consents for, and construct, transmission infrastructure, the currentarrangements can lead to lengthy delays in connecting new generation project, as evidenced by the connectionqueue in Scotland. One idea put forward is to have a “connect & manage” approach to access which wouldallow earlier connection of renewable and other generation projects and would give clearer signals to the GBSystem Operator (SO) and Transmission Operators (TOs) in terms of the need for transmission investment.However, it would give rise to the higher operational costs referred to above, as generation would have theopportunity to connect before transmission reinforcement was completed. Ofgem and others argue thatcontinuing to “socialise” these costs would amount to a cross-subsidy and that there is a case for targeting allor some of the incremental operational costs on the generation that gives rise to those costs.

There is also the issue of whether a “connect & manage” approach should apply to all generation, or justrenewables—recognising the particular replacement role that renewable generation has with fossil fuels.Applying “connect & manage” to renewables alone goes some way towards a feed-in tariV but not completely.The basic feed-in tariV design discussed below has three parts to it: the grid operator guarantees to take all theelectricity (ie the electricity has priority access) for a pre-determined length of time (usually between 10–20years depending on country); the grid operator pays a certain pre-determined price for the renewableelectricity (which is then sociaised across all customers with the exception of major users who are exempted);and there are clear rules for connection. In this way, the investor/generator knows that their electricity will bebought at a certain price; that they can sell their output; and that there are clear rules for immediateconnection.

“Connect and manage” would give priority in terms of connection access to the grid, but the project wouldstill have to trade energy in the market and might be exposed to the high short run costs of access entry. Inthis sense, connect and manage is a very poor relation of a feed-in tariV.

In terms of reinforcement planning there is also the issue of whether National Grid’s current arrangementsadequately reflect the characteristics and role of emerging generating technologies. The replacement role ofrenewable generation and the variable nature of energy produced by renewable technologies such as wind,



tidal etc, suggest that these technologies should “share” transmission capacity with conventional generatingtechnologies. This issue has been recognised by National Grid who are conducting a review of their securitystandards in relation to intermittent generation. However, there is concern that National Grid will concludethat their existing arrangements are essentially appropriate and will not introduce necessary changes. Theimplications of not adequately recognising that diVerent generating technologies place diVerent demands onthe transmission system and the need to share transmission capacity, will lead to unnecessary transmissionbeing developed and unnecessary cost and delay in connecting renewable generation.

There is a need for a more strategic approach to delivering infrastructure. The Government has attempted thisto some degree with the White Paper Planning for a Sustainable Future.11 It includes a section on NationallySignificant Energy Infrastructure. However, its legislative base is the Electricity Act. As such, it only deals withrenewable energy projects over 50MW.

Despite this, electricity infrastructure developments can take time to deliver, ie around 12 years for the 2ndYorkshire transmission line and the continuing delays over the Beauly—Denny transmission line in Scotland.Ofgem believe that customer commitment should be obtained before expenditure is allowed to avoid the riskof stranded assets which would be picked up by end users. This is a problem for wind (particularly small)developers who are unable to commit meaningful sums to development until they have consents (includingplanning) and financial closure. However, when faced with the timescales associated with delivering majorelectrical infrastructure, wind developers can not seek planning consents as these consents, once granted, arefor a limited period. This is a catch 22 situation and could result in infrastructure not being available in timeto meet our 2020 targets.

An alternate approach would be allow National Grid to commit expenditure on new infrastructure on thebasis of renewable resource in a particular area, local targets or expressions of interest. Take mid-Wales as anexample. Renewable targets have been announced via TAN8 but, because individual developers do not knowwhether they will be successful in terms of planning permission, they can not commit to the infrastructure, sothe infrastructure may not get built and the renewable projects are delayed.

There have been discussions about a strategic approach to infrastructure development but there has been noobvious movement forward. This is despite other infrastructure projects, such as road and airports, being builton the basis of estimated demand.

Support Schemes

8. Can the existing Renewables Obligation deliver the level of expansion of renewable electricity that the target for theUK implies? Should the UK consider other mechanisms, such as Feed in Tariffs?

No, the RO will not deliver the level of expansion required by the EU. Yes, the UK should transfer, sensitivelyand over time, to a Feed-in TariV. This was discussed earlier on. It should be used in conjunction with variousother research, development and demonstration mechanisms, including capital grants for micro-generation.

The basic feed-in tariV design has three parts to it: the grid operator guarantees to take all the electricity (iethe electricity has priority access) for a pre-determined length of time (usually between 10–20 years dependingon country); the grid operator pays a certain pre-determined price for the renewable electricity (which is thensocialised across all customers with the exception of major users who are exempted); and there are clear rulesfor connection. In this way, the investor/generator knows that their electricity will be bought at a certain price;that they can sell their output; and that there are clear rules for immediate connection.

It is the coherence of the feed-in which makes the whole thing “easy” which is why its so successful and attractsin such a broad amount of investment—whether from large companies or small, domestic investors.

However, a feed-in tariV is only as good as its coherence. If any of the three parts are not included in arenewable energy policy, then it will undermine if not destroy its success. Moreover, if the feed-in payment istoo low it will not stimulated the required investment. Thus, a feed-in tariV is, in our view, the appropriatetool for increasing the rate of deployment of renewable energy. However, the details of that feed-in tariV arealso very important.11 DCLOG, 2007.



9. Should the EU be involved in harmonising or regulating support schemes offered by Member States to encouragerenewable energy generation?

No, the EU should not attempt to harmonise support mechanisms. However, it should concentrate on:

— ensuring that each member state deploys a certain amount of renewable energy; and

— ensuring that there are minimum payments for renewable energy and that priority access, in the senseit is intended within the various EU Directives, is in place.

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15 June 2008


Witnesses: Professor Catherine Mitchell, Professor of Energy Policy, University of Exeter, Mr Phil

Baker, University of Exeter, and Professor Goran Strbac, Professor of Electrical Systems, Imperial College,London, examined.

Q130 Chairman: Thank you very much indeed forcoming. It might help the Committee if you werebriefly to introduce yourselves, particularly yourprofessional and commercial experience andbackground.Professor Mitchell: I am Catherine Mitchell. I workfor the University of Exeter. I have recently movedthere from the Warwick Business School, where I wasfor a decade before that. In the past I was on theEnergy Advisory Panel for two terms and I wasseconded into the Cabinet OYce for the EnergyReview back in 2001–02 prior to the Energy WhitePaper of 2003. I have just come back from workingfor the New Zealand government, which has beenundertaking an energy review and I am currently onthe Intergovernmental Panel on Climate Change(IPCC) working on a special report on renewableenergy which will feed into the next assessment reportof the IPCC. Phil Baker is also working at Exeter.Mr Baker: My background is very much theelectricity supply industry. I spent many yearsworking for the Central Electricity Generating Board

(CEGB) and more recently National Grid. Eightyears ago I retired and worked for DTI as TechnicalDirector, Electrical Technology. I retired fromBERR, as it is now, at the end of March and sincethen I have been working for the University ofExeter.Professor Strbac: My name is Goran Strbac and I ama Professor of Electrical Energy Systems at ImperialCollege. I am also Director of BERR Centre forSustainable Electricity Generation, which providesfundamental research and support of governmenttargets on renewables. The centre is composed ofthree universities with expertise in integration,particularly of intermittent and other renewableenergy sources, including overall operation anddevelopment of the electricity system. Our area ofwork is really issues associated with the technical andregulatory framework to support integration ofrenewable generation in the UK electricity systemand we are working with a range of companies indeveloping standards, grid codes, and changes in theregulatory framework to support eYcient integrationof these sources in the system development.



21 April 2008 Professor Catherine Mitchell, and Mr Phil Baker, University of Exeter;and Professor Goran Strbac, Imperial College, London

Q131 Chairman: Thank you very much. I wonderwhether, Professor Mitchell, you would like to start.Three members of this Committee have asked me toask you through the Chair to give these giftedamateurs sitting on this side of the table a briefintroduction to ROCs, to the Renewables ObligationCertificates, and feed-in tariVs. If you could verybriefly for the record describe how they work, what iswrong with them—you may have heard evidencegiven by Lord Oxburgh because you were sittingimmediately behind him—but also the applicabilityof feed-in tariVs. Perhaps you would define those toofor the UK’s obligations.Professor Mitchell: Yes. Unlike Lord Oxburgh, Ithink that if the UK is in any way likely to reachthis target, it has to move over to a feed-inmechanism for all scales of renewable energy heatand power plants. It needs to be very sensitive aboutan overlap with the RO for the large-scaledevelopments (in other words, the RO has tocontinue for several years when a feed-in mechanismis implemented to ensure that those who haveinvested in the RO are not adversely eVected).Ireally believe that is absolutely central to movingforward. The thing about making renewable energyhappen is to make it easy for people to invest. Thefeed-in tariV in its purest form is made up of threeaspects. First of all, the grid operator guarantees totake the electricity from the power plants. There isa known payment for that electricity depending onwhat the technology is, and that contract is forabout ten or 20 years and there are rules andincentives to do with connection, which alsohappens immediately. There is eVectively priorityaccess for that electricity which is just taken by thegrid operator. Any extra cost of doing that is thensocialised across all other electricity consumersexcept for the major users, who are exempt from it.That completely de-risks the mechanism forinvestors. It means that anybody can invest. I couldinvest or a medium-sized company could invest ora large-scale company could invest. It means that itcreates diversity; it can be diversity of the type ofinvestors come in, diversity in terms of thegeographical region—so it might be a wind farmwithout very good wind energy, for example—anddiversity in size of plant. That diversity is good forsecurity of supply and it is also good in terms ofskilling up the population. Germany now hassomething like 240,000 jobs in renewable energy; wehave 7,000. Feed-in tariVs make it easy to invest anddevelop renewables, which is the central thing. TheRenewables Obligation, on the other hand, is anextraordinarily complex mechanism and it does theopposite of making it easy and it is very risky. Itintroduces market risk, volume risk and price risk.You cannot obtain finance on the Renewables

Obligation contract itself. Only those who are ableto raise money via their corporate assets are able todo that. Because it is so risky, it has been incrediblypoor at bringing in new entrants. I think 82% of ourrenewable generation happens through a few largecompanies, the big six. So it has been incrediblypoor at bringing in new entrants, and the RO is alsoin the control of those large companies. I am not a“small is beautiful” person at all but I do believethat a mechanism that is exclusive gives power tothose who are in control, and what we haveessentially seen in the UK is that renewables developat the rate that the large companies wish them todevelop. It is incredibly poor in terms of deploymenton the ground relative to other countries and it is avery inflexible mechanism, which goes way beyondthe normal wishes of business to have certainty forthe long term. That is primarily because ofsomething which is known as the recycled or “buy-out” mechanism. There is an obligation on suppliersto buy a certain percentage of their electricity eachyear. If in the last year they supplied 1,000 MWhand if in the next year the obligation was 3%, thenthe suppliers have to buy 3% of those 1,000 MWhfrom eligible renewable electricity sources. Thesuppliers can buy that electricity directly from agenerator, buy the required number of RenewableObligation Certificates (1 ROC % 1 MWh) or theycan “buy-out” by paying a penalty and not buyingany renewable electricity at all. The fine or penaltygoes into the recycled mechanism. That recycledmechanism fund is then returned to the suppliersaccording to the percentage that they had bought ofthe Renewables Obligation Certificates, whichproves what they have done. So if a supply companybought 5% of the ROCs, the Renewables ObligationCertificates, then they would receive 5% of therecycled mechanism. That sets up an incentive sothat those companies want to know ahead of timeexactly what renewable electricity is going to bedeployed, in other words what percentage of the ROis going to be met in any one year. Suppliers needto know that in order to know how big the recycledfund is going to be , in order that they know whatthe recycled fund coming back to them is, whichmeans that they then know how much the value oftheir renewable energy is. I am sorry to do this toyou but it is very complex. EVectively, the incentivewithin the mechanism is to know exactly how muchrenewable deployment is going to happen going intothe future. If there is any change at all to the rulesor incentives of the Renewables Obligation, it willaVect the proportion of the Renewables Obligationwhich is met, which in turn changes the amount ofrecycled mechanism that comes back to the supplier,which in turn will aVect the value of their ROC. Thewhole of their returns is based on knowing this, so




they do not want anything to change more than isnormal in business. It is a hugely inflexiblemechanism and it is also extraordinarily risky.

Q132 Chairman: You have explained it very clearly.I think you favour shifting the responsibility from theenergy suppliers, the big companies, who have targetsto source from renewable energy suppliers, to therenewable energy suppliers themselves, giving themcertainty, grid access, et cetera.Professor Mitchell: Yes. I think the target isextraordinarily challenging but, in order to have thebest go at meeting that target, a number of areas haveto be dealt with. One is the policy, so you need tomove from this risky, exclusive mechanism of the ROover to a less risky mechanism. You need to sort outthe grid and infrastructure development side ofthings, and I have experts on either side of me to talkabout that. At the moment Ofgem would say thatthey are unable to do the things that are necessary tobe done in order to sort that out. Ofgem either has tochange its mind to start to do that or the duties ofOfgem have to be changed. Planning has to becomemore streamlined and more eYcient and governmenthas to do what it is able to do to help in terms of thesupply side.

Q133 Chairman: I am going to ask Lord James tostart in just a moment on grid access because I knowthat both Professor Strbac and Mr Baker are familiarwith this and experts in the field. I think, ProfessorMitchell, it would help the Committee, when youhave the time, if you could let us have a brief note onwhy you feel so strongly about moving to the feed-intariVs as opposed to the ROCs. That would behelpful to us.Professor Mitchell: It would be my pleasure.

Q134 Lord James of Blackheath: Professor Mitchell,I felt very much listening to you then that I had goneback 30 years in time and I was sitting opposite thefinanciers at the outset of the North Sea. I want to putit to you in fairly direct terms that the mistake thatwas made then is in danger of being made now,because the return on capital is being pitched at thewrong point because they are not getting the rightcombination of factors. If you go back 30 years, theinitial exploration of the North Sea, in which I wasvery heavily involved, demonstrated that there werehuge resources beyond the feasible financial level atwhich you could finance at $16 a barrel at the time,and nobody would put up the money for doing that.As things have gone on, I want to put it to you thatthere is another mistake which may be made now,because it will aVect what is done with theinfrastructure that is put in here, and that if you hadlooked 30 years into the future and seen $110 a barrel,

everybody would have gone ahead with thatinvestment and would have made a fortune today butit was because they had to pitch the investment at alevel before it could make the return. Is there not achallenge to your point that it is not the major fueldistribution and energy source companies thatshould be carrying this, and they should in fact beputting in a huge amount of investment ininfrastructure now in order to be able to get thereturns and enjoy those returns 30 years hence, whenthe renewable energy has begun to challenge in termsof the same price structure that we now have for whatwe left in the ground 30 years ago?Professor Mitchell: That was very well explained. Iwas actually a journalist writing about oil and gas atthat time, so it takes me back. I will leave the gridinfrastructure stuV to these two.

Q135 Lord James of Blackheath: It is inseparablefrom that issue really.Professor Mitchell: Yes. It is absolutely a “chicken andegg” situation at the moment that in order forinfrastructure to come forward, the renewable energydevelopers have to be able to say that they definitelywill use it. They do not know that they will definitelyuse it because they do not know whether or not theyare going to get planning permission, so they cannotsay that you will definitely use it, so no infrastructuregets going. That is the essential ring that has to bebroken in order that there is going to be aninfrastructure in place in time to enable the kind oftechnologies we want, and it is not just any oldinfrastructure. One of the problems is we do notknow what technologies we do want to come forwardand we do not know where we want them to comeforward, whether it is oVshore and micro or justscattered around the place. So you need to enablethese technologies to come forward in the best waypossible rather than channel them, because of theavailable infrastructure, towards one technology orconstrain certain technologies or futures altogether.Mr Baker: Transmission infrastructure takes anawful long time to deliver. I am just thinking back tothe second Yorkshire line, which I think was the lastmajor infrastructure development in England. Itspent about 100 months in planning and took about12 or 13 years to develop from start to finish. Thatdoes not give us an awful lot of time in terms of 2020.As well as delivering new infrastructure, in terms ofrenewables, it is important to note that we should bethinking about sharing the infrastructure we alreadyhave with renewable generation, and to do thatindustry rules need to change. At the present timeNational Grid applies rules which basically meanthat before they can connect new generation, thesystem has to be totally reinforced and compliantwith all their rules. That is fine in a world of




conventional generation which all wants to beoperating at the same time to meet the winter peak.You need to build a system which can accommodateit all at the same time. With renewable generation, itis basically there to replace the conventionalgeneration, so almost by definition it will not want tobe there at the same time as the conventionalgeneration it is replacing is going to be there, so thereis the opportunity to share what infrastructure wealready have, and to do that things really need tochange.

Q136 Lord James of Blackheath: How do you set outto demonstrate that cross-over in the calculation to apotential financing source, which we failed to do 30years ago?Mr Baker: It is very diYcult, I think, but NationalGrid are currently going through an assessment to tryand understand how much you can shareinfrastructure and how much you need to build newinfrastructure. The economics of that will come outof that review.

Q137 Lord James of Blackheath: Picking up a pointthe Chairman made earlier, if you could win thatargument about the future value of what you weregoing to get with what you were spending now, whatwould you most wish to give as a priority fordevelopment for another renewable source beyondthe wind we talked of earlier? Where would theconcentration of that investment go with yourdirection?Professor Strbac: I am not sure I understand thequestion.

Q138 Lord James of Blackheath: I am saying that 30years ago we did not take everything out of theground we could have done because we could notfinance it at that time. We now would like to havewhat we knew was there then and have it at that cost.If you were able to make the extra investment now,not just in wind or whatever else is available now atthis time and get the 10% target, but could actuallyget to the 25% target, what would you actually lookto develop and where would you look to try toenhance the financing ability of this by bringing innew financing sources to generate new sources ofrenewable energy which are not currently on theslate, or which are known but not consideredeconomically viable at the moment?Professor Mitchell: There are two things here. Theproblem is that in the short-term economic analysisyou are not including all the disbenefits of climatechange. The problem is that that calculation is notable to be done. I think Lord James is saying if youwere going to spend your money now, where wouldyou spend your money where you think in the future

would have the best returns back for developingrenewables most quickly and most eVectively, if youhad the chance to do that now?Professor Strbac: I am probably not understandingyour point. We have got the commitment to market-based operation. We are not trying to second-guesswhat is going to happen in 20 years’ time and we aretrying to make sure that a framework is put in placeto ensure that a cost-eVective solution to whatever wewant to solve will emerge. That is how I understandthe emphasis. Maybe I do not quite understandwhere you are leading to but I would not be able totell you what I think we should be doing in terms ofinvesting in this technology rather than thattechnology. I simply do not have a full enoughappreciation of that to be able to answer thatquestion in that way. The work which we are doing isproviding quantitative evidence of the fundamentaleconomic change of the system which we are going tomerge into if we connect such a significant proportionof new forms of generation. What we are showing isthat the present technical commercial regulatoryframework, which is being optimised for anincumbent system with conventional generation, isnot providing a level playing field for facilitating cost-eVective integration of any renewables which wepotentially want to connect. There is a significantcommitment in that context to market operation, andthe focus of the development we are working to is tomake sure that the regulatory framework is such thatwe have this level playing field rather than trying topick out winners ahead of all information beingavailable.

Q139 Lord James of Blackheath: 30 years ago I wasa humble boat driver driving round the North Sealooking for oil, and in those terms it seemed to me atthe time that I was deeply frustrated by the fact thatthe banks we were dealing with would not give me theextra contract to go another month to go five milesnorth, where all the geological evidence was thatthere was a huge amount because they said, even ifyou found it, we could not get it out at $16 a barreland make a profit. Now we know that we could havedone. I am saying what is it that is there at themoment that you could get to which would be for thefuture the same answer to that same issue that wewould not have lost if the financing sources wouldput the money up to enable you to go five miles north,as I was not allowed to do? I developed the Argyllfield.Professor Mitchell: You are talking about renewablesources, energy that we could get if we spent moneynow.Lord James of Blackheath: I am talking about itstrictly in terms of renewable. I am not talking aboutfinding another field of the same stuV that we have




not had or not used. I am talking about where you aregoing to get the investment to make worthwhile whatyou could do, and know about, but which is nothappening now.Lord Mitchell: Can I just ask Lord James, if you wereposing that question 30 years ago, you would alsohave to say your expectation of what the price for oilwould be 30 years in the future, because that is whatwas not known then but we know now.Lord James of Blackheath: We were talking with thebig banks and we knew at that time that if we got a$10 hike on the $16 a barrel that they got the returnthat they wanted, but they did not believe oil wouldever go that high. I thought that was ridiculous.Lord Mitchell: But we live in a diVerent world todayand I think it might help if we perhaps plugged intothe equation a price in the future, $150 or somethinglike that, and how that would change things.Lord James of Blackheath: 150 and counting, yes.Chairman: Here a political commitment is beingmade by European Union ministers about renewableenergy. Unless you want to add anything, I want toturn to some other colleagues.

Q140 Lord Whitty: Chairman, on that point, in asense, it is the estimated price of carbon 10 to 20 yearsdown the line. Clearly, supply and demand for thebasic product would be better, but the diVerentialprice for renewable energy would become more andmore attractive in purely price terms as weinternalised the price of carbon into other sources.Where is the cross-over so that we might invest moreheavily in renewable sources? What sort of price ofcarbon would we have to hit before that became moreattractive, and by when? When I was speaking toLord Oxburgh, he was saying that if we pushed thedate back we could probably get more investment inother sources than wind for renewable energy, butalso, if we brought the higher price forward, wouldthat have the same eVect or a similar eVect?Professor Mitchell: There are endless studies about thecosts of doing this and they are very diversified. If youlook at a straight price of carbon now, then mostrenewables are nowhere near as eVective as energyeYciency measures, for example, and where the priceof carbon is $20 a tonne or whatever it is now, it is notin any way helpful to delivering renewables forward.I prefer to look at it from the Stern point of view. TheStern Review, which came out in November 2006,said that the cost of inaction would be five times asgreat this year and for ever into the future of the costof not taking action, so the cost is roughly equivalentof 1% of GDP, and 5% of not doing so, and that itcould go up to 20%. I know there are hugediscussions around those figures but I was recently ata lecture by him and he said that he would have beenmuch tougher about what those costs of inaction

would be. So given that the EU’s targets, even asenormous though they may be are not equivalent tothe 80% cuts in carbon by 2050 that we expect wehave to make to get to 450 parts per million, I thinkthe important question is how we start movingforward quickly across the board, across thesetechnologies which are out there with what we have,rather than worrying about the kind of costs of doingso, because we know that we in the UK are more orless at the bottom of the table in delivering renewableenergy compared to the rest of Europe. We have nochoice at the moment but to deploy the renewableenergy technologies which are available to us. So thebest thing that Britain can do is put in place a policywhich delivers these renewables in line, whetherelectricity, heat and transport, and tries to fit in withdemand reduction measures and with our currentagricultural policy and so forth, with what we have.We know that, not for all the renewable energytechnologies but for technologies that are supportedboth through the RO and the with the feed-inmechanism, such as onshore wind energy, that we inthe UK pay more per kilowatt hour than Germanydoes within the German mechanism. So we are in thesituation whereby we have the Stern, we know thecost of moving to a sustainable energy system is goingto cost us far more if we wait and do not do anything;we know that there is evidence from up to 20 yearsfrom all sorts of countries about the best way to moveforward to actually deliver it; and it seems to me that,really, the UK has to stop worrying about the costsof the mechanism, which are permanently beingdisagreed with by diVerent people, because we knowthat the only technologies we have in front of us arethose that we can aVord and we really have to getgoing on them. That is not to say, of course, that costsare not important and we should want to try andreduce them but really we know that we are doing itin a more expensive fashion than other countries aredoing it, and that, I think, is one of the importantpoints.

Q141 Lord Bradshaw: I agree with you about energyeYciency. There is a lot to be done. I have taken thepoint about ROCs. I have taken the point about feed-in tariVs and planning. The question is, will themarket ever provide the capital necessary to put inplace the necessary network to bring renewables onstream?Professor Mitchell: It certainly will not with theRenewables Obligation because the point about theRenewables Obligation is that it is an exclusivemechanism. Where you have feed-in mechanisms,which is an inclusive mechanism, anybody canbecome involved in them, so if you look at the figuresfor investment in, say, Spain, it is about 50% fromlarge companies, 50% from not the energy




companies. In Germany it is something like 20%from large companies and 80% from other people. InSweden and so forth it is about half and half. One ofthe most straightforward ways of getting hold of thatinvestment and giving certainty to the market is toreduce the risk and broaden the pool from whichinvestment can be obtained. Yes, it is a big ask toimagine that all that investment is going to comeforward, but it is certainly more likely to comeforward with a feed-in tariV, particularly one whichis available in parallel to the RO at the start. Largecompanies may feel threatened by new entrants. Atthe moment they are completely in control of therenewable market and they can deploy renewablesatthe rate they wish to fit in with their other portfolios.I might add that people do not necessarily agree withme here, so you should listen to them.Professor Strbac: Was your question abouttransmission, whether the market would delivertransmission or whether the market would deliverrenewables?

Q142 Lord Bradshaw: No, the market will deliverrenewables if we have a feed-in tariV—I have takenthat point—and we sort the planning system out, butwill the market pay for the grid network which willactually collect and distribute the energy generatedby the various renewables producers?Mr Baker: I think National Grid would certainlywant to develop the network to do that and theywould probably do that and make quite a modest rateof return on it. I think the slight concern is that beforeNational Grid are confident that they will be able torecover their costs of putting that infrastructure in,Ofgem is likely to insist that the cost is covered byuser commitment, in other words, the people that areactually causing the need for that reinforcementmake some financial commitment to make sure endusers, customers, do not get landed with the costs ofstranded assets. One of the problems withtechnologies like wind is that they are probablyunable to give that financial commitment until theyhave planning consents and they achieve financialclosure, which does not normally happen until aboutthree, four or five years maybe before they want tooperate. That is a bit inconsistent with the timescalesnecessary to develop the infrastructure.

Q143 Lord Bradshaw: I am sorry. I am notunderstanding you. I have said we have accepted theplanning, we have accepted the feed-in tariV, weassume that the renewables generators will come online if we fix these things. Can the grid be provided bythe market to service these people?

Mr Baker: Yes, I think once Ofgem allow NationalGrid to recover the costs of that through their use ofsystem tariVs, National Grid would go ahead anddevelop the infrastructure.Lord Bradshaw: That is the answer I wanted.

Q144 Lord Whitty: Before I make the heroicassumptions that my colleague has just made aboutaccepting the feed-in tariVs and the planning system,could you be clearer on what you think the changesthat will be required from Ofgem to speed up thisprocess would be? The feed-in tariV is part of it, as Iunderstand it, but could you say what demands you,between you, would place on Ofgem to change theirapproach, and secondly, on the planning system,what changes you would want to see in the planningsystem and do you think the Bill that is heading ourway at the moment goes any way towards meetingthem?Professor Strbac: If I can start on this, the area whichI would like to address is the question of theintegration of these renewables in the overall systemoperation development, which is fundamentally atransmission issue, given that we currently have, youmay be aware, about 12 GW of obligations inScotland and more than 10 GW oVshore. There isquite a lot of commitment out there to develop this.I think we are, in that respect, not doing too badly.We have conducted quantitative assessments toanalyse how much transmission we need to cost-eVectively accommodate this generation, and thatanalysis points out very clearly that we would need tofundamentally change the way in which we thinkabout the transmission system. Phil has mentionedthat a key element of that is the need for conventionalplant and renewable plant to share transmission, andour technical, commercial and regulatory frameworkdoes not support this concept. I can briefly give youan example which will clarify this, hopefully. If wehave about 60 GW peak demand in the UK—justround numbers—we have 72 GW of conventionalplant to meet that demand, because there is obviouslya capacity margin to make sure the lights stay on andthe risks of outages are small. If you add on, let us usethe number of 25 GW, which is currently the amountof interest for wind, given that this wind is now goingto be located in a relatively small geographical area,again, the first approximation is that this wind has avery small capacity. It is going to displace energy butnot the capacity of plant. What do you do in Scotlandwhen there is a number of days per annum wherethere are clear skies and not very much wind blowing?Broadly speaking; it is not exact but just to get the feelwhat it is. You would need to maintain conventionalpower generation as it is. 72 plus 25 is 97, so you areheading towards 100 GW of generation to meet 60GW of demand. Our present transmission access




philosophy is that the transmission system must beable to accommodate maximum output of allgenerators, if a firm access to grid is to be guaranteedto all. In this case, National grid would need to buildthe network which would accommodate 100GW ofsimultaneous output of generation to meet 60GW ofdemand. That is clearly ineYcient because, even if webuilt this transmission, we would never be able totake advantage of it because there is only 60 GW ofdemand. The fundamental phenomenon is that onwindy days transmission systems will be occupied bywind, and on and non-windy days we burn organicsin a conventional plant. As I say, the presenttechnical, commercial and regulatory frameworkwould not support this. That is why we are having atransmission access review which is reviewing thesearrangements. The problem with that is what has notbeen done. We do not know what is broken thatneeds to be fixed. Ofgem has not listed explicitly theweaknesses of the present arrangements so that wecan make sure we fix the ones which we haveidentified as wrong, and in that respect what I wouldcriticise Ofgem for is not having a vision as to theframework we need to facilitate the fundamentaleconomic behaviour of the system which would leadto least cost operation and least cost development ofthe system. I am very concerned that we haveprovided lots of evidence as to where the problemsare but we have not seen from this access reviewprocess a clear identification of what the problemsare. We are now jumping into solutions withoutpreviously identifying clearly what issues there are atpresent which we need to fix. The change is materialas we are moving from central investment planninginto decentralized decision making process intransmission and although the overall direction isabsolutely right, we need a long term vision for thenew market based access arrangements.

Q145 Lord Bradshaw: I think I understand that. Arewe seeing Ofgem? We are. What about the peopledoing the access review—are we seeing them? Who isdoing this access review?Mr Baker: It is a joint exercise between BERR andOfgem.Chairman: We have questions for Ofgem.

Q146 Lord Bradshaw: Yes, quite a lot, I think.Professor Strbac: We can debate the details but maybeI can send you the list of concerns and then maybeyou can try to use that and get a more informeddiscussion, if that is helpful.Mr Baker: I entirely agree with Goran. The onlyadditional point I would like to make, at the risk ofrepeating myself, is although we do need to shareexisting capacity, we will need to build additional

infrastructure to connect renewables and resource inremote areas, oVshore, and I just have a concernabout whether that can happen quickly enough giventhe regime we have at the moment. AlthoughNational Grid would love to build this infrastructure,and probably build too much of it, it can only do thatwhen it has suYcient users financially committed tothat additional infrastructure. That is very diYcult atthe moment because of this issue about gettingconsents.

Q147 Lord Whitty: This may be moving to adiVerent subject. One of the other diVerences, apartfrom the tariV structure and the planning structure,that we have between Britain and Germany, say, isthat there is far more decentralised energy inGermany. In other words, there is far more localisedgeneration which may have an intermittentconnection with the grid but is actually not primarilyfocused on the grid. There is a school of thought thatsays if we shifted to more decentralised energy, and ahigh proportion of that was renewable energy, wecould achieve it faster than focusing on getting therenewable energy into the grid, to put it crudely. Doyou think there is anything in this?Professor Mitchell: I certainly think the way that theUK is being channelled is towards large scale. Somethings are going on in terms of micro generation, acertain amount of money and so forth, but it isdwarfed in relation to the large-scale stuV.

Q148 Lord Whitty: I am not really talking aboutwhat we normally call micro generation. I am talkingabout things like community heating and middlesized provisions like, for example, they have inBerlin.Mr Baker: Distributed generation clearly has a bigrole to play but, no matter what voltage you have toconnect the generation to, you will have an impact onthe transmission system. If you happen to build thatrenewable generation in Scotland, for instance, itwould still add to the power flows in the transmissionsystem coming south. So there are still transmissionimplications which would have to be addressed.Professor Mitchell: Just in relation to your questionabout planning, there is planning for the futurecoming through, and the idea is that that will help insome way the planning diYculties but that is for sitesgreater than 50 MW, so it is not going to helpanything below that level. I think one thing thatwould help enormously is if there were more peopleworking in the planning system. There are very fewpeople who deal with these projects. There are quitea lot of requirements on planning that happened afterPPG22 went through a few years ago, which are, forexample, that these projects have to be looked at, say,within eight weeks but what happens is there are not




enough people working in the planning departmentsto look through them, so at eight weeks minus a daythey just say, “We have looked at it and we areputting it oV, and then another eight weekrequirement sets in” and these things roll on If youthink that there needs to be a strategic long termenergy policy plan which includes infrastructure,planning and demand reduction and so forth as a wayforward to the sustainable future then, yes, theGovernment is moving in some ways towards that

but it is not opening up all those technologies whichmay—we do not know which will—be helpful in thefuture.Chairman: Thank you very much. I want to ask theCommittee to remain behind for ten minutes so wecan go into private session and take stock of where wehave got to. Thank you very much indeed. When youread the draft transcript, if you have anyclarifications or any further points to make, please doso in writing. We are very grateful to you. Thank you.



MONDAY 28 APRIL 2008

Present Bradshaw, L Rowe-Beddoe, LFreeman, L (Chairman) Ryder of Wensum, LMitchell, L Walpole, LPaul, L Whitty, LPowell of Bayswater, L

Memorandum by National Grid

Introduction

1. National Grid plc owns and operates the high voltage electricity transmission system in England andWales, and as Great Britain System Operator (GBSO), we operate the Scottish high voltage transmissionsystem. National Grid also owns and operates the gas transmission system throughout Great Britain andthrough our low pressure gas distribution business; we distribute gas in the heart of England, to approximately11 million oYces, schools and homes. In addition National Grid owns and operates significant electricity andgas assets in the US, operating in the states of New England and the state of New York.

2. In the UK, our primary duties under the Electricity and Gas Acts are to develop and maintain eYcientnetworks and also facilitate competition in the generation and supply of electricity and the supply of gas. Ouractivities include the residual balancing in close to real time of the electricity and gas markets.

3. Through our subsidiaries, National Grid also owns and maintains around 18 million domestic andcommercial meters, the electricity Interconnector between England and France, and a Liquid Natural Gasimportation terminal at the Isle of Grain.

4. National Grid is pleased to have the opportunity to contribute to this inquiry. Our submission will dealwith:

— the ability of changes to the transmission access regime to increase the amount of renewables in theGreat Britain fuel mix;

— the need for planning reform to speed up delivery of energy infrastructure; and

— issues with the current regulatory regime.

Background

5. The European Commission has outlined in its package of measures to deliver a reduction in carbonemissions of 20% and a 20% share of final energy consumption from renewable sources by 2020. This targetbreaks down by Member State and by sector. UK power generation is likely to have a target of around 40%of electricity produced from renewables.

6. Great Britain’s current electricity generation mix is heavily reliant on carbon based fuel. Coal and gascurrently provide over 70% of the primary fuel source for electricity generation, with nuclear providing around20%. Electricity generation from renewables sources is currently around 2%.



Coal

Gas

Nuclear

Renewables

Other

38%

35%

20%

2%5%

7. Over the next 12 years to 2020, much of this generation infrastructure will reach the end of its engineeringand economic life and will require replacement. The impact of the Large Combustion Plant Directive will seemuch of the heavy carbon based plant come oV the system, while the case for replacement of the currentnuclear fleet has been made elsewhere; it is worth reiterating that by 2020, even with life extensions, much ofthe current nuclear plant will need to be replaced by new generation plant.

Current Progress and Existing Obstacles to the Increased Use of Renewable Energy Sources for

the Generation of Electricity

8. The current installed electricity generation capacity in Great Britain is around 77GW, with peak demandbetween 55GW and 60GW. Since the privatisation of the electricity industry in the early 1990’s over 22GWof new electricity generation has connected to the high voltage transmission system. This is a significant churnand compares especially well with other countries.

9. Since the introduction of the British Electricity Transmission and Trading Arrangements (BETTA) in2005, unprecedented numbers of applications to connect to the system have been processed. National Grid,as Great Britain System Operator has made around 170 oVers to connect to the transmission system, withconnection dates to 2015 and beyond. Throughout Great Britain, we are currently managing 47GW of signedconnection contracts for new generation. 16GW of this is for renewable energy projects—7GW of which is inEngland and Wales and 9GW is in Scotland.

10. Planning consent is the most significant blocker to the timely connection of these projects and thedevelopment of network capacity to accommodate the transfers around the system. Of contracted windprojects in Scotland only 16% has consents and only 23% across Great Britain. We fully support reform of theplanning regime and in particular the proposals that the Government have come forwards with which willallow more certainty in shorter timescales in the delivery of essential transmission infrastructure to deliverpower from point of production to end use.

Transmission Access Review

11. Changing the arrangements for access to the transmission system is a key element of the work NationalGrid is undertaking to increase the amounts of renewable electricity in Great Britain. We are playing a pivotalrole in driving this forward with BERR and Ofgem within an industry wide discussion on reform of the currenttransmission access arrangements. There are currently three proposals; “Connect and Manage” (whereby theuser pays for additional system management costs) “Connect and Socialise” (whereby the costs of connectingare spread across all industry participants) or an auction of existing rights. Two of the most significant issuesare: Who pays the cost of the connection, and; who owns the property rights in the existing capacity? This isan issue that all of the industry as well as National Grid and Ofgem need to consider and so consideration



through the appropriate governance arrangements is essential. We have put forward modifications to theindustry code and these modifications proceed according to plan changes to the access system could bedelivered by the end of 2008.

Regulatory Regime

12. The change in fuel mix to accommodate 40% of renewables by 2020 will mean a locational and geographicshift in where electricity is generated and where it needs to be transported from. The network in areas whererenewables, especially wind, are most abundant either does not exist, such as oVshore, or has only been built toserve small amounts of demand, such as in the Highlands and Islands of Scotland. This will require significantinvestment in the transmission system to both connect locally and to upgrade the wider system toaccommodate larger flows.

13. One of the major issues that National Grid is concerned with is whether the current regulatory regime willfacilitate the scale of investment in the timescale required. The regulatory regime currently requires firmfinancial commitments from users who trigger infrastructure investment before National Grid can eVectivelystart construction work. This regime has served Great Britain’s energy markets well since privatisation wherethere has been relatively little need to increase transmission capacity on a large sale basis, and an incrementalapproach has been fit for purpose.

14. This transmission investment still needs to be carried out in the most economically eYcient way to ensureconsumers are protected, given that other factors within the market are increasing the wholesale energy pricesare rising. However, given the scale of the challenge and the short time that the industry has to deliversolutions, new approaches need to be harnessed. One example could be “no regrets investment”, whereby theregulator and network companies consider what network developments are likely to be required ahead ofdefinite and confirmed customer needs to upgrade and reinforce the network. Such an approach is rare butnot without precedent. National Grid is in active discussions with Ofgem around diVerent regulatory modelsto ensure that the required investment is made in order to help deliver renewables and ensure security of supplyis maintained. One key issue to be worked through is the eVect any changes may have on the risk and rewardprofile under new regulatory models and how this impacts upon the wider market and upon consumers.

Offshore Transmission Regime

15. Due to limited space and planning considerations onshore, the bulk of the renewables needed to meet theEU target will need to be accommodated oVshore. It is, therefore, critical that the Government get the oVshoreregime right. Ofgem and BERR have proposed a competitive tender approach to appoint OVshoreTransmission Owners, ie the companies that will make investments and build transmission infrastructure toconnect oVshore windfarms, in order to deliver a regulated solution that introduces competitive benefits toend consumers. This will encourage single radial links for windfarms, rather than co-ordinated oVshorenetworks to develop. While at the time this decision was made this was an appropriate solution and fit forpurpose, clearly the picture has changed significantly since then, most significantly with the EU targets forc.40% renewable generation by 2020 and BERR’s announcement of their aspiration for around 30GW ofoVshore renewables to be in place by 2020.

16. However, National Grid does not believe that the proposed regulatory regime for oVshore transmissioncan deliver the UK Government’s aspirations. The proposed regime is overly complex with many areas of theregulatory arrangements still uncertain and undecided. Further, we do not share the Ofgem/BERR view onthe consumer benefits in terms of cost reductions that this regime will produce. In National Grid’s view, thedeployment of simple, co-ordinated, regulated transmission build is a more eVective approach to help meetthe significant challenge which is ahead of us in the next 12 years. The quickest, simplest and most eVectiveoption is to extend the current regulated onshore transmission franchises oVshore, but other options areavailable.

17. That said, National Grid has a key role to play as Great Britain System Operator and has a significantresponsibility in delivering any oVshore transmission regime, as well as many other key programmes whichwill be critical to the delivery of renewables. We are absolutely committed to supporting the Government andBERR in the delivery of any regime that they choose.

23 April 2008




Witnesses: Ms Nicola Pitts, Head of UK and EU Public Affairs, and Dr Lewis Dale, Regulatory StrategyManager, National Grid, examined.

Q149 Chairman: Thank you very much indeed forcoming. May say that, if we are interrupted by adivision, which will happen, I think, on thisamendment perhaps at some time, we will simplyadjourn for ten minutes, but if you would like toremain. It is not the fire bell going oV; it is the divisionbell. Would you like to introduce yourselves for therecord?Ms Pitts: I am Nicola Pitts, I am Head of UK and EUpublic aVairs at National Grid, and this is mycolleague, Dr Lewis Dale, who leads on renewablesissues in Europe for the company but also deals withUK issues such as transition access reform and othergrid-related regulatory matters.Chairman: Thank you very much. We are going to gostraight into questions. Lord Mitchell.

Q150 Lord Mitchell: Good afternoon. It is a verygeneral question but, in your judgment, howachievable are both the EU’s general 20% and theUK’s national 15% renewable energies target and,secondly, will other EU energy policies facilitate theEU achieving these targets?Ms Pitts: I think it is extremely tough, but from ourperspective there are three things that need to happenand those things need to be quite quickly aligned forus to meet the 2020 target which in energy terms isreally not that far away. The first is planningreform—that is absolutely critical—the second is thatthe whole of the market mechanisms were actuallyformulated with a rather diVerent energy-mix inmind, so there is some work that is going on at themoment with National Grid and BERR and alsowith Ofgem to review those to make sure that thereare no barriers within them and, if there are, toactually fix them, and the other thing that we areparticularly concerned about is that usually whathappens is that people will design their projects andit is only once they have got planning permission thatthey will send a full signal to us to actually startbuilding the networks, and given that we only have 12years, we are quickly coming to the realisation thatwe will probably need some strategic transmissioninvestment to take place so that the networks arethere for when they are needed and not potentiallyarriving late, and that is an issue that we are in activediscussions with Ofgem about as to how we achievethat.

Q151 Lord Mitchell: How do they provide thatstrategic transmission?Ms Pitts: What we are doing is looking at what arethe areas, both on and oV-shore, that we would wantto provide that we would really need to start buildingfairly soon, but that would mean that we would

probably have to have a rather diVerent frameworkto the one that we have at the moment, so that is anarea that we are actively pursuing. In terms of theother EU’s policy instruments and in terms of theclimate change package that they issued, I think thereis general concern that there may be a conflictbetween a renewables target which is reached in afairly short period of time and, potentially, the sort ofcarbon targets and really which one is moreimportant than the other. There is a potential, ofcourse, that by going for a renewables target by 2020,we are really talking about a wind scenario by thenjust because of the viabilities of the technologies, so Ithink that there are some issues around this willcrowd out investment in other forms of renewables,such as wave and tidal, or will it push the emphasis onto achieving the renewables targets and notnecessarily looking for the quickest and cheapest wayto really reduce carbon. I think that there are someissues that need to be worked through there.

Q152 Lord Mitchell: Can I press you. I think you areimplying anticipation of demand; that the NationalGrid would build capacity ahead of a firmapplication by a generator or a supplier and that youwould need Ofgem’s co-operation to increase yourprices to finance it.Ms Pitts: There is actually an example of when thishappened. Lewis, you were actively involved in thatwork.Dr Dale: Yes, in mid-Wales. Our regulatory regime isset up that we get paid when we respond. The risk ofbuilding a network in advance of firm need is that youcould end up with a network that is not needed and,then, who bears the cost of that? Is it the transmissioncompany or consumers? One of the things we havebeen doing, though, is trying to get renewablesprojects together and progress the reinforcementsneeded to get them on. For example, in the centre ofWales there are a number of small projects.Altogether they do need a transmission link in thecentre of Wales to the existing network and we havebeen trying to get them together give us signal and toget some agreement on a taking forward the network.

Q153 Lord Mitchell: That is really co-ordinationand co-operation.Dr Dale: It is co-ordination, but once you have got agroup where there is some evidence that at least partof them will go forward, then it is much easier tomake the case that some network reinforcementought to be initiated at this time.



28 April 2008 Ms Nicola Pitts and Dr Lewis Dale

Q154 Lord Mitchell: You referred to planning. Doyou have any suggestions to make as to how theplanning system could be changed?Ms Pitts: The big issue for us is that under the currentsystem in England and Wales the actual overheadline is consented by BERR but the individualsubstations are consented by local planningauthorities. So it is like being given permission tobuild a motorway but you do not have any on and oVramps, if I can put it in that way. So we are verysupportive of the Government’s proposals in thePlanning Bill for an Infrastructure PlanningCommission (IPC), for the national policystatements and also, critically, this sort of singleconsenting authority. The other key issue from thenew planning proposals is certainty of timetable. Ithink if you ask any developers, they would prefer acertain yes or no within a particular timescale ratherthan an uncertain timescale as to when they might beable to get any sort of decision.

Q155 Lord Mitchell: The second question is: howcoherent are these proposals in the context of theEU’s energy policies in general and the Third EnergyPackage in particular?Dr Dale: National Grid has been working with ourEuropean TSO colleagues. In fact we joinedsomething called the European Wind IntegrationStudy, which is funded by the EU, in part. In general,we think the policies are coherent. A single marketshould deliver the framework that is necessary toencourage renewables, to integrate them eYcientlyand deal with variability and to share the reserves andback-up that will be necessary for variablerenewables.

Q156 Lord Rowe-Beddoe: Grid access really. Can wemove to more detail? To what extent do you thinkthat grid access remains a significant barrier to theachievability of our renewable targets?Dr Dale: Just at the moment we have anunprecedented demand for grid access. We havesomething like 47,000 megawatts of generationseeking access, 170 projects and, I think, 16,000megawatts of that is wind and renewables, but all ofthese projects have contracted with us for access inthe future. I think majority of them have got accessdates that they are satisfied with but there is aminority that has not. You have heard about the GBqueue, the people who have got planning permissionbut have got later access in the queue; there are someothers who have got earlier positions in the queuewho do not yet have planning permission; so we areworking to address this. I think we are working infour areas. One is on the queue itself, to make surethat people who have been granted access rightsearlier do not hoard those rights if they are not ableto use them and we could move people who are more

ready use access earlier, to satisfy the issue that Imentioned earlier. Another issue is our regime, asNicola mentioned, which has been set up forconnecting gas and conventional stations. Wind ismore variable. It is likely that they will want to sharenetwork capacity more with conventionalgeneration, and we need to adapt the access regime toallow that sharing of access rights. The third area, Ithink, is oV-shore transmission. We need to sort outthe processes and arrangements for people to connectoV-shore and get network infrastructure built—thereis still quite a lot of detail required on that—and thenthe fourth area is the question of trying to getnetwork investment underway before projects are intheir final position of having firm consents and all therest of it.

Q157 Chairman: Is the problem there finance or justrisk on National Grid that additional finances willnot be available?Dr Dale: At the moment we are in a responsive mode,and the issue is, if we invest without that signal fromdevelopers, then it is very diYcult for us to show whythat is an eYcient investment. While there is someuncertainty about whether projects are going to goahead, it is a risk of stranded investment primarily.Ms Pitts: But there is an issue. If you look at all ofthose connection applications that we have signed, all47 gigawatts of it, only 23% across the GB haveactually got planning permission. Obviously, that isquite a big block for any development at the moment,which goes back to my point about planning being avery key issue here.

Q158 Chairman: If all the planning permissions weregranted and all the finance was available, whatpercentage of our target for 2020 would we meet?Dr Dale: At the moment we have 16,000 megawattsof wind contracted. All of that has been given datesbefore 2020, but to meet 20% electricity renewablesby 2020 will probably need something more like25,000 megawatts of projects signed up. To meet 20%renewables of all energy, we probably need more like40 gigawatts, 40,000 megawatts, of wind and otherrenewables, and we just do not have that number ofprojects signed up with us yet.

Q159 Lord Rowe-Beddoe: On this question of access,how would you rate current situation in the UKcompared to the EU in general?Dr Dale: Across the EU there is all sorts ofapproaches, but the one that we see in Germany,Spain, Denmark, where there are very large windcapacities already connected, is that there they haveeVectively passed laws which require the utility to buyrenewable electricity at the terminals of the windfarm at a fixed price at a fixed time, so all of theuncertainty falls to the utility. In these cases it is often




not clear whether the utility is the network or theenergy supply company. Probably it is both. So thatgives a very certain environment for renewables todevelop, and it has been very successful. In the UK,the Government support is eVectively for renewablesdelivered to market and it is for individual projects toacquire connections and access rights and get theirelectricity to market, and there is a key diVerence.

Q160 Lord Rowe-Beddoe: Therefore, in the light ofthe size of what has to be done, do you think thatthere is a case to look at and perhaps revise what youdo hear in that whole area compared to the success incertain countries you mention in the EuropeanUnion because of the diVerent approach?Dr Dale: There is certainly a public policy issue to belooked at, at the advantages to getting windconnected, but also the flip-side is there are someconsequences of this approach. If you guarantee thedate by which wind can come on and the price, thenwhat happens if the connection is more expensive orthere are some problems getting deeperinfrastructure and there is some congestion? Thosesystems, eVectively, pass those costs straight throughto the customers, consumers, and so I think Ofgemand BERR have to decide, on a public policy basis,to what extent is the regime moved to one that isfriendly, easier and more certain for renewablesdevelopers but risks more cost perhaps falling toconsumers in the shorter term.

Q161 Chairman: In an ideal world, what would youlike Ofgem to do?Dr Dale: Our licence duty is to develop an economicand eYcient system and to meet our licenceobligations. We will try to do that as best we can. Ithink these kind of public policy questions really liebeyond the scope of our duties within our licence.

Q162 Chairman: No, I am asking you what in anideal world you would like changed?Dr Dale: We would like to see the renewablesconnected and developed as quickly as possible andgovernment targets met; so things which advancerenewables is what we would like to see.

Q163 Chairman: That means relaxation in terms ofOfgem’s control over your tariVs, over the pricesultimately raised and paid by the consumer.Ms Pitts: I think in terms of our tariVs, those are verytightly controlled, and so there would be a sort offinite sum that we would collect which would beheavily regulated. I think the issue is whether the riskis on the developer or whether the risk is on theconsumer at the start, bearing in mind that, quiteobviously, the consumers do bear a lot of the risk inany case.

Q164 Lord Walpole: I was wondering whether Icould ask Mr Dale, as an engineer, not as a manageror anything else, about the cheapest way of movingenergy. Is it cheapest to move it in a pipe or is itcheapest to take it along lines and at what voltage?Why is it AC when DC loses less heat?Dr Dale: If the energy is in the form of gas in the firstplace, it is cheaper to move it by pipeline. Gaspipelines are very eYcient at moving energy, but ifyour energy is in the form of wind and you harness itwith a wind turbine, it is probably best to move it aselectricity, and higher voltage is more eYcient thanlower voltages, particularly over long distances, Ithink for two reasons. Losses are lower at highvoltage but also there are economies of scale innetwork. So, per unit, high voltage networks aremuch cheaper than a low voltage network, althoughyou would not think so when you look at the absolutecapital cost.

Q165 Lord Walpole: And AC and DC? You do notget heat loss in DC, do you?Dr Dale: Yes, but DC has losses as well, particularlyin converter stations. The trouble with DC is that it isless easy to switch and at the moment you need prettymuch point to point DC links, so there is a lot of extracost with these because of the converter station. Onaverage, AC transmission losses in Great Britainare 1.5%.

Q166 Lord Whitty: Can I just go back to the figureof the queue. I think you said there were 47 gigawattsin the pipeline—pipeline is the wrong word—ofwhich 23% had already got permission. Is that right?Dr Dale: Yes.

Q167 Lord Whitty: And of those that had a firm datefor when they want the connection, what proportionare dissatisfied with that firm date? In other words,where have you not managed the queue to optimisethe developer satisfaction?Dr Dale: Of the renewables projects, I think we aretalking about, at most, half a dozen projects. Forexample, in Scotland 16% of projects have gotplanning permission, most of those have got aposition in the queue that they find acceptable, butthere are some projects which have got planningpermission now but connection and access dates laterthan they wanted. Some of them we have managed tomove forwards as gaps in the queue open up. So it isa small number.

Q168 Lord Whitty: Those in which planningpermission has been denied, is it?Dr Dale: In part, yes.




Q169 Lord Whitty: Or the investment goes away.Dr Dale: Yes. So it is a small number, and we hope tomake it even smaller.

Q170 Lord Whitty: So although it is a small number,there is quite a lot of attention drawn to it. Do youthink your management of the queue in that sensecould be improved or do you think it is more aquestion of the planning system bringing them onstream in an orderly way rather than some taking alot longer than others?Dr Dale: I do not want to get too much into thehistory of the queue, but a very significant feature inScotland was the process by which the markettransitioned from NETA and a separate Scottisharrangement into a GB arrangement, and accessrights were basically granted to anyone who appliedbefore a certain date, which was in the future, so justabout everyone who was thinking about developinga wind project applied before that date. I think thatwas the origins of the queue, which has set us quite aconundrum to try to work our way out of it. As I saidbefore, I think there are number of ways of tacklingit and they boil down to making sure that the peoplethat are most ready to use access get moved forwardand the ones who are not able to, perhaps becausetheir planning permission has been denied, aremoved later. The second area is to make sure that thecapacity that they are waiting for gets built.Unfortunately, some of them are waiting for theBeauly-Denny reinforcement within Scotland, andthat is the subject of planning.Chairman: We will recess for 10 minutes.

The Committee suspended from5.00 p.m. to 5.09 p.m. for a division in the House

Chairman: We will start again.

Q171 Lord Whitty: The issue of intermittency. Is itlikely to be a significant problem for meeting energytargets? What measures would either the UK or theGrid, or whoever, need to take to ensure thatintermittency was not undermining the achievementof the renewables target?Dr Dale: I think, because electricity has to bebalanced, generation and supply continuously,second by second, then intermittent sources like windare an issue, but, that said, there are advantages ofhaving a Europe-wide transmission network becausewhile weather systems are the size of the UK theytend not to be the size of Europe and so acrossEurope there is more diversity between diVerent windsources to be exploited. Also, if you have a networkyou can share the reserves across a bigger area andthat makes the balancing costs cheaper. The work wehave done on the UK is to look at the cost ofbalancing the Great Britain system, and those costscome out somewhere between three and a half

pounds a megawatt hour of wind energy produced toseven pounds a megawatt hour of wind energyproduced. For 40% renewables, which would besomething like 140 terawatt hours of wind energy, ifdemand stays much as it is today, then in total that issomething between 500 million and a billion poundsper annum of balancing cost. I think that is a kind ofbusiness as usual cost. The lower end is if balancinggets cheaper because you have perhaps moreinterconnectors to use reserves in Europe, or maybethere is new storage plant, or things of that nature.The more expensive end is if you have significantconstraints also to manage within the GB network,but that is the range. We extrapolate from balancingcosts we currently see.Ms Pitts: I think there is also an issue about lookingat this in a diVerent way, because I think that theenergy system has grown up really trying to satisfyevery additional piece of demand that might be outthere, and so issues like concentrating on energyeYciency, looking at ways to reduce peak demandpotentially through things like microgeneration,rolling out smart meters to make people more awareof the energy that they are using, but, of course, if youhave smart meters, then you could have diVerentialtariVs which actually encourage consumers to usepower oV-peak. I think there is a range of issues, notgoing down the business as usual but really trying tothink a bit more creatively about this, and in thefuture you could have consumers on tariVs whichpotentially allowed the National Grid from itscentral control room to turn their fridges down by adegree, or something like that, which does not sounda lot on an individual household, but if you tried toextrapolate that across the whole of the countrycould actually make quite a significant diVerence interms of balancing the costs of that.

Q172 Chairman: Could you put Lord Whitty’squestion and your reply into the context of theincrease in consumer prices? You talked about half abillion to a billion. What percentage increase are wetalking about?Dr Dale: I think you have to take into account thefact that wind is displacing other fuel. So, whilebalancing costs may go up a bit, it might be that otherfactors are reducing the cost of electricity, but, just interms of the balancing costs, if three pounds to sevenpounds a megawatt hour of wind produced per 40%of the wind, then for 100% of the load it would besomething like one pound a megawatt hour to twopounds a megawatt hour for all customers.Ms Pitts: The other thing to say is that transmissioncosts are actually quite a small proportion of the billwhen you compare energy costs and also the supplycosts as well. They are currently around 3 or 4%, andeven though that balancing figure would double inthe scheme of things, that would not be a significant




amount of money per individual customer. It soundsa lot on its own.

Q173 Lord Whitty: The Chairman is trying to say iswhat does this mean for average bills, for householdor for business?Dr Dale: One to two pounds a megawatt hour on thewholesale price is point one to point two pence a uniton a consumer’s bill.

Q174 Lord Whitty: Also on pricing, is there atension between all these measures for encouragingrenewable generation and a commitment to moresophisticated locational pricing?Dr Dale: The purpose of locational pricing is so thatgenerators take into account the cost of the networkin deciding what they do with their projects, wherethey locate them, et cetera, so it is what drives theeYcient development of generation and network, butthat said, people who are trying to develop windprojects see any additional cost as another hurdle.We are faced with our duty, which is to be economicand eYcient, we have licence obligations to charge inaccordance with our cost-eVective methodologies,which we must keep under review. If there is a case,though, for treating renewables or wind diVerently, Ithink that is a matter for Ofgem and BERR toconsider. Again, I think it goes back to the issue wediscussed earlier about whether you keep the levelplaying field or try to get wind going at the moment.You make a tilt in their favour.Ms Pitts: To give you an idea, people talk aboutlocational charging as being a cost on renewablegeneration in Scotland but, because of locationalcharging, Scottish consumers benefit to the tune ofaround £100 million per annum. In making anychange there will be winners and losers, but it reallydepends where that policy driver is.

Q175 Lord Bradshaw: This is a fairly leadingquestion. We have heard quite a bit about planningand the last remarks about BERR and Ofgem. Is itfair to say it is the planning system, which has beenmuch criticised and is about to be reformed, or is thereal problem a lack of clear government policies for

Supplementary letter from National Grid

Further to your request for additional information about the costs of managing intermittency with 40% ofelectricity generated by renewable sources, I hope the following is helpful.

1. The Definition of the Costs of Variability/Intermittency

There is scope for making diVerent definitions of the additional costs that result from the variability/intermittency of certain renewable sources and, without care, this can lead to double counting of some costs.The definitions used in my oral evidence on 28 April and in this note are consistent with the methodology

oV-shore and on-shore developments? Which is thebiggest obstacle? Is it clarity of objective or is itsimply the planning system?Ms Pitts: I think that there are two issues here. Thefirst is really will people make decisions? Bearing inmind that generators have to have a portfolio, willthey choose things that are easier to build, whichwould probably take you down the gas generationroute, but then you do have things like ROCmechanisms, and in terms of providing those sort ofincentives for wind I think the ROC mechanism doesthat. If there is something at the middle that stopsthat, I genuinely think it is planning and thediYculties of getting through that system and theuncertainty of doing that. I would see that as amassive blocker that could be removed relativelyquickly. Of course, in Scotland they are also bringingforward planning legislation, which will be criticalbecause of the wind resources in Scotland but also theneed to build lines through Scotland because demandwill be in the south.

Q176 Lord Bradshaw: If the planning system isreviewed, are there any other regulatory or otherobstacles which are in the hands of BERR or Ofgemwhich need to be tackled at the same time?Ms Pitts: Going back to what I said before, there isthe issue of the whole framework which we need tosort through to make sure that that is pointing in theright direction, green lights going forward, and theother issue is very much connecting things. Peopleconcentrate on the wind farm or the wind farmdevelopment, and it sounds very simple, but peopleforget about the networks. That might be the slightlyboring part of it, but it is very much getting thenetwork investment in place at the right time to meetthings like the 2020 targets.

Q177 Chairman: I think we have run out of time Wewill be writing to you perhaps with some additionalquestions that members of the committee have andour special adviser. Thank you for very much foryour patience. Do stay. We have got two morewitnesses, Energywatch and Ofgem, but thank youvery much indeed.Ms Pitts: Thank you.



published in an earlier paper1 which compared a scenario (A) in which electricity is produced solely withconventional generation to a scenario (B) in which a proportion of electricity is produced from wind power.

The key cost components were defined as follows:

Scenario A: Conventional Only Scenario B: Conventional & Wind

1. Generation capacity financing Conventional capacity (including Conventional capacity (slightlycosts security margin at peak) reduced from scenario A due to

wind capacity contribution butremaining suYcient for windbackup role)

Wind capacity (turbine capitalcost)

2. Generation fuel costs (also To meet demand To meet demand less wind energyreflecting carbon emissions) contribution (potentially 40% of

fuel)

3. Balancing costs (in which Short-term reserve capacity & Short-term reserve capacity &significant changes expected) utilisation for diversified mix of: utilisation for diversified mix of:

(i) demand forecast errors (i) demand forecast errors(ii) conventional generation (ii) conventional generation

breakdowns/unavailability breakdowns/unavailability(iii) wind variability

Congestion/constraint costs Congestion/constraint costs(depending on network capacity (depending on network capacityconstructed) constructed)

4. Network costs Connections for conventional Connections for conventionalgeneration generation

Connections for wind generationInfrastructure for conventional Infrastructure for conventional &generation wind generation (some shared)

In the GB market, generation capacity (item 1) and fuel costs (item 2) are funded through the wholesaleelectricity price. Balancing (item 3) and network costs (item 4) are funded from National Grid’s use of systemcharges, some of which are passed to generators (and so are also funded by the wholesale electricity price) withthe remainder passed to suppliers.

The earlier paper (which contains prices that need updating to reflect recently observed inflation in fuel andequipment costs) identified generation capacity costs (item 1) and fuel (item 2) as the most material costelements so that the overall economic impact of accommodating wind in the electricity system is dominatedby the extent that fuel and associated carbon emission savings oVset the cost of the wind turbines. However,the impact of wind on the need for conventional “backup” capacity, network extension and balancing doresult in additional costs which need to be considered for a complete assessment.

In my oral evidence and subsequent detail provided below, the estimates of additional balancing costs referto item 3 only. As noted below, however, the component arising from network constraints will depend on theextent that additional network infrastructure is established (item 4). At large wind penetration levels, windvariability will be the dominant driver of short-term reserve requirements.

2. Balancing Cost Estimates

Assuming that the electricity market continues to maintain suYcient generation capacity to meet peak demandsecurely (including suYcient backup capacity for low wind days), we estimate the additional short-termbalancing costs arising with wind providing circa 40% of electricity in 2020 to lie in the range £500 million to£1,000 million per annum. (For reference, current total balancing costs are circa £530 million per annum sothat these additional requirements represent a doubling or tripling of current balancing costs).

1 “Total cost estimates for large-scale wind scenarios in the UK”, Dale, Milborrow, Slark & Strbac, Energy Policy 32 (2004) 1949–1956.



On the basis that wind would be supplying approximately 140TWh of the assumed annual electricityconsumption in that year, these balancing costs represent between £3.5 and £7 for each MWh of windproduced. The cheaper end of this range represents a business as usual scenario with reserves and balancingperformed as today and with the market prices of the various balancing services remaining constant (despitethe larger volumes required). The higher end of the cost range includes network constraint/congestion costswhich might arise if there are delays in establishing network capacity or if there is significant network capacitysharing. As my colleague Nicola Pitts highlighted in her evidence, there are opportunities for improveddemand side response (perhaps better facilitated by Smart meters) which could reduce such costs somewhatfrom these business-as-usual estimates.

Given that these costs are incurred on 40% of the energy produced, the cost per unit consumed would be inthe range £1.4 and £2.8 per MWh consumed or 0.14p/kWh and 0.28p/kWh. This would be a small part of aconsumers electricity bill (circa 1.6% to 3.2%). If we take an average domestic consumer electricity bill to be£390 per year (source: EnergyWatch website), the balancing cost for wind would represent an additional £6to £12 per annum.

19 May 2008


Witness: Mr Allan Asher, Chief Executive, Energywatch, examined.

Q178 Chairman: Mr Asher, thank you very muchindeed for coming. I am sorry we have delayed yousomewhat, but thank you for sitting through theevidencea littlebit earlier fromNationalGrid.For therecord, would you like to introduce yourself, yourorganisation and your title?Mr Asher: It is Allan Asher, Chief Executive ofEnergywatch.

Q179 Chairman: I think it would help the committee,having heard what National Grid have said, and youprobably followed some of our proceedings if you hada chance to read the transcripts, if you would like tomake an opening statement?Mr Asher: Yes; indeed. I think Energywatch and, wefeel, consumers in general are very sympathetic tothe overall goals of increasing the proportion ofenergy from renewables, and that includes powerand all other energy cases as well, that is transportand heat. I think it is increasingly the case thatpublic opinion polls show that consumers regardsustainable development as important and climatechange threats as something that they would like tocontribute to. However, having said that, there is anobvious gulf between consumers’ expressions of thatkind and their behaviour as both energy buyers andenergy consumers, and I guess that, for our part,until there is reconciliation between those gulfs, theprospect of the UK getting anywhere near its targetsis going to depend on understanding why it is thatthis growing gulf exists and how, if consumers arenot dealt with in a sensitive way, they might becomeactively hostile to the sorts of measures that pushup costs and edit choices and things like that, andso I think it is a serious issue.Chairman: I am going to ask Lord Ryder to open thequestions. From the point of view of the consumer, Ithink we need to develop your latter points ingreater detail.

Q180 Lord Ryder of Wensum: Thank you, LordChairman. I am interested in what you say. I wonderwhether you could, as the Chairman said, develop thepoint that you have made, because it strikes me that,however desirable these targets are, they are notgoing to be achieved unless industry and theconsumer is capable of bearing those additionalcosts, particularly during a time of recession, andsuch planning laws as are in place are changed tomake it easier to achieve those particular targets.Mr Asher: Yes. From the position of consumers andthe carbon impact of end consumers, this is domesticconsumers, we know that around 40% of carbonemissions in the UK are from the domestic sector.That is not all household, that includes transport, buta huge part comes from domestic space heating andwater heating and it is in that area that the biggestenergy eYciency changes can be made too. Yet I haveto say that overall policies across Europe and inthe UK largely treat consumers as a passive objectof either government promotional campaigns,or targets, or admonitions, or threats, orencouragement, but the actual measures taken togenuinely equip consumers with the information andthe tools that they need to make a diVerence arelargely absent. Just in case people fear that that is thesort of rhetoric that you always hear about peoplewho have a political view but do not carry it out,could I draw your attention to the growth inconsumer responses to recycling. Over 10 yearsconsumers are recycling, on average, four times thevolume that they were ten years ago and, apart froma few silly examples, there is no law enforcement,there are no legal obligations on domestic consumersto perform in that way but, because consumers havebought into that agenda, they are being given enoughinformation over a long enough period and, ofcourse, the tools, whether it is one, two or three greenboxes, or something like that, and people respond.



28 April 2008 Mr Allan Asher

Compare that with, say, petrol consumption, wherein 1998 there was a point at which a barrel of oil hit$15. Typically it was a bit higher than that, but in anyevent you could say in the ten years oil prices havegone from $15 to $115 and yet UK consumption ofpetrol has actually gone up by 30%. So the pricemechanism alone is clearly not the solution to thesethings and, in any event, given the relativeinelasticities of demand here, you would have toincrease prices by a factor of four or five, andconsumers would simply run out of money—they justwould not be able to pay, rather than their behaviourchanging—and so it is absolutely necessary thatconsumers are bought in through careful informationand being entrusted to be part of the answer and notperceived as irrelevant or just part of the problem.

Q181 Lord Ryder of Wensum: Forgive me forpressing you on this, but simply because agovernment or public authorities take consumersinto their confidence and persuade them, at the end ofthe day it is going to come down to two things: it iseither going to come down to incentives or burdens.Mr Asher: Both.

Q182 Lord Ryder of Wensum: Okay; both. Sopersuasion is dependent upon incentives andburdens.Mr Asher: I am saying “tools”, not just words.

Q183 Lord Ryder of Wensum: The tools are eitherincentives, because you have to give the consumersome encouragement, or you have to place suYcientburdens on the consumer that he is going to come onyour side irrespective of what the merits of theargument are.Mr Asher: Yes, that is so, but there are some othervery practical measures that we have not employed.There is a big debate at the moment, and I heard theNational Grid refer to this too. Smarter meters, orsmarter metering as I prefer to call it, because smartermetering is about equipping consumers with real-time information about their consumption, its priceand its consequence; so carbon feedback, time of daymetering and ability to know with precision theamount of energy you are using. At the moment athird of all energy bills are just wrong, because theyare based on estimated readings, and a third ofconsumers do not even have the meter readaccurately once a year, and so as we call on them tobehave in much more responsive ways, how can they?So accurate metering, the development of tariVs fortime of day, the ability for two-way feedback onthose things and to pass through the sort of incentivesthat you speak of, I think, are just absolutelyimportant things. The second dimension to that—perhaps it will come up in another question butI want to flag it importantly now—is that with the

soaring growth in fuel poverty, we are back up to4.5 million families now from one and a half millionjust four years ago and shooting for perhaps sixmillion, which takes us back to the late 1990s, thereis going to be, and there already is if you just look atall of the charities who work in poverty, an increasingdegree of frustration, anger and resentment at whatthey feel to be either government indiVerence orincapacity to tackle that, and that could actuallypoison the whole energy eYciency and the wholerenewables debate because people will become just sodisenchanted with the social consequences of thisthat a very, very sad backlash might occur.

Q184 Lord Mitchell: You will have heard thisquestion from the previous speakers, but again, howachievable are both the EU’s general 20% and theUK’s national 15% renewable energies target? Willother EU energy policies facilitate the EU achievingits target?Mr Asher: In my view, the UK 15%, if that isconfirmed, is absolutely unachievable in thetimeframe, and when one looks at the extraordinarilylow level now, 2% or so of achievement, this is aftersix years’ of the Renewables Obligation. So to get to2% after six years, I think, one does need to be a littlesober about these things. That is not to say that a lotmore cannot be achieved, and we heard also fromNational Grid about the large number of newprojects that are queuing up, but when it comes to thecost of those connections and, remember, even if allof those projects come on line, that is still only about10% of the increase in renewables that would berequired to meet a whole 20, 15% of energy.

Q185 Lord Mitchell: But they were somewhat moreoptimistic than you seem to be?Mr Asher: My views are drawn largely fromextrapolations of what has actually happened andwhat the Government is doing and the almostinsuperable barriers to getting through a lot of thesethings. What is needed is actually a virtual storm ofinnovation, new entry, competitive oVerings and,sadly, we have a tightly controlled, verticallyintegrated sector with six fairly, I would have to say,recumbent, if not lazy, operators and they are justincapable of bringing about the results that are goingto be required.

Q186 Lord Powell of Bayswater: This is a briefaddition to that. Why do you think the governmentsigned up to it? Was it simply badly advised? Was itnot paying attention? Did it have a diVerent agenda?Mr Asher: I think a rush of blood to the head, but Ithink it is a recognition, and rightly so, that to meetsome of the imperatives of science about bringingabout, at least in Europe, a reduction in the growthof carbon dioxide in the atmosphere that unless we



28 April 2008 Mr Allan Asher

can get to some of those stabilisation numbers, wewill be devastating the earth. Of course, we recognisethat the UK’s proportion is pretty low and even thewhole of Europe’s, but I think I would agree with theGovernment that they cannot with any moralauthority persuade China, India or other vastgrowing producers to change their systems unless weare seen to as well. Nonetheless, I would also have tosay that by agreeing to such an unachievable target,I fear it might have the opposite result than thatintended because it will be seen as just the sort ofthing that you say when you know that you are goingto be out of oYce for 10 or 15 years before anybodycomes to measure it.

Q187 Lord Bradshaw: Would you just reflect on theRenewables Obligation as opposed to feed in tariVsfor a second, please?Mr Asher: Yes. I give two answers: (1) if we did nothave a Renewables Obligation now, I would arguestridently that we should not introduce one. It is oneof the most costly ways of achieving the sorts ofresults that are sought. The sad thing is that six yearsin, and with all of the investment decisions made andthe systems in place, something that is even worse forlong-term achievement is no long-term planning andthe stickability of decisions, and so I regret to say that

Supplementary letter from Energywatch

In response to your letter of 7 May 2008, please find enclosed a report of the results of an omnibus survey,which is the opinion poll that I was referring to in my evidence to the Committee on 28 April.

In September 2007, energywatch included four questions on the Public AVairs Monitor, which is a face-to-faceomnibus survey undertaken by Ipsos MORI on a monthly basis. The four questions were designed to capturerespondents’ awareness of low carbon energy generation, and their support for low carbon enerby producedfrom renewable and nuclear sources.

Ipsos MORI

“Low Carbon” Awareness and Support among UK Residents

An Omnibus Survey Conducted on Behalf of energywatch

Method

Between 20 and 25 September, 2007, energywatch included four questions on the Public AVairs Monitor, IpsosMORI’s monthly face-to-face omnibus survey.

The four questions were designed to capture:

— awareness of low carbon energy generation;

— understanding of the generation methods that are considered “low carbon”;

— support for low carbon energy produced from renewable sources; and

— support for low carbon energy produced from nuclear power.

it is probably necessary, at least through the next 10to 15 years of these projects, to allow that to continuebut I think it is absolutely time that we experimentedwith a range of feed in tariV scenarios, and this wouldbe particularly if we want to use the approach ofmicrogeneration at domestic level or combined heatand power at a larger scale and, most especially, insome areas where it can achieve a number ofobjectives, including fuel poverty. I am thinking hereof those vast tracts of the UK where there is no gasand that the use of renewable sources—biomass andanaerobic sources—for oV-gas areas where thesethings can be used, and to have feed in tariVs in thosecircumstances could achieve two or three of thesegoals at once. They are not mega goals, they are notanywhere near the gigawatts required, but they gosome way to dealing with this problem in areaswithout large developed grids or without gasconnections.

Q188 Chairman: We are going to have to move onbut thank you very much. If I might say so, the clarityof your answers and your comments is muchappreciated, and I am going to ask your kindness inperhaps responding in writing to any questions thatwe might ask you again.Mr Asher: Of course.Chairman: Thank you very much indeed.



Sample

In total, 2,015 respondents participated in the survey. This sample was designed and weighted to berepresentative of the UK population in terms of gender, age, social class, working status and region.

Awareness of low carbon energy generation

The majority of respondents (59%) thought, or were sure, that they had heard of low carbon energygeneration, while one in four (41%) had not or did not know.

1

29%

30%

3%

38%

Awareness of low carbon generation

Yes, definitely

Don’t know

Yes, I think so

No

Q1 Which of these best describes whether you have heard of something called ‘low carbon energy generation’?

Base: All respondents (2,015)

Keeping in mind that factors such as social grade, newspaper readership, household income and home tenureare strongly related, lack of awareness of low carbon energy generation is significantly higher among:

— Women (42%) compared to men (33%).

— Those younger than 35 or older than 75 (42% and 47%, respectively).

— Lower social grades (36% of C1, 38% of C2, 49% of DE) compared to AB’s (28%).

— Those not working (43%) compared to those working full time (33%).

— Those who are renting their home (50%) compared to owners (33%).

— Those with a household income of less than £30,000 per year (43%) compared to those with a higherincome (23%).

— Readers of popular newspapers (42%) rather than quality newspapers (26%).

— Those with no car in the household (49%) compared to those with a car (35%).

— Those with no formal qualifications (52%) compared to those with GCSE or equivalent (40%), thosewith A-level or equivalent (35%) or with a Degree or higher (22%).

Perceptions of low carbon methods

The findings show that the public are confused about which methods of generating energy are low carbon.While the vast majority correctly identify renewables as a low carbon method, only one third of respondentscorrectly identify nuclear power. Similarly, one in five respondents incorrectly believe biomass to be lowcarbon generation.



2

75%

34%

20%

6%

4%

3%

4%

11%

Understanding of ‘low carbon’ methods

Renewables (wind, solar, hydro, wave & tidal power)

Nuclear Power

Biomass (energy from incineration of rubbish/waste)

Gas

Oil

Q2 Which, if any, of the following methods for generating electricity do you think are ‘low carbon’?

Coal

None of these


Don’t know

As with awareness, understanding that renewables and nuclear power are both low carbon is higher amongmen, and among those of higher education, social grade and household income. Respondents under the ageof 25 are least informed about low carbon methods and are significantly less likely than almost all of the otherage groups to indicate a correct response.

Support for low carbon methods

As prelude to the next question, respondents were informed that the two main methods for low carbon energygeneration are from renewables and from nuclear power. They were then asked how much they agreed ordisagreed with two statements regarding the production of energy through each of these methods.

While the vast majority (85%) of respondents support production through renewables, with a slim majority(51%) strongly agreeing, only 44% of respondents agree that they like the idea of low carbon energy producedfrom nuclear power. In line with this, disagreement is almost non-existent (1%) regarding energy fromrenewable sources, while a quarter of respondents (25%) disagree that they like the idea of low carbon energyfrom nuclear power.



3

51

13

34

31 24 18 7

5

7

8

Support for low carbon generationQ3 & 4 How much do you agree with the following statements: “I like the idea of

low carbon energy produced from…”

% Neither/nor

% Tend to disagree

% Don’t know

% Strongly disagree

% Strongly agree

% Tend to agree

Renewable sources

Nuclear power


Support for renewables is higher among AB’s, homeowners, married or co-habiting respondents, and thosewith higher household incomes.

Meanwhile, men are more supportive of energy from nuclear power, as are AB respondents, and homeowners.

14 May 2008

Memorandum by Ofgem

Introduction

1. Ofgem is the regulator of the gas and electricity industries in Britain. Protecting consumers is our firstpriority. We do this by promoting competition, wherever appropriate, and regulating the monopolycompanies which run the gas and electricity networks. Other priorities and influences include:

— helping to secure Britain’s energy supplies by promoting competitive gas and electricity markets—and regulating them so that there is adequate investment in the networks;

— contributing to the drive to curb climate change and other work aimed at sustainable developmentby, for example:

— helping gas and electricity industries to achieve environmental improvements as eYciently aspossible; and

— taking account of the needs of vulnerable customers, particularly older people, those withdisabilities and those on low incomes.

Summary

2. The target is achievable but very challenging both for the UK and for the EU. It is likely to requireunprecedented levels of investment and technical innovation in a relatively short space of time. This will berequired in all areas of the supply chain: the generation market, the transmission and distribution networksand the retail market.

3. The electricity transmission networks—the wires which carry electricity from generators to customers—donot have enough capacity or appropriate access rules to meet the target. New lines need to built in order tohelp connect more renewables, and better use needs to be made of existing lines. Ofgem is playing its part by



allowing a 100% increase in investment in the energy networks and by reviewing the arrangements for allowinggenerators to gain access to the networks.

4. The biggest single obstacle faced by renewable generators and transmission owners will remain planningprovisions—particularly for major electricity infrastructure. It is estimated that there are currently 8 gigawatts(GW) of renewable generation capacity delayed within the onshore planning system. Whilst we recognise thatthe UK Government’s Planning Bill aims to improve the planning process for major infrastructure projects,this legislation would apply only to England and Wales, where planning delays are less acute at the moment.

5. Meeting the target will not be cheap. It is vital that the policy instruments designed to meet it also protectcustomers from facing excessive or ineYcient costs. This is particularly important given the context of rapidlyrising energy prices and increasing fuel poverty. The experience of other EU Member States provides evidenceon the cost-eVectiveness of diVerent policies. However, their relative performance will be influenced by otherfactors too, such as the lack of planning constraints and the availability of spare transmission capacity.

Question 1—How achievable are both the EU’s general 20% and the UK’s national 15% renewable energy targets?

6. The target is achievable but very challenging both for the UK and for the EU. It is likely to requireunprecedented levels of investment and technical innovation in a relatively short space of time. This will berequired in all areas of the supply chain: the generation market, the transmission and distribution networksand the retail market as it responds to the pricing signals likely to emerge from an electricity network with highpenetration of intermittent generation.2

7. We think it is vital that the policy instruments designed to meet the target also protect customers fromfacing excessive or ineYcient costs. This is particularly important given the level of investment required andthe context of rapidly rising energy prices and increasing fuel poverty. Lessons can be learned from the existingsupport mechanism for renewable energy—the Renewables Obligation (RO). The RO was designed to sitalongside the competitive wholesale market and allow subsidies to fall away as technologies becamecompetitive. The proportion of Britain’s energy coming from renewables has increased since the RO wasintroduced but by far less than is required to meet the target and there are questions about its cost eVectiveness.The Government is now considering what form the RO should take in the future. Given the risks anduncertainties in meeting the very challenging EU target, any new policy instrument needs to be robust to anyfuture obstacles. There could be continued problems with planning if Government’s reforms take time toimplement or are unsuccessful. In addition, for the next few years there may be bottlenecks in the renewablemanufacturing supply chain (for example for wind turbines) as EU and global demand surges andmanufacturers seek to increase their manufacturing capacity.

8. It is important to note that the 15% target relates to energy. Much of Britain’s energy use is in transport,where the scope for renewable energy is more limited, and in the use of natural gas in businesses and domestichomes. This means that the proportion of electricity that must be generated from renewable sources in orderto meet the UK’s target is likely to be much higher than 15%. Many estimates put it in the region of 35 to 40%.To see what this means in practice, a renewable electricity target of 38% would equate to an electrical outputof around 135 terawatt hours (TWh) compared to a total GB output of around 355TWh. Assuming a generousload factor of 35% for renewable generators,3 this would require renewable generation capacity at around44 gigawatts (GW), equivalent to 56% of existing installed generating capacity in Britain (78GW). To achievethis target in the next 12 years is immensely challenging, given the number of potential barriers to increasesin renewable electricity capacity. These include:

— obtaining planning consents (for generation sites and for grid connections/upgrades);

— obtaining access to the electricity transmission grid;

— constraints in the supply chain for generation (eg wind turbines) and connections (especiallyoVshore);

— sourcing finance from investors and debt suppliers;

— cost-eVective support mechanisms; and

— achieving the best balance between the heat and electricity sectors.2 High wind penetration and current typical demand patterns could lead to more volatile wholesale electricity prices. Demand during

night time in summer can fall to 30% of winter daytime peak levels. Prices may even fall to zero at night time when there is more windgeneration than demand. Suppliers will therefore have a strong incentive to oVer new services and tariVs to encourage customers tospread their demand across the day by, for example, using more time controlled domestic appliances.

3 Much of the new renewable energy is likely to come from wind power which, depending on location, can have load factors lowerthan 35%.



9. Some of these barriers are outside Ofgem’s statutory responsibilities and powers. For example, Ofgem doesnot have responsibility in respect of planning decisions. It is estimated that there are currently 8GW ofrenewable generation capacity delayed within the onshore planning system. A further 3.2GW is currentlyawaiting consent oVshore.

10. Ofgem has an important role to play in helping to meet the target through the way we regulate themonopoly transmission and distribution networks which carry electricity from generators to customers. Weset price controls for all of the network companies every five years and these create the financial incentives onnetwork companies to invest to expand capacity on their networks to connect new generation. We also havethe power to approve or reject any changes to the way they charge for use of their networks and any changesto the commercial rules that govern how generators connect to and access the networks through variousindustry codes. In addition, we can hear and settle any disputes between a network company and a generatorover the terms of their connection to the network.

Question 2—How coherent are these proposals in the context of the EU’s energy policies in general and the ThirdEnergy Package in particular?

11. The European Commission emphasised in its Strategic Energy Review in January 2007 that its clear policydirection is to work towards sustainable energy markets. The Commission listed a number of options aimed atachieving sustainable, competitive and secure energy supplies in the EU. The “Green Package” and the “ThirdEnergy Package” provide the legislative basis for delivering this vision. The two packages must be seentogether and are very important, significant and welcome initiatives by the Commission. The Third Packageinitiatives are a vital step in delivering a fully liberalised EU energy market. The Green Package sets out a clearand significant commitment to promoting renewable technologies, reducing carbon emissions and increasingenergy eYciency measures in the EU. Taken together, these initiatives, when agreed, will allow for a paradigmshift in the EU energy market which should include a buoyant market in renewables.Where there are specificoverlaps between the two initiatives it is important that they be consistent with each other and with the overallpolicy objective of securing sustainable and competitive energy markets.

Question 3—To what extent are these targets capable of improving the EU’s security of energy supplies?

12. An increase in the amount of energy from renewable sources could increase the overall generation capacityavailable, as well as delivering a more diverse energy mix and lowering reliance on imported fossil fuels. Thiscould improve security of supply.

13. However, there are potential risks to security of supply. Wind is an intermittent resource and there islimited experience of the operational challenges of running an integrated transmission system reliably andwithin existing quality standards with such a high proportion of intermittent generation. The scale of the 2020target and the limited time available to meet it could also reduce security of supply. Ambitious renewablestargets, especially if supported by attractive financial incentives, could divert investment away from othergeneration technologies. In addition, the short space of time may require the use of similar technologies orthe same manufacturing design for a significant proportion of our generation fleet. This reduces diversity andincreases the risks associated with “type faults” being discovered with a particular turbine design. There arealso risks associated with some technologies that are not yet fully tested in operational conditions such asoVshore wind.

14. Nevertheless, an overall reduction in security of supply could still be justifiable given the carbon savingsand other benefits associated with action to tackle climate change.

Question 4—How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewableenergy generators?

15. The Internal Market in Electricity Directive requires that grid operators do not discriminate in the termsthey oVer for connection and access to their networks. If properly implemented, this should create a levelplaying field and prevent, for example, grid operators owned by vertically integrated companies4 stoppingnew entrant renewable generators being denied access to the system on reasonable terms.

16. The Renewables Directive allows renewable generators to be given priority access to electricity gridsahead of other forms of generation but it does not require Member States do so. This is a matter for eachMember State.4 Vertically integrated companies may have interests in more than one part of the supply chain in energy: generation, transmission and

distribution networks, and supply.



Question 5—To what extent does grid access remain a significant barrier to increased consumption of renewableenergies? Is it consistently a problem across all Member States?

The Transmission Access Review

17. Ofgem is undertaking jointly with the Government a review of the charging and commercial arrangementsto gain access to the transmission network and we will publish our final report in May.

18. We originally called for reform in 2000 and primary legislation was introduced by the Government toenable changes to be made. However, the industry argued at the time that reform was unnecessary as thetransmission system was unlikely to be constrained for the foreseeable future. Since then, a large queue hasemerged of generators waiting to connect to the transmission system or to receive an oVer to connect.

19. Ofgem and BERR hope that the necessary reforms can be designed and implemented under the existingindustry code governance framework, even though previous attempts to implement reforms have been veryslow and piecemeal. National Grid has announced that it will raise a suite of proposed modifications to thecurrent arrangements based around three distinct models of reform. The proposals will be analysed by theindustry before coming to Ofgem for decision. The Government has made clear that it will consider primarylegislation if the industry does not improve its performance and bring forward appropriate reforms quickly.

Why transmission access needs to be reformed

20. The current arrangements for access to the transmission network were designed for fossil fuel and nucleargeneration with relatively high load factors. They do not allow low load factor plant such as wind to shareexisting capacity with conventional generators. Nor do they provide the transmission companies with enoughinformation about the plans of new and existing generators in order to build infrastructure and allocatecapacity in a certain and timely manner. Major reforms of the existing arrangements are therefore necessaryto allow significant volumes of new renewable and other low carbon generation to connect to the system.

21. Requests for connections to the transmission network are dealt with on a “first come, first served” basis.This means that generators who have finance and planning permission may be further down the queue thangenerators who do not have either in place but who may have approached National Grid first. Transmissioncompanies therefore lack certainty over new users’ plans to proceed to connection, as well as existinggenerators’ intentions to continue to use the transmission system for a defined period. Without usercommitment it is diYcult to present a robust case as to why the transmission licensees should risk buildinglarge infrastructure substantially ahead of need. If the transmission licensees predict the need for a new lineincorrectly, investment could be wasted and the costs would have to be paid by consumers. We are alsoconcerned at the level of asset stranding risk that customers could face.

22. Conversely, appropriate user commitment would allow the transmission licensees to proceed and buildprojects several years in advance of need so that the major reinforcements could be delivered to coincide withgenerators’ wishes to connect. In the case of existing generators, if a more appropriate level of usercommitment was provided, the transmission licensees would have better information on when a particulargenerator would exit the system, and when its capacity would be available for others to use. This is a primeexample of how existing infrastructure could be used more eYciently.

23. The connection of renewable generators represents an additional challenge. Transmission companies havetraditionally adopted an approach of “invest then connect” when dealing with new generation connectionrequests. They will not allow a generator to connect until they have invested to increase capacity in thetransmission system. This work can take several years. Generators are only able to connect quickly to thetransmission system if they choose to connect in an area of the system that has spare capacity. However,renewable generators only have intermittent output and low load factors and when connected will displaceexisting fossil fuelled generation. This is because Britain has very limited export capacity and electricitydemand is not very sensitive to changes in price, so the extra electricity is unlikely to be absorbed by additionaldemand in Britain or on the continent. Transmission companies could therefore take a diVerent approach andconnect renewable generators without investing to increase overall network capacity substantially. Renewablegenerators and fossil fuelled generators would then share capacity on the system.

24. However, this may not work in all locations. For example, it may not be possible where the transmissionsystem is already constrained and there is not enough capacity to allow existing generators to export theirpower to other parts of the system, such as in Scotland. If two generators wish to dispatch their electricity tothe same part on the network at the same time, one must be paid a premium for not being able to do so (ie itis constrained oV). If no generators wish to dispatch their electricity, but National Grid estimates that morepower is needed in order to balance supply and demand, it can force a generator to dispatch in return for being



paid a premium (ie it is constrained on). Simply connecting more generation will add to the existing costs ofconstraints on the system and raise customers’ bills.

25. As part of the Transmission Access Review, BERR and Ofgem will be assessing what the potential benefits(primarily a reduction in carbon dioxide emissions) and costs (higher constraint costs for electricity customers)if we moved from the existing approach to a “connect and manage” approach where the transmissioncompany simply allowed all renewable generation to connect on request and then managed any resultingtransmission constraints.

26. Regardless of the improvements that are made to the transmission access regime, the single largestdiYculty faced by renewable generators and transmission owners will remain planning provisions—particularly for major electricity infrastructure. This can be illustrated by the case of the upgrade to the Beauly-Denny line. This project was referred to a public inquiry by the relevant planning authorities and has alreadyundergone a two year consultation process, prior to a further period after which Scottish Ministers will taketheir decision on whether to allow planning permission for the line. Whilst we recognise that the UKGovernment’s Planning Bill aims to improve the planning process for major infrastructure projects, thislegislation would apply only to England and Wales, where planning delays are less acute.

Funding to renew the energy networks

27. Ofgem has played its part in providing the necessary funding for the transmission companies to invest toincrease capacity to connect new renewable and other low carbon generation. In recent price reviews Ofgemhas allowed an unprecedented 100% increase in investment in the energy networks to upgrade the existingpipes and wires and connect new generation, much of it from renewable sources. The Transmission PriceControl Review for 2007–12 allows the electricity transmission companies to invest £3.8 billion to maintainand upgrade their networks. The funding is flexible and transmission companies’ funding will increaseautomatically if more generation seeks connection than was assumed when the price control was set.

28. Prior to that, in 2004 Ofgem approved £560 million of additional investment in transmission capacityoutside the normal price control process to avoid delay in the upgrade work necessary to connect renewables.The main project aVected was the upgrade to the line running from Beauly, west of Inverness, to Denny, westof Falkirk: a key part of transmission network in Scotland where much proposed renewable generation islocated. This allowance has not been used because of major diYculties in gaining planning permission. In 2006the Scottish Executive referred the project to a public inquiry.

29. There is the potential for more investment as more generation comes forward. For example, we arefacilitating more “localised energy” (smaller-scale distributed energy and household-scale microgeneration)which we are addressing through our work on the next Distribution Price Control Review for the period2010–15.

A new offshore electricity transmission regime

30. OVshore, there is the potential for over 30GW of renewable oVshore wind generation to connect to thesystem, potentially operating at a load factor higher than 35%. Together with BERR we have been developingand implementing a new regulatory regime for oVshore transmission to make sure this generation can accessthe onshore market. OVshore transmission has diVerent technical characteristics and it costs much more tobuild lines oVshore than onshore. BERR and Ofgem have therefore decided to base the arrangements aroundcompetitive tenders for major oVshore transmission projects. Ofgem will organise tenders and appoint themost competitive bid to build, own and maintain the oVshore transmission lines. Subject to the Energy Billbecoming law, the first tenders are likely to commence in the first quarter of next year.

31. The challenge lies in rebuilding the transmission system to accommodate this major change in the locationand nature of flows across the transmission system. Funding of onshore reinforcement works should notpresent diYculties since Ofgem can allow the expenditure provided it is eYciently incurred. However, the sheermagnitude of the task will place an immense burden on the planning system.

32. Our discussions with other energy regulators through the Council for European Energy Regulatorssuggest that grid access and planning constraints for new transmission lines are also significant issues in manyother Member States.



Question 6—How does Use of System charging affect grid access for renewable energy generators? How far can thedifferent levels of renewable energies take-up in different Member States be attributed to Use of System charging andcost sharing rules?

33. In line with the European Commission’s position on promotion of markets in energy, the GB mechanismfor use of system charging is designed to reflect the costs of locating at diVerent points on the network. Underthis approach, if a generator is located far from a centre of demand, or connects in a part of the system wheregeneration already exceeds demand in that location, it will pay a higher transmission charge, reflecting the costof the transmission lines necessary to move power from where it is produced to where it used. This promotescompetition between generators (for example between renewable and other low carbon forms of generation)and helps them to make economically eYcient decisions. For example, it enables oVshore wind farms to tradeoV the costs of onshore and oVshore transmission when deciding where to connect to the onshore system. Asmore renewable generation comes onto the system, displacing existing fossil fuel plant, it encouragesgenerators to examine the costs and impact on the transmission system when considering which fossil fuelpower stations to close. Finally, it promotes a more sustainable energy system as the transmission system hasits own environmental impact through its visual amenity and carbon footprint.

34. There is no evidence that locational charging in the UK has yet proved a barrier to renewabledeployment—even in Scotland where the locational charges are highest. There is currently a total of over13GW of renewable generation that is connected or is seeking to connect to the transmission system inScotland at today’s charges. Wind farm developers in the remotest and most expensive parts of Scotland(including the Scottish Islands) have indicated to Ofgem that the subsidy provided by the RenewableObligation is suYcient to make projects financially viable at current wholesale prices and transmissioncharges.

35. It is diYcult to determine whether the increased penetration of renewable generation in other MemberStates can be attributed to diVerent use of system arrangements. The degree of penetration is more likely tobe aVected by the financial support mechanism in place; the ease of obtaining planning consent for renewabletechnologies such as wind; geographical factor such as the availability of hydro resources; whether there isspare capacity on the transmission system; whether planning is a problem for major expansions of thetransmission network; and whether renewables are given priority access to the grid. Ofgem has not seen anystudies or evidence to suggest that diVerent transmission charges in diVerent Member States are a major factorin explaining why some Member States have a much higher renewable energy penetration than others.

Question 7—What impact do the various systems of reinforcement planning and work have on encouraging renewablegeneration? How important is the issue of constraint in increasing Member States’ renewable generation?

36. The main challenges faced by developers as a consequence of the way in which reinforcements are plannedand delivered fall into two main areas:

— a mismatch in timing. It often takes longer to get planning consent for the necessary gridreinforcements than it does for the renewable generation itself; and

— a lack of certainty about which generators will connect to and stay connected to the grid.

37. Ultimately both issues can be resolved by new and existing generators providing an appropriate level ofuser commitment to use the transmission system. Our Transmission Access Review sets out this analysis andconsiders the issue of constraints. More information can be found in our answer to Question 5.

Question 8—To what extent is further co-ordination of National Regulatory Authorities needed to encourage gridaccess for renewable energy generators?

38. The EU Third Energy Package of internal market measures currently under negotiation is designed toprovide reinforced coordination between national energy regulators. The measures include the establishmentof an Agency of EU regulators to help facilitate the development of the internal market, especially on crossborder issues and other areas most critical for market entry.

39. Whilst there are significant legal and political diYculties in agreeing the powers and responsibilities of theAgency, once agreed, these improvements in regulatory coordination would not be specific to any one type ofenergy generation and will help address the current “regulatory gap” on cross border issues. To the extent thata specific renewable grid access situation is a cross border issue, it will benefit from this enhanced regulatorycoordination. There are other elements of the third package where an element of enhanced regulatorycoordination is envisaged and which should encourage new entrants and connections. Amongst others, these



include: addressing problems in market concentration and vertical foreclosure; better coordination ofinvestment in capacity; overseeing development of compatible network operation codes; improving access tointerconnectors; and improving transparency of information.

Question 9—How far do current regulations inhibit access to the grid?

40. The existing transmission licence regime broadly ensures that all generators who apply for a connectionare given an “oVer” setting out, amongst other things, the costs and terms associated with connecting in theirparticular location. In this sense there are no direct barriers to applying for a transmission connection. Thereare, however, issues relating to the queue of generators wishing to connect which need to be addressed. Thisis discussed in further detail in our answer to Question 5.

Question 10—At what level should the EU be involved in harmonising or regulating support schemes offered by MemberStates to encourage renewable energy generation?

41. A variety of support mechanisms for renewables are in operation across Member States. Whilstharmonisation would be desirable, we think that a higher priority at this stage is to make real progress inintegrating the EU’s energy markets. Harmonisation at this stage could be onerous and expensive because ofthe variety of schemes and the variety of market conditions in which they operate.

Question 11—What impact have the various schemes in operation across the Member States had on encouragingrenewable energy? How have these schemes affected take-up both by producers and commercial and domestic consumers?

42. There are four main types of support schemes for renewable energy currently used in various MemberStates. These include feed-in tariVs; obligations or quotas; tenders; and tax incentives or rebates. A feed-intariV is an additional premium (fixed or variable) paid on top of the electricity market price that renewableenergy producers receive. An obligation or quota system normally involves a finite set of renewable energygeneration certificates being generated and traded, with penalties in place for not possessing them, when it ismandatory to do so. Tenders involve inviting companies to bid for the right to get involved in renewableenergy investments. Finally, tax incentives or rebates provide tax advantages for those choosing to generaterenewable energy.

43. These schemes have had varying levels of success in encouraging renewables and at very diVerent costs tocustomers and costs per tonne of CO2 emissions avoided. A recent evaluation of their relative eVectivenessconcluded that feed-in tariVs were generally more eVective at encouraging larger volumes of renewablegeneration at generally lower costs than the other options.5 However, these studies are very context specificand a policy that is ineVective and/or expensive in one Member State may be more eVective and cheaper inanother Member State if, for example, there are fewer planning constraints and more spare transmissioncapacity.

44. The mandatory nature of obligations means that is the costs are largely passed through to business anddomestic customers. This has been the case in Britain, where the Renewables Obligation currently adds around£10 to a domestic electricity bill per year and is set to rise to around £20 a year by 2015. Even so, there remains asignificant gap between renewable generation targets under the scheme and actual renewable output in Britain.

Question 12—Will cross-border renewables markets be genuinely affected by the existence of a variety of supportschemes? Is necessary investment hampered by lack of market harmonisation?

45. In the short term there may be an impact if there are bottlenecks in the renewable manufacturing sector.If a relatively small number of wind turbines are available, these are likely to be deployed in countries withthe most attractive support schemes. However, even in the short term, there are a range of other factors whichwill aVect investment decisions in renewables, eg ease of access to grid and planning constraints will be ofmajor significance. Any constraints in the manufacturing base should ease over time as new manufacturingcapacity is built and any support scheme that oVers commercial rates of return to windfarm developers anddoes not have other significant barriers (such as delays in obtaining planning permission or access to the grid)will attract significant investment in renewable generation.5 Feed-in TariVs and Quotas for Renewable Energy in Europe, CESifo DICE Report, 4/2007.



Question 13—To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisationof support schemes?

46. The trade of Guarantees of Origin certificates (GoOs) between Member States will generally be limited tothose countries who have met their interim targets. We do not consider that harmonisation of support schemesis required in order to trade GoOs between Member States. Together with BERR, we are committed toworking to ensure that issues arising in negotiations on the Renewables Directive are addressed in anappropriate and timely manner. The Council of European Energy Regulators is also reviewing the use ofGoOs.

25 April 2008


Witness: Mr Steve Smith, Managing Director of Networks, Ofgem, examined.

Q189 Chairman: Thank you very much indeed forcoming. I apologise for casting you last, as ourcommittee is depleted from other pressures. Wouldyou be kind enough to introduce yourself.Mr Smith: My name is Steven Smith. I am Ofgem’sManaging Director of Networks.

Q190 Chairman: I think it would be helpful to thecommittee if you could perhaps make one or twointroductory remarks, perhaps focusing specificallyon how Ofgem might be able to respond to thesubmissions or pressures coming from, for example,National Grid in terms of permitting some of theinvestment cost of improving the potential supplierof renewable energy to be financed?Mr Smith: Certainly. I think if we start with the mainquestion. Are the targets achievable? I think ouranswer would be, yes, and I would not demur fromwhat the previous witness said in terms of the sheerscale of the challenge. I think the challenge is not justfor the networks, it is also for the generation sector interms of the scale of investment that will be requiredbut also for the supply part of the industry as well, interms of some of the discussions you have heardabout smart metering and the need to innovatearound tariVs and make sure that customers actuallyrespond if we have that much renewables. In terms ofwhat Ofgem can do, the recent price control reviewsfor the three transmission companies in GreatBritain, we allowed more investment funding in thosecontrols for the next five years than the companieshave collectively spent over the last 20 years; so ourview is firmly that the problem is not one of funding.There are two main problems. One is planning in thatone of the big lines that we want to get built inScotland, which will enable a vast amount of wind tobe connected, is currently stuck in the planningsystem and I think the most optimistic view is thatthat line will not be operational until 2012, the leastoptimistic view is 2015. The second issue is actuallythe rules by which you get access to the system. Wehave been asking and calling for a number of years tosay those rules need to be amended. Indeed,Parliament passed primary legislation, going back to2000, to change the governance arrangements for

those rules to allow changes to be made, and theindustry told us, including National Grid, for a longtime there simply was not a problem. I guess it doesnot really please us that we have been vindicated, ifyou like, and that there clearly is a problem and theindustry is a number of years behind in tackling thatproblem.

Q191 Chairman: Could you, for the benefit of thecommittee, explain in greater detail what you arereferring to in terms of the rules to gain access tothe system?Mr Smith: At the moment National Grid operate anapproach that basically says they will not allow youto connect up to the system unless they have built thewires to accommodate you. Clearly, when a lot of thiswind power comes on it is not going to requireadditional transmission capacity, it is going todisplace some of what is already there. What thecurrent rules do not allow National Grid to do is lookat renewables and say, “We do not need to buildmore, we can allow them to share the existingcapacity”, and so the example I would give, it is a bitlike when British Airways sells seats on a jumbo jet:it knows it has only got 450 seats but it can sell 550tickets because it knows on most days a lot of peoplewill not turn up. You could adopt a similar approachin transmission, where you could actually sell morecapacity to the renewables generators than you havegot because you know if the wind is blowing there areonly so many customers at the other end of thesystem who are using power, and therefore some ofthe thermal generators would set aside. As I said, wehave been calling for those reforms going back to theyear 2000. Unfortunately, the industry for a numberof years said there was not a problem and now finally,belatedly, it has woken up to there being a bigproblem.

Q192 Chairman: So National Grid should increaseits plans to increase capacity, not only for reasons ofintermittency, coming from wind, but also tofacilitate a better supply of renewables either comingfrom the incentives provided by the feed in tariV orgenuine new innovations.



28 April 2008 Mr Steve Smith

Mr Smith: That is absolutely right. National Grid hasthe money, the Scottish companies have the money.They could squeeze an awful lot more renewables onmuch more quickly—we are talking gigawatts—ifthey changed, which they are now belatedly startingto do, the rules through which they actually allowpeople onto the system, but I think when you arethinking about the 2020 targets, you are then lookingat massive transmission investment and I think one ofthe key issues there is the extent to which whateverthe Government does on planning does some of thattransmission investment action need to be made oV-shore? Obviously, a lot of the renewable resourcewould sit in Scotland where you need thetransmission lines across areas of staggering naturalbeauty and you have to question whether planningwill ever be able to deliver the kinds of towers andwires that will be required. I think one of the otherthings we need to start thinking about now, which thetransmission companies are, is about the prospect oflarge subsea cables that run down the coast and comein closer to where the electricity is actually used.Chairman: I am going to ask colleagues to follow up.Lord Bradshaw.

Q193 Lord Bradshaw: Is the renewables programmea good bargain for the taxpayer and are there betteralternatives which will reduce the amount of CO2?Mr Smith: I have to say, I think it is a reasonablebargain for the taxpayer, it is not a reasonablebargain for the electricity customer and I think theexisting renewables support scheme has cost an awfullot of money and delivered very little. Hindsight isalways a wonderful thing. I think had we not had theplanning problems and the transmission constraintswe had, it would have been a marvellous scheme.When you have transmission constraints andplanning problems, it becomes hugely expensive andI think part of the problem has been that sense ofwhat seemed like a sensible idea at the time has notreally been looked at in the light of the bitterexperience of what has happened; but I thinkalternatives like feed in tariVs, arrangements whereyou only pay the generators when they actuallydeliver output, of which feed in tariVs is a form, willbe a much more cost-eVective way of providingrenewables support. I think when you look atsupport measures for 2020, the key thing is to learnthe lesson of the past, build a policy that is robust todelays, be they, “We cannot get the turbines; wecannot get the transmission capacity”, and make sureyou only pay people when they actually deliver.

Q194 Lord Bradshaw: That is the second thing I wasgoing to ask you. When you consider the renewablespolicy, is it fair to say that the protagonists of therenewables policy have presented the case in a false

and misleading way so that they do not take accountof the network costs and the backup generation?Mr Smith: I do not know that they presented it in afalse and misleading way; I just do not think there isa great deal of honesty at the moment about howgenerous the existing level of support is. We do haverenewable generators suggesting, for example, anarea of questioning you are going to come on to, thattransmission charges are a problem for them. Wehave repeatedly called over the last three years forany project to come forward and demonstrate, basedon the existing level of support available to them,transmission charging is a problem and no-one hascome forward and suggested that. We have even goneand talked to the developers on the Scottish Islands,and they have suggested that at the moment they areeasily financeable and it just does not stack up withthe facts. At the moment in Scotland you have 13gigawatts of renewable projects seeking connection.If all of those were to connect, that would provide100% of Scotland’s energy use and about 10% of theUK’s. So it is hard to see an idea that at the momentthis level of financial support is anything other thanmore than adequate to cover all of those costs. I thinkyou get into diVerent sets of considerations when youthink about 2020 and you are talking aboutdelivering 40% of our electricity.

Q195 Lord Mitchell: Ofgem is now in the process ofreviewing its rules for gas and electricity gridregulation, with a view to encourage new investmentand, consequently, facilitate the growth ofrenewables. However, regulatory changes are notexpected until 2015. What is your feeling aboutwhether earlier changes are necessary?Mr Smith: To set that in context, that is a root andbranch review of the way we regulate all networks. Iwill not bore you with the technical details, but I donot think its main focus are these issues. I thinkchanges will have to be made, particularly for thetransmission companies, before then, and we havealready said we are happy to do that. What we aretrying to do is to work out for this investment thatneeds to be made how do we get a fair deal betweencustomers and the company’s shareholders, but weare going to have to encourage them to innovate andto do more and to take risks, and really the debate weare now having with the companies is how do we dothat in a way, as I said, that we can stand up tocustomers and say, “We have got you a good deal”,but we will have to deliver change well ahead ofthat review.

Q196 Lord Whitty: In the 2004 Act we madesustainable development a secondary objective ofOfgem. There is now some argument that sustainabledevelopment should be part of the primary objectiveof Ofgem. Do you have any views on this, because it




would have a bearing on how Ofgem helped todeliver this particular target?Mr Smith: Far be it for me to point out to yourLordships in terms of the constitutional settlement. Ican answer the question in terms of giving you viewson how we might react, we take the boring positionthat as a statutory body it is for this wonderful Houseand the Commons to decide what we should do andthen we will get on and do it. All I would say is, if youfocus on the networks, I genuinely struggle to seewhat changing our duties further would lead us to domore in this area. I spend most of my time as MDNetworks focusing on issues relating to removing thequeue from transmission, changing the currentarrangements to get more renewables on and that isdriven by existing duties. So when you ask me theopen question, which is what would you dodiVerently or what could you do diVerently if wechanged your primary duty, I genuinely struggle tosee what more we could do. If you look at otheraspects of what we do, the way we regulate thegenerators and supply market, potentially, butnetworks, which is my primary focus, I think thechanges you did make in giving us a duty that relatedto sustainable development has led to significantchanges in the way we regulate the networks.

Q197 Lord Whitty: Yes, but there still tends to be anargument. I agree with an intelligence of networks asagainst a supplier, but I think there still tends to be anargument that direction on sustainable developmentis actually a matter for the Minister, and that is thedivision the legislation provides, and it is not forOfgem to interpret that in relation to their primaryobjective. This may be arcane and slightly theologicalprobably more so in the networks that it is in termsof supply, but it does seem to a lot of people that thatmeans Ofgem is saying it is somebody else’s duty tofocus on the sustainability of this outcome?Mr Smith: Let me try and put a bit more flesh onthose bones. The Government at the moment has setthe support mechanism which will deliver hugevolumes of renewables if they can get planningpermission. Our job, as we see it, against our existingstatutory framework is to make sure that all of theoutput can get on the system as quickly as as possibleand manifestly at the moment I would describe theplaying field as tilted away from renewables, for someof the reasons I have explained, including these rules,and we see our jobs as to level the playing field andwe think that, once that playing field is levelled, thefinancial support that is there will make sure that allof the renewables targets are met. What thesustainable duty has made us think about in terms ofthe networks is how to make the networks themselvesmore sustainable, so we have introduced incentives tocut the carbon emissions associated with thenetworks and to look at ways that, as well as

connecting up renewables, you can actually make thenetworks themselves have a lower carbon footprintand a lower wider environmental footprint.

Q198 Chairman: Can I ask a question about securityof supply in relation to third country suppliers. Isthere anything that you think Ofgem should be doingto promote security of supply in that regard?Mr Smith: I think where we have looked at this hasprimarily been in the gas market. What wediscovered, we did a big study as part of our responseto the recent Government energy review, was thatactually in the gas market competition has been veryeVective at forcing suppliers to think very carefullyabout this question and at that actually Britain,despite being Europe’s largest gas market, had one ofthe most diverse sources of supply. So suppliersnaturally had said, “Let us go to as many countries aspossible, let us try and go to those countries that arepolitically more stable”, and if you were to compareus, say, to Germany or France, where you have asingle company that had tended to put all its eggs inone basket, I think we came to the conclusion thatactually markets worked as well as they could againsta geo-political background of managing the risk thatwas there and that was the most that we as Ofgemshould do. Obviously, there are then issues forgovernment in terms of the discussion it has withsome of these large gas suppliers.

Q199 Chairman: Are there any other issues that youhave heard replied to or discussed by the otherwitnesses? I think we have covered most of thequestions that we had in mind. Is there anything elsethat you would like to add that has not been covered?I think there is one, on reflection, and that is theconnect and manage policy which has occupied ourattention in the past. Perhaps you could comment onthat, and then have we failed to elicit from you anygreat pearls of wisdom?Mr Smith: I think I have done locational pricing foryou. I will deal with the question you asked later, buton the intermittency question and security of supplymore generally, I think some of the discussion onsecurity of supply misses an element. I do not thinkwe are particularly worried about intermittency. Thisis an industry that is incredibly good at dealing withthose sorts of problems. The question is really one ofcost. I think intermittency can be dealt with; it is justwhether the cost of doing so is acceptable. One of thethings that is potentially missed on security of supplyis the risk that if you rush to a target that requires40% power to be delivered from renewables in a shortspace of time, there is a technology risk, because itwill require us to invest probably in single types ofturbine design, et cetera, and there is a risk then thatyou meet the target and then discover that thetechnology you have picked is not reliable or viable.




I think that is one thing that is missed. Even there,clearly, there is a benefit as well, and that is the benefitof the carbon saving. So I think we should be realisticabout the impact on security of supply and acceptthere are trade-oVs. We are taking that risk becauseof the carbon savings we will make. It is not a reasonnot to do it, but I do not think we should beunrealistic with customers that moving to such adramatic renewables target may involve someadditional extra risk in terms of security of supply.Forgive me, your other question.

Q200 Chairman: Connect and manage.Mr Smith: Of course. Connect and manage reallycomes into that class of what I was talking about interms of if you know your jumbo jet has only got 450seats, how many tickets can you actually sell withoutgiving rise to problems? We have said that connectand manage is something that needs to be analysed.So, if we get that wrong and we sell too many tickets,we will then have to buy them back in much the sameway as British Airways does, and it will not be usbuying them back, it will be customers. So, as long aswe can persuade ourselves that the costs of doing thatand the risks of doing that are not too high whenoVset against some of the carbon savings, thenconnect and manage is entirely a viable approach.National Grid last week raised a change to the accessarrangements to actually put connect and manage onthe table and it will now go through that assessmentprocess. The only area where I am slightly nervousabout connect and manage, without having done allof the detailed analysis, is I am afraid north of theborder: because we know already in Scotland we havebig constraints on the system, we know there arethese planning diYculties in increasing the line, so wejust have to reassure ourselves that, as I said, we arenot exposing customers to very great financial riskrelative to the benefits.Chairman: I think Lord Whitty may have a lastquestion.

Supplementary memorandum by Ofgem

1. On 28 April 2008 Ofgem’s Managing Director of Networks, Steve Smith, gave oral evidence to theCommittee as part of its inquiry into the EU Renewable Energy Target. Subsequently the Committee tookevidence from other witnesses who, like us, have focused on the challenges facing the energy networks. Thissupplementary memorandum contains further information that may be useful to the Committee.

2. On 26 June we published, jointly with the Government, the conclusions of the Transmission Access Review.This will see major reforms of the grid access rules to make it easier for new generators to connect.1 We hopeto see the new regime in place by 2010. In parallel, we will develop and implement a new incentive frameworkfor the transmission companies that will allow them to invest in new capacity ahead of contractual

Q201 Lord Whitty: Do Ofgem have a view on thedesirability of harmonising the renewable supportschemes across Europe? As I understand it, theGovernment have said that the cost of achieving thetarget could be reduced by something like 30% ifthere was intra-community trading in one form oranother but that without harmonisation much of thatbenefit would be lost, any Guarantees of Origin in thescheme and other things which would require somedegree of harmonisation really. Do you have a viewas to whether we ought to be moving to greaterharmonisation across Europe in terms of supportschemes and, if so, would we move closer to, say, theGerman system or hope the Germans move closer toa certificate trading system that we have beenoperating?Mr Smith: I think it is a good idea. I simply question,without having seen the detail of the Government’scalculation how big a priority it should be. ActuallyI think harmonising schemes across Europe is asecondary issue. I think getting the scheme right inthe UK and thinking we are going to get close tomeeting our targets to the point where we wouldactually be in a position to trade and also, I wouldsay, in terms of the debate in Europe, I think it is farmore important to focus on on the third package andthe debates that are going on in terms of gettingcompetition working, because there is no pointharmonising support schemes if, as at the moment,you cannot get access to the German grid unless youown it. As I said, I would describe it at the momentas a nice to have and certainly something we shouldnot lose sight of, but there are some bigger prioritiesfirst, which is to get the European market workingand get fair access to the grid and then to start tofocus on harmonisation. Domestically we shouldfocus on getting our support scheme right.Chairman: Are there any further questions fromcolleagues? If not, thank you very much indeed. Ithink you have achieved more in terms of theeYciency with which you have put your points thannormal witnesses. Thank you very much indeed forcoming. The session is closed.



commitments from new renewable generators. This is necessary because the Government has not yet put inplace financial support mechanisms to deliver the 2020 targets, and developers may not be able to makefinancial commitments to the transmission companies. Given the long lead times for new transmission build,this will make sure that the physical capacity of the network keeps up with demand for capacity. However,our framework will also protect customers from paying for ineYcient investments in capacity that is notrequired or is under-utilised. Under the proposals, the returns on transmission companies’ investment will belinked to how much generation connects post-construction. Shareholders will, therefore, take on some of therisk of ineYcient network investment in return for being able to earn higher returns.

3. In addition, we have identified short term measures which can be implemented before these newarrangements are in place to deal with the existing queue of renewable generators waiting to get onto the grid.This may enable up to 1 gigawatt (GW) of renewable generation with planning consents to connect to the gridfaster than under the current rules. Furthermore, the wider context of high energy prices and rising fuelpoverty means it is particularly important for Ofgem to ensure that consumers, especially the vulnerable, areprotected from excessive and ineYcient costs as the industry strives to meet the target.

Reforming Access to the Grid

4. A vital requirement for meeting the Government’s renewable energy target is to change the rules governingaccess to the electricity transmission network. (See Ofgem’s initial memorandum, paras 20–26.) The longoverdue reform of the access regime has, however, been blocked in the past by the electricity industry. TheCommons Innovation, Universities and Skills Committee recognised this in its recent report on renewables.“[Our] frustration is compounded by the knowledge that Ofgem attempted to pilot transmission access reformin 1999 and 2000 but, under threats of legal action, was unable to proceed.” At the time, many in the industryargued that reform was unnecessary. In addition, existing conventional generators have had an incentive tooppose reform as they do not want to share their access rights with, for example, new renewable generators.

5. We want a new grid access regime which requires all generators to make a clearer financial commitment oftheir future demand for capacity—or else give up their access rights to new renewable generators who may bemore willing to make such a commitment. This approach has two significant advantages. First, it givesNational Grid a lot more information about generators’ demand for access to the network, which in turnallows them to invest in new capacity to meet that demand where necessary. Second, it allows for much greatersharing of capacity. For example, much renewable generation is intermittent, and if a wind farm and aconventional power station use the same lines on the network, the conventional generator can start runningwhen the wind is not blowing.

6. We are pleased that the industry is now making much more positive comments about access reform andwe hope they will follow these with real action to amend the industry rules. As the transmission access reviewdraws to a close, National Grid (NG) has raised a suite of proposed changes to the key industry codes toreform the current arrangements based around three distinct models of reform. The proposals are now beinganalysed and discussed and NG will present its recommendations to Ofgem in September. We will then carryout an impact assessment on the proposals before reaching our final decision on which model to implement.We aim to have new arrangements in place by April 2010, which will also time for the necessary IT systemdevelopment, though the timetable may be threatened if any of our decisions are subject to legal challenge.The Government has made clear that it will consider primary legislation if the industry does not improve itsperformance and bring forward appropriate reforms quickly. Ofgem is doing all in its power to facilitatethe reforms.

Short Term Measures to Bridge the Gap

7. The signs of progress on transmission access reform are promising. However, the 2020 target is too pressingfor us to wait for a new regime to be in place. A lot can be done in the meantime to help bridge the gap. Forexample, we have encouraged National Grid to move away from a “first come first served” approach todealing with the queue for grid connections. At present, generators who have finance and planning permissionmay be further down the queue than generators who do not have either in place but who approached NationalGrid first. National Grid is now taking a more robust approach to removing unviable or purely speculativeprojects. National Grid is also progressing an amendment to the industry codes which would make it easierfor existing and new generators to share access to the grid.

8. We estimate that these shorter term measures are capable of bringing forward 1GW of new renewableconnections including just under 600 MW of projects that already have planning consent. We remain open toany other ideas which will accelerate longer term investment in the grid to meet the target.



Longer Term Measures Looking to 2020

9. Even with transmission access reform, there are still significant challenges ahead. For example, theGovernment has not yet put in place the subsidy mechanisms to deliver the 2020 targets. This means thatrenewable generators may not be able to signal their future capacity needs to National Grid and sign contractsbecause of the uncertainty over what financial support they will receive. By the time the subsidy mechanismis clear, there may not be suYcient time to build the capacity early enough to meet the target.

10. Ofgem is therefore engaged in several projects to help ensure the grid can be properly configured for therenewables challenge. We have asked the transmission companies to produce an investment study to identifythe options to invest to provide the extra transmission capacity that will be required to deliver the 2020 targets.We are also working with the companies and will implement a new investment incentive framework that willallow them to reach decisions on the necessary investments given the long lead times for significanttransmission investment. This will make sure, subject to the planning regime, that we have the necessary gridcapacity in place in time to meet the 2020 targets. The framework will allow this investment to take place whilstprotecting customers from the risk of having to pay for substantial investment in new transmission that is notrequired. This is clearly important given the context of rising energy bills.

11. All this is in addition to Ofgem’s existing work through our price controls. For example, we are allowinga 160% increase in investment in the onshore electricity grid, with flexibility for the network operators to gobeyond this amount in response to demand for additional capacity. We are also implementing, with theDepartment for Business, the new oVshore electricity transmission regime which will allow the potential ofmarine renewables to be fully and quickly achieved.

12. These contributions should allow a significant expansion in renewables by eliminating undue networkbarriers.

Protecting Consumers

13. The measures needed to meet the renewables target will not be cheap. This raises particularly importantchoices at a time of high energy prices and rising fuel poverty. The companies understandably wish to protecttheir shareholders from as much risk as possible, and to transfer the risk and potentially more of the costs tothe consumer. However, at a time when around 4.5 million households could be in fuel poverty, we believe itis vital that consumers are protected from excessive or ineYcient transmission costs.

14. That is why, for example, our new incentive package encourages the transmission companies to managesome of the stranding risk that there is not enough demand from generators to use the new capacity once ithas been built. In return for taking on more of this risk, the companies will be allowed to invest early and earnhigher returns. Measures such as this allow us to be more confident, on customers’ behalf, that the investmentsrequested by the transmission companies are genuinely required. At the same time, we want to see more longterm commitments from generators to use their capacity rights—or else make way for new renewablegenerators who are ready and willing to connect.

Ofgem’s Duties

15. Some witnesses have raised the issue of Ofgem’s statutory duties and whether they are appropriate for thechallenges ahead. Our primary duty is to protect consumers. Sustainable development features in oursecondary duties. The above actions have all been taken under our existing suite of powers and duties.

16. It is for Parliament to decide whether these duties are right, or whether they need to change. We can oVersome general thoughts that may be helpful as you approach this issue:

— We are keen that our duties should be broadly consistent over time. This is because unprecedentedinvestment will be needed in the energy sector over the next few years. This in turn requires a stableregulatory regime that gives investors confidence.

— Some proposals for changes to our duties are based on creating twin principal objectives. Thisapproach could involve granting the responsibility to make potentially diYcult trade-oVs. In thiscontext it is for Parliament to consider the scale of the discretion it wishes to grant an unelectedregulator.

— Finally, if we are granted additional duties, it is important for policymakers to consider the powersthat are needed to fulfil them.



17. We would be happy to answer any further questions or provide any additional information that theCommittee may find useful.

30 June 2008



MONDAY 12 MAY 2008

Present Bradshaw, L Powell of Bayswater, LFreeman, L (Chairman) Rowe-Beddoe, LJames of Blackheath, L Whitty, LPaul, L


Witness: Lord Dixon-Smith, a Member of the House of Lords, examined.

Q202 Chairman: Lord Dixon-Smith, thank you verymuch indeed for coming. I think you know thepurpose of our inquiry. We are hoping to concludetaking evidence before the start of the summer recess.Whether we can produce a report before the recess orimmediately we come back remains to be seen, butthe object is to try and oVer some comment andadvice to both our ministers and the Council beforethey consider our obligation some time, we believe, inNovember. I understand you want to try and help uswith an opening statement and then we have anumber of questions. Over to you.Lord Dixon-Smith: My Lord Chairman, I am gratefulto you for both sending me your terms of reference,the questions which you are examining and, indeed,a list of potential questions. I am not quite surewhether I am heading for the dentist’s chair, theexecutioner’s axe, or indeed, riding my first point-to-point! I never thought I would find myself sitting infront of a Committee doing this. I want to look at thisproblem from what I call the other end of thetelescope, the 2050 end. It is actually ratherimportant. I find very little that I can read about whatthe economy is supposed to be doing and what it issupposed to look like in 2050. We pass all sorts oflegislation, the Climate Change Bill, through thisHouse. There was a great deal of interest there in the2050 target of a 60% reduction in carbon dioxideemissions, because, of course, the UN and otherswere already postulating that is not a suYcientcarbon dioxide reduction and that 80% is what thefigure should be. We need to think about that quitecarefully because there are quite strong implications,and although prophecy, as I have heard said, is anavoidable sin there are discernible points which canbe made. It is much easier to consider 80% than it is60% because when you do that it narrows youroptions, so I am going to take 80% as the target. Inany event, I think anybody who listened to the debateon the Climate Change Bill would come to theconclusion that 80% is where we are going as acountry and in my view that actually has to be theglobal target, so it has major internationalimplications for the developing world. We have anobligation, on the other hand, since we set oV theIndustrial Revolution, to show them how toovercome the consequences, so we have a very heavy

responsibility. Let us think about it then from the2050 perspective. First of all, can I say that it isabsolutely fundamental that we have to keep theeconomy going forwards over the period from nowuntil then otherwise we probably cannot aVord thenecessary change. That is the first essential that wehave to think about. If we do that, possibly one of thethings we think about too very seriously is what thismeans in the context of energy use. There are lots ofpeople who seem to think that energy eYciency andeconomy will actually solve this problem for us. Ifyou look at the energy used per unit of economicoutput over the last 30 years, the Science andTechnology Committee did in their 2006 report avery interesting graph, and it shows the rise in GDPand the reduction in energy used per unit of output,but what the graph in the middle shows also, which isthe critical graph that we need to think about, is thatenergy demand is remaining pretty well flat throughthe period, and that is likely to continue as far as I cansee. If we are going to continue to grow the economy,energy demand will continue on a relatively flatplane. I do not think there is a great deal we can do,in fact, to change that, so that we have to think aboutother things, because energy demand will continue ata high level if the economy is growing. The secondthing that we need to think about it is are there fossilfuel uses which we cannot dispense with, and Isuggest an obvious one from the mining industry issmelting. It does not get a lot of public considerationbut it is a chemical reaction rather than a heatprovider, and with the growing demographicproblem globally and increasing economic strengthin Third World countries there will be an increasingdemand for resources and smelting will take a lot offossil fuel one way or another. I would suggest alsoaviation is an essential. It is an essential because,although one can argue about the validity of touristflights to the South of France, the fact is that tourismis a very important factor for many Third Worldcountries, and a major growing point for theireconomies. If it is not that then the French beans thatyou get from Kenya is an obvious example and out ofseason flowers and all these other things, which ThirdWorld countries can provide which we cannot andactually they do it quite energy eYciently. If we weredoing it ourselves we would be using enormous



12 May 2008 Lord Dixon-Smith

amounts of energy. I suggest aviation will need tocontinue. Shipping is slightly more diYcult, Isuppose there is a scale of shipping at which onemight consider nuclear power, but otherwise I thinkshipping is the third use. Those transport uses andsmelting, I suggest, by 2050 will probably occupymost of the 20% of available carbon dioxideemissions. I cannot prove that and anybody who setabout doing that would be a very rash man indeed,but I think that is likely. I am afraid I work on theassumption that we have to change everything else. Isimply observe, en passant, that the all-electrichousehold is of itself already zero emissions, it maynot be energy eYcient but it is zero emissions, theemissions may be emitted by the power generatorsbut the house itself does not make emissions at leastfor that reason. Then we come back to the other pointthat we need to keep in the back of our minds, andthat is that all the non-carbon dioxide emitting formsof energy finish up as a form of electricity eVectively.Can we see a universal economy running entirelypowered by electricity? The short answer is yesbecause the fuel carrier if you want one could easilybecome either electricity, which of course is theobvious one, but the one you need for transportbecomes hydrogen or possibly batteries, batteriesmay work well in cars, but I think the weight penaltywould probably be too heavy for road transport.Hydrogen could also be the energy reservoir in placeswhere you cannot use pumped hydro. The scope isthere. Is there a suYcient source of energy, yes. LordFlowers, who is probably not known to most of youbut was a very distinguished scientific member of theScience and Technology Committee in the happydays when I served on it with him, said once, “Youknow, Bill, mankind only has one source of energy,and that is nuclear and he has a choice, he can havehis nuclear power station here or he can have it 98million miles away, and I know where I would ratherhave it.”, and he had worked in the nuclear industry,and knew it very well. So if you stop and think aboutthose statements, they are an absolute statement ofthe position, all our energy, all our fossil fuels simplystored solar energy altered by geology and time. Isthere solar power, yes, we have got energy runningout of our ears and all we have to do is learn how touse it. The only other thing I want to say by way ofintroduction is all the technologies exist, all right theywill improve, they will develop, they will change and,as I say, we do not know what the pattern will be in2050, but if we need to go for it, it is possible. That iswhere I am coming from.

Q203 Chairman: Thank you very much. That is veryhelpful because it sets in context, over a slightlylonger timescale than we have been looking at, whatthe challenge is in terms of a reduction in carbonemissions. I would like to start and then I am going

to hand over to Lord Rowe-Beddoe. My question isin the slightly shorter timescale which the EuropeanUnion has proposed for the Council of Ministers toconsider later this year, that is to say 2020, only 12years from now. Do you believe in the context ofwhat you have been saying that it is at all credible thatthe United Kingdom can achieve 15% of our energyoutput from renewable sources, and we are definingrenewable sources very specifically as wind,specifically wind turbines, solar, specifically solarpanels, and as far as water is concerned, we areinterested in the barrages? We are going to takeevidence from EDF on La Rance, we are interested inthe barrage across the Severn and perhaps othersources of hydro.Lord Dixon-Smith: Yes, I think it can be done. Thequestion is whether we can get over that wretchedthing, which we all suVer from, institutional inertia.If we take one step back and discuss the question ofestuarial barrages, I do believe that they have a roleto play. The question mark is over tidal streamtechnology which can also produce a great deal ofpower, and I am not sure which will come first. Thelead-in times for the Severn Estuary, as I understandit, is a minimum of 10 years, we have got 12. Will itbe having a major eVect by 2020? Maybe, but givenour institutional procedures even with the PlanningBill, frankly, I have my doubts. Personally, I wouldteam the Severn Barrage with the Humber and theThames. There was an interesting article in theSunday Times, that the Dubai people who have beenproducing the palms there think they can produce acouple of islands across the Thames Estuary andbridge it and provide London at the same time withan additional amount of flood protection. If youproduced barrages instead of bridges, you could thenproduce a great deal of electricity there, you would dothe same on the Humber and, of course, that way youwould overcome the tidal wave, because they are justabout six hours apart on the tidal charts. Then youcome up to the institutional inertia thing. The sameapplies to wind. Personally, I think the wind industryhas got the wrong approach. They are what I wouldcall power station hypnotised and think you have topump this power out into the 220,000 volt grid. Onegenerator can perfectly well be set up to put powerstraight in to the 11,000 volt local main. If you wentand asked most small communities in rural areaswhether they would like to have 30% of theirelectricity generated by wind, most of them I thinkwould say yes. They might object if anybodysuggested putting down five, some of the biggertowns might need five but then they have got a greaterperiphery and you still might be able to do it, youwould have problems with London. I think we needto think about dispersed wind as a way ofovercoming the enormous objections that wind farmsseem to arouse, for which I think the main motivation




is jealousy, to be quite honest. That deals with thewind thing. Tidal stream I have mentioned, I am told,and I can only go by what I am told, that the PentlandFirth has enough tidal power racing through it all thetime to produce the whole of Scotland’s electricitydemand continuously. I cannot answer that, but thatis what I have been told. It has certainly an enormouspower. We can pick up the tidal stream all the wayround the coast, it will be low level generation, but,on the other hand, if you have enough of it, it willwork. It is like the number of wind turbines you putup, if you put up enough eventually you have gotenough power. The question is whether we areprepared to put the manufacturing industry intoplace, and, indeed, overcome the regulatoryproblems. One of the reasons we are doing so badlyin this country, I am told, and the reasonmanufacturers are trying these systems abroad, isthat it takes them only two years to get to go abroad,it takes five years to get to go here. That is dreadful.That is probably the biggest obstacle we face. Is thatsuYcient?Chairman: Yes. It is very helpful.

Q204 Lord Rowe-Beddoe: I was going to lead youinto estuarial power, but you have gone ahead of me.Lord Dixon-Smith: I am sorry.

Q205 Lord Rowe-Beddoe: Not at all. In the way thatyou have talked about it, it is most interesting. Youused the word “inertia”, and I suppose that is anaphorism for leadership. One of the things that cameout in the debate we had in the Chamber was that theSevern Barrage has been talked about and plannedand debated since about 1890. If we listen to yourscenario, we have not the luxury to aVord furtherdelays, not just on that but on this whole question.Therefore, what confidence do you have that thePlanning Bill will achieve what it is supposed toachieve, and greatly reduce the time that is requiredin order to get all forms of renewable sources ofenergy on their way?Lord Dixon-Smith: Of course, this applies to thewhole generating industry, does it not, particularlythe nuclear question. I will just try and answer yourquestion in the context of the Planning Bill. It is stuckin the Commons, as I understand it, at the presenttime, because the ministers have said, quite rightly,that there must be some sort of political oversight onthe question of what should or should not be anational infrastructure project. The diYculty theGovernment are having, as I understand it, is that inintroducing that political control they do not wish toimpose any greater delay. That is not proving to bequite straightforward, as you might imagine. TheGovernment are trying very hard, and I do not doubtthat the Bill will arrive here soon. If it works, and itdoes reduce the planning time, it will be enormously

helpful. I say “if” with some caution, because we metthe CBI a little while ago and it was quite clear thatthey thought this was the answer. The question ofpolitical control had not hit them by then. But, also,the other thing that had not hit them was that thisdoes not exempt any planning application which goesbefore them from all the existing planningregulations, all it does is streamline the procedure bywhich it will be heard. Their applications will have tobe compliant—heaven help us—with existingplanning legislation. One of the merits of the previoussystem was that a planning application actually couldevolve from the initial application to the time it wasapproved and that facility will no longer exist. Theapplication will have to be in perfect form when itgoes to the planning commission and that will bewhat they consider and that of itself will probablymake the process of developing a planningapplication more complex and more diYcult tohandle, in my view. I was foolish enough to start mylife on the county’s planning committee, it took mefive years to realise that all planners were mad. I amsorry, I am being minuted but I do not mind. Let meput it this way, all the wonderful things that we havein this country, which we fight to preserve in societytoday, came about almost exclusively long before theplanners even thought about them. I am a greatbeliever if people have a bit of freedom they willactually do things rather better than we as politicianslike to think they will. I have gone way outside thebrief.Lord Rowe-Beddoe: Very helpful.

Q206 Lord James of Blackheath: I would like to askyou a question in three parts, if I may. First, given thedependence upon collective sourcing within Europeand the dependence of Europe on countries otherthan European countries for sourcing a lot of this,what do you feel about the reliability of continuedsupply from those non-European sources?Lord Dixon-Smith: I think one of the good thingsabout the increasingly globalised economy is that it isbecoming increasingly interdependent and the peoplewho might supply energy, particularly solar power,will find that the income it generates is somethingthey cannot do without. Mr Putin, who is in a slightlydiVerent class because he is not in the solar business,played a very heavy-handed game with his energysuppliers, in my view, and he does not realise howvulnerable he is.

Q207 Lord James of Blackheath: This is not a part ofthe question which had been prepared and agreedwith colleagues but I would like to ask you thisanyway. Am I getting totally paranoid or would youshare any of my concern that the dependence uponsourcing of energy from Russia having to flowthrough France has eVectively created the first plank




of the 19th century balance of power which causedBismarck such dismay and could it possibly occuragain and unsettle the whole of the Europeanstructure?Lord Dixon-Smith: I think that is too pessimistic.

Q208 Lord James of Blackheath: Pray God it is.Lord Dixon-Smith: Indeed, I entirely accept thatremark, but I think it is too pessimistic.

Q209 Lord James of Blackheath: It will needmanaging, I think.Lord Dixon-Smith: Everything needs managingnowadays. We like to think it will not work if we donot manage it.

Q210 Lord James of Blackheath: We went on Fridayto Scroby Sands wind farm and, of course, we allthink we are absolute experts in wind farms now butcertain things came out of that day trip which arevery much in our minds at the moment. One of themwas the fact that there is a major problem in theintermittency of the supply that they can maintain,which in turn knocks on to the fact that they cannotat moments of overproduction, compared with themean average they need to maintain, achieve anystorage. Is this simply a matter of investment or is ita technical problem, which is insurmountable, interms of storing to be able to even out the supply?Lord Dixon-Smith: From what I have read, and I amnot an expert, I think it is a technical problem, not aninsurmountable one. The technical aspect of theproblem is the economic cost of providing some formof storage, as indeed is the whole question of theintroduction of, if you like, these new energy sources.I have an acquaintance who has his own windturbine. He is very pleased with it, it does very well,it generates a great deal of his electricity, it generateshim a bit of income with the electricity he supplies tothe grid and so on and so forth. He also getscertificates for it which gives him income, but he is ona 60 year payback period at the present time. Thesame argument applies, we could apply it to carbonsequestration, will it work or will it not, I have heardall sorts of costs. With some of the figures I haveheard carbon sequestration is not a solution, it is tooexpensive, and so it goes on. I am sorry, you have tolook at the individual case.

Q211 Lord James of Blackheath: Looking at thatparticular issue, one wonders whether it knocks oninto the third area of the question I have for you,which is the steps which ought to be taken now by theEuropean Union generally and the UK in particularin order to ensure security of supply into the future.I am not sure whether you said it is the lack of easilyaccessible technology or because we cannot fund theachievement of that technology at this moment to

overcome that particular problem we just thought of,because looking at the wind farm on Friday, I thinkwe were all very impressed at the unanimous view ofthe management that there is a huge supply chainproblem. When I go back to my early days in theNorth Sea in the early 1980s, when that was justbeginning to be an emerging area of salvation for us,it was noticeable that the Scots did one thing verydiVerently, and I see no parallel with it today. TheScots independently, whether out of patriotism orjust an appetite for investment, invested hugely in theperipheral activities such as the necessary boats forconstruction and for servicing the oil rigs in theNorth Sea. I do not see any comparable structure ofinvestment today. They were bemoaning the fact thatthey cannot build and extend the wind farms becausethere are only two boats available for theconstruction process, and they are in constantdemand elsewhere so there is a long queue. Is this notan initiative that Government ought to be takingnow, just as the Scottish investment community didin the early 1970s, and start to build on a commercialbasis the necessary boats to create the infrastructureto build more farms?Lord Dixon-Smith: Have you not answered your ownquestion? I think you said the Scottish investmentindustry?

Q212 Lord James of Blackheath: Yes.Lord Dixon-Smith: Well, is not the answer then withthe world of business and commerce?

Q213 Lord James of Blackheath: It probably needssponsoring by Government, and it needs fiscalbenefits to do it or something.Lord Dixon-Smith: I will go with you this far. At themoment there is an enormous lack of clarity aboutthe determination of this Government to goanywhere on the issue at all and I think that is a verydeep problem. You know what I said aboutinstitutional inertia.

Q214 Lord James of Blackheath: Probably theanswer to my question is yes, and the Governmentshould not approach it from that direction.Lord Dixon-Smith: I do not think the Governmentshould actually do it is the diVerence between us. Ithink unless the Government make it clear that this isthe sort of thing that has got to be done it will nothappen.

Q215 Lord James of Blackheath: I can think of manyworse things that the Government could waste itsmoney on than building another four ships at thepresent moment for the construction of these windfarms.




Lord Dixon-Smith: So can we all! Let me go back towhat I said earlier. You are talking about servicingthese enormous wind farms out at sea but there is aproblem with the whole grid issue. If we could go todispersed land turbines, we would overcome most ofthat problem and, not only that, if you were puttingpower into the low level grid you would not have theenormous transmission losses that you do by shovingpower through the high level grid. We would actuallyhave a much more eYcient system.Chairman: That is a very interesting point. If I can puta last question which is well inside your personal fieldof experience and knowledge but where you havealready helped the Committee, and that is onplanning and local planning permissions inparticular. If we look at what the Committee hascalled micro-generation beyond wind turbine, theodd solar panel et cetera, there are two questions theCommittee need your advice on. First of all, how canwe improve the existing planning system at the localauthority level and, secondly, what changes wouldyou like to see or do you believe might be helpful inthe Planning Bill in terms of speeding up institutionalinertia? I will just ask Lord Bradshaw, just before youanswer that, if he has anything to ask.Lord Bradshaw: That was exactly the question I wasgoing to ask.

Q216 Chairman: I see. Back to you.Lord Dixon-Smith: I would amend the GeneralDevelopment Order to permit houses to installphotoelectrics or wind or anything else withoutplanning permission at all. I would probably set it atsomething like 71

2 KVA or even 10 would not beunacceptable in my view. This would take care ofalmost any normal household, and, of course, itwould cause a great deal of fury in many


Witness: Mr Simon Roberts, Chief Executive, Centre for Sustainable Energy, examined.

Q218 Chairman: Mr Roberts, thank you very muchindeed for coming. I am going to ask you, for therecord, if you would tell us a bit about yourbackground and your responsibilities. We are notgoing to go through the questions that have beencirculated in advance, but please do pick on any ofthe topics that you feel best able to comment on forour benefit. After your opening statement, if youhave one, I will ask a question about achieveability ofthe 15% target and then I will turn to Members of theCommittee to ask questions that they believe arerelevant. Mr Roberts?Mr Roberts: Thank you, my Lord Chairman. Myname is Simon Roberts, and I am the Chief Executiveof the Centre for Sustainable Energy, which is acharity based in Bristol. We have been working, as

communities. I can imagine conservation areas goingcorporately wild about the issue, but I think we haveto be prepared to accept that sort of change. If youthen consider the wider issue, part of the question isaccess to the grid. Completely coincidentally, I amsponsoring a dinner here later in the summer by afirm who are specialists in access to the grid. They aredeveloping a whole host of instruments to helpordinary people over this particular hurdle. How farthey will be successful, I do not know, and it is not forme to advertise, but this work is going on, and therewill be others in the field. The other thing, I think,that lies behind your question, and the reason thatGermany has been so successful, particularly with thefield of photoelectrics, is that they have for a longtime had a sensible lead-in price, and I think that alsowould encourage people. I go back to what I said, inthe end for individuals and everybody else, this is aquestion of economics. People will do these thingsnot exclusively because they are convinced they arethe correct thing to do but also, particularly, if theyhad some hope of their being reasonably economicor, let us put it this way, not too un-economic. Thereare a lot of people in the countryside, in my view, andin the towns too who would like to do more, but atthe moment the fiscal penalties are too great. That isnot to say that technical developments will not takecare of some of those, I have seen photoelectricmanufacturers predicting economic competitivenessin less than five years. That is going on. It has nothappened yet, but there is a lot to look forward to.

Q217 Chairman: Thank you very much.Unfortunately, time has beaten us but thank you foryour very practical advice. We are grateful for yourtime.Lord Dixon-Smith: Thank you very much. You let meoV lightly!

the name might suggest, on sustainable energy fornearly 30 years now. In relation to this particularsubject area of renewable energy, I have been amember of the Government’s Renewable AdvisoryBoard since it was set up in, I believe, November2002. I have chaired its finance and investmentworking group, which particularly helped what isnow called BERR, rather unfortunately, but used tobe called the DTI, to understand the need to engagevery clearly with the finance and investmentcommunity to understand its needs in terms of theway one creates support mechanisms, and tomaintain that dialogue on the basis that most of thefunding for renewables was going to come from theprivate sector equity and debt finance and not fromthe renewable energy developers. We have done work



12 May 2008 Mr Simon Roberts

particularly on community benefits of renewablesand worked for the Renewables Advisory Board,which maybe we will have a chance to talk a littlemore about. Over the last three years, again for theDTI, we have trained, or run workshops, for nearly2,000 members of the planning community inEngland, both councillors and also planning oYcersand planning inspectors to improve their knowledgeof renewable energy, particularly wind energydevelopments, and the role of the planning systemand planning policy that surrounds those. I do thinkthis particular Directive presents a real and verywelcome challenge, particularly to the UKGovernment, because in my view none of the leversand tools it currently has can be yanked that muchharder to produce much faster deployment ofrenewables in the UK. Having said that, myexperience from sitting on the Renewables AdvisoryBoard is that it still seems to be looking in the sametoolbox. It has a very limited perspective of what isappropriate. It is very tied into the idea that it has theright perspective on what constitutes eVective marketmanagement and, as a result, it has failed almostentirely to learn any lessons from abroad and applythem in the UK. We have already heard from LordDixon-Smith the German example, but you couldturn equally to Spain for the deployment of windenergy, for example. Last year, they put in 3,600megawatts of onshore wind, and probably capturedalmost all of the industrial benefits of doing so byvirtue of having aligned their industrial policy, theirplanning policy and their support mechanism policy.In the UK we achieved just an eighth of that, orpossibly a seventh if one is being generous. Yet theGovernment still holds on to the idea that it has themost pure and perfect support mechanisms in spite ofthe fact that it is not capturing industrial benefits, it isnot achieving that scale. It also has high risk supportmechanisms compared with overseas where theyhave much lower risk support mechanisms which aremore predictable and create less risk premium in thesystem and, therefore, produce lower cost finance. Asa result, in both Germany and Spain you have a widerdiversity of ownership of renewables, you have muchmore sense of community belonging, becausecommunities benefit as a routine and systematic basisof projects going forward, whereas in this country weare dependent on a high-risk support mechanism,benefits to communities being at the largesse of thedeveloper rather than anything systematic, and as aresult I think we are falling well behind. That wouldbe fine if the Government was now learning andlooking abroad for ideas but I do not see that yet andI think that is a major failing, and in spite of the factthat this is an EU Directive it does not seem to belooking to the EU for examples. I will stop there andanswer questions, but there are a number of points. Ishould say, I know very little of the conditions which

aVected Bismarck, and, no, not a lot of the EU. Mymain focus is UK policies, so if we can stick to that,that will be fine, please.Chairman: Very helpful opening remarks.

Q219 Lord Bradshaw: I will only endorse yourcomments about Spain so far as the railways areconcerned because having ridden on the new line toBarcelona it is absolutely perfect and was constructedvery quickly, to time and everything works. This isabout alignment of policy, I absolutely agree withyou. However, can I go back to what Lord Dixon-Smith was saying because you did hear him. It doesseem that the Planning Bill is going to be axiomaticin getting anything done and yet he is already sayingthat there are serious flaws. Do you share his view?Mr Roberts: I do. I am not sure it is necessarily flawsin the Planning Bill as opposed to the way we arethinking about planning. We did a study for theRenewables Advisory Board around communitybenefits, and what was common to Spain, Germanyand Denmark is that decisions around individualdevelopments are taken by oYcials, not by electedmembers, and the democratic accountability focuseson the policy framework and the plan, so youeVectively decide what you are going to have in anarea and then individual decisions are made againstthat basis. I do not see that really coming through inthe Planning Bill. I think taking some of the decisionsinto a more independent planning commission issensible and to put in much stronger focus onnational policy in that planning commission is goingto be important. But I do not necessarily see the samedrive going into the local planning decisions whichare actually where most of the renewable energydecisions are going to get made over the next 12years. I do not see the same drive and dynamismbeing applied to that, as would occur in the above 50megawatt line, which is going to be for those. I do notsee yet that it is followed through. I still think we havenot done enough on the basic process of planning, sowe are still looking at individual decisions, which canget tweaked on the basis of quite partisan views andquite limited views at a particular point in time,rather than thinking more on planning policyframeworks and development frameworks covering amuch larger area. Each decision can be taken in eVectagainst those by oYcials rather than by individualmembers each time.

Q220 Lord Bradshaw: Stepping outside theAdvisory Board of which you are a member, whatwould you do if you were told that you have got toreduce carbon used by energy very dramatically?What steps would you take as of now?Mr Roberts: I think the first thing I would do is, ratherthan just talk about aggressive energy eYciencypolicy, I would actually implement some so that you




look at the demand for supply. This whole Directiveis a percentage, it is not an absolute amount and,therefore, you should do much more and focus muchmore eVort. I do not see that at all within BERR.There are just comments around the fact that energyeYciency is going to be done, but somewhere else ingovernment. That is one thing, and also integratethat into a proper policy around the existing ClimateChange Bill infrastructure. The other thing I woulddo is simplify much more the support mechanism forrenewable energy so one looked more at the Spanishmodel of having what in eVect is a stepped feed-intariV. They change it each year, but there is asystematic process, which is much lower risk, muchmore predictable, and therefore creates much lessfinancing premium, and where they have alignedplanning, industrial sector development and supportmechanisms. If you have those things lined up thereis an awful lot of space in the system to do it. Theother thing I think that is needed, and it may come upin questions, is that the Government needs to stoplooking at regulation of the grid as being somethingto do on behalf of consumers as though their onlyinterest was in how much they paid rather than whatenergy system was developed. I think one needs tolook much more at a grid system that is managed to,in eVect, predict and provide, going back to a slightlyolder mechanism, but one taking the lessons we havelearned from the last 20 years of doing it the way wehave with much more following demand anddevelopment. Actually we are going to need to put inthe infrastructure and plan that grid on the basis ofknowing where the resource (wind, whatever it mightbe) is and planning the provision of that over time,not waiting for developments to come forwardthrough planning before the grid comes forward. Wecould still meet targets but they will just be an awfullot later, and probably too late in terms of the otherambitions we have to curb carbon emissions.

Q221 Lord Paul: What can we do about movingfrom the Renewable Obligation Certification to afeed-in tariV without ruining the confidence in thepolicy community?Mr Roberts: We might ruin some confidence in thepolicy community, but that is not the interestingcommunity, it is the investor community, the peoplewho have put their money into projects or areplanning to put their money into projects. I actuallythink the Renewables Obligation, while in the pastone would say, “do not keep changing it because theinvestor community needs some sense ofpredictability and certainty”, that does not mean it isthe ideal mechanism. I think what we have seen overthe last five or six years is a fairly consistent andstrong sense from the Government that they areserious about renewables, which has now been

embedded within the finance community. I do notthink they think they are about to pull the plug—excuse the pun—pull the rug, to use a diVerentanalogy, from underneath the investmentprogrammes that have gone on. I think what youhave got now is an opportunity where theGovernment has built up that confidence andunderstanding, it could now introduce completelydiVerent support mechanisms without underminingthat confidence. The government understands veryclearly the notion of grandfathering and how tosupport existing investments while bringing in newprogrammes, new support mechanisms. I was on thesteering group of a study that the Carbon Trust did afew years ago, which eVectively said, ”if you structureit right and are very clear about it and make itpredictable and reduce the risk in it, the investmentcommunity will lap it up”. The only problem youhave got with the Renewables Obligation is theGovernment tends to tinker and make it morecomplicated and less predictable, and that issomething the investment community does not like.As long as every time you are applying these basicthings; is it more predictable? Is it lowering the risk,like something like a feed-in tariV or a stepped feed-in tariV, or, what in that study was called a renewabledevelopment premium, something which iseVectively politically controlled but manages toimprove the investment return so that it was aninvestment that people wanted to make. Then I donot think you are going to have an issue with theinvestment community. If you bring them in, talk tothem, plan it through, make it predictable, I thinkthey will probably favour it rather than reject it atthis stage.

Q222 Lord Powell of Bayswater: Just leading onfrom that, would you also say that really supportschemes need to be harmonised across Europe andthat would give the investor community greaterconfidence for the basic support scheme? Would it bethe feed-in tariV?Mr Roberts: I am not sure whether you need to partlybecause the resources are diVerent in diVerent partsof Europe, so it would not necessarily be appropriateto give a wind farm in Scotland the same support asthey would give it in a rather less windy part ofmiddle Germany.

Q223 Lord Powell of Bayswater: Not the same levelof support but the same instrument of support?Mr Roberts: I am not entirely convinced that isnecessary, and I think what we would find is the EUand the various Member States spending an awfullylong time harmonising their support mechanismwhen actually we could get on and deliverprogrammes. I think what is needed is for the




Government to look to what has happened in othercountries and take some lessons from that. What wehave seen is that support mechanisms which havemore of the characteristics of feed-in tariVs seem todevelop more quickly, and ultimately at a lower costto the consumer. There has been the Government’sargument for using the RO, yet there is no evidenceany more to support that at all; in fact it is a veryexpensive per megawatt installed way of supportingrenewables. As an organisation which works on fuelpoverty as much as we do on carbon emissionreduction, that seems to me to be something whichthe Government ought to be taking very seriously. Ido not think you need to harmonise support acrossEurope. I think you need to look at making sure thatthe investment opportunities in the UK look asinteresting and predictable and low risk as they do inother parts of the EU but also, much more broadly,in other parts of the world.

Q224 Lord Powell of Bayswater: Do the Guaranteesof Origin Certificates make any sense without aharmonised European support scheme? How willthey be traded?Mr Roberts: I am not entirely convinced they shouldbe traded, and certainly I would not see the UK,being an area with a very good renewable energyresource, as a country that ought to be looking toachieve its obligations from investing in countriesoverseas. If they were, or if British companies weredoing that, it is probably a sign that the UK has notgot its support mechanisms right rather than becausethe resources, in terms of renewable resources, werethat much better somewhere else.

Q225 Lord Powell of Bayswater: Maybe a timingissue because there is a deadline which cannot be metwithout doing this, you know that?Mr Roberts: Maybe come back to you in 2018 on thatone! I just actually think at the moment, let us get onwith it and stop worrying and fiddling around withwhether we are going to hit 14.7 or 15.3%, and howmuch we might be able to trade. It is fairly obviouswhat we have got at the moment is not going to workto get anywhere near that kind of level. There areexamples from overseas that we could readily importif only we could get oV our holier than thou, we havegot pure market mechanisms, we must be better thananyone else, and we have got competition so we mustbe somehow better, high horse. Back oV and learnfrom what they have managed to achieve in Spain.From a standing start five years, after we started withthe NFFO, they have got to the stage where they arenow installing twice as much per year as we haveinstalled in the last 15. It seems to me there is a lessonto be learned there.

Q226 Lord James of Blackheath: Is that just landversus land or is that all methods? Are you taking thetotality of land and sea-born wind farms together inthat or are you talking land versus land?Mr Roberts: If you just include onshore you look farworse in the UK compared with Spain. They did3,600 megawatts of onshore wind last year, and wedid, including oVshore, something around 500 or600.

Q227 Lord James of Blackheath: Does that, MrRoberts, bring us back to the point I was debatingwith Lord Dixon-Smith about the supply chain beingconditioned by the infrastructure of equipment thatis available to sustain the development andproduction of these farms?Mr Roberts: Yes. I think there is a chicken and eggaspect to that, but I also recognise what you aresaying about the role government can play instimulating supply chains in developing capacitywhich would enable industrial benefits to be capturedhere rather than somewhere else and to scaledevelopments to overcome those kind of obstaclesyou are going to get if simply you wait for the pullfrom the market to pull industrial developmentthrough. What they did in Spain was eVectively say,“If you want to put up a wind turbine in Galicia andget planning for it, you will need to source 60% of thecomponents for that from within Galicia”. All of asudden there is a lot of manufacturing capacity inGalicia associated with it. Now, you say that to theDTI and they will basically talk about EUprocurement laws and how you cannot possibly. Youtalk to people from Spain, and they will say, “I do notsee anyone from the Commission coming andchallenging us”.

Q228 Lord James of Blackheath: Is your approachto this then that the British Government ought to beresolving this by, first of all, a dialogue with Europeto establish what can be done and then going out anddoing the maximum?Mr Roberts: I do not need to teach this Committeethat Britain tends to take a much stricterinterpretation of every single law that ever comes outof Europe than any other part of Europe does and, asa result, we tend to never really stretch the boundariesand never really find out. I think there would be greatbenefit in understanding how those industrialplanning and support mechanism alignments can beachieved within the confines of European law.

Q229 Lord James of Blackheath: In contrast to LordDixon-Smith’s response, I think you are saying thatit is much more a government policy initiative whichneeds to be taken rather than an investmentcommunity initiative?




Mr Roberts: The investment community is going toinvest in things they see they can make money out of.Putting money into building a ship to put piles in theground for wind turbines oV-shore is quite a bigdecision to make when what you are actually waitingfor is to see how much of that development is goingto take place. At the moment the only mechanism theGovernment uses is eVectively to use the RenewablesObligation to pull development through by providingsome benefit at the end. There is a lot of evidencefrom other countries that you need to intervene atmore places along the supply chain, rather than justthe end, for example the output support in order toget industrial scale development, sectordevelopments—we are talking about an oVshorewind industry sector and an awful lot of money beinginvested in that over time—if you want to get thatgoing simply paying a little bit extra for the electricityit will produce will not drag it through quicklyenough at scale where the UK will gain the industrialbenefits of that unless you also intervene. I am also aboard member of Regen South West, which is asustainable energy agency for the South West fundedby the RDA, the regional development agency downthere. They did a bit of work a few years back, to lookat what role the RDA, which is in eVect an arm ofgovernment, could play in stimulating marineenergy, “what was the missing bit?” In eVect whatthey identified was the missing bit was the connectionfrom the sea to the land and the planning permissionassociated with connecting up with that. They nowhave a programme which is going forward with theRDA support and some input from governmentfunding to do what is called the wave hub. This iseVectively best described as a long extension leadwith a four gang socket at the end of it under the sea,about 30 miles long, coming into ground at NorthHoyle in Cornwall. That will provide four privatedevelopers with their own money, and probably somegovernment grants as well, a pre-consented testingground for their marine energy devices, wave energydevices. This is public money being used to clearthrough what would otherwise take each individualdeveloper an awful long time to sort out because thealternative is each developer has to go and find a wayof getting a 30 mile cable laid to North Hoyle so it cantest its device out. That seems to me an excellent useof public money. There will be almost no publicbodies involved in the delivery of it, it will be done bythe private sector, because they can do those kinds ofprojects better, generally speaking, but it will havepublic money to support it and the publicengagement of stakeholder process identified it andled to its development.

Q230 Lord Whitty: On the planning side, I think Iheard you say quite early on that the local planningframework needed to be positive, and in some other

European countries, I think specifically, Spain, thecommunity supported these projects because thecommunity benefited from these projects. Bearing inmind you are talking about consumers and prices atthe end of the day, are you saying that in relation tosome of these projects the specific communitybenefited in the sense that they had cheaper electricityor growth of jobs or whatever and that the localplanning framework facilitated that or are you sayingsomething rather more general?Mr Roberts: Both general and specific probably at thesame time. What I will do is send to the Committee asummary of the report we wrote because it was tryingto piece those things together. EVectively what itshowed was in Spain, Denmark and Germany—thethree countries we looked at and compared with theUK—there are, through various diVerent ways: inSpain principally industrial benefits and thereforejobs within the region, and there is a very strongregional identity in Spain; in Denmark much morethrough local ownership and the co-operativestructure they have got there; and in Germany simplythrough a very, very dispersed ownership structurefor most of the wind turbines which have been put—and in some cases, in one of the states, they have afund which provides a certain amount of euro/centsfor each metre of vertical structure in the landscape,a rather Teutonic solution, but one where there is avery clear framework in which in the community—and you can define that in all kinds of diVerent ways,how big or small it is—there is a real sense that this isnot something being done to them by an outsidecommercial often not even UK-owned interest butsomething which is being done partly by peoplewithin the community or people who are benefitingthe community with jobs or where there is a very clearframework of growth and support for that. I think weneed in the UK to look at how we make the benefitsthat flow into the communities a much moresystematic and routine part of the development. Andwhether that is by simplifying support mechanisms,so a wider range of people can get involved easily indevelopment rather than being a rather high riskprocess, I think it is probably more, at this stage in thegame, about starting to set standards for the kind ofcontributions that wind energy development willmake into funds which can then be used for goodworks within the community and to make thatsystematic and routine, and set benchmarks for itrather than leave it at the largesse of the developer. Ithink developers will talk about them being goodneighbours and opponents will talk about beingbribed, but I think there is a very clear justification;the wind does not belong to anyone, if you areputting up wind turbines you are farming thecommons in eVect, and I think there is a good case forarguing that some of that should be put back intosome common fund for the common good of the




community. We have done a community benefitstoolkit for the DTI and Renewables Advisory Boardwhich drew out a lot of these issues. One of themobviously is where you draw the line around thatcommunity, who controls it, how you make decisionsaround that, but at the moment that is completely adhoc, completely at the largesse of the developer, localauthorities get involved in it but get it muddled upwith planning and economic development and arenot clear about it. It needs some more systematic andclear process so that it is very clear that localcommunities will, and quite transparently, benefitfrom renewable energy development in their vicinity.

Q231 Lord Whitty: How do you see that beingdriven through the planning structure that we have?Is it an initiative which the Regional DevelopmentAgencies or the regions could drive by their role as acatalyst for this or is it something which needs tochange systematically within the planning systemitself?Mr Roberts: The planning system cannot takeaccount of any of those kind of things which I thinkis a fault. When we did the original study one of therecommendations was you needed to start looking atthe economic benefits which can accrue locally assomething which is material within the planningsystem, and at the moment they are outside it. I thinkthat becomes a diYculty in relation to wind so youend up with this rather purist planning decision andthen the economic development side rather separate.It seems to me that does not create clarity. You havesome local authorities now, particularly in Scotland,where they insist on some renewable energycommunity fund being made but declare that it iscompletely independent of any planning decisionthey might subsequently make. It is basically a messat the moment and it needs to be resolved and wouldbest be resolved by setting some very clear nationallyagreed benchmarks for the level of contribution thatwill be made from any renewable project into a fundwhich will be organised for the community good andthat may be organised on a regional basis or a localauthority basis. I think those kinds of things mayvary from region to region and where that is clear anddecisive. I am not sure at this stage whether you

Memorandum by the British Wind Energy Association

1. The British Wind Energy Association (BWEA) is the leading UK trade association in the field of renewableenergy, with over 350 corporate members representing the large majority of the wind energy business in thiscountry. Wind energy is the fastest-growing renewable technology in the UK, and will make an increasinglysignificant contribution to our electricity supplies over the next decade and beyond. BWEA also representsthe interests of the emerging wave and tidal stream energy sector, building on its experience in the developmentof oVshore wind. We therefore welcome the opportunity to submit evidence to the Sub-Committee on thesubject of the EU’s Renewable Energy Target.

would even need to legislate for that. I think youcould probably set up something which workedinitially on a voluntary basis and you could thenbuild it into basically common practice. You are notsure, maybe I am just not being clear enough.

Q232 Lord Whitty: You did say initially that weneeded to look at this aspect of the planning processas well as the big infrastructure projects.Mr Roberts: Yes.Lord Whitty: If we were to do this for the smaller onesthen I think you would need to look at the planningsystem and as we know the Planning Bill is comingthis way very shortly. Do you have any ideas!

Q233 Lord Rowe-Beddoe: A very quick question. Asyou are Bristol based I must ask you, do you have acomment on the inquiry or the proposal for a SevernBarrage?Mr Roberts: I have been around in Bristol for too longto have really much of a thought on that because ithas flowed in and out like the tide, basically. My senseis that it is a big technological lever that theGovernment is desperately trying to pull on to hopethat it can fill in a big gap in its calculations as to howit is going to hit targets. It strikes me that it isincredibly capital intensive. There are a lot ofunanswered questions. It suVers the usualengineering problem of trying to extract all of theenergy out of the Severn rather than just take some ofit out which would reduce a lot of the impacts. And Icannot at the moment see any way in which it wouldbe funded. I think there are also some importantissues around its impact on the grid because, while itis predictably intermittent, it actually will beproducing power at various diVerent times. Itbecomes much more problematic to deal with a verylarge project like that, and Graham Sinden at theCarbon Trust has done some interesting work onthis. If you have a very big project like that producingpower with the tide (so predictably), the balancingissues ensure that the real power you can count on thesystem is much less than you might imagine and itcauses all kinds of problems in relation to that.Chairman: Thank you very much indeed for comingand for your very clear and interesting evidence.



General Questions

How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target?

2. The contribution of renewables to the EU energy sector was 8.5% of overall end use in 2005. Much of thisenergy was produced by large hydroelectric generators, though there was also a significant contribution frombiomass in a number of forms. While there should be some leeway for growth in use of biomass, large hydrois likely to have reached a plateau: apart from a few exceptions at the margin, potential sites are oV-limits,primarily for environmental reasons. The growth required for the 20% target to be met in 2020 will have tocome from other sources.

3. Fortunately, there are a number of technologies that are growing rapidly and will be making verysignificant contributions in 2020. Sources such as solar, in both thermal and electric forms, geothermal energy,accessed through heat pumps, and biomass and waste technologies are outwith the expertise of BWEA; theirproponents will lay out their views on delivery, while we will reserve our comments to the technologies of wind,both on- and oVshore, wave and tidal stream. These latter forms will be vital to the UK meeting its share ofthe target.

4. According to figures from the European Wind Energy Association,1 across the EU, there were 56GW ofwind power installed at the end of 2007, 1GW of which was oVshore. This capacity generated 119TWh(10mtoe), 3.7% of the Union’s electricity demand. Wind was thus generating about one-quarter of the EU’srenewable electricity last year. The European Commission has calculated that 34% of the EU’s power will haveto be renewably-sourced if the 20% target is to be met, given the expected contributions of renewables for heatand transport, so capacity able to provide a further 20% of power demand must be developed in the next 12years.

5. EWEA’s projection for 2020 is that 180GW of wind power will be installed in 2020, 35GW of which will beoVshore. This capacity will generate 477TWh (41mtoe), equivalent to between 11.6% and 14.3% of EU power,depending on the level of overall demand expected in 2020. Wind will thus be providing about half of theincrease in renewable power required. It is reasonable to expect other renewable sources to collectively providethe rest, though BWEA will leave it to others to comment in detail on the feasibility of those contributions.

6. In the UK, 41% of our energy is used for heat, 37% for transport and 22% in the form of electricity. Weare starting from a very low base of renewable energy use: the current UK share of 2% is mostly in the formof electricity generation, where 5% of our supplies are renewable, while renewable heating and transport fuelsonly make very small contributions to their sectors. Not only are contributions from biofuels and renewableheating small, the policy agenda to drive their implementation is much less advanced than for power, and sotheir growth will be slower than is possible in the electricity generation sector. From bases of well under 1%in both cases, the most that can be expected from each is 3–4% of UK energy supplies. Renewable electricitywill therefore have to be contributing half of the target, perhaps 7.5%; given that power is only 20% of overallenergy, renewable power will have to make up at least 35% of UK electricity supplies in 2020 if we are to meetour target, possibly more.

7. Of the available renewable power technologies, wind is the only source that can deliver in the bulkquantities that will ensure the target is met, given the development of the technology and the resource that theUK has—the best in the EU. Other technologies, particularly the marine sources of wave and tidal stream,can make a contribution by 2020, though major growth is likely to be after this date. Were Government todecide that it is desirable to build the Severn Barrage, this could be under construction by 2020, but it isunlikely to be generating.

8. Wind is a mature technology onshore and the challenges are primarily about planning and grid availability,though attention will have to be paid to the funding mechanism in order to ensure continuing developmentthrough to 2020. Current costs are well-defined for onshore wind, though uncertainty remains as to whichdrivers of cost will be most prevalent in the future, and thus how the overall cost will develop.

9. OVshore wind presents diVerent challenges as the technology will need further development to allow its fullcontribution to the 2020 target to be realised. This is required to move into the deeper water sites, furtheroVshore, that will be required to reach the maximum contribution. Since the necessary innovations in turbineand foundation technology have not yet been brought forward commercially, the costs to build thesedevelopments are unclear. The regulatory regime for the oVshore grid is untested as yet, and the reinforcementof the onshore grid necessary to accept the power produced is yet to be planned, let alone procured and built.EVorts are also required to build the industrial capacity in the UK to deliver the volume of equipmentrequired.1 Pure Power: Wind Energy Scenarios up to 2030, EWEA, March 2008



10. Wave and tidal stream technology is less well developed than even oVshore wind, and so presents the mostdiYculty in forecasting deployment and costs. The UK has a significant opportunity to develop a world-leading industry here, however. The consenting issues for the marine renewables are not dissimilar to oVshorewind, and so there are key synergies here that can be exploited.

11. In BWEA’s view, if the challenges to developing these resources are met, then capacities of 13,000MW,20,000MW and 1,500MW of onshore wind, oVshore wind and marine respectively are entirely possible by2020. These would contribute approximately 10%, 17% and 1% of UK power in each case. Therefore, nearly30% out of the over 35% needed to meet the target can be obtained from wind, wave and tidal stream; existinghydro will still be generating then, providing 2–3% of our power, so there will only need to be smallcontributions from other sources. If the Severn Barrage goes ahead and is counted towards the target, it couldbe providing a further 5% of the UK’s power. Further contributions from wind, wave and tidal stream couldbe brought forward: for instance, the UK Government has started a process that will see sites for oVshore windawarded that would enable up to 33GW of this source alone to be delivered, though to greatly exceed 20GWwill need very strong Government drive, implemented immediately.

How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Packagein particular?

12. BWEA believes the renewables proposals are consistent with EU energy policies in general. Mostimportantly, the increase in contribution from renewables will be vital in meeting the EU’s objectives onreducing carbon emissions. The 477TWh of wind power forecast by EWEA for 2020 should mean 328mt ofCO2 emissions are avoided, 44% of the amount required to meet the Union’s target of reducing emissions by20%. Development of renewable energy will also reduce the import dependence of the Union, which is a keyobjective (see below). Wind power in particular has been instrumental in increasing competition in theEuropean power sector, with new players gaining a foothold through development of wind projects.Renewables can also improve the EU’s competitive position in line with Lisbon objectives: wind power inparticular is an area where Europe shows technological leadership.

13. In BWEA’s and EWEA’s view, the Third Energy Package, and in particular the proposals on ownershipunbundling of grids, is entirely complementary to the proposals on renewables: without movement towardsthe level playing field the Third Package aims to provide, the renewable objectives will be more diYcult toreach, while the public policy objectives of requiring more renewable energy on networks can be incentivisedwithout distorting this playing field.

14. To what extent are these targets capable of improving the EU’s security of energy supplies? The extent towhich the EU’s security of supply is improved by meeting renewable targets will depend on which sources ofenergy are displaced. With the emphasis on electricity as described above, the fuels displaced will be mostlycoal and gas: the more gas displaced, the more imports are avoided, since a greater proportion of coal isproduced within the EU; the more coal displaced, the higher the carbon reduction benefit. In any case, the useof renewables should primarily displace imports, given that these will often be from higher-cost and/or riskiersources. If the increase in renewables from 8.5% to 20% results in 10% of our energy not being imported, thatwill mean a significant reduction in the EU’s energy dependence, which is currently running at 50% and wouldbe 65% in 2030 on current trends.

Grid Access

How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energygenerators?

15. The existing directive has had mixed results in promoting access to the grid for renewable generatorsacross Europe. While such generators are guaranteed transmission and distribution of their power under thelegislation, the weaker provisions on access (“[Member States] may also provide for priority access to the gridsystem of electricity produced from renewable energy sources”—emphasis added) has allowed EU countriesto continue inconsistent systems, leading to patchy promotion of renewable access. In some countries thisweakness in the directive has allowed vertically integrated power companies to be obstructive to newrenewable generators, where these have been perceived to be a threat to the generation side of their businesses.In general, however, the issue of access is tied up much more with the building of new grid capacity, and thedelay that this causes, rather than procedures surrounding grid entry.



16. In the absence of a liberalised market across the EU, the UK government must not undermine eVorts topromote renewable energies through regulatory incentives relating to grid access (as proposed by theEuropean Commission in Article 14 of the draft directive). Priority access to transmission and distributiongrids for electricity from renewable energy sources (as proposed in Article 14) should be interpreted andimplemented along the same principles and criteria in the diVerent member states, in consultation with thestakeholders, so as to correct and avoid market distortions. This should be reflected in the relevant harmonisedtechnical and market codes, to be drafted according to the procedure that will be set once the Third EnergyPackage is agreed.

To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is itconsistently a problem across all Member States?

17. On the whole, the issue of access to grids is a lesser problem than the building of new grid capacity toaccept renewable generators. What might be tied up with “access” as more of a problem is balancing andstability of networks: directive 2001/77/EC dictates that transmission and distribution for renewables areguaranteed “[w]ithout prejudice to the maintenance of the reliability and safety of the grid”. As networks relyon higher proportions of variable renewables like wind power, the eVort required to ensure grid stability willincrease as a result, and this may be a barrier to full development. As numerous studies have shown, however,this is a manageable issue.2

How does Use of System charging affect grid access for renewable energy generators? How far can the different levelsof renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules?

18. Member States have diVerent approaches to charging for use of networks. These range from “shallow”regimes, where generators pay for the connection to the network and other costs are spread across all gridusers, through to the situation in the UK where new generators are expected to pay for the full cost ofconnecting them to the system, as well as locational charges to reflect transmission losses. Clearly the morethat charges are loaded towards the renewable generator, the more revenue from power sales will have to bedirected to grid costs, and the less the profit for the developer. In general, this is not a problem as long as thesupport system provides income such that the diVerence between revenues and costs is large enough, and thisis generally the case in the UK: the diYculties in delivery of wind power have not been directly economic innature. In the north of Scotland, however, the charging regime results in high transmission costs, which are adisincentive; future oVshore projects will also be paying high costs for their network service. BWEA supportsthe principle of cost reflectivity, with generators paying in full for the services they require, but if the incomereceived is not suYcient for them to develop profitably when they are paying these costs, then this situationneeds to be examined critically.

What impact do the various systems of reinforcement planning and work have on encouraging renewable generation?How important is the issue of constraint in increasing Member States’ renewable generation?

19. The issue of expanding grid capacity to accept large quantities of new renewable energy is crucial to theEU and UK meeting their targets. New networks have long planning, procurement and build times, usuallywell in excess of the project cycle for developers; consequently, grid owners and operators need to thinkstrategically about the reinforcements required to accept these new plant, coping with the uncertainty causedby having to plan for projects that have not yet been brought forward by developers.

20. In other European countries, grid companies have been through a process of dealing with the newtechnology of wind, initially with suspicion and then with acceptance as they have grown familiar itscharacteristics. In Spain and Ireland particularly, hostile operators (RED and ESB respectively) have movedto be enthusiastic partners in planning new grids; wind developers have accepted the timetables for connectionas they have participated in their development. While there are delays in providing the infrastructure, whichwill be a constraint on delivery of renewables, the issues are being resolved.

21. In the UK, however, this has not been replicated, though National Grid is keen to work with newgenerators to see them connected in a timely manner. The problem here is that Ofgem, as a regulator clearlyfocused on the cost to the consumer, will not allow new capacity to be planned without connectionapplications from generators, for fear of stranded assets. Developers are thus placed in a dilemma: either applyearly for a connection, before planning consent is gained, with the risk that fees paid for the application arelost if the project fails, or apply after consent is gained, which risks delaying connection by several years.2 See, for instance, The Costs and Impacts of Intermittency, UK Energy Research Centre, March 2006.

www.ukerc.ac.uk/Downloads/PDF/06/0604Intermittency/0604IntermittencyReport.pdf



Solutions to this impasse are being discussed, but in general there needs to be more flexibility shown so thatNational Grid can move ahead with the planning for work on the network which is clearly required ifrenewable targets are to be reached. This may be facilitated by the National Policy Statement for energynetworks that will be produced under the new national planning system currently being legislated on. We donot advocate procurement and installation of infrastructure ahead of firm connection applications, but muchdesk-based planning and consent work can be done beforehand.

To what extent is further co-ordination of National Regulatory Authorities needed?

22. Coordination amongst regulators is required to facilitate further interconnection between Member States:the more systems are interconnected, the more variable renewable generation can be accepted, since the newgrid capacity allows exchange of power when the weather provides surpluses in diVerent countries. This isrecognised in the European Commission’s Trans-European Networks—Electricity (TEN-E) programme andthe appointment of a number of “grid coordinators” to promote particular strategic connections, includingfor oVshore wind. Regulators need to work further to ensure that market conditions at either end of the newwires allow free trade of power through them, but this is in hand through the European Regulators’ Groupfor Electricity and Gas (ERGEG).

How far do current regulations inhibit access to the grid?

23. Regulatory standards can inhibit grid access, and are a key inhibiting factor to getting renewablegeneration onto the UK grid. In the UK, the Security and Quality of Supply Standards (SQSS) govern whengenerators may connect from a technical point of view. These essentially require that grid capacity must beprovided to take all of the output of a new generator before it can be allowed to connect. These standards werewritten based on the requirements of large, dispatchable plant, and do not reflect the needs of variablerenewable generators like wind power. The generation pattern of wind, dictated by the weather, means thatwind farms do not often need the full capacity of the grid; rather than have developers delay connection untilgrid companies have provided 100% ability to export the power, BWEA believes that a system wherebygenerators are allowed to connect within a set time frame, on the understanding that there may be curtailmentat certain times due to lack of grid capacity, would be better. We refer to this concept as “connect andmanage”. The Transmission Access Review that BERR and Ofgem are currently leading is considering thisoption, and we strongly hope that it is taken up swiftly.

Support Schemes

At what level should the EU be involved in harmonising or regulating support schemes offered by Member States toencourage renewable energy generation?

24. Support schemes for renewable energy are, and should remain, the responsibility of Member States, underthe principle of subsidiarity. Renewable resources vary between countries, and so it is only right that Statesdecide what is the best way to develop them. The draft renewables directive opens the door to “flexibility”through the trade in renewable Guarantees of Origin (GoOs), and since the targets for each country are partlybased on GDP per capita and not renewable potential, this is appropriate. Extreme care needs to be taken,however, so that such trade does not disrupt the national schemes, since the latter will be the primary meansof delivering the large increase in renewable energy required.

25. The Commission will regulate support schemes through its powers to scrutinise Member States’ NationalAction Plans: if the NAP is judged to be inadequate, including in the area of support schemes, it can be referredback to the Member State. However, the Commission should refrain from attempting to impose a harmonisedsupport scheme across the EU; any such system will inevitably be diVerent in some way from every nationalscheme in the 27 Member States, and thus introducing a harmonised arrangement will result in uncertaintyand disruption, which we cannot aVord if the targets are to be met. In any case, it is not sensible to talk aboutharmonising the system for renewables when the market for electricity generally is not yet harmonised. Untilsuch time as there is a level playing field for trade in power across borders in the EU, then all talk ofharmonising support for renewables should be quashed.

26. However, BWEA believes that there is leeway for some States to open up borders to free trade in GoOsin so-called “cluster” markets. In this regard, the initiative of Sweden and Norway to set up a common greencertificate trade will be an important test. The renewables directive should be drafted in such a way that itallows, but does not mandate, such trading.



What impact have the various schemes in operation across the Member States had on encouraging renewable energy?How have these schemes affected take-up both by producers and commercial and domestic consumers?

27. The various support schemes across the Union have been vital in encouraging the new renewabletechnologies. Policies in the power sector have been most successful, though initiatives on heat and transportare also showing some results.

28. The lesson of the UK is that a suitable support scheme will not be successful if the non-economic barriersare not addressed: since the introduction of the Renewables Obligation in 2002, about 15,000MW of onshorewind capacity has been submitted to the planning system in this country—and half is still there; of thesuccessful projects, some are awaiting grid connections. If these two issues had been dealt with eVectivelyearlier, then the RO would be regarded as a very successful system. One of the main benefits of the RO hasbeen the engagement of the mainstream power companies in the renewables sector: arguably, this has led tocompanies like Eon and RWE changing their opinions of these technologies and thus bringing them into theircore international strategies.

29. The take-up of distributed renewable generation technologies in the UK under the RO has not matchedsome other countries, where diVerent support schemes have been in place, notably feed-in tariVs. WhileBWEA is strongly of the opinion that the RO should be retained for larger generators, in order to retaininvestor confidence in the UK market, we also believe that a feed-in tariV for smaller generators may bejustified. This is due to the failure of the grant-based Low-Carbon Buildings Programme to deliver a thrivingmicrogeneration sector, and the mismatch between a complex system like the RO and the need for a simplemechanism to encourage a multitude of potential small generators to invest.

Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Is necessaryinvestment hampered by lack of market harmonisation?

30. As noted above, the prime vehicle for delivering the required renewable energy will be national supportschemes; this is particularly true because of the stipulation in the current draft of the directive that countriesmust meet their interim targets for delivery of renewables before they can export GoOs to other MemberStates, a position that BWEA fully supports. In the de minimis view of trading, this will be purely anintergovernmental function, with countries that have generated a surplus through a successful nationalsupport scheme able to recoup some of the cost through exporting GoOs to countries that have a lesssuccessful scheme, less resource, or both. Whether there needs to be cross-border trade by companies isdebatable. Given the free movement of capital within the EU, companies can invest wherever they like andreceive the return that the relevant support scheme provides. The advantage of cross-border trade would beto allow companies to invest in countries outside of the national support scheme, and this should beencouraged in order to ensure that the 20% target is met at minimum cost. However, as noted above, any moveto go beyond intergovernmental trading will need to be done with care to ensure that the national schemes,which are the most important factor, are not disrupted.

To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation of supportschemes?

31. It is entirely possible for GoO trade to be undertaken with no harmonisation of support mechanisms, sincesuch trade could operate completely outside of these mechanisms. If Member States move towards the “clustermarket” approach referred to above, then there will need to be a quite high degree of harmonisation if thereis not to be gaming between the countries’ support mechanisms. It is important to note that this harmonisationwill have to extend to non-renewable conditions such grid costs: if there is disparity across two countries, withgenerators having connection costs paid in one but not in the other, then consumers in the former country maybe eVectively subsidising the latter country in meeting its target if GoOs are cheaper there and thence areexported in volume to the country where generators have to pay in full for their grid service.

23 April 2008




Witnesses: Dr Gordon Edge, Director of Economics and Markets and Ms Maria McCaffery, ChiefExecutive, British Wind Energy Association, examined.

Q234 Chairman: Thank you very much indeed forcoming. Our last witnesses this afternoon are fromthe British Wind Energy Association. I wonder if youwould be kind enough to introduce yourselves and ifyou have an opening statement or openingcomments, it would be much appreciated. Then, withour somewhat depleted Committee, I am not going topursue the questions we have circulated in order butif we have not in our 30 minutes covered any of theissues you particularly like to get on the record,please raise them. As you know, we are trying toproduce a report to the House of Lords in order togive our views prior to British Ministers agreeing thetarget which has already been discussed of 15% ofenergy being generated from renewables. Over toyou.Ms McCaffery: Thank you very much, my LordChairman. I am Maria McCaVery, I am chiefexecutive of the BWEA. I have been in post for afraction under two years. I am not from therenewable energy industry, my background is innational membership organisations andpredominantly international business support, withclose links with Government. So it has beensomething of a very steep learning curve for me overthe last two years.Dr Edge: My name is Dr Gordon Edge, I am theDirector of Economics and Markets at BWEA. I tendto be providing the technical back-up for Maria whohas a lack of background in the sector.Ms McCaffery: I have prepared a short, comfortablyless than five minute, statement and I have copies forthe shorthand writer. In a nutshell, BWEA representsthe wind, wave and tidal energy sectors in the UK.We are exclusively concerned with electrical powergeneration. As you recognise, the European targetincludes all primary energy but we are onlyconcerned with electrical power and specifically, atleast for the time being, in wind, wave and tidal. Ourmembers view the European Union’s 15% renewableenergy target as a tremendous opportunity; there is alot of positivism about the target. Over the next 12years, up to 2020, approximately a third—it variesfrom 30 to 33% but we will just call it a third—of thetotal capacity of our electrical generating plant willretire and to fill that gap we have two basic choices.We can increase our dependency on imported fossilfuels, especially gas, which will subject us to increasedvulnerability in supply and volatility of price.Alternatively, we can persuade the Government tostand four-square behind its support for therenewable energy sector, and assist us in harvestingthe tremendous natural resources we have in thewind, wave and tidal resources around the UK. Wehave coined a phrase recently, we refer to oVshore

wind as the “new North Sea oil”. In that context webelieve it has the potential to attract over £65 billionof private investment and at the same time generateat least 100,000 new, what we now term, green collarjobs. At the same time it will reduce our dependencyon imported fossil fuels, reduce our carbon dioxideemissions and provide a sustainable source ofelectrical power at a fixed price. To exploit thistremendous potential we believe we need four things.We need the resource, the technology, the capital andthe political will. We can tick the boxes of the firstthree—we have an enviable resource; the technologyis very highly developed as far as wind is concerned,still emerging on the wave and tidal front and so weare expecting a later contribution from thosetechnologies; and there does not appear to be anyshortage of capital, in fact we have attractedtremendous interest from global investment marketshere in the UK. On the political will front, I ampleased to say that there are encouraging signs thatpositive political will is developing. It does appear tohave been a long time coming but, as the nationalrepresentative body for these leading renewabletechnologies and for the stakeholders, we areimploring Government and the opposition parties toembrace the opportunities of the domestic andEuropean targets and to work with us to overcomethe remaining obstacles to delivery.Chairman: I will ask Lord James to start. LordJames, Lord Powell and I were members of theCommittee who have just been in the North Sea withE.ON looking at the wind farm of 30 turbinesoperating 21

2 kilometres oV Great Yarmouth, and wewere much impressed by what we saw but LordJames will outline some of the problems we couldidentify.

Q235 Lord James of Blackheath: You speak withsome enthusiasm and apparent comfort about thelevels of investment which are available, but one ofthe messages we brought back from Friday’s trip tothe wind farm is that this is not translating into thecreation of the necessary supply chain equipmentrequired to develop more rapidly the growth of morewind farms. Could you suggest how that capitalmight be inspired to move more quickly in creatingthat infrastructure?Ms McCaffery: It is perfectly true that one of ourchallenges at the moment is in the supply chain butwe regard this as very much a chicken and eggsituation. We believe if the strong message issustained about the UK being open for business forrenewable energy, the supply chain will follow. Thecurrent members of the supply chain, turbine andcomponent manufacturers, are expanding both in



12 May 2008 Dr Gordon Edge and Ms Maria McCaffery

terms of the size of the machine they are producingand in their capacity to step up to the opportunities,particularly in oVshore and particularly in the UK.Naturally we want to attract as much of that aspossible into the UK but there is a little bit of a stand-oV position at the moment waiting to see what isactually going to happen. There is a dialogueunderway at the moment with a Dutch-basedmanufacturer talking to a British-based gear boxmanufacturer who are exploring four possiblelocations for foreign direct investment, two of themin the UK, and looking to explore that dialogue andencourage participants from British manufacturersto step up to the plate and exploit theseopportunities.

Q236 Lord James of Blackheath: At a comparablestage in the development of the North Sea, say about1982, there had been a huge proliferation of Scottishcompanies created in and around Aberdeen andEdinburgh and as a matter of fact there would be fiveor six gear box manufacturers in Scotland by thistime, if it was comparable technology required.Nothing like that has happened in England. Evenallowing for the fact that the Scots are fanaticalpatriots anyway and throw money at anything theythink is good for Scotland, what is missing here whichhas not achieved the same?Dr Edge: I think it is not fair to say that we are in thesame place as North Sea oil was in 1982. I think it ismuch fairer to say we are where North Sea oil was inthe early 1970s, a much, much earlier stage ofdevelopment, and we have not seen the very strongpipeline of work which would encourage people to setup manufacturing. What manufacturing companiesneed is a strong consistent flow of orders and that isprecisely not what they have had out of the UK forthe reasons of planning.

Q237 Lord James of Blackheath: It was notable atthe meetings on Friday at Scroby Sands, that the onlygear box they wanted to consider is the Siemens oneand they were not interested in anything else at all.Given that attitude, that mindset, how are you goingto provide adequate stimulation for a Britishmanufacturing source to come up to it?Dr Edge: There are a number of British companieswho might be about to enter that market. There aresome barriers in that you have to go through quite aserious qualification procedure in order to prove thatyou are producing gear boxes of the highest quality,which is what we need, plus we are talking aboutDanish and German companies with establishedsupply chains with established suppliers, so you haveto break into new company supply chains. I thinkthat is where oVshore becomes interesting because itis a whole new industry and it is there to be createdand that is right at the start.

Q238 Lord James of Blackheath: You say we are inthe early 1970s compared to the 1980s, I think if weare in the early 1970s then we are way behind thetimetable required to get up to the necessaryproduction level here. How do you react to that andwhat can be done to catch up?Dr Edge: We can learn very much from the experienceof the oil and gas areas and transfer a lot of thosetechnologies. Maybe I was mischaracterising thestate of play, but we are certainly at a place where weneed Government to be making it much, much morecertain that this is going to happen. There is still anelement of doubt there and we need to be absolutelyclear this is what we are going to do and then thecompanies can invest in it.

Q239 Lord Powell of Bayswater: I am glad to say wewere on the North Sea and not in it, which wouldhave been rather uncomfortable. Perhaps just threepoints, not unrelated to the ones Lord James hasalready asked. First of all, your figure of £65 billion,would you like to explain how you reached that? It issomewhat larger than China’s sovereign wealth fundand it is about 12 times Saudi Arabia’s sovereignwealth fund, so it is a pretty sporting figure. How doyou arrive at it?Dr Edge: That is looking at oVshore wind at about 20gigawatts, which is in the region of £2 million permegawatt, and onshore wind of 13 gigawatts at about1. That gets you most of the way there, then there isinvestment in manufacturing to make that happenas well.

Q240 Lord Powell of Bayswater: So the figure is notfunds available for investment, which was theconclusion I drew from your statement, perhaps Imisheard.Dr Edge: The capital cost of installing all that plus thecapital cost of the manufacturing plant to make ithappen.

Q241 Lord Powell of Bayswater: Secondly, on thisquestion of manufacturing, I am on the board of one,and on the advisory board of another, bigmanufacturing company, both of which maketurbines, both of which have looked at this area andboth of which decided there is not a suYcient returnto be made on it to be worth investing. Are theyjust wrong?Dr Edge: Other companies like GE and Siemens aretaking a rather diVerent view.

Q242 Lord Powell of Bayswater: GE is not going totake much of it, Siemens has, I agree.Dr Edge: Are we talking specifically oVshore?

Q243 Lord Powell of Bayswater: I was talkingspecifically oVshore.




Dr Edge: Siemens investors have taken the view theyare playing. There are a number of other companies,including Multibrid, which is 51% owed by Areva ofFrance, there is REpower owned by Suzlon of India,and there are other companies which we perceive tobe coming down the track, who are planning to maketurbines specifically for the oVshore space.

Q244 Lord Powell of Bayswater: We were told whenwe made this visit that the rather specialised nature ofthe turbines and the still relatively small demand forthem was a deterrent for major companies to investin manufacturing this particular sort of turbine.Ms McCaffery: If I may comment on the specific caseof GE, GE is an American company and America isthe only country in the world with a supportmechanism which is more attractive to globalinvestment than the UK. Also the potential in theNorth American markets for their existingtechnology represented a better strategic option forthem at that time, but our understanding of GE, oneof our prominent members, is that they are keeping awatchful eye on the potential for oVshore wind.

Q245 Lord Powell of Bayswater: Lastly, Shell veryrecently withdrew from the London Array windfarm. Why do think they did that?Ms McCaffery: Their oYcial statement was forexactly the same reason, they are refocusing theirattention onto onshore wind in North America. Justto comment on the perspective that the media haveattached to that, we are not able to give sensitive andconfidential information about the parties who haveexpressed interest to us in taking over Shell’s stake,because the remaining two members of theconsortium—E.ON and DONG—are seriouslyconsidering making it a two-party joint venturerather than a three-party joint venture. But had it notbeen for the fact that this is a flagship project—ie thebiggest being planned, 1 gigawatt, and such arecognisable name as Shell attached to it—we reallydo not think it would have been that newsworthy.The members of the consortia for all of these bigoVshore projects regularly change. Airtricity boughtout Fluor’s stake in the second largest oVshore windfarm, Greater Gabbard, and now SSE have takenover Airtricity’s stake, and this is happening all thetime. We just call it business as usual.

Q246 Lord Powell of Bayswater: The impression Idevised from talking to E.ON at the end of last weekwas that if they were considering going it alone, as itwere, with one partner, this was a faute de mieuxrather than because they wanted to corner it allthemselves. They were far from confident therewould be other investors to take Shell’s place.

Ms McCaffery: We have had several approachesasking us to field approaches into Shell. I would justlike to point out that from inside information weknow that E.ON have an ulterior motive in sendingout a signal to the supply chain manufacturers thatenough is enough in terms of price rises, and if theycan introduce a question mark over whether or notthey want to proceed on a flagship project they arehopeful it will oblige the overseas-basedmanufacturers to reconsider their pricing. If thatworks, it will be of benefit to the whole industry.

Q247 Lord Powell of Bayswater: So you are reallypersuaded that the industrial and investment appetiteis there to take forward oVshore wind on a big scale?Ms McCaffery: Indeed.

Q248 Lord Whitty: You said at the beginning thatthe thing which was lacking was the political will. Bythat do you mean the institutional framework andthe structure and the fact we have a marketplaceROCs system rather than a more direct regulation oftariVs or subvention? Or do you mean that this is nothigh enough up the political agenda and were it to bea more clear strategic objective then majorcompanies and financiers would be more interested inthis field, as they are in Germany?Ms McCaffery: It is more a case of the latter but untilrecent times we did feel it had taken the Governmenta long time to wake up to the real potential ofrenewable energy. A strong impression has beencreated that the real force was not actually there andthat the industry could not in fact deliver, but thatappears to have taken a step change in the course ofthe last year to 18 months, where we have seensignificant progress towards overcoming the barriers.To put it in a nutshell, we need two fundamentalthings. One is a robust, reliable and consistentsupport mechanism, and we believe we have that inthe Renewables Obligation; it is doing the job it wasintended to do, and no doubt we will return to thatissue. The other thing that is required is a planningsystem which gives consistent, clear and timelydeterminations and we really have suVereddeplorably from the regime hitherto.

Q249 Lord Whitty: Unlike other witnesses, you aresaying the ROC system should work and it is theplanning framework and the delays that has impliedwhich has been the problem?Ms McCaffery: Yes.

Q250 Lord Whitty: Not that there are better systemsfor encouragement?Dr Edge: Absolutely. Since 2002 when the renewablesobligation was introduced, 15,000 megawatts ofonshore wind projects have entered the planningsystem. It is not the fault of the Renewables




Obligation that we have only 2,000 megawatts ofonshore wind currently generating, it is the fact thatover half of that capacity is still in the planningsystem. That is the problem. To blame theRenewables Obligation for the failure of both theplanning and the grid system is perverse, frankly.Ms McCaffery: We think the time and theopportunity for choosing between supportmechanisms and either the RO or a general Feed inTariV was five years ago when the choice was made.But having gathered the momentum we havegathered to this point, we feel it would be absolutelydisastrous and would kill the existing momentum inwind energy in the UK to change horses mid-race,which is eVectively what we would be doing.However, to be absolutely clear, BWEA does whole-heartedly support the introduction of a Feed in TariVfor micro-generation and for emerging technologies,but for wind energy we think it would be disastrousto introduce it now or to switch to that mechanism,and it certainly is not responsible for our relativeposition with our near neighbours in continentalEurope.

Q251 Lord Powell of Bayswater: So you take adiVerent view from our previous witnesses?Ms McCaffery: Indeed we do.

Q252 Lord Bradshaw: You have identified theplanning system as the major obstacle, you know thePlanning Bill is before Parliament, does it give youoptimism that things will be better?Ms McCaffery: We recognise that is the intention andwe do applaud that, but as far as onshore wind isconcerned the Planning Bill is not going to make theslightest bit of diVerence, primarily because thethreshold of 50 megawatts is above the level at whichthe vast majority of remaining applications are goingto fall, so unless we were successful in persuading theDCLG to allow for clusters of small projects in orderto take it over the threshold and make it the subjectof an IPC decision, it is not going to make anydiVerence. Where we feel the IPC could be of greatbenefit is in the desperately-needed development andinvestment in the grid infrastructure. In oVshorethere will not be anything under their threshold of 50megawatts; all oVshore wind projects will be big.Dr Edge: We do feel that with a few key amendmentsthe Planning Bill could be extremely useful for ourmembers. Maria has already referred to the ability tocluster and refer to the Infrastructure PlanningCommission. We are also very keen that the nationalpolicy statements which come out of this, particularlyon renewables, will be given greater statutory forceand so influence those decisions on smaller projectsunder 50 megawatts under the Town and CountryPlanning Act. Currently the Government is sayingthose national policy statements will have the same

force as current planning policy statements, butPPS22 which covers renewable energy has not solvedour problem so it is therefore hard to see how adiVerent policy statement with the same force wouldmake any diVerence.

Q253 Lord Bradshaw: And you have some suggestedamendments?Dr Edge: We have. We have been applying to DCLGto work with them and, to be frank, we have not hada lot of joy.

Q254 Lord Rowe-Beddoe: In your opening remarksyou referred to your Association and membershipsand its interests being wind, wave and tidal. You havedealt with wind, would you like to say anything aboutwave and tidal?Dr Edge: We see these as being areas of technologywhere the UK can make an enormous contribution.We have the resource and we have the intellectualinfrastructure to make it happen. Simon Robertstalked about wave hub but that is really at the end ofthe chain which starts with the university research,NAREC in Blyth in Northumberland, the Europeanmarine energy centre; there is this huge supportingstructure for this. What we need is the kind of supportmechanism which will pull it through with somecertainty, and that is why Maria mentioned we maysupport something like a Feed in TariV for anemerging technology like wave and tidal where theextra price certainty would be really helpful and it iscurrently small scale. If we can get the supportstructure right, then we can perhaps build thatindustry which we have failed to do so far withwind—and hopefully we can do that with oVshorewind—and can be the originators in the industrialpower house.

Q255 Lord Rowe-Beddoe: Following on anotherwitness source—I do not want you to necessarilycomment on the veracity or otherwise of thenumbers—I think I am right that 36,000 megawattsof oVshore wind power would help us meet ourtargets for 2020 and we currently have over 300megawatts installed. Would that be right, 36,000?Dr Edge: The headline figure I think you are graspingfor is 33,000 megawatts.

Q256 Lord Rowe-Beddoe: Okay, 33,000.Dr Edge: At present we have just over 400 megawattscapacity oVshore, we have 550 under construction. Ianticipate the new projects coming forward will bringus to somewhere in the region of 2,000 megawatts by2010. Certainly that is a big jump. We think that33,000 is perhaps a stretch too far. We certainly thinkthat 20,000 megawatts is achievable and would be afantastic achievement if we got there, and if we really




push it we can go somewhat further, but that is thekind of figure we prefer to talk about.

Q257 Lord Rowe-Beddoe: In that context then youare talking of somewhere between £25 and £36 billionof investment for oVshore?Dr Edge: In the region of £40 billion in projects, yes.

Q258 Lord Rowe-Beddoe: £40 billion?Dr Edge: Yes.Ms McCaffery: For 20 gigawatts.Dr Edge: Our ballpark figure for the capital costs isabout £2 million per megawatt.

Q259 Lord Rowe-Beddoe: Which of course is asubstantial opportunity for a whole load oforganisations and pipelines, if they are prepared totake the opportunity, which comes back I suppose to

Supplementary memorandum by the British Wind Energy Association

Planning Reform Bill

BWEA welcomes the Planning Reform Bill as a serious attempt to tackle unnecessary delays in the planningsystem. However, the current version would capture a very small proportion of renewable energy projects andwould do very little for our industry in tackling climate change and achieving government’s renewable energytargets. The proposed EU Renewable Energy Directive requires Britain to supply 15% of its energy, includingtransport and heat, from renewable sources by 2020. That will mean that 30–40% of our electricity will haveto come from renewable energy. Within the timescale available, wind energy is the only technology with anindustry ready and able to deliver the large scale increase in generation required to meet the 2020 target.

The issues below need to be seriously considered by Government in order for BWEA to continue to supportthe Bill in the House of Lords.

1. Pre-eminence of NPSs

We understand that local authorities are obliged to take into account the NPSs when drafting their LocalDevelopment Frameworks and NPSs have to be considered a material planning consideration when makingplanning decisions in advance of updating the LDFs. However, we believe that is not enough. PPS22 iscurrently a material consideration but has little influence in determining individual planning applications.Therefore, it is essential that the pre-eminence of NPSs is clearly established within both the IPC and TCPAconsent regimes. In order to ensure consistency across planning regimes, and clarity of policy hierarchy, it isimperative that Section 19 of the Planning and Compulsory Purchase Act 2004 be amended to require that:

— Pre-eminence be given to NPSs in the preparation of development plan documents, and in advanceof updating existing development plans at the regional and local level.

— Overarching consideration be given to NPSs when determining individual planning applications.

Considering that the majority of onshore projects are below 50MW, NPSs would provide very little benefit toour industry without the changes above.

From a previous meeting with BERR we understood that DCLG would issue a document that outline therelationship between NPS and the TCPA regime. We would be interested to learn what the status of thisdocument is.

the commitment that we signal to this industry thatwe are going to get it done?Dr Edge: I think you will find there are companieswhich are moving in the background, and I wouldanticipate in the not-too-distant future we are goingto start seeing companies coming forward withinvestments in manufacturing. It has just taken thisamount of time for people to believe the market to thepoint where they will invest like that.Ms McCaffery: Yes, there is a huge disparity betweenour current installed operating capacity and thetarget but at this moment we have 19 gigawatts ofwind energy in development at all the diVerent stages,either in planning, in construction or with consentand going forward to operation.Chairman: On that point we will end. Thank you verymuch indeed. You have been extremely helpful andwe are grateful.



2. 50MW threshold

BWEA appreciate the need to strike the right balance between nationally significant projects and those whichshould be determined at local level. We also realise government’s commitment to devolution. BWEA does notadvocate a change to the 50MW threshold but seeks a commitment from the government to use its referralpowers to the IPC under clause 33 for energy schemes under 50MW in the following circumstances:

— If a number of local authority applications are ‘clustered’ and due to the scale and proximity ofdevelopments are considered to be of national significance.

— If an onshore application has spent above 16 weeks in planning and following request by thedeveloper should be considered an exceptional case.

The first point, the “cluster approach”, would de facto create developments that are considered nationallysignificant, would speed up the determination of planning applications and would spread the commercial riskfor developers. The second point would be an incentive for timely consideration under the TCPA regimewithout removing local authority consideration. The table below illustrates the small number of projects,around 30 per year, which would fall into this category.

2007 BREAKDOWN OF LOCAL PLANNING AUTHORITYSUBMISSIONS THAT GO BEYOND 16 WEEKS

England Wales

Number of MW 379 122Number of submissions 30 3Percentage of submissions 94% 75%

We seek a commitment by the government in front of the House and by letter to use its referral powers ofClause 33 of the Bill as outlined above.

3. 100MW offshore threshold

The Government is proposing that when the Marine Bill is introduced in the next Parliamentary session thenew Marine Management Organisation (MMO), will have responsibility for the consents process for oVshoreenergy installations generating less than 100MW, whereas projects above 100MW will fall under the remit ofthe IPC. BWEA believes that this will create a disjointed approach to oVshore planning and wouldunnecessarily duplicate oVshore consenting skills and knowledge. For this reason the proposed 100MWthreshold for IPC consideration of oVshore consents should be reduced to 1MW thereby extending itscoverage to wave & tidal and aligning it with current section 36 requirements.

4. CIL

We understand that the CIL is intended to support the infrastructure needed to support the development of anarea, and not, as with the current system of planning obligations, the infrastructure necessitated by a particulardevelopment. Nevertheless, BWEA believes the CIL is an unjustified additional charge for developers for thefollowing reasons:

— Energy projects already contribute directly to local amenities and community development throughthe use of section 106 agreements.

— Energy infrastructure is both prior and fundamental to the very community infrastructure that CILseeks to support, because it is needed to provide the energy on which all such infrastructure criticallydepends.

— Unlike the vast majority of projects, renewable energy projects are reversible and invariably haveplanning conditions/obligations specifically dealing with decommissioning.

— Wind farm projects do not generally themselves lead to the need for increased communityinfrastructure, and where they do they meet the cost of providing these directly.

The wind industry is keen to provide benefits to the communities where developments take place, which arerelevant, direct and better reflect the needs of the local community. Therefore, we recommend that anenhanced mechanism should be considered, specifically focused on renewables related community benefits



5. Planning Bill and Climate Change

BWEA supports the joint amendment of the Association for the Conservation of Energy, Ecotricity, Friendsof the Earth, Green Alliance, The National Trust, Ramblers Association, RSPB, TCPA, UK RIGS andWWF. This amendment outlines that the Bill should ensure that the process of approving major infrastructuretaken as whole is capable of delivering on two important objectives:

— Fully considering climate change impacts in decision making.

— Ensuring that full consideration is given to meeting the UK’s national and international obligationson carbon reduction.

BWEA considers the Bill as a great opportunity of tackling planning delays. However, the above issues needto be addressed in order to enable BWEA to continue supporting the Bill.

May 2008



MONDAY 19 MAY 2008

Present Dykes, L Rowe-Beddoe, LFreeman, L (Chairman) Ryder of Wensum, LMitchell, L Walpole, LPowell of Bayswater, L Whitty, L

Memorandum by E.ON

Summary

— E.ON believes that renewable energy can make a significant contribution to meeting EU and UKenergy demand and to climate change targets.

— However, the UK’s proposed share of the renewable energy target poses major challenges,particularly given the relatively short period between now and 2020 and the limited contributionrenewable sources currently makes to UK final energy consumption.

— The extent to which it is delivered will depend on whether some major barriers to investment can beovercome and suYcient incentives exist to attract the very large capital investment required not onlyin renewable capacity but also the fossil plant required to back up intermittent generation from windand tidal resources.

— Even if a renewable share of electricity of some 40% is achievable (which is not yet clear), theimplications of this for grid investment and performance are potentially very significant and need tobe clearly modelled, explained and understood.

— To ensure the most eYcient delivery of the target the UK’s heat and transport sectors mustcontribute a level of renewable energy commensurate with their cost eVective potential to avoid anexcessive burden falling on the power market.

— The renewable targets are only credible if the directive gives Member States flexibility in deliveringthem; in particular trading in renewable allowances from a Guarantee of Origin (GOO) tradingscheme should not be unnecessarily restricted.

— The Government should publish its estimate of the full cost to the consumer of meeting the targetin each sector.

— The main barriers to completing renewable electricity projects are the time required to achieveplanning consent and the construction of major grid upgrades.

— Turbine manufacturing capacity will need to be scaled up and vessel availability increased if the levelof oVshore wind projects required to meet the target are to be delivered.

— Changes in transmission access arrangements are likely to be required but these must balance theneed to connect new renewable generation with the need to avoid ineYcient constraint costs.

1. E.ON UK is one of the UK’s largest retailers of electricity and gas. We are also one of the UK’s largestelectricity generators by output and operate Central Networks, the distribution business covering the East andWest Midlands. In addition, our E.ON Climate and Renewables business is a leading developer of renewableplant in the UK with 21 onshore and oVshore wind farms and a dedicated biomass power station currentlyoperational, and more in development.

2. Across the E.ON Group we currently have renewable generation capacity in excess of 7,300MW. We haverecently doubled our investment budget into renewables to ƒ6 billion between 2007 and 2010. E.ON is lookingto increase its overall share of renewable electricity significantly by 2030 which will assist the company inmeeting its target to be 50% less carbon intensive by 2030 (based on 1990 levels). Our answers to theCommittee’s questions are as follows.




3. The UK’s proposed share of the renewable energy target poses major challenges, particularly given therelatively short period between now and 2020 and the limited contribution renewable sources currently makesto UK final energy consumption. In 2007 renewable energy accounted for approximately 2% of UK finalenergy consumption. Renewable electricity has grown significantly since the Renewables Obligation was putin place in 2002 but nevertheless accounts for only about 5% of electricity consumption at present. Given thatthe Government estimates that the UK is likely to have to meet 25% of the total EU additional cost, meetingthe target in full may be more diYcult for the UK than for the EU as a whole although particular MemberStates may have diVerent issues arising from their particular energy mix.

4. The extent to which the target is delivered will depend on whether some major barriers to investment canbe overcome and suYcient incentives to attract the very large capital investment required not only inrenewable capacity but also the fossil plant required to back up intermittent generation from wind and tidalresources. However, this will require a very rapid acceleration in investment in renewable energy sources overlittle more than a decade, bearing in mind that the directive may not be agreed until well into 2009.

5. The implications for the electricity sector are significant given that a very substantial contribution—possibly in excess of 40% of electricity consumption—may need to be met from renewable electricity sources,largely in the form of onshore and oVshore wind and some biomass generation. This level of target will requirea number of significant barriers to be overcome including grid access, planning and supply chain constraints.In addition, a robust long-term policy framework which will attract the necessary investment to the UK isrequired. Such a large penetration of renewable generation also poses some very major issues for the powersystem as a whole. These need detailed assessment but given that wind generation is variable in output, arelatively inflexible source of power and only a small proportion of total capacity can be relied on to meet peakdemand, a large volume of more flexible fossil generation will be needed to maintain system stability. Theseissues will need to be addressed in the strategy which the Government has indicated it will publish next yearafter the directive has been agreed.

6. The full potential of renewable heat and transport sources will need to be utilised to avoid an excessiveburden falling on the power market. The heat sector is currently the largest consumer of energy and accountsfor approximately 43% of the UK’s final energy demand. This sector has historically received little attention.However, there is substantial renewable potential from heat technologies which BERR is currently addressingfollowing its Call for Evidence.

7. Given that the targets are expressed as a percentage of final energy consumption, a key objective must beto ensure that eVective energy eYciency policies are in place to ensure that total energy consumption is reducedor at least growth contained, which would reduce the absolute level of renewable investment required to meetthe targets.

8. The deliverability of the targets would be improved if the Directive allowed flexibility in how the target ismet. We support provisions in the directive for importing renewable energy from states adjoining the EU,provision to take account of investment in large tidal schemes, and for trading of Guarantees of Origin (GOO)certificates across the EU, although, as currently drafted, trading will be largely at the discretion of MemberStates. If the targets are to be met in a sustainable way which is acceptable to consumers, a key componentmust be the cost eVectiveness of delivery which will be enhanced by the ability to trade renewable energy eVortvia GOO certificates. We note the conclusions of the recent Poyry report on behalf of BERR on the compliancecosts of meeting the 2020 renewables target which states: “On the basis of the Commission burden sharing,the cost to the UK increases by around 34% from ƒ5.0 billion to ƒ6.7 billion if trading is not a viablealternative.”1 Trade in GOOs must not be unnecessarily restricted.

9. In addition appropriate financial support mechanisms will be required to incentivise investment. It isimperative that current renewable investment plans are not delayed or discouraged by uncertainty about thepolicy framework. On this basis, E.ON UK would prefer to see a continuation of the Renewables Obligation(RO) as the primary financial support mechanism for renewable electricity which will need to be developedfurther if the target is to be met. However we do not rule out other forms of support for very large long lead-time capital projects such as the Severn Barrage.1 http://www.berr.gov.uk/files/file45238.pdf




10. The renewable energy targets could have the eVect of diverting investment from other potentially moreeconomic means of delivering carbon savings. Under this scenario, it would raise the overall cost of achievingthe EU’s climate change targets, which would not be consistent with the EU’s objective of maintaining aninternationally competitive economy. It will be important to ensure that support for renewables results inreductions in technology costs which reduce the long term cost of renewables. Furthermore there must alsobe adequate incentives to invest in other low carbon technologies and Member States must aim to meet in fullthe targets set out in the Energy EYciency Action Plan.

11. It is important that all the elements of the green package form a coherent whole. In particular the EU’s20% renewable energy target and the 20% GHG emissions reduction target and the associated reductions inemissions required under the EU ETS have to be consistent. An unexpectedly high level of carbon abatementfrom the renewables target could deliver the reduction eVort expected of the EU ETS. This could significantlyreduce demand for EU emission allowances (EUAs) and result in a low or zero carbon price, reducingincentives to invest in or operate other lower carbon technologies. As the green package is considered by theCouncil and European Parliament, it will be important to ensure that the targets maintain a credible pricefor carbon.

To what extent are these targets capable of improving the EU’s security of energy supplies?

12. E.ON UK agrees with the Commission that achievement of the Renewable Energy target would improvethe EU’s security of energy supply in that renewable energy will reduce dependence on imported gas and oiland contribute to diversity. However, this may to some extent be balanced to the extent that the EU or theUK becomes reliant on a large proportion of relatively new technologies, such as oVshore wind, which maybe less reliable in operation in its early stages of commercial deployment. Policies to deliver the target shouldinclude a focus on ensuring long-term reliability.

Grid Access


13. In general the existing legislation has had little eVect in encouraging grid access as its provisions state thatMember States “may also provide for priority access to the grid system of electricity produced from renewableenergy sources”.2 Whilst the existing Directive does state that the transmission operator should give priorityto renewables when dispatching plant, this is not relevant to the self dispatch market based approach withinthe UK which allows renewable generators themselves to determine when they want to generate. The UK’scurrent access arrangements are technology neutral and seek to prioritise those projects that are able to usethe system the soonest. The transmission operators have obligations in their licences that do not allow themto discriminate between technology types.

14. Growth of renewable generation that is connected to the distribution network has been steadily achieved.The main issue with obtaining a distribution connection is overcoming local project specific connection andgrid reinforcement issues.


15. The main transmission-related barrier to the growth in renewable generation is the lead time associatedwith achieving planning consent for, and the construction of, major grid upgrades. This can often be manyyears longer than the development and construction time required for an onshore renewable generationproject. BERR and Ofgem have commenced a review of transmission network access in the UK, to look atways in which the capacity of the existing network can be further shared between existing and new generationprojects in advance of and in parallel with the need for further upgrades to the electrical networkinfrastructure. The main balance to strike is between the ability to connect additional generation, the costs tothe consumer associated with constraining oV generation owing to insuYcient network capacity and the needto maintain network reliability and safety for security of supply.2 http://eur-lex.europa.eu/pri/en/oj/dat/2001/l 283/l 28320011027en00330040.pdf




16. The level of use of system charging in the UK is determined on a cost reflective basis. This means thatparties that are seeking to use the transmission system bear their appropriate share of the costs that theyimpose on the transmission network. This provides a locational signal that helps to ensure the long termeconomic eYciency of the network, where generation that is located further away from demand must pay moreas more network is required to transport the energy to the demand centres.

17. In the UK the main demand centres are in the south of the country, with the majority of the onshorerenewable development occurring in Scotland. There is presently a 10GW queue of renewable generationprojects in Scotland that are at various stages of development and seeking to connect to the grid. In the contextof the overall UK energy market, the higher use of system charge in Scotland does not itself appear to be abarrier to bringing these projects forward. Conversely renewable generation projects seeking to connect in thesouth, closer to the demand centres, are encouraged to do so as they would incur lower use of system charges.


18. In the UK, the transmission companies have a licence obligation to plan reinforcement and operation ofthe network in accordance with the Security and Quality of Supply Standard (SQSS). This is a deterministicstandard that ensures that an appropriate balance between the requirements to connect additional generation,the costs associated with constraining oV generation owing to insuYcient network and the need to maintainnetwork reliability and safety for security of supply is achieved. It is worth noting that a cost benefit analysissupplements the deterministic standard to aid determining an appropriate and acceptable level of constraintcosts.

19. The SQSS is presently being reviewed by the three transmission licensees in the UK to determine theappropriateness of the assumptions made in the standard for modelling intermittent generation sources, suchas wind. The extent to which the SQSS can accommodate additional renewable generation depends on theassumptions made on the diversity and load factor of the renewable generation sources, particularlyintermittent generation, and the diVerence in cost between additional network reinforcement and networkconstraint costs arising from insuYcient network to secure demand.

20. In order to connect to and use the transmission system in the UK, a party must hold an agreement withthe transmission operator for Transmission Entry Capacity (TEC). The TEC is provided on an “invest andconnect” basis, whereby appropriate network reinforcement is completed before a generator is permitted toconnect and export to the network. This ensures that the level of network constraint costs will not be undulyincreased, as these costs may not be borne by the party that is connecting, but instead are paid by other marketparticipants that are not deriving a direct benefit from the connection of that generation, giving rise to anindirect subsidy. The issue of constraint costs is significant in the UK pay as bid market mechanism formanaging network constraints.


21. In our view, it should be left to national regulators to approve national grid access arrangements in lightof the requirements of EU legislation, guidance or codes developed at the EU level, except where trade acrossMember States is an issue. Coordination of approach can be achieved through the European Network forTransmission System Operators (ENTSO) and the Agency for Cooperation of Energy Regulators (ACER)proposed in the third package.


22. The primary cause of delay in terms of grid access has been the extended timescale for securing planningapproval and for construction of transmission upgrades. Some improvements in transmission accessarrangements are possible but these need to be at an acceptable cost to the consumer, as discussed above.



Support Schemes


23. The EU should in principle move toward a more harmonised approach to renewable support as this wouldbe consistent with an eYciently functioning internal energy market. However, shifting to a fully harmonisedapproach now would create uncertainty for investors and render the targets more diYcult to achieve.Therefore we can expect both quota based systems such as the renewable obligation and feed-in tariVs tocontinue to operate across the EU to meet the 2020 targets. Nevertheless the draft directive does enable,subject to certain conditions, trading between Member States despite diVerent support schemes being inoperation. Allowing the trading of GOOs will not only provide the flexibility to facilitate credible and eYcientrenewable investments, but will lead to a degree of convergence over the value of the renewable supportschemes across the EU. However the extent to which this occurs will be down to the market rather thanthrough regulation.


24. In the UK, the RO has successfully stimulated growth in the lowest cost renewable technologies includinglandfill and sewage gas, co-firing of biomass and onshore wind. Before the RO was introduced in 2002, theUK had less than 2% electricity from renewable sources. Today renewables represents around 5% ofelectricity. However the limited support available for renewable heat to date has prevented this sector fromfulfilling its potential.

25. The growth in renewables particularly from onshore wind would have been substantially greater if theplanning system was more eYcient, and we are supportive of the government’s reforms contained in thePlanning Bill which are designed to increase the eYciency of the process for larger scale projects in particular.Furthermore growth in renewables has been held back by grid constraints. Clearly this needs to be addressedto ensure that projects can connect to the grid in a timely and eYcient manner. Without a significantinvestment in the grid infrastructure, the UK will not be able to deliver the 2020 targets.

26. The introduction of banding to the RO has been required to stimulate investment in oVshore wind anddedicated biomass, two renewable technologies that have the potential to make a significant contribution tothe energy sector. Without the changes contained in the current Energy Bill, oVshore wind would requireadditional financial support such as capital grants to enable such projects to be sanctioned.

27. Renewable development in Germany has been supported through feed-in tariV and this has led to asubstantial development in onshore wind capacity as well as other technologies such as photovoltaics.However there has been limited oVshore development hitherto. This approach has been in place for longerthan the UK and planning and transmission constraints have been less significant issues. Given that the UKhas adopted the Renewables Obligation which is incentivising large volumes of renewable development, thatits structure has been amended to support a range of technologies, and that transmission and planningconstraints are being addressed, we see no point shifting at this stage to a diVerent support mechanism giventhe disruption and uncertainty this would cause for investors. Support for some technologies in Germany, forexample photovoltaics, have been extremely generous and we question whether this would be seen as aneVective use of customers’ or taxpayers’ money in the UK.


28. The challenge of delivering the renewable energy targets will require a significant level of domestic eVortin each Member State. Nevertheless the ability to trade via GOOs will help to minimise the cost of meetingthe target. The development of GOO trading is not conditional upon a harmonisation of support mechanisms.The draft directive permits trading of GOOs even though Member States will be operating diVerent renewablesupport schemes. In our view there are other more fundamental barriers which must be addressed which wehave discussed above.




29. The trading of GOOs can operate alongside mixed national support mechanisms. Therefore we believethat the Renewables Obligation in the UK can operate alongside other support mechanisms whilst stillpermitting the trading of GOOs.

30. As the directive is currently drafted, a producer in Ireland who sold a GOO certificate to the UK marketwould not receive the income stream from the feed-in tariV. Instead the producer would be entitled to the valueof the GOO which would be determined through negotiation with the counter-party from the UK. The GOOwould count towards the UK contribution but would be excluded from the production of renewables withinthe Irish market. This demonstrates how two diVerent support mechanisms can operate whilst enabling thetrading of the GOO certificate.

21 April 2008

Memorandum by npower Renewables

1. In November 2007, RWE AG announced plans to set up a new renewables dedicated company that willenable the significant expansion of its renewable activities, both in the UK and in Europe. We anticipate thatgrowth will be aligned with the policy targets set at European and national levels, and that ambitious UKtargets for renewables will attract substantial investment by RWE into the UK renewables market, where wewill continue to pursue our commitment to organic growth through investment. Our primary focus will beto develop, construct and operate the currently deployed commercial renewable technologies where we havedeveloped significant expertise: onshore and oVshore wind, hydropower and biomass. Innovation will also bea central strand of our activities with a particular focus and significant expenditure on the commercialisationof emerging technologies, such as wave and tidal power from 2008 onwards.

2. RWE’s retail arm in the UK is npower, one of the UK’s leading suppliers of electricity and gas with overseven million customers. Serving the residential, small to medium enterprises and industrial and commercialsectors, npower delivers competitive, advanced solutions for its customers. Npower retail is also committedto R&D into renewable technologies through its 100% renewable electricity tariV, Juice. This has proven tobe a popular programme, with the subscription of 50,000 customers due to rise to 100,000 in two years. Thisfurther demonstrates the importance of renewable energy within not only the business community but alsothe wider population.

3. From 1 February 2008, all npower renewables UK assets, as well as our development and operationalactivities, have been pooled into the new company, RWE Innogy. To date, our operating portfolio has theability to generate approaching 463 MW of clean electricity (see appendix 1), and we have many more projectsin construction and under development. We are also fully committed to the research and development of lowcarbon renewable technologies and see such Research & Development to be a key enabler in relation to RWEInnogy’s target of 4.5 GW of renewable generation by 2012.

4. Appendix 1 identifies current positions for RWE renewable technology as well as the key barriers to beovercome to achieve large scale deployment and meet the EU 2020 targets. These are also the key technologiesthat are supported by the Renewable Obligation (RO) programme to encourage investment into clean energyproduction.

Achieving the 2020 Targets

5. Our track record and commitment to energy innovation gives us a valuable perspective to identify andsupport the most viable and cost-eVective technologies to maximise renewable energy use. We are fullycommitted to helping the government meet its renewable targets and believe this can be achieved if thegovernment continues to support the most viable and cost-eVective renewable technologies.

6. However, it is important to point out that the EU’s energy policies in general and the Third Energy Packagein particular suVers from a dilemma regarding the fundamental objective of climate change policy—ie,“greenhouse gas” abatement. This is because renewables is only one of several mechanisms that can providereductions in CO2 emissions. One method that could help resolve this dilemma would be to link the penaltyfor a Country that failed to meet renewable targets with a reduction in its CO2 permit allocations.

7. That said, we are confident that existing renewable technologies have the capability to meet a significantproportion of the current 2020 targets, which simultaneously increases the UK’s indigenous energy supply.However, given that the UK’s share of renewables in final energy consumption was around 1.6% in 2006(according to BERR’s “2007 Digest of UK Energy Statistics”); the nearly tenfold increase proposed by 2020



is extremely ambitious and will only be achieved through change. Unless radical transformations are madewithin the areas of grid access, planning consent, and supply chain, existing technologies will not be deployedin time to meet energy targets. EVective government policy is essential for overcoming barriers in these areasand maximise renewable energy capacity if the UK wishes to decrease its energy import supply dependence.

8. The recent Government reforms to the RO mechanism will further enable large-scale deployment ofexisting technologies. In particular, the banding up of “post demonstration technologies” help addresseconomic challenges encountered by renewable technologies, particularly oVshore wind where we anticipatea greater than tenfold increase by 2020. This vast increase in oV-shore development does not come withoutproblems in the form of grid connectivity and planning constraints. Therefore, it is now critical thatGovernment ensure policy stability and consistent support across the UK for the sake of achieving oneclear goal.

9. The draft Renewables Directive provides a second mechanism to help the Government achieve its targets.Article 5.9 allows EU members states to meet their national targets in other countries by trading Guaranteesof Origin (GoOs), which makes reaching the governments goals more achievable without undermining thenational support mechanisms. (As explained in paragraphs 31–33). Furthermore, we feel that the combinationof the two support schemes (RO and GoOs) will not only have a long term positive eVect on the nationalrenewable energy market but they will also greatly change the entire UK energy structure by securing newenergy supplies. (See also paragraph 33 re GoOs.)

10. However, it is important to note that other types of energy generation will still be needed in conjunctionwith renewable energy. Given the large-scale use of wind energy in the UK, and intermittent nature of winditself, traditional sources such as nuclear, coal and gas plants should be used to supplement wind power.

Grid Access

11. The availability of grid connections for renewable projects remains a major barrier to the deployment ofmost renewable technologies, particularly wind and marine renewables. The current grid structure is designedfor conventional forms of generation. Physical grid access and the grid code inhibit, and therefore delay, theconnection of renewable assets to the grid. Furthermore, UK grid code regulations are more onerous thanthose of other European countries. These regulations influence the technical requirements of turbines, whichslows the supply chain while imposing unnecessary costs.

12. Wind developers in the UK must compete for turbines in a competitive international environment.Demand for turbines, in particular, has risen dramatically over recent years and has contributed to risingproject costs for both onshore and oVshore wind. BERR recently commissioned a report3 to explore thecapital and operational cost of renewable technologies, where they found capital costs of wind projects haveincreased by 25% over the previous 12 to 24 months. Furthermore, the costs of turbines, towers and blades areexpected to increase in real terms until around 2010 as a result of supply—demand issues and rising steel costs.

13. However, the problems within the supply chain are not limited to wind farm components but it alsoincludes the lack of qualified staV. Currently these deficiencies are being seen in the areas of engineering,construction and sciences. Due to the fact that the UK is expecting to increase its renewable installed capacityby tenfold then it is easily understood that we will also need to significantly increase the number of trained staVfrom current levels. Therefore, the government has a responsibility to promote the development of renewablesrelated skills across UK schools and universities if they want to increase the chances of reaching the 2020targets.

14. Npower Renewables takes its role as a buyer and employer very seriously. As such we actively seek toengage with manufacturers to develop opportunities in the UK. For example, npower renewables recently co-sponsored (with Business Link North East) “Meet the Buyers—Wind Energy”. This trade fair inNorthumberland aimed to bring together turbine suppliers, the construction industry and local contractorsin order to build relationships between local and international suppliers. We support the development ofvoluntary approaches to developing opportunities for UK manufacturers that can be adopted by the industryas a whole and contribute positively to UK GDP.

15. Priority grid access for renewable generation was addressed in legislation (2001/77/EC) but as yet article7.1, which suggest that EU member states “may also provide priority access” for renewable electricity, has notbeen applied in the UK. This is because the article insisted upon priority despatch for renewables with theoption for Member States to have the choice of priority access (connection). Priority Despatch is provided byeconomic means in the UK as renewable generators receives the benefit of Renewable Obligation Certificates3 Department of Trade & Industry, Impact of banding the Renewables Obligation—Costs of electricity production, April 2007. This

report was commissioned by the Dti and prepared by Ernst & Young LLP.



(ROC), which significantly increases the cost of turning down renewable generation, due to the fact that mostrenewable generation has no fuel cost and because of the loss of ROC’s associated with that generation.Accordingly in a self despatch market such as GB the plant operator will ensure that his generator is running.It is therefore a generally held view in the UK that no further legislation is required in relation to prioritydespatch, npower renewables shares that view.

16. However, we do feel that a complete overhaul of the GB grid connection system is needed to achieve thegovernment’s target for renewables. The outcome of this overhaul should be that all generators can obtain aconnection within the planning timescale of the project (ie the period it takes to obtain planning consent forgenerators such as wind farms). Npower reneweables believes that this outcome is achievable and would makethe need for priority access unnecessary. There is also the argument that priority access could cause existinggeneration plants to be stranded. This will send a negative signal to the market as developers of wind farmsmay also be concerned that at some point in the future they may also find that they are forced to give up theiraccess rights and become a stranded asset.

17. We support the BERR/Ofgem review of transmission access arrangements, as we also believe that changeis inevitable and must be made with the help of an appropriate impact assessment and cost/benefit analysis.Given the government’s aspirations to see an increasing amount of renewable generation connected to thetransmission network, together with the potential for the closure of older plants, we recognise that thetransmission access arrangements must be fit for purpose and enable the delivery of new connections withinacceptable timescales and at costs that are reasonable both for the party seeking connection and for otherusers.

18. Some of these issues could also be addressed in the short- to mid-term with better grid queue managementto enable a more timely connection of renewable generation capacity. This would take out the morespeculative applications that impose more constraining pressures on the application process. In the mediumto long-term, it is very clear that, across the industry, significant investment in infrastructure will be vital toprevent the transmission and distribution grids constraining current and future energy generation. Thisinvestment is also needed to provide for the evolving nature of generation to include more distributed andembedded generation, in addition to existing conventional flexible generation.

19. Any investment in infrastructure must be appropriate and timely; we believe the best way to achieve thisis to ensure that investment is driven by the requirements of present and future projects being developed.Consequently, National Grid with Ofgem’s support need to be more proactive in conducting feasibility anddemand studies, as they have been with the study that lead to the 400KV Beauly to Denny line in Scotland.

20. The current process for developing long-term strategies on reinforcement planning (also known asnetwork development) has had a detrimental eVect on renewable generators by greatly increasing timelines,uncertainty and cost to projects. This puts the UK at a competitive disadvantage compared to other EU states.While other EU governments more proactively forecast grid needs and guarantee grid connections within theirplanning permissions, UK energy companies can find themselves receiving planning permission to build awind farm while not actually acquiring permission to connect to the grid.

21. The current problems impeding the UK’s progress have gone hand-in-hand with obtaining local planningpermission to actually physically build the infrastructure network. For example, to access the windiest regionsof Britain, which tend to be away from main population centres and transmission networks, new sub-stationsor underground/over ground cables must be built to allow renewable generators in these areas to export theirelectricity output. However, proposals to establish these links are often met with strong local opposition,which can frustrate the construction of both the line and the renewable generator. This was seen in the lastnational infrastructure upgrade for conventional power in North Yorkshire, where a second power line tooktwo public enquiries and ten years to create.

22. If these problems are to be overcome, the UK Government must take responsibility to ensure that localimpact and cost issues associated with new infrastructure do not cause further delays. We recognise that theGovernment is taking steps toward this goal through the Planning Bill, which centralise some powers in theproposed Infrastructure Planning Commission (IPC) for new projects. However, the Planning Bill is limitedby its applicability to only England and Wales, and in the process whereby local governments (who will stillbe responsible for consenting most renewable projects) conform with national policy statements. That said,we strongly feel that the planning bill will not only streamline the planning process but also drastically increasethe deployment rate of renewable technologies and secure the UK’s ability to achieve their targets.

23. The three UK TOs are currently reviewing the GB Security and Quality of Supply Standards (http://www.nationalgrid.com/uk/Electricity/Codes/gbsqsscode/) in order to ensure that the SQSS are fit-for-purposegiven the large growth in renewable generation. It is important to point out that these standards definetechnical methodologies that GB transmission licensees shall use in planning and operating of the GB



transmission system. Given the intermittent nature of most renewable generation development ofmethodologies that allow for more eVective use of each MW of transmission capacity is a natural outcome ofthat review.

24. It is very clear that grid access and planning constraints are the two most pressing restrictions on the UK’sability to reach their 2020 energy targets. We feel that these renewable energy objectives are achievable butonly with help from government to resolve these pressing restrictions. That is why these issues need to beplaced at the top of the governments’ agenda through support of the Planning Bill, the development of betteraccess methodologies that are cost reflective and a proactive approach to reinforcement planning by NationalGrid and Ofgem.

25. If these actions are taken, then the UK has a real opportunity to not only meet its 2020 targets but, evenmore importantly, change its energy supply structure towards a much larger share of indigenous renewableenergy. This will reduce dependency on imports and buVer against the eVects of high and unpredictable fuelprices. The UK will also be able to build a strong industrial position in wind power technology and otherrenewables.

Support Schemes

26. Investors are sensitive to political risk and regard frequent changes to policy as a source of significantuncertainty. As such, clear commitments from the UK government and the EU, coupled with stable supportmechanisms, have a significant role to play in the deployment of renewable technologies.

27. Npower renewables supports the Renewable Obligation (RO) and believes that it has to date created apositive economic environment for growth in the renewables industry throughout the UK and indeed has thepotential to ensure that strong investment in renewables continues. It is important to point out that the ROcomes at a cost to the consumers; therefore, it is the governments’ responsibility to verify that it is a cost thatthey wish to undertake.

28. The RO has been particularly successful in engaging large suppliers (because by nature it is an obligationon suppliers) and therefore it has been successful in encouraging significant sums to be invested in therenewables industry. As the chart in Appendix 2 demonstrates, the RO has been very successful in achievingits goals and we support, in principle, the RO proposal announced in the consultation document The Reformof the RO. However, any changes should address the newest technologies deployment of renewable generationcapacity, and provide good value-for-money to consumers in terms of CO2 emissions saved per pound paidinto the RO.

29. That is exactly what we feel has been achieved in the most recent reforms to the RO with the re-bandingof the number of certificates that are given by technology. It is our view that the current level of reform isappropriate, but, as shown in Appendix 2, there is an influence of political risk on deployment rates, as evidentduring the transition from NFFO to the RO.

30. That is why we feel that the government has a clear responsibility to stabilise the market and supportmechanism levels by removing uncertainty and grandfathering the current rules. The government outlined acommitment to the principle of grandfathering in the 2005 Review of the RO. With the exception of co-firing,any reduction in support applies only to future projects (operational after the date of implementation ofproposed changes, 1st April 2009). This reform would not only remove current uncertainty but it would alsofurther encourage the development of more renewable generation resources, making it even more probablethat we can achieve the 2020 targets.

31. A further step in meeting these targets is supporting the RES Proposal (as seen in paragraph 9) regardingthe EU Trade of Guarantee of Origin (GoOs), which is a secondary market driven certificate support schemethat countries can trade depending on their position in reaching their 2020 targets. This is needed becausenational targets have been set with reference to Member States’ ability to pay rather than the resources theypossess; therefore, this flexibility is required in order to minimise the cost and for reasons of fairness.

32. Consequently, we fully support the aim of the RES Proposal to promote an increased share of renewableenergy in all member states of the EU. This resonates well with our strategy to increase the share of renewablesin our generation portfolio through an annual investment of 1 billion euros per year. We also welcome theCommission’s idea to introduce tradable GoOs, in principle to try and encourage a loosely defined marketbased instruments and a least-cost-approach.

33. Unfortunately, the GoOs transfer scheme proposed by the current language of the proposal is insuYcient.We would therefore encourage policymakers to take a more decisive step toward the use of a stronger market-based mechanism. Therefore, the transfer of GoOs should be opened directly to companies, rather than as atransfer via government. This approach would also greatly decrease the possibility of undermining successful



existing national support schemes because it would take any type of national bias out of the equation.However, considering the view on a single European Market and long-term energy goals, we need more clearand harmonised rules to reach the ambitious targets and be as eYcient as possible. To strengthen these goals,the interim targets should be mandatory for all member states.

34. Trade will only provide its full benefit if there is a level playing field across borders. Currently conditionsin the 27 Member States vary widely, for instance, diVering regimes for grid access. It is vital that a system oftrade is brought forward at the same time as progress made on developing an energy policy that applies acrossall of Europe.

35. The support scheme in the UK has been one of the main driving forces behind encouraging newdevelopments into cutting edge technologies while maintaining existing regimes and planning for the future.Therefore, it is safe to say that it would have been a much more diYcult journey to get from where we werefour years ago, when there were less than 200 MW built in the year 2004, to a position where the UK has builtwell over 800 MW of capacity in 2006 (as seen in appendix 2). However, the RO need not be used in isolation;the GoOs mechanism can work in conjunction with the UK’s RO mechanism to achieve the 2020 targets in acost eVective manner, while decreasing the UK’s dependency on foreign energy.

Conclusion

36. While the UK has come a long way in the renewable energy sector over the past 10 years, there are stillmany barriers to the industry that must be overcome if the 2020 targets are to be reached. Grid access, supplychain and consent remain the most problematic areas of concern for the greater deployment of renewabletechnologies and should be addressed by government in a timely manner. Without true, measurable reformsin these areas, the UK will be most unlikely to meet its 2020 targets.

37. Whilst it is important that developers take on the responsibilities and commitments associated withinfrastructure development, it is equally essential that National Grid take a more proactive role inreinforcement planning. Therefore, we feel that Ofgem should be encouraged to permit National Grid inconjunction with developers to take on more risk regarding speculative research into grid demand andfeasibility studies.

38. Finally, we understand that these are very diYcult and complex issues that will not be solved overnight.However, we are also committed to the government’s goals and welcome the debate on how to move forward.We feel that the 2020 targets are so ambitious that they will only be attainable by working together as a team,with government and industry working in partnership for the sake of obtaining one goal.

22 April 2008

APPENDIX 1

RenewableTechnologies Hydro Wind Biomass Solar Wave & Tidal

Types Run-of-river On-shore Techn.: co-firing, Photovoltaic (PV) Tidal barrageLarge vs small OV-shore grate/fluidized Solar thermal (ST) Marine current

bed, gasification Wave energySource: agricultural,forestry residues, live-stock waste

Maturity of Mature On-shore: High development Low degree of still in pilotTechnology Stand-alone Stabilizing potential for increase maturity phase

economically viable powering of eYciency Further developmentOV-shore: Some crucial for reachingtechnical hurdles commercial maturitybut expected tostabilize in nearfuture

Estimated time of Already On-shore: Next Biogas: 10–15 years PV: unknown Tidal: unclearCommercial Maturity 2 Years Biomass: 15–25 years ST: 15–20 years (cost

OV-shore: Next 10 reduction notYears in sight)

Other:2010–20



RenewableTechnologies Hydro Wind Biomass Solar Wave & Tidal

Installed Capacity RWE UK: 62 MW RWE UK On- RWE:UK: 264MW RWE: 0 MW RWE: 0 MW& in Construction UK: 6015 MW shore:3416 MW UK:181 MW UK: 0.3 MW UK: 1 MW

RWE UK OV-shore: 60 MWUK On-shore: 2205MWUK OVshore: 304MW

APPENDIX 2

Build rate of UK wind capacity (MW)

0

200

400

600

800

1000

1200

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Date

Capa

city

(MW

)

Transition from NFFO to RO

Memorandum by Centrica

General Questions

1. How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target?

The UK objective of 15% renewable energy by 2020 represents a challenging but achievable target. As yet isunclear precisely how this figure will be achieved as the capacity of the three diVerent sectors (heat, transportand electricity) to deliver is still being assessed. Centrica’s interests in the sectors contributing to the UK targetare predominantly large-scale wind projects, and microgeneration technologies, particularly those providingheat. We oVer the following brief comments on the potential in each of these areas which are expanded onelsewhere in this response.4 Ofgem estimation calculation: ROC’s are only issued for the percentage of electricity generated from eligible renewable sources. This

qualifying percentage changes on a monthly basis for each station. This estimate of capacity is based on the number of ROC’s issuedin the latest month.

5 Renewable Obligation Certificate generating.6 10 MW npower renewables wholly owned, 331 onshore !60 MW oVshore owned by zephyr Investment and operated by npower

renewables. Some with PPA with RWE Ltd.



Large-scale wind

It is our understanding that around 40% of the UK’s total electricity requirement will need to be generatedfrom renewable sources. Wind power is currently the most economically viable and scaleable renewabletechnology and will play a major role in meeting the target.

Centrica has already made a significant commitment to develop renewables assets as part of our energyportfolio. In July 2003 we announced plans to invest in our own renewable generation assets, primarilyoVshore wind farm developments although we continue to keep other forms of renewable energy generationunder review.

We are currently investing in six oVshore wind farm developments, one of which, Barrow OVshore Wind, isnow operational. Two others, Lynn and Inner Dowsing (LID), are in construction, and are expected to be fullycommissioned by the end of the year. This is currently the world’s largest oVshore wind construction project.

Of the remainder, Lincs had its application for consent submitted in January 2007, and we are awaitingdetermination, whilst Race Bank and Docking Shoal will have their consent applications submitted this year,based on detailed environmental impact assessments. Barrow is a joint venture development with the Danishenergy group DONG; all other projects are wholly owned by Centrica.

We have two operational wind farms onshore in Scotland, the wholly owned Glens of Foudland wind farmin Aberdeenshire, and Braes of Doune wind farm in Stirlingshire in which we acquired a 50% ownership fromAirtricity in July 2007.

We are also investing in a range of power purchase agreements with renewable electricity developers whichwill increase the amount of green electricity that we buy through oVtake contracts in the UK over the next fiveyears. These projects cover a diverse range of technologies such as wind, landfill gas and biomass generation.

Centrica believes that the UK electricity sector is capable of rising to the challenge of deploying renewableprojects at scale over the next decade, though this will require significant eVort from all stakeholders to removebarriers to investment. It also requires that firm investment decisions be made in the very near future on areassuch as grid and in elements of the supply chain. For this reason it is of utmost importance that investors areclear of the Government’s ambitions in this area, and have confidence that these ambitions will be unswerving.

Building oVshore wind costs around three to four times that of gas-fired plant. To meet the targets, therefore,industry will need additional government support through a strengthening of the existing RenewablesObligation targets and extending the timeframe past 2027. This will signal the long-term nature of the UKrenewables sector and, if set at the right level, should encourage the necessary investment in projects, skills andin growing a UK supply chain. A high and visible carbon price going forward would also help the economicsof renewables.

In addition, an eVective, streamlined planning system which allows the delivery of both oVshore and onshoreinfrastructure is crucial. A new consenting regime will need to better manage stakeholder conflict which hascharacterised many developments in the past. Fishing, shipping and radar concerns from MoD and NATSare all potential barriers to the early implementation of new wind projects.

Microgeneration

The sheer size of the heat market as a proportion of the overall energy market (around twice the size of theelectricity market in energy terms) means there is significant scope for the heat market to make importantcontributions to both the 2020 Renewable and 2050 Carbon Targets, both through continued energy eYciencyimprovements and through the deployment of low carbon and renewable microgeneration.

In order to stimulate the widespread deployment of microgeneration technologies, an appropriate supportframework is vital. Any eVective support mechanism for microgeneration will need to recognise the specificdeployment issues involved, and the diVering needs of diVerent microgeneration technologies.

Barriers to microgeneration include the often high up-front capital costs, as well as regulatory issues (includingproblems with planning and high transaction costs for accessing ROCs), and a lack of consumerunderstanding about what can be achieved in this area. All of these barriers will need to be addressed.

The Government currently provides support to some technologies such as oVshore wind in excess of the priceof carbon avoided. This is done when these technologies oVer additional benefits such as diversity of supply,technological learning, and creation of a UK export industry. Where other technologies provide similarbenefits then a similar level of financial support should be available. We believe this is the case for a numberof renewable heat technologies.



Whilst the 2% additional innovation band for microgeneration in CERT is a positive step, we do not believethat this is suYcient to bring about a market transformation in this sector, and do not believe that CERTshould be viewed as the primary support mechanism for microgeneration. Additional assistance will thereforebe required.

Assistance could be in the form of either capital support or revenue support. We see merit in both and wouldwork within either framework to deliver products to our customers. The most often mooted revenue supportmechanism is a feed-in tariV. The eVectiveness of this mechanism is likely to depend on the level at which it isset, and its operation.

Suppliers, who have an existing relationship with customers, are best-placed to administer a feed-in-tariVscheme. Allowing suppliers to reclaim revenue paid out to customers from a central fund is crucial. If thescheme is not funded centrally, suppliers may be disproportionately disadvantaged and unwilling to promotemicrogeneration technologies as a result. The scheme could be funded from general taxation, although we notethe significant revenues that are likely to be raised from auctioning emission allowances in the future andbelieve that this could be a source of future support.

A feed-in-tariV would provide an ongoing revenue stream for a defined period. We believe that if theappropriate revenue were guaranteed, suppliers and others would actively consider introducing servicesdesigned to lower the capital cost of relevant technologies.

Trading of Guarantees of Origin

There is scope for part of the UK requirement to be delivered via trading with other countries but at this stageit is unclear how much trading will take place. Trading across the EU could be a cost-eVective way for the EUas a whole to meet its targets, but this needs to be reconciled with the need to keep existing investments inhome countries on track. The Directive allows for limited trading with countries outside the EU under strictconditions including the import of the electricity generated. Centrica does not oppose this level of trading, butwe strongly oppose any amendment of the EU Directive to allow more widespread international trading. Webelieve this would undermine some of the objectives of the Directive, particularly in reducing dependence onfuel imports, and security of supply, and could significantly undermine investment within the EU.

Furthermore, meeting the UK target predominantly from projects within the UK will have additional benefitsin terms of improving security of supply and building a domestic capability and capacity in the renewablessector, bringing value to UK plc. These benefits will be lost if the domestic target is diluted through trading.Potential UK investors will need to be confident that the UK government is serious about meeting the targetbefore committing resource in this country.

We also have a concern that the potential for trading within the EU will not be known until the middle ofthe next decade. As we have already stated, we believe that the scale of the deployment required is extremelychallenging, and requires firm action to be taken in the short term. Anything that throws doubt on thenecessity for such deployment will undermine chances of achieving changes of the scale necessary.

2. How coherent are these proposals in the context of the EU’s energy policies in general and the Third energy Packagein particular

There are four areas of the EU’s energy policies that will have an important bearing on the renewable energytargets. These are the Emission Trading Scheme, energy eYciency, energy liberalisation and energy securityof supply.

Investment in lower-carbon technologies including power generation will depend ultimately on a strong andvisible carbon price. The European Commission’s proposals setting out a framework for Phase III of theScheme beyond 2012 strengthens the ETS significantly.

Centrica welcomes those measures and hopes the UK will use its considerable influence in Europe to ensurethat the Scheme is not weakened during its forthcoming negotiation phase.

The most cost-eVective solution to climate change is to improve energy eYciency. The government hasprovided a strong impetus for action in the UK, notably through the suppliers CERT programme which willsee energy companies spending £1.5 billion over the next three years promoting reductions in carbon emissionsand installing energy eYciency measures in customers’ homes.

At the EU level more action may be required to ensure that other member states take greater advantage ofthis underdeveloped source of lower carbon emissions.



The European Commission identified a number of pre-requisites for adequate new entry by electricitygenerators that do not exist in many continental energy markets. These include access to electricity networkson non-discriminatory terms as well as ensuring that the necessary network investments are carried out.

The removal of these deficiencies is being driven forward by the EU via its Third Energy Package. TheCommission’s proposals for ownership unbundling remain the cleanest and surest way of ensuring thenecessary cross-border investments to deliver security of supply, liberalised markets and the delivery of a lowcarbon future. The UK is to be congratulated for its support of the Commission’s proposals.

Care will be needed at the EU level to ensure that delivery of the EU targets for renewable energy does notundermine the EU ETS which could be the basis of a global carbon market, and the source of support for lowcarbon technologies in the future.

3. To what extent are these targets capable of improving the EU’s security of energy supplies

Renewables could have a significant positive impact on security of supply in the UK and elsewhere in the EU.

At the current time, around 25% of Europe’s gas needs are being met from east of the EU. Over the comingdecade both the UK and the EU are forecast to be increasingly dependent on imported gas. By 2015 the UKwill be importing as much gas as it produced in 2007, although meeting the EU renewable target will have someimpact on this. Moving to a renewable electricity target of around 40% would drop load factors for coal andgas plants dramatically—gas fuel use could drop by around 50% from 2007 levels by 2020/25 from acombination of wind and new nuclear build.

This reduced UK gas dependency will increase the diversity of the UK’s fuel mix, and furthermore will meanthat a large proportion of its energy requirements come from sources where the fuel is free. Given the needfor conventional back-up to renewables, additional conventional generation will need to be planned for goingforward.

Grid

4. How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energygenerators

Directive 2001/77/EC on the promotion of renewable electricity covers a number of areas, including renewabletargets, support schemes and grid system issues. With regards to grid system issues, the UK has opted toprovide non-discriminatory grid access for all forms of generation and does not give preferential treatment torenewable generation.

However, in practice renewable generators do have priority with regards to the transportation of electricitybecause by putting in expensive (unattractive) bids and oVers in the Balancing Mechanism, these generatorsare unlikely to be constrained oV when National Grid has to take action to balance the transmission system.

It is important that a balance is met between conventional and renewable generation, not least because theformer is still required to provide back-up for renewable energy which is mostly of a variable nature.Renewable generation without adequate reserve or backup would have security of supply issues.

5. To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is itconsistently a problem across all member states?

As identified by the Energy White Paper and confirmed by the Transmission Access Review carried out byOfgem and BERR, access to the transmission system is a significant barrier for both renewable andconventional generation. Currently there is more than 40GW of projects (both renewable and conventional)waiting to connect to the transmission system with connection dates which extend beyond 2018.

To replace existing conventional generation, and to provide necessary back-up to new renewable generation,around 22.5GW of conventional power stations will need to connect by 2020 in locations which are oftenremote and distant from centres of demand and/or current generation locations. Centrica believes that newaccess arrangements should support the connection of renewable generation, but at the same time notundermine investment in existing and new conventional generation, in particular as intermittent renewablegeneration requires back-up from conventional generation.



6. How does Use of System charging affect grid access for renewable energy generators? How far can the different levelsof renewable energies take up in different member states be attributed to Use of System charging and cost sharing rules?

Both renewable and conventional generators pay for the use of the transmission system (TransmissionNetwork Use of System (TNUoS) charges) and for balancing services provided by National Grid as Systemoperator (Balancing Services Use of System (BSUoS) charges).

The TNUoS charge has a both a locational and a non-locational element. The locational element is toencourage generators to connect in areas close to demand as this would require less transmission infrastructurethan generation located in more remote or peripheral areas. The further away from demand, the higher theTNUoS charge and in addition the more electricity is lost as a result of transporting electricity over long(er)distances. This is true for both renewable as well as conventional generation.

Centrica believes that the locational element of the TNUoS tariVs is non-discriminatory and gives atransparent investment signal.

In the UK constraint costs are already considerable, in particular because of the high level of (renewable)generation in Scotland compared to Scottish demand and the limited capacity of the Scottish interconnectors.Under the current regime, these constraint costs are socialised via BSUoS charges across all generators andsuppliers. A further increase in generation in Scotland will most likely exacerbate the problem and result ineven higher BSUoS charges.

7. What impact do the various systems of reinforcement planning and work have on encouraging renewable generation?How important is the issue of constraint in increasing Member States’ renewable generation?

As much of the UK transmission system is coming to the end of its asset life, in addition to the work neededto extend the network for new projects, National Grid also has to replace the existing network. This putspressure on resources and equipment. This has been exacerbated by the Regulatory requirement to only investin eYcient and economic reinforcement, as signalled by signed connection agreements.

The Transmission Owners have not been allowed to invest strategically, ahead of the predicted growth inrenewables, and this is now impacting the ability to provide connections in the required locations.Consideration should be given to allowing Transmission Operators funding for planning and public inquirycosts and perhaps even network reinforcement costs before individual connection agreements are in place.

8. To what extent is further co-ordination of National Regulatory Authorities needed?

It is important that the UK takes into account the regulatory regime in other EU countries. There is a dangerthat if the UK regulatory regime becomes too complicated and/or creates uncertainty (for example theproposed oVshore regime), investors and developers will spend their money elsewhere.

9. How far do current regulations inhibit access to the grid?

Getting planning consent is also a major issue for both generators and National Grid and is being addressedby the Planning Bill currently before Parliament, although it is uncertain how eVective this bill will be inaddressing the problem.

As part of the Transmission Access Review the industry, with National Grid, is making a number ofimprovements to the existing transmission access regime. For example, changes to the transmission accessqueue process have been made recently, moving away from a solely first come first served basis to one thatalso reflects a generation project’s progress. This should help a number of renewable projects, with consents,to leapfrog other connections delayed due to issues such as planning.

Support Schemes

10. At what level should the EU be involved in harmonising or regulating support schemes offered by Member Statesto encourage renewable energy generation?

The EU target places a collective responsibility on member states to tackle climate change. Each country hasvery stretching targets with an appropriate share the burden of delivery and the legally binding element of theframework ensures that there is a significant penalty for inactivity. This means that the EU regulation of therenewable energy framework is central to ensuring that all countries deliver.



Individual member states can choose how to meet their targets through a combination of relative eVort on,for example, energy eYciency, electricity and transport. This allows each country to maximise the indigenousrenewable resource and ensures the most cost-eVective delivery of the target. Having decided how to meet thetarget, each country can implement national support mechanisms that will best deliver the targets, taking intoconsideration additional and non-fiscal barriers and the extent to which they can be overcome. The RO, forexample, works particularly well in a liberalised market as in the UK.

The EUETS has taken a similar approach in setting a national target, and then allowing individual memberstates to deliver the target as they see fit, an approach we support and which we believe to be successful.

We note that a major barrier to the delivery of an increase in renewables is the need to ensure publicacceptability for both the costs of meeting the targets, and the physical impact of, for example, significantlymore wind turbines. This may be more diYcult to achieve if a forced harmonisation gives the misleadingimpression the targets are a Brussels initiative.

11. What impact have the various schemes in operation across the Member States had on encouraging renewableenergy? How have these schemes affected take-up both by producers and commercial and domestic consumers?

There is no doubt that there is a marked diVerence in the level of take-up of renewable energy across memberstates. Fundamentally, we do not believe that this is a measure of the eVectiveness of the national supportschemes, but is a reflection of other barriers to deployment such as grid connection, planning permissions andpublic engagement.

Each country has varying motives for implementing renewable energy programmes, with climate change andsecurity of supply being sometimes conflicting strategic objectives. In the same way there are a wide variety ofbarriers to development that exist across member states with grid constraints, local planning consent, nationalplanning decisions, consumer engagement, renewable resource availability, and supply chain issues eachhaving a diVerent impact in diVerent countries.

The lack of development in the UK is often compared to a high take-up in Germany where a system of feedin tariVs is seen to have been eVective in bringing on significant renewable investment against a “failing” ROin the UK. We believe that it is wrong to assume that this is because feed-in tariVs work and the RenewablesObligation does not as other factors are at play.

This fundamentally understates the additional encouragement that German developers receive in the form ofeasy and cheap access to the grid, low cost finance for developments and relaxed planning constraints. Bycontrast, each of these three areas represents significant barriers to development in the UK.

Indeed, there are around 8 GW of developments that are held up in the UK planning system, many renewableprojects have grid connection dates that extend out to 2018 (for which developers have to securitise the costs),and there are no additional finance benefits oVered to developers outside the RO.

Centrica believes strongly that the development of large-scale renewables should continue to be supportedunder a reformed and banded RO.

Maintaining but reforming the existing system will allow a continuous flow of investment, will maintaininvestor confidence, and is consistent with the parameters of a competitive market. Under a banded RO,suppliers will remain obligated to deliver renewable generation, thus encouraging their participation inrenewables.

We believe that the RO provides a mechanism that works well in our liberalised energy market and is not thesource of construction delays. We believe that with some modification it is capable of being extended to meetthe EU requirements. Any move to radically change the support mechanism is likely to result in a marketdamaging hiatus in renewable build, as investors struggle to get comfortable with new parameters. This wouldoccur just at the time when we are trying to accelerate the development of projects and could jeopardise theUK’s achievement of the EU targets.

Mega-projects, such as the proposed Severn Barrage project which have limited potential to be copiedelsewhere and are characterised by their enormous size, should be supported outside the RO. If allowed intothe RO scheme, these projects will either produce a significant amount of generation thus potentially floodingthe market with ROCs (and causing a price crash), or no generation, potentially starving the system of ROCs(and causing a price spike). Either way, the existing system would be destabilised, threatening existinginvestments.



12. Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Isnecessary investment hampered by lack of market harmonisation?

There is currently a significant volume of renewable power traded across EU borders and between memberstate and non-EU countries. In principle, Centrica does not believe that this cross-border renewables marketwill be aVected by the existence of a variety of support schemes. However we are mindful that as a price isattached to Guarantees of Origin, it would be inappropriate for existing projects to receive high windfallbenefits resulting from the EU mechanism. We therefore support the EU framework in restricting the tradableGoO to new plant only. This would not prevent the trade of renewable power from existing projects, but theGoO would not be transferred.

We do not believe that investment is hampered by a lack of market harmonisation. The barriers to investmentin the UK are well understood and include diYculties in securing consent to build, connecting easily to thegrid, and sourcing generators and ancillary equipment in an appropriate timescale, and are not to do with thesupport scheme.

13. To what extent would the enhanced use of Guarantee of Origin certificates require the harmonisation of supportschemes?

Centrica understands that the design of GoO trading arrangements is such that it does not require theharmonisation of support schemes. In the long run, we would expect harmonisation to occur as all low-carbontechnologies are supported by the carbon price.

However, the system as devised enables each country to continue and through the system of “PriorAuthorisation” protect the national support mechanism. In the UK, once a project has opted for the RO asits support mechanism, it continues to get support until the end of the RO (2027). If the project receives ROCs,the Guarantees of Origin are automatically presented for cancellation and cannot be traded.

This therefore requires the developer of a new UK renewable project to decide between the RO support andthe opportunity to trade Guarantees of Origin on the European market (provided the UK Government hasgranted Prior Authorisation). In this way, we believe that the EU mechanism does not require harmonisationof support schemes.

21 April 2008


Witnesses: Mr Michael Lewis, European Managing Director, E.ON Climate and Renewables, Mr Kevin

McCullough, Managing Director, npower Renewables, and Mr Sarwjit Sambhi, Director of Power andRenewables, Centrica, examined.

Q260 Chairman: Gentlemen, thank you very muchindeed for coming and sparing your time. As youknow, this Committee is looking into renewableenergy and the target for this country, which at themoment looks like 15% of our total energy by 2020.We are looking at whether this can be achieved, whatthe likely complications are in achieving that in 12years’ time. For the record, I am going to ask MrLewis to start oV with an opening statement and passto your colleagues, and then we will have questionsfrom the floor.Mr Lewis: Thank you very much, Chairman. Myname is Michael Lewis. I am Managing Director forEurope at E.ON Climate and Renewables. That is anew unit we have set up within the E.ONCorporation to deal with our internationalrenewables business. We have centralised all of ouractivities across Europe and North America into onefunctional unit which now manages our entirerenewables business plus our JI/CDM business, thatis to say, the flexibility mechanisms under the KyotoProtocol. In terms of my opening statement, I will say

a few words about E.ON’s aspirations and what weare intending to do in growth and how we see the UKfitting into that. We are the seventh largest windenergy generator in the world at the moment. Wehave 1.3 GW of capacity, with approximately 90%wind. We are aiming to grow to 4 GW by 2010, andthat is spread across Europe and North America, sothere will be approximately 2 GW in North Americaand 2 GW in Europe. We have a coverage of aroundnine countries at the moment and we are bothonshore and oVshore but the majority is onshorewind at the moment. In terms of how renewables fitsinto E.ON’s overall strategy, we announced some 11months ago that we were aiming to reduce our CO2

emissions per unit of generation by 50% by 2030.Renewables is one of the central pillars for achievingthat. Looking out to 2015—we do not go out to 2030yet in terms of our planning—we aiming to go to 10GW of renewables. As I said, in terms of where theUK fits into our plans, we are very keen oncontinuing to grow our onshore portfolio, which iscurrently around 250 MW, both wind and other



19 May 2008 Mr Michael Lewis, Mr Kevin McCullough and Mr Sarwjit Sambhi

technologies, at the moment biomass, where we havethe largest dedicated biomass plant which recentlyopened in Scotland, and, of course, oVshore. Wealready have Scroby Sands, which I understand theCommittee visited recently, and we are currentlybuilding Robin Rigg and have a number of otherprojects in planning. So the UK is certainly one of themajor markets where we aim to grow.Mr McCullough: My name is Kevin McCullough withRWE Innogy, the second German utility representedon the panel. Our company in the UK is npowerRenewables, and npower Renewables has inconstruction at this moment up to 670 MW worth ofwind in the UK, of which about 500 is currentlyoperational and the rest in construction. We built thefirst oVshore wind farm, North Hoyle, in 2003-2004and are currently building our second at Rhyl FlatsoV the coast of Wales. Like my colleague here, wehave aspirations to grow that further on the back ofthe Renewables Obligation mechanism here in theUK. Our focus as RWE however is not just the UK;it is EU 27, and whilst there is no hard wall at EU 27,that is the focus of our deliberations for renewabledeployment, and we are looking to invest in excess ofƒ1 billion per year from this year onwards. The vastmajority of that in the early years will be targetedtowards the UK but as other markets open, especiallyin large-scale oVshore, and the competing market willbe oVshore Germany, North and Baltic Seas, andincreasingly moving on to the Netherlands so that weget the high-volume deployment throughout Europe.Briefly, my background is 24 years in the powersector here in the UK, starting on black fuel plant,coal and gas, throughout the Eighties and nineties,sometimes international work developing powerplants around the world, with a two-year spell inretail business here in the UK, consolidating retailbusinesses which have now become the npower retailbrand. For the last five years I have been dedicated torenewable development of various types, chiefly windbut including hydro, biomass and, most recently,marine, both wave and tidal sources here in the UK.Mr Sambhi: I am Sarwjit Sambhi from Centrica. Ihead up our UK power business, which is currentlyseven operational gas-fired stations across the UKand 360 MW of wind, a mix of both onshore andoVshore wind. I am also responsible for our twoconstruction projects. One is the construction of thegas-fired Langage plant in Devon and also theconstruction of the Lynn and Inner Dowsing windfarm in the Wash. In terms of our future investmentin power generation, we are investing most of ourcapital in oVshore wind. After the projects that I havejust mentioned, the next big project we will belooking at is the Lincs oVshore wind farm project andfurther beyond Lincs, which is a 2011 project, wehave Docking Shoal and Race Bank, 500 MW each,which we see to be constructed in the 2013-2015timeline.

Chairman: Thank you very much. We have five keyquestions to ask from five members of theCommittee. After we have gone through those we willthen pick up any other issues that colleagues wouldwish to put but please, if you think we have missedanything that you would like to record for ourinquiry, please do so.

Q261 Lord Ryder of Wensum: Can I please kick oVwith a general question about the targets and whetheror not you believe that the 15% and 20% targetsrespectively are achievable?Mr McCullough: I will certainly give a view. If youlook at the various components that make up thetarget being achievable, one is clearly the sectorresponding on the back of the RO mechanism todevelop the requisite number of projects. From anindustry perspective, I think we can definitely say thatwe have responded. We have something like 2.4 GWof installed capacity now, we have 6-7 GW awaitingdetermination in the various stages of planning andconsenting, and 9-10 GW of other projects across thewhole sector awaiting submission to the planningprocess. If you look at the total volume of gigawattswithin the planning and consenting cycles, there is inexcess of that required to meet the 2015 targets in theUK already. Clearly, however, not all of those will orperhaps should be determined. There will be good,bad and indiVerent projects in there. But I think interms of the industry responding, it has respondedwell. Of the two main blockers to that, one is gridaccess and the other is the length of time within thevarious stages of planning that it takes for a projectto be determined, either positively or negatively.Some of my own projects—and again, I thinkprobably for those people represented on theplanning, they are quite often in that open-endedplanning determination stage for in excess of two orthree years, and when you are talking about verylarge infrastructure projects of 500, 700, 1,000 MW,that is a very costly exercise for the sector to maintainon an open-ended determination. So it is achievablebut there are certain things that have to really beaccelerated in terms of supporting the industryresponse, because we already have responded, andmaking sure that grid and planning align to make ita reality.

Q262 Lord Mitchell: Can I just ask on that, what ifyou had to assign probabilities in your own mind asto the achievability of certainly the 2015 target thatyou mentioned?Mr McCullough: My personal belief is that unless theInfrastructure Planning Commission is created withteeth and therefore an ability to really acceleratedeterminations through the planning process, youare probably looking at best at 70% realisation of thetargets, and that is an “at best” scenario, from our




view. We have significant issues with the variousdiVerentiators between planning regions and whilstwe always want to seek to have a local content and avery significant local content in determination, unlessthere is a smoothing of the process that means that wecan get to a determination, positively or negatively,and move on, it will be no better than a 70% at best.That is a personal view.Mr Lewis: Can I add to that? I endorse everythingthat Kevin has said. There are a couple of additionalpoints I think it is worth making. The question reallyis, what is the target? With the energy eYciency targetin the background, of course, the renewable targetflexes up and down depending what happens to grossenergy consumption. If you look at some of thestudies that have been done on a European basis, ifprimary energy consumption stays about the sameand you are asked to get to an additional 600 TWh ofRES, if (a) we meet the energy eYciency targets and(b) the eYciency targets are translated into primaryenergy consumption reduction—a big “if” but ifthose two things happen, that number falls to around280 TWh, which is a significant reduction in theamount of renewables you need. I think there is aquestion mark there over the extent to which energyeYciency can play a significant role. I think theCommission has been quite clever in tying it to energyconsumption because it does give the Member Statesan incentive to reduce energy consumption becausethat in turn reduces the amount of RES you have tobuild. That is point number one. The second point isthat flexibility is also important in achieving the pan-European target. We at E.ON are looking at thebusiness from a pan-European perspective and, as faras we are concerned, it would be better if we couldmeet the target from a European perspective at leastcost, i.e. through some kind of tradable mechanismthat allows you to exploit the resources that arecheapest first but spread the cost across all of theMember States. That is an important point as well. Ifyou look at the countries that have the most wind onthe system, namely Germany and Spain, it showswhat can be achieved when the system is set up todeliver it. In the UK last year we had an additional0.5 GW of wind. In Spain there was 3.5 GW added totake them above 16,000 MW. That means if youcould replicate the 3.5 over a 10-year period, yes, youcan achieve the target. If we stay where we aretoday—I do not think we will, by the way, as Kevinhas said, but if we do, we certainly will not achieve it.It is very diYcult to put a probability on it becausethere are so many variables, but I do think that, fromour perspective, flexibility and looking at the role ofenergy eYciency are also key.

Q263 Lord Ryder of Wensum: Is there anythingfurther you would like to say about the role of energyeYciency measures?

Mr Lewis: I think the only thing I would add is to goback to this point about the extent to which energyeYciency is translated into a reduction in energyconsumption. I do not know the answer to this but Ido think it is important that when energy eYciencymeasures are taken, we actually look at what impactthey have in terms of energy consumption, becausethe so-called rebound eVect does indicate that even ifyou increase the energy eYciency of heating andlighting in houses, it is not necessarily reflected in adrop in energy use because people either turn thethermostat up a notch or leave the lights on.

Q264 Chairman: Just before we leave Lord Ryder’squestion about targets, would you like to commentabout the target date? One of the earlier witnesses—I do not know whether you have had a chance to lookat the web and read some of the earlier evidence—suggested 2030 might be a more acceptable targetthan 2020, to avoid the problem of too much earlyemphasis on wind generation and with all theproblems that that might create in terms ofintermittency, et cetera, and indeed pressures on thesupply chain. Do you have any views about thedate itself?Mr Sambhi: From our perspective, when we look atthe date, 2020 is achievable. You raise an issuearound intermittency—we do not see that asinsurmountable. We are not the company that runsthe grid system, so the Grid are the experts but theevidence that we have heard from the technicalexperts suggests that you can manage a grid with asignificant amount of intermittency. Yes, the rest ofthe generation in the portfolio has a diVerent role toplay. That just makes the requirement for changemore necessary. In terms of supply chain, thebottlenecks that we are seeing at the moment are onesthat can be overcome, in say, a few years. You canmove manufacturing capacity for, say, some of therolled steel components and of, say, the towers to theUK. In fact, we know that some manufacturers areconsidering that. Vessels has been quoted as apotential bottleneck. The lead time for constructing anew vessel is a couple of years and, when we lookdown the list of new vessels that are being floatedaround, if you pardon the pun, it is quite significant.All of the issues that we see today around potentialbarriers to getting a steep build rate of wind power wedo not see as issues that will continue over a numberof years.Mr McCullough: I think any step to extend thewindow of opportunity for targets in my view wouldbe retrograde. In the opening marks I made about thetarget question I said the sector has responded and isresponding. All of us—and there are manycompanies represented in this sector—have a goodmany projects that will be capable of making thetargets achievable. The challenge that we have, and




why I believe that it would be retrograde, is that thelargest factor about making these targets areachievable now that the sector has responded interms of the industrial players is that it would be avery disappointing thing to put a target back becausewe thought that there was insuYcient vigour to makesure that things like determination and planningconsenting we could make work by the IPC, or thatwe could look at the supply chain to make sure thatit was responsible enough to meet that demand.Talking about that latter point, if you look at thesupply chain, yes, renewables, in particular wind, isthe most cost-eVective form of generation in highvolume, and the Renewables Obligation certificatesand indeed the various tariVs that exist aroundEurope are intended to actually bring that highervolume generation to the fore quickest and soonest,so that we can meet those targets and have analternative to carbon-intense technologies. I thinkthe point that is made about whether such highvolume in one particular technology, in this case theone that is closest to the market, wind, will deterothers such as marine, wave, tidal, et cetera, or evengeothermal, solar thermal and the like I think is a bitof a moot argument. We have a responsibility tomake sure that we do this in the most cost-eVectiveway, and I think we can very soon get lost in theromance that these technologies are closer to marketthan they are. They are not. We as an individualcompany, RWE Innogy, are investing currently intwo diVerent types of marine-based technologies, andthere are others represented as well. But the reality isthat we are now in that valley of death situation withthese technologies where there are numerous typesthat need commercial assistance to make it from thedesign board or the swimming pool in the universitylab to actually take it into a harsh realityenvironment. The banding of the RenewablesObligation to give those extra ROCs per megawatthour installed I believe is suYcient to actually makethem suitably attractive and, frankly, if we delayedthrough indirect means or otherwise targets for,eVectively, wind because it is the cheapest to market,we would fall significantly shorter of the target thanI illustrated earlier.Mr Lewis: I would only add to that I think the singlemost important variable in getting companies likeE.ON and my colleagues here to put the resourcesinto delivering this target is that we have a certainamount of credible commitment in terms ofgovernments and the EU wanting the targetachieved. If they start fiddling around and saying“Well, actually, we are going to push it back a littlebit, or we are going to change this”, youautomatically create uncertainty, which in turn startsto make us ask questions about the long-termcredibility. So I think now the target is in place andthere is a very firm framework, that has given us a

basis on which to commit the resources, which isindeed why we created E.ON Climate andRenewables.Chairman: That is remarkable unanimity by all threewitnesses and actually very encouraging, if I mightsay so. For the benefit of my colleagues who have justjoined us, to say that all three witnesses have aYrmedthat a 15% target in terms of energy consumptioncoming from renewables, principally wind, isachievable, subject to certain conditions, butpractically achievable by 2020. We are now going tomove on to the next question.

Q265 Lord Walpole: Good afternoon. I was one ofthe people who were fortunate enough to go toScroby Sands and I must say I thought that yourcolleagues put on a very, very good presentation tous. I thought it was most interesting. I was going toask you what impact you think the regulationscontrolling grid reinforcement and expansion willhave on encouraging renewables but before I do that,do you think that the energy consumption in thiscountry and in the EU will ever become static or godown, bearing in mind the number of houses we aretold we need to build in this country and the numberof households and cars we are going to have? Is itpossible it would ever come down, the total energyconsumption?Mr Lewis: That is a bigger question than justrenewables. Is it possible? I guess we have seen adecoupling to some extent of economic growth withenergy consumption. If we can start to drive that—and this is the point I made earlier—if you cantranslate energy eYciency, the technical solutions ofenergy eYciency, into a reduction in primary energyconsumption, then yes, there is no reason why youcannot do that. The question is, how do you actuallyachieve that?Mr McCullough: If I may add, my Lord Chairman, itis a very interesting conundrum and one that I wouldprefer to answer in terms of global sustainability, if Imay, because if you look, clearly, the net growth inthe UK is actually not that significant; it is a smallpercentage year-on-year, but what we are actuallyseeing behind all of that—and this is common to mostdeveloped Western European and North Americancountries—is a declining demographic in that thepopulation is getting older, the birth rate is gettingsmaller and, as that shifts, I think within theforeseeable future, certainly by the 2050 targets whenwe are talking about CO2 reduction, energy eYciencymoves, it is likely that we will see some decline in thatkind of time frame, but before we get there I think wehave a peak to see that we have not yet reached, andit is very hard, as my colleague from RWE Innogyhas said, to actually model what that will look likebut all of us, as energy companies, clearly have thatin mind because in order to actually deliver growth




for our shareholders we have to have a view on whatthe longer-term view of market size is. So rather thanactually see total volume size, what we are looking atseeing, and where most of the energy is beingexpended in new product base is in the scope ofenergy eYciency and energy services, so that youmove away from the scenario where, as a consumer,you pay less for the unit consumed the more you useit, which has a weird irony to it in this age when youare trying to conserve energy and increasingly youare seeing products brought to the market where thattrend is turning, and, coupled with demographics,certainly for western European countries, it willplateau, in my view, and it will eventually shrink, butnot for a number of years to come.

Q266 Lord Walpole: I think that is a very helpfulreply. Could we go back to the grid then? Whatimpact do the regulations controlling gridreinforcement and expansion have on encouragingrenewables?Mr Sambhi: The grid issues that we have for a highwind build rate are really around the various modelsthat are being discussed as to how you invest. Thecurrent model is user basically commits tounderpinning the investment that Grid would make.Alternative models that are being considered—andyou may have heard the expression—are connect andmanage, for example. Now, there are issues with thecurrent model. For example, they do not promotewhat one might call riskier investments, such as—Iwill pick an example—we have lots of capacity, say,in Scotland; we have onshore bottlenecks in terms ofgrid in getting that surplus to England; a riskierinvestment might be a long sub-sea cable, but that isnot in the remit of National Grid. It is not rewardedfor taking riskier investments like that. Connect andmanage has a disadvantage in that you can build allthe generation plant and once it is built you might notactually have the grid there to take the power away,so you have built all this renewable power butactually it cannot run. Nobody has the answer in theindustry yet. This is what the Transmission AccessReview Group is reviewing and as part of the CUSCmodifications—sorry to introduce a bit of jargon–they are soliciting industry input.

Q267 Lord Walpole: I do not know which one ofyou—and I am going to put my foot in it now—wasgoing to do the Outer Hebrides project.Mr Sambhi: It was not any of us.

Q268 Lord Walpole: That, to my mind, seemed quiteextraordinary that someone was going to put 250large wind turbines out there, and the cost of bringingthe stuV even to the mainland must have been totallyastronomical, let alone joining up to the grid, whichI suppose exists up there somewhere because it must

join up the nuclear stations. It just seemed to me itwas not on. Am I totally wrong?Mr Sambhi: This is the Lewis project?

Q269 Lord Walpole: Yes.Mr Sambhi: Aside from the local planning issues, theeconomics of the project were never going to be great.The fact that you have three major suppliers sittinghere and none of them invested should tell yousomething.Mr McCullough: The Isle of Lewis project was anAMEC/British Energy project jointly so they are bestplaced to comment on the economics. However, inthat kind of scenario, just to give some context, onthe one hand, you have absolutely superb windconditions. You also have a community that ispredominantly rural and clearly in high need of local,sustainable work for many people, not just throughconstruction. So you have on the one hand thebalance of the Highlands and Islands’ need for goodand long-term jobs against any of the largeinfrastructure projects around the British Isles, whichat best have a grid connection that takes us to thecoastline. So for any of the projects that the three ofus are working on at the moment, all of them verylarge scale, we have this dilemma: at the best we getto the coastline and then we have to look atestablishing grid connectivity. So simply because theIsle of Lewis wind farm happened to be on the Isle ofLewis, the principle of it being oV the mainland is nodiVerent actually to that being on any large-scalewind park of 500 or 700 MW around the actualshoreline. The infrastructure cost is, in my view,going to be of the same order of magnitude. Comingback to your core question about basically can thegrid cope, we have to bear in mind that this is notunique for renewables and the grid infrastructure inthe UK was built on very large centres of generation.When you look at what is happening on the broaderpicture beyond renewables, on 1 January this year,for example, the Large Combustion Plant Directiveclock started ticking on very many of the ageing coal/fossil fuelled fleet that will be closed by 2015. If youoverlay on that the Magnox reactors that will alsoclose in that time and the AGR fleet that will diminishby 2018–20, we are looking at a total large-scalechange-out of some form of about 40% of all of theinstalled capacity in the UK by 2020. That is aphenomenal change that the grid has to cope with.Typically, for the projects that we have all built onthis panel, to date they have been more or less of thetype that would be classed as distributive local energygrid connections so that they connect at a lowervoltage distributed energy and are easier for us tomanage, providing that there is spare capacity on thegrid locally to do that. So when siting a windproject—and this is what will determine the good, thebad or the indiVerent—it is not only about wind, it is




not only about location, it is about the gridconnectivity, so that the cost of that can beminimised. One of the key challenges that we have—and frankly, this is where I would encouragemembers of the Committee, if not canvassed already,to canvass the views of National Grid and Ofgem onthis matter, because certainly working on variouspanels looking at grid, there is a real healthy interestby the National Grid Company and the distributivegeneration companies to look at innovative ways,including connect and manage, to explore whatalternatives exist. At the moment we have the ironicsituation where the grid code that the National Gridhas to adhere to was based on those very large centresof generation, land-based around the power stationsthat we have seen all around the UK, and the samerules apply to making that determination whether itis type X, Y or Z generation, irrespective of thevolume of megawatts being considered. One of theprohibitive things that they have clearly is that meansthat extends the cost base of their work and, being aregulated business, that has implications for Ofgemand ultimately the consumer but it is one of thoseessential steps that National Grid have to go throughwith users in the system such as ourselves that needthat point of connection to really explore in a lotmore detail what work can be achievable, because thesizing of the grid at the moment is historically builtaround very large centres of generation, increasingly;even the largest of the wind farms that we are lookingat around the shores are smaller than the 1,300 MWsizing of any line loading, for instance, in the UK.Therefore it does need to be re-energised andreinvigorated debate, and that has to be with theexperts, who are National Grid.Lord Walpole: I think that is very helpful.

Q270 Chairman: Make we just ask, just to pursueLord Walpole’s question, you saw the Times article atthe end of last week showing a diagram of a possibleNational Grid oVshore high-voltage cable runningfrom the Northern Isles literally right round thecoastline to connect large oVshore wind farms. Howrealistic is that?Mr McCullough: From a purely technical perspective,that capability exists not just round the UK but tolink into Europe is perfectly feasible. We haveinterconnections now through France at 4 GW, thattakes predominantly the nuclear flow into the UKfrom the French generators. We haveinterconnectors throughout Europe. There is no realtechnical challenge meaning that cannot be extendedto the sea and marine environment. The realchallenge comes in the practical financial challenge ofwho pays, and there is a huge investor position to betaken there, because you are not looking at anythingthat will have short-term returns. You are talkingabout a hugely expensive oVshore grid, technically

feasible, but that provides a challenge that at somepoint in the chain the consumer will, unless there issome other scheme brought to bear, have to actuallybear the cost of that.Mr Lewis: May I just add to that? I think that isabsolutely right. The key thing here is there is a hugeamount of new capacity that needs to come on to thesystem, both renewables and replacement for thecapacity that is going to fall away as the LCPD comesinto eVect. The key question is, what is the mosteVective way of creating a grid that satisfies that? Itmay be an oVshore high voltage cable. It may besomething else. The point is, we need a strategicapproach to look at the plausible scenarios and whatgrid system is the right one, rather than the ad hocsystem we have at the moment, where you build aproject, you connect it and, if it triggersreinforcement, you have to reinforce the grid. Thequestion is, given that we are planning to expandoVshore massively, what is the right gridconfiguration and therefore how should NGT, orsomeone else, be incentivised to make that happen inthe least cost way to the consumer, who ultimatelywill have to pay for it? I think that is the key: takinga longer-term view of planning and finding, at leastapproximately, what the right answer is rather than amore ad hoc approach.

Q271 Lord Powell of Bayswater: I just wanted followup on that particular point. Could you illustrate thesort of incentives you think would be necessary tomake that feasible, in very broad terms? I am notsuggesting it is a very easy calculation to make.Mr Lewis: The incentives they have at the momentare fine in terms of the rate of return on investment,or RPI minus X system. You get the investment. It isa question of when is the investment done? Does itanticipate growth or does it trail growth? At themoment we have seen a number of projects waitingfor grid reinforcement to come on. It is always behindthe curve, and therefore you have projects waiting tocome on rather than anticipating that the grid has tochange in advance, providing incentives in advance.The problem is that the Grid will not do that becausethey would then have to take the risk that they are notrewarded for that investment through the regulatorymechanism. If there can be some kind of systemwhereby Ofgem agrees in advance that certaininvestment is required and NGT can pass thatthrough in their transmission system charges, thenyou will get anticipation rather than waiting to makethe investment. I think it is the timing issue.

Q272 Lord Powell of Bayswater: I see that point. Doyou think it is do-able consistent with Europeanregulation on things like subsidies and so on?




Mr Lewis: I do not see why not. You are not askingthem to take a subsidy. What you are saying is weneed to have an anticipatory mechanism to ensurethat the right strategic bridge is built and they arerewarded for the investment they make.

Q273 Lord Powell of Bayswater: It looks a bit likestate aid, does it not?Mr Sambhi: The requirement is to allow a higher rateof return on these assets. That is not a subsidy. Thatis saying that actually, you are not going to take awaythe rent that the investor deserves because of the riskthey have taken.

Q274 Lord Mitchell: Can I say, on these mega-projects that we have been describing, mega-capitalcommitments, if we look at other countries where itmay be pertinent—I suppose we are talking aboutSpain, Denmark, France—do you see ways where theprocess is diVerent there that would enable it tohappen better there? In other words, do we havelessons to learn from what they are doing?Mr Sambhi: When I look back on the penetrationthat renewable energy has had, say, in Germany, thelesson learned for me is that they have introducedsomething and they have stuck with it. Yes, they havea diVerent support mechanism for renewable energyin Germany in the form of feed-in tariVs and yes, thatcould work in the UK but, as far as I see it, in the UKtoday we have the RO, the renewables obligation. Itis a young mechanism; it has been in place since 2002-2003, and we have to give it the run time before youstart seeing the kind of penetration that we have onthe Continent. That is why one of the things—backto the first question: are the targets achievable? Oneof the requirements from my perspective ismaintenance of the RO, because now, five yearsdown the road in terms of having the RO, we arestarting to see investor confidence—not just utilityinvestor but other forms of investor—starting to getcomfortable with oVshore wind risk. A big part ofthat is that they see the RO as something that isdurable and works. The key for meeting the targets isto extend the duration and increase the absolute levelof the RO.Lord Mitchell: I must say, my Lord Chairman, Ithink that is a really fundamental point.

Q275 Lord Rowe-Beddoe: I would just like to saythat I endorse the sentiment expressed by the LordChairman in receiving your commitment to seeingthat this target could happen. That is somewhatdiVerent to previous witnesses that we have heardhere, and bearing in mind, obviously, that all three ofyou have identified two major blocks—one, gridaccess, which we have been discussing, and the otherwas planning. I think it is fair to say that myunderstanding is that all three organisations say that

unless there is considerable improvement in boththose areas, the energy targets will not be met. Can wejust focus for a moment on planning? There is aboutto be before Parliament the Planning Bill. Can youcomment as to whether you see this as a significantstep forward to improve the planning process?Mr McCullough: The one thing that is incrediblypositive is that all of the stakeholders involved in thevarious aspects of planning and ultimatedetermination have realised that we have a problem,and the problem is very severe and needs to beaddressed. The challenge that we have is that we havehad various rounds of initially planning policyguidance issued to local planning authorities, andindeed regional planning authorities, because theway these matters are approached in Scotland andWales is somewhat diVerent to in England. Thatplanning policy guidance was initially very soft andnot uniformly adhered to in terms of taking whatconstitutes good, bad or indiVerent projects. Thenthe somewhat strengthening planning policyguidance moving on to planning policy statements,which tend to have more teeth, again, a positive stepto try and help educate and show by example localplanning authorities what makes good and badplanning determinations. Still we are looking at asituation where many of the projects—just oneexample, a 750 MW oVshore wind farm, Gwint yMor, a Round Two oVshore site, went into theplanning determination process in December 2005and prior to that it had three years of very extensivedeliberations about environmental impactassessments, strategic siting, marine ecology,ornithology, et cetera, as you would expect, yet stillwe are here now with that not determined. We havelocal support but we have the challenge of Secretaryof State determination, placed with many otherchallenges for determination to be made. The bottomline is that we are not getting these determinationsthrough in anything like a timely enough manner.You are seeing a trend in the sector; you are onlyseeing, frankly, the people with the biggest chequebooks capable of keeping these projects alive,because to actually keep those kinds of infrastructureprojects alive and sustain them through a furtherround of iteration, including public inquiry, is a fairlydangerous thing to do in terms of making sure thatyou come anywhere close to the targets, because it isincredibly costly. To go back to the Planning Bill initself, again, I think there is a recognition that initialguidance was well-intentioned but did not materialiseany real diVerence in the determination process. Thepolicy statements that were intended to reinforcethat, again, only very incrementally added a phaseshift. We all hope that the Planning Bill somehowfinds a way to allow that planning process to be morevigorously run through in the timetables required forthat particular process. I have to say, at this stage I




hope that that is the case but I am very doubtful thatwe will see any real material benefit in the short term,because there is a lag involved. No matter what thePlanning Bill says, there is the education process thathas to take place throughout the various planningauthorities, of which there are many.

Q276 Lord Rowe-Beddoe: If that be true, thenclearly, your earlier statement that we can achievethis target by 2020 must be under very seriousconsideration.Mr McCullough: My earlier statement was basedalready on the knowledge of what I know about theplanning determinations.Mr Lewis: Having said that, I think there are somepositives. Let us not be too negative about it: movingtowards a single consenting process, having nationalissues dealt with nationally and local issues dealt withlocally are all good steps forward which mean thatyou will not have unnecessary delays, asking whetherwind is needed at all in a public inquiry when thatpolicy has already been decided by Parliament. All ofthose things are a good step forward but, I agree,these things take time to move through the system,even once the Bill has been passed. It takes time toimplement, and time is something we do not have agreat deal of before 2020. The only other thing to sayis there are still a large number of projects below the50 MW threshold that I am sure will not be covered,but when you look at oVshore, the larger projects,yes, I think the Planning Bill will have an eVect on theability to get those projects approved.

Q277 Lord Rowe-Beddoe: The infrastructureplanning.Mr Lewis: Correct.

Q278 Chairman: Could I come back to the answerthat you gave to the earlier question, particularly MrMcCullough from nPower? Could you just developyour point a little further for the benefit of theCommittee, because we have already had Ofgem andNational Grid give evidence. Could you just developthe sequence that you believe would enable us tocomfortably achieve—or perhaps with some eVort—these targets, that is to say, Ofgem permittingNational Grid, with appropriate returns oninvestment, to invest in anticipation of requirementand then for the contractors to respond?Mr McCullough: I think it is a two-step process, thefirst of which is not that onerous. One of the thingsthat we in the industry, certainly RWE and nPower,and, I believe, others have been calling for is theability for NGT to have a properly funded scope ofwork to look realistically at the changing landscapeof connectivity in the UK. We are an island and wehave had a legacy of very large-scale centralisedgeneration, and that landscape is changing very

dramatically. The technology or focus is, of course,renewables because, as we touched on earlier, the vastmajority of new projects are not actually the megaprojects; they are very many small, locally connected,distribution voltage connections that are quitequickly eating into the spare capacity that is availableto allow that generation to run whenever there is arenewable source available to allow it to run, so in noencumbered way. There is a transmission accessreview, as already mentioned. There are severalworking groups that have brought forward manypeople into the diVerent processes to actually look atthe solutions to this, but one of the things that we arecalling to look at is the broader scope of looking atand making sure that Ofgem in particular understandthat, one, we have the initial scoping exercise to do,and then ultimately what will result is perhaps areview of the landscape which talks aboutconnectivity, especially as it results in very large-scaleoVshore grid infrastructure, even before you get tothe type of the map that you referred to in The Timesthat shows a grid network around the UK,potentially linked to Europe. We are talking aboutbinary connections here. At best, where projects areadjacent, we can look at synergies and benefits byputting a grid access point that can connect one ormore, but the way we are looking at the geographicaldispersal of those projects at the moment, they arevery much one-oV connections that at the momenthave unique solutions, depending on where theirpoint of connectivity is.

Q279 Chairman: I know, but you are talking aboutan increase in capacity, and ultimately the consumerhas to pay, and presumably pay up front. I do notunderstand how we can have a significant increase ingrid capacity, because those who will supply thefinance will obviously require an appropriate rate ofreturn and therefore prices must rise, must they not?Mr Sambhi: In terms of the cost of total investment,generation and grid?

Q280 Chairman: Correct.Mr Sambhi: Absolutely right, and there has beenmuch press around the scale of the cost of investingin oVshore wind. If you are putting in 40 GW of wind,the minimum price ticket on that is going to be £80billion, at minimum.Mr Lewis: I think it is worth saying the consumerwould not—the phrase you used, Chairman—haveto pay up front. By trying to create a more strategicanticipatory framework, you are not trying to ask theconsumer to pay up front; you are trying to makesure that when the wind farms come on, the grid isthere to take them, whereas at the moment we havelarger projects waiting to come on because the gridhas not been reinforced. So it is a question of puttingthe timing together rather than asking them to pay up




front. Certainly they have to pay but, as my colleaguesaid, the key point is the grid has to change in anycase. It was designed for a diVerent era. A lot ofinvestment will have to go into it to make it fit for anew era, and certainly the consumer will ultimatelyhave to pay for that investment. But we are nottalking about taking money up front. We are talkingabout trying to co-ordinate it so that theinfrastructure is built as the projects are ready to goon to it.Mr McCullough: If I may come back, one of thethings that is worth pointing out is that clearly at themoment we have the legacy system as we have it at thetime that we are trying to aggressively connect to helpmeet government targets, and EU targets beyondthat. One of the things that is potentially verydangerous in this time is to forget the longer termstrategic view of what we need in the future. Forinstance, when some colleagues in the sector talkabout auctioning the capacity that is surplus in thegrid at the moment, my view is that it is a very short-term, narrow view that will result in quite a short-term spike in the cost to the consumer, because youdo not actually look at fixing the problem. You lookat taking a very black and white view: the system isthis big, we have that much capacity in it, so we willauction the spare capacity in various blocs. That willcreate in particular supply and demand. There is hugedemand for that capacity, not just in renewables butin all forms of new generation technology wanting toconnect, so any kind of capacity auction in the shortterm that fails to look at the longer term strategicneed is potentially very dangerous, andunfortunately, if we go down that route of that shortterm-ism, we will get to a roadblock very quicklywhere prices will spike, and then we will have torepair the problem even later on, when we have somenew capacity connected.

Q281 Lord Dykes: Against that complexbackground, assuming that all the planning and gridconnection issues could be resolved, and obviouslythat is a big assumption; it is extremely complicatedindeed, and bearing in mind what Mr Sambhi saidjust recently about the German system, what wouldbe the impact on the deployment of renewables if onedid change from the Renewables Obligation to afeed-in tariV system?Mr Lewis: I think the first thing, as I said when I wasanswering about the target itself and the year, is itwould immediately create uncertainty. Stability ismost important in terms of marshalling the resourcesto deliver this target. People want to know that theycan rely on policies over an enduring period whenyou are making an investment that is going to last 25or 30 years. So changing the feed-in tariV in itself willgenerate uncertainty because it will create strategic

uncertainty for the people who have to make theinvestment.Mr Sambhi: If you want to put an estimate on it, youwill have a three-year hiatus whilst investors say,“OK, I’m backing oV this market because I am notquite sure what the regulatory regime is going to be,”and in three years we can achieve a lot in terms ofconstruction.Mr Lewis: I would also add that the feed-in tariV itselfis not a cure-all. You have various systems ofincentive across the world. The feed-in tariV has beenvery successful in Germany but it has its drawbacksas well. The way it is structured means it does notnecessarily incentivise the best wind resources tocome on first, so you do not necessarily get thecheapest solution. That is point number one, butpoint number two is Spain, which has a very largewind penetration, more than 16,000 MW, has a moremarket-based system. So it is not the incentive systemthat has created the problem in the UK. As you said,it is to do with the grid and the planning issues. Ithink fiddling around with the incentive mechanismnow is a recipe for creating a hiatus, as my colleaguehas said. It is not a recipe for making the targets bedelivered any quicker.

Q282 Lord Dykes: You have maintained a highdegree of agreement on this issue. Do you agree withthat, Mr McCullough?Mr McCullough: I absolutely fundamentally agreewith that. I think if the comments I made about the70% or so being achievable are predicated on what weknow today, one of the absolute cornerstones ofstability for the investment community is the RO inthe UK. If you look historically, and my colleaguefrom Centrica has pointed out already the feed-intariV in Germany, for example, where you have nearsaturation of onshore wind farm capacity, somethinglike 20,000 MW, yes, has been a very successfulinstrument. However, if you look at the UK pre-2002-2003, when we had a whole series of eVectivelyfeed-in tariVs, non-fossil fired obligation, where therewas a tariV mechanism established to encourage theonset of the cheapest renewable form of energy on tothe grid first, that had a near flat growth for the tenyears preceding that, with only a very small amountof generation coming on in the UK. When the ROwas introduced in 2002 we had a period of about ayear or 18 months where the investment communityeducated themselves by involvement with all thestakeholders about how long-term this would be,how stable it would be, what kind of cross-partysupport it would have, all of those very essentialingredients to give us confidence that, rather than goto country X, Y or Z, we can invest very large scalehere in the UK, and without a shadow of a doubt theRO, if you look at the growth since that 2003 period,it is now nearly exponential. As I said in answer to




one of the first questions, we have 2.4 GW of installedcapacity today and 1.8 to 2 GW of that have beenbrought on since the onset of the RO. We have afurther 6.5 GW in planning awaiting determinationon the back of the strength of the RO, and we have afurther 9 to 10 GW all in various stages ofdevelopment, again, on the strength of the belief thatthe RO is the mechanism that has given trueconfidence to investors. We are now seeing secondaryinvestment in some of the schemes. We are seeingpeople like the traditional investment fundcommunity, from the pension funds, et cetera,globally wanting to actually take a piece of what isconsidered very stable, very predictable, despite thefact it is driven by market and therefore is more pricereflective than many of the feed-in tariVs that areartificially based at some point or figure and do notreflect the true cost of generation.

Q283 Lord Dykes: Mr Sambhi, did you want to addanything?Mr Sambhi: The only thing I would add is feed-intariVs may have a place in promoting other forms ofgeneration such as micro-generation or evendistributed heat. So, as a mechanism, it can beapplied to stimulating technologies where there is anabsence of deployment.

Q284 Chairman: We are almost running out of timebut before I ask colleagues whether they have anymore questions, we have spent all our time on wind.Can you give us any evidence or comment on othersources of renewable energy, for example, solar orwater?Mr Lewis: I will give a quick view on what E.ON isdoing. As I said in my introductory statement, we are90% wind, we are 9% biomass/biogas and 1%everything else. We are currently looking at how weposition ourselves in relation to those othertechnologies. I think it is fair to say that outside ofwind, biomass and biogas will be the twotechnologies which make up most of the additionalgrowth. Biomass has certain challenges. It is diVerentfundamentally from some of the other renewables inthat it has a significant variable cost component, soit is not just in the up-front investment; you have tomanage the long-term fuel procurement.Nevertheless, we do see that as a cost-eVective way ofmeeting at least part of the targets. I think of theother technologies, there are still a number oftechnologies where there is a long way to go in termsof reducing costs. If you look at solar PV, it isextremely expensive per megawatt hour of energyproduced, particularly in northern Europe. E.ON islooking to drive down the cost of that. We have ajoint venture with Schuco, the manufacturer of

photovoltaics, to use thin film technologies, and wewould look to do a joint project with them to try anddrive the costs down and ensure that that technologycan be deployed more widely. There are otherprojects we are looking at—wave and tidal power inthe UK. Again, it is more of a test and learn phaserather than a deployment phase, but we do expect thecosts of that to come down over the next decade or so.In a nutshell, apart from biomass, most of the othertechnologies are extremely expensive at the momentbut we do expect to see the costs fall over the nextdecade, and it may be that certain technologies startto emerge as ones that can be rolled out in a large-scale deployment like tidal stream or concentratedsolar power.Mr McCullough: I would agree certainly in terms ofbiomass being perhaps the second greatestcontributor in terms of volume. The one thing Iwould say, however, is if you look at the UK inrelation to natural resources available, wind is anobvious resource: 40% of Europe’s wind is actuallyhere, fortunately, in and around the UK, and we donot exploit it enough. The same applies however forthe tides and the marine environment. Clearly, we areall aware, for instance, that the Severn estuaryscheme is raised again as a potential, and it is verytrue that that technology is actually quite simplistic.It is not that complex. It is very costly because of thelarge civil engineering construction there, but I amonly talking about the direct cost. In a similar waythat biofuels has quite often, unless it is trulyindigenous and local, more global implications forsustainability that have to be considered, likewise dovery large tidal and marine schemes. They all havetheir consequence of deployment. The energy captureis available. There is no doubt about that. I think allof us without exception are beginning to invest in thevery small-scale—not pilot scheme but small-scalecommercial scheme, which is no diVerent to wherethe wind sector in the UK was ten or 15 years ago. Itis a cycle that has moved on, so whilst wind ismaturing, marine is not quite embryonic any more; itis beginning to see its commercial reality. On top ofthat, the other thing that we clearly have to consideris that we are a European utility and we do not justlook at the UK market. We look at a selection ofmarkets, so solar thermal in Iberia, geothermal insome parts of Europe has great potential, and we arelooking at all of those, but for the time being in theforeseeable future, by far the largest contributor totargets will be wind.Mr Sambhi: We have got some interestingdevelopments at the distributed generation and heatlevel which have the advantage that you save on the7% of transmission loss that you get down thepower lines or the 1 to 2% cent through gastransmission. For example, we have pilotprogrammes for air source heat pumps and also a




ground source heat pump as well. We have made aninvestment in a company called Ceres Power, whichhas quite a unique fuel cell technology which takesnatural gas and air to produce both heat and powerin the home. All of those are emerging technologies.To start getting them up the growth curve,potentially not for the next decade but the decadeafter, we need to see demonstration of deploymentmechanisms like feed-in tariVs to support them.

Q285 Lord Powell of Bayswater: There is a verylarge advertisement in today’s Wall Street Journalplaced by Japanese sources for heat pumps, whichyou have just mentioned. I have not the faintest ideawhat they are. Could you give us a 30-secondtutorial?Mr Sambhi: Basically, a reverse refrigerator. An airsource heat pump basically, through a refrigerant,takes heat out of the air and pumps it into yourhome. The ground source heat pump does the samebut it is using heat from the ground. That, in anutshell, simplistically, is what they do. Thetechnology is in its early days but the main issue iscost, bringing the unit cost of the infrastructuredown.

Supplementary memorandum by E.ON

1. The Committee asked for supplementary evidence on the remit of Ofgem and whether this was consistentwith delivering the transmission investment needed to support delivery of the EU’s renewable targets in theUK.

2. The principal objective of the Gas and Electricity Markets Authority (the formal statutory body whichgoverns Ofgem), in carrying out its functions under the Electricity Act 1989, is “to protect the interests ofconsumers . . , wherever appropriate by promoting eVective competition.” Consumers include both existingand future consumers.

3. The Authority also has to have regard to guidance from the Secretary of State on the attainment of anysocial or environmental policies, in carrying out its functions under the Act. This guidance has to be laid beforeboth Houses of Parliament before it can be issued. The last guidance was issued in February 2004 and refersto the 2003 Energy White Paper and the policies in existence then.

4. Other obligations are also relevant including its duty to contribute to sustainable development and tosecure a diverse and viable long-term energy supply.

5. We support this approach which gives Ofgem a clear focus on the interests of consumers and helps avoidit having to make judgements about competing energy and environmental policy objectives, which we believeare more appropriately matters for political judgement. This also helps create a regulatory framework wherecompanies operating within it know how the Authority is going to approach regulation. However, indetermining how best to protect the interests of consumers, the Authority has to have regard to other socialand environmental goals.

6. The key question is whether these duties permit the Authority to allow transmission companies to recoverthrough their transmission charges the funding they need to construct the new transmission assets required tofacilitate the delivery of the UK’s renewable energy targets, where some of this expenditure may be neededbefore specific projects for connection to the grid have been identified. We believe they do permit this if theright conditions can be met.

Q286 Lord Powell of Bayswater: The Japanesepresent it as the answer to all climate changeproblems.Mr Sambhi: The reality is if we go beyond 2020 andstart to think about the 60 or even 80% reductionin greenhouse gases by 2050, we have to start seeingaccelerated development of these types oftechnology over the next 10 years, otherwise thatlonger term goal is shot.Chairman: Let us hope all members of theCommittee will still be sitting here to discuss 2050!I just have one request to make before we close thepublic session. It would be very helpful to theCommittee if you could submit in writing some briefthoughts on how the remit of Ofgem might bechanged to meet the point which all of you havemade about investment by the Grid in anticipatingadditional supply to meet additional renewablesdemand. I think that would help us because we arecoming to take evidence from the Minister and weare going to Brussels. Unless anyone has any otherquestions or there are any final statements, if I mightsay so, it has been a very helpful session. You havebeen extremely clear, and also everyone seems toagree with each other, which is quite remarkable.The formal session of taking evidence is closed.Thank you.



7. In Great Britain, transmission licensees operate a very “shallow” connection policy which means that mostrevenue is recovered through Transmission Network Use of System (TNUoS) charges. Only the costs of verylocal connection assets are recovered through connection charges with the generator concerned. TheAuthority allows transmission companies to recover revenue through charges if it can be shown that there isa need and that the investment is eYcient. This is a valuable discipline to ensure that large amounts of capitalexpenditure are not committed abortively with customers ultimately carrying the cost.

8. At present the transmission companies meet this requirement by building their networks in order to meetthe oVers for connection that they have made to generators, and do not build strategically to meet a predicteddemand for generating capacity, as the Authority does not allow them to recover the relevant revenue on thatbasis because there is a risk that the need for that capacity might not materialise.

9. We see no reason why the Authority’s duties would preclude a more strategic approach. The Authoritywould need to be persuaded that the proposed expenditure would in fact be required to connect the renewablegeneration needed to meet the EU targets and that the expenditure needed to be committed before some orall of the required renewable generation asked for a connection.

10. This should be possible provided there is a clearer understanding of where and when the expectedgeneration would be built than exists at present. Transmission companies should be able to provide thisevidence by reference to the Government’s own intentions for example to make available areas oVshore forrenewable development under the “Round 3” Crown Estate leasing process. Although the identity ofsuccessful bidders will not be known until later in the process, the sites designated for leasing and the level ofgeneration they can accommodate will be apparent earlier on. The Government’s renewable strategy to meetthe proposed EU renewable targets to be published in 2009 could provide a more comprehensive basis for sucha strategic approach and should go further in identifying the required levels and general locations of renewableinvestment and the required transmission reinforcement. Reform of the planning system along the lines of thePlanning Bill would also assist in providing more predictable timescales for renewable and indeed transmissiondevelopment.

11. This approach would be further supported if the Secretary of State were to issue updated and more specificSocial and Environmental Guidance which would refer specifically to the Government’s policy for delivery ofthe EU renewable targets, which the Authority would then have to have regard to in considering theinvestment requirements of the transmission companies.

May 2008

Supplementary memorandum by Centrica

Introduction

The Committee has asked for further information on Ofgem’s7 remit with regards to transmissioninvestment necessary to meet the EU’s 2020 renewable target. The question is whether Ofgem’s remit wouldrequire changes to allow transmission owners (“TOs”) to take a more strategic approach to networkinvestment.

Transmission Investment

TOs have a statutory duty to build, develop and maintain eYcient, co-ordinated and economic networks andto facilitate competition in the generation and supply of electricity. The process of setting the TO allowedrevenue means that TOs can only recover cost deemed eYcient and economic by Ofgem. Therefore TOs willgenerally only undertake transmission investment when generators have signed a connection agreement andhave made a financial commitment to underwrite the network investments.

Strategic investment carries the risk of stranded assets because generation projects that were anticipated maynot materialise. Stranded assets result in additional costs to TOs or consumers (the former if the investmentis not considered eYcient and economic).

Although user commitment is an important principle for avoiding creation of stranded assets, because thenetwork is reactive, it can result in a piecemeal and delayed approach to network reinforcement. This mayappear cheaper in the short-term, but may be more costly in the long-term. Because of the long lead time ofinfrastructure projects, timing of investment is key, in particular when there are only 12 years left to meet theEU’s 2020 renewable target.7 Formally the Gas and Electricity Markets Authority, the body that governs Ofgem.



Ofgem’s Remit

Ofgem’s primary duty is to protect the interests of consumers, by promoting competition where appropriateand regulating monopolies. In addition to its primary—overriding—duty, Ofgem also has a number ofsecondary duties, relating to sustainable development, the environment, security of supply and vulnerablecustomers.

Part of Ofgem’s secondary duty is to have regard to Social and Environmental Guidance (“Guidance”) asissued by the Secretary of State.8 In short this means than when carrying out its duties Ofgem should takeinto account the social and environmental targets set out in the 2003 Energy White Paper. However, theGuidance is not prescriptive—as the market is said to be best placed to deliver cost eVectively the outcomessought—and does not cover implementation of specific social or environmental measures that would havesignificant financial implications—as these will be implemented by Ministers.

A Case for Change?

Centrica is not convinced that a change in Ofgem’s remit is required to allow TOs to take a more strategicapproach to transmission investment, although a diVerent interpretation of the existing criteria regarding“economic and eYcient investment” and “interest of consumers” may be necessary to take account of short-term as well as long-term costs.

Firstly, the existing framework (TO licences and Ofgem’s duties) allows for better co-ordination between TOsand developers. A good example is National Grid’s recent initiative to introduce a co-ordinated connectionapplication window for Mid-Wales. This has meant that a group of developers could come forward withina specific timeframe to underwrite the transmission investment which probably would not have happened ifindividual developers had applied for a connection within diVerent timescales.

Secondly, we believe that under the existing framework a more strategic approach is already possible byallowing TOs to apply for planning consents and pay for public inquiries before receiving firm commitmentsfrom generators. The cost of this preparatory work is small compared to the actual cost of the infrastructureproject and is far outweighed by the potential time savings. It should therefore—under certain conditions—be considered economic and eYcient and in the interest of consumers.

Finally, we are not convinced that the existing framework prevents Ofgem from agreeing to actual strategicinvestments as well as associated preparatory work where there are clear indications that projects will comeforward in due course, even if connection agreements have yet to be signed. For example, oVshore wind isallocated to specific coastal zones. The Crown Estate has recently released its round three leasing programmewhich details the size and the location of the next round of oVshore wind projects. Potential parties still haveto bid for development zones, but as these projects are key to meeting the government’s renewable targets theyare likely to go ahead and additional network capacity will be required. Clearly under these circumstancesstrategic network investment will be economic and eYcient and in the interest of consumers from both anenvironmental and a long-term cost perspective though the challenge of minimising costs remains.

We recognise, however, that Ofgem may be restricted with regards to certain strategic network investment.As mentioned above, under the current Guidance, environmental measures which would have significantimplications for consumers or regulated companies will be implemented by Ministers. It is our understandingthat the Guidance will be reviewed as part of the Renewable Energy Strategy (“RES”) consultation, expectedlater this month. A final RES document setting out how the EU’s 2020 renewable targets will be delivered, isexpected to be published in spring 2009. This document could be the basis of strategic network investment tobe sanctioned by the government and/or Ofgem.

June 2008

8 Social and Environmental Guidance to the Gas and Electricity Markets Authority, DTI, 23 February 2004.

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MONDAY 2 JUNE 2008

Present Bradshaw, L Mitchell, LDykes, L Paul, LFreeman, L (Chairman) Walpole, LJames of Blackheath, L


Witnesses: Malcolm Wicks, a Member of the House of Commons, Minister of State for Energy, Mr Simon

Virley, Director of Renewable Energy and Innovation and Mr Tim Abraham, Director of EU Energy,Department for Business, Enterprise and Regulatory Reform, examined.

Q287 Chairman: Good afternoon, Minister. We arenow in public session. May I welcome you and thankyou very much for making time available. Iunderstand that you might like to make an openingstatement and you have kindly agreed—so that mycolleagues can keep an eye on the clock—to finish nolater than 5.15.Malcolm Wicks: Lord Freeman, it is good to be here.I am joined by two colleagues, Simon Virley who isthe Head of our Renewable Energy and InnovationUnit and Tim Abraham who is the Director ofEuropean Union Energy. I am grateful to theCommittee for this opportunity to set out theGovernment’s views on the Commission’s veryimportant proposal for a directive on the promotionof the use of energy from renewable sources. We facetwo major energy policy challenges, one is tacklingclimate change by reducing greenhouse gas emissionsfrom energy related sources; the second is ensuringour country’s energy security. Responding to thesechallenges the heads of government at the 2007Spring European Council agreed ambitious targetsto deliver a 20% reduction in EU greenhouse gasemissions by 2020 and also to ensure that 20% of totalEU energy comes from renewable energy sourcesagain by the same date of 2020. The EuropeanCouncil also endorsed measures to support carboncapture and storage and to improve the functioningof the European Union Emissions Trading Schemewhich is very much the centre piece of the EU’scarbon reduction policy. The resulting climate andenergy legislative package published in Januaryrepresents, I believe, a landmark policy frameworkthat underpins our global objectives of securing acomprehensive international agreement ultimately totackle climate change. In line with the overall EUrenewable energy target the Commission hasproposed individual binding national targets forrenewable energy, including a 10% minimum bindingtarget for the use of renewables in transport to beachieved by each Member State. An overall 15%renewable target has been proposed for the UnitedKingdom and to put this in context this compareswith a current UK figure of less than 2%. Renewable

energy is already an integral part of the UK’s energystrategy however and we are taking significant stepsto drive up the level of renewable energy domesticallythrough a comprehensive raft of measures. TheGovernment is fully committed to meeting its shareof the overall European target but that is not tounderestimate the ambitious and challenging natureof it. Achieving it will require a step change increasein the proportion of our energy coming fromrenewable energy resources over the next 12 years,almost a ten-fold increase in fact. Over the summerwe will consult on the most cost eVective way to meetthe UK’s share and will introduce a new renewableenergy strategy next spring. We must also not losesight that the 2020 renewable energy target is not anend in itself; it must be considered as an importantcontributor to the EU 2020 greenhouse gas targetsand as a stepping stone to meeting 2050 carbon andenergy goals. Turning to the proposal itself, becausethe cost eVective renewable potential for eachMember State was not taken into account in thesetting of the targets and because of the significanteconomic implications of the target, it is imperativethat Member States are able to deliver their targets ina way which minimises costs, and obviously the issuesof energy costs are uppermost in our minds at thepresent time. It is also important that the EU candemonstrate to the wider world that it can achieveambitious targets in a way which reinforce ratherthan hinder the competitiveness of our industry. CosteYciency is therefore essential to the credibility of thetargets. In practice this means that Member Statesmust have suYcient flexibility in how they meet theirtargets suited to national circumstances. TheGovernment therefore supports the principle ofrenewable trading between Member States, supportsderogations for exceptionally large projects that arenot complete by 2020, possibly the Severn Barragefor example. We welcome the indicative nature of theinterim targets. The Government opposes, on theother hand, a number of the mandatoryadministrative and regulatory requirementsproposed in the directive, including those in relationto priority access to the grid for renewable generators



2 June 2008 Malcolm Wicks, Mr Simon Virley and Mr Tim Abraham

and use of renewable energy in buildings. Thebinding nature of the 2020 target provides, webelieve, every incentive for Member States to removeunnecessary barriers to deployment. Additionalmandatory requirements on Member States aretherefore, we judge, unnecessary and do not takeaccount of specific Member States’ circumstances.Finally, may I say that the draft directive is currentlybeing considered by the Energy Council andEuropean Parliament. The March European Councilagreed that the package should be adopted before theEuropean Parliament is dissolved for the 2009elections in order to demonstrate EU commitment inthe next round of international negotiations on a newglobal climate change deal.

Q288 Chairman: Thank you, that is extremelyhelpful. It might be useful to you, Minister, to knowthat we have had about 12 sessions so far of thisCommittee taking evidence and making visits. Weare hoping to produce a report for publication inOctober as a contribution to informing theirLordship’s House. It might be helpful to theCommittee if you would comment as to whether youthink that target date of perhaps the end of Octoberis going to ensure that we make a contribution—hopefully supportive in many ways—for the workthat is being done by Her Majesty’s Government andalso by the Council and by the European Parliament.Malcolm Wicks: I think that would be very helpfuland very timely. We are consulting, as I indicated, onour renewable energy strategy; in the coming weekswe will be publishing a document. It is a consultationdocument; we are inviting contributions. The aim,therefore, is to finalise our strategy by the spring ofnext year. I think your contribution will be timely.Chairman: Thank you very much. If we may we willstart the questions. I am going to ask Lord James tocommence the questions.

Q289 Lord James of Blackheath: Minister, I amafraid this is going to be rather like arriving in themiddle at Lords to be told by the umpire that you aregetting a ration of two or three bumpers an overinstead of the one you were expecting because thequestion is going to come with a few little extra bits Iam afraid.Malcolm Wicks: I have not practised my hook for along time!

Q290 Lord James of Blackheath: I am sure we shallfind it very eVective! The first part of the question isto ask whether there is the possibility that we aregoing to lead to an over-dependence on renewabletechnologies as a result of choosing a commitment of20%. Depending on perhaps wind to the detriment ofour diversity and security of supply. I want to add tothat that if we are looking at an achievable target by

2020—and at the moment we are advised by otherexperts who have come to us that wind is eVectivelythe only thing that can achieve it in time and we knowthat we are now looking at a commitment possibly tonuclear as well but which may not be possible to comeon stream in that time—are we going to find asituation in which we have presented ourselves withan unachievable and impossible target deadlinebecause we have not put enough investment into thenecessary infrastructure required to get to 20% ofwind by that time? As a Committee we have been tosee a wind farm and I think we were all unanimouslyvery unimpressed at the lack of equipment requiredto extend the wind farm concept suYciently throughthe coasts of Britain in that time because there wereonly two ships with the necessary craneage inexistence at this present moment which could do thetask. Should the Government not therefore be takinga major initiative to invest in providing those ships todrive it and therefore create the infrastructure bywhich to achieve the target if we are going to dothis piece?Malcolm Wicks: Let me comment on the broad issueand if one of my colleagues has a contribution tomake on the supply chain ships et cetera perhaps oneof them might care to do that. The first thing to say,as I acknowledge in the statement and as we allacknowledge, is that the renewable targets is anextremely demanding one. I always emphasise toaudiences—not to this audience because you know itas well as I do—that this is a target about all energyand not as hitherto electricity. I say hitherto becausethe UK had its own targets for renewables but wetended to couch them as a percentage of electricity.This is all energy. The second thing I would say isthat, as you know, our contribution as it were to the20% target is likely to be 15%; it is still being discussedwith the Commission because it varies from MemberState to Member State, rightly so because sometraditionally are rich in hydro resources, for example;we all start from diVerent starting points. So it ishugely challenging. As I said, we are somewhat below2% of all energy coming from renewables at thepresent time, so 15% in a short space of time is verydemanding. I agree with you on that, but what Iwould say is that it is possible; indeed, we aredetermined to hit the target. Our renewable energystrategy which we will be consulting on quite soonshows us how we mean to get there. We need to getthere for the two reasons I have stated, one is becausethose of us—the majority I think now—who areconvinced about the science of climate change (thereare one or two dissenters I think in this House, butmost of us are convinced by the science of climatechange) realise that we need to do radical things toget there. As you know, this commitment of the UKGovernment needs to be seen alongside othercommitments, not least our relatively new




commitment to civil nuclear energy. Going forwardone can see a circumstance not by 2020 but way after2020 where sizeable proportions of our electricitycould come from nuclear (which is non-carbon) andsizeable proportions of electricity (some might say35% or 40%) would be coming from renewables.

Q291 Lord James of Blackheath: Minister, I haveheard you say two things there which I would like totake up particularly, the first is that you arerecognising without actually saying it, I think, thatwe are talking here about two separate and parallelagendas, one is renewable energy which is carboneYcient and the other one is a renewable source ofenergy for this country which is aVordable within theworld economy. We are moving at such a rate of costper barrel at the present moment that we have to findways of cutting that cost which is certainly going tohappen if we can get the renewable energy within ourown indigenous resources. However, does that notimply that a diVerent approach should be made to thestatements which were being made by theGovernment last week to the eVect that there is still26 billion barrels’ worth of oil in the North Seafollowing the 37 billion that have already beenextracted and that has been turned by analysts—andby government analysts as well I believe—into anexpectation of an increase of 4% in output for theforeseeable future. Would it not be better to beaiming at the present cost per barrel, and theadvantages of extraction costs that that would imply,to move to get that up to somewhere around four orfive times that figure in order to use that resource fora period of time to extend the period in which toachieve the renewable energy with more time on sideand more opportunity for eVective and manageableinvestment to get to the higher renewable energyafterwards living oV the incremental output of the 26billion barrels in the short term?Malcolm Wicks: There must be a short answer to yourquestion but I cannot think what it is because youhave raised the whole field really of energy policy. Myown judgment about these things is that faced withthe challenges we have—and aVordability of courseis a crucial challenge now—we need to be movingforward on a range of fronts, including energyeYciency, including of course wherever possibletrying to increase the world’s supply of oil and gas,although that is not easy. Yes, we should look at ourown backyard, namely the UKCS, the North Sea, tosee if we can increase production. I am happy to givemore details of that should you wish. We have a verydynamic partnership with the oil and gas industry inthe North Sea known as the Pilot Partnership; wehave an approach there to licensing which could besummarised as “use it or lose it”, if a big player doesnot use a licence to extract oil we will take it away

from them and give it to a hungrier company and soon. Last week’s announcement was to say that we arevery ambitious about the North Sea but personally Ido not see that as any kind of alternative—short orlong term—to moving forward on a number offronts, including nuclear and including the subject ofthis discussion, renewables.

Q292 Lord James of Blackheath: In agreeing withyou on that, Minister, I go back to my point which Ithink I heard you mostly agree with, that time andresult are not necessary in line in expectation here. Itmay well be that the longer we can survive within thecosts of what we have to source for the energy needsof this nation and the costs of developing thealternatives may be better used if they have longer inwhich to be developed with confident application ofthe skills necessary to extract them and we wouldtherefore be better used to accelerate certainextractions which are within our control like theNorth Sea. I think you then said it encapsulates theissues which face government policy. In agreeing withyou on that I do not think I have heard anything ofgovernment policy which says they are doinganything to specifically address those points.Malcolm Wicks: The reality about the North Sea orthe wider UKCS is that it is in decline in terms of asource of oil and gas. I think the last figures I haveseen show it is in decline by 8% per annum, somethingof that order. What we were saying last week is thatwe have to do everything possible to slow that declineor to improve production. As you know the easilyhanging fruits have been picked from the North Sea;the terrain now gets more diYcult, for example we areworking with four oil companies to see what thepotential—which could be significant—might bewest of Shetland, for example. We are ambitiousabout the North Sea; we are at one with you there.However, if I may say so, your remarks and yourquestions very much address issues about energysupply; I do not think, with respect, they addressissues about climate change and global warming. Ofcourse one of the major reasons—maybe the majorreason—why we are committed to renewables isbecause it will help us in our very demanding targetsto reduce carbon emissions. I do not judge myselfthat time is on our side. Indeed, as your Lordshipswill know, the Climate Change Bill is before theParliament and although we have a very demandingtarget in the middle of the century—60% reduction ofcarbon emissions against 1990 levels—we areestablishing through that Bill an independentcommittee to give us five yearly targets on carbon.Renewables is a big player there.Chairman: I think in the interests of time we mustmove on now. Lord Mitchell?




Q293 Lord Mitchell: Minister, you have touched onthis point but it is a question which puzzles us fromtime to time and it is basically how the formula wasagreed on by the Member States to allocate thetargets? What consideration was given to factorsother than GDP?Malcolm Wicks: The burden sharing methodologyproposed by the Commission is based on acombination of a flat rate increase for all MemberStates. I guess the Commission are saying that allMember States—even those with a relatively healthyproportion of energy coming from renewables at themoment maybe through hydro traditionally—haveto have a flat rate increase, so all Member States arein the same boat in that sense, but then with theremainder weighted according to a Member State’sGDP. The methodology therefore did not takeaccount of generating capacity factors but didmarginally take account of previous deploymentsuccess. A cap was introduced to ensure that a targetis not more than 50% of a Member State’s energymix. I do not know whether one of my colleagueswants to say more about that, but they are the broadoutlines of the methodology.Mr Abraham: As you say there are essentially threepotential elements here and the Commission decidedagainst taking specific account of the capacity ofindividual countries which makes it perhaps, as wecome to later on, more important that there is somesort of mechanism whereby across the EU as a wholethe most cost eVective increases in renewable use arefacilitated through trading or something similar. Thecountries that have very high levels of renewable usealready were given a cap, in particular I think it wasSweden, otherwise their figures would have been wayover 50% which they persuaded the Commission wasunacceptable.Chairman: Lord Dykes, I think your question followsdirectly on from that.

Q294 Lord Dykes: How do you envisage theGuarantees of Origin scheme will work in practicealong side the Renewables Obligation? To whatextent will the UK need to rely on the Guarantees ofOrigin scheme to achieve its target?Malcolm Wicks: I will ask my colleague TimAbraham to come in on this as well, but can I say thatwe do feel that while the great bulk of Britain’s extrarenewables will come here in Britain—I amconvinced of that –it is important to develop thenotion of trading. Indeed, I have before me aninteresting estimate that the cost of achieving the finalone percentage point of the UK’s target couldrepresent approximately 25% of the total UK cost.As we indicated earlier, at a time when I guess the bigagenda item in energy is aVordability and the sheercost of energy, I think therefore we feel that trading

should have its role to play. May I ask Mr Abrahamto add more?Mr Abraham: I think all I would add is, as theMinister said, that this is very important in terms ofcost reduction, particularly perhaps for the UnitedKingdom but for the EU as a whole. The currentproposals in the directive are actually quitecomplicated and there is quite a lot of discussionwithin the Council at the moment over trying to makesure that we actually have a system that works,because there are some legitimate concerns fromother Member States that the proposed system mightundermine individual Member States’ own domesticsupport schemes for renewable energy and mighteven also break some single market legislation. TheUnited Kingdom is in the forefront of this trying todevelop a perhaps rather simpler version but toensure that the main thing is that it is simple and itwill be used by Member States so that, for instance,if it is cheaper to purchase some extra renewableenergy in Romania and the Romanian government ishappy then we can have a bilateral arrangementperhaps between the United Kingdom and Romaniato reach between us the total figure but in a more costeVective way for the EU as a whole.

Q295 Chairman: Has any work been done on thispossible scheme?Mr Abraham: Yes indeed. We are beginning todevelop something that will work. We hope we will besharing this with our Member State colleagues verysoon.

Q296 Lord Paul: There have been calls for theRenewables Obligation to be replaced by a feed-intariV. Is there a role for feed-in tariVs? If so, what isthat role?Malcolm Wicks: Feed-in tariVs certainly have theiradvocates and I would imagine this will be adiscussion when the Energy Bill comes to the GrandCommittee (which is very soon, I think) and then toreport stage in the House of Lords. These aremechanisms which we need to compare and contrast.We have gone down the road of the RenewablesObligation, as you have indicated; others,particularly the Germans, have had a feed-in tariVsystem. I do not want to be dogmatic about one or theother and in our new strategy which we will beconsulting on we look at both. I think one practicalpoint I would make is that we have had theRenewables Obligation now for a number of years;we believe that from the low base—which wasBritain’s experience—we are now moving in the rightdirection in terms of renewables deployment. Indeed,we are reforming the Renewables Obligation in theEnergy Bill which is before Parliament to make itmore sensitive to some of the newer technologies. Atthe moment you could say it is a blunt instrument; it




has largely benefited onshore wind and we want to domore in the future for oVshore wind (which isobviously more expensive) and do even more forsome of the new marine technologies such as waveand tidal. We are reforming the RO and we do believethat in terms of investor confidence and generalconfidence in the renewables industry to change nowfrom the RO to a new mechanism could be quitediYcult. I am aware of the arguments. However,could I just add that when it comes to micro-generation it is the desire of a growing number ofhouseholders to install some technology in their ownhomes or maybe on community buildings or schools,I think there is an argument in favour of feed-intariVs, there is an argument in favour of othermechanisms to try to increase support. We areweighing those as part of our renewable energystrategy and they will be part of the discussion whichwe hope our consultation document will prompt.

Q297 Lord Bradshaw: I want to talk about thePlanning Bill. This creates new procedures foronshore projects over 50MW. This almost goes backto the last question about feed-in tariVs. There will bemany projects which do not reach 50MW and is itsensible to exclude them or will the Planning Bill, aswell as making planning permission easier, make iteasier for people who invest in projects to sell theirelectricity?Malcolm Wicks: The Planning Bill, as you know, istrying to get the balance right between letting localpeople make their judgments heard about localmatters that aVect their community while trying toensure that in the field of energy—although not justin the field of energy—we can move towardsdecisions rather more quickly than has happened inthe past. Certainly when it comes to renewable energywe have all heard of stories of projects that aredeveloped in a board room and do not come tofruition for maybe eight or ten years. We will bepublishing a national policy statement about energyas a whole with specifics about renewables withimplications for the Town and Country Planningsystem. Would it be possible for me to ask mycolleague Simon Virley to say more?Mr Virley: I think the national policy statements thatwe will be consulting on this autumn will beimportant in setting the context for those smallerschemes that fall below the 50MW threshold. It is theNPS that will provide the context for local planningdecisions. In addition the Department forCommunities and Local Government has initiatedwhat they describe as an end to end review of theplanning system at a local level to see whatbureaucracy can be removed from it. There are anumber of measures and we will be consulting onfurther measures in the renewable energy strategy

this summer to try and speed up the planning systemat a local level whilst respecting local democracy.

Q298 Lord Bradshaw: That is a very diYcultequation to pull together because there is a resistance.To go back to the feed-in tariV, that could produce alot of smaller schemes which will be less objectionableand therefore give rise to less objection. Is that a fairpoint or not?Malcolm Wicks: There can be quite a lot ofcontroversy actually when a humble citizen tries toput a micro wind turbine on their roof. I thinkbroadly speaking you must be right, that the smallerthe less controversial, but I do not think it alwaysapplies. We obviously hope that whilst respectinglocal opinion and reserving the right—perfectlyproperly—from time to time to say no to projects(small projects in the case you are talking about) thatwe will be able to facilitate the development of morerenewables, including onshore renewables which iswhat your question is about.

Q299 Lord Bradshaw: I just think it is going to be avery, very diYcult problem. I think the Germanexperience is that smaller things just get throughmore easily.Malcolm Wicks: Yes, which is why we are ambitiousabout micro generation. As I say, it will be part of ourrenewable energy strategy and I am bound to say thatit links into another very relevant theme here whichis how we facilitate more heat, including renewableheat—ground source heat pumps for example seemto have much going for them and there is a widerquestion about not wasting heat in power stations,combined heat and power and so on—but certainlyas part of our micro generation strategy we areconscious of issues about heat more and more andnot just electricity. Indeed, it may be—we are not sureyet, we are doing arithmetic on this—that in terms ofcost eVectiveness some renewable heat developmentscould be particularly welcome.

Q300 Chairman: Before we move onto LordWalpole can we just pick up two points that LordJames made. Minister, could you comment on thesignificance of oVshore wind? The Committee didvisit oV Great Yarmouth and an onshore windfacility at Avonmouth. There are three specific pointswhich I hope you can comment on. First of all, are weover reliant on oVshore wind and what sort ofcontribution to this 15% of total energy consumed inthis country is oVshore wind likely to contribute?Secondly, the point Lord James made about supplychain which is a point that came up several timesduring our visits. Thirdly, the importance of perhapsa high voltage underwater grid connection foroVshore wind farms around the United Kingdom,particularly in the north North Sea and the Hebrides.




Malcolm Wicks: Let me try to tackle the first questionand my colleague Simon Virley will I think come onthe next two questions. In terms of how we get to the15%, we are not in the business of disaggregating andsetting targets for diVerent technologies. Obviouslythe Committee will understand that that would notbe the sensible approach. Having said that, as thingsstand at the moment I think that oVshore wind doeslook like a very favourable development. As we knowas individuals but as we know from research we areblessed—if that is the correct word—with a hugewind resource in the British Isles and also I amadvised that we are blessed too in the sense that thewaters around parts of Britain at least where we needto erect oVshore wind turbines are relatively shallowso obviously that helps the economics. We thereforecould see a truly massive expansion of oVshore windterminals. I am bound to say, however, that we doneed to bring forward some of the new technologies.I have mentioned wave and tidal and although I donot think myself that they will be making a hugecontribution by 2020 I would have thoughtnevertheless in the next decade we will see successfuldeployment of the very exciting technology in termsof wave and tidal. Many companies are in thebusiness at a stage where technology is being tested inthe water although very little has been tested in thewater for long enough I think my judgment would bethat oVshore wind is particularly important. Thereare, however, these very important issues about thesupply chain and also about grid connections whichmy colleague Simon Virley will cover.Mr Virley: You are right to say that the supply chainblockages are a significant issue at the moment,including the number of vessels available to actuallydeploy some of these turbines oVshore. Whatindustry are telling us is that the main solution fromthe point of view of government policy is to providea stable long term policy framework for renewablesagainst which the private sector can invest in thiscountry and to confirm that the Government is goingto meet its targets and therefore the private sector caninvest against that assurance. In our renewableenergy strategy that we will be consulting on thissummer, as the Minister has indicated, we will besetting out some of the long term policy frameworkthat we will be putting in place in order to giveinvestors that confidence, as well as a number ofspecific interventions of particular bottlenecks suchas on gear boxes, publishing research around that asto the facilitative actions we can take fromGovernment, including with the regionaldevelopment agencies to tackle some of those specificblockages. There are a suite of measures on supplychain that we will be developing. On the issue of thegrid and the transmission system, we are workingwith National Grid, the other transmissioncompanies and Ofgem on what the strategic grid

might need to look like in a world where we have asignificant amount of renewable energy, includingcoming from oVshore wind. That will includeconsideration of whether there needs to be new highvoltage transmission lines as you say, potentiallyunder sea, coming down from Scotland. You will beaware of the problems there have been with theonshore connections. We will be publishing againsome results of our work with Ofgem and thetransmission companies on what the strategic gridmight need to look like going forward as part of ourrenewable energy strategy, so there is work underway on that aspect as well.Malcolm Wicks: I would just add that the EuropeanCommission have established a stream of work andappointed, as I recall, the former German ministerAdamowitsch to look at issues around a Europeangrid for renewables in the North Sea which is anotherinteresting indication of where things could move inthe future.

Q301 Lord Walpole: I find it interesting, Minister,that wherever we get to with a question you haveanswered half of it but not quite. May I ask you whatmeasures will need to be taken at an EU and indeeda national level to ensure reliability and predictabilityof energy supply? To what extent will intermittencybe an obstacle to achieving the target, particularly ifthe amount of renewable electricity gets up to, say,40%?Malcolm Wicks: I will ask one of my colleagues tocome in on the European dimension of this. In termsof the United Kingdom, I did touch on it earlier. Ifone thinks of us hitting the target, as we will, by 2020a considerable proportion of our electricity will becoming from renewables because it is in the electricitysector, however diYcult, that one can see more rapiddevelopments than say in terms of fuel for our motorcars for example. You could be thinking, I amadvised 35%, 40%—you get diVerent estimates—ofour total electricity, so the issue of intermittency isclearly a very important one and people think thatthey are the first person to tell you that the sun doesnot shine all the time and the wind does not blow allthe time. We are not in the world of centralplanning—you will be pleased to know—nevertheless one has to think about the situationwhere, not by 2020 so much because the first newnuclear power station may not be built by 2018 or2020, but going forward after that you could see asignificant proportion of our energy coming fromnuclear. I think in terms of the diversity, therefore,and the flexibility in the system there will always beenthat need—or at least in the foreseeable future—forfossil fuel power stations including coal powerstations to bring that flexibility into play that anysystem of this kind will need




Q302 Lord Walpole: Could I just put another pointto you, one that I have asked of someone else before,but when do you think that our total energyrequirement level will start to come down? We haveto save as well as produce less.Malcolm Wicks: I agree with that.

Q303 Lord Walpole: Do you think it will?Malcolm Wicks: Yes, I do. I think the first part of anysensible energy strategy and also the first part of anysensible climate change strategy is about trying toconstrain and then reduce energy demand. Indeed, Ithink that with every day which passes with concernsabout the price of a barrel of oil and wholesale pricesof coal and gas, that becomes clearer and clearer. Ithink we can look forward to a future where energydemand comes down. To give you an example, Ispent the morning at the headquarters of the BuildingResearch Establishment near Watford where on theirsite now a number of housing constructioncompanies—I walked round six or seven of them—have constructed either zero carbon housing or very,very low carbon housing; they are the higheststandards in terms of thermal eYciency of housingyou would ever see. Actually in those dwellings youneed to expend very small amounts of energy to keepwarm. I think we will see demand for electricitycoming down, but not tomorrow.Mr Virley: Shall I return to the issue of intermittencyand just expand on the answer? There are a numberof aspects to this, the first, as the Minister hasmentioned, is the need for conventional plant toremain on the system to run when the wind is notblowing. We recognise that and are doing modellingaround that at the moment. There are a number ofother aspects, the second of which is to ensure thatthe EU market is working correctly and that theinterconnectors are working correctly so we havediversity of supply. Of course the more wind farmsyou have the more chance that at least the wind isblowing somewhere around the coast and there is adiversity point there in that the expansion shouldensure that the wind is blowing somewhere across theUK. Finally, there is the role that demandmanagement and storage, as you indicate, couldactually play going forward in terms of managing thedemand side of this equation as well as the supplyside. There are a number of mechanisms there to copewith the intermittency issue which we think can bedealt with, although there will be some cost to it.

Q304 Lord Walpole: You are putting a great deal ofextra work on the grid, are you not?Malcolm Wicks: Yes, including the work of theNational Grid itself. I have had a presentation fromthem on this very issue.

Q305 Chairman: Wehaveheardevidence thatOfgemshould have its remit extended to make CO2 reductiona primary duty. A key example of why this matters isthat current Ofgem rules prevent the National Grid—we are advised—making strategic investment neededin advance of new renewables. The question we wouldappreciate your guidance on is: should Ofgem’s remitbe changed? If not, how can National Grid behave ina more strategic fashion to make investments with theagreementofOfgemand in the interests ofmeeting thetargets we have talked about?Malcolm Wicks: Again, if I may, we will do this in twopartswithmycolleagueSimonVirleycoming inon thesecond more detailed and authoritative part. We havelooked long and hard at this question and of course itis a very serious question because there is Ofgem at themoment with a primary duty towards the customer.That is fair enough, it is very important in terms ofensuring there is competition and indeed they areundertaking a new inquiry just to check thecompetitive system is as competitive as many of usassume, and they have secondary objectives in termsof sustainability but also in terms of what one mightcall the social policy here to tackle what has nowbecome known as the issues around fuel poverty. Wehave lookedat this andour judgment is thatwe shouldnot have a radical interference with that but that weshould issue new guidance to the regulator, to Ofgem,on the issues around sustainability and indeed thesocial implications of that. I think you get into somediYcult territory if you have two or three primaryduties. There would always be this question ofbalance. I think we also feel of course that it is themajor role forGovernmentwith supportingplayers totackle issues around sustainability and climatechange,and itdoesmakesense tohavearegulator thatis particularly keen to make sure that issues ofaVordability are not lost in the debate. Simon, wouldyou like to add something?Mr Virley: Just on the specific point about how weincentivise National Grid and the other gridcompanies to make the strategic investments that aregoing to be needed. We have been working withOfgem on the Transmission Access Review to bepublished shortly and that will include someproposals around how the regulatory regime mightneed to change to facilitate that investment.Wewillbecoming forward with some proposals on exactly thispoint very shortly which should facilitate thenecessary investment.

Q306 Chairman: Could I just ask you about thetimescale of that, is that likely before the consultationperiod ends?Mr Virley: Yes. At the moment we are intending topublish the Transmission Access Review certainlybefore the summer recess so that will be in good timefor your Lordship’s report.




Q307 Chairman: Will that naturally come to thisCommittee or could we make arrangements to haveit forwarded?Malcolm Wicks: We will make sure it does.

Q308 Chairman: That is much appreciated; thankyou. We have been concerned in taking evidence,certainly in Bristol, that the consumer might havesome resistance to the higher costs of energy derivedfrom renewable sources. I am thinking particularly ofsolar. We heard evidence of the cost of solar panels,the reduction in the grant available, the diYculty nowin installation, but more generally is there anyevidence of what I would call consumer resistance tothe introduction of this renewables target?Malcolm Wicks: Again, particularly against abackdrop of the last couple of weeks and theincreasing concern about the cost of energy ofdiVerent kinds, whether it is gas bills or the fuel weput in our motor cars, we have to have a huge regardto this. The simple truth is that the measures that weare now taking at a UK level and a European level totackle climate change add to costs. One of mycolleagues might have the exact figure but frommemory, if you look at our electricity bills now, Ithink 14% or 15% might be through the diVerentclimate change measures. I am thinking of theEuropean Union ETS, I am thinking of theRenewables Obligation in particular because, as youhave implied, renewables are relatively expensive atthe moment. They are relatively new technology, orif they are not new technology they are newlydeployed in this country such as photovoltaics. Ithink we do need to ensure that going forward to our15% target in 2020 that we are as rigorous as possiblein trying to find the most cost eVective solutions andmethods to reaching the 15% target. This issomething I am very, very mindful of and it is one ofthe reasons, as we touched on earlier, that while wefeel that some degree of trading in Europe in terms ofhow we hit the target could be very appropriate, notleast because of the estimate I gave, the last onepercentage point as it were could be the mostexpensive percentage point of all.

Q309 Lord Mitchell: Minister, I think I heard yousay that you had high confidence that we would hitour target by 2020 (I do not think that is your exactwording, but words to that eVect). In our evidence wehave had a variety of probabilities put on thatlikelihood occurring, some have been quitepessimistic, some have been more optimistic, buteven the more optimistic of them have said that theyare going to need a fair wind to hit that target.Certainly, speaking for myself, I find myself in somedegree of confusion in being able to put my finger ona likely outcome to this target being hit. I wonder ifyou could help me on that.

Malcolm Wicks: I am a long term optimistic,sometimes a short term pessimist, but this is quite along term target to 2020. We have signed up to this atheads of state level; it is European policy. We are nowgoing through a process with the Commission ontalking about the details of this, meanwhile here inthe UK we are developing the strategy that we havebeen talking about which we will be consulting on. Imake two judgments about this. One is that it isextremely demanding but I am confident that we canfind a way of hitting that target. We need to take anumber of radical steps, although I think themainstream here in terms of deployment will bedevelopments like oVshore wind, but not exclusively.One of the reasons I am particularly keen on microgeneration is because I think you have to get thecitizen involved in this. I think there are a lot ofcitizens out there, the group I think of as the recyclingcohort, those of us who spend rather a lot of timerecycling things. My wife has me now washing outempty cat food tins and plastics, empty bottles oflemonade and things like that. I think those are thepeople who are actually beginning to look to theirhomes and their transport systems to ask what extrasteps they can take to help us on this. Microgeneration is very important. At the other extrememacro generation is very important which is why wehave said we have said about the Severn Barrage andwhy in principle we think that could be a significantsource of renewable energy in the future, but we arenot gung ho about that, we are looking at theenvironmental implications, however if that could bebrought about it could be five per cent of the nation’selectricity and we need to build up in that way to the15% for all energy from renewables.

Q310 Lord James of Blackheath: Minister, I notedcarefully when you answered my earlier question,your comment about the priority, as I understoodyou to say, of getting the environmental issuesstraight by the generation from renewable fuels. Doesthat not imply a significant risk that if we concentrateon that solely and fail to achieve it we are hit by thedouble whammy of failing on that score and at thesame time failing to achieve mounting cost fuelmarket alternative sources on a cost eVective basis ofexisting fuel which we can use to win the time to getto the position of having the renewable fuelavailable? Should you not be applying bothobjectives simultaneously, renewable fuel anddevelopment of existing sources at maximum?Malcolm Wicks: When you use the phrase “renewablefuel” do you mean general renewable energy?

Q311 Lord James of Blackheath: I mean wind andhydro and all those.




Malcolm Wicks: We have to move forward on anumber of fronts and we are hardly inactive. PrimeMinister Blair set up an energy review which he askedme to lead. After consultation that led to an energyWhite Paper; that in part led to the Energy Bill. Nowwe have the new targets set by the EuropeanCommission which we are looking at, but we aremoving forward on a number of fronts. We havehardly been inactive on nuclear; it has beencontroversial but this is the first government for along time really to grasp that nettle.

Q312 Lord James of Blackheath: It will take time,Minister.Malcolm Wicks: Of course it will. We are thinkinglong term about this. Meanwhile I have said what Isaid about the UKCS, the North Sea; we have a veryactive relationship with the oil production industrythere. Also, because we do recognise that the world,including the UK, will be burning fossil fuels for theforeseeable future, we are a lead nation in developingtechnologies around carbon capture and storage andindeed will be among the very first nations—possiblywith Norway and maybe with someone else—todemonstrate the whole range of carbon capture andstorage because we do believe that in a world that willbe burning fossil fuels we have to find ways ofsuccessfully taking out and storing the CO2 which arethere with the fossil fuels.

Q313 Lord James of Blackheath: We all know that ifyou cannot beat them then join them, and if wecannot beat the existing sources of fuel at 113 dollarsa barrel then we should surely be getting every lastbarrel out that we can at a lower cost. You talkedabout North Shetland being non-cost eVectivebecause it was deep. I was told that I could not get theoil out of the Argyle Field 30 years ago; it cost me£12.4 million to buy one ship that could get it out ofthe depth of the Argyle Field and I would bet that fornot a very big increment on £12.4 million I could getthe oil out of North Shetland today.Malcolm Wicks: Well, we may need your help.

Q314 Lord James of Blackheath: I do not have myMasters licence any longer!Malcolm Wicks: The West of Shetland project is anextremely taxing one. I think it is becoming moreeconomic because of the price of a barrel of oil. Thatis why, very proactively as a government, we areworking with four major energy companies to seewhat the possibilities are there. Of course furtherafield that is why in Canada it has now become

certainly very economic to look at the oil sands, forexample. You are right, with the price of a barrel ofoil being very high it becomes more possible toextract fossil fuels.

Q315 Lord James of Blackheath: I think you willrecognise then, Minister, that throughout theremainder of this debate over how many months itcontinues this is an issue on which I will continue toconcentrate and I am sure you will also.Malcolm Wicks: I look forward to that.

Q316 Chairman: Minister, may I just come back tothe targets themselves? This may sound like a cynicalquestion, it is not supposed to be but we have hadevidence that somehow the target of 20% renewablesby 2020 seems rather over-simplistic, it may havebeen plucked out of the air quite late at night in theCouncil of Ministers or indeed by members of theCommission. Is it not time to perhaps think moreflexibly that perhaps the target should be 2030?Perhaps it should be expressed in more specific sub-sector targets, particularly for wind which is, as Ithink you have indicated, likely to be the majorcontributor? And why 15% for the United Kingdom?It looks like a calculation that has not been based ondeep scientific or objective analysis. Forgive me ifthat sounds cynical, but I would appreciate yourcomments.Malcolm Wicks: It did not suddenly come out of theair; there had been earlier proposals, as I understandit, from the European Commission. The EuropeanParliament looked at this with some care and I thinkproposed 25%. All this was part of the process beforethe Commission decided on 20%. Obviously it wasnot 19% and it was not 21%; it is a rounder numberthan that, so let us not pretend there is an absolutedetailed scientific precision. I think it is based on thejudgment and seen in the context of the EuropeanCommission’s own targets about greenhouse gasemissions and the Commission’s ambitions—whichwe share fully, indeed we have helped lead thedebate—on tackling climate change. Myunderstanding of the science is that we do not have anawful lot of time to try to get on the right side of theemissions balance sheet. I would be loath to accept anargument that we should now postpone.

Q317 Chairman: Thank you very much indeed. Wehave just hit our target time of 5.15. We look forwardto receiving further information, particularly aboutthe consultation. The session is now closed.Malcolm Wicks: That just shows we can meet targets!



THURSDAY 5 JUNE 2008

Present Bradshaw, L Paul, LFreeman, L (Chairman) Powell of Bayswater, LJames of Blackheath, L Walpole, LMitchell, L


Witnesses: Ms Magda Stoczkiewicz, Director, Ms Esther Bollendorff, Climate/Energy Campaigner,Friends of the Earth Europe; and Ms Frauke Thies, EU Energy Policy Campaigner, Renewable Energy,

Greenpeace, examined.

Chairman: Good morning. Before you introduceyourselves, as a matter of courtesy I will ask mycolleagues to introduce themselves and explainwhether they are independent peers or belong to apolitical party and what their particularresponsibilities are.Lord Powell of Bayswater: Charles Powell. I am anIndependent member of the House of Lords. I comefrom a combined diplomatic and businessbackground.Lord Paul: Swaraj Paul, I am a Labour member of theHouse of Lords and I come from an industrialbackground.Lord James of Blackheath: David James with theConservatives. Once upon a time I used to be in oilexploration at sea.Lord Mitchell: Parry Mitchell, a Labour peer. I havean IT business background.Lord Walpole: Robin Walpole, Independent. I ambasically agricultural and that side of things. Youmay well ask what I am doing here, but I am moreinterested in ecological problems and that sort ofthing.Lord Bradshaw: Bill Bradshaw, transportbackground. Liberal Democrat.

Q318 Chairman: I am Roger Freeman, aConservative peer, former minister and Chairman ofEU Sub-Committee B which deals with the internalmarket. Our report is focused on renewable energy.Perhaps you would be kind enough to introduceyourselves.Ms Stoczkiewicz: Thank you very much for invitingus . My name is Magda Stoczkiewicz. I have juststarted as Director in Friends of the Earth Europe,which is the European oYce of the Friends of theEarth Federation. You may know the UK group is amember group.Ms Bollendorff: My name is Esther BollendorV. Iwork on the climate and energy campaign in Friendsof the Earth Europe.Ms Thies: My name is Frauke Thies. I work for theEuropean oYce of Greenpeace in Brussels andspecialise in energy.

Q319 Chairman: Would you like to say something tobegin or for us to go straight into questions, it isentirely up to you?Ms Stoczkiewicz: Maybe just a couple of words. Bothorganisations work on issues related to climate andenergy. For both organisations these are veryimportant aspects. We see renewables as a big part ofthe solution to climate change and responding to theenergy sector in Europe. I come from a new MemberState, Poland. I also look at the issues related to thenew Member States’ energy potentials, so if we get tothat area I can step in.

Q320 Chairman: Would you like to say somethingfrom Greenpeace’s standpoint?Ms Thies: I can only support what Magda has said.Renewable energy is a big part of the solution to ourclimate and energy problems, not only for climatechange reasons, although that is the primarymotivation for us, but also for security of supplyreasons. We really see the main solutions to be energyeYciency and renewable energy sources. We believethat this will be the major part of our energy supplyin the future.Chairman: I have asked my colleagues to askquestions about separate topics. If you feel that youhave nothing to comment or it is outside your field ofexpertise, please say. Do feel free to amplify or pickup on any point that anyone has made.

Q321 Lord Powell of Bayswater: I am going to starton the subject of the target itself, the 20% by 2020.What do you think the reasoning behind that targetwas? It has been said rather unkindly that it appearedto have been devised on the back of a cigarette packetand it is a pot-shot at a target. Do you think there is atight reasoning for setting this target at 20% by 2020?You could argue, for instance, that it would makemore sense to set 30% by 2030 because that givesmore time for other technologies to be proven andmore time for governments to do things with tidalpower and so on. What do you think about thereasoning and why did they choose this particularfigure?



5 June 2008 Ms Magda Stoczkiewicz, Ms Esther Bollendorff and Ms Frauke Thies

Ms Thies: There are two questions there, why 2020and why 20%? The 2020 number is not just anarbitrary number, this is the timeframe that theindustry tells us they need in order to have suYcientinvestment, security and certainty, but at the sametime a suYciently long timeframe to look ahead.Anything longer than that could lead to postponingactions. Governments are not that clearly bound by a2030 target because they can leave it to the followingadministration. The 2020 number seems to be theright number in that respect. Apart from that, it isalso the urgency of the climate crisis that forces us todo something to 2020 and wait no longer. We have tostart now. The technologies are there and areavailable, we have to implement them. We know thatemissions have to peak by 2015 and this is why 2020is adequate now. Apart from that, we can look atwhat has to happen beyond 2020 and should weconsider further targets then and that might benecessary depending on the development ofrenewable technologies until then and whether theyare competitive or not.

Q322 Lord Powell of Bayswater: You do not think itrisks distorting it slightly? In Britain, if we are goingto have a chance of reaching the target by 2020 wecan only do it with wind power. That may not be themost eVective solution long-term. You do not thinkthis is imposing something just to get a short-termresult which ignores the best long-term result?Ms Thies: I do not think so for several reasons. Evenin Britain the target is an overall target, so it is notonly in the electricity sector. The UK will probablynot be able to meet the target with wind only, therewill be other technologies needed, such as biomass..In the heating sector solar thermal technology willhave a role to play. Hydro energy will have a role toplay to some extent, but probably not that much inthe UK because the potential has already beenexploited to a large extent. Nonetheless, thesetechnologies will play the most important role and atthe same time industry and government know thatclimate change will not stop in 2020 and rising fuelcosts will not stop in 2020 and it is up to thegovernment to design a policy that takes this intoaccount and encourages further development. Agood example is the photovoltaic sector. So far wehave only had 2010 targets and over the last few yearsthere has constantly been a growth rate of around50% every year and this has happened although thetechnology is still quite far from the market.

Q323 Lord Powell of Bayswater: From what youknow about the situation in the UK, and clearly youknow quite a lot from what you have said, do youthink it is really feasible for us to achieve that target?Obviously people with a vested interest in a particulartechnology say it is feasible but, on the other hand,

our experience has been that independent observersare much more sceptical as to whether it can really bedone. Do you think it is technically achievable for us?Ms Thies: Technically it is achievable, there is noquestion if you just look at the technical potential.One thing to bear in mind is the UK does not have a20% target but a 15% target and there are severalprojections on what could happen technically andalso politically. For example, there is a study by theTechnical University of Vienna which estimates thatin the electricity sector alone if the UK was toimplement best practice policy measures they couldstill get over 30% in the electricity sector until 2020,although not much has happened up until now. It isfeasible but the question is the political will, thecorrect support mechanisms and the removal ofbarriers. The barriers is where we have one of thebiggest problems in the UK at the moment regardingadministrative procedures and grid access. If this isnot removed fast then there will be a problem intackling this issue.

Q324 Lord Powell of Bayswater: We will come on tothose aspects. Perhaps one other aspect. Do youthink the rather tight national targets set by theCommission is the right way to go or shouldgovernments be left more flexibility to decide what isbest for each country and what is the most cost-eVective solution for each country? I can see ourGovernment is already beginning to wriggle a bit insaying we have to have flexibility and maybe we willhave to have a credit for projects which will notnecessarily be completed by 2020, for instance theSevern Barrage. Do you think we should have moreflexibility?Ms Thies: Some flexibility, yes, because of the way thetargets have been defined based on economicpotential. We accept that some flexibility might bebeneficial, the question is how is this flexibilitydefined and does this flexibility undermine the overallachievement of the 20% target by 2020. If this was tohappen then the whole target would be put intoquestion, why do we have the target. The target wasa clear commitment, there is a point to having the EUtarget. We believe flexibility, yes, but the SevernBarrage argument if a country has invested beforebut does not conclude the project until 2020 webelieve that should not count towards the 2020target. It can possibly count towards a future target ifthere is such a target, which is likely, and to the futureclimate commitments, of course, but it should notcount towards the 2020 target. In the same way,flexibility between Member States should be there toan extent but at the same time every country shouldalso develop the potential at home to its own benefitbecause at the end of the day everybody will profitfrom having security of supply at home and havingthe climate benefits at home.




Q325 Lord Powell of Bayswater: Do you think thetarget can be achieved without having properrenewables trading between Member States?Ms Thies: I think it can only be achieved withouthaving renewables trading.

Q326 Lord Powell of Bayswater: Really.Ms Thies: The question is what you understand bytrading. We believe that a trading mechanism on acompany level would undermine the achievement ofthe target for a couple of reasons. If we have a tradingmechanism that runs on top of the existing nationalsupport mechanisms it is quite clear that most of thesupport mechanisms would be undermined anddestroyed. This is something that not only theMember States that have support mechanisms thatare under threat have recognised but also theEuropean Commission has recognised it and tried tointegrate it in the Directive at the very last minute.Other Member States are recognising it also. This isnot the way to go to have a trading system on top ofthe national support systems. Having a harmonisedtrading system at the moment is quite a theoreticaldiscussion because it is not going to happen. Even ifit was to happen, we believe this would not be the wayforward because with the experience we have ofnational support systems for renewable energy we seethat especially the technology specific supportsystems, at the moment so-called feed-in systems inEurope where a certain tariV is paid for each kilowatthour depending on the technology, have been muchmore successful in promoting the uptake ofrenewable energy, and at the same time have beenmuch more cost-eVective. For that reason we believeit would be a severe mistake to now impose a tradingsystem on the whole of Europe which has so far had avery bad track record, not much has happened in thecountries that have trading systems. Much of thatcan also be explained theoretically as to why it cannothappen and why, if at all, it can only promote certaintechnologies and not others.

Q327 Chairman: I think we need to move on. Is thereanything that you would like to add at this stagebecause Greenpeace has covered quite a number ofissues, which we are going to return to in a minute ingreater detail? Would you like to comment?Ms Bollendorff: I wanted to add something on theflexibility of trading.Chairman: We will come on to that. Lord James, doyou want to ask a supplementary just focusing ontargets?

Q328 Lord James of Blackheath: Ms Thies has saidvery clearly that she considers it is technicallypossible to achieve the target, but I wonder if MsThies would agree that it is only technically possibleto achieve the target if the supply chain of the

technical services required to achieve the installationsare available. At the present moment in the UnitedKingdom we emphatically do not have that supplychain at an adequate level for even just the windfarms alone in total contrast, for example, to thesimilar point of the development of the North Seafields, the conventional oil extractions 30-40 yearsago, when there was a huge amount of commercialinvestment in the field of creating a supply chain andthere has been none now. Does Europe contemplateany form of subsidy or sponsorship for the creationof the necessary supply chain, or is it doing anythingto encourage the British Government to providecentralised subsidy and support for the creation ofthat chain? Without it, I cannot see and agree withyou that it is technically possible.Ms Thies: There are two sides to that. In someMember States we do have this supply chain andthere it has developed almost by itself withoutgovernment support. This is because in thesecountries there has been investment stability, supportsystems that have provided this stability and allowedbanks to give credit at quite low interest rates.

Q329 Lord Mitchell: Could you say which countriesbecause I think that is quite important.Ms Thies: Yes. The main countries are Spain andGermany. Denmark started it but has moved awayand changed its system. At the moment, the clearexamples are Germany and Spain. Germany startedin the early 1990s introducing a stable supportsystem, the system of feed-in tariVs, where investorsknow what return on their investment they are goingto get. This is the investment climate in whichindustry comes to the country and starts to developthe production chain to install the renewable energyprojects.

Q330 Lord James of Blackheath: That happened 40years ago with the Norwegians coming across withtheir own developments to do the development of theNorth Sea for us. Do you see any situation now underwhich we can develop or sponsor a relationship withother European states which will come across and dothe development of the wind farms for us because wehave not got the infrastructure to do it ourselves?Ms Thies: If the UK had a support system thatattracted investors then this would happen by itself.This is what has happened in other countries. InSpain initially there was no industry but Spain has avery favourable support system, which by the way isone of the cheapest in Europe.

Q331 Lord James of Blackheath: The short answer iswe do not have that environment, so what are yougoing to do in Europe to create it or help us tosponsor it?




Ms Stoczkiewicz: One area that you can explore,especially given the fact that Great Britain is verypowerful in the institution, is to explore the EuropeanInvestment Bank as a European bank giving loans onquite favourable terms. They now have a very strongrole in combating climate change and giving moneyto renewables. That is one of the areas to explore foradditional funding.

Q332 Lord James of Blackheath: We should make anote that we should take that up with the Departmenton Monday.Ms Thies: May I add one point to this. Apart fromcreating a stable investment framework, there isanother point which is the infrastructure and thefacilities we need there. There I think Europe can adda lot of benefit in facilitating the creation of a gridsystem that connects especially the North Seacountries in the beginning. This is something whereEurope can play a co-ordinating role at least, if notmore than that. This is something that we should beencouraged to do.Lord James of Blackheath: I finish oV on this point toput it in context. At the present moment we have twoboats capable of doing the development of windfarms in Britain; at the comparable stage ofdevelopment of the North Sea we had 78.

Q333 Lord Walpole: What I want to ask you about,or discuss with you, is the relevance of the renewabletargets to the EU energy policy, and two particularthings. You have touched on it already but, frankly,people we have been discussing this topic with havenot really told us how we can be more eYcient in ouruse of energy. I do not mean gas or electricity, butenergy generally. How are we going to be moreeYcient in its use?Ms Bollendorff: There are legislative frameworks inplace already which need to be implementedcorrectly. On eYciency specifically there is theEnergy Performance of Buildings Directive whichhas enormous potential to reduce energyconsumption. There are other examples of existinglegislation which need proper implementation, suchas the legislation on appliances, the Eco-DesignDirective and so on. These are sectors which have bigpotential which need to be exploited fully. In terms ofthe more general question on what is the scope of theRenewables Directive or the potential of thatDirective in the larger picture of emissions that needto be reduced, the potential is of 600-900 milliontonnes of CO2 per year. Those are the oYcial figuresfrom the Commission. If you compare this with theemission reductions that need to be achieved in theEVort Sharing Decision, which is a part of the EnergyPackage, by 2020 this figure amounts to 240 milliontonnes of CO2 equivalent. There is enormouspotential in the Renewables Directive which needs to

be exploited and which is complementary to otherelements of the Energy Package, such as the EVortSharing.Ms Stoczkiewicz: We believe that for the Europeaneconomy in the current situation the only way to gois to aim at reducing the energy use, the resource use.These are the areas where, with the technology, wecan become more competitive. If you want to becompetitive in the global market that is not going tobe through the heavy use of energy and heavy use ofresources, that has become very clear in the last fewyears.

Q334 Lord Walpole: The other thing I was going toask you was what about security of supply fromrenewables particularly?Ms Stoczkiewicz: That is a connected question. I donot think that we can fully secure the energy demandthrough renewables, but that can be a big part thathelps the security of supply. One of the areas when wediscuss renewables is this is heavy investment and wedo not have the funds or infrastructure for it at themoment. No-one really looks at the cost of theimported energy sources and how much it costs notonly for buying it but also for securing the supply inthe long-term. For us, it would be diYcult to give youa figure that would reduce the supply by this amount.It is very clear that it will help the security of supply.Ms Thies: In the short-term we cannot give a figurebecause 20% renewables means there is 80% otherenergy which needs to be imported or generated inEurope, but the likelihood it is going to be importedis high. The further we get into the future, the morerenewable energy can replace imported fuel sources.We have produced a study on this. Unfortunately, Ihave only one copy with me. You may have heard ofthe energy [r]evolution scenario that Greenpeace hasproduced, together with the European RenewableEnergy Council, where we outline in a realistic wayhow the development of renewable energy could goforward globally. We also have a European scenario,and a new edition will come out in September. Wehave done an investment report for this scenario. Inthe electricity sector alone, until 2050 the investmentcosts for renewable energy will be a tenth of the savedfuel costs that we have from this investment inrenewable energy. That means in the electricity sectoruntil 2050 the investment in renewables pays tentimes just through replacing fuel imports.Chairman: You referred to trading and I am going toask Lord Paul to ask his question now.

Q335 Lord Paul: What role do you think theGuarantees of Origin schemes have to play in helpingthe EU and Member States to meet the targets?Ms Thies: To be frank, I do not think they will havea role. They will have a role as a disclosuremechanism, as they used to have in the past, but what




we are hearing now from the Council and theEuropean Parliament is target accountingGuarantees of Origin will probably not have a role toplay for the reasons I touched on briefly before, thatthey would undermine existing support systems,especially the most successful one. Other ways offlexibility have to be found. There are goodpossibilities on the table. For example, one would bethat a Member State goes to another Member Stateand makes an agreement to invest in a wind farm. Forexample, Luxembourg could come to the UK andsay, “Can I invest in a wind farm in the UK, in yourterritory? You will have the benefits of industrialdevelopment, climate benefits and so on, and I willget the credits to count towards my renewable energytarget in Luxembourg”. This kind of model would bepossible and deals could be made in this way. It couldeven go as far as Member States deciding to sharetheir systems. For example, the Benelux countriescould say, “We will join up our electricity markets orwhole energy markets and we could introduce a jointsupport system and join up our targets”.

Q336 Lord James of Blackheath: I am confused.Why is that not a contradiction of what you saidearlier about eVectively no cross-border supportfrom renewable energy?Ms Thies: It is not a contradiction. We believe anobligatory trading system on a company level acrossthe EU would be a problem because that wouldundermine national support systems. If, however,certain Member States decide to join up their systemsand even create a joint system, like if these threecountries, Belgium, Luxembourg and theNetherlands, decided to create a joint system, therewould not be a threat of support schemes beingundermined.

Q337 Lord James of Blackheath: With respect, itsounds like a complete reversal of the answer yougave to the Lord Chairman earlier.Ms Bollendorff: This kind of flexibility scheme wouldbe dependent on achieving intermediate targets fromthe country that would sell, for instance. This is in theDirective anyway, but just to clarify there are someconditions that need to be met in order to be able toexchange credits or to put in place a certain tradingmechanism.

Q338 Lord Paul: If you can just go on because itmakes a bit of sense to me. Please, go ahead.Ms Thies: The main diVerence is do we create atrading system between companies that runs on topof the national support systems or do we leave thecontrol over the support systems to Member States.If Member States decide to change their systemscompletely and harmonise with their neighbourcountries, for example, they remain in full control

and there is one single support system. The problemis if every Member State has a support system and ontop of that there is a trading system running whereinvestors can choose, “I will invest here, but I will sellmy Guarantee of Origin there and take the supportfrom that country”, that is where we see the biggestproblem, leaving it to investors and to the market todecide where they want to invest and where they wantto take the benefit. That will only work if we have aharmonised support system.Chairman: That is a very clear answer. We will moveon now to questions on the grid with Lord Bradshawand if we could broaden it out to internationaltransmission.

Q339 Lord Bradshaw: I believe the grid is anessential part of any developed energy system. I amvery concerned about what you said on connection,that is you must have a feed-in tariV if you are goingto encourage investment. I want to know what theincentives are, both in Europe and in the UK, to yourknowledge, which actually would cause this tohappen.Ms Thies: I am not quite sure I understand thequestion. Do you mean what would create the gridconnection?

Q340 Lord Bradshaw: Yes. How can we make thegrid eYcient within Europe and within the UK sothat it encourages renewable energy eYcientconnection to the grid? That is what I want to knowbecause I know very well in the UK there areconsiderable obstacles to connecting the grid up tothe sources of energy.Ms Thies: There are a couple of issues there. The firstand biggest one, which does not apply so much to theUK but to the rest of Europe, is that we do not havea free market regarding the grid. This is the first bigstep that Europe has to take to say that the grid isfully unbundled and separated from production andsupply activities because the situation we have inmany European countries now where conventionalproducers of electricity are sitting on the grid andcontrolling who is connected and who is not will notlead to a proper grid system for renewable energy. Weneed proper unbundling there. This is the first andmost important step. On top of that, we do believethat we need specific rules that encourage theconnection of renewable energy right now. This isbecause the grid as it is now has developed mostlyunder monopolistic structures to suit theconventional practices, so what we have is acentralised grid system that is very inflexible, that issuited to large coal-fired power stations whichproduce at a very constant rate and are verycentralised, have one point of production and is thenspread out. The renewable energy system would lookcompletely diVerent. We would have a decentralised




system with many points of production, the powerwould flow much more flexibly and the renewableenergy output would be variable so we would have amuch more flexible management system as well. Forthat to happen, some corrective action is necessarynow to outweigh the imbalances of the past. I wouldnot say they are necessarily imbalances but we havediVerent starting points. We have a system that hasdeveloped to suit conventional centralisedproduction and now we have new renewables cominginto a system that is already there and it is not suitedto their needs. We have to help them as long as theyare a maturing technology and we have to integraterules, such as priority access for renewable energy tothe grid system.

Q341 Lord Bradshaw: So your advice would be thatthe regulatory authority in Britain actually looks atthe question of the grid as well as the question ofgeneration of power?Ms Thies: Indeed, a strategic grid development isneeded.

Q342 Lord Bradshaw: So you would bring themaltogether and that creates the best climate forinvestment in renewables.Ms Thies: Yes, an integrated and strategic approachon grid development would.Chairman: Lord Mitchell’s questions follow onnaturally from Lord Bradshaw.

Q343 Lord Mitchell: Good morning. I am quiteinterested in comparing diVerent countries as well.Part of the reason for coming here is not to take a UKperspective on it but also a European perspective.When you look at what is happening amongst thediVerent countries, do you see great diVerences,particularly with respect to planning and regulation?You have already talked about Spain and Germany,but I would like to get a feeling as to who are the goodguys and who are the bad guys and where does theUK sit in all of that. That would help us a lot.Ms Thies: In terms of planning, we have very positiveexperiences, especially in the Scandinavian countries.I said earlier that Denmark has changed its supportsystem for renewable energy, which is why not muchis happening. Denmark has very favourableconditions for authorisation procedures, forexample, for renewable energy plans and also for thegrid connection. The Scandinavian countries areplaces to look at. We have some newcomers that havefollowed in the footsteps of Spain and Germany andintroduced similar systems, especially Portugal wherewe have seen tremendous growth over the last fewyears which is amazing for such a small country. InIreland quite a lot has happened, although we stillhave some grid problems there. These are the main

countries to look at at the moment. The CzechRepublic is trying hard as well.

Q344 Lord Mitchell: What is the key? What are theydoing that makes it happen?Ms Thies: One key thing is the administrativeprocedures are very simple in these countries. Manyof these countries have installed one-stop shopprocedures which mean the renewable energyinvestor has to apply to one authority and thisauthority follows the process and co-ordinates withthe other authorities that have to give their go-ahead.There are time limits on the authorisation proceduresand the procedures are diVerent for diVerenttechnologies, you do not have to go through thewhole process if you just want to put somephotovoltaic cells on your rooftop. This is one of theconditions. Another one is that the technologicalknowledge is there, education is there for renewableenergy installers. This is a criterion for smallertechnologies than just for heating systems, but a veryimportant one. The other one is the grid access.There, the particularly useful rule at the momentseems to be to say there is guaranteed grid access forrenewable energy development. Some countries aresaying that grid operators are obliged to take therenewable energy. This has some economic logicbehind it, except for biomass maybe. It is also marketlogic, because when renewables produce theyproduce almost zero marginal cost because when thewind blows it costs almost nothing to feed theelectricity into the grid. It is very logical that thiselectricity would be taken up anyway. Therefore thegrid operators have to take this electricity becausethere are apparently market failures which workagainst this logic and normally the wind would betaken up anyway, so countries have made it law andsaid, “You have to take up this electricity”.

Q345 Lord Powell of Bayswater: Can I just interjecton this subject. You talk a lot about the supportschemes and the better ones which exist in mainlandEurope, or some countries, than in the UK, but is itnot the case that the German Government now ismoving away from feed-in tariVs on the grounds theyare simply too expensive?Ms Thies: This is not the case. The GermanGovernment seems very proud of its feed-in tariV. Ido not know at what stage these discussions are atbut, as far as I understand, outside the GermanGovernment and in the scientific community the ideais to adapt the feed-in system in a way that comescloser to the market. That could be in the direction ofthe Spanish system, for example. In Germany there isa full price for each kilowatt hour of renewableenergy guaranteed by law and every kilowatt hour isat this price but in Spain it is diVerent, they define apremium where the electricity goes to the market as




normal, is sold at the normal market price but gets apremium on top of that that is defined by Spanishlaw, and this premium is diVerent for diVerenttechnologies. There could be ideas that in the longerterm it would make sense to introduce such apremium system in countries that at the moment havestable feed-in systems, especially when thetechnologies become more mature, to give them anincentive to integrate better into the market and tolearn how to deal with the market price fluctuations,and so on. This could be an idea. There is no sign atall that the German Government is moving awayfrom the feed-in system principle because it is hugelysuccessful and also there is a lot of support for thesystem amongst the German public.Ms Stoczkiewicz: If I could add something to that.What is clear from all of these examples is there is aneed for the government to set the properenvironment for renewables to take oV and until nowwe have not really seen that happening. If we talkabout renewables, that has not been happeningacross Europe to the extent that is necessary. AsFrauke said, it is very important to look at the pictureas a picture that is dominated by the previous way ofthinking and the previous way of feeding in fossilfuels rather than taking on the renewables, and thathas to change. This is a mindset, but it is also astructural change that needs to happen in everycountry. In some countries it has happened and thereare some results, but without that the reaching of thetarget will be very diYcult, if not impossible.

Q346 Chairman: Could I ask your advice as to whichtwo or three countries you believe that we in theUnited Kingdom should be looking at for experienceon renewable energies and specific questions that wemight ask in each country. I am not suggesting we aregoing to do it. Shall we start with your good selfbecause you have got experience in Friends of theEarth right across Europe, as does Greenpeace ofcourse.Ms Stoczkiewicz: Yes, although we have not beenworking much on renewables. The examples arecoming through what Frauke was saying. I believethe UK is a country where you can put quitedemanding provisions and people will follow. Fromthat perspective, I would look to Germany and seehow it works in Germany. I would also look atNordic countries, as has been mentioned.

Q347 Chairman: Any in particular of the Nordiccountries? Would Denmark be a good exemplar?Ms Thies: Denmark would be a good exampleregarding administrative procedures and grid access,but if you want to look at the overall picture the twocountries are the examples that have been mentionedbefore, the Spanish and German cases. These areparticularly interesting because they have slightly

diVerent support systems, as I outlined before, theGerman one with the fixed feed-in tariV, which hassome clear advantages, and the Spanish system withthe premium which also has its own clear advantages.Comparing these two regarding the support system,but also regarding administrative procedures andgrid access, are the ones that are very interestingexamples.

Q348 Lord James of Blackheath: Wind and solar arerelatively new and still emerging technologies and Ifind it very interesting that you reiterate theperformance of Germany and Spain particularly.Germany has a longstanding track record of alwaysbeing technologically advanced in the perfection ofevery new development coming in. Is it not possiblethat the timetables that are now set for renewablesare going to run in conflict with the speed andperfection of the technologies and we will not get thefull benefit of them because we are going to run toofast with an imperfect technology rather than wait forthe full development of perfection that will comefrom experience, and particularly where we can learnfrom, say, Germany and Spain and their experienceand carry this forward for the future? In other words,are not the timetables potentially self-defeating?Ms Bollendorff: We do have figures from therenewables industry from EREC, which has beenworking with Greenpeace, on what is available fromdiVerent types of renewable sources. For electricity,for instance, renewables can provide 40% of theelectricity demand by 2020 and in heat renewablescan provide 25% of demand. The figures are therethat industry is ready and the target, as it is set nowof 20% by 2020, can be met.

Q349 Lord James of Blackheath: Does the EUoperate any central technological monitoring orresearch unit of its own so that it can decide what isbest and sponsor that or redeploy that around therest of the community?Ms Thies: There are several projects and there havebeen attempts to monitor that. To an extent that isalways limited by the industry trying to keep theirtechnology for themselves, obviously, and notsharing their insights. On the one hand there is theIntelligent Energy Europe programme, which isrunning diVerent projects. Then we have the energytechnology platforms which are diVerent platformsthe European Commission has initiated. They havebeen designed especially for renewable energytechnologies and some others, for example the solar,photovoltaic technology platform, the wind energytechnology platform. These are platforms where thescientific community and industry are comingtogether trying to identify challenges and existingbarriers and bottlenecks and trying to advise theEuropean institutions on what needs to happen to




improve the development of the environment forthese technologies.

Q350 Lord James of Blackheath: I think you are,therefore, rather agreeing with the thrust of myquestion without actually giving an answer to it,because surely the literal interpretation of what youhave said is, yes, it is going to get a lot morecompetent and eYcient and we should wait.Ms Thies: No.

Q351 Lord James of Blackheath: It certainly soundslike it.Ms Thies: What the technology platforms are doingis mainly looking at not only the technologicalbarriers but also other barriers. I am a member of thegroup on policy and environment of the wind energytechnology platform where we identify planningbarriers and things like that. We can only do thatbecause it is in the process of development and wehave experience. The best way to develop an industryand the technology is to test it and work on it. This isthe only way it is happening. This is how we have seenthe best and highest growth rates of renewable energytechnologies and technological development in thosecountries which have applied these technologies.

Q352 Lord James of Blackheath: I think you areasking a lot of questions to make a very biginvestment on imperfect technology which is going toget a lot better before they have the advantage of thecost-eVectiveness of everything that is going to comethrough.Ms Thies: I disagree for a couple of reasons. The besttechnological development you get from thedevelopers themselves, you do not get it if you put upa research and development programme and commitcertain researchers to do something. The bestoutcomes and developments we are seeing in theindustry are those that the companies themselveshave done. They only make those if they havesupport and invest and see a market.

Q353 Lord James of Blackheath: There are, at themoment, three gearboxes available for wind farms ona commercial basis. One of them is massively moretechnically advanced than the other two, but becauseit is there is no availability because of the supplychain block. All wind farms in ten years’ time wouldhave been better to have started with that mostperfect of all the gearboxes, but they cannot.Ms Thies: Indeed, you can make the same argumentfor coal-fired power stations or gas-fired powerstations, which started developing centuries agowhich have improved constantly over time, but whenthe development started you did not say, “Let’s waitfirst and look into technological development andstart investing”.

Q354 Chairman: Do not pursue the point anyfurther, I think you have answered Lord James’question very well. I have the last question and thatis the consequences for the individual, for the familywho has to pay, will have to pay more for the deliveryof energy because the introduction of renewableenergy is going to cost a lot of money. We havebrought with us the statement that you are probablyaware of made yesterday by the British Government.That is a press release coming from the Crown Estateon oVshore wind farms, a very substantialprogramme, and that is going to cost a lot of money,as Lord James has indicated, in terms of investment.We recently took evidence in Bristol and went to thehouses of two families to look at their solar panelsand they said, “We wouldn’t do it again if it waspurely a rational economic decision. We did itbecause we belong to Greenpeace”, probably Friendsof the Earth as well, “and we believe in the project”.The panels were expensive and government grantshave come down. Could we start with Friends of theEarth. Do you think the individual is going to pay forthis renewable energy revolution?Ms Stoczkiewicz: I would rephrase the question alittle bit. If you look at it from a purely financial pointof view and do not take into account other benefits,and the fact we do believe countries have to do thisshift in their thinking, you will impose somethingpeople will not necessarily accept immediately. Whatdoes not happen is the calculation of the costs whichwe have to pay as individuals for the fact we are usingobsolete technologies and we are using sources ofenergy that are very destructive both to theenvironment and the climate, but also people’shealth. These costs are not calculated and as long asthey are not calculated they will not appear in thepayment and as long as they do not appear in thepayment the renewables might lose on that. Theother thing that is not taken into account is the initialinvestment. The operation later on is much cheaperthan the initial investment. We are trying to saycountries need to make this leapfrog, this change, sothey need to help with the initial investment. Imentioned the idea of using the European InvestmentBank. The UK uses the EIB for a lot, the UK isgetting about ƒ4 billion a year in loans, I believe.Why not use some of this to make the initialinvestment that is necessary. If you say this is all onthe consumer you are going to be defeated becauseyou do not do that with other sources of energy, youdo not put all of the costs on the consumer that comewith it. If we are honest about the costs, including theexternal costs, the discussion would be diVerent.

Q355 Lord Powell of Bayswater: I just wanted to adda further question. You say we do not take accountof the full costs of existing energy systems, and youare right, but are we actually being accurate about the




cost of renewable energies? We are always quotedwhat is called the direct cost of renewable energy andit is always presented as a rather modest figure, it is 5billion either pounds or euros, not that there is muchdiVerence these days, as the annual cost. But thatdoes not include the infrastructure investment cost orthe resource cost of having to use more expensiveenergy in the economy. Both ways you do not reallyget a very accurate cost of what renewables will be.Ms Stoczkiewicz: I disagree that this is moreexpensive energy. I go back to my other point, thatyou do not calculate the amount of money which isnecessary to ensure oil fields in Iraq are not gettinginto diYculty or that you have to fit in to be able toensure the supply of fossil fuels and you do notcalculate the costs which are related to theenvironmental destruction.

Q356 Lord Powell of Bayswater: My point is thatapplies both ways, it also applies to renewableenergies where we do not calculate the resource costs.Ms Stoczkiewicz: Renewables are definitely muchlower and you do not have the same costs that youhave with the traditional fossil fuels. With solarpanels, the renewable part of it is that it is not beingused and you cannot use it again. The overall costsare lower.Ms Thies: On the overall argument I agree withMagda that the external costs of fossil and nucleartechnologies are massive and cannot be comparedwith the additional costs of renewable energy becauseit is not just a few digits diVerence. To quote the muchquoted Stern Review, he says the cost of climatechange if we do not act is 20% of global domesticproduct whereas the action to prevent is 1%. This isjust one example. This only takes into accountclimate change. Yes, I am with you on the costs thatrenewable energy is creating on top of the directsupport mechanisms regarding grids and so on.However, the grid system would have to be developedanyway. Looking at the UK, the grid system is morethan 100 years old and new investments are neededno matter which technology we are connecting. Wecannot fully pass this on to renewables, anytechnology would require new grid development. ThediVerence with renewals is we have to make the shiftfrom a centralised system towards a moredecentralised, more flexible system. This is a one-timeshift that the system has to make. The costs are oftenover-estimated because they are not compared withthe costs that would occur if we wanted to maintainthe system, which are also tremendous. In thatrespect, these extra costs are often over-estimated.Another thing that is often not taken into account inthe equation is the benefits that renewables arecreating, not only to climate change and security ofsupply but also industrial development, job creationand these aspects. To go to the hard economic facts

in the short-term, because in the long-term there is nodoubt that renewable energy will pay oV, and I comeback to the quote I gave earlier on the reduced fuelcosts compared to the renewables investment costs,the costs of renewable energies are often over-estimated because external factors on the price arenot taken into account. One example is a study thatwas made of the German market that concluded thatunder ideal market conditions renewable energies atthe moment would be reducing the total electricitycosts in Germany by ƒ5.5 billion every year and thatis because when renewable energies are producing,for example when the wind blows, they go into themarket and because of the way the market operates,which I believe you are familiar with, the lasttechnology that enters the market to cover demanddetermines the total market price. If we have a certaindemand, the first that will go in are other renewabletechnologies because they produce at very lowmarginal cost, almost zero, and we would probablyhave some nuclear and coal because their operationalcosts are relatively low—if external eVects are notreflected in the prices—compared with investmentcosts and other technologies, such as gas, only comein if demand still requires them because their cost bythe hour is very high. If the demand is there therenewables come in and they throw out thetechnologies that are most expensive to operate bythe hour and the total electricity market price isreduced quite significantly. In a functioning market,for the German consumers, this would lead to savingsof ƒ5.5 billion compared with ƒ3.5 billion ofinvestment support for renewable energy, or feed-intariVs in that case for renewable energy. In fact, theGerman consumers could already benefit from thiseVect today. This is very often overlooked and nottaken into consideration although this is a verysignificant factor. This expands further by a factorthat comes on top, and that is the carbon price. If wehave renewable energies in the market obviously thepressure on the emissions market is decreasedbecause renewables have no, or almost no, emissionsand, therefore, there is a relief on the carbon price.We all know that the carbon price is going to go up,and has to go up, and Europe is now talking aboutsome caps for the emissions trading, which are a startbut nowhere near where they need to be if we believethe scientific figures, which we do because we have to,and then the cap has to be much higher. Then we talkabout carbon prices that are way above the prices weare seeing now and thinking about. If we take thiseVect into consideration on top of it then todayrenewables are already a major benefit to consumers.

Q357 Chairman: What an excellent point to finishon. We have significantly overrun but that is a tributeto you for the clarity of your answers and the very




eVective contribution you have made to our report.We will send you copies of our report. If, when youread the transcript, you want to correct anything orwrite to us with some further information, please doso. Incidentally, Lord Bradshaw and I were talking

about the age of the grid and I have now realised whythe House of Lords is doing this inquiry, it is becausemost of us are almost as old as the grid!Ms Thies: I hope not!Chairman: Thank you very much indeed.






Witness: Ms Eluned Morgan, Member of the European Parliament, EP Rapporteur for the Internal Marketin Electricity Directive, examined.

Chairman: First of all, thank you very much forcoming. We will introduce ourselves and I will saysomething about the inquiry. This is Sub-CommitteeB of the European Union Select Committee. We havebeen at this inquiry for three months, that order ofmagnitude, into the renewable energies target, the20% by 2020, 15% for the UK. The way in which wego about these things, as you know, is we takeevidence in writing and in person, hence we have gota session today in Brussels. Thank you very much foryour time. We intend to report in October. Thereason for that is it has taken slightly longer than weoriginally thought because there is more work to bedone. We are only focusing on wind, sun and waterto meet the target, so we are not looking at biofuel,transport, nuclear. It is quite a narrow focus but,frankly, if we had widened the focus it probablywould have taken us three years. The Minister,Malcolm Wicks, told us last week that the UKGovernment is starting a consultation exercise onthis whole topic which will last through toSeptember, my guess would be, and then there will befurther UK considerations, and probably informals,in the Energy Council. Yesterday, as you may or maynot know, there was a statement in Parliament byMalcolm Wicks where he outlined significantbacking for oVshore wind turbine with the co-operation of the Crown Estate obviously. I think weall knew, given the evidence that has been oVered tous, that was where the main contribution would cometo meeting our target. We have been focusing on fivekey issues which will come out in our questions. Ifyou do not mind, we will each ask you questions andif you either cannot answer or would prefer to moveon to the next one, please indicate. The five areas are,first of all, the targets themselves, where do they comefrom, and Lord Powell will begin with that, and thereare a number of issues that arise out of that.Secondly, by focusing on oVshore wind, which iswhere the Government’s main concentration is, tomeet our target within that timeframe, is that sensibleor is that distorting, how is it going to be financed, etcetera. We have been looking at your advice on theGuarantees of Origin and Trading RenewableProduction Certificates essentially. The evidence we

had this morning from Greenpeace was “Don’t dothat” because it will distort the UK domesticincentives. We have, as you know, the RenewableObligation Certificates. The Minister was quiteinteresting when he came last week and indicated thatfeed-in tariVs for micro-generation might well besensible to look at. We have been remindingourselves that energy eYciency is as important as therenewable target. We have been encouraged to lookat what Spain, Germany and Denmark in particularhave achieved and how long it has taken them andwhy they started so early. I hope that gives you theflavour. We will go round the table and introduceourselves.Lord Powell of Bayswater: Charles Powell,Independent member of the House of Lords, acombination of Civil Service and businessbackground.Lord Paul: Swaraj Paul, member of the LabourParty. My experience has been in the manufacturingindustry.Lord James of Blackheath: David James,Conservative. Some years spent on the North Sea.Lord Mitchell: Parry Mitchell, Labour peer. I am abusinessman in the IT sector.Lord Bradshaw: Bill Bradshaw, Liberal Democrat,with a background in transport.Lord Walpole: Robin Walpole, Independent. I am afarmer, landowner and environmentalist.

Q358 Chairman: This is our specialist adviser who isan academic at Imperial College specialising inenergy policy and technology. We will send you thedraft of the transcript, please feel free to correct it andsend it back. Before I start with Lord Powell, couldyou just tell us about your own background and yourposition. If you would, could you tell us a bit aboutthe parliamentary timetable on this issue.Ms Morgan: First of all, thank you very much forasking me to come along and give evidence today. Imust tell you to begin with that I am not an expert onthis particular field, my field is more liberalisation ofthe energy markets, but I have been working closelywith Claude Turmes, who I understood is givingevidence to you.



5 June 2008 Ms Eluned Morgan MEP

Q359 Chairman: He had to go to a funeral today,unfortunately.Ms Morgan: What a shame. That explains a lot. He isan absolute expert in this whole field.

Q360 Chairman: We will be asking him for somewritten comments.Ms Morgan: Obviously it is an area which is crucialto the Energy Package and Climate Change Packagethat is going through the European Parliament at themoment. The first thing to say is there is a realrecognition of how tough these targets are. There isno misunderstanding about that within theParliament. Obviously you are going to have people,the Green lobby, who are always going to be pushingit much further, but there is an understanding thatthis is tough. Having said that, on the renewablesspecifically, the key thing that I would like toemphasise is that it is much easier to reach thesetargets if we implement energy eYciency first. Themore you can deal with in terms of energy eYciency,the easier it is to reach these targets, withoutquestion. The thing to constantly remember is this ispart of a package where we have made a commitmentto a 20% cut in carbon. If you are looking at that youhave to take it as the whole package. The renewablesis part of a package to reach that 20% target. If wereduce or diminish this target in some way we willhave to make up for it somewhere else. There are allkinds of things happening in terms of energyeYciency. We are talking about building regulationsbeing tightened up, car regulations being tightenedup, cleaning up the quality of oil, for example, orwhatever. All of these things are part of a jigsaw. Ifyou move one it means you have got to make up forit in another area. It is very diYcult because you canimagine on cars, for example, we are trying to have atarget of 120kg and the German lobby is very, verymuch against that. If we were to say, “Right, we willconcede to you on that”, we have to understand thatwe may need to go further with renewables orwhatever else. The energy eYciency part is absolutelycentral to it all. It is very interesting in the UK that alot of politicians try and parade their greencredentials by saying, “I’m going to do somethingabout the standby buttons on TVs” or whatever, andthe fact is you cannot do that in a UK exclusive area,you have to understand that is an EU competenceand the Commission is doing all kinds of thingslooking at how that can be done. You simply will notbe allowed to sell TVs into the EU in future unlessthey reach a particular standard when the standbybutton is oV. That sets a global standard as well. Allof this is very important. Energy eYciency isabsolutely central to these targets and I cannotemphasise that enough. Obviously in the UK we areway behind a lot of other Member States in terms ofour renewable targets and that is reflected in the

target that the Commission has given us. It is goingto be a very, very tough target to meet, withoutquestion, and very costly. I am sure you are aware ofthe Poyry report on how much they are predictingand I am sure you have had other people telling youhow their predictions are going too far. Certainlypeople have been telling me that there is a crunch interms of steel, which you need to produce the windturbines, and in time there will be more production ofsteel and already there is an adjustment to that so theprice is likely to come down. The key thing toremember is what our pathway towards addressingthis is, but the issue that is of real concern to me ishow we do this and protect people who arevulnerable to these price increases. For me, that isabsolutely crucial. You can imagine, I have beencampaigning a lot recently and it is an issue on thestreets, the cost of energy is a real issue, and we dohave to address this issue of energy poverty at thesame time. If we are going for these targets that issuehas got to be addressed. It is quite interesting that inthe UK at least there is recognition of the issue ofenergy poverty and there is a strategy and that doesnot exist across a lot of the EU. We are trying to getthat on to the European agenda, not in a harmonisedway but simply saying, “This is an issue that MemberStates have to recognise has to be addressed in thefuture”. Those are key things for me.

Q361 Chairman: Just before I turn to Lord Powell,could you give us an indication as to when you expectthe Renewables Package to be accepted by theCouncil and by the Parliament?Ms Morgan: We are hoping to have a single readingon this because we are running out of time, that is thereal issue. Our parliamentary term comes to an end inJune next year but things will be winding down byJanuary/February, so we simply have not got time tohave two readings on it. The other issue is that theLisbon Treaty will probably—may—come into forceby then. If we do not get a first reading done byJanuary we would have an eight week delay becauseit has to be discussed within national parliaments aswell. There is real pressure on to get this done veryquickly. I think the target is September. Theamendments are going in next week, which is thedeadline for amendments for our committee, andSeptember is the date when we should be having ourfirst reading in plenary.

Q362 Chairman: And the Council of Ministers?Ms Morgan: I know the French want to do it duringtheir presidency but I do not know the exact dates.

Q363 Chairman: So we could be talking easilyNovember/December?




Ms Morgan: Yes.

Q364 Chairman: On the record, I am not breachingany confidence, the Minister was quite clear with uslast week that the British Government was looking ata slightly longer timetable.Ms Morgan: My understanding is that the French arevery keen on this Climate Change Package, and youcan imagine that Sarkozy wants to notch up a winduring his presidency, and the Climate ChangePackage is the win that I understand he is looking for.

Q365 Chairman: You see the renewables part of thatas absolutely central?Ms Morgan: I would think so, yes.

Q366 Lord Powell of Bayswater: Many thanks forthat interesting introduction. Just focusing for amoment on the targets. We have been wrestling withhow the 20% by 2020 was arrived at. From what youhave said one might deduce that it all stems from the20% reduction in emissions and this was, therefore,set scientifically in relation to that. But there is asuspicion, however, that it is a good deal morepolitical target and, indeed, it has been cruelly saidthat it might have been devised on the back of acigarette packet. How do you think the target wasarrived at?Ms Morgan: It is very interesting. In the EuropeanParliament, the position in the past has always been25%, so we have had a higher target. We always gofor a slightly higher target because we know theCouncil of Ministers are likely to dilute it in someway. The Greens generally try and go for a 30%target, the PPE go for 20% and we have finished upsomewhere in the middle, and that is the typicalEuropean compromise you would expect. It is notfigures plucked out of the air. It is partly because it isbased on what happened with the ElectricityDirective in the past, the Renewables ElectricityDirective, and the fact that did drive the renewablesprogress that there has been because there wereexamples in the past where there has beenencouragement but nothing happened. Unless youprovide binding targets then people are less likely tohit them. You can see that in the biofuels targets, theyare nice indicative targets but everybody misses them.We looked at that. The European Parliament hasalso been very anxious to do a lot more with heatingand cooling, and for years we have been asking for aHeating and Cooling Directive. There is generally alittle bit of disappointment that we have not got aspecific Directive for heating and cooling, but therewas an understanding that these are tough targets sowe should allow flexibility for Member States todetermine how they are going to reach those targets.There have also been all kinds of impact assessmentsby the Commission. It is interesting because in all this

energy area it is very political and when people do notlike things people do question impact assessments.We have had this with the liberalisation agendawhere the impact assessment was very vigorouslychallenged. That was not the case in the same waywith renewables so, to me, that means people felt thatit did stand up to scrutiny.

Q367 Lord Powell of Bayswater: Do you think theCommission proposal has suYcient flexibility? As Iunderstand it, it has regular two-yearly reviews,sanctions, penalties. Is that really going to run?Ms Morgan: You have got to remember that this isthe beginning of a negotiation process as well. Whoknows where it will end up. I do not know if you haveseen a copy of Claude Turmes’ report?

Q368 Lord Powell of Bayswater: Yes.Ms Morgan: He is trying to push it even further.

Q369 Lord Powell of Bayswater: That was whatworried me.Ms Morgan: You expect that from a Green politician,frankly. There is an understanding that the target isalready very ambitious within the other politicalgroups. From the debate we had recently, the oneexchange of views we have had on biofuels, becauseClaude has suggested that we should take away thebiofuels target, it looks like the three main politicalgroups will continue to ask for the biofuels target tobe mandatory.

Q370 Lord Powell of Bayswater: Still on theflexibility issue, there is bound to be a bit of fudging,is there not, and I see that already our EnergyMinister is saying we can only reach the target if thereis renewables trading and if exceptions are made forpending large projects. Do you think that is realistic?Ms Morgan: Again, Claude has suggested that largeprojects should not be. I live near where the SevernBarrage may or may not be built. It is pretty clear tome if we are going to reach this target you do need adegree of flexibility. I think there is an understandingby other groups that there will need to be someflexibility, but you expect people who are purists to beas tough as they possibly can.

Q371 Lord Powell of Bayswater: Perhaps a lastquestion on the targets. Do you think there is adanger they are distorting in the sense that had thetarget been set for 2030 it would have left more timefor other technologies and things to come into playwhich would have made it possible to realise the goalsat less economic cost?Ms Morgan: Do not forget, that what is driving thisis the two degree target. If we are going to meet thetwo degree target then you need to peak by about




2015, so 2030 is just too late. Although that might bea nice idea, there are other imperatives working here.

Q372 Lord Paul: If already in 2008 you think it is anambitious plan, what are the chances of exceeding itto any level or will it fizzle out?Ms Morgan: As far as I can see, this is about politicalcommitment. The bottom line is that other countrieswhich are similar to us have done it and we have not.That fundamentally comes down to whether youwant to do it or not and where do you prioritise this.You have got to remember the Stern report that saidyou either do it now or you pay later, so we are goingto have to pay at some point, and it makes more senseto pay now. When you see the price of oil going up,all these diVerent factors come into play. The securityof supply issue is huge, it is very, very important. Youhave got to see it in a much broader context than oneof, “We are just doing this for the sake of it”, we arecertainly not. This is about security of supply,sustainability and competitiveness. If we start thisthen we are setting a standard globally. Europe’scompetitiveness is under threat, but if we can be themarket leaders in this area—you have seen how muchGermany is making in terms of exports, it isenormous—there is real potential for it.

Q373 Lord Walpole: What I want to discuss withyou is the topic of the relevance of the renewabletargets to the EU Energy Policy. The first question isto do with eYciency. We must be more eYcient in ouruse of energy. Have you got any interesting ideasother than getting better motorcars? Have you gotany other bright ideas for saving energy? My secondquestion is on security of supply. I have a thirdquestion when you have answered those two.Ms Morgan: First of all, there is an Energy EYciencyAction Plan that the Commission has alreadyproduced and there are about 80 or sorecommendations in that. There are lots and lots ofideas on the table. Some of them are about eco-designand building design in right from the beginning, sobuilding energy eYciency into your product, but alsoabout buildings. The main problem we have withenergy eYciency very often is implementation.Britain was late, for example, in implementing theBuildings Directive. We have to be very careful. It isvery interesting when you go round trying topromote Europe, the first thing people say is “We allobey the rules and all these other foreigners don’t”,this is what you get every time, but on environmentallegislation we are not as good as we should be.Energy eYciency is an area where we have a lot tolearn from our neighbours. Designing things in iscrucial. There is an Eco-design Directive andeverything will be measured against that. That is ahuge step in the right direction. There are otherissues. It is about planning bus routes, public

transport, it is so broad. It is about eco-cities, and weare trying to get the largest cities in Europe to worktogether to learn best practice from each other. Thereare all kinds of ideas there. You should have a look atthe detail of the Energy EYciency Directive becausethere are 80 recommendations there.

Q374 Lord Walpole: Security of supply was mysecond point.Ms Morgan: I think it is fundamental. If we carry onthe trajectory we are on at the moment then we aregoing to increase our dependence on gas from threeexternal sources from 30% to 70%. That is not cleverby any stretch of the imagination. This is definitelypart of addressing that issue of security of supply. Wehave to take that very, very seriously. Also, the oilsituation, there is a link between oil and gas prices.Goldman Sachs are saying it is going to go up to $200a barrel. If you get into those kinds of figures thensuddenly the renewables economics really take oV. Imet with lots of UK electricity generators the otherday and you can imagine they are slightly spooked bywhat this target will mean for them. By the way, Ithink one of the crucial issues with this is that we haveto encourage small and medium-sized enterprises,that is absolutely crucial as far as I am concerned, butat the moment it is dominated by the big six players.The Renewables Obligation has almost set that instone and we need to get away from that. We need tostart encouraging much more micro projects, butthere are huge problems with that as well. I have hadsolar thermal put in on my roof and I was very proudof it but, my goodness, it was very, very diYcultbecause the skills were not there, the plumbers had noidea what they were doing.

Q375 Lord Mitchell: Was that here?Ms Morgan: No, in the UK. You have to build intraining, a massive training package with this targetbecause unless you do that we have got no hope ofreaching this. At the moment I could not recommendto people to do what I have done because it was ahuge problem and until we have sorted out thosethings and made it much easier I think it is going toput people oV rather than encourage them.

Q376 Lord Walpole: My last question requires a oneword answer. What year do you think the EU’sconsumption of energy will start to go down?Ms Morgan: That is very diYcult because you cannotblame Eastern European countries for having a hugegrowth. That is a very diYcult question because thereis no question that it will be increasing.

Q377 Lord Walpole: It cannot increase forever, canit?Ms Morgan: No. I do not know. I would not want toput a figure on it.




Q378 Lord James of Blackheath: Ms Morgan, youstarted by saying energy eYciency first and I wouldlike you to think for a moment in terms of theeYciency of the production processes for renewableenergy and whether you feel that we are running toofast at the moment with the timetables that have beenset insofar as we are running with technologies whichare short of perfection yet which will go through a lotmore development. We could well look back in tenyears from now and think that we had been left withsomething pretty antiquated by the standards ofwhat will happen then. Do you see any opportunitieswithin the EU to stimulate and centralise the overalltechnological developments of wind, sun and waterin a way that could shortcut that process and bring usto the point where we have a better technology withwhich to go so that we get the eYciency at theproduction end rather than at the utilisation endfirst?Ms Morgan: You are absolutely right, but we havenot got time on our side on this one, that is the realproblem. We do have to get on with it.

Q379 Lord James of Blackheath: But we can buy thetime if we are prepared to utilise some of theadditional resources which are available oftraditional fuels to win us the time. We might bebetter oV to use those reserves for a period of timeunder controlled conditions to buy ourselves a fewextra years to get better technology going forward.We are talking about posterity and looking into thefuture, but we might be selling the future very short ifwe jump the gun to this extent now.Ms Morgan: That is okay, but it is quite high risk. Forexample, if you take the ITER project that they havebeen trying to develop on nuclear, it has always been40 years oV. We have kept saying, “Let’s do this. Thisis going to be the answer to all our energy problems”,but it is still 40 years oV. We are spending billions andbillions and billions on this and it is still 40 years oVand it has been 40 years oV for as long as I canremember. That is a nice idea, having faith in thefuture, but I do not think we can aVord the time totake that risk. What the EU is already doing is thereare billions being spent on research and developmentthrough the FP7 programme and energy ishighlighted very, very strongly within thatprogramme. There is work already being done onfossil fuels and for example hydrogen. There aremillions and millions going into this. I am sure youcould get the exact figures from the EuropeanCommission on what is already being done to pushthis. This is an area where we do need to co-operateand the states need to co-operate.

Q380 Lord James of Blackheath: You have gracedmy question with a more technical answer than thequestion itself anticipated because I was thinking

more in terms of an example I quoted to our friendfrom Greenpeace this morning, that at the momentthere are three gearboxes which are available to useon a wind farm, one is like a Ferrari and the other twoare a couple of old Ford tour buses. If we got to thepoint where we could wait until we had got theFerrari standard gearbox available for wind farms insuYcient numbers that could be used across allprojects then we would be leaving a far greater legacyfor posterity than we are going to get with what wehave got at the present moment. That seems to me tobe a simple, straightforward issue of jumping the gunon something which is not really as good as it couldbe.Ms Morgan: I think the time issue is a real issue. I donot think we can aVord the time. We are alreadydoing as much as we can in terms of cleaning up coal-fired power stations, for example, and puttingmeasures in place. If we are not doing that, how arewe going to get our energy. If what you are saying iscontinue but let us clean up coal a bit while we arewaiting for this new technology to develop—

Q381 Lord James of Blackheath: Ms Morgan, if youwould accept the principle that at the moment wehave a twin agenda, one is reduction of carbon andthe second is we have to do something to be able toproduce an alternative source of fuel which is goingto be competitive with what we are having to pay perbarrel to get the stuV out of wherever it is comingfrom at the moment. If we end up using anincompetent system like wind farms are going to haveto be to a certain extent with the wrong gearboxesand go ten years out into the future, we have onlyreplaced an expensive form of fuel with anotherexpensive form of fuel because we are not maximisingthe performance of what we have invested in. Yousay we have not got time now but we may look backand wish to God in ten years’ time we had used thetime in a diVerent way. I am not sure anybody istaking a top-down view on this, which is a hugelycritical issue for me.Ms Morgan: This is like being on The Apprentice! Iunderstand your point, I just think we do not havetime. Biofuels is a great example where it is clear thatsecond generation biofuels will be better than firstgeneration, but can we aVord to wait.Chairman: Now we come to a very importantquestion with Lord Paul.

Q382 Lord Paul: The Guarantees of Origin schemes,what role do they have and how can they help EUmembers meet their targets?Ms Morgan: I think they are going to be diYcult touse. I have been trying to work out how they wouldwork and I cannot pretend to understand the wholesystem. My understanding is that the cheapest placeto get renewable energy from is biomass in Bulgaria.




Why Bulgaria is simply going to say, “You come inand do this instead of us”, when their target is goingto be pretty high anyway, I just do not understand. Ido not understand why they would say, “Come on,Britain, you come and do it”. My guess is they willnot be doing that until they have reached their owntarget. I am not sure how that will work in practice.I understand the logic behind it, but I do not think itwill come into play until very late towards 2020.

Q383 Lord Paul: I think in our earlier sessions theyfelt it was a non-starter almost. Do you go that far?Ms Morgan: We have got to consider it because thediVerence in price is quite substantial. If we can usethis flexibility instrument it would be useful for us interms of price and that would be useful to theconsumer.

Q384 Lord Paul: Wind turbine technology, is 45years old. It is not something new, so do we need towait for this technology to develop further? 45 yearsis a long time.Ms Morgan: It is a long time. Cars have developed ahuge amount over the years but the fundamentalprinciples are still the same. How long are youprepared to wait, it is a real problem. I do not knowthe detail of how wind farm technology works, I donot know how the generator works.

Q385 Lord Powell of Bayswater: Planningpermission probably takes longer than thetechnology!Ms Morgan: Planning permission is a huge, hugeissue in the UK especially.

Q386 Chairman: Lord Paul indicated that we hadalready received evidence from parliamentarians thatthe Guarantees of Origin process (a) might not work,(b) might not be appropriate and (c), if necessary,might come in late. Could you just comment on theCommission’s view because the Commission andParliament seem to be heading for a train crash.Ms Morgan: We have not got into the detail of theGuarantees of Origin yet, so I cannot tell you wherethe Parliament is on this. I think they are trying tomake it easier for people. I understand what they aredoing. The way they calculated what the percentageshould be for Member States did not take localopportunities for exploiting resources into account, ittook into account a flat rate plus your GDP. Thereare diVerent potentials in diVerent countries. Theyare pretty tough targets for all Member States. Myunderstanding is that Belgium and Luxembourg, forexample, have fairly tough targets that it will be very,very diYcult for them to meet unless they have somekind of trading arrangement.Chairman: Bilateral perhaps, even. That was theimplication this morning.

Q387 Lord Bradshaw: This is an area where youhave already declared your expertise.Ms Morgan: Oh gosh, that was dangerous!

Q388 Lord Bradshaw: That is the free market. I amreally interested in the extent to which theunbundling and distribution of supply is going on inEurope and whether, as we were informed thismorning, it looks as if the proposals which have beenput forward by the Commission are likely to beblocked by the Council of Ministers.Ms Morgan: This is why I have got to rush back forthe vote actually. It is pretty clear that the six or sevenMember States who are keen to block unbundling atany cost are very, very active. It feels to me themajority are being pushed around a little bit by thatminority. Obviously there is the Council meeting onFriday where we are expecting some decisions onwhat will happen in relation to electricity and gas. Onelectricity, the Parliament’s position at the moment isthat we want to see full ownership on bundling, thatis the Committee position. Whether we can hold thatin plenary is a diVerent issue and whether we can gettwo-thirds majority is, again, a diVerent issue. I amfairly confident that we can do that but, frankly, if theCouncil does the deal on something that is less then itwill be more diYcult for us to maintain that position.

Q389 Lord Bradshaw: Do you think that unbundlingis a key issue in getting grid access, putting thesupplier and the grid under the same umbrella, as itwere?Ms Morgan: I think it is essential. It will make a hugediVerence. What is more, as the rapporteur for theElectricity Directive, we have said very clearly thatrenewables should have priority access onto thegrids. The Commission were not at all happy with ussuggesting that, which is quite interesting because intheir own Renewables Directive they suggest thatvery thing, so it is a very odd approach. Therenewables lobby is very, very keen on full ownershipunbundling and they feel there are examples acrossEurope where particularly smaller generators arebeing blocked to the kind of access that they shouldbe getting.

Q390 Lord Bradshaw: From what you have just saidyou obviously believe that feed-in tariVs areimportant.Ms Morgan: They are very useful for micro-generation in particular.

Q391 Lord Bradshaw: That is what I meant.Ms Morgan: Just look at what has happened inGermany and you can see the development. I haveone of the biggest solar factories in my constituencyin Wrexham and it will be a great boost for them aswell. There are real opportunities if we go down the




route of a feed-in tariV, but at the moment theincentives are not there.

Q392 Lord Powell of Bayswater: My recollectionfrom the evidence we have received is that therewould be a considerable disruption cost if we were toswitch to that and there was some resistance fromsome of our witnesses to the idea that we shouldmove to feed-in tariVs.Ms Morgan: I would need to know who yourwitnesses were first.

Q393 Lord Powell of Bayswater: I think mostlypower companies.Ms Morgan: That just says it all.Lord Bradshaw: That is not surprising because theywould regard this as a rival to a certain extent.Thank you.

Q394 Lord Mitchell: We have heard in previousevidence that looking around Europe the countriesthat are to the forefront, shall we say, are theScandinavian countries, Germany, Spain andPortugal. From your experience and from what youhave seen, why do you think that is true and why doyou think the UK seems to be significantly behind,which I think you are also implying?Ms Morgan: We have not seen the need to do itbecause we have had North Sea Gas for such a longtime so we have not had the same impetus as some ofthose other countries. Now we are coming to acrunch on the gas situation and this push fromEurope and clearly we need to move our positionon that.

Q395 Lord Mitchell: Also the price. The price of oilmust be—Ms Morgan: Clearly that will make a big diVerence tothe economics.

Q396 Lord Mitchell: What do you think needs to bedone in the UK to make sure that we get in on thefast track?Ms Morgan: Political commitment. It comes downabsolutely purely to political commitment. Nothingelse can explain the disparities within Europe otherthan political commitment. Can I just come back toone issue on renewables, the issue of biogas. I havehad a lot of correspondence on this from some peopleand it is not counted at the moment as part of theRenewables Obligation and that is something thatneeds to be addressed.

Q397 Chairman: And increase the target.Ms Morgan: At the moment it is not includedanywhere, it is not recognised as something thatqualifies for the credits in the Renewables Obligation.

Q398 Lord Powell of Bayswater: This is an entirelydiVerent question for you as a parliamentarian. Ithink I am right in saying the Commission hasintroduced this under an article requiring qualifiedmajority voting. Do you think that will actually go ordo you think states are going to want to insist onunanimity here?Ms Morgan: There was a lot of controversy aboutthis, was there not?

Q399 Lord Powell of Bayswater: Yes, and there wasan alternative legal base they could have used on theQMV route. Certainly the British Government seemsto be opposed to that, believing they can get others tosupport it. Will Parliament take a strong view on this?Ms Morgan: Absolutely. Parliament will not concedeany territory at all on something like this, no questionabout that.

Q400 Chairman: Could I just ask you about thebarrage. I do not know whether from a constituencystandpoint you are able to comment and if you likewe can not put it on the record. My question comesfrom our visit to Avonmouth speaking both to theport but also getting a briefing from the consultantsto BERR. Two things stood out that we wouldappreciate your comments on. First, there are twoalternatives, one a much smaller barrage very close tothe second Severn Crossing where the port’sobjections seem to fall away, although not theenvironmentalists, and a larger one from Swansea toWeston-super-Mare where the evidence given to uswas pretty clear that it was not going to be built by2020 and involved substantial cost and a lot of veryunresolved issues. That is my question on the barrageand I would appreciate your response.Ms Morgan: It is quite interesting because the WelshAssembly Government have been fairly positiveabout at least looking into whether the barrageshould be used as a way of reaching some of thesetargets. You cannot ignore the fact that it is going tocost £16 billion, which is a lot of money. The thingthat I keep on mentioning to them is if you are goingto do this it has to comply with European Directives,it has to comply with the Birds Directive and theHabitats Directive and there is no way around that.That may cost extra money if you are going to haveto mitigate the eVects somewhere else. We have beenthrough this on a very small scale in CardiV Baywhere they built a barrage and had to produce awhole area for wildlife somewhere else. You aretalking about a very complicated ecosystem with abarrage. Having said that, there are realopportunities and it does make sense for us to at leastresearch further whether this makes sense. As aconstituency MEP, I am seeing it on a much broader




scale and there are real opportunities for training,economic development and everything, there is awhole package that could go alongside this, but it isundoubtedly a lot of money and before opting for itwe need to research whether with that £16 billion, ifit was spent on energy eYciency, you would not get abetter result. The diVerence is, of course, a lot of themoney for the barrage would come from the privatesector whereas the private sector will not put thatkind of money into energy eYciency projects. That isa diYculty.

Q401 Chairman: You saw the Governmentannouncement by the Minister, Malcolm Wicks, oryou must have read about it, in the House ofCommons on Wednesday about a significantemphasis on wind turbines oVshore with a hint ofpublic sector support in order to meet a large part ofthe renewables target. We have been up to GreatYarmouth and had a look at that oVshore wind farm,which certainly looked impressive, and Lord Jameshas touched upon it with some of our witnesses aboutsome of the technical and supply chain problems.From your standpoint, what are the implications forapprovals necessary from Europe in terms of stateaid, the Birds and Habitats Directives, the possibilityof grid connection with some of our other colleagues,and one thinks particularly of Denmark and possiblyeven Holland?

Ms Morgan: I think state aid is an area that has notbeen addressed to the extent that it needs to be. Upuntil now, if you are talking about the overall energytake from renewables being a few percentage pointsthen it is not going to have a huge eVect on price, butif you are talking about 20%, and in some MemberStates you have massive state intervention and inothers you do not, then that will bring upcompetition issues. Undoubtedly that needs to beaddressed and my understanding is that theCommission is looking at that. Grid connection is areally important issue. We have to try and ensure alevel playing field and that is quite diYcult becausewhy do oVshore wind farms have to pay for their owngrid connection whereas if you are buildingsomething on land it is just connected to the grid. Wehave got to be very careful about discriminationeVectively against renewables if you are talking aboutgrid connection. We do need to look at that as well.You cannot get around these European Directives,they are there for a reason and need to be respected.You just finish up in years and years of legalwrangling if you do not respect them. If that does nottake us any further you need to build it into yourassessment when you are looking at where you wantto place these things.Chairman: We have left one minute of the timeavailable to thank you very much indeed. We willsend you the transcript for correction. Good luckwith your specific responsibilities on unbundling andthank you very much for coming.






Witnesses: Mr Hans van Steen, Head of Unit—Regulatory Policy and Promotion of Renewable Energy, andMr Jean-Arnold Vinois, Head of Unit—Energy Policy and Security of Supply, Directorate General Energy

and Transport, European Commission, examined.

Chairman: Thank you for coming. We will send youa copy of the transcript, please feel free to make anycorrections. We will go round the table and introduceourselves. It would be helpful if you could make someopening statements principally about procedure andtimetabling, what is actually going on in terms ofrenewables. We know in the United Kingdom therewill be a consultation procedure during the course ofthe summer and we had evidence from the Ministerthat agreement is possible within the Council ofMinisters on the final details towards the end of theyear. Your comments on that would be helpful.Lord Powell of Bayswater: I am an Independentmember of the House of Lords. I come from first aCivil Service background and later business.Lord Paul: I am Swaraj Paul, a Labour member of theHouse of Lords. My background is themanufacturing industry.Lord James of Blackheath: David James,Conservative.Lord Mitchell: Parry Mitchell, Labour. I am a high-tech entrepreneur.Lord Bradshaw: Bill Bradshaw, Liberal Democrat. Ihave a background in transport.Lord Walpole: Robin Walpole, environmentalist,Independent, farmer and landowner.

Q402 Chairman: I am a Conservative formerminister, Conservative member of the House ofLords and Chairman of Sub-Committee B. This isour specialist adviser to this particular inquiry who isan academic at Imperial College. It would be helpfulif both of you could very kindly brief us on procedureand the timetable.Mr van Steen: Jean, maybe you want to start with theoverall policy.Mr Vinois: Maybe if I could quickly set thebackground. The origin of this is to be found first ofall in the UK Presidency in the second semester of2005 when there was a summit at Hampton Courtwhere your Prime Minister at the time was keen todevelop the concept of European energy policy. Thisled to the production of a Green Paper by theCommission on secure, competitive and sustainable

energy in March 2006, which in turn led to the so-called First Strategic Energy Review by theCommission in January 2007 with a number of otherpapers, such as the progress report on electricityproduction from renewables and biofuels, but also onthe internal market for energy, that is gas andelectricity. This work by the Commission in January2007 was quite substantial, looking at the wholeenergy mix of the EU and all the aspects which hadto be dealt with. This paper was processed veryquickly at the time by the Ministers of theEnvironment and the Ministers of Energy to pave theway for a decision by the European Council andHeads of State and Government in March 2007. Anannex to the Conclusions of the Presidency of theEuropean Council enshrined an Action Plan for anEnergy Policy for Europe 2007–09 where you willfind all the targets of the energy policy for Europe asstated at the time and the main elements of theInternal Market Package, which will be discussedtomorrow in the Energy Council, which theCommission tabled in September 2007. Also, itannounced the Climate and Energy Packages ofJanuary 2008 which include the RenewablesDirective, and the Emission Trading Scheme inrevision. It is a process in which we are now engagedand we continue to produce a number of proposals asa result of the Energy Action Plan of March 2007. Weare now preparing, and it may be important for youto know, a Second Strategic Energy Review whichwill focus a bit more on the security of supply. Thefirst one was mainly led by climate change. This isplanned for the end of October 2008. That will beprocessed by the French Presidency who wants todiscuss at the European Council of December 2008,the issue of security of supply or energy security,which is the word that is mostly used now, and theexternal energy policy which has not been properlydefined up to now. Although for two years the Headsof State and Government have said the EU shouldspeak with one voice with third countries, the reality,if you think about the gas pipelines discussions inrecent months, particularly with Russia, is a bitdiVerent. We have very intense activity at this stage



5 June 2008 Mr Hans Van Steen and Mr Jean-Arnold Vinois

on all the issues of the energy policy and it is veryimportant to understand the targets which have beenset. I would like to say that when the Commissioncame with the First Strategic Energy Review inJanuary 2007, the analysis was quite clear; it hadalready been said by the International EnergyAgency in Paris at that time that our energydevelopment was not sustainable. With the businessas usual scenario in mind between 2005 and 2030, itwould increase significantly our consumption ofenergy, we would be more dependent on thirdcountries and on a limited number of suppliers foroil, gas and other fuels, and we would continue toincrease greenhouse gas emissions. That was not feltto be sustainable. The debate we had at the time, andit was confirmed by all the reactions we had receivedon the Green Paper of March 2006, was on the needto show decisions are needed to change our energypattern because it would leave us in a situation thatwe would not manage. Of course, at the time we werehelped by all the work done in the framework of thepost-Kyoto Protocol, the preparation for the newnegotiations there, and the Stern report saying it willcost less to act now than to wait for more naturalcatastrophes that will cost much more. All of this hasbeen feeding the process. The idea was to say we needto take action. We found a consensus very quickly onenergy eYciency actions that had been identified inOctober 2006 by the Energy EYciency Action Plan.It was well received by Member States as energyeYciency would be something to work on verystrongly. Then the renewables came as a way ofsaying to a certain extent it is a response to increasingdependency on third country suppliers. It is also towork much more on local production and to use theindigenous resources to try to cope with the demandfor energy. That was clearly understood at the time.It was felt that the best common driver for actionwould be to work on the reduction of greenhouse gasemissions. The paper was structured in a way whereit said we have a problem with energy, we have aproblem with the climate, so we put climateprotection and energy together and it was the firsttime we did it in a very integrated way. The strategicobjective set by the Commission was to say we wouldgo for a unilateral reduction of greenhouse gasemissions of 20% by 2020 and 30% in case we reachinternational agreement, much needed becauseEurope only emits 15% of the greenhouse gas at themoment in the world. It is for Europe to show thelead in this field as it is a major polluter and has toshow an example. If we want to bring the others onboard, we need to show that we are ready to act onthis first. We had the driver of the 20%/ 30%reduction of greenhouse gas with the additionaltarget of 20% of renewables and also a target not seenas binding but an objective, which was 20% energyeYciency improvement by 2020. We said we have

three times 20% by 2020, easy to understand and todefend. It was based on a number of studies andimpact assessment work to see whether these targetscould be realistically reached. Two months later theEuropean Council accepted this approach under theGerman Presidency. Chancellor Angela Merkel waspushing for this approach to be accepted and it wentthrough. Once you have a decision in principle byHeads of State and Government as the EuropeanCouncil has no binding power and does not makelegislation, all this has to be translated into hardlegislation and that is how the Directives have beenproposed by the Commission, such as the Directiveon Renewables in January 2008. That is thebackground. When we are talking about renewableswe are talking about one element of a much broaderpolicy which has the ambition to cover all the issuesof the energy sector combined with climate change.We had a lot of discussion on the targets, becausethat was seen as a top-down approach which coulddistort the market and lead to picking certaintechnologies rather than others, but at the same timeit was widely accepted. To change the mentality,which was that energy was cheap, easy to access andso on, you need to focus on binding disciplines tochange the pattern. 18 months later, progress madewill be reflected in the Commission’s paper on theSecond Strategic Review. History gives us muchmore comfort in relation to what was proposed inJanuary 2008 when we saw a barrel of oil at $130. Itmakes all renewables more competitive with oil atthat price than in January 2007. In the meantime, theInternational Energy Agency has said there will be asupply crunch for oil. We have investigations also ongas supply from Russia. The quicker we movetowards relying on our own resources, that is savingenergy and developing local resources in renewablesor local production of electricity, the better we willbe. That lets you understand the background of thenew energy policy for Europe.

Q403 Chairman: An excellent tour d’horizon.Mr van Steen: Just to add specifically as far as therenewables are concerned, as Jean said we had aparticular emphasis on renewables in March 2007 inthe First Strategic Review because we included inthat package the so-called renewable energyroadmap which was where the Commission proposeda 20% target for the EU as a whole for renewableenergy. It is important to understand that this is ashare of renewable energy in overall energyconsumption. This was proposed by the Commissionin 2007. There was an impact assessment that wentwith that proposal, and we can go into that in moredetail later on if you want. As Jean explained, thattarget was accepted by the European Heads of Stateand Government a few months later. What we aredoing right now, at the request of the Heads of State




and Government, is to translate that politicalcommitment for the EU as a whole, of the 20%, intolegislation. Essentially this is done via a proposal fora Directive, which the Commission came out with inJanuary of this year which we are now negotiating inthe Council in diVerent working groups and we arebeginning the process in the European Parliament.Hopefully we can come to a conclusion on thatprocess by the end of this year. The importance of arather rapid timetable is that this is an importantelement of the overall climate and energy strategy ofthe EU which feeds into the wider internationalclimate negotiations which will hopefully culminatein Copenhagen in 2009 with the successor to theKyoto Agreement. I think it is widely recognised thatthe negotiation position of the EU as a whole will beso much stronger if we can come not just with agreedtargets at an overall EU level but also with a clearlyagreed plan on how this is going to happen, what isgoing to be the contribution of each and everyMember State, for example, in terms of renewableenergy. That is the purpose of the Directive, to fix thenational targets that come from the overall 20%target, and we can come back to how we made thattranslation from the 20% at EU level to the individualtargets at national level. Essentially, this is what thisDirective does, plus it creates the whole frameworkfor how the renewables policy should developbetween now and 2020, which is our target date.Chairman: That is excellent, thank you very much.We are two-thirds of the way through our inquiryand we have taken evidence in about 10 diVerentsessions, including two travelling within the UnitedKingdom, so we are nearing the end of takingevidence and hope to produce our report in October,which I hope will be a contribution certainly to theHouse of Lords Chamber for possibly a debate, wehope, and also prior to the final agreement. I have sixcolleagues and I am suggesting five minutes for eachcolleague because we will aim to finish at four o’clockbecause we know you are busy.

Q404 Lord Powell of Bayswater: Can we start on thetargets, which will be my area of questioning. Tell usa little more about how you arrived at the 20%? Wasit plucked from the air? Was it a political target? Wasit deeply scientific?Mr van Steen: It was neither. It was not deeplyscientific. In the impact assessment we did conduct asensitivity analysis where we looked at an 18% targetand a 22% target. What we did see with the 22%target was the cost, because we all have to recognisethat renewables are more expensive than energy,would start to increase more steeply than the benefitswhereas the opposite was the case if we went for 18%by 2020. Of course, we are also in a politicalenvironment and have to recognise that. For some

time the European Parliament has called for a targetof 25% for 2020 which the Commission has alwayssaid is high, and we continue to believe it would bevery high. We had that in mind but wantedsomething at the same time that was ambitious andfeasible. We thought the 20% was that, and theimpact assessment confirmed that is indeed feasible,especially from two points of view. One is theavailability of biomass resources because a very largepart of the 20% will have to come from increased useof biomass, so the question is, is this biomass goingto be available, do we have enough land, and thereply was yes. The second was a feasibility criteria wehad which was the ability of the grid to absorb theamount of variable power that comes fromrenewables, especially from wind but also solar, andwould this create issues of grid stability. Theconclusion we came to in the impact assessment wasthat 20% would not lead to such diYculties. Apartfrom the fact that the 20% fits nicely into the sloganof 20% by 2020, and goes well with the greenhousegases, it is not like some have suggested, that it wasjust a slogan and the right target would have been 1712 or 21, there was some analysis behind it and wethought it was the right target to set.

Q405 Lord Powell of Bayswater: Obviously youwould not have suggested it if you did not think it wasachievable, although I have to say not all ourwitnesses believe it is achievable in the UK. But doyou think you have left Member States enoughflexibility in choosing how they get there or do youthink you are being too prescriptive? To some of usit seems very prescriptive with this talk of sanctions,penalties and so on.Mr van Steen: We think there is quite a lot offlexibility built into the Commission’s proposal. Firstof all, we are talking about renewables generally. Inthe current legislation we have indicative targets forrenewable electricity, they are not binding. This willno longer be the case, we will leave it entirely toMember States to decide whether they think it wouldbe best to focus on electricity, heating, cooling oreven transport suitable to their conditions. Iunderstand biofuels is the subject of a separateinquiry so we will not have to go into too much ofthat, it is a fascinating subject on its own. There isflexibility there for Member States to choose whatthey want. Secondly, we have the trajectory fromnow until 2020. It is important not to leaveeverything until 2020. In our view, it would not be theright thing to do to simply set the target for 2020, say,“Okay, that’s it”, and wait until the end of 2019 to seehow well we are doing. There has to be a trajectory.But we have specifically proposed a trajectory whichis indicative so that leaves Member States someflexibility in terms of whether they want to




undershoot or slightly underachieve, and that is okayas long as Member States are still making eVortstowards that trajectory. You mentioned penalties,the Commission has not proposed penalties. There isa proposal from the rapporteur in the EuropeanParliament to propose penalties, but we have notproposed penalties.

Q406 Lord Powell of Bayswater: You areabsolutely right.Mr van Steen: We believe that the traditionalinfringement procedures at EU level are suYcient.We would not be able to legally pursue MemberStates which are not on their trajectory. We would beable to legally pursue Member States which are notmaking an eVort to make progress towards theirtrajectory, and that is an important diVerence. Thereis some flexibility built in there but, of course, there isa balance to be struck. We cannot give completeflexibility because then we know we will continuewith the current situation which is that some MemberStates are making very good progress whereas othersare making practically no progress towards increaseduse of renewables. There is a balance to be struck andwe believe that we have more or less the right balance.

Q407 Lord Powell of Bayswater: One last questionon flexibility. There is a view in some quarters in theUnited Kingdom that the target could not be reachedwithout renewables trading. Is that a view youaccept?Mr van Steen: Yes, but we could get very close to thetarget without trading. There would be a fewMember States that would have diYculties meetingtheir targets entirely through domestic productionbecause the way we have set the national targets is nottaking into account the potential for renewables inevery Member State but rather a complicatedformula, which I am happy to explain, whichessentially takes into account the ability to invest inrenewables because we have a large component in themethodology, which is GDP per capita, as a measureof ability to invest. Some Member States have a highGDP per capita but perhaps not so much potentialfor renewables. Small, densely-populated landlockedcountries, for example, might have diYculties andthey would need the trading. Our analysis showedthat all Member States, with one or two exceptions,would be able to meet their targets entirely throughdomestic action. But the important thing is the costof doing so without trading would be higher. Thetrading is essentially there to bring down overall costsand to focus investment and action on renewableenergy in those Member States where there is a lot ofpotential which perhaps has not been harnessed sofar.

Q408 Lord Mitchell: We are in 2008 now and thereare 12 years to go. Sitting where you are sitting, whatdegree of confidence do you have that number will beachieved by 2020 on a European basis?Mr van Steen: We believe that it is certainly feasible.A lot of it will depend on international oil pricedevelopments because we are in an area wherecompetitiveness plays a role and the higher the oilprice the more competitive renewables become inrelative terms and the less you need specific supportschemes, support measures, financial support, tomake the renewables take oV. If we are going to be ina world of higher oil prices, I have absolutely nodoubt that we will meet the target. If, for somereason, there are diVerent developments and the oilprice starts to go down, if there are other majordevelopments in terms of other types of energysources becoming more competitive or for otherreasons play a bigger role, then it might be a diVerentstory. From where I sit, I cannot really imagine thatwe would have great, great diYculty meeting the20%. From our point of view, it is feasible. In theoverall impact assessment that came out with theproposal we assessed the cost of this operation andcame to the conclusion that the GDP by 2020 wouldbe something like half a percentage point lower thanit would be had we not decided on meeting thesetargets, and that is really a relatively small price topay compared with the costs which are associatedwith very severe greenhouse gas emissions orclimate change.

Q409 Lord Mitchell: When we have been takingevidence and looking at our own country, I have tosay we have had a very mixed bag of reports. Justregarding how the UK is going to go, some people arepessimistic, some are optimistic but say we requiretremendous political will that has not quite beenshow yet to get there. We are trying to balance, evenin the UK, how it is going to go and I wonder if thatis true in other countries or is it just a UK issue?Mr van Steen: It is certainly true generally that it willrequire some political will to get there. In fact, this iswhat we have seen and demonstrated in our progressreports on renewable energy so far. We have twodiVerent Directives in place at the moment, one onRenewable Electricity, one specifically on biofuels,and both of these require the Commission to reportregularly on progress towards the indicative targetsthat we have. What we see is that some MemberStates, and we give them two positive smileys in ourreport, are on track towards meeting their targets for2020. Those are the Member States where you can seethat there have been a lot of positive policies put inplace to encourage renewables where the supportschemes have been developed in such a way that theyactually facilitate the higher uptake of renewableenergy, whereas Member States that do very little




and just rely on these things happening by themselvesare the ones that are trailing behind their indicativetargets. Policy has a very big role to play here. It ispolicy both in terms of putting in place supportschemes, but it is also policy in terms of providingaccess to the grid and providing information to theenergy users. A lot of this will have to happen at arelatively low level in the sense that these aredecisions sometimes by individual households even,“Am I going to replace my boiler with somethingrenewable or am I going to have another gas boiler?”,that sort of thing. If the consumers are not aware ofother opportunities they will go for what they havehad so far. If the man who comes to them when theyring up the guy who is going to give them an oVer fora replacement is not going to tell them there are thesediVerent options then clearly it will not happen.There is a policy to be put in place in terms ofinforming, training installers of renewable energy,and in our proposal we have put specificrequirements for Member States to do these sorts ofthings as well.

Q410 Lord Bradshaw: In previous questions we havesatisfied ourselves that grid access and theunbundling are all very central. I know it is not thejob of the Commission, but what steps are necessaryin your view in Britain to enable us to meet moreeasily the targets?Mr van Steen: I think you have put two importantissues there on the table, the issue of grid access andthe removing of barriers to renewables moregenerally in terms of administrative procedures forgetting licences, for going ahead with planning andthings like that. On the grid access, current EUlegislation does not include an obligation forMember States to provide priority access. We aresaying that it would be useful to do it but we still havethe word “may” in the Directive, so there is norequirement for this to be the case. In the newDirective we are proposing we have changed that to“shall”, so “Member States shall provide gridaccess”. We did that because the experience we hadwas that many renewable developers said, “This isabsolutely essential, we need to have that assurancethat we will have access to the grid and we need tohave it at an early stage in the planning process”. Webelieve that is an important point. On the issue ofadministrative procedures, again the situation is verydiVerent in the diVerent Member States. Quiteregularly we have complaints from renewable energydevelopers saying, “We have now been in talks withour authorities for several years and every time wethink we are coming towards the end of the processand we can go ahead, there is a new procedure thathas to be fulfilled. There is no clear deadline set forthis, so once you submit your application you cannotbe sure when you will get a reply” and so on. Here,

again, we think there is a need for Member States todo more and we have strengthened that particularrequirement with the new proposal. Whereas in theold proposal there was a requirement for evaluatingto what extent these barriers should be removed, nowwe have a specific requirement for Member States toremove such barriers. We believe it will make adiVerence because when you have the word “shall”,that means we can more easily justify legal action.What we have been doing so far when we have beengetting these complaints is we have analysed them, wehave checked to the best of our ability in theCommission what the situation is, is it this particulardeveloper who is very diYcult or not presenting theplans in the right way, or is there a genuine problemof processing these from the authorities. If it is thesecond then we write to the authorities saying that weare concerned, can they please explain, and that is thefirst step in an infringement process. Normally fromthat point it gets better, we see things starting tomove. We will have the ability to do that in a betterway once we have an even clearer text on that pointin the Directive.

Q411 Lord Bradshaw: You mentioned specificallythe question of training and we have heard in one ortwo other places that there are not suYcient peoplewho are trained and equipped to actually installrenewable sources of energy. Is that common inEurope or is it particularly bad in Britain?Mr van Steen: In our view it is common probably inthe whole of the energy sector, especially onrenewables where it is so important to buildconfidence in technologies which are not widelyknown and where there is a general perception thatrenewables are good for the environment but are theygood for me in my house. There is a need to build upconfidence and the way you can do that is to ensurethe people who are dealing with these at aprofessional level are professionally trained to dothat. We have proposed that Member States shouldhave a certification scheme in place whereby theycertify that installers have the right type of training,that this is updated regularly as the technologydevelops, and so on. We believe that will be veryuseful.

Q412 Lord Paul: You said you were Danish, andDenmark has had great experience in renewableenergy and they were almost the pioneers. How havethey been able to achieve that and others arestruggling?Mr van Steen: It is true that the Danes have beenpioneers, especially when it comes to wind. In certainother areas, especially when it comes to biofuels, theyhave not been pioneers, they have been ratherreluctant, but this is changing now. In wind it is trueand they still have the highest proportion of wind in




their electricity consumption, somewhere close to20%. The way this has been achieved has beenthrough support schemes essentially, priority accesscombined with a feed-in support scheme whichprovided the developer with a guaranteed price forthe energy produced from his installation throughoutcertainly a big part of its lifetime. That has workedextremely well. That led to an industry being built up,especially with the company Vestas, which is now theworld’s biggest wind turbine manufacturer. It createdlots of employment and so on. That wasencouragement for the government to continue withsupport schemes for renewables. I would say it isessentially these two things, plus a lot of interest inlow carbon energy technology solutions. In fact it isnot just renewables, it is also energy eYciency, andthat has been achieved especially through supportschemes and high taxation.

Q413 Lord Paul: On the question of Guarantees ofOrigin scheme, how do you think they are likely tohelp the EU in the markets and what will be thebenefits?Mr van Steen: This part of the proposal is very muchlinked to the way in which we have decided topropose the targets. If we had been able to proposethe targets 100% in accordance with where thepotential was we would not really need such ascheme, but since we do not think we have all thisinformation we feared it would always be disputed ifwe tried to go down that road. Therefore wedistributed the targets in a diVerent way essentiallywith the so-called flat rate plus a large element ofGDP per capita. It means it is not the most cost-eVective way of achieving the 20% at an EU level. Inorder to bring back the cost-eVectiveness we thenneed to enable those Member States that have arelatively high target, but perhaps not such cost-eVective potential, to be able to achieve their targetthrough production and consumption in otherMember States. The Guarantees of Origin scheme isessentially there as a vehicle for making that happen.For example, let us take a country like Luxembourg,a small country with a relatively limited potential buta high target because they are lucky enough to berich. They might want to achieve their target throughinvestments in countries like Bulgaria, Romania or,indeed, other Member States where there is bigpotential, for example, for biomass. They then makethese investments, they make the arrangements forthe Guarantees of Origin which certify that a certainamount of renewables has been produced, and theseare transferred back, but not necessarily the energyitself. It is a type of virtual trading scheme forrenewable energy, which can complement thephysical trade that we imagine will take place inbiomass, for example wood pellets, or in biofuels,which are things that can be easily transported. But

when it comes to electricity obviously we know thereare infrastructure bottlenecks and if the purpose isonly to meet the target there is no need to transfer theenergy but we need this guarantee that investmentshave been made and the renewable has beenproduced.

Q414 Lord Paul: We have got some evidence, someis completely negative about it and some verylukewarm. Is this not a scheme that will be self-defeating and take people’s attention away from thetargets they should be achieving?Mr van Steen: It is true that it is a part of the proposalwhich has provoked a lot of debate. Some say that itis not enough, this does not provide enoughflexibility. We believe there is enough flexibilitybecause, in fact, we are proposing that Guarantees ofOrigin can both be transferred between MemberStates but also between operators, so we have twolevels of flexibility. We cannot see how it could bemade much more eVective without making it aEuropean-wide support scheme for renewables andthis is clearly not the intention of the Commission.Our analysis shows that it is not yet the moment to godown that road. There are others who say this isgoing too far, that transfers of Guarantees of Originwill not enable us to carry on with our successfulsupport schemes as we have them today. This hasbeen the view expressed by Germany, but also Spain.There we say we do not understand how they feel thisis going to be such a problem because there is thepossibility of Member States limiting the transfer ofGuarantees of Origin for a number of reasons andthereby in a way can ring-fence their national supportschemes and avoid the need to increase fixed tariVs.We still feel this is a good balance between those twoviews, but we also know there is lots of discussiongoing on and we understand there are Member Statestalking to each other and trying to come up with analternative scheme. Commissioner Piebalgs has beenvery open on this point and said that from theCommission’s side we feel what we have proposed aworkable scheme, but that we are open to look at anyother schemes that might be put on the table that willachieve the same objectives. The objective is to bringdown the cost and in the impact assessment we did wesaid that the cost reductions resulting fromGuarantees of Origin could be up to 8 billion ƒ

annually in 2020, which is quite significant, and weshould not miss the opportunity to harvest such costreductions if at all possible.

Q415 Lord James of Blackheath: When youanswered Lord Bradshaw’s question I think youchose to answer it from the point of view rather moreof the consumer and the ability of the market to betrained adequately to deal with the consumer at thedomestic end. The question we have been trying to




develop this morning with the others we have spokento has been the suYciency of the infrastructure toprovide the industrial establishment of the means ofgenerating renewable energy from wind farms, hydroand solar. When you said that training was aproblem, did you also include the professional end ofthe means of achieving adequate installation ofinfrastructure?Mr van Steen: Not specifically. We do not see that asa major problem. Of course there is an issue aboutinfrastructure reinforcement, which is a requirement,because you include more renewables into the grid.

Q416 Lord James of Blackheath: What aboutsupporting the supply chain to provide the necessaryequipment for these installations?Mr van Steen: The bottlenecks in terms of windturbine manufacturers and things like that, forexample?

Q417 Lord James of Blackheath: That seems to us tobe a big problem too from what we have seen. Wewere asking those we met earlier today whether thesefactors contribute towards the possibility that thetimetable is too tight to achieve a cost-eVectivecreation of the entire infrastructure which is neededand whether, in fact, the technology itself is not goingto advance so rapidly with the experiences we arehaving that we shall look back in ten to 20 years’ timeand feel we have not got the best because we went toofast too soon before the technology had reached itsoptimum conditions. Could you comment on that?Mr van Steen: We have heard those views, but we donot necessarily agree with them. The cost ofrenewables will come down but they will also comedown because of mass production. This is what wehave seen in solar photovoltaics. The level is still farhigher than traditional electricity production, but thecost curves are declining very rapidly and are verymuch linked to the increase in production of thesetypes of technologies.

Q418 Lord James of Blackheath: Will the unitswhich have come down in price have the optimumperformance that would be achieved with theadvancement of development in technology whichmust happen with experience as we go forward? Willwe not have the cost of having to replace them allover again long before we are through to the end ofthe timetable?Mr van Steen: You can never know these things.There is always the question whether it would bebetter to wait for additional research to beundertaken, new development, more demonstrationof the technologies. On the other hand, what we seeis a lot of the price development of renewables comesfrom mass production as far as we can see, forexample on wind as well. The reason why wind in

certain locations is competitive now is because it ispossible to produce much more eVective windturbines, which is clearly something that hashappened because we have seen a huge improvementin wind turbine technology.

Q419 Lord James of Blackheath: I made the pointearlier this morning that the major supply chainhiccough at the present moment is in wind farms, thatwe have not got adequate boats with suYcientcranage to be able to do the installations. In theUnited Kingdom there are only two boats withadequate cranage which can do it. When we startedoV on the North Sea there were 78 boats in the NorthSea which had the cranage to do it. Should this not besomething which is the subject of government directinvestment and should there not be some form of EUapproved subsidy or tax concession allowed toprovide this impetus?Mr van Steen: To put in place those sorts of incentivesor schemes is certainly a possibility. On the specificissue of oVshore, we know there are clear bottlenecks.First of all, there are very few manufacturers at themoment that produce oVshore turbines, but there aremore looking to go into this. We are planning tocome out with an OVshore Wind Action Plan as partof the Second Strategic Review in the autumn ofthis year.

Q420 Lord James of Blackheath: Can you tell uswhat incentivisation that might provide?Mr van Steen: For oVshore?

Q421 Lord James of Blackheath: Yes.Mr van Steen: There are several issues that arecurrently seen as barriers to oVshore. One istechnology, as you have mentioned. Another is thespatial planning involved. You need to developmethodologies for doing spatial planning oVshore,which we do not have at the moment. There is theissue of grid connections. Sometimes these oVshoreparks will be located in areas where they could behooked up to diVerent grids, so there need to be somesort of rules that can be applied in that sense. We arelooking at all these things, but we have not yet got afull picture because this is a document that is stillunder development. We have a public consultationout currently that closes at the end of June where weare inviting all stakeholders to come forward withtheir views so that we know exactly what the mainissues to be addressed are. Hopefully we will get inputon the kinds of things you are mentioning from someof the people most aVected by these constraints.

Q422 Lord James of Blackheath: Is there any scopefor an EU-led initiative to monitor and advance orcentralise the technological developments to speed




up the process and ensure that at least we have stateof the art still with us in ten to 20 years’ time?Mr van Steen: It is one possibility that we could lookat: a big European-wide technology project in thisarea. We have our Strategic Energy Technology Planwhere wind and wind turbine technology wasidentified, together with second generation—

Q423 Lord James of Blackheath: My five minutes areup, but given the huge concentration that Europe hason this whole project I find it astonishing that it hasnot happened already.Mr Vinois: We have a technology platform to dealwith that within the research and developmentprogramme covering 2007-2013.

Q424 Lord James of Blackheath: Is it delivering?Mr Vinois: That is where you put together all theplayers and have a good exchange of information onthe evolution of technologies and what should bedone and what kind of incentives should be broughtabout to push for that.Lord James of Blackheath: Thank you. My fiveminutes have gone!Chairman: We will be dealing with this issue in ourreport, we think it is quite important.

Q425 Lord Walpole: I was going to ask you aboutthe relevance of the renewable targets, the EU’senergy policy, and I was going to ask you a little bitmore about the eYcient use of energy, but probablythis comes in your Energy EYciency Action Plan. Iwas going to ask you about security of supply whichI think you did touch on, but would you like to gofurther on that?Mr van Steen: We can do that. Maybe Jean can alsosay a little bit on that. Just on the energy eYciencypoint, as Jean said at the beginning, we do not havea binding target for energy eYciency in the way thatwe have for renewable energy. Some people criticisethat, but we see the renewable energy target to be agreat incentive for energy eYciency because it isobvious when you have a target which is expressed asa percentage of your energy consumption you can tryand achieve your target both by increasing the shareof renewables but also by reducing the overallconsumption. In a way, the renewables targets arealso stimulating eVorts on energy eYciency, we hope.The two are very closely linked. Just to come back tothe question of whether the 20% is achievable, and ifwe feel confident, I talked about the oil price butanother very important element is energy eYciency.Without a lot of energy eYciency and eYcient use ofenergy in 2020 it will be very hard to meet therenewables target because obviously the absoluteamount of renewable energy you will need will behigher in that situation. On security of supply, in theimpact assessment that we did for the roadmap when

we first proposed the 20%, we did have some analysisand said if we met the 20% by 2020 it would lead to areduction in fossil fuel consumption in the order of300 million tonnes oil equivalent in 2020. Of course,not all of this would be imported but a bigproportion, perhaps just less than half, so therewould be positive implications for security of supply.What is important here is that renewables replacediVerent types of energy. Some renewables replacefossil fuels where the import dependency is very, veryhigh, especially oil, but those are also renewables, aswe have seen, turn out to be rather controversial,especially when it comes to biofuels. But they are theones that directly replace oil or petroleum products.It also depends on whether or not we are going toimport biomass, for example. That also has securityof supply implications. But we will be importing fromdiVerent parts of the world, we will not be importingbiomass from the Middle East for example. Securityof supply is also a concept of diversification. We dobelieve that it does have positive implications forsecurity of supply. Perhaps the maximum one couldexpect is a reduction in the percentage of dependencyof some 4% or 5%.

Q426 Lord Walpole: Thank you. If I could just makeone quick remark about the eYciency of energy. Ihave no idea what Brussels looks like at night, but Iam sure you know what Westminster looks like atnight. We do waste a fantastic amount of energy, dowe not? If we could do better, could you give me ayear when the EU will start lowering its energyconsumption?Mr van Steen: I do not think we can give you that. Wecan say what the ambition with the Energy EYciencyAction Plan, is to increase energy eYciency by 20%compared to a baseline. This is not my particularresponsibility in the Commission since I have myhands full with renewables, but as far as I understandfrom colleagues who deal with that, it will lead to anoverall reduction in the level of consumption withinthe EU sometime well before 2020 if we meet the 20%.For me, that is a very, very ambitious target.

Q427 Lord Walpole: I think it is where we have gotto go, is it not?Mr van Steen: It is certainly where we have to go, butthere are few examples of Member States who haveactually managed to do that, even those that haveperformed best when it comes to energy eYciency.The best performing Member States have managedto keep energy consumption relatively flat in spite ofeconomic growth and all that.

Q428 Lord Walpole: And population growth.Mr van Steen: To my knowledge, no Member Statehas managed to decrease energy consumption as suchin any major way.




Lord Walpole: Thank you very much indeed.

Q429 Lord Powell of Bayswater: Can I ask anentirely diVerent question about the legal base thatyou propose under Article 175.1, which is qualifiedmajority voting. There is a view, in some MemberStates anyway, that these are very sensitive issueswhich go to the heart of national decisions, includingsecurity of supply. Do you expect to have a majorargument in Council as to whether it should havebeen under 175.2, unanimity?Mr van Steen: No. We had that discussion when the20% target was agreed. In a statement to the minutesof the European Council the President of theCommission, Mr Barroso, made a very clearundertaking that no Member State would be forcedto accept a target which it could not accept. What youare referring to is this business about measures thatsignificantly aVect Member States’ choice of energysource and the structure of energy supply. There is anelement of unanimity, one can say, in the sense thatno Member State will be forced to accept a targetwhich it cannot live with. We have proposed this witha double legal basis, which is both 175.1 and 95.Article 95 is the internal market. We propose that forthe Biofuels Sustainability Scheme in particularbecause we want that to be an internal marketmeasure which should apply in exactly the same wayin all Member States. No Member State should beallowed to go further on biofuels sustainability forinternal market reasons.

Q430 Lord Powell of Bayswater: You do not see thisreplacing the President of the Commission’sstatement, relegating that to past history in a sense?

Mr van Steen: No, I do not see that.

Q431 Chairman: Thank you very much indeed.Before we conclude, I want to ask Mr Vinois if thereis anything that he was dying to say during thatfascinating hour we have just had.Mr Vinois: Maybe one point of information linked tosome questions that have been put. In the StrategicEnergy Review we will deal with security of supply,which means we will look much more at thecontribution of the internal market to the security ofsupply of each Member State and the EU collectivelyat whether the infrastructures are there to meet ourenergy objectives, including the integration ofrenewables. It is important to see how the wind, forinstance, onshore and oVshore will be connected tothe grid. At the same time we will produce a GreenPaper on the role of the trans-European networkpolicy. It is a policy which is in the Treaty where upto now we have had mainly the superposition ofnational plans to make a European grid but we neednow to have a view on a European grid. We seeelectricity as part of that approach. With the internalmarket we have much better co-operation among thetransmission system operators and regionalregulators in the initiatives. This means we have a lotof co-operation in looking at how we may bestinclude wind, for instance, in the electricity grid. Theincumbents were not very keen to bring renewables inbecause they preferred nuclear or a thermal powerplant. It is important that we create the right climatewith all the players to integrate these new renewableresources. It is working and we will address it in thisspecific paper dealing with infrastructures in Europe.Chairman: Thank you very much indeed, that hasbeen an absolutely fascinating explanation byyourselves. Thank you for answering all of ourquestions.

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Present Bradshaw, L. Paul, L.Freeman, L. (Chairman) Powell of Bayswater, L.James of Blackheath, L. Walpole, L.Mitchell, L.


Witness: Mr David Halldearn, Council of European Energy Regulators and European Regulators’ Group forElectricity and Gas, examined.

Chairman: Mr Halldearn, thank you for coming. Wehave agreed that we will finish the session at a quarterto five, so I would ask colleagues to try and beconcise. I have explained the background to ourreport. As a courtesy, we will quickly go round thetable and explain who we are and if you would bekind enough to tell us what your responsibilities are.I am going to ask Lord Bradshaw, who has asked anumber of questions in our evidence sessions onregulation, whether he will be kind enough to kickoV. Then I am going to ask colleagues by exception,in other words if they have a question could theycatch my eye.Lord Powell of Bayswater: Charles Powell,Independent member of the House of Lords.Originally a civil servant, more recently abusinessman.Lord Paul: Swaraj Paul, a Labour member of theHouse of Lords. My experience has been in themanufacturing industry.Lord James of Blackheath: David James,Conservative. I had some time in the North Sea andoil development at the outset of the North Sea period.Lord Mitchell: Parry Mitchell, Labour, high-techentrepreneur.Lord Bradshaw: Bill Bradshaw, Liberal Democrat. Ihave a background in transport.Lord Walpole: Robin Walpole, Independent.Farmer, landowner and environmentalist.

Q432 Chairman: I am a Conservative life peer,former minister. This is our specialist adviser, anacademic from Imperial College.Mr Halldearn: I am David Halldearn. I work forOfgem, the British regulator, but I am here todayrepresenting CEER and ERGEG. I must apologisebecause, as I think he is now, Lord Mogg was hopingto be here, but, unfortunately, he simply cannot andsends his profuse apologies.

Q433 Chairman: Would you like to say a word aboutthe European Regulators’ Group because we havetaken evidence from Ofgem?

Mr Halldearn: You see this rather complicated title ofCEER and ERGEG. CEER and ERGEG areactually two organisations. CEER is a group ofEuropean regulators that come together voluntarilyto discuss things that regulators like to discuss, whichis principally co-operation on regulatory issues.ERGEG is a body which was set up by the EuropeanCommission using a Commission Decision and itsrole is to advise the European Commission on energymarket issues. The key thing I want to say is mostEuropean regulators do not have statutoryresponsibilities for sustainability issues. In thatregard, Ofgem is the exception rather than the rule.CEER and ERGEG’s principal functions are aboutdeveloping competitive markets rather thanpromoting sustainability. Nevertheless, we do see avery strong role for European regulators in helping toachieve the targets that are set down in theCommission’s proposals because we do haveresponsibility for trying to make sure that themarkets work, that the networks operate properly,and we see some huge diYculties that need to beovercome if we hope to achieve these ratherchallenging targets.

Q434 Lord Bradshaw: May I start by asking youwhat the huge challenges are, please?Mr Halldearn: From our perspective, we see thechallenge as a huge change from networks which arebased around largely thermal plants which use atransmission network which is pretty fixed, to onewhere the network is responsive to newdevelopments. We need to think in terms of the waythe markets operate because the challenges that amove towards renewable generation are going tobring mean that we will need more flexible plant, andsomehow that plant has got to be rewarded by themarket, people have to have incentives to have thatplant there and have it available so that the networkscan operate securely and safely. We see challengesthrough price because, of course, we do want to sendsignals on price because carbon has a price, so thatleaves challenges for some consumers who aredisadvantaged and we have to find ways ofaddressing those. We see areas which have proved to



5 June 2008 Mr David Halldearn

be quite diYcult even in the existing world, andprobably will become even more diYcult in the newworld, things like land planning where some of thediYculties we see, even today, of building new wiresand power plants stem from the fact that it takesquite a long time simply to get land planningapprovals.

Q435 Lord Bradshaw: I think we have establishedthat last point fairly clearly with a number of people.So far as the remit of Ofgem is concerned, as Iunderstand it they have a remit relating to generationbut they do not actually have a remit relating to thegrid, is that correct?Mr Halldearn: Talking about Ofgem, Ofgem has aremit to regulate the grid, but, if I might point toCEER and ERGEG, European regulators typicallyall have responsibilities relating to the regulation ofthe transmission networks and the distributionnetworks. Not all of them have responsibilitiesrelating to the operation of the marketplace. Mostdo, but if one looks at the German regulator, forexample, they are principally a network regulatorrather than a markets regulator. It is true that theresponsibilities of European regulators looking rightacross Europe do vary, but all of them haveresponsibilities relating to the operation of thenetworks.

Q436 Lord Bradshaw: Does the British model enableOfgem to actually give directions to the grid operatorto connect at a reasonable speed for people who wishto generate from renewables?Mr Halldearn: Let me answer the question in a waywhich brings out the challenges that we face. InBritain, as well as in other countries, we face theprospect of a huge amount of investment having togo into the networks, an enormous amount ofinvestment. We do not know exactly where newgeneration is going to be sited. We need to make surethat the people who do have the best understandingof where that investment is going to be made are theones who take the decisions. Ofgem is of the view thatwe need to get the best information out there so thatthe people who are responsible for the networks cancome to informed views about where to invest andbuild new lines. Ofgem is now looking at ways toincentivise the network companies to make decisionsabout these investments so that the investments canbe made and the risks fall in the right place, so we donot transfer all of the risk and potentially the cost onto customers, so we end up with a flexible andresponsive network which is responsive to the needsof the marketplace at the lowest cost we can forcustomers. We are doing that through reforms ontransmission access arrangements and ways in whichusers of the network can provide information byputting in place long-term commitments for capacity.

We are expecting industry to come forward with theright proposals and changes to the necessary industrycodes under the system we have in Britain to makethose become a reality. We think that by pursuingthose reforms we can achieve the balance of aneVective and responsive network at the lowesteYcient cost to customers.

Q437 Lord Bradshaw: It does appear to me that itshould be possible for people who know about theindustry to make pretty informed guesses aboutwhere are the likely sites of renewable generation. Iam just wondering whether the players are all waitingfor the first one to move, or one another to move. Isanybody driving this forward?Mr Halldearn: The approach we have is one where wehave a lot of renewable developers and the peoplewho know where the sites are most likely to be are therenewable developers themselves. The way to try andsift through the people who are most likely to havetheir projects come to fruition is to ask them for somefinancial commitment, put some money on the table,to say, “Yes, we think we are going to be there”.Against that information background the networkcompanies can come to judgments about where tobuild. What Ofgem is trying to do is to put in placethe right incentive framework so that the right peoplewho can make the best decisions have every incentiveto do it. Ofgem is not an organisation that goes outand builds wires, nor do we think it is our job to goand pick winners on which sites we think are mostlikely to be the ones. We think it is much better to putin place arrangements so the best informationbecomes available and the people who then do makethe investment decisions make judgments aboutwhere the wires should be built, and if they put thewires in the right place they can get a reward for that.We think that is the right approach and good forcustomers.

Q438 Lord Bradshaw: The only thing is, we areaiming for a 2020 deadline and the timescales arelong in this sort of investment. The Rail Regulatorhas just published today the determination up to2014, so we have not got long to do this. I am justconcerned that we may be in an elaborate quadrillewhich will take us nearer and nearer the date withouta lot of action.Mr Halldearn: If I might just respond to that. One ofthe worries that Ofgem has is that if we end up withthe wrong people making the decisions on where todevelop we could end up putting an awful lot ofcustomers’ money at risk and potentially waste it. Ihave a nasty suspicion that were I to have themisfortune to come before this Committee when itwas inquiring about what happened to all that moneyyou might have some rather diYcult questions for meto answer.




Q439 Chairman: We had evidence earlier on todayabout the discussions on unbundling in the EnergyCouncil. As far as the 27 national regulators areconcerned, is there a uniformity of view that theability to meet the renewables target is best achievedthrough unbundling, separate ownership of thetransmission system from supply?Mr Halldearn: Every regulator believes that eVectiveunbundling is the right answer in terms of achievingcompetitive markets. Every regulator believes thathaving competitive markets is the best route to havea marketplace which is responsive to the needs ofrenewables and, in fact, other forms of generation aswell. I think every regulator is committed to the ideathat we need competitive markets. In fact, theregulators produced a paper some time ago, I recall,which said that having competitive markets isessentially a foundation stone both for achievingsustainability targets and also for ensuring we havesecurity of supply.

Q440 Chairman: Is there a feeling that greaterauthority should be vested in the international groupof national regulators?Mr Halldearn: I think there is in the sense that whatEuropean regulators believe is that havingpredictable, consistent regulation is one of the keyfactors in ensuring we have a sound investmentclimate. We need to make sure that when peopleinvest their money they understand the basis uponwhich regulators are taking their decisions. Havingother forms of involvement in the energy marketsadds to uncertainty, which undermines investment.We believe that European regulators should have theability to take regulatory decisions and have themapplied. One of the problems we see, of course, is theframework of European law does not actually help usclearly to achieve that outcome. What we find is theidea of delegating powers to a European body likeERGEG, or the proposed Regulatory Agency,contravenes some tenets of European law,particularly things like the Meroni doctrine, whichmakes that problematic. Some of the things we havebeen trying to do have been to work around thoseconstraints to see if there are ways in which we, asregulators, can have at least an extremely stronginfluence on decisions so we can get as much of thatpredictability into the business of regulation as wecan. I have to say, we have had some success at anational level because the proposals that we see in theLiberalisation Package are aimed at giving nationalregulators much more autonomy and authority. Thatis a pretty good outcome as we see it so far.

Q441 Lord Powell of Bayswater: I wanted to askabout another aspect of the market and how it willoperate with the renewables, and that is the

Guarantees of Origin. We have had some discussionwith diVerent witnesses on this today, with theCommission taking the view this is an important partof the renewables programme that countries shouldbe able to trade renewables, whereas people likeGreenpeace and Friends of the Earth saying it is acomplete cop-out and should not be allowed. Do theregulators have a view on how this would operate?Would they have a role in supervising the operationof Guarantees of Origin?Mr Halldearn: Yes, regulators do have a view onGuarantees of Origin. In fact, we issued a pressrelease just today, which I will let you have.

Q442 Lord Powell of Bayswater: You knew I wasgoing to ask the question!Mr Halldearn: Part of it is about Guarantees ofOrigin. We think that producing energy fromrenewables should be done in the way that is mosteYcient. Having Guarantees of Origin andcertificates that enable people to trade we think is agood thing. We do have some concerns about theparticular proposals that are in the package becausewe are concerned that whatever is there is robust,eYcient and, indeed, people can use them so thatthere can be trade. We want to make sure that thereis no fraud, no double-counting, and the wholeprocess is eYcient. Yes, in principle we think it is agood thing.

Q443 Lord Paul: Will that not just take people’sattention away from what they are supposed toachieve if they get it through trading?Mr Halldearn: We think the answer is no. The aim isto try and tackle climate change and climate changeis a global issue. If there is a market which isparticularly suited to producing energy fromrenewable sources, and another one which is perhapsless suited, then we think the incentives should bethere so that you can get the production in the rightplace. At the end of the day, the reduction in CO2 isgoing to be the same.

Q444 Lord Paul: Would it be tantamount to aquestion of richer and poorer countries instead of theability to generate energy from renewable sources?Mr Halldearn: It depends on the value of therenewable output, I suppose, but I do not really see itlike that. I see it much more as one where really theaim is to try and get the most eYcient outcome. If wehave got ƒ100 to spend on getting a certain amountof CO2 reduction and it is more expensive to do it inone country rather than another, then in reality weare going to get more CO2 reduction by doing it in theplace that is most eYcient.




Q445 Chairman: Can I return to the issue ofunbundling because Germany’s electricity supply isnot unbundled along the same lines as it is in theUnited Kingdom in substance, yet Germany is heldup as being a country where the industry is allegedlyreasonably eYcient. Is there not a dichotomy there,or am I misrepresenting either one or both sides ofthat equation?Mr Halldearn: We certainly hear from people whoare trying to participate in that marketplace that theGerman market is actually quite diYcult to get intoand the competition, according to some people whoare trying to enter, is not very eVective. It is certainlytrue that in relation to the development of renewablesGermany has been quite good, and there areparticular rules there that oblige the development ofrenewables. I suppose one would have to drill downa bit more to see whether the particular approachthat has been taken in Germany has resulted in themost cost-eVective way of developing renewables andwhether the particular model they have there issomething one could replicate across Europe. One ofthe risks that regulators see with the proposals onrenewables is that the targets are very aggressive andvery ambitious. We want to meet the targets onsustainability and we also want to meet the objectiveson competitiveness and security, and regulatorsbelieve the most eVective way to do that is to havecompetitive markets and market mechanisms to hitthese sustainability targets. One option for countries,however, may be to take a rather more centralisedapproach and a centralised approach couldpotentially undermine the achievement ofcompetitive markets. Yes, we think that achievingand moving towards more sustainable generation isnot an option, it is something we have to do. We areworried there are risks that, if we are not careful andtake our eye oV the ball, then in trying to achievethese targets and solve the associated problems theremay be a tendency in some countries to go for centralsolutions rather than market solutions which wouldtend to undermine the operation of the competitivemarket and, therefore, we would fail to achieve oneof our other objectives in Europe.

Q446 Chairman: Can I just ask you about themeasurement of performance for both the setting ofnational targets, 15% in the case of the UK, but alsofor the feasibility of the trading of Guarantees ofOrigin. Could you tell us how the trans-nationalorganisation of regulators standardises themeasurement of output? It may be very simple for allI know.Mr Halldearn: We have groups of regulators thatactually sit down and worry about these sorts ofissues across a wide range of areas. One of the areasthat we are focusing on now is worrying about howwe deal with price controls and cost of capital and

how we standardise our approach to those things sothat we can improve the way regulators work. Wehave not yet focused on this question, I have to tellyou. We have not focused on the question of how youwould standardise the definitions that could then beused for Guarantees of Origin, but you are quite rightto identify that as an issue which would need to beaddressed. Like all these things, at one level it is verysimple because a megawatt hour is a megawatt hour,but when it comes to ensuring that they are measuredproperly to the right standard, that the time periodsare the same, because the value of electricity changesaccording to time. All of these things are ones thatwould need to be addressed.

Q447 Chairman: I am going to ask one morequestion, if I may. We heard in evidence last week inthe United Kingdom and in the press again today,and in the Minister’s statement in the House ofCommons yesterday, about oVshore wind farmexpansion in the United Kingdom. Let us take apractical example, Denmark and the UnitedKingdom, because we heard evidence of thepossibility of common, very large oVshore windfarms feeding electricity into low voltageconnections, or even high voltage grid connections,buried under the seafloor. Can you see any diYcultiesin co-operation between national regulators wherethere are bilateral national agreements?Mr Halldearn: As we sit here today there arediYculties, largely because national regulators arenational. They are statutory bodies and they havenational duties, all of them. The one thing they do nothave is obligations, duties, to look across the borderand think about issues which are to the commonbenefit of everybody. They are bound in law to lookat the national picture. The new EnergyLiberalisation Package extends the duties of nationalregulators. Then I think we will be in a much betterposition and energy regulators will be driven to havea broader picture. Will that solve all of the problems?Probably not overnight. There are diYcult questionswhich arise, not just technical questions. Some of theissues you raise are clearly technical ones and fromtechnical problems flow things like how one allocatescosts and all of the things that need to be done tomake sure investment happens and the electricityflows. There are other questions about if you start tojoin markets together and share the proceeds ofrenewable generation, then who gets the benefit, whoincurs the costs, and are one set of consumers goingto be better oV than another. These are issues whichare not unique to the issue of development ofrenewables, these are issues that regulatorsunderstand are there and we have to work through. Iam afraid I think we probably have some ratherdiYcult discussions to come on some of thosequestions.




Q448 Chairman: Definitely a final question from me.We had evidence from Greenpeace and Friends of theEarth this morning and one suggestion as far as smallrenewables energy generators are concerned was thatthere should be a one-stop shop dealing with issuesfrom planning, regulation, financing even. There wasa feeling expressed by the ladies who gave evidencethat the processes in certain countries were just toocomplicated to get a project oV the ground. We werestruck in our last report by SOLVIT, and we wereimpressed by SOLVIT as a concept and also how it

has been operating in the United Kingdomincidentally. Is there any case for a SOLVIT forrenewables?Mr Halldearn: I think anything that reduces barriersto entry for small companies is good. In principle, ofcourse, it is good. The diYculty one always comesacross is how you ensure that this agency then has theauthority to deal with things like negotiatingplanning consents and all of those things, becausebehind it all you still have diVerent authorities withdiVerent interests. Yes, in principle it is a good idea isthe answer.Chairman: Thank you very much indeed for comingand helping us.



MONDAY 9 JUNE 2008

Present Bradshaw, L Rowe-Beddoe, LFreeman, L (Chairman) Ryder of Wensum, LJames of Blackheath, L Walpole, LMitchell, L Whitty, LPaul, L


Witness: Mr Jeremy Nicholson, Director, Energy Intensive Users Group, examined.

Q449 Chairman: Mr Nicholson, thank you verymuch indeed for coming. You are familiar, I know,with Select Committee proceedings. So perhaps youwould be good enough just to give us a bit ofbackground on the Energy Intensive Users Groupand also yourself; an opening statement.Mr Nicholson: Thank you, firstly, for the opportunityto allow us to voice some of our concerns about thetarget and the way it is being pursued, and its possibleimpact on the industrial sector. The Energy IntensiveUsers Group is an umbrella group that represents adozen or so trade sectors, mostly trade associationssuch as the Chemical Industries Association, theConfederation of Paper Industries, steel producers,brickmakers, aluminium, cement and so on, all ofwhom represent industries that operate ininternational markets. They have to beinternationally competitive, and depend therefore onsecure and competitive energy supplies to stay inbusiness. They are also sectors that have a strongcommercial interest anyway in energy eYciency,which will not surprise you when you realise that fora steelmaker, 20-25 per cent of the production costsmight be energy related; for an aluminium smelter,40-45 per cent; for the industrial gases and some ofthe chemical firms, as much as 70 per cent of theircosts are energy based, typically for the electrointensive firms. So for them, you can see howpotentially small diVerences in energy prices can havequite a big impact on their competitiveness, butequally provides them with a very strong commercialincentive to manage their supplies eYciently. I shouldsay, our views sometimes diverge, to put it mildly,from the environmental lobby and occasionally fromGovernment and opposition too. We accept the needto diversify away from fossil fuels, both forenvironmental and economic reasons, partly toreduce concerns about energy security, but we do nottake an ideological view on energy supply. We do notthink any technology should be ruled in or out onthose grounds. In fact, we welcome research anddevelopment to bring as many new low carbontechnologies as possible to the market, and reducingthe barriers to their exploitation. However, we do notaccept the practice of setting arbitrary politically

determined targets, whether in the UK or at an EUlevel, for renewable energy, or indeed any othertechnology. We believe consumers’ interests are mostlikely to be met by allowing the market to determinethe energy mix within a carbon cap. We would alsosay, and I do not know whether you would regardthis as controversial or not, but the practice of targetsetting undermines one of the cases for marketliberalisation that we and the Government arepursuing elsewhere in Europe, allowing the marketthe maximum freedom to determine where oursupplies come from, and perhaps even moreimportantly internationally, it undermines theprinciple that markets should be allowed to reduceemissions at least costs, and choose the technologiesto do so. That is implicitly enshrined in the EUEmissions Trading Scheme and something that we inprinciple are trying to advance internationally, so Ihope that might be one aspect of the debate we mighthave a chance to touch on this afternoon. I should sayI will not be able to answer in detail some questionsabout the potential costs, but I hope I can give anindication of the possible impacts in the absence offull evidence, and I hope that if that is notsatisfactory, I can give some other supplementaryresponse on behalf of our members, if there isanything that remains unanswered.

Q450 Lord Ryder of Wensum: Good afternoon,thank you very much indeed for your very clearintroduction. You have touched on the EU and UKtargets in your introductory words, I wonder whetheryou would like to put perhaps some more detail tothem and tell us how achievable you think they are.Mr Nicholson: I would not use the word achievable todescribe either the UK or the EU targets. I think oneof the diYculties in discussing this whole subject is wefeel obliged to talk in euphemisms. We do it asconsumers, I am sure ministers feel they are obligedto do this regularly in the course of their work; well,perhaps that is natural, but I think it is sad when theenergy industry and others who should be perhaps abit more open about this find that they have to do sotoo. So do we, I think for reasons of trying to avoidcausing oVence to the environmental movement and



9 June 2008 Mr Jeremy Nicholson

others. But sometimes, targets are not challenging,they are ridiculous, and I think it therefore falls onthose of us who have the freedom to express thoseviews rather more clearly than some to do so on therecord. That does not mean that we should not belooking at ways of rendering renewable energy morecommercially viable, subsidising it perhaps wherenecessary, and certainly in an eYcient way, andcertainly reducing barriers to its exploitation. But Ithink the EU has done itself no credit in making sucha public commitment to a target which I think few inthe energy industry or outside, even in the greengroups actually, starting from a current position,believe is achievable. It certainly is not for the UK.The thought that we are going to go from 2 per centto 15 per cent of our energy in the next eleven and ahalf years, more particularly 5 per cent of ourelectricity to perhaps somewhere between 35 and 40per cent of our electricity in that timeframe, orshortly beyond, is not realistic, and I hope perhaps asa result of your Committee’s eVorts and others thatwe might reach the stage soon where ministers andthe energy industry can be a bit more open aboutthat.Lord Ryder of Wensum: You have been clearagain, thank you.

Q451 Lord Rowe-Beddoe: Thank you, MrNicholson. Yes, so let us speculate, however, for onemoment. Let us assume that the EU 20 per cent targetis achieved. How would that aVect you, do you think,in your association, the members of your associationrather more particularly?Mr Nicholson: Firstly, I think it is theoreticallypossible that the EU target could be met. I suspect thepolitical and economic consequences of doing somight be rather dramatic, but at least it istheoretically possible, unlike the UK target, which is,I think, practically, as well as economically,impossible. Part of the answer to that depends onhow that target is met, or at least how we movetowards it, because some aspects of that target mightnot actually be delivered by 2020. The SevernBarrage, for example, within the UK, if it ever comesabout, might be delivered rather later than that. I amsure you will have read or had drawn to yourattention the important piece of work done forBERR by Poyry Consulting on the potential costs ofmeeting this target, not just to the UK but to the EUas a whole, and they are talking about lifetime costsin the order of ƒ259 billion to achieve the target,under the most optimistic scenario, namely that thereare not any undue barriers to exploiting technologieswhere they are feasible, there are no particularproblems with grid access or back-up, that thetechnologies are just deployed in the mostgeographically sensible location, as opposed to thosedetermined by Government national subsidypolicies, and that it is done in the most eYcient way

as far as timing is concerned. Now all of those thingsare somewhat in doubt, to put it mildly, and they alsopresuppose that there is free trade in renewableenergy across the European Union. Well, we do nothave free trade in gas or electricity across theEuropean Union at the moment, we have somethingapproaching it, and indeed I recall giving evidence toyour Committee a couple of years ago about the slowprogress of liberalising the energy markets. This isdoubly diYcult with renewables, because there is aplethora of national support policies that in practicemake it very diYcult to trade renewables acrossnational boundaries, even assuming there is acapacity to do so across the networks, which as I amsure you are aware in many cases there is not. So allof that suggests to me that the costs of attempting tomeet this are likely to be on the higher side ofestimates rather than the lower, much though as wewould wish it otherwise. Certainly PoyryConsulting’s cost estimates suggest that for the UK,we might be talking about an impact four or fivetimes as great in financial terms as is caused by theRenewables Obligation currently, which at themoment is costing consumers around £1 billion ayear, and adding just over £3 per megawatt hour,increasing annually, to our electricity bills. That isabout 5 per cent of the cost of supply to an industrialuser. Now I do not know whether pro rata the sameimpact would apply from the renewables supportpolicies that might emerge as a result of pursuing thistarget across Europe. But certainly a cost impact fouror five times the size, when renewable subsidies arealready accounting for around 5 per cent of our bills,and we have to pay a climate change levy, albeit atreduced rate for the intensive sectors, and we have theimpact of the EU Emissions Trading Scheme as well,which is morally a very good thing, but that is addinganother £12 per megawatt hour or so to our powerprices too, and therefore the competitiveness impacthas to be seen in the context of tax and emissionstrading hitting power prices at the same time. All ofthis, of course, is happening at a rather unfortunatetime as far as the consumer is concerned when,irrespective of the environmental agenda, the marketis driving energy prices up anyway.

Q452 Lord Rowe-Beddoe: Your assumptiontherefore is that energy produced by renewablesources is going to be more expensive than currently?Mr Nicholson: That is true as a generalisation. It is notuniversally true that renewable energy is expensive,of course. Large scale hydro, where it is feasible, isprobably the cheapest source of bulk energy that wehave. There are environmental constraints as to theextent it can be exploited, of course. Certain forms ofbiomass and energy from waste again can be highlycost eYcient, although there are limits to what can bedone in scale. Not all of them have equally glowing




environmental credentials as far as CO2 reduction isconcerned. The problem with evaluating the cost ofsomething like wind is it is not a single cost. I do notjust mean whether you do it onshore or oVshore, butwind at 1 per cent of the energy mix has a trivialimpact on balancing costs and security of supply.Wind at 15-20 per cent has very considerable costsassociated with it, and therefore, there is a non-linearrelationship there. So it is wrong to generalise and sayit is either expensive or cheap, it depends on the scaleon which you are doing it. Unfortunately, the sort ofscale we are talking here implies very largeexploitation of wind which is problematic actuallyfrom a security of supply point of view. So we shouldnot generalise to the extent of saying renewableenergy and the subsidies that might have to go with itwill necessarily be very damaging but it is the scalethat causes the problem here.

Q453 Lord James of Blackheath: Mr Nicholson,quite early in your comments you indicated a deepdegree of scepticism as to the achievability of thetarget. I wonder if you could define that more closelyfor us; whether that is a scepticism on behalf of theentire membership of the association that you areworking with, or whether it is in fact related to theoverall achievability for the United Kingdomwithout reference to the mix of diVerent energysources presumably needed, because some will beneeding a huge dependence on electricity and otherson fossil fuels. I have never heard of a foundry thatcould run on electricity.Mr Nicholson: You are right, there is a diVerence ofexposure to this within the Energy Intensive UsersGroup and our members. Some proportionately buyvery little electricity and use natural gas as afeedstock. Actually, it is not obvious for them whatrenewable alternative they have in producingfertiliser, a certain amount of biogas perhaps, but byand large, there is no alternative to what they arecurrently doing. Others are highly electro intensive;in fact, even in the steel sector, the electric arc furnaceoperators are highly electro intensive. They are notbuying much in the way of fossil fuels, but they areconsuming a lot of electricity, so there is a range ofexposure there. It is true that all up to a greater orlesser extent are concerned about the costs arisingfrom this. It is not true to say that they are prejudicedagainst renewables. Some take advantage of them;there are aluminium smelters that have a directinterest in hydro production themselves, some co-firebiomass in coal fired power stations which are part oftheir autogeneration and so on. One or two as a smallpart of their energy mix have wind turbines and otherfacilities on their industrial sites. So there is not aphilosophical objection to this, there is a practicaland economic one as to what this would mean for afirm that requires secure, 24-hour baseload supplies,

and is highly exposed to international competition,and this accounts for a very, very large proportion oftheir production costs.

Q454 Lord James of Blackheath: Mr Nicholson, isthere any way in which your organisation canmonitor the extent of success in using renewablefuels, and guide your membership to the point wheresome part of it gives up a dependence on fossil fuels torelease those fuels which are more necessary to otherparts of your membership and get a better balanceinto the use of fuel within the economy overall?Mr Nicholson: Is this a suggestion that natural gasmight be best used as a feedstock rather thannecessarily as a generating fuel?

Q455 Lord James of Blackheath: They seem to havemore flexibility in many ways, and you yourselftalked about the possibility that wind might besuccessful. Wind is likely to drive electricity, and youmight have a lesser demand on electricity, and I amwondering whether any part of your user base couldbe given up in order to free up more of the valuableand scarcer fuels as we use instead, something ofwhich we can make a surplus, and whether we shouldbe directing policy that way?Mr Nicholson: I think in a sense the market is startingto drive in that way anyway. A number of peoplethought that gas supplies were going to remainrelatively cheap compared with coal, for example,and that we could merrily, without any greatintervention, see a continuation of the dash for gas,this would result in the benign situation that priceswould be kept under control and emissions would godown simultaneously. If only we were in thatsituation; we are not, and for international reasons,we are not going to go back to it. The market is tryingto diversify away from gas, in power generation inparticular, but of course there are constraints onwhat it can do in the short term. In the medium term,we are locked into it. In the long term, we have theoption of diversifying away to nuclear and eventuallyto coal with carbon capture, and I guess there is noreason to expect that renewables will do anythingother than grow within the mix. Our concern is aboutthe eVect of trying to artificially grow thatproportion, beyond what the technologies cancurrently sustain.Lord James of Blackheath: Thank you. My LordChairman, I would welcome a supplementary later iftime permits.

Q456 Lord Walpole: I know you started on this one,but let us continue: given the nature of the industriesyou represent, what role do you see for them inenergy eYciency measures to help meet EU targets,and as a supplementary I would like to ask you: whendo you think, at the sort of production level they are




now, their energy consumption will actually start tofall?Mr Nicholson: Well, I assume, if I might answer thatlast point first, that by energy consumption falling,you are talking about an energy eYcient responserather than a demand destruction response or arelocation of industry to other parts of the world.

Q457 Lord Walpole: No, purely eYciency.Mr Nicholson: Yes, I assumed as much, but thoughtthere would be no harm to put that on the record,because nobody wants to achieve our environmentalaims by transferring our liabilities on to someoneelse’s balance sheet.

Q458 Lord Walpole: Absolutely not.Mr Nicholson: I fear that we are up againstdiminishing returns in the intensive sectors as far asenergy eYciency is concerned. There may beimprovements in carbon eYciency, particularly inrespect of the electricity supplies on which theydepend, but of course these industries have alwayshad a commercial interest in keeping their energybills down, much more so than either businessgenerally or most of us as domestic consumers,unless, I would say, we live in fuel poverty, and therethere is a very strong commercial incentive to keeppower bills down, unfortunately sometimes at theexpense of the health of those concerned. So we aretempted sometimes to say that the energy intensivesectors are kind of the fuel poor of the industrialsector. We do tend to manage these things quite well,and there has been a steady history of energyimprovement even within those sectors recently, andI think we have seen evidence of this from thosesectors covered by climate change agreements, whohave probably made more energy eYciency savingsthan perhaps some others. I think therefore the scopefor energy eYciency savings, both proportionatelyand in aggregate, is higher in the less intensive sectorsand in some parts of domestic supply, and I do notthink we have really fully exploited that at all. Ofcourse, it takes a while for the public and for non-intensive businesses to catch up with fuel price risesthat are rising anyway from the market, quite apartfrom signals that may be imposed on top fromGovernment, but I have no doubt that there areplenty of boardrooms that are concerned aboutmanaging energy eYciency costs now that were notas concerned two or three years ago. Now you posedthe question how important is this in terms of hittingthe renewables target as a whole; well, plainly, ifenergy consumption is either lower than it is now orat least has not grown by as much as it otherwisewould, the practicality of hitting that target orsomething close to it becomes that much greater, sowe certainly should not let up on energy eYciency. Infact, for economic reasons, irrespective of climate

change, it makes good sense to do so in any case. Iwould raise a note of caution here: the history ofenergy eYciency improvements has not gone hand inhand with a net reduction in aggregate energy usehistorically, and there are wonderful academicarguments as to how much energy eYciency savingsmight be realised in practice, some of it takes the formof compensatory increases for comfort taking and soon, but I think it would be unwise to rely too muchon an energy eYciency saving at a micro level,resulting, you know, megawatt for megawatt, in anenergy eYciency saving at an aggregate level, becausehistory tells us it is not that simple. It is worthpursuing, it may make the renewable target thatmuch more realistic, but it is not a substitute, I amafraid.

Q459 Lord Walpole: I think this Committee, it musthave been this Committee, a few years ago went tohave a look at a cement manufacturer. I mean, evenat that stage, they were using what you might callsecond-hand car oil and old tyres and things then,which I really was very impressed by. They cannotreally go very much further than that, can they?Mr Nicholson: That is my fear, either in terms of theirdirect carbon input or indeed the energy use pertonne of product, and if you think of a process likealuminium smelting, well, there is a chemicalequation, that some of you here may well be veryfamiliar with. Given a tonne of bauxite or whateverit is and a tonne of finished product, you are going torequire a certain amount of energy to convert onething into another, even in theoretically perfectlaboratory conditions. You are never going to gobelow that target. The alternative, I guess, is to find asubstitute product, ultimately, but that is not terriblyeasy when it comes to something like steel, on whichjust about every process depends. So I think we haveto be realistic about how much more we can carry ontapping the intensive sectors that have done so muchto improve eYciency there, and we are therefore intoa rather more problematic area of how do you dealwith service industries and much more atomisedbusinesses, not all of which have energy managementdepartments or board interest in this that perhaps thefirms that our members represent do.

Q460 Lord Paul: In the last 20 years, steel industryand aluminium industry has done a lot of things forenergy eYciency, to reduce their energy consumptionper tonne, would you be able to say what kind ofreduction they have been able to make per tonne? Ifyou do not have the figures oVhand, you can writeto us.Mr Nicholson: I do not, but I would be very happy --in fact, I will probably get told oV by my boss,because I know there is a very good little leafletproduced by UK Steel on the subject which is sitting




on my desk at the moment which has a chart thatshows just that, and a comparable one in my filingsystem for the aluminium sector, and I would bepleased to provide it for you. One thing I would sayis that some of these sectors, not just in the UK butelsewhere in Europe, are already getting secure lowcarbon supplies, those that are fortunate enough tohave access to hydroelectricity, Scandinavia being anobvious example, but also those that have a directrelationship with nuclear producers. I am thinkinghere of firms like Anglesey Aluminium within theUK; they are already doing their bit by procuring lowcarbon supplies from a local nuclear power station,which unfortunately will be closing by 2010. None ofthis is an anti-renewables comment, but we wouldquestion why, if a business is already doing the rightthing by procuring a low carbon energy supply thatsuits their business, even if other options may beviable for other sectors of the economy, they shouldbe forced to pay a premium to subsidise otherbusinesses and other consumers that are not doingthe same thing, and perhaps an unnecessarily highpremium, because there has been too much of anemphasis on renewables within that low carbon mix.That is the point we would raise. We fully understandthe need to decarbonise baseload energy supplies,actually we have a number of alternatives availablethere from the industrial sector, but they may notnecessarily be the ones that environmentalcampaigners or, dare I say it, politicians chasingvotes or playing to the green gallery, wouldnecessarily choose as being an easy sell. Nonetheless,if we want those industries to survive in Europe, wehave to recognise that renewables will not always bethe ideal source of energy for them.

Q461 Lord Bradshaw: I am going to change myquestion a bit, because you have more or less told usthe targets’ named are not what we should befocusing on. I would like you to talk a little bit aboutsecurity of supply, and the volatility of energy prices,and how that will aVect your industry. I have someassumptions that were produced last week whichhave the BERR forecasts for 2008, they are justhopelessly wrong, I mean many orders wrong, andobviously I would have thought it was more sensibleto talk about $200 a barrel of oil, if you are thinkingahead. What can you say about security of supplyand volatility?Mr Nicholson: Firstly in terms of pricing of fuel,before answering that part of the question, none of usknows with confidence what the future price ofenergy is going to be, and if we did, we woulddoubtless be making a lot of money out of it on themarkets instead of sitting in this room. However, Ithink our group and others have expressed concernthat until recently, BERR, and DTI as was, wastaking a rather optimistic view, particularly on gas

prices, and indeed the ability of the gas market todisconnect from the price of oil. Now I was givingevidence last week to the Business and EnterpriseCommittee on this very subject, so I will not repeat itagain here, suYce to say that even if we have atheoretically perfect market within the UK, or indeedacross the whole of the rest of Europe, and we havefar from that at the moment, we are still at the mercyof international markets, and the Russians andothers are not keen to price gas on anything otherthan an oil index basis, and we have all seen what hasbeen happening to oil prices recently. Even if we takethe view that there is an element of a bubble going on,in addition to the supply/demand situation, it is hardto see oil prices going back to anything like the levelthat consumers enjoyed a few years ago. We are allgoing to have to live with higher prices there. Thatdoes two things, it means that it makes it morediYcult for the economy to absorb additional costs oftransition, but also actually it makes a strong case fordiversification away from oil and gas anyway oncommercial grounds to some extent. Now thequestion of security of supply, the simple answer tothat, which others I know have already given you, liesin having diversity of fuels, and also in respect ofthose fuels having a diversity of supply routes andcountries of production. So to the extent thatrenewables will help with that, it is obviouslybeneficial. The problem comes, I think, when there isan over-reliance on a particular form of renewableenergy that is either inherently expensive, and onethinks of the example of solar in the German marketfor this, it is not a particularly cost-eVective way ofproviding your energy or indeed your carbonreductions, and in particular wind, which we allrecognise has a growing role to play, and on aseasonal basis can contribute significantly in terms ofreducing fossil fuel demand over a period of time.However, on an instantaneous basis, the reliableoutput from any given wind turbine is eVectivelyzero. Unfortunately, given the sort of climaticconditions that can prevail over the whole of theBritish Isles and indeed north-west Europe, there areoccasions, not all the time, but with a certainstatistical frequency, when the output from thatentire wind resource is depressingly close to zero aswell, which means that back-up has to be maintained.We have seen not just theoretical evidence orscaremongering from those who might have adiVerent agenda, but empirical evidence fromnetwork operators in Germany and elsewhere aboutwhat the practical diYculties are of managing fastdrops in output from wind turbines over a largesupply area or indeed large increases in power. I thinkwe need to be realistic about how diYcult that isgoing to be to manage. It may not be impossible, itwill certainly be easier to manage if we have a moreliberalised market, with more flexibility in the




transmission systems, because they are not physicallyconstrained and so on. So there are a number ofthings we can do to make it more manageable, but tosuggest that it is straightforward or an issue we neednot confront is, I think, naive. I suspect theGovernment is very well aware of that, but like manythings, it is constrained on what it can say in public atthe moment on this subject.

Q462 Lord Bradshaw: So the disconnect whichpeople had hoped for between oil, gas and electricityand other prices is something which is not going tohappen?Mr Nicholson: Not in the immediate future.

Q463 Lord Paul: What eVect would a well-functioning Guarantees of Origin scheme have onindustry and users? How do you envisage the schemeworking in practice? We have had some very mixedviews on this.Mr Nicholson: This is the Guarantee of Origin idea;well, before answering the practical question, from atheoretical point of view, it would be a great thing ifthere was free trade in renewable energy across theEuropean Union, and to the extent we might wish tosubsidise it either on its own merits, or because it is alow carbon source or support it otherwise, that itwould be done on a consistent basis that does notdistort the markets and act like a series of blatanttrade restrictions, which is what frankly nationalpolicies do at the moment. However, I think there area number of practical issues with this. Even if it couldbe done with the agreement of 27 Member States,which is problematic, to put it mildly, there arepotentially quite high transaction costs associatedwith doing this, and tracking the energy and so on,which I do not think should be underestimated. Theymay not be insurmountable, but they are notnecessarily going to be trivial either, and it is certainlytrue that if we were going to move towards such ascheme, we could not do it overnight, and thereforeour progress towards this renewables target over thenext few years would have to take into considerationexisting schemes and modifications of those existingschemes before we even thought about moving to anoverarching single support mechanism or somethingclose to it for the European Union. On a morepressing matter, of course, this simply will nothappen if Member States do not wish it to happen,and Member States have constructed their renewablesupport programmes with a view to supportingindigenous renewable energy, and those forms ofenergy that are considered more popular within theirnational boundaries. Well, they are not going todismantle those schemes in a hurry, and I think theCommission is well aware of this. Where that leavesus, I am not sure, but as you will have heard fromother evidence, not least from Ofgem, and indeed

from the Poyry report to BERR, without thatflexibility of trading, there really is not the remotestchance of the UK even getting near to the 15 per centtarget or 35-40 per cent electricity figure, we simplycould not move anywhere near to that internally.Now even if we had a theoretically perfect tradingsystem for renewable energy within the EuropeanUnion, would there be enough surplus for someoneelse to sell us commensurate with a deficit relative toour target? I think that is highly questionable. Beforeperhaps even considering what can be done betweennow and 2020, it is worth reflecting on the fact thatvirtually every European country has failed toachieve its existing renewable electricity target for2010. We are not there yet, I suppose a revolutioncould happen in some of those states in the next yearand a bit, but it does not seem very likely, and this hashappened during a period of rising fossil fuel prices,relatively generous fuel subsidies, plenty of publicgoodwill in the main, even if planning systems andother things are not perfect, and so I think it is highlyquestionable whether the other Member States, youknow, those who have looked at it in suYcient detail,are going to get anywhere close to these targets. Ifothers do not exceed it, there cannot be a surplus foranyone else to purchase.

Q464 Lord Paul: Do you think it is an excuse for notdoing anything?Mr Nicholson: I certainly would not advocate that wedo not do anything, indeed our group does not. WhatI would question is whether we are doing things in anintelligent, cost-eVective and realistic way, and I doworry personally that there is going to be somethingof a backlash here against the green agenda. I thinkwe have seen some aspects of it with green taxation,which governments may pursue for a number ofdiVerent motives on occasions, and even if theirmotives are pure, it does not stop suspicion arising inthe minds of those who have to pay the bills. It is onething expecting people to give governments thebenefit of the doubt on this when energy prices arelow, oil is $15 a barrel; it is quite another when it isnudging $140 and issues of competitiveness for usand fuel poverty for others are very pressing. So I amconcerned, and I think our members are concerned,that despite these ambitious targets, as some peopledescribe them, the market actually will decide thatthey are not tenable, and will not invest accordingly,and what will this do? It will mean that the prices ofthings such as the Renewables Obligation are likelyto spike even higher, and there will be generaldissatisfaction all round. I go back to the point Imade earlier, it does no one any favours to be inpursuit of a target which no one seriously believes canbe achieved. One last word on that: I was mostencouraged by the measured remarks of Paul Golbyfrom E.ON in the press recently on this. It is not an




easy thing for a large energy company, let alone onethat has an interest in coal-fired and potentiallynuclear power stations as well, to say publicly what Iknow he and his colleagues in other firms have beensaying in private possibly to some of you and othersas well, but to be open and honest about the likelycost implications of this, the need to move in ameasured way, that brings the public with us, andallows those of us who are working in industry to say,well, it is a pain to be paying a bit more, but it issomething we can live with, and we can stayoperating in this increasingly low carbon economy;that is really important. I hope that this Committee’sreport, when it is published, might encourage those,as I say, in Government and elsewhere to have theconfidence to say that without fear of criticism fromothers, because I do not think anyone should beafraid ultimately of speaking their mind on thesetopics.

Q465 Lord Whitty: You have clearly spoken yourmind on these topics, you have had a few sideswipesat the green agenda. On the other hand, you have saidthat there is a need to have a lower carbon economy.Two things arise from what you have said: one, othercountries have achieved or are on course to achieve ahigher level of renewables than we are. They may nothit the target, but they are very significantly higherthan the UK. Have your fellow industries in thosecountries suVered from that process? Or if not, whatis so unique about either the natural heritage, whichI can understand hydro power in Scandinavia, say, orthe terms of the government policy in those countrieswhich makes that more acceptable to your equivalentmembers? The second thing, just briefly: you inpassing said we ought to be focusing on othertechnologies for achieving a low carbon economy;did you just mean nuclear power or are there othertechnologies you had in mind which may not beacceptable to public opinion or politicians but whichyou think we should be pursuing which would berather more cost eYcient than renewables?Mr Nicholson: Certainly nuclear is essential within thecontext of baseload power supplies to industry, noquestion about that. That is not the only answer, ofcourse, either. I think it is vital that we pursue carboncapturing storage as an option. I think the jury is outabout how expensive that is going to be, but it iscertainly likely to be less expensive than some of therenewable options, though not necessarily all, andgiven the scale of the task ahead of us, it seemsastonishing that more has not been agreed at aEuropean level on this. There was much talk about 15demonstration plants, I think, across the EuropeanUnion. Of course, this is not just relevant to powergeneration; for primary steel production, absent

carbon capturing storage, or indeed for the cementindustry, there is no low carbon solution. You candecarbonise your energy supplies as much as you like,but you cannot produce the stuV without producingCO2, and as the world needs both commodities, andthe developing world needs it in very large quantities,I think it is essential that we move forward on thatfront too. There is also, I should say, in theenvironmental lobby, a predisposition against largescale hydro. I am not quite sure why this is. I am sureit is appropriate in some instances and less so inothers, but there seems to be a view that if a projectis large and delivers energy at competitive prices, itmust therefore have something wrong with itenvironmentally, which I think is not always veryhelpful. You asked the question, Lord Whitty, aboutwhether members in other parts of Europe aresimilarly concerned about this agenda or not. Thenature of the support policies is very diVerent indiVerent Member States, just as the energy mix is. Weare part of an international federation, IFIECEurope, and I spend a certain amount of my time asa UK board member of that organisation discussingthis with colleagues in Brussels and elsewhere, andindeed with the Commission. It is true that one or twostates have taken quite a diVerent line in terms ofexempting intensive users altogether from the cost ofdirectly subsidising renewables; of course they get theknock-on costs of carbon through their powersupplies, if they are exposed to it, Sweden being anobvious example, and to a lesser extent, Germanytoo. There are some qualifying criteria there, youhave to be a user over a certain size and a certainamount of value added associated with energy spend,but for some of those more intense, more exposed tointernational competition, there has been arealisation there that the renewable subsidies need tobe tempered, not necessarily removed entirely, butlevied at a diVerent level. I think this is analogous towhat we have in the UK with the climate change levy.I am not saying there is a free ride on this, you stillhave to pay an element of the tax, but you have toundertake energy eYciency improvements throughthe climate change agreement, which I think haveworked reasonably well. I cannot see why in principlethe same thing could not be done with renewablesubsidies; in other words, if the costs reached the levelwhere they would threaten the viability of someintensive industries, and that is the last thing we want,because we are hardly going to persuade China oranyone else to go down this route if we cannot sustainthose industries within our low carbon economy; infact, it would provide an absolute disincentive forthem to follow. This could be a way of mitigatingsome of the impact, if it was felt that some classes ofconsumer could absorb this and others could not, soI think that is something we hope the Governmentmight pursue here when consulting on how to moveforward, beyond the current level of costs.




Q466 Lord Mitchell: When we have taken evidenceand been speaking to various oYcials, one of thethings that I thought has come out of it is that certaincountries have made pretty significant progress inthis issue, and the countries that have been cited arethe Scandinavian countries, Germany in particular,Spain and Portugal. There have been various reasonsput forward, one of which, and that is certainly truein the northern countries, is the fact that planningpermission is much easier to obtain, and it wouldseem to me, when we come to do this report, that isgoing to be an issue we have to think about a lot,because if planning is one of the major inhibitors onthis, this is significant, and I wonder if that is yourview.Mr Nicholson: It most certainly is, and not justincidentally with respect to renewable facilities, buteverything that goes with it. The transmission linesand so on; we have had an example of this within theUK, even where it is possible to get the generationthrough planning, there is an objection ironicallysometimes from the same people who want morerenewable energy to the transmission lines to hook itup to the grid. Well plainly, you cannot have onewithout the other, and indeed, as I have mentionedearlier, and I know others will have done too, we aregoing to need an expansion of grid capacity to copewith greater amounts of intermittency, and indeed adiVerent distribution of renewable energy across theEuropean Union, so that I think is vital. While wewould certainly welcome a more responsive planningsystem here and everywhere else in Europe, it is notin the interests of consumers, whether in industry oranywhere else, to have undue barriers to newcapacity coming onstream. Those barriers areunhelpful from the point of view of security ofsupply, just as they are from the point of view ofcarbon reduction. So we think that the renewableindustry has a valid point in complaining about thenon-responsiveness of the planning system here andelsewhere, and indeed the lack of equitable access tothe grid. Now we might part company with them inarguing for preferential terms for grid connection,but it is certainly true that the tardy response fromgrid operators here and elsewhere in Europe isunhelpful to them and indeed to consumersgenerally, and that is somewhere where we think, youknow, improvement is due. When people talk aboutprogress in renewables, they mean diVerent thingsdepending on which perspective they are comingfrom, and what commercial interests they have in themarket. I am somewhat surprised sometimes whenpeople talk about the great success of renewables inGermany. It depends what you mean by success. If by

success you mean making energy more expensive andno more secure than it was before, I would argue ithas done quite a good job. It has not necessarilydiversified towards the more secure forms ofrenewables or certainly the more cost-eVective. Iheard a presentation from a member of the UK’sclimate change committee the other day, who shallremain nameless, to avoid his embarrassment, whowas talking about the great commercialopportunities of solar power, and look what a successit was in Germany. I did point out, and he agreedwith me, that they are receiving seven times themarket rate guaranteed for the next 20 years. Well,most things would be successful if you gave themthat. I would like to earn seven times the market ratefor the next 20 years, and I am sure that most of mymembers would love to for their products too. So Ithink we need to be quite careful what we mean bysuccess. To me, and this may be a few years away, butis not unimaginable, success is when renewableindustries can compete with the minimum ofsubsidies subject to internalising the carbon cost oftheir competitors and can do so without artificialsupport, and indeed are the market choice. Thatwould be success to me, and it is not clear that thesupport policies we have in Europe or elsewhere aremaking that more likely.

Q467 Lord James of Blackheath: Mr Nicholson,towards the end of your response to my earlierquestion, you were saying that there was anexpectation that gas would have to reduce insignificance, or I think words to that eVect. In theevent that it became possible to increase the resourceof gas on comparable terms as at present, would thismaterially alter your ability to achieve a betterdistribution and utilisation of overall energyresources to extend the time in which to introduce thenew renewables?Mr Nicholson: I am sure it would. Incidentally, notjust in the UK but elsewhere in Europe, we are lockedinto a certain amount of growth in gas consumptionin power generation in the medium term at least, untilother scale alternatives become available, so that gasdependency is likely to grow unfortunately for awhile before there is a possibility of diversifyingaway. There are all sorts of views about the -- I amhesitating, to avoid using the word peak gas becausepeak oil is a controversial subject; we are certainly adistance away from that. Unfortunately, if you lookat the location of gas resources internationally, muchof it is in some of the less stable states.Chairman: Thank you very much indeed, MrNicholson, for coming.



Written Evidence

Memorandum by British Energy

Summary of Key Points

— Overall, there should be greater focus on the three key objectives of energy policy—greenhouse gasreductions, maintaining security-of-supply, and the provision of aVordable energy for consumers—rather than on prescribing how these objectives should be met at Member State levels.

— The UK’s national 15% renewable energy target is extremely challenging, bearing in mind renewableenergy currently contributes just 2% of the total.

— The renewable energy target will be delivered from three sectors: heat, transport and electricity.Independent analysis suggests that the largest single contribution is likely to come from the electricitysector, and implies about 40% of the electricity generated in 2020 must come from renewable sources.

— Government interventions on this scale have far-reaching consequences. Most important is that theyundermine liberalised markets and increase costs to the consumer.

— In the context of security of supply, it is worth noting that the relatively low connectivity of the UKwith mainland Europe means it benefits much less than other Members States from developmentsin Europe.

— In setting the renewables target, little account appears to have been taken of alternative lower costabatement options in the electricity sector such as nuclear and fossil generation fitted with carboncapture and storage.

— Planning is the biggest obstacle to connecting renewable generators to the transmission system, asthe recent decision to reject the Lewis Wind Project (which would have been one of the largestdevelopments in Europe) demonstrates. This needs to be addressed by the Planning Bill.

— The detailed implementation of policies and measures to deliver the targets and the costs involvedhave not been suYciently considered and could also lead to unforeseen circumstances such as theundermining of the EU ETS.

— In terms of additional infrastructure, a significant amount of new fossil standby plant will be neededto cover low renewables production during certain periods of the year; a significant expansion of thegrid network to accommodate a larger more dispersed generation sector will also be needed.

— A significant excess of generation could exist under periods of high renewable production and lowdemand; in this case it will be necessary to constrain oV some plant to maintain system stability.

— Member States have indicated they are willing to take on specific targets and they should be allowedto develop support mechanisms that best suits their economic circumstances.

Detailed Response to Questions

On Targets


1. The EU’s general 20% and UK’s national 15% renewable energy targets are both extremely challenging,bearing in mind renewable energy currently contributes about 7% and 2% for the EU and UK respectively.The scale of the challenge is highlighted in Table 1.



Table 1

RENEWABLES CONTRIBUTION TO TOTALS

2005(1) 2020 BaU(2) 2020 EU Directive(3)

EU (% of total energy) 7 12 20UK (% of total energy) 2 5 15UK (% of electricity) 4(4) 41(5)

UK (TWh electricity) 17(4) 150(1)

References:(1) Compliance costs for meeting the 20% renewable target for 2020, A Report for

BERR, POYRY Energy Consulting, March 2008(2) European Energy and Transport: Trends to 2030, EC, update 2005(3) Draft Directive on the promotion of the use of energy from renewable sources, EC,

23 January 2008(4) Digest of UK Energy Statistics (DUKES), July 2007(5) Based on 368TWh electricity generation in 2020, Energy White Paper, May 2007

2. It is worth noting that the 2% of energy for the UK in 2005 in the table above is the result of a policy topromote renewable electricity through the NFFO and RO schemes since 1990; also, this figure has a significantcontribution by hydro electricity which was largely built before 1990. Bearing in mind there are now only 12years to go before 2020, the original BaU renewables contribution of 5% would have been diYcult to reach—achieving a trebling of this value (ie 15%) would seem unrealistic, even with heavy handed marketinterventions and substantial cost to the consumer.

3. It is proposed that the 15% UK target will be delivered through three sectors: heat, transport and electricity.In the specific case of electricity the current 4% contribution by renewables will need to increase by an orderof magnitude to about 40%, to deliver the UK’s commitment under the draft Directive.

4. To meet the level of requirement suggested by the POYRY(1) analysis of 150 TWh in 2020 means:

— A growth rate of 20% per annum is required, twice the average growth over the period 1998–2006.

— An improved planning process, a grid that can respond to a high degree of variability, and a marketstructure that is sympathetically flexible, are issues that need to be successfully resolved. In theabsence of these developments security of supply and economic well-being will be compromised.

— The RO, or any successor support mechanism, would have to provide suYcient incentive for allrenewable technologies, and in particular oVshore wind development.

— That supply chain bottlenecks in the renewable sector must be overcome if the extremely largenumber of new projects required are to be delivered in a timely fashion.

— A significant amount of new standby plant (ie non-intermittent, conventional plant) will be neededto cover low renewables production, for example, during periods of low wind. There also needs to bea financial mechanism to encourage development of standby generation, to levels well beyond thosecurrently in the market.

— Excess of generation during periods of low demand is also a potential problem. Maximum outputfrom the renewables could be 150TWh per year in 2020. Based on an average load factor of around35%, which equates to 49GW of generation capacity in periods of high renewables yield comparedto a low demand of around 27 GW (an excess of 22GW which would need to be constrained oV). Ifwe consider that in addition to this there needs to be thermal baseload generation (fossil andnuclear), then inevitably we must assume there would be a significant excess of generation. This isan important system issue that has yet to be fully considered.

— Similar simple calculations show there will need to be a significant increase in the size of the grid in2020 with all the attendant impacts associated with transmission lines, planning, and cost to theconsumer. By way of illustration, assuming all generation is from thermal sources, 64GW of installedcapacity will be required to deliver the 368TWh demand in 2020; to generate 40% of electricity fromrenewables, a total of 87 GW is required (made up of 49 GW renewables and 38GW of conventionalthermal generation) to achieve the 368 TWh demand. The latter scenario would require 36% increasein grid size. (It is important to note that this does not include the standby plant needed which would besignificantly higher in the second case).




5. It is widely recognised that the “20:20:20” targets set, for the three areas of energy eYciency improvements,greenhouse gas reduction, and percentage contribution to energy consumption by renewable sources, is a hugechallenge for Member States. In particular there are a number of concerns:

— Overall, there should be greater focus on the three key objectives of greenhouse gas reductions,maintaining security-of-supply, and the provision of aVordable energy for consumers, rather thanon prescribing how these objectives should be met at Member State levels.

— The detailed implementation of policies and measures to deliver the targets, and the cost involved,has not been suYciently considered and this has led to considerable criticism amongst keystakeholders.

— There are also potential unforeseen eVects. The emissions trading scheme (EU ETS) is a very eVectivemarket mechanism that can deliver emissions reductions across the economy through a credible andeVective cost of carbon, and provides an important vehicle to engage with, and facilitate activitiesoutside of the EU. Forcing industry to deliver the renewables target has two eVects:

— The carbon savings would be more expensive than if they were delivered through the EU ETS.

— Emissions reductions through renewables undermines the need for emissions reductionsthrough the EU ETS, putting downward pressure on the cost of carbon, thus weakening theincentives for abatement across the economy.


6. The technologies proposed to deliver these targets would improve security of energy supply. However,there are two aspects to security of supply, access to primary energy and variability of supply; both of thesehave implications for a modern economy. There are some important limitations:

— Indigenous fossil supplies in coal and to a lesser extent oil and gas have ensured access to primaryenergy for most for the last century. Today, dwindling indigenous oil and gas resources leavesindigenous coal and nuclear to provide a measure of secure supplies. Renewables can also contributeto this aspect of security of supply, although as indicated below, and with the exception of indigenousbiomass, there are significant limitations.

— Wind power, the main renewables technology proposed to deliver the targets, is subject to thevagaries of meteorology and as such there are periods in which they cannot be relied upon to deliverthe energy required—because of this variability, significant (fossil) standby plant is required on thesystem to ensure provision of electricity. Storage of electricity in the UK is very limited with hydroelectric pump storage as our only viable form of electricity storage. The greater the wind componentto the electricity system, the greater the standby plant needed, and the less eYcient the overall system.

7. In the context of security of supply, it is worth noting that the relatively low connectivity of the UK withmainland Europe means it benefits much less than other Members States from developments in Europe.

On Grid Access


8. The Directive for Production from Renewable Energy sources has not had any real aVect on grid access.

9. The rules for transmission use of system charges in the UK are the same for all technologies. The currentsystem is split 20% “locational” and 80% “residual” ie a wind generator for example, will have to pay 20% andthen the remaining 80% is socialised.


10. The speed of implementing upgrades is slow mainly due to planning and partly due to uncertainties intimescales for gaining consent for new build schemes and the associated transmission connected assets.




11. National Grid Transco has a licence obligation to promote competition, and thus benefit the consumer—to achieve this goal their charges are non-discriminatory against technologies.


12. This issue is being considered by National Grid and by industry. Provision for 100% rated capacity forwind and hydro could be less cost-eVective than dynamic management of the appropriately sized grid. TheOfgem/BERR transmission access review is ongoing alongside an industry review of code amendments, oneof which considers sharing of capacity.


13. No comment.


14. The current regulations do not inhibit access, but planning does have a major impact, not only forrenewables but all competing technologies.

On Support Schemes


15. Government interventions on this scale have far-reaching consequences. Most important is that theyundermine liberalised markets and increase costs to the consumer.

16. Member States have indicated they are willing to take on specific targets and they should be allowed todevelop support mechanisms that best suits their economic circumstances.

17. However, the EU role is an important one:

— They should ensure that the level of subsidy provided does not distort competition across the region;they should also ensure that when a technology has become “mainstream” it should no longer receivea subsidy and be allowed to compete with other technologies on a level playing field.

— One idea put forward is to allow a new “renewables accounting” to emerge in which a technologysuch as coal (or gas) fitted with Carbon Capture and Storage is allowed to count towards renewablestargets ie that it has renewable “status”; such an intervention would be a clear indication that therenewables target was set at too high a level for the timescale involved, and if this were to go aheadthen all low carbon technologies, including nuclear should be part of this approach.

— A framework for any proposed “trading” of renewables across Member States needs an EU overviewso that its development, were it to go ahead, balances domestic action with the need for the lowestoverall cost solution.

— The EU should ensure that the renewable target should not compromise the drive for truly liberalisedmarkets—the latter are at serious risk under the proposed level renewables, particularly in theelectricity sector, if these continue to be subsidised over the long term.


18. The UK is an island generator with limited electrical connectivity to Europe—we should therefore notdraw analogies from the vast majority of Member States who do not face the same constraints as the UK.



19. There are a number of lessons learned from the development of the renewable sector in the EU over thelast two decades or so:

— Setting targets, whether indicative or absolute does mobilise action but they must be complementedwith policies and measures that address the nature and scale of financial incentives, planning issues,and grid connection.

— Governments should avoid picking winners—rather its role must be to create the financial, planningand technical regimes that encourage the successful technologies to emerge. So long as thegovernment provides the enabling framework, the market will ensure the successful adoption of themost appropriate technologies.

— The German model whereby renewables developers are guaranteed grid connection and electricitysales at a premium price has proved particularly eVective in delivering operating capacity. Theobligation mechanism, favoured in a number of countries including the UK, with incentives andpenalties, should also prove eVective in this context but perhaps at a much lower overall cost to theconsumer.

— Any new legislation must allow the possibility for polices and measures to evolve because therenewables sector, as well as some of the key underlying drivers for the industry, are dynamic, andwill continue to be so for some years to come.

— It is important to address the institutional support for any scheme adopted ie the monitoring,verification and administrative support since this could involve significant additional costs.

— Once the financial incentives have achieved their aim eg cost convergence with traditional players,then these technologies must be judged alongside the traditional players, otherwise there is a risk ofmarket distortions.

— Competitiveness issues between companies, and countries, have largely been absent from discussionson the development of renewables. Such issues are likely to be more prominent as the renewablessector grows into a significant contributor to the electricity mix.

— The development of national polices and measures must also reflect international developments insome areas. For example, there is strong interest in developing a major Green Certificate marketacross the EU, and this will provide additional impetus to the industry. Questions of parity willinevitably arise with pressure to harmonise policies and measures.


20. Support mechanisms for renewable technology deployment have been developed by Member States to suittheir own economic structure. These technologies deliver a number of attributes to Member States which theywill be keen to retain: electricity and biofuels for economic activity and social well-being; carbon reductions;and a measure of security of supply. These interests make the emergence of a significant cross-borderrenewable market less likely, and if this is the case, then a lack of market harmonisation is less important froman investment standpoint.


21. Further harmonisation of support schemes is not necessary so long as individual Member State schemeshave been scrutinised by the EC, and Guarantees of Origin adhere to a required “standard”.

8 May 2008

Memorandum by Mr Giles Chichester MEP

1. Question 1

1.1 Both the 20% EU (European Union) and 15% UK (United Kingdom) targets for the renewable energyshare of final energy supply are extremely ambitious. They are only achievable by 2020 if money is no objectand planning constraints are set aside. Nor is past performance encouraging that burden sharing will succeed.



2. Question 2

2.1 These proposals are coherent in the context of two of the three pillars of EU energy policy, namely securityof supply and sustainability. The third energy package, not to be confused with the more recent climate andenergy package, should, if anything, improve the prospect of achieving the targets by making energy marketsmore open, flexible and competitive.

3. Question 3

3.1 By definition renewable energy is an internal resource, so in theory, the greater share of final energy itprovides the less dependence on imported fuels. However current rates of increase in renewable energy suppliesare not fast enough or great enough to make a significant diVerence.

4. Question 4

4.1 There does not appear to be much evidence to show what eVect 2007/77/EC has had on encouraging gridaccess for renewable energy generators. National policies and fundamental factors such as cost andengineering feasibility remain dominant.

5. Question 5

5.1 Considerable.

6. Question 6

6.1 Use of system charging and priority access are obviously factors but probably feed in tariVs and generoussupport schemes can over-ride diYculties.

7. Question 7

7.1 Probably not much impact but this is a question better answered by TSOs (Transmission SystemOperators).

8. Question 8

8.1 Further co-ordination of NRAs (National Regulatory Authorities) is desirable in the overall context ofconsistent, even-handed regulation of energy markets to promote competition and eYciency but in the contextof 27 MS (Member States) operating diVerent support schemes for renewables it is a moot point whether itwould be better to leave well alone or push for full harmonisation.

9. Question 9

9.1 DiYcult to quantify by comparison with cost factors but the European Commission has identifiedadministrative obstacles as a barrier to be overcome along with inadequate distribution channels,inappropriate building codes and lack of market information.

10. Question 10

10.1 Interestingly the European Commission has identified four reasons why it is currently inappropriate toharmonise. First because diVerent instruments or schemes have the same economic eYciency and can bedesigned in conformity with existing internal market rules.

10.2 Second because imposing one harmonised system would create disruption and short-term uncertainty inthe market for renewables, especially where it involves abolishing existing well-established schemes.

10.3 Third because of the diYculty in diVerentiating between the costs of diVerent techniques in diVerent MSwhich might discriminate against fledging technologies.

10.4 Fourth because national support schemes are often designed to promote regional development in onemember state which might not be appropriate in another.



11. Question 11

11.1 Clearly schemes must have had a positive impact as demonstrated by the increases in renewables shareof final energy. However, results are patchy and it seems diYcult to identify a successful formula although feedin tariVs have helped for some technologies in some countries.

12. Question 12

12.1 This question invites the counter question of which cross-border markets had you in mind? At presentthe challenge and the obstacles are essentially at the MS level. Once the renewables have been converted intoelectricity then it becomes a matter of physical energy flows across borders which are subject to congestion orcapacity constraints and relative pricing, ie matters the third energy package seeks to address.

13. Question 13

13.1 Not, provided benchmarking or mutual recognition of standards are in place.

14. Final Thought

14.1 I believe we are at risk of mistaking the end with the means as well as pre-judging which solution isappropriate to our climate change challenge. If the objective is a low carbon economy as characterised by a60 2050 objective, ie 60% reduction in CO2 emissions by 2050, why do we close oV our options by focussingon 20 20 20, or 20% share of final energy from renewables by 2020.

14.2 This seems to me a case of missing the wood for the trees. Set the ultimate target and challenge the MSto meet it, leaving how to them to decide.

14.3 Personally I liked 60 20 20 when I proposed it back in 2005, 60% of electricity from ultra low carbonemitting technologies by 2020 ie 20% renewables 40% nuclear.

21 April 2008

Memorandum by the Confederation of British Industry

General Questions

(i) How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target?

— The CBI has long supported the need to expand UK renewable capacity to meet carbon targets andpotentially to improve security of supply. However we have never accepted an EU role indetermining national energy mix, not least because of the additional cost involved in imposing apreset mix.

— The target is essentially an arbitrary, symbolic figure. The Commission estimates the Directive targetwill require an incentive price of ƒ45—51 /MWh, while recent UK analysis of the Directive (Poyrycommissioned by BERR1), estimated that the incremental carbon abatement cost in the electricityand heat sectors is in the order of ƒ57/tCO2 in the UK. This includes individual project costs andnot additional network investment or other hidden costs (eg transaction costs) that may increase thetotal resource cost to the economy.

— As the UK’s target is one of the largest increases in renewable energy, the achievability of the targetis questionable. The Poyry analysis assumes that about half of the UK’s target would be achievedby purchasing Guarantee of Origin certificates, which means that half of the UK’s target isdependent on investment, planning, and regulatory decisions taken in other Member States.

1 http://www.berr.gov.uk/files/file45238.pdf



— CBI’s objectives are for the Directive to be implemented at least cost and utmost flexibility.

(ii) How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Packagein particular?

— A liberalised, competitive, interconnected EU energy market will help the EU face the growingchallenges of energy security, carbon abatement and business competitiveness. The CBI thereforestrongly supports the thrust of the Third Energy Package.

— Improving European energy markets and building more electricity interconnections may allowelectricity demand patterns and renewable resource availability to be balanced in order to avoidbuilding as much back-up capacity. Growing amounts of renewable electricity may makeintermittency more of an issue that must be managed with greater interconnections, back-upcapacity, and demand response and energy storage technologies.

— If Member States are unable to reach political agreement over the Third Energy Package or if theproposed Directives are insuYciently implemented then the European Union’s commitment to jointenergy policy may be questionable.

— CBI proposes that the results of the 3rd Energy Market Package be reviewed in several years and theRenewable Energy targets be adjusted (or timelines extended) if there is in-suYcient improvementin cross-border energy cooperation and investment.

(iii) To what extent are these targets capable of improving the EU’s security of energy supplies?

— As the UK’s target is expected to be met largely with wind power there are likely to be intermittencyconcerns when there is more than 20% wind on the grid. This may require higher levels of grid back-up services from natural gas combined cycle plants, so that the contribution to security of supplyis limited.

Grid Access

(iv) While grid access is an important issue, CBI does not have particular comments on the Committee’squestions in this section.



Support Schemes

(v) At what level should the EU be involved in harmonising or regulating support schemes offered by Member Statesto encourage renewable energy generation?

— The many diVerent, uncoordinated subsidy mechanisms in EU Member States may lead investmentsto chase favourable incentives instead of where the most renewable energy can be produced.

— CBI supports the UK Renewables Obligation as it set the “rules of the game” for promotinginvestment.

— CBI supports the European Commission’s “StaV Working Document”2 conclusion that “it iscurrently inappropriate to harmonise European support schemes”.

— Price based (feed-in tariV) and quantity based (Renewables Obligation) systems are equally valid.Attempting to harmonise schemes may make it diYcult to diVerentiate between diVerenttechnologies and diVerent costs in diVerent countries. Technology cost diVerentiation is an aim of“banding” provisions in the Energy Bill).

— Encouraging the EU to begin a process of harmonising support schemes would introduce significantuncertainty for renewable energy companies that would significantly slow investment.

— Over the long-run there may be a case for harmonisation, perhaps following the Commission’ssuggested “bottom-up” approach of aligning regional green certificate or feed-in tariV schemes.

21 April 2008

Memorandum by Drax Power Limited

Introduction

1. Drax has an ambition to further develop its co-firing technology and build a long term presence in therenewable energy market. Current aspirations are to generate 10% of the station’s output from renewablebiomass materials, principally from a wide variety of energy crops, by the end of 2009. We have committedup to £80 million in extending our biomass capability, including handling and processing of biomass materials.Hence we are keen to contribute to the evidence used by the Sub-Committee and have prepared the followingas a summary of our progress in developing biomass co-firing and as a means of indicating the barriers whichneed to be removed before this renewable energy can fully achieve its potential in the UK. We have contributedto several Government consultations on biomass and renewable policy over the last few years and thisdocument summarises the key policy issues rather than detailing specific areas and recommendations.

Co-firing: An Efficient Carbon Abatement Technology

2. The recent Energy Review signalled some major shifts in the Government’s thinking on the future role ofcoal-fired electricity generation. The most important of these was the recognition that coal-fired generation islikely to play a significant part in the UK energy mix going forward. As a result, Government policy will needto ensure that the environmental impact of this form of generation is eVectively managed and needs to addressco-firing since this is the most eYcient way of reducing CO2 emissions from coal-fired power stations.

3. The forthcoming Renewable Energy Strategy provides the Government with an opportunity to clearlyexpound the view that biomass co-firing should be encouraged to play a greater role in reducing CO2 emissionsfrom coal-fired power stations. Such a role should not be confined to the existing coal-fired plant since Draxfirmly believes that any new coal-fired plant, which will eventually be fitted with Carbon Capture and Storage(CCS) technology, should maintain a co-firing capacity. The Environment Agency, through its definition ofBest Available Technology (BAT), should require all new coal plant to be built with a biomass co-firingcapacity of up to 20%. It should be noted in this context that the DTI-commissioned study (ThembaTechnology, 2006) investigating the carbon balance and sustainability issues surrounding co-firing concludedthat “from an avoided greenhouse gas perspective, the co-firing of biomass with coal represents one of themost eVective uses of biomass resources for energy”.2 http://ec.europa.eu/energy/climate actions/doc/2008 res working document en.pdf



Targets and Challenges

4. The EU’s target for renewable energy will be challenging and the Government needs to integrate and clarifythe energy and environmental policy frameworks. It can be calculated that the UK co-firing resource is of thesame magnitude as wind and we believe that it deserves a similar level of Government recognition and supportas a fundamental part of both the renewable energy and carbon abatement strategies. However, if thisrenewable energy resource is to play a significant role in contributing to the EU’s challenging targets, there ismuch that needs to be done, particularly by ensuring much better co-ordination between GovernmentDepartments in order to develop consistency and to fully utilise the infrastructures and potential capabilitiesof the UK biomass industry.

5. We welcome the fact that the Government has recognised the imperatives in this area as indicated in therecent Biomass Strategy:

— Biomass will have a central role to play in meeting the EU target of 20% renewable energy by 2020.

— We need to explore every avenue for achieving these cuts in emissions in sustainable ways over thedecades ahead.

— Delivery of our objectives will require a major expansion of biomass use for fuel, energy andindustrial products.

6. However, our extensive eVorts over the last few years in trying to build a biomass programme result in theclear conclusion that policy implementation does not yet match these aspirations and hence the prospects formeeting the challenging EU targets do not look good without a greater policy emphasis on biomassproduction and usage.

7. DEFRA and BERR need to develop a more consistent, integrated policy which builds the UK capabilityfor biomass production and usage in a sustainable manner. The current Government policy of dividingbiomass into energy crop and non-energy crop was well intentioned but has demonstrably not beenparticularly successful—the UK energy crop industry is still embryonic after several years of eVort and the co-firing throughput of non-energy crops has been severely reduced through volume caps and changes inRenewables Obligation (RO) support levels. Indeed, we find it highly disappointing that the overall UK CO2

reduction from biomass co-firing has fallen over the last few years despite the high public profile aVorded tothe climate change issue and despite the fact that it is clearly the most economic way of reducing CO2 emissionsfrom power generation.

8. The UK Government needs to reverse its view is that biomass usage “is constrained by the availability ofbiomass products”. This is far too pessimistic a view and we believe that more options to encourage thesustainable production of energy crop and non-energy crop biomass co-firing need to be considered to obtainthe maximum national CO2 reduction.

The Way Forward

9. Our view is that building a more robust and wider UK energy crop industry is a key way forward becausethese fuels contribute towards the development of a viable UK biomass industry and allow security of longterm volume. In particular, it must be recognised that current programmes and current market conditions areinadequate to deliver the 300,000–350,000ha energy crop objective set out in the Biomass Strategy. Inaddition, the Energy Crop Scheme has been beset with diYculties which have prevented significant plantingand this has severely tested both farmers’ patience and their long term confidence in the stability of the Schemeinto the future.

10. Given this, we expect it to prove diYcult to encourage farmers to plant significant volumes of energy cropin the current economic climate with, for example, wheat commanding a high price. Only by widening thedefinition of energy crop, developing the UK forestry resource and providing consistent, long-term supportcan we develop a sustainable UK energy crop and biomass industry.

11. Drax is hopeful that we can source much of our biomass fuel from the UK since this should be the mostcompetitive and also the lowest “carbon footprint” source. However, we need Government to developprogrammes to help the UK biomass industry develop suYciently to meet as much of the potential volumerequirement as possible.

21 April 2008



Memorandum by Ecotricity—Further information following the Committee’s visit to Bristol Port WindPark, on 23 May 2008

1. Onshore Wind—Potential Contribution to Targets

Ecotricity’s view is that onshore wind could provide at least 10% of the UK’s electricity.

Current UK consumption is 350,000 GWh per annum, 10% would be 35,000 GWh.

A typical onshore wind turbine will produce around 3 GWhs per MW installed and typical turbine sizes arerapidly approaching the 3 MW installed level. Using these figures we would need, in total, about 4,000 windturbines to provide 10%.

Allowing for the 1!% that wind already provides in the UK, we would need an additional 3,600 turbines tobring the total contribution of wind up to the 10% level. Although within the likely timeframe of thishappening (up to 10 years) typical turbine sizes will increase. 3,600 new turbines therefore represents the higherend of the probable outcome in that respect.

2. Barriers to Onshore Wind

Without question, the biggest single barrier to onshore wind energy is the planning system. Wind energy findsitself in a planning system not designed for it and not fit for purpose.

Wind energy is the only major generating source which requires planning approval from District Councils.The Government takes the planning decisions for all other forms of generation, and for good reason. DistrictCouncils are (and have amply demonstrated themselves) not capable of balancing national strategic interestswith those at the parish level.

Under current circumstances, and often against planning oYcers recommendations, two thirds of all planningapplications for wind projects are turned down and two thirds of all subsequent appeals are upheld. That’s alot of bad decisions being overturned eventually, but at great cost in time and money to the developer andcouncil alike.

All other major forms of generation are consented through the Section 36 process. This process was conceivedbefore wind energy (and renewable energy) became possible on a commercial scale, and it is designed to takeall but the very small conventional generators out of the hands of local councils and into the hands of thegovernment. The cut oV threshold, below which a project is in the hands of the local council, is 50 MW. Forconventional generation that is indeed a very small project—very few gas and no coal or nuclear powerstations exist at this size and nor will they. However 50 MW is a very large wind farm.

The Section 36 process could easily be adapted with a diVerent threshold for onshore wind to reflect itsdiVerent size characteristics.

Ecotricity believes that wind projects of up to 3 turbines or 2 MW total installed capacity could be dealt withby district councils. County councils could readily manage wind applications of up to 20 MW, since they arealready used to dealing with strategic issues, such as waste. Applications above 20 MW should go straight tothe new streamlined section 36 process that is intended to commence operation next year.

Whilst there are a small number of very large (in excess of 100MW) wind projects in the UK, these are theexception. These large sites (predominantly north of the border) are all but fully utilised and future emphasiswill naturally fall on the smaller sites and those in England. Factors such as nearby housing, designated land(eg SSSIs, AoNBs, etc), proximity to grid, available wind resource, access to site and landowners’ willingnessto host wind projects, all act to restrict the size of potential wind sites. This is true universally but moreapparent in limiting site size in England.

The bulk of England’s potential sites are below 50 MW, and considerably so. It will not be utilised in a timelyfashion if it remains in the current planning process. It is imperative that the anomaly of wind energy beingthe only generation technology to be consented by District Councils is brought to a timely end.

3. Offshore Wind

Against the backdrop of onshore planning problems, oVshore wind has often been touted as the answer to theUK’s renewable energy issues. OVshore wind however costs around twice as much per installed MW asonshore wind. The principal additional cost is incurred installing the turbines and transporting the power backto shore.



A key claim for oVshore wind (other than easy planning) is the high potential load factor, often cited to be 30%higher than onshore projects (40% for oVshore v 30% for onshore). But oVshore projects have yet to deliver onthat promise.

Round One oVshore projects have been subject to annual reporting and a recent government report showsthat none of these projects delivered anything close to the 40% load factor promise and most performed nobetter than a good onshore project (at 30%)—in some cases a good deal worse than onshore.

There are a number of reasons for this, perhaps the greatest and most obvious is indicated by the availabilityfactors of these machines—which are very low by onshore standards (in the low 80 percents rather than thehigh 90s). Putting aside the question of whether oVshore machines are as reliable (in such a toughenvironment) as onshore ones, it is clear that what may be a simple maintenance task onshore can takedramatically diVerent proportions oVshore—with the need to operate within weather windows and withavailable barges and other equipment.

Ecotricity has no doubt that more productive winds exist oVshore but we believe that this possible upside hasbeen outweighed considerably by the realities of operating machinery in the oVshore environment—andperhaps this has been overlooked to date by oVshore’s various ardent proponents, not least of which is thegovernment.

4. The Potential of Micro Generation

What potential does micro generation have to contribute to our national energy needs? Ecotricity believes theanswer is in the question—it is Micro.

Whilst micro generation undoubtedly engages people to think about where their energy comes from, andmakes them use it more wisely, this is perhaps it’s only saving grace.

On purely economic analysis it has no rationale— it is the most expensive way to deliver renewable energytargets by a very long way and it is probably the most expensive way to deliver carbon reduction targets—possibly more so than new nuclear.

Micro Generation technologies available today fall into just two camps—Solar PV and micro Wind.

A typical PV installation will cost £5k for 1kW installed and that 1kW will produce about 1MWh per annum.These are broad but reasonable numbers.

A typical micro Wind turbine of 1kW will cost £2k to install and will produce virtually nothing. This is thesituation with the first generation of micro wind.

Ecotricity believes that second generation micro wind turbines will be available for around £3k per kWinstalled, and each kW installed will produce roughly 1 MWh per annum—on a par with 1kW of solar.

We oVer these two examples of micro generation to demonstrate our point regarding costs and costeVectiveness for any given budget. Existing PV and second generation micro wind—compared to onshoremacro wind;

A large wind turbine of 2 MW will cost around £1.8 Million to install today, and will produce roughly 5,000MWh each year.

To match this output with solar PV would require 5,000 kW of solar (on up to 5,000 roofs) at a cost of £25Million.

To match this output with micro wind (version 2.0)—will require 5,000 1kW machines at £3k each—£15Million total cost.

In both cases an order of magnitude greater cost to achieve the same result with micro as with macro. Do wereally have that much money to spare?

Germany is often held up as a great example of how micro generation can be (aided by FITs). It is often saidthat Germany has 13% of it’s electricity from wind and solar projects and the inference given is that microgeneration (which means solar in Germany) plays a significant role in that 12%. But it does not. Examinationof the figures from German Federal bodies shows that solar (for which read micro generation) contributes0.3% and large scale projects contribute 11.7%. That is the truth behind the statistics.

0.3% may be considered by some to be nonetheless an achievement—but consider that at 30p per unit, hadthe money instead been spent on large scale wind energy, rather than 0.3% resulting from that spend -Germany could have had six or more times the renewables contribution, more like 2% of nationalconsumption. The multiple would be far greater in the UK where we have a much better wind resource thanin Germany.



Ecotricity believes that micro generation is an emotional distraction from real energy policy, an easyconversation for politicians to engage in, it being hard to find someone who is against it (it’s like “motherhoodand apple pie”)—it appears an easy answer. Until you examine the numbers.

Our suggestion is that government policy at the household level should focus on energy saving, wheresignificant in roads to consumption could be made for economic sums—and energy policy should focus onmacro generation where significant scales of economy will pay real dividends.

5. Does the UK need Feed In Tariffs to Support Micro Generation?

It is not always appreciated by people when discussing FITs and micro generation that there is currently noeconomic way to meter the power from a micro generator and consequently the power is “spilled” into thelocal distribution network where it reduces losses on the system. No electricity supplier can have the exportfrom a micro generator “notified” to their “account” and therefore micro generation has no actual value toelectricity companies individually—they can’t get their hands on it, put simply.

The reason for this is that “settlement meters”—the only meters that the UK electricity settlement systemallows to be used to notify generator output—cost many times more per year to operate than the value of theexport from a typical micro station.

It’s a popular misconception that FITs would apply to electricity suppliers, and that this is how it workselsewhere.

An obligation to provide FITs in the UK would need to be on the Distributions Network Operators (DNOs)—not the electricity suppliers themselves.

DNOs charge all suppliers to use the local distribution system, and one of those charges is for losses—pro rataaccording to the volumes each supplier puts through the network.

Thus if a DNO paid for the micro export, the cost would fall evenly on all suppliers operating in that part ofthe network—pro rata to their volume. The costs of FITs would be shared equally between the beneficiaries—the suppliers whose losses are reduced by micro spill.

FITs would require an obligation on DNOs, and a new piece of legislation.

The job of FITs is to pay enough money for micro generation to stimulate more of it. This can be done throughthe RO, by giving more multiple ROCs to micro than the two currently proposed.

To emulate German levels of around 30p per unit we would need to give 6 ROCs per unit, maybe more.

If policy is to support (and pay for) micro generation, irrespective of its economic shortcomings, Ecotricitybelieves that FITs are not the best way to do this.

Ecotricity believes this because although FITs could be made to work in the UK, this would require newlegislation on DNOs—whereas existing RO legislation could do the same job, more quickly and more easily.

7 July 2008

Memorandum by EDF Energy

Summary of Evidence

The 15% renewable energy target for the UK is extremely challenging. It will:

— significantly increase the cost of delivering greenhouse gas emission reductions;

— create new security of supply challenges (by increasing the amount of plant that must be built toachieve a satisfactory capacity margin and increasing the volume of actions that the system operatormust take to ensure that supply and demand are matched in real-time) if a very high percentage ofintermittent renewable electricity generation is built;

— create the need for radical change in how the UK electricity and heat sectors are structured andoperate; and

— alter investment incentives for other types of new plant including nuclear and clean coal fitted withcarbon capture and storage equipment both of which are important elements of a low carbon,diverse, secure energy mix in the future.

Government’s primary environmental objective must be greenhouse gas emission reduction targets. Thedelivery of the 2020 renewables targets must be a “stepping-stone” that facilitates delivery of the UK’s 2050climate change target in the least-cost manner. When deciding on the apportionment of eVort between UK



sectors the cost-benefit of proposed measures must consider the whole lifetime energy system cost.3 A targetof 40% renewable electricity by 2020 will be extremely diYcult and very costly to deliver. All sectors shouldtake a fair share of the burden and the electricity sector should not be used as the sector of “last resort” fordelivering the UK renewable energy target.

Given the large cost increases that customers will face, delivering expensive renewables targets in the mosteYcient manner possible is essential. The ability to trade renewables certificates across national borders willhelp minimise costs. The current draft Directive text restricts trade and should be amended.

Renewable electricity delivery to-date has been slowed by transmission access and planning issues rather thanthe nature of the financial support mechanism. However, despite this, we consider that there is a majorquestion mark over whether the Renewables Obligation is fit for purpose for delivering a large, mandatoryrenewable energy target because:

— suppliers have the option to pay the buyout and do not have to contract with enough renewablegeneration to meet the target;

— if carbon price rises (and this was not foreseen when ROC bands were initially set) existing ROC-eligible projects will receive excessive support; and

— the size of the target will require simultaneous construction of both expensive and lower cost projectswithin each technology type4—RO banding may prove insuYciently flexible to deliversimultaneous construction in a cost-eVective manner.

We support a full review of the most appropriate financial support mechanism.

Whilst the existing transmission access arrangements can be reformed to improve the allocation of existingcapacity, for example by enabling the sharing and trading of TEC,5 the key to accommodating much largervolumes of renewable generation is the construction of new assets. Strategic investment ahead of need is likelyto be necessary to build these assets in time to meet the 2020 target. Proposals in the Renewables Directive forpriority access for renewables are of concern because the UK requires major investment in both new renewableand new thermal capacity. Investor confidence must be maintained for investment to occur in all technologies.

Introduction to EDF Energy

EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. Ourinterests include coal and gas-fired electricity generation, combined heat and power plants, electricitynetworks and energy supply to end users. We have over 5 million electricity and gas customer accounts in theUK, including both residential and business users. We are part of EDF Group, one of the largest energycompanies in the world. EDF Group maintains a large energy research and development capability in-house.

EDF Energy already contracts with a wide range of renewables generators, both bilaterally and via the Non-Fossil Purchasing Agency, and in response to the Renewables Obligation and consumer demand is aiming todevelop 1000 MW of renewable generation by 2012 as part of a wider package of environmental initiativescontained in Our Climate Commitments.

General questions


1. Both the EU and the UK targets are extremely stretching. Without the ability to import significant volumesof Guarantee of Origin certificates to meet the UK target we have only limited confidence that the UK targetwill be met by 2020. Trading would assist the UK in delivering its target in the most cost-eVective manner asdescribed in the recently published report for BERR by Poyry. The current draft Directive text will obstructtrading and force the UK to rely almost entirely on domestic measures to deliver its target, potentially resultingin higher costs.

2. Recent concerns surrounding the sustainability of biofuels make it questionable whether the transportsector will deliver its share of the target. Biomass resources are finite and, even allowing for successfulexploitation of indigenous resources and imports from inside and outside the EU, they are likely to make onlya very limited contribution to UK electricity and heat targets.3 This should include the additional costs of transmission, back-up capacity and reserves to cope with intermittency, and costs associated

with the displacing more cost-eVective methods of low carbon electricity generation for the lifetime of the renewable generation assets4 For example, the cost of the 1st GW of oVshore wind could be much lower than the 30th GW due to factors such as water depth,

distance from shore, etc.5 TEC % Transmission Entry Capacity, the product that defines volumetric, instantaneous access rights to the transmission system



3. The majority of the electricity target will be met by output from large scale on and oV-shore wind farms.Delivery of the electricity sector target is dependent on planning reforms (to facilitate both large and smallscale projects and for transmission and distribution infrastructure), turbine supply, adequate financialsupport, the right incentives for network operators to invest in a timely fashion and public acceptance of highpenetration of wind energy both on and oVshore. None of these elements is assured as yet.

4. Heat sector renewable deployment is dependent on adequate financial support, development of installercapacity and public acceptance of new technologies. None of these elements is assured as yet and will requiretime to take eVect.

5. Our current understanding is that BERR is considering a sectoral split of approximately 10% transport,10% heat and 40% electricity. How the burden is allocated between the sectors is within the control of the UKgovernment. Redistributing the burden such that a greater emphasis is placed onto heat would reduce thelogistical diYculties associated with major electricity transmission system reinforcement and installingc.30GW of oVshore wind capacity in little more than 10 years. This could make the UK target more easilyachievable. It may also be more cost-eVective when considering the necessary decarbonisation of the heat,transport and electricity sectors to deliver a CO2 emission reduction target for the UK of 60–80% by 2050 tohave a more balanced low carbon electricity generation portfolio with a lower penetration of intermittentrenewable generation.

6. We consider it is essential that heat pump (both air source and ground source) is an eligible renewabletechnology under the Directive. In the long term, heat pumps are likely to be the main low carbon technologyfor delivering low carbon heat as biomass supplies are limited and the transport of large volumes of biomassinto urban environments is problematic. The Directive provides an excellent opportunity to commence theroll-out of this technology in the UK and develop a large supply chain and installer base. The technology isdeveloping, eYciency is improving rapidly and units are now available that can be retrofitted to conventionalradiator-based heating systems found in most properties in the UK. In other European markets annualdeployment rates are as high as 120,000 units per annum.


7. There are a number of inconsistencies. The proposal for priority access for renewable generation isdiscriminatory and could threaten the investment in thermal generation which is needed to replace closingplant in the UK. It could also lead to higher costs for consumers if constraint costs are increased. The tradingproposals are so restrictive that they threaten the current trade in renewable certificates and will prevent thefree movement of goods and capital across the EU—this is counter to the move towards regional markets andthen a single market for power across the EU.

8. The renewables target will increase the cost of the primary environmental objective of deliveringgreenhouse gas emission reduction targets and will therefore exacerbate fuel poverty. Although it now appearsthat the renewables target is unlikely to crash EU ETS prices there remains a risk that EU ETS price will belowered significantly by the renewables target. This risk could aVect investor confidence in other unsupported,more economic low carbon technologies.

9. Looking at UK energy policy in particular there is a risk to carbon capture and storage (CCS) and nucleardeployment if too great a renewable target is placed on the UK electricity sector and delivered by intermittentrenewables supported by thermal peaking capacity. Given that the UK objective of a 60-80% reduction in CO2

emissions by 2050 will require significant decarbonisation of the transport and heat sectors as well as theelectricity sector, most likely by the use of low carbon electricity, it is essential that the UK embarks on a paththat provides the correct investment signals to meet this essential longer-term target. Forcing a very high levelof intermittent renewables into the UK electricity generation fleet by 2020 could delay investment in thetechnologies which will be required to deliver the 2050 target (nuclear, CCS, more predictable forms ofrenewable generation, heat pumps).


10. At a high level renewable energy targets will displace imported fossil fuels in the EU and improve securityof supply.6 However the targets will also create problems for the UK because the primary means of meetingthe proposed electricity sector target will be intermittent onshore and oVshore wind. Managing intermittencywill create additional costs for consumers (greater reserves held by the system operator to ensure systembalancing, backup plant to provide reliable capacity at times of low wind speed across the UK, lower load6 They may also displace indigenous fossil fuels such as UK coal and German lignite.



factors for conventional plant requiring higher prices when these plant do run to recover their fixed andfinancing costs over fewer running hours, etc). Lower load factors for the conventional plant that the systemwill require in addition to new renewable capacity is likely to lead to the construction of low capital cost,flexible plant which is likely to be gas-fired CCGT and OCGT. This in turn may prevent the construction ofnew nuclear and coal plant with CCS and contribute to an increased dependence on gas and reduction in fueldiversity in the UK than would otherwise have been the case. This plant will have higher CO2 emissions thancoal with CCS or nuclear.

Grid Access


11. In the UK new renewable energy generators are treated in the same manner as new thermal generationwhen applying for access to the transmission system. Over the next 10–15 years the UK is likely to require inexcess of 30GW of new thermal generation to replace closing coal, oil and nuclear stations in addition to40!GW of renewable generation to meet the UK share of the 2020 renewables target. Long lead times forconnections at present are a result of the time required to achieve planning consent and then construct thenecessary deep reinforcements to transmission infrastructure. The current UK planning regime means thatmajor transmission reinforcements typically take approximately 10 years from initiation to completion.Proposals to reform the planning regime and provide shorter and more certain timescales for consent willreduce this timescale. Similarly the TAR (Transmission Access Review) process could increase the eYciencyof utilisation of existing transmission assets (see below) but it is important that the process of improving short-term access allocation eYciency does not undermine long-term signals for investors.


12. In the short-term in the UK, grid access has delayed the construction of a number of renewables projectsthat have been by brought forwards by developers in response to the financial incentives oVered, primarily,by the Renewables Obligation. However this has led to relatively little “loss” of renewable electricity becauseof the relatively low level of the Renewable Obligation to-date. In the longer-term, National Grid has indicatedthat it believes that it could construct suYcient infrastructure to deliver the electricity sector share of the UKtarget by 2020, providing it can make strategic investments ahead of firm need being signalled by connectees(for example to increase the general capacity of the system to flow electricity from north to south or toaccommodate onshore flows of electricity from oVshore wind farms). For this to happen, it will be necessaryfor the currently proposed planning reforms to be implemented. This approach of strategic investment by Gridwill create a risk of stranded assets, the cost of which would need to be recovered from system users andultimately consumers; however it is a pragmatic and strongly desirable response to the challenge ofdramatically increased renewable electricity targets. Improvements should also be made in the eYciency ofallocating existing transmission capacity to generators which could increase the amount of renewableelectricity in the short-term (but at a cost). “Sharing” of the existing grid can be facilitated by a move to zonaltransmission access rights, rather than nodal (location-specific). A move to zonal transmission access rightswill facilitate trading to ensure more optimal use of existing transmission capacity. However, TEC sharing willhave a relatively small impact on the level of capacity that will be able to be connected and it will not resolvethe issue of the GB queue. What is also required is further major investment in infrastructure.

13. A “connect-and-socialise” type transmission model has been advocated by some renewable developers.This would give them the right to nominally “connect” even when the Grid could not take their power at alltimes, due to deep reinforcements not yet being complete. When these projects are constrained oV the systemthey would receive full financial compensation including lost renewable subsidy (RO) income. The developerwould thus be, financially, satisfied. Unrestricted nominal financial access to the Grid of this type forrenewable generators creates the risk of very high constraint costs for consumers and is unacceptable.



How does Use of System charging affect grid access for renewable energy generators? How far can the different levelsof renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules ?

14. Current TNUoS charging in the UK is based on long-run marginal costs of increasing transmissioncapacity. As a consequence generators located in the north of Great Britain, distant from demand, face highertransmission charges than those located in the south close to the major centres of demand. This is economicallyeYcient and reflects the cost of reinforcing the system to accommodate their electricity. The UK has goodonshore wind resource in the north and lower resource onshore in the south although high quality oVshoreresource exists both in the north and south. If TNUoS charging were altered to either provide a discount torenewables or to reduce the strength of the locational signal more generally this would create a hidden subsidyfor renewables and other generation in what are naturally high TNUoS areas. The latter would, perversely,penalise southern renewables developers.


15. The UK transmission system requires major reinforcement to accommodate new renewable generation.The construction of new major transmission lines takes circa 10 years, mainly due to the requirements of theexisting planning process. The Planning Bill should provide greater certainty on timescales for transmissiondevelopment and hopefully reduce the time to develop new lines.

16. Typically new transmission investment can only be made once an application for connection foradditional generation has been made. Given the existing transmission constraints, very large increase inrenewable generation capacity required by 2020 and the long lead times to construct transmission assets amore appropriate approach would be to allow strategic investment ahead of need by transmission companiesin areas identified as likely to need reinforcement to accommodate power flows from additional generation.Whilst placing some additional risks on system users and ultimately consumers (from costs associated withineYcient, underutilised investment) this sort of approach is needed if the UK is going to have any chance ofreaching its renewable energy target in 2020.

17. As explained above, proposals for “connect and socialise” type transmission access proposals in the UKwill cause very large constraint costs for consumers for little environmental benefit, without oVsetting benefits.They have no merit.

18. High levels of intermittent generation in the UK will create very volatile wholesale electricity prices andrequire large volumes of “backup” thermal generation because the capacity credit of wind (ie its probabilisticcontribution to meeting peak demand) is very limited. Increased interconnection between the UK and the restof the EU will reduce price volatility (subject to the correlation of wind output across interconnected markets)and could create further eYciencies if it is possible to share backup generation across a wider geographic area.


19. No comment.


20. The current access arrangements do not inhibit access to the grid for renewable generation relative toother forms of generation. We do however believe that a number of improvements could be made. Theseinclude:

— CAP 150 (Connection and Use of System Code Amendment Proposal number 150) will allowNational Grid to remove “phantom” projects from the grid connection queue (eg those for whichplanning consent has not been applied for), remove over-booked capacity (where planning consenthas been applied for a lower capacity than the connection requested from Grid) and put-backprojects to a more realistic connection date where it is the timing that looks to be an issue;

— CAP 131 which will introduce a requirement on generators, new and old, to enter into financialcommitments (“user commitments”) to partly cover the cost of their connection assets. This shouldcause the developers of generators that will never be built to formally cancel their connectionagreements to avoid paying this commitment fee;

— Better operational utilisation of the existing grid (eg using live line ratings rather than fixed powerline maximum transfer limits, particularly in Scotland);



— relaxation of grid security limits in fair weather to a greater extent than at present (almost all“customer lost minutes” at present are due to DNO issues, implying that the transmission systemmay be over-secured). The grid normally secures against the simultaneous loss of two Grid circuitsat once (“N-2”) and only in very fair weather does it secure against the loss of only one Grid circuitat once (“N-1”). In Scotland, N-1 is the standard that is worked to far more frequently;

— increase the tensioning of lines (“hot wiring”) to reduce sag and hence increase maximum powertransfer capabilities;

— increase the use of commercial intertrips whereby a generator can be disconnected from the systemin the event of a transmission system fault (a form of “voluntary TEC sharing”);

— TEC7 sharing whereby the Grid would be divided into TEC sharing “zones”, within which TEC isnot regarded as nodal but as a uniform commodity with a one-on-one transfer capability betweennodes within a given zone (hence, TEC would become zonal, not nodal). TEC sharing at an ex-ante,fixed exchange ratio of 1:1 would be possible between locations within the TEC-sharing zone. Withineach TEC sharing zone, existing and new/proposed power stations could voluntarily share TEC(perhaps via commercial agreements) and would only need to have suYcient TEC in aggregate tocover their total, collective generation at any point in time. This eYcient allocation would enablewind farms to group together and share TEC as their combined output would never equal theirmaximum installed capacity and also allow low load factor “back-up” generation to share TEC withwind farms because they will almost never run simultaneously. The concept of TEC sharing couldalso be expanded to a more dynamic form of TEC trading; and

— introducing the concept of overrun whereby generators would be able to purchase “non-firm TEC”which would not come with the right to receive transmission constraint compensation from Grid inthe way of “bid” acceptance monies when constrained oV. Instead, when generating against non-firmTEC, the generator would be billed the cost of any constraints that it caused elsewhere, ie costsassociated with constraining-oV other generators in order to make way for this output. Non-firmTEC would be charged at a lower rate than firm TEC.

Support Schemes:


21. The current proposals for trading in the draft Directive are so restrictive that only very limited tradingwill occur. Harmonisation of support schemes would help to facilitate trading by removing some of thegrounds for objecting to more widespread trading by certain Member States. However, national variation incharging for connections, access, etc and national/regional power markets (reinforced by limited transmissioninterconnectivity) make harmonisation problematic because the support level for a particular renewabletechnology required in one country may be very diVerent to that required in another. Looking to the longerterm, low carbon technologies should compete with each other based on the price at which they abate carbon.The EU should be looking now at how renewables technologies move from bespoke support mechanisms tosupport being provided by carbon pricing alone. Contracts for DiVerence (CfDs) on carbon price provide amethod for preventing excessive support to renewables if market-based carbon prices rise.


22. The Renewables Obligation in the UK has brought forward a large pipeline of projects. Delivery has beendelayed by transmission access and planning issues and not the strength of the financial support signalprovided by the RO. Simple comparisons of FiT (feed-in tariVs) in other European countries and the RO thatconclude that the RO is inferior on the basis that delivery has not been as high are much too simplistic andignore the wider issues associated with transmission access and planning that aVect projects in the UK.

23. Looking forwards though there is some doubt as to whether the RO will be the most eYcient supportmechanism for deploying large volumes of renewables in the UK. The table below provides a high-levelassessment of how the RO and alternative support mechanisms perform against relevant criteria.7 “TEC” stands for Transmission Entry Capacity—the right of generators to be able to inject power up to that specified level, in MW,

onto the Grid (or, where there is a transmission constraint, to be compensated financially by National Grid for not being able tooperate, so that they do not lose profits—although they should not exploit the constraint by asking for unduly lucrative compensation.The compensation price is set by the generator as his “bid” price to Grid). TEC at the moment is a static MW figure that relates to agiven generator at a given location, or “node”.



Criteria RO FiT CfD8

Build diVerent technologies simultaneously Yes Yes Yes

EYciently support construction of low and high cost projects of No Possibly Possiblysame technology simultaneously

Prevent windfall to generators if carbon price rises No Yes Yes

Guarantee delivery versus targets No Possibly Possibly

Integrate auction revenues into support mechanism No9 Yes Yes

Continuity for investors Yes No No

24. On several criteria the RO appears to perform poorly against the alternatives. For example, feed-in tariVsand CfDs could prevent windfalls to generators if CO2 prices rise, and feed-in tariVs and CfDs only triggerconsumer cost if capacity is delivered.10 Also the RO does not guarantee delivery of the target. We considerit is essential that a full review of the most appropriate support mechanism is undertaken and look forwardto the government’s consultation on the development of the UK’s Renewable Energy Strategy due in thesummer of 2008.

25. Demand for renewable electricity supply contracts (business customers) in the UK were driven initiallyby the Climate Change Levy Exemption Mechanism which oVered a small financial saving. This has beensuperseded more recently by corporate social responsibility as the primary purchasing driver. Renewableelectricity demand in the domestic sector remains low. Going forwards it is essential that Ofgem’s green supplyguidelines, the Carbon Reduction Commitment and Defra’s Corporate Greenhouse Gas Emission reportingguidelines and electricity suppliers Fuel Mix Disclosure requirements which use REGOs to demonstrate therenewable content on suppliers labels provide a consistent message to consumers regarding the environmentalbenefit of purchasing/supporting renewable electricity deployment. The current Ofgem proposals for greensupply guidelines are inconsistent with the CRC proposals (because they would attribute a CO2 benefit toLEC-backed electricity supply contracts) and could create customer confusion.


26. It is not yet clear how support will be provided for development of projects within Member States todeliver against the EU 2020 targets and then to allow the output to be traded. One possibility is that MemberState national support mechanisms will be able to cross national boundaries as currently exists for LECs andREGOs, ie UK consumers could directly fund a project in another Member State with the ROCs, REGOs(and LECs) being repatriated to the UK. If this model is followed then the presence of diVerent supportmechanisms would have only limited impact on cross-border trading although consideration of the impact onexisting investors within the RO would need to be carefully considered.

27. Investment will not necessarily be hampered by lack of market harmonisation, rather the overall eYciencyof investment likely to be lower across the EU if the lowest cost opportunities cannot be accessed by allcountries through restrictions on trading. However, looking forwards as the EU moves towards regional andthen a single market for power then the opportunities and incentives for harmonisation will become greateras diVerences in renewable economics within Member States become smaller.


28. See answer above. Harmonisation is not a pre-requisite to REGO trading if national support mechanismscan cross borders.

21 April 20088 Contract for DiVerence9 Support would have to provided separately, for example using capital grants10 Guaranteed headroom in the RO, once the target has reached a certain level, should reduce partially the risk of excessive consumer

costs if delivery is not occurring



Memorandum by Ms Kathryn Emmett

Subject

Review of the proposal for a directive on the promotion of the use of energy from renewable sources(COM(2008) 19 final) published by the European Commission on 23 January 2008 (the “Draft Directive”) andof the draft report of the Rapporteur of the Committee of the European Parliament on Industry, Researchand Energy, Claude Turmes MEP, in relation to the Draft Directive published on 13 May 2008 (the “TurmesReport”).

1. Introduction

The Draft Directive (defined above) published by the Commission is currently under scrutiny by the EuropeanParliament. As part of this process, the Committee on Industry, Research and Energy (ITRE) of the EuropeanParliament has appointed Claude Turmes MEP as its Rapporteur. The Turmes Report (defined above)proposes amendments to the Draft Directive. The Turmes Report is now itself the subject of debate andamendment in the ITRE Committee.

This briefing note considers the mechanisms for trading renewable energy between EU member states underthe Draft Directive and the Turmes Report. These are intended to provide flexibility to member states inmeeting their renewable energy targets. This note does not consider the provisions relating to renewable energyproduced in countries outside the European Union.

Considerable detail in relation to the flexibility mechanisms is provided in the sections below. However, theprinciple mechanisms proposed in the Draft Directive and in the Turmes Report are outlined in summary here.

1.1 Summary

The Draft Directive creates a new tradable good, the Guarantee of Origin (GO). This represents 1MWh ofrenewable energy. GOs perform three functions:

(i) disclosure,

(ii) target accounting, and

(iii) provision of a mechanism for installations in one member state to access to the national supportscheme of another member state.

GOs are issued to producers of renewable energy and may be traded by companies nationally orinternationally. However, a company must submit a GO for cancellation when the production of energyrepresented by the GO receives the benefit of a member state’s national support scheme. Following submissionfor cancellation, GOs may be traded between member states and may count towards the achievement of amember state’s renewable energy targets. Direct sales of GOs from companies in one member state to anothermember state itself may also be possible.

Key issues relating to the Draft Directive being discussed in at the European level are:

— the implications of trade for national support schemes;

— the degree of flexibility that member states and persons should have in trade; and

— the legality of trade restrictions.

The Turmes Report uses four flexibility mechanisms:

(a) Transfer Accounting Certificates (TACs) represent 1MWh of renewable energy. They aretransferred between persons and, when cancelled (usually when the production of energy representedby the GO receives the benefit of a member state’s national support scheme), TACs may counttowards a member state’s target. A key feature of TACs is that member states have discretion to opt-in and elect to permit TAC transfers by companies.

(b) Trades between member states to meet national targets are statistical transfers of renewable energyby volume calculated on the basis of EUROSTAT data.

(c) Member states or persons may invest in projects in another member state (the host country). In thiscase the host country will arrange for a statistical transfer to the investing member state or issueTACs to the private investor.



(d) Two or more member states may agree on joint target compliance for example by opening up theirnational support schemes to energy produced in other member states or by establishing a regional,harmonised support mechanism.

GOs, used today for disclosure purposes as evidence of the green origin of renewable energy, are maintainedfor this purpose alone. Instead, TACs fulfil the target counting function of GOs under the Draft Directive.Importantly however, TACs do not entitle an installation to benefit from another member state’s nationalsupport scheme, unlike GOs under the Draft Directive.

A more complete description and analysis of the provisions of the Draft Directive and the Turmes Report isfound below.

This note is structured as follows:

— Section 2 outlines of the proposals for trading in the Draft Directive and highlights perceiveduncertainties in their operation;

— Section 3 provides a summary of the main issues in relation to the flexible mechanisms beingdiscussed at European level; and

— Section 4 outlines of the proposals for trading in the Turmes Report and highlights perceiveduncertainties in their operation.

2. Review of the Draft Directive

The Draft Directive envisages the virtual, electronic trading by member states and persons of Guarantees ofOrigin (GOs). GOs may count towards a member state’s renewable energy targets. GOs are not intended toreplace national support schemes but instead provide a harmonised framework for the transfer of renewableenergy in the European Union.

2.1 The instrument, compliance and administration

— GOs perform three functions under the Draft Directive: i) disclosure; ii) target accounting and iii)access to national support schemes. With respect to this last function, GOs are understood to providea mechanism for an installation in one member state to access the national support scheme ofanother member state (see further below).

— GOs are issued by a member state following a request from a producer of renewable energy (article6(1) Draft Directive). Requests are assumed to be voluntary although, upon transposition, memberstates might require the issue of a GO where the benefit of a support scheme is sought.

— GOs are issued in respect of:

(a) electricity produced from renewable sources; and

(b) heating or cooling produced from renewable sources.

— GOs represent 1MWh of renewable energy (article 6(1) Draft Directive). There is no diVerentiationof GOs by technology type, although member states may provide for this when integrating GOs andtheir national support schemes.

— Progress towards the national 2020 renewable energy targets are continuously tested against anindicative trajectory calculated in accordance with Part B of Annex 1 of the Draft Directive. Failureof a member state to meet the indicative trajectory has implications for trading of GOs (seefurther below).

— In each member state a competent body is appointed responsible for the issue and cancellation ofGOs, recording of GO transfers and compiling of annual reports (article 7(1) Draft Directive).

— Although not express in the Draft Directive, it is assumed that GOs are issued by the competent bodyof the member state where the renewable energy was actually produced to allow verification itsrenewable origin.

— A register of GOs held by persons is required (article 7(3) Draft Directive). Although unclear, it ispresumed that a register is also required at member state level to administer GOs submitted forcancellation by persons and to facilitate trade between member states.

— GOs may only be presented for cancellation within one year of their date of issue (article 8(3) DraftDirective). Interpretation of articles 8 and 9(1) of the Draft Directive suggests that this time limitapplies to both transfers by persons and member states, although this should be confirmed.



— No mechanism for the banking of surplus GOs exists which may lead to limited liquidity and GOprice volatility. However, this also ensures that trading will take place on a continuous basis and willnot be back-ended to the compliance date.

2.2 Integration of GOs with national support schemes

GOs operate alongside national support schemes. Questions of their integration with national supportschemes arise upon their issue and cancellation. Article 8 provides for the mandatory submission of GOs forcancellation in three circumstances:

1. Where the renewable energy represented by a GO has received support from feed-in tariV payments,premium payment, tax reductions or payments resulting from calls for tenders, that GO is to be submitted tothe competent body of the member state which established the system of support (article 8(1)(a) DraftDirective);

2. Where the renewable energy represented by a GO is used to count towards a renewable energy obligation,that GO is to be submitted to the competent body of the member state which established the obligation (article8(1)(b) Draft Directive); or

3. Where a supplier or consumer uses the GO as evidence of the share of renewable energy in its energy mix,without claiming the benefit of a support scheme, that GO shall be submitted to the competent body of themember state in which the energy in question is consumed (article 8(1)(c) Draft Directive).

The Draft Directive does not prescribe that submission of a GO for cancellation must be to the competentbody of the member state where the renewable energy is produced. This oVers the possibility of a producer inone member state obtaining the benefit of the national support scheme of another member state. Followingsubmission for cancellation a GO becomes the property of the member state and may either be cancelled bythat member state and count towards its national renewable energy target or be traded with another memberstate (General Secretariat of the Council of the European Union, 2008).

The mechanics of integration of the GO regime with national support schemes will be determined by eachindividual member state, however some general observations are appropriate.

2.2.1 Integration with a feed-in tariff regime

— Upon receipt of a feed-in tariV payment, a producer must submit its GO for cancellation. This avoidsdouble payment for the same unit of energy. However, unless producers may opt-out of the nationalfeed-in tariV regime, producers will always be required to surrender their GOs and will notparticipate in GO trading.

— The mechanics of allowing a producer in another member state to benefit from a member state’s feed-in tariV require further examination with a focus on the legal and regulatory obstacles. Where aproducer seeks to obtain the benefit of a feed-in tariV in another member state without any physicalsale of energy, it is unclear how the producer may benefit from the feed-in tariV of another memberstate without the transaction being characterised as a trade of GOs.

2.2.2 Integration with a quota obligation

— Whilst integration will be determined by each individual member state, it is possible that some willallow GOs to be presented by a person as evidence of compliance with a renewable energy obligation.In this case GOs are submitted for cancellation to the competent body of the member state whichestablished the obligation.

— It is assumed that a GO will be issued to national producers to the exclusion of the national tradablegreen certificate (such as a ROC) to avoid double payment of support. Alternatively, other meansof avoiding a double payment may be implemented (for example mutually exclusive coupons to beredeemed nationally or internationally).

— Where the national tradable green certificate is banded (as is the case with ROCs), member states willhave to devise a mechanism to integrate GOs with their banded national instrument. For example, atechnology specific exchange rate may be necessary to convert GOs to ROCs for calculatingcompliance with the RO. Where a technology is entitled to a fractional national tradable greencertificate, a producer may prefer to trade GOs internationally and receive support from a morefavourable scheme, rather than participate in the national market depending on the diVerencebetween the level of support available nationally and internationally.



— In order to benefit from the quota obligation support scheme of another member state, a producermay sell its GO to the obliged actor in the other member state or may enter into an agreement forsale with the member state itself. Again, this transaction has the appearance of a trade in GOs.

2.2.3 Lock-in

— Where an operator has submitted GOs from a particular installation for cancellation to a competentbody following participation in a support scheme, GOs must be requested for all future productionfrom that installation and all future GOs issued must be submitted for cancellation to the samecompetent body (article 8(2) Draft Directive).

— The operation of the lock-in provisions and their application to diVerent market actors requiresfurther analysis. The eVect on the economic eYciency objectives of the GO regime of requiring GOsfrom one installation to be cancelled by the same competent body also requires furtherconsideration. These provisions would appear to create national GO markets, rather than a singleEU-wide market.

2.3 Trading

Trades of GOs are permitted:

(a) by a member state to a member state (article 9(1) Draft Directive);

(b) by a private person to a private person (article 9(3) Draft Directive); and

(c) by a private person to a member state (inferred from discussions with stakeholders).

2.3.1 Trading between member states

— A member state may transfer GOs submitted to its competent body for cancellation to other memberstates. The competent body of the receiving member state will immediately cancel the GO. Uponcancellation, the quantity of renewable energy represented by the GO shall count towards thereceiving member state’s national target. This same quantity is deducted from the transferringmember state’s renewable energy balance. (Article 10 Draft Directive).

— This trade is subject to restrictions. In order to sell GOs, a member state must equal or exceed itsindicative trajectory in the immediately preceding two-year period (article 9(1) Draft Directive). Asa result, trades of GOs by member states are not expected until 2013 when progress towards nationaltargets can be assessed.

2.3.2 Trading between persons

— Trades may take place between persons within the same member state or between persons in diVerentmember states.

— International trades between persons are permitted provided the GOs traded are issued in relationto energy produced by installations which became operational after the date of entry into force ofthe directive (article 9(3) Draft Directive), although capacity increases after this date are treated asnew installations (article 11 Draft Directive). It should be clarified whether GOs are issued to old andnew installations but trades only permitted in respect of new installations. It should also be clarifiedwhether this restriction also applies to national trades.

— Further restrictions on international trade may be imposed at the discretion of member states (article9(2) Draft Directive). Imports may require a system of prior authorisation if, in the absence of thissystem, the transfer of GOs is likely to:

(a) impair the member state’s ability to ensure a secure and balanced energy supply; or

(b) undermine the achievement of the environmental objectives underlying the member state’ssupport scheme.

With respect to exports, prior authorisation may be required for the grounds at (a) and (b) above. In addition,member states may require a system of prior authorisation if, in the absence of it, the transfer of GOs islikely to:

(c) impair a member state’s ability to comply with its renewable energy target set out in article 3(1) ofthe Draft Directive or so as to ensure that the member state equals or exceeds its indicative trajectory.



It should be clarified whether existing GO trades will be grandfathered and that these restrictions may not beapplied to installations which have already engaged in GO trades before their introduction.

— In all cases, member states will have to justify the imposition of these restrictions in accordance withthe single market provisions of the EC Treaty.

2.3.3 Trading by a person to a member state

— Direct international sales from operators in one member state directly to another member state maybe permitted. The General Secretariat of the Council of the European Union (2008) envisage thatthe financial support resulting from this trade may be diVerent from that given to national renewableenergy production if this can be objectively justified. Clarification should be sought.

3. Key Debates in Relation to Trading under the Draft Directive

— The implications of trade for national support schemes. Many member states and trade associationsare concerned that GOs will be traded by companies so as to take advantage of the most generousnational support scheme. The result envisaged is that some operators would receive wind-fall profitsby choosing to locate generation in countries where it is cheapest to do so and by selling GOs intomember states with the most favourable support scheme. This would increase the cost of renewableenergy to consumers and eventually result in a lowering of the support available in that member state(either by market operation or legislative action). It is feared that this would undermine currentlysuccessful national support schemes.

— Flexibility. Other member states are concerned that the market for GOs will be limited and want therestrictions on trade at member state level, including the requirement that member states haveexceeded their indicative trajectory and the one year validity of GOs, to be relaxed. At a companylevel, the restrictions on international trade, the lock-in provisions relating to trade by persons andthe absence of demand for GOs at a company level in member states operating feed-in tariV regimes(due to the design of the support scheme) mean that the size and liquidity of any GO markets maybe restricted.

— The legality of trade restrictions. The analysis of the Rapporteur, Claude Turmes MEP, and manytrade associations is that the imposition by member states of a system of prior authorisation to tradesby private persons may breach the free trade provisions of article 28 of the EC Treaty and be liableto challenge by individuals in their national courts (EWEA, 2008). The Turmes Report hasattempted to address this by changing the trading mechanism from an opt-out to an opt-in regime.The Commission considers that its proposals are legally sound and that an opt-in mechanism is evenmore restrictive of trade (Commission, 2008).

4. Review of the Turmes Report

The primary objective of the changes introduced by the Turmes Report is to maintain flexibility in meeting the2020 targets whilst ensuring member states retain control over progress towards their targets. A key concern isto protect consumer interests by restricting wind-fall profits and to maintain the integrity of national supportschemes (Turmes, 2008). Given the recent publication of the Turmes Report, little supporting material isavailable to assist interpretation of its provisions.

4.1 Overview of the flexible mechanisms

The Turmes Report envisages the following “flexible mechanisms” for achieving the 2020 targets:

(a) Transfer Accounting Certificates (TACs) are transferred between persons and, when cancelled, maycount towards a member state’s target (article 6a(1) and article 9(1b)(a) Turmes Report). Although itis not explicit in the Turmes Report, it is understood that TACs are used merely for target accountingpurposes. Therefore, unless TACs are adopted by a group of member states and integrated into aregional support scheme, TACs will not by themselves entitle an installation to benefit from thenational support scheme of another member state. Domestic support may however be available.

(b) Trades between member states to meet national targets are characterised as statistical transfers ofrenewable energy by volume calculated on the basis of EUROSTAT data (article 9(1b)(b) TurmesReport).



(c) Member states or persons may invest in projects in another member state (the host country). In thiscase the host country will arrange for a statistical transfer to the investing member state or issueTACs to the private investor (article 9(1b)(c) Turmes Report).

(d) Two or more states may agree on joint compliance for example by opening up their national supportschemes to energy produced in other member states or by establishing a regional, harmonisedsupport mechanism (article 9(1b)(d) Turmes Report).

GOs are used for disclosure purposes only and their use in trade on voluntary markets is therefore preserved(article 6(1) Turmes Report). GOs and TACs are administered by the same competent body in each memberstate and in a similar fashion to the mechanisms envisaged under the Draft Directive (article 7 Turmes Report).The Turmes Report expressly prohibits the issue of TACs and GOs by a competent body in respect ofrenewable energy generated in another member state (article 7(3a) Turmes Report).

A significant change introduced by the Turmes Report is that the indicative trajectories contained in the DraftDirective have been restated as mandatory minimum interim targets (article 3(2) Turmes Report). Article 10aintroduces penalties for non-compliance.

4.2 Guarantees of Origin

— GOs are electronic, tradable certificates representing 1MWh of renewable energy (Article 6(1)Turmes Report). Their sole function is for disclosure of the origin of renewable energy and they donot count towards the renewable energy targets. Any trade envisaged appears to be between personson the voluntary markets including labelled green products such as green energy tariVs (RECsInternational, 2005). It is unclear whether a trade in GOs must accompany the physical sale ofenergy. GOs are issued at the request of a producer of renewable energy (article 6(1) Turmes Report)although member states must make their issue mandatory if the energy has received the benefit of asupport scheme (article 11a(1) Turmes Report).

— The export of GOs may be restricted by member states if a GO has received support from a nationalsupport scheme (articles 6(4b) Turmes Report).

— GOs must be submitted for cancellation when a supplier or consumer uses them to prove therenewable origin of their energy mix (article 8(1)(c) Turmes Report). In this case the GOs aresubmitted to the competent body of the member state in which the energy in question is consumedand immediately cancelled (articles 8(1)(c) and 8(2) Turmes Report). GOs may only be submittedfor cancellation one year after their date of issue (article 8(3) Turmes Report).

— Article 8(2a) of the Turmes Report provides for the removal of an equivalent amount of renewableenergy, for the purposes of disclosure only, from the register upon the cancellation of the GO. Therationale for this provision is unclear.

— Member states may require the relevant supplier or consumer to surrender any TAC issued in respectof the renewable energy represented by the GO when the GO is surrendered (article 8(1a) TurmesReport). Although unclear from the Turmes Report itself, it is understood that this is to ensure theadditionality of renewable energy used for green energy products. How this provision will beenforced where GOs and TACs are issued to producers and may be transferred separately tosuppliers and consumers is unclear.

4.3 Transfer Accounting Certificates

— TACs are electronic instruments representing 1MWh of renewable energy which may be transferredby persons (article 9(1b)(a) and (c) Turmes Report), either in association with or separately from theunderlying physical energy they represent. Transfer is presumed to be permitted both betweenpersons in the same member state or between persons in diVerent member states. Upon cancellation,TACs may be used by member states to count towards national renewable energy targets (article2(ag) and article 10 Turmes Report).

— TACs, like GOs under the Draft Directive, are issued upon request from a producer of renewableenergy (article 6a(1) Turmes Report). Requests are assumed to be voluntary although, upontransposition, member states might require the issue of a GO where the benefit of a support schemeis sought.

— In contrast to the GO regime under the Draft Directive, the TAC regime is also voluntary at themember state level (article 9(1b)(a) Turmes Report) and so the market is described as an “opt-in”scheme. It is assumed that a member state may also opt-out again (suggested by the language of



article 8a(1)) and that existing transfer arrangements will be grandfathered, however, this is not clearfrom the language of the Turmes Report.

— Transfer of TACs is only permitted by installations which became operational after the entry intoforce of the directive (although it is assumed that extensions in capacity are treated as ““new”installations and that the amendment of the cross-references in article 11 Turmes Report wasintended). Transfer by persons is prohibited where member states have not exceeded theirmandatory interim minimum targets for the two-year period immediately preceding the period forwhich the transfer is valid. This latter restriction did not apply to persons under the Draft Directive,applying only to trades of GOs by member states. This arguably introduces considerable uncertaintyas to whether TAC transfers will be possible and will require constant monitoring by companies ofa member state’s progress towards its targets. (article 9(1b)(a) Turmes Report)

— In addition, member states may require prior authorisation of international trades (imports andexports) of TACs on similar (although not identical) grounds to those applicable to GOs under theDraft Directive; namely security of supply, environmental objectives and achievement of targets(article 9(2) Turmes Report).

— TACs are cancelled if the production of the energy they represent received the benefit of a nationalsupport scheme (article 8a(1) Turmes Report). Although this provision is similar to the requirementsunder articles 8(1)(a) and (b) of the Draft Directive, it has been indicated that TACs will not enableinstallations in one member state to benefit from the support scheme of another member state. It isunclear whether the transfer of TACs would be attractive to investors if this is the case and whatvalue (if any) a TAC would command in these circumstances.

— TACs may also be cancelled voluntarily for example to ensure the additionality of a green powerproduct (article 8a(4) Turmes Report) but, where this is the case, may not count towards nationaltargets (article 10(2) Turmes Report). Article 11a(2) of the Turmes Report suggests that there arecircumstances when cancellation under article 8a(4) is mandatory. Clarification of this provision isneeded.

— Member states may also require the equivalent GO relating to the energy represented by the TACto be submitted for cancellation (article 8a(2) Turmes Report). This may be to ensure that therenewable energy does not benefit from both national support and payment from the voluntarymarkets.

— The lock-in provisions applicable to GOs under the Draft Directive apply equally to TACs (article8a(3) Turmes Report). A derogation permitting TACs to be submitted for cancellation to competentbodies in other member states is allowed however to allow regional markets to develop or whereconsolidation of targets has been chosen (Article 9(1c) Turmes Report).

4.4 Other flexible mechanisms

— Trading between member states takes place by statistical transfer (article 9(1b)(b) Turmes Report).These transfers shall be taken into account in the calculation of a member state’s compliance withits renewable energy targets (article 10(1b) Turmes Report).

— Transfers are limited to the total volume of energy from renewable sources which has benefited froma support scheme operated by the transferring member state and are only permitted if the memberstate has exceeded its mandatory interim minimum target in the two-year period immediatelypreceding the period for which the transfer is valid (article 9(1b)(b) Turmes Report).

— Member states may invest in joint projects in another host member state and may count an agreedproportion of the renewable energy produced towards their targets. Member states may only act ashost for a joint project if they have exceeded their interim targets in the two year period immediatelypreceding the agreement for a joint project in an amount equivalent to the volume of energy to beproduced by the joint project. The rationale for and operation of this restriction are unclear. (Article9(1b)(c) Turmes Report)

— Investment by persons in joint projects may also be permitted with TACs awarded to investors(Turmes, 2008). However, because TACs are not intended to allow installations access to the supportschemes of other member states, it is presumed that private investors will seek the benefit of the localsupport scheme and will then surrender their TACs to the host member state’s competent body inaccordance with article 8a(1) Turmes Report. It should be clarified whether in this case the TACsmay carry an entitlement to support in another member state perhaps under a special agreementbetween the investing and host member states.



— Member states may also agree to consolidate their targets, allowing for regional renewable energymarkets to emerge (Article 9(1b)(d) Turmes Report).

References

Commission (2008) Address of Mr Hans Van Steen to the European Parliament ITRE Committee meeting of28 May 2008, Brussels, Belgium.

EWEA (2008) EWEA briefing for MEPs on Flexibility and Guarantees of Origin in the Directive on thepromotion of the use of renewable energy sources. EWEA [Online]. Available from: www.ewea.org

General Secretariat of the Council of the European Union (2008) Memorandum regarding the Proposal for adirective of the European Parliament and of the Council on the promotion of the use of energy from renewablesources—Technical clarifications on Guarantees of Origin and transfer schemes. 7263/08. 11 March, Brussels,Belgium.

RECs International (2005) The use of the Guarantee of Origin. RECs International [Online]. Available from:www.recs.org

Turmes, C (2008) Address of Mr Claude Turmes, Rapporteur, to the European Parliament ITRE Committeemeeting of 28 May 2008, Brussels, Belgium

24 June 2008

Memorandum by the Energy Networks Association

Introduction

1. The Energy Networks Association is the energy industry body funded by UK gas and electricitytransmission and distribution licence holders and operators.

2. ENA supports the promotion of renewable power, in order to tackle climate change and enhance securityof energy supply, and we welcome this opportunity to provide some context and background on the EU andUK renewable energy targets, as seen from the networks’ viewpoint.

3. Networks companies, both transmission and distribution, have been very active in facilitating theconnection of renewables to the electricity grid. Nevertheless, the EU has set an ambitious target of 20% ofenergy from renewable sources by 2020. Meeting the UK’s own share of this target, 15% of our final energydemand to be met by renewable energy, could mean that up to 40% of electricity consumed would need to begenerated from wind power and other renewable energies by 2020. This huge increase in renewable generationrepresents a significant planning and techno-economic challenge for the networks.

Role of Electricity Networks

4. Transmission networks play a fundamental role in meeting the UK’s energy policy goals, especially in termsof accommodating renewables and potential new nuclear build. All UK Transmission Owners and the GBSystem Operator have been actively and directly engaged in assessing the capacity and utilisation of existingtransmission system infrastructure, considering innovative approaches to network management andoperation, and upgrading the existing electricity transmission system in order to connect additionalgeneration.

5. Distribution Network Operators (DNOs) have similarly been very active in accommodating renewabledistributed generation, (DG), connected directly to the distribution network.

6. In doing so, all the network owners and operators have reviewed the technical rules and standards andcommercial arrangements for access and connection, whilst continuing to ensure the eYcient and economicdesign and operation of the networks.

Planning Issues

7. Lengthy planning procedures for renewable generation projects, transmission lines and distributionnetworks present a major obstacle to the development of renewable sources of energy. Reform of the planningsystem is needed if we are to connect up new, remote renewables generation in time to meet the 2020 targets.The requirement to transport new and diverse energy from remote areas and between communities calls fora new approach to planning. The sources of much of the renewable energy needed to meet the EU targets are



remote and currently unconnected to the electricity network. The Yorkshire transmission line took over 10years to complete thanks to the planning process and the Beauly to Denny transmission line, essential totransporting new wind energy generation, has already been delayed by a number of years.

8. We believe the Infrastructure Planning Commission proposed by the Government’s Planning Bill will havea vital role to play in delivering these objectives, provided it is suYciently and expertly resourced. We welcomethe proposal for pre-agreed timescales, and are urging the Government to set time-limits for each stage of theplanning process in order to provide maximum certainty for developers and aVected communities.

9. We also believe that the legitimate needs and concerns of local communities must be a centralconsideration. The eVectiveness and transparency of decision making are fundamental to underpinningcommunity engagement and ensuring that developments move forward eVectively and in a responsive way.As a result, local communities must have a full opportunity to express their views and be heard. Central tothis will be enhanced duties placed on developers to ensure that local communities are eVectively consultedbefore an application is made. The energy sector continues to strive for the very best practice in this area andhas already had discussions with groups such as the Campaign to Protect Rural England to ensure standardsare continually improving.

Short Term Technical Challenges for the Networks

10. In operating transmission and distribution networks most emphasis to date has been placed on increasingthe use of the existing electricity networks, and identifying opportunities to connect additional generationcapacity within the existing regulatory and commercial frameworks.

11. Network owners and operators have actively been seeking more innovative engineering approaches tonetwork management and operation, including the deployment of new network technologies to manage thevolume of network constraints and allow network access. However, the scope for further improvements isrelatively limited and often site specific. Consequently increasing attention is being given to the developmentof new analytical and operational methods to deal with the present and future technical challenges presentedby renewable generation, including oVshore transmission infrastructure.

12. A further important consideration when connecting renewable generation is the level of security required,and the appropriate level of investment to maintain such system security, whilst continuing to ensure theeconomic and eYcient operation of the system. In the case of oVshore electricity transmission in particular,this has meant an assessment of the relevance of the existing technical rules governing onshore networks foroVshore networks, and the development of a range of feasible alternative options for oVshore securitystandards. Similarly, network operators have been oVering terms for a less firm connection than that normallyrequired. Even when these connections are attractive to generators, the lowering of technical and securitystandards should only be done following careful consideration of the likely implications for overall systemreliability and security.

Longer Term Considerations

13. The EU’s general 20% and the UK’s national 15% renewable energy targets will have a profound impacton the need for new network capacity and the associated network investment needs. The consequences whichincreasing levels of renewable energy with intermittent or variable output could have on the overall stabilityand security of supply and system back-up and balancing will also present technical challenges.

A. Capacity needs

14. Technical evaluations of the networks adequacy against likely generation patterns in Scotland and Waleshave already been conducted and various development options investigated eg the Transmission Investmentfor Renewable Generation (TIRG) projects, the Renewable Energy Transmission Studies (RETS 2003 andRETS Revisited 2005), and Technical Advice Notes (TAN).

15. Ofgem is undertaking a review of credible generation scenarios to meet the 2020 targets eg the Long TermElectricity Network Scenarios (LENS) project, which could be used to identify not only the expectedgeneration patterns, but also future infrastructure and technological needs.



B. System Balancing

16. Wind power, both on-shore and oVshore, is presently the principal commercially available and scaleablerenewable energy technology in the UK. Wave and tidal generation technologies are at an earlier stage ofdevelopment but are expected to be developed for commercial use within the next decade, and will also needto be accommodated into the networks.

17. When considering wind power, there is a need to identify the nature of wind variations in national andregional generation and demand groups, and then assess the implications of such variations given theflexibility available from responsive generation and load locally and, via interconnections, more remotely.

18. Increased levels of intermittent generation, such as wind, will significantly increase the need for capacityof other generation that would need to be kept in service to operate on low wind days. A close monitoring ofthe margins is needed to ensure that there is always suYcient flexible generation or demand side response tomeet demand cycles, plant breakdowns and frequency control requirements.

C. Network Investment Costs

19. It is clear that substantial investment in the networks will be essential, to pay for the renewal ofinfrastructure, the connection of greater levels of renewable generation, and to allow the networks theflexibility to respond to the needs of network users and consumers.

20. ENA Member Companies are now beginning a programme to replace more than two thirds of the existingnetwork as it nears the end of its design life, and to shape it for these new and increasingly complex and diversepatterns of generation. In building new infrastructure, the aim will be to maximise the opportunities forintegrating green energy/low carbon designs.

21. The Regulator also has a fundamental role to play in setting the market and regulatory frameworks basedon a full and detailed analysis of the options to facilitate eYcient and timely investments in infrastructure. Aforward looking and supportive regulatory regime is required. A stable investment target is needed to ensurethat the required future investment is put in place, and policymakers must then retain a strong commitmentto meeting these targets.

D. Pan European Research

22. In 2005 the SmartGrids European Technology Platform for Electricity Networks of the Future wasestablished. Its aim is to formulate and promote a vision for the development of European electricity networkslooking towards 2020 and beyond.

23. The Platform includes representatives from industry, transmission and distribution system operators,research bodies and regulators. It has identified clear objectives in the context of the drive for lower carbongeneration technologies and greatly improved eYciency on the demand side that will enable customers tobecome much more interactive with the networks.

24. Network technologies are able to contribute to the further improvement of network eYciencies inoperation and investment, but they can also facilitate the implementation of a range of alternative futureelectricity developments, from centralised to distributed generation.

E. Skills

25. The large scale network development to accommodate renewable energy will require a substantial increasein qualified and skilled workers to build and operate the new infrastructure. There is a need for innovative andhighly qualified engineers to design new systems that push at the boundaries of network technology.

26. As a responsible industry, our members are actively involved through the Sector Skills Council (EU Skills)in collectively looking at the skilled resource challenges for the sector. We need to make the networks sectormore “career attractive” to young people and ensure that we have good, and experienced, academic and sectorspecific trainers.

23 April 2008



Memorandum by Professor Dieter Helm

1. The EU climate change package, published in January 2008, proposes a set of overlapping targets—foroverall carbon emissions, for energy eYciency and for renewables. This memorandum focuses on the 20%target for renewables—its rationale, costs and benefits, and the practical implications of achieving it—andprovides a series of recommendations for the radical overhaul of renewables policy that would be necessaryto achieve the new targets. It comments, too, on the various suggested strategies for “watering down” thenational targets.

The Rationale

2. Surprising though it may seem, there is no clarity as to what the objective is that the renewables target issupposed to achieve⁄what the question is that it is supposed to answer. This target is independent of the overall20% carbon target, independent of the EU ETS, and has no clear relationship with global warming. It isvariously claimed that: it will provide a basis for creating a new industry (the infant industry argument); it willshow world leadership (ahead of Copenhagen and post-Kyoto negotiations); it will increase security of supply;it is an eYcient way of reducing emissions; and it will help solve climate change.

3. All of these rationales are open to challenge. First, since much of the target will be met through wind power,which is a mature and well-understood international technology, it is hard to see why it needs infant industrysupport. Second, leadership has two characteristics: demonstrating that the target can indeed be met; andpersuading others to change their policies in response. On the former, targets have widely to date been missedin the EU (especially in Britain) and there is little evidence that the roll-out of wind has had a marked eVectat the Bali Conference or in the subsequent build-up to Copenhagen.

4. Third, the relationship between renewables and security of supply is complex: externally it depends on whatthe back-up technology comprises (typically gas in the EU, and increasingly so going forward); internally itdepends upon grid design, and stability. There are concerns in Germany that as wind generation movestowards 20%, grid stability may be endangered.

5. Fourth, there is no evidence to suggest, except at the periphery of electricity networks (small islands,remoter locations) that renewables are the cheapest way of reducing emissions. Indeed, evidence suggests theyare expensive relative to a range of other options, from improving thermal eYciencies in existing coal plants,switching from coal to gas, and even nuclear power. Finally, the impact of even 20% renewables (plus thethermal plant back-up) will in itself make virtually no diVerence to climate change. By way of illustration, windfarms in the Outer Hebrides are comparatively trivial when compared with the 1,000GW of new coal plant tobe built in China by 2030, contributing to the 50% projected increase in global CO2 over the same period.

6. There are many reasons why renewables should be supported as part of an energy policy, but the mostplausible explanation of the 20% target is that it is the same number as targeted for aggregate CO2 and energyeYciency—in other words, that it makes a good political slogan: 20-20-20. If, however, the aim is good policy,then it is recommended that the EU (and the British Government) spell out precisely what the rationale of therenewables programme is, and to which objectives it is expected to contribute, and precisely how these are tobe achieved. This would greatly enhance the credibility of the target and associated policy instruments.

The Scale of the Challenge

The costs and failures of current British renewables policy

7. If, notwithstanding the above criticisms of the rationale, the programme goes ahead, then there will needto be radical changes in renewables policy in the UK.

8. The current renewables programme in the UK is among the most expensive in the developed world. (Someargue that Italy is worse). The domestic renewables policy is built around a target of 10% renewables by 2010,to be delivered through a combination of the Renewables Obligation (RO), Renewables ObligationCertificates (ROCs), the contribution of grid and distribution network investment, and a host of ancillarysubsidies, exemptions and indirect support.

9. The reasons why the renewables policy in the UK has both failed to deliver the investment to meet thedomestic 2010 target, and been so expensive are multiple. They include: the basic design of the RO and theROCs; the (lack of) coordination with network regulation; planning; and the political lobbying by the windand other specific technology-vested interests. There is nothing “joined up” about the British renewablespolicy.



10. The RO rewards investors twice: once from the wholesale electricity price, and once for the extent to whichthe market fails to meet the target. In other words, investors get the benefit of the way the NETA wholesalemarket works, and on the basis not of their own costs, but how diYcult it is for others to invest. The resulthas been high returns typically well in excess of the cost of capital. (NETA itself is poorly designed to meetthe objectives of energy supply and in particular in respect of investment and security of supply.)

11. The regulation of networks is the job of Ofgem, which has primary duties to customers, not to theoverarching energy and climate change policies. Not surprisingly, Ofgem has been vigilant in pointing out thecosts of the renewables programme, and has not been noticeably encouraging in pushing renewables-relatednetwork investment. Ofgem’s secondary duties and guidance are just that—secondary. Regulation is, as aresult, poorly joined up with renewables policy.

12. Planning is the bete noire of many energy projects, and there have been many planning problems for therenewables programme. However, the simplistic argument that this is the fault of the planning regime is notwell founded: the main diYculties lie in the lack of clear government policies for the oVshore and onshoredevelopments.

13. Political lobbying has been a notable feature of British renewables policy. There are very powerful lobbygroups who have, not surprisingly, presented wind and other technologies in the best light. Cost estimates haveencouraged a false sense of economic rationale—typically the full cost of renewables, including networks andback-up generation is excluded, and network pricing does not fully confront remoter generation sites with thefull cost of extended power lines. The result is that many widely quoted estimates of the costs of renewablesare misleading. These lobbies have been remarkably successful, making renewables the political conventionalwisdom, and not surprisingly the lobbies have not pushed for other low-carbon technologies (like nuclear andcarbon capture and storage, CCS) to be put on a similar playing field.

Meeting the new targets

14. The national targets emerging from the EU-wide 20% target are of an order of magnitude moredemanding than experienced in Britain to date. The costs are likely to be correspondingly higher, exacerbatedby the demand for wind turbines across Europe as all Member States increase their orders.

15. If Britain undertakes to meet the targets from domestic sources, and on a narrow basis for the definitionof renewables (see below for alternative approaches), then there will need to be a large-scale coordinated plan,which will need to be implemented by an appropriate delivery and regulatory agency. With only 12 years inwhich to deliver the 2020 target, and given the timescale for network investment, the current process of five-year periodic reviews for transmission and distribution, and the excess costs of the RO, there will need to berapid reforms of the policy instruments and institutions.

16. The RO will need to be replaced by a mechanism which provides a reasonable rate of return. The RO wassupposed to provide eYciency incentives (and hence uncapped returns). However, in the balance between, onthe one hand, the overriding importance of the cost of capital, and, on the other, the eYciency in capital andoperating expenditures, the sheer simplicity of wind, combined with the tight market for the turbines, theseincentives issues, though important, become strictly second-order. A competitive tendering requirementwould take care of much of the eYciency concerns. The widely advocated feed-in tariV approach could besuitably adapted, but the details of the mechanism design matter greatly.

17. In terms of the institutional coordination of the network investment, Ofgem’s design in the 1990s is bestsuited for the asset-sweating priorities of that period, rather than the present. There are many arguments forsubsuming it—and the Carbon Trust and the Energy Saving Trust, and some of the functions in Defra andBERR concerned with delivery (rather than policy formation)—into a single Energy Agency. These have beenset out in Helm (2004 and 2006).11 If the government really wants to achieve the renewables target, then suchan agency will be required to coordinate and deliver the investment programme. The existing institutionalstructure is not suYcient to the task and may in practice form an obstacle.

Getting round the new targets

18. The scale of the task, the lack of a willingness to grasp the problems with the RO and the institutionalreform issues, and concerns about the costs have led some in the government to seek ways of diluting therenewables commitment. Such approaches may break with the spirit of the EU climate change package, andthe government should be open and transparent about its negotiating tactics. These dilution strategies arebasically threefold: to broaden the domain; to lengthen the time; and to enlarge the technologies included.11 Helm, D (2004), Energy, the State and the Market: British Energy Policy since 1979, Revised Edition, Oxford University Press.

Helm, D (2006), “From Review to Reality: The search for a credible energy policy”, Social Market Foundation, October.



19. Broadening the domain means in practice buying in renewables projects from outside the EU. This hasadvantages: they may be cheaper; and they may show a willingness to help developing countries make theirown contribution to mitigating climate change. But they have drawbacks too: it shows less leadership if theEU oV-shores its carbon-reduction eVorts; and the projects may not be credibly monitored and regulated.

20. Lengthening the time period is already envisaged in the draft EU Renewables Directive. Large-scale hydroprojects (implicitly the Severn Barrage and a major Portuguese dam) may be allowed back into the pre-2020targets if they are completed soon after 2020. But there could be other “delays” incorporated in the targets,and it is hard to see the EU taking enforcement action in 2020 if member countries are behind the targets butpromising to deliver soon afterwards. The Renewables Directive lacks credible sanction for non-compliance.

21. Enlarging the technology base builds on the fact that the term “renewables” has no definitive meaning.So it may be argued that other low-carbon technologies might be taken into account—explicitly or implicitly.Explicitly, CCS has been suggested by British ministers as one possibility, though little of this would beavailable by 2020. Implicitly, those member countries with larger nuclear programmes might argue for lowernational targets.

Conclusions and Recommendations

22. The main conclusions and recommendations are as follows:

— The European Commission and the British Government should set out the rationale for the 20%renewables target.

— The RO and the ROCs’ support policy has been extremely expensive, and should be replaced by amore cost-related support scheme as soon as possible.

— Clarity should be brought to the numerous renewables support (explicit and implicit) schemes, andthe full costs of these technologies should be examined by the National Audit OYce, building on itsearlier work (or some other independent body).

— The options for watering down the renewables targets should be openly analysed and debated, andrelated back to the rationale of the policy.

— Of the three options for watering down the target, the most eYcient is to broaden the renewablestargets to a de facto low-carbon obligation, so as to minimise the scope for lobbying and “pickingwinners” which is inherent in the current scheme.

— Meeting the EU target will require a radical step change in policy instruments and the institutions.

— The current institutional arrangements have been largely designed with the problems of the 1990s inmind (excess supply and low fossil-fuel prices, together with a weak CO2 constraint). They now needto be simplified and brought together within a single Energy Agency, which would not only reducebureaucratic costs and institutional conflicts, but also provide a more robust barrier to lobbying byvested interests, and introduce a significant level of coordination.

23. Muddling on as at present would be the worst approach. It will create considerable additional costs, anddeliver little—mirroring, on a much larger scale, what has happened so far under the RO/ROCs scheme andOfgem’s regulation of the networks.

24 April 2008

Memorandum by Dr Karsten Neuhoff

i. How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target?

Several studies have demonstrated the available potential and technology to deliver the target. Delivering thetarget will imply that power companies have to shift their focus to renewable energy rather than continuingto use their current business-as-usual approach where the majority of attention is given to then next wave ofmergers.

Only an ambitious target can actually be achieved—the experience of the UK in recent years demonstratesthat without commitment a far less ambitious target is easily be missed—despite the excellent resource basein the UK. A step-change by both companies and government will therefore be required.



ii. How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Packagein particular?

iii. To what extent are these targets capable of improving the EU’s security of energy supplies?

Renewable energy has the potential to increase production of domestic energy and thus reduce the needs forimports of coal, gas, and, if many cars shift to electricity, oil. With appropriate power market design this canreduce the long-term price volatility for final consumers. While intermittent generation will increase the hourto hour volatility of wholesale prices—it is the longer-term price volatility (eg year to year) that matters mostfor final consumers. This would also shift funds that are currently directed to oil exporting countries torenewable energy provision in European countries.

This does not imply that countries and security of supply suVers from closer trade relationships. Renewableenergy might well be imported from other regions of the world, eg large scale solar concentration in NorthAfrica. The challenge for national and energy security is to ensure that this shift is supported by goodgovernance frameworks.

Grid Access

iv. How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energygenerators?

v. To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is itconsistently a problem across all Member States?

Management and regulation of grid access remains an important constraint for increased renewablesdeployment. In the UK, like in much of Europe, most of the technical grid expertise and information about thenetwork is located with the network/system operator and owner NGT. In contrast to the US, detailed networkoperation and technical characteristics are not public, and no process exists that allows market participantsto challenge decisions on delayed grid connections. Also, the regulator and government often rely oninformation, expertise and interpretation provided by NGT.

Grid access can be split up into two components. First, the connection of a renewable generator to the gridand second, accepting the power delivered from the generator.

In many Member States, grid operators and owners are vertically integrated with existing generators. As newrenewable power sources create competition for their existing assets, network owners have an incentive todelay connection of these assets. In the UK distribution networks owners also hold generation assets.

In an eYcient power market, all generators that apply are connected to the grid. Not necessarily all generatorscan deliver power at the same time. If at one location, or in one region, too many generators aim to deliverpower to the system, then an eYcient market design ensures that the generator with the lowest marginal costsis dispatched before more expensive generator operates.

In most Member Stats, including the UK, connection to the network entitles a generator to nominate anddeliver power flows to any location within the country—without consideration of potential congestion in thenetwork. If the nominated flows exceed the network capacity, then the transmission network operator (NGT)is charged to resolve the constraint. NGT has to use the balancing mechanism, or contract with somegenerators, to reduce generation in parts of the country that are export constraint, and increase generation inparts of the country that are import constraint.

NGT bears the costs it incurs when contracting with the generators as part of an incentive scheme to minimisecongestion costs. This is ineYcient, because the market design does not signal to generators the cost they areimposing on the system. The simplified market design was chosen at a time when stable flow patterns in aconventional power system with strong transmission capacity created very limited congestion.

With increasing shares of renewables, flow patterns will be more volatile and will result in some congestion.Some congestion is eYcient—an electricity network that is never congested is over-dimensioned. The diYcultyis that NGT bears the cost of the congestion and thus has an incentive to limit the connection of renewablegeneration capacity so as to limit congestion costs.

Various fixes have been discussed, but I do not see how they will oVer long-term solutions and therefore marketstability. I anticipate that the UK will eventually move to an eYcient scheme—nodal pricing. The price inevery area is set at the value electricity oVers to the system at a specific location. Where there is too muchsupply, a lower price is set, and expensive fossil generation reduces output, or storage hydro plants shiftproduction. Generators can receive financial transmission contracts to hedge against the locational price risk



they face under such a scheme. The states in the North-East of the USA have moved to nodal pricing—andit works very eVectively.

Priority access for grid connection is across Europe the policy response to a market structure and marketdesign that is ineYcient and artificially hinders the investment in renewable generation. It typically sets a cleartime frame within which new projects have to be connected and requires that generators power can be insertedinto the system.

Implementing priority access in the UK would create a challenge for NGT, given the long list of projectswaiting for connection. This could encourage NGT and Ofgem to implement a market design that allows foreYcient investment and operational decisions, eg nodal pricing with a centralised dispatch and financialtransmission contracts. Once a clear, transparent, and eYcient way for grid connection, congestionmanagement and dispatch has been implemented, priority access provisions are no longer required.

This does not imply that there might not be the need for grid expansion. But it will be important to evaluatethe need for transmission expansion assuming an eVective market design that allows for eYcient networkoperation. This could reduce the need for transmission expansion relative to current estimates, and allows fora decoupling of grid connection of new projects from some of the transmission grid expansion (at the expenseof temporarily higher congestion in the system).

vi. How does Use of System charging affect grid access for renewable energy generators? How far can the different levelsof renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules?

European countries diVer in the way they allocate grid costs. In the UK grid costs are shared betweengenerators and consumers, but many other countries impose virtually no charge on generators and require theconsumers to pay all the costs. As this was an established principle for conventional generation it is alsoapplied to new generation, and therefore varies widely.

The UK is one of the countries where generation has to pay connection charges. The methodology wasdeveloped for conventional generation capacity and the implied simplifications create a bias againstintermittent generation technology. The TNUoS system of charges (based on ICRP) does not diVerentiate bytechnology despite large variations of capacity factors.

vii. What impact do the various systems of reinforcement planning and work have on encouraging renewablegeneration? How important is the issue of constraint in increasing Member States” renewable generation?

Physical transmission constraints currently only create a constraint for renewables at very distant sites, eg inthe North of Scotland. The inappropriate power market design results in the UK, like in many Europeancountries, in ineYcient use of transmission capacity and therefore induces network operators to delay theconnection of new assets.

A change of congestion management can thus allow for better use of the network and allow for connectionof more renewable generation assets. This creates the time window to expand the network where this will stillbe required to deliver the larger shares of renewables.

viii. To what extent is further co-ordination of National Regulatory Authorities needed?

ix. How far do current regulations inhibit access to the grid?

Support Schemes

x. At what level should the EU be involved in harmonising or regulating support schemes offered by Member States toencourage renewable energy generation?

If the 15% renewables target is to be achieved, a significant investment from private sector actors into thesupply chain will be required; from cables to turbine manufacturing plants, and from tailored ships to newmarine energy devices. The challenge for national policy makers has always been their inability to crediblycommit to future targets—and therefore investment in the supply chain always was slower then the subsequentmarket growth. As is now observed, this resulted in bottlenecks with higher scarcity prices for severalrenewable technologies.

The EU Renewables Directive oVers national governments a unique opportunity to commit to targets and totrajectories on the way to these targets. It will be important to implement a stringent compliance mechanismand to turn the indicative trajectory into mandatory milestones. Credibility of the growing market enhanced



by the commitment and scale provided with the EU Renewables Directive can trigger a step change ofinvestment across the industry.

Implementing renewables requires a multitude of activities, ranging from planning to grid access, fromencouraging local participation to ensuring eVective national balancing and congestion management schemes.These are responsibilities that can only be pursued at the national level. Therefore delivery responsibility andflexibility to choose the most suitable instruments must rest at the national level.

xi. What impact have the various schemes in operation across the Member States had on encouraging renewable energy?How have these schemes affected take-up both by producers and commercial and domestic consumers?

In principle feed-in type schemes have been most successful. They provide a simple and transparentremuneration, in most cases with a 20 year price guarantee. This has allowed a multitude of project developersto pursue projects. The most successful developers were often the ones that managed to engage best with localcommunities to obtain support and subsequent planning consent. The clear revenue streams also facilitatedinvestment by private investors in projects, thus increased local ownership, and allowed local banks to providelarge shares of debt (70-80%) to reduce financing costs. The result has been significantly lower costs per turbineand larger deployment levels.

In contrast, trading based schemes create significant policy risk associated with future target levels, qualifyingresources and other design components. Also changes to grid charging methodology as well as balancing andcongestion management have disproportional impacts on intermittent generation technologies and thereforeincrease policy risk for investors in renewables projects. As a result project developers required long-termcontractual arrangements with vertically integrated incumbents to oV-load policy and other risk components.The experience across Europe is that incumbents are reluctant to encourage large scale investment inrenewables where these create competition for and reduce the profitability of their existing assets. Only Spainwitnessed an incumbent utility, Iberdrola, taking forward large shares of renewables—because they satisfiedrapidly growing electricity demand rather then replaced output from their existing power stations.

Given the limited interest most UK power companies have so far expressed for large scale investment inrenewable energy, as for example illustrated by ongoing delays with oV-shore wind parks, it will be importantto provide a market structure that allows for new entrants. The threat of entry is increased with long-term priceguarantees that facilitate investment. It can either shift the focus of incumbent power companies to arenewable strategy, or might allow new entrants to take forward the renewable energy projects.

xii. Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Isnecessary investment hampered by lack of market harmonisation?

I appreciated the value of the initial ideas of the Commission to pursue a European-wide trading scheme forGuarantees of Origin—eVectively a European market for green certificates. This would have oVered theframework for a strong compliance mechanism. It also addresses the concern that renewable resources are notalways located where demand and economic activity is highest. Thus with trading, countries can commit torenewable targets that are not necessarily linked to their renewable resource but to their economic strength.

The approach, however, had serious draw-backs, including the replacement of existing support schemes incountries where feed-in tariVs were successful. Also, a common “renewables currency” does not diVerentiateacross technologies at a time when even the UK government had acknowledged the drawbacks of anundiVerentiated scheme, and introduced banding to access a set of technologies including oV-shore wind.Finally, renewable trading is nice in theory, but has so far not shown to be eVective in supporting the level ofinvestment required. Most importantly, the approach would have removed national targets and responsibilityto implement the necessary framework by Member States, including grid access, expansion, market design,and planning.

In response to these concerns, the Draft Directive published by the Commission in January allowed MemberStates to opt out of installation based trade with Guarantee of Origin (GoO) and to pursue domestic schemes.Member States opting out of installation based trade could still cooperate and transfer GoOs at country level.

There was subsequently a vivid debate on the extent to which the opt-out provisions from installation basedtrading are legally robust. Also, few countries envisaged participation in the GoO trading approach as thiswould require significant changes to domestic changes—and would have prevented the UK fromimplementing banding or the ROC scheme. This might well result in a shift away from installation basedtrading of GoOs towards transfers between Member States.



Renewable targets for Member States are set based on their economic activity, not their renewables resourcebase. Without any type of trading it would be costly, and for some countries probably impossible, to delivertheir targets. The Directive therefore envisages that Member States can transfer some of their targets. Thisapproach oVers the opportunity for eVective cooperation to deliver the EU renewables targets by MemberStates. It allows for example Belgium and Bulgaria to work together to define how many TWh of renewableenergy will be produced in Bulgaria and counted against the Belgium target. Both countries would announacethis cooperation in their National Action Plans.

Such bilateral cooperation provides a robust framework and a reasonable time-frame to implement policiesthat facilitate the renewables investment. They can involve cooperation across many institutions, (includingTSOs, regulators, local and national administrations), and thus follow the successful experience of countrytwinning ensures cooperation among equals, usually an important basis for eVective work.

The Directive implies that Member States are only allowed to export their renewable targets, if they satisfytheir domestic objectives. Thus bilateral cooperations can increase the focus on delivering domestic targets.

So far the Directive is not specific on how such cooperation has to be pursued, and according to thesubsidiarity principle, it might be best to leave it to the Member States to define their cooperation. However,it might be worthwhile to actively discuss guidelines among Member States for such cooperation, to acceleratethe process, facilitate some harmonisation and transparency, and give smaller Member States the comfort thatthe framework agreements they will be using are fair and eVective.

xiii. To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation ofsupport schemes?

A GoO trading scheme, as described in the Draft Directive of January, would likely require abandoning thebuy-out price under the ROC scheme, and would prevent the introduction of head-room, ski-slope, and moreimportantly the banding envisaged for the ROC scheme.

8 July 2008

Memorandum by PB Power

PRESENTATION MADE TO THE COMMITTEE ON 23 JUNE 2008SUMMARY OF MAIN TIDAL RANGE PROPOSALS REVIEWED BY THE SUSTAINABLE

DEVELOPMENT COMMISSION IN 2007

Sustainable Development Commission

Brief

— To review tidal power in the UK

Process

— Evidence Based

— Informed by Research

— Focus on Tidal Range (Barrages / Lagoons) and Tidal Stream Technologies

— Stakeholder Engagement

— Published Reports and Recommendations

Output

— “Turning The Tide”–main report

— 5 Supporting Research Reports



For the Severn Estuary….

SDC Findings

1. There is no conflict between Tidal Stream and Tidal Range Technologies

2. Strong Case for Tidal Lagoon Demonstration Project

3. Strong Case for a sustainable Severn Barrage

4. Climate change adaptation may present an “environmental opportunity” when consideringcompensatory habitats

5. Should be publicly led with innovative financing to allow public risk / reward to be in balance

Main Options

Cardiff Weston Barrage

— 17TWh per year electricity generation costing £15 billion

Shoots Barrage

— 2.75TWh per year electricity generation costing £1.5 billion

Tidal Lagoons

— Swansea Bay Lagoon generates up to 187 GWhper year at a cost of £250 million

Issues

Environment

— Habitats Directive

— Wild Birds Directive

— Water Framework Directive

— Appropriate Compensation

Commercial

— Navigation Impacts

— Energy Pricing

— Construction Costs

— Private / Public Split

Cardiff Weston Tidal Barrage

— 8640 megawatts installed capacity

— 17,000 million kilowatt hours annual output, equal to 4.4% current UK electricity demand 216turbine generators, 9 metres diameter, rated at 40 megawatts each

— 166 sluices, total area 35,000m2

— 16 km length

— 2 locks for ships

— 2 locks for pleasure craft

— 480m2 enclosed area of basin

Location

— Between Brean Down and Lavernock Point



Cost

— £15 billion

Non Energy Benefits

— Flood Defence

— Potential for new Road and Rail Crossings

Operation

— Generates on the Ebb Tide

— Predictable but intermittent energy

— Requires additional national grid infrastructure

05

1520253035404550

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Time of Day (hrs)

Dem

and

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Typical Winter Demand

Barrage Output MeanSpring Tides

Base Load supplied byNuclear, Gas andImports

10

200 175 150 125 100 75 50 25 0

Barrage LineMinehead Cardiff Avonmouth Sharpness Gloucester

8

6

4

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-4

-6

M.O.D.

High Water

Weir

Km

Spring Tides

Low Water

ExistingBarrage, No pumping

Key to Levels

Water Levels - Estuary and River



Shoots Tidal Barrage

— 1050 megawatts installed capacity

— 2,750 million kilowatt hours annual output, equal to 0.8% current UK electricity demand

— 30 turbine generators,7.5 metres diameter, 35 MW

— 42 sluices, total length 1.26km

— 6km barrage length

— 1 lock for ships and pleasure craft

— 93 sq km enclosed area of basin

Operation

— Generates on the ebb tide

— Refills on the flood tide

— Downstream: Tidal levels similar to today’s

— Upstream: Upper tidal levels marginally reduced and tidal range approximately halved

— Large number of sluice gates to allow tidal basin to be recharged using only the upper water levelswhere silt load is lowest

— Navigation upstream of barrage through ship lock requirements determined by GloucesterHarbour Trustees

Cost

— £1.5 billion

Non Energy Benefits

— Flood Defence –Gloucestershire

— Rail Link adjacent to existing Severn Tunnel

Construction Programme

— 4 to 5 Years

Tidal Lagoons

Many Different Proposals

— Russell Lagoons

— Swansea Bay

— Other shallow locations within the Estuary—eg Bridgewater Bay

— 4500MW potential capacity identified in the Severn

Swansea Bay Lagoon

— Promoted by Tidal Electric Limited

— Estimated Capital Cost:£81.5 million

— Annual Output:187GWh

(Tidal Electric Limited Figures)

NB: A separate DTI Review however challenged these figures, giving a total cost estimate of £255 million andenergy yield of 124GWh per year.

A more recent npower study in Liverpool Bay for a similar sized scheme estimated constructions costs of£108–£135 million



Cost Benefit

Option Capital Cost Annual Output Cost per kWh at(£m) (GWh) 8% (p/kWh)

CardiV Weston Barrage 15,000 17,000 8.54Shoots Barrage 1,500 2,750 6.80Swansea Bay Lagoon (TEL) 81.5 187 4.15Swansea Bay Lagoon (DTI) 255 124 18.39

23 June 2008

Memorandum by the Re-Generation Partnership

This evidence is presented to the Committee by the RE-generation Partnership in Wales—RE-generation isfocused on raising the potential of renewable energy to achieve sustainable economic development in theregion surrounding the Severn Estuary.

Our main objective in this paper is to highlight the role that the Severn Barrage could play in achievingrenewable energy targets. In this context we question the consistency of the EU’s 20% target with the limitedrole that carbon pricing is currently playing in achieving it. If an improved EU Emissions Trading Scheme canbe developed that leads to a stable and fair price for carbon, then the Severn Barrage, along with otherrenewable technologies, will become more feasible and attainable.

Currently, EU policies on renewable energy, regional economic development and carbon pricing do not yetsuYciently support each other and attention is required to improve matters.

Delivery of the targets will depend on the type, scale and distribution of renewable energy resources, the speedof planning decisions and the price competitiveness of alternative technologies.

A further factor will be the capacity of the industry—at regional and local levels—to deliver a seven foldincrease in energy from renewable resources over the next 12 years.

Whilst proven technologies are available, the investment capacity of households and small businesses, and theplanning regime for projects below 50MW, pose risks to the pace at which small scale technologies can beintegrated in the market. Hence, in our view, emphasis will need to be placed on larger renewable energyprojects—like the Severn Barrage—if the targets are to be met.

For example, the Welsh Assembly Government consultation—A Renewable Energy Route Map for Wales—identifies potential carbon savings from alternative technologies in kt/yr as:

Type of Renewable K tonnes per year

Biomass 600 to 800Severn Barrage 1,050Other marine 300 to 600Hydro 80Waste 128Wind 1,150Microgen 90

The Severn Estuary could be responsible for over 1 million tones—almost 40% of all potential carbonemissions savings from renewable energy resources in Wales.

A Barrage is not the only option for developing the renewable energy resource of the Severn Estuary andvarious marine energy technologies are likely to be developed in and around the Estuary. However, in ourview, the Barrage is the only option with the ability to better integrate the Welsh economy into the EUtransport system whilst also keeping upstream property assets insurable against sea level rise and tidal surge.(See the Annex on the Economics of the Barrage).

Indeed pitting the Severn Barrage against alternative tidal projects serves only to miss the point—a fleet ofprojects, on land as well as at sea, will be needed in the region over the next few decades to meet EU carbonreduction targets.

The carbon savings in the Estuary have potentially a very significant value. According to OFGEM, the costper tonne of carbon dioxide saved under the UK Renewable Obligation varied between £184 to £481—farhigher than other policy measures such as the EU Emissions Trading Scheme at £12 to £70 a tonne, the UK



Climate Change Levy at £18 to £40 a tonne and the Energy EYciency Commitment which prices carbon ataround £60 a tonne.

On these figures, each tonne of carbon saved as a result of operating the Severn Barrage (in total just over 1million tonnes p.a.) would be worth between £12 and £481 to the Welsh economy. That could mean over £400million of investment funding becoming available each year, depending on the shadow price of carbonadopted by various government schemes.

However, to encourage investment in renewable technologies the price of carbon needs to be fair and stable.This is not a diYcult task. For example, it should be possible through a reformed EU Emissions TradingScheme to establish a reasonably stable price per tonne for carbon of around (say) ƒ50 by 2010.

Such a scheme would need to auction the initial tradable permits and it might be possible to introduce ceilingsand floors around the price by issuing more or less permits as the market evolved. A successful scheme willrequire the participation of other countries—particularly the USA. If the EU or UN were to set more stringentcarbon reduction targets, then the ceiling price of carbon could be allowed to rise each year until it reached(say) ƒ100 per tonne by 2050.

Once it became clear that a robust, market-driven price could be established and maintained then it would bepossible to securitise future revenue streams from carbon trading (alongside those from future electricitysales), and create tradable “Severn Estuary Bonds” to facilitate construction, operation and maintenance ofthe Barrage.

In this context, the ƒ50million plus per year income from carbon emissions trading (perhaps rising steadilyup to 2050) could be added to the major benefits that the Barrage would bring in terms of direct jobs, indirectjobs and international reputation.

This raises the question why diVerent carbon reduction schemes are sending such conflicting price signals tothe market. Discrepancies on carbon pricing on this scale have costly economic consequences and willundermine long term investment in renewable technologies. It indicates the need for urgent EU action to helpthe market determine a single EU price per tonne of carbon and establish predictability through futurestrading. A stable carbon price would greatly assist the development of the Severn Barrage.

The RE-generation Partnership has been established in Wales in order to highlight the potential benefits forlocal businesses and communities of major renewable energy projects and programmes in the Severn Estuary.The potential economic benefits of the Barrage are set out below in the Annex.

Annex

THE ECONOMICS OF THE SEVERN BARRAGE

In economic terms Wales and the South West are at a tipping point. Prosperity levels are below the UKaverage, there is heavy reliance on the public sector and productivity levels are low—partly because of a lackof capital investment in infrastructure. Things are not expected to improve in the near future.

Indeed massive investments in roads, railways, airports and other infrastructure projects (eg the Olympics)in the rest of England will pose further problems for the competitiveness of the Welsh and the South Westeconomies.

Harnessing the green energy of the Severn oVers a solution to the economic decline of the region because aBarrage will deliver much more than just green electricity.

1. Firstly it will produce energy that is predictable, reliable and carbon free for perhaps 100s of years whichwill generate a significant income stream.

2. Secondly it will create thousands of new jobs—making a significant contribution to the economicdevelopment of the whole region. To put things in perspective, in addition to the direct expenditure of around£15 billion, the project would generate between £3 billion and £4 billion of indirect and induced expenditures—these indirect “spin-oV” expenditures will be capable of creating over 35,000 jobs.

3. Thirdly the barrage is likely to increase the bio-diversity of the estuary rather than decrease it—slowingdown the tide will introduce more light and oxygen, turning the estuary “blue” (it’s currently a murky brown),encouraging the growth of micro organisms. Hence more fish will be attracted which will support a greaterand more diverse bird population. This will enhance the appeal of the estuary to tourists.

4. Fourthly, the Barrage could have a beneficial impact on the visual environment. The Design Commissioncould ensure that it reflects international standards of design and create a “WOW” factor for the region—certainly people find well designed bridges extremely attractive and the Thames Barrier has become a touristattraction in a poor part of London.



5. Fifthly, and most importantly for economic regeneration, by carrying new road and rail links over theestuary the barrage could create a new regional economic powerhouse—the “Severn Gateway”—integratingthe economies of South Wales and South West England. (The rail link would be the first to enable Welshproducts to travel directly to the European mainland—currently Severn Tunnel height restrictions precludethis—and no-one knows how long the Severn Tunnel will remain operational.)

These factors together will boost the tourist sector and attract international investment into the region. In thissense the Barrage has the potential to create an iconic sustainable city-region on the west coast of Europe—outside the “hot banana” area.

Various marine energy technologies are likely to be developed in the Severn Estuary but the Barrage is theonly option with the ability to better integrate Wales into the EU transport system whilst keeping upstreamproperty assets insurable against sea level rise and tidal surge. Such significant additional benefits might oVsetthe potential negative impacts of the barrage, including the problem of access to Bristol docks.

Pitting the Severn Barrage against alternative tidal projects serves only to miss the point—a fleet of projects, onland as well as at sea, will be needed in the region over the next few decades to meet carbon reduction targets.

Finally, the Barrage will not need large Government subsidies. Despite the credit crunch there are still hugefunds in the City looking for good, long term projects in which to invest. The funding options would be greatlyassisted by the development of an eYcient market in tradable permits that set a stable price for carbon. If theGovernment supports the Barrage through the planning process, then the returns from predictable, long term,reliable, green energy will ensure that the capital cost will be funded by private investors.

The challenge for the region will be to develop the 21st century equivalent of the South Wales coal field.However, this time, the aim will be to build the foundations for a new industrial base across the region thatretains the wealth, protects the environment and creates a competitive economy with sustainable, healthycommunities.

To address this challenge the “RE-generation Partnership” has been formed—it will focus on maximising theeconomic, social and environmental benefits of the marine energy in the Severn Estuary.

Achieving this goal will require a good understanding of the supply chains needed to deliver local economicimpacts. EYcient supply chains with skilled competitive businesses will be needed to counter the prospect offootloose global project teams arriving to exploit the opportunity and export the wealth.

RE-generation will develop and support practical options that harness the green energy of the Severn and atthe same time promote sustainable development and local SME growth.

One option will be to develop a supply chain club for “Severnside SMEs” to ensure local companies andcommunities benefit from all marine energy projects—keeping the local pound, local.

A related option is to ensure that the PPP contract with prime contractors includes a “framework agreement”that includes as many competitive regionally based companies as possible—many of these firms will go on toserve global markets.

RE-generation will be developing options that harness green energy and simultaneously generate economicgrowth—an important goal in a region crying out for new jobs and opportunities.

RE-generation Partnership—includes representatives from the Welsh Assembly Government, CBI, ICE,Universities and the private sector.

21 April 2008

Memorandum by the Renewable Energy Association

General Questions


The REA is not qualified to comment on the 20% overall EU target, but we do observe that the Parliamenthad previously sought a 30% target.

There is no doubt the target is very demanding, however, and will require several bold measures, including:

— An increase in the RO.

— An eVective measure to boost on-site renewables, eg a feed in tariV, and non-discriminatorytreatment under the Carbon Reduction Commitment.



— Reform of Business Rating for on-site renewables. At present the arrangements discourage theiruptake—as described in the paper on this subject on the REA website.

— A reward-based tariV for renewable heat. This was the REA’s key message in its response to BERR’srecent Call for Evidence on Heat consultation (REA Response to the Heat call for evidence).

— A very large programme to retrofit zero carbon technologies to existing buildings.

— An increase in the Renewable Transport Fuel Obligation.

The UK’s target is perfectly achievable, given the right political will. One means of achieving it is describedin a paper by P Wolfe. The REA is also participating in the development of a national sustainable energyaction plan along with a number of other organisations. This work is being co-ordinated by the Royal Societyof the Arts. The organisations involved felt that the proposed timetable of a consultation this summer,culminating in a Renewable Energy Strategy in 2009 would be too slow, given the scale of acceleration neededand that collaborative action on an action plan might prompt more rapid progress.

(ii) How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Packagein particular?

We feel the Directive’s proposals are highly coherent. We welcome the target being in terms of total energy,and not broken down into electricity, heating/cooling and transport fuels. Whilst there is a minimum targetfor the latter, this is logical as beyond energy conservation (travelling less) and energy eYciency (more eYcientvehicles) fuel substitution is the only option.


Almost all renewable energy technologies increase energy security, by directly replacing imported energysources such as gas, uranium or imported coal. The exception is imported biomass. Even so, imported biomassstill contributes to improved energy security through widening the range of countries and diversifying typesof trading partners. Much of this trading will be with countries with less geopolitical tensions than those wecurrently import energy from.

Grid Access

(iv) How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energygenerators?

The existing legislation has not assisted progress in the UK. Whilst it enables the UK to give priority accessfor renewables we have not chosen not to go down this route. The UK may eventually be forced to implementpriority access however, as the new draft renewable energy directive says that member states “shall” givepriority access, rather than saying they “may”.

“They shall also provide for priority access to the grid system of electricity produced from renewableenergy sources.” Extract from Article 14 para 26.

BERR has commissioned a report on this very subject which, although completed in August last year, has notyet been published.

The problems with the current UK situation are well documented but progress towards overcoming them, hasbeen very slow.

At present the default situation in the UK is that existing generators have priority over new projects whichwish to connect. This is because only when new infrastructure has been built, and the system has suYcientcapacity to accommodate the full output of the existing incumbent generation plus the proposed newgeneration, is the new generator allowed onto the system.

This is despite the fact that the amount of generation requiring transmission is determined by the volume ofdemand. If the current rules are not changed, the end result would be far too much transmission capacity beingbuilt. The rules governing the design of the network (Security and Quality of Supply Standard) are beingreviewed, however, and a Transmission Access Review is underway to address the problem.

At an informal meeting BERR stated that its intended outcome from the review is that projects can beconnected within a reasonable timeframe, of say 3—5 years from applying to connect. If and only if thisaspiration is translated into an access methodology that achieves that objective, will the issue of priority accessfor renewables (over existing non-renewable plant) become less important. Until a system is achieved that



allows all new plant to connect within this time period following a request to connect, government shouldcontinue to be pressed to implement priority access for renewable generation, as it is currently clearly allowedto do and may in the future be compelled to do by the new Directive. We would emphasise that priority accessmeans priority to connect without regard for the eVect of that in reducing the output of existing non renewableplant. After all, the purpose of renewable generation is precisely in order to reduce generation from fossilfuelled generators. If a maximum connection time scale of 3-5 years is achieved for all new generation thenpriority access for renewable generation would be less important.

Ideally a decision about priority access should have been made at the outset of the Transmission AccessReview, in order to provide clarity. However the most pressing need is to implement timely access as rapidlyas possible. Provided this occurs, we suggest by April 2009 then BERR can aVord to give more time to considerthe requirements for priority access. It is worth noting that Ofgem believes that its existing remit enables theimplementation of speedy access, but not priority access.

(v) To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is itconsistently a problem across all Member States?

In Germany renewables can connect as soon as the local connection is built. However, in the UK, grid accesstogether with the planning system form the two biggest barriers to increasing renewable electricity generation.

(vi) How does Use of System charging affect grid access for renewable energy generators? How far can the differentlevels of renewable energies take-up in different Member States be attributed to Use of System charging and costsharing rules?

In addition to the transmission access issue Transmission and Distribution Network Operators areincreasingly imposing technical requirements on renewable generators. Whilst some of these are necessaryothers are inappropriate and not required to ensure system security. This increases the cost of renewablegeneration unnecessarily.

Use of system charging has very little impact on grid access for renewable generators. It is the rulessurrounding the ability to connect that is the problem. How much it costs to use the grid, may, to some extent,limit the volume which wishes to connect, but despite this there is over 14GW wishing to connect.

There is also the prospect of totally inappropriate use of system charges being levied on generation that isconnected to the distribution network. The Transmission Network Operator would like to charge theseembedded generators use of system charges that would apply had they been connected to the transmissionnetwork. The terminology is that National Grid favours gross charging for distributed generators, whereasthe industry believes that net charging should apply. We can provide a detailed paper on this subject.

(vii) What impact do the various systems of reinforcement planning and work have on encouraging renewablegeneration? How important is the issue of constraint in increasing Member States’ renewable generation?

REA is only qualified to comment on the UK reinforcement planning rules. Our response to the consultationon the Transmission Security Standards Review for onshore intermittent generation can be found on thewebsite.

(viii) To what extent is further co-ordination of National Regulatory Authorities needed?

Priority access to transmission and distribution grids for electricity from renewable energy sources (asproposed in the new renewable energy directive) should be interpreted and implemented along the sameprinciples and criteria in the diVerent member states, in consultation with the stakeholders, in order to avoidmarket distortions. This should be reflected in the relevant harmonised technical and market codes, to bedrafted according to the proposed regulation in the 3rd liberalisation package. Therefore national regulatoryagencies should coordinate and the proposed Agency for Coordination of Energy Regulators provides theproper platform.



(ix) How far do current regulations inhibit access to the grid?

The current regulations are a major barrier to renewable electricity uptake, as described in the answer toquestion iv, above.

There is around 14GW of projects at varying degrees of development in a queue waiting for connection, thereare some projects which already have planning permission which at present stand to wait until 2016 beforethey are scheduled to be connected. The situation is completely unacceptable.

Support Schemes

(x) At what level should the EU be involved in harmonising or regulating support schemes offered by Member Statesto encourage renewable energy generation?

It is helpful for the EU to seek to encourage the widespread adoption of facilitating measures, such asstreamlined consent processes, administrative arrangements, training etc. Indeed many articles of the newRenewable Energy Directive do just that.

Whilst guidance and comparisons of the eYcacy of support between member states, such as the 2005 reportis very useful, it would be counterproductive, however, for the Commission to attempt to enforceharmonisation of support schemes. Each member state is diVerent, and there are reasons why one approachmay be more appropriate than another. There is also a great deal of history in many member states, andintervention could be profoundly destabilising.

The harmonisation of support schemes was higher on the European Commission’s agenda in the mid 1990’sthan it is now. At that time there was pressure on member states to move away from feed in tariVs towardsquota-based systems (such as the RO) or competitive tendering arrangements (such as the NFFO). However,over time, more and more countries have moved in the reverse direction. At the moment, in the EuropeanUnion, 18 EU Member States have feed in tariVs and 6 EU Member States have a quota-based/greencertificate scheme.

The renewables industries in countries with feed in tariVs have fiercely defended their governments’ policiesand continue to do so.

When the 2001 directive was brought in there was a requirement to monitor progress, and compare diVerentsupport mechanisms across member states. The resulting report clearly shows countries with feed in tariVshave been more eVective at deploying renewables, very often more cost eVectively than quota- based or greencertificate mechanisms. This was confirmed again very recently in a Commission document released on the 23January 2008 together with the Renewable Energy Directive: “Well-adapted feed in tariV regimes are generallythe most eYcient and eVective support schemes for promoting renewable electricity”. Germany for instanceachieved its 2010 target for renewable electricity in 2007. The drive for harmonisation from the commissionhas consequently receded.

Investor confidence is one of the major requirements of any policy, and consequently there has been very littleappetite for rocking the boat regarding feed in tariVs from the UK renewable industry. EU EnergyCommissioner Piebalgs said it on the 28 February this year that “the goal of the European Commission is notto undermine any national support scheme.”

A new clause which would introduce tariVs for small scale renewable power generation and renewable heatand biogas has been tabled for debate at the report stage of the energy bill. The REA is supportive of thisaction, and has drafted a short briefing note for MPs on the clause.

The REA believes that such tariVs for small renewables and onsite generation can co-exist with the RO, anddeliver the best of both worlds.

(xi) What impact have the various schemes in operation across the Member States had on encouraging renewableenergy? How have these schemes affected take-up both by producers and commercial and domestic consumers?

The report referred to above helps answer this question, for renewable electricity generation.

The UK RO has been particularly poor at encouraging the uptake of renewables at the small scale (what wewould refer to as on-site use), but eVective at larger scale producers (ie merchant plant). Feed in tariVs aremuch more straightforward to understand, and clearly more eVective at the smaller scale, which is why theREA is encouraging this approach to be pursued for on-site renewable power generation in parallel with theRenewables Obligation.



We also feel it would be the most eVective approach to encourage renewable heat and could be applied torenewable gas.

(xii) Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Isnecessary investment hampered by lack of market harmonisation?

There should be no inherent reason why diVerent support schemes should themselves limit cross bordertrading—but one does have to ask what the objective of cross-border trading is.

There is likely to be cross border trading of biomass and renewable transport fuels but limited trading ofguarantees of origin for the purposes of meeting member states’ targets. Countries can only trade when theyhave exceeded their target. The kind of certificate trading that takes place at present is merely allocating creditfor renewables in a voluntary reporting sense and there is no clear link between this and encouraging newdeployment. It is likely that this form of trading will tail oV dramatically once the new directive is in place.

(xiii) To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation ofsupport schemes?

Under the current drafting of the directive in relation to GoOs, which we are comfortable with, the use ofGoOs would not require harmonisation of support schemes. We don’t consider harmonisation of supportschemes to be a priority—we would rather eVorts were focused on ensuring member states meet their targets,however their policies are structured.

It may theoretically be more eYcient to have harmonisation particularly with full tradability where countriesdon’t have to meet their target to sell renewable energy. However, this is not practical given the currentdiVerences between countries support mechanisms as described above. The eVort required to achieve thisdegree of harmonisation would be large, and the benefits not quantified. One thing is clear, however, and thatis that the process would result in a lengthy hiatus, and large scale loss of investor confidence, both of whichwould be unhelpful with respect to meeting the 2020 target.

21 April 2008

Memorandum by the Renewables Advisory Board

1. Introduction

The EU has proposed that the UK increase the proportion of its energy use provided from renewables to 15%by 2020. The current percentage is less than 2%. RAB has been asked to advise on policy issues and thepotential for UK wealth creation and jobs related to achievement of this target.

2. RAB’s strategy has been to develop its vision of the 2020 renewables market and then address the manypolicy issues which will need to be implemented if that vision is to be realised. This note outlines RAB’s 2020Vision and identifies some of the most important issues that need to be tackled, many urgently. Much furtherwork is underway addressing individual policy topic.

3. UK Renewable Energy Sectors

We have divided the UK’s renewable energy use into four categories as follows:

BULK ELECTRICITY BULK HEAT

— Onshore wind — Industrial scale— OVshore wind — Biomass heat & CHP— Dedicated biomass & CHP — Solid recovered fuels— Co-firing— Landfill gas— Anaerobic digestion— Solid recovered fuels— Hydro— Tidal stream and Barrages— Wave— Severn Barrage



BULK HEAT TRANSPORT

— Photovoltaics — RTFO from 2010— Biomass CHP — EU Directive from 2020— Biomass boilers— Heat pumps— Solar thermal— Micro-wind

4. Biomass presents particular modelling problems since the available fuel supply will be limited, but its useis possible in all four sectors. RAB believes that Government needs to make a strategic decision on the optimalusage for biomass within the UK.

5. Current Policies

To assess the size of the challenge RAB firstly estimated how much renewables can be expected to deliver by2020 if current policies eg Renewables Obligation, RTFO, Round 2 oVshore wind, remain unaltered. Our bestestimate is that the UK will achieve about 6% of our energy from renewables in our “business as usual”scenario. We note that this figure is similar to other recent studies.

6. It should be noted that we have forecast total UK energy use in 2020 will be 150Mtoe; this includes areasonably aggressive assumption about future energy savings. In what follows figures are reported aspercentages of this figure: for instance the 15% target equates to 22.5Mtoe; a value of 7.5% would fulfil halfof the 2020 target.

7. 2020 Vision

Expert groups in each of the four sectors were asked to predict what could be delivered by 2020 with significantbut achievable policy changes. In each case the groups emphasised that business as usual, or a small extensionof it, would fall well short of the target.

8. If the 15% target is to be approached we need to establish a diVerent energy world with new policy,economic and social drivers. Many of these changes will need to be radical and will require, above all else,political leadership and a determination to succeed. RAB believes that public concerns about climate change,fuel imports and energy price volatility make radical political action deliverable. Industry and commercethemselves stand ready to deliver but, as ever in the renewables industry, the greatest investment risk is seenas political risk. Investors need to be confident that government is determined to achieve its own targets.

9. In total the expert groups felt able to forecast that 14% of UK energy could be provided by renewablesprovided that a set of identified policy changes could be implemented in good time. We have called this our“base case”. RAB further identified three more challenging alternatives which could close the gap to 15%;indeed it may be prudent to aim for a figure somewhat higher than 15% to accommodate possible failure orslippage. See figure 1.

The following sections provide details for each sector.

10. Bulk Electricity

11. Vision

Constraints on the volumes of renewables that can be delivered in both the Transport and Heat sectors (seelater sections) require Bulk Electricity and the Built Environment to provide a large part of the 15% target. Inour base case 2020 vision 7.1% of energy will be provided from the Bulk Electricity market. This equates toapproximately 40% of the grid-connected electricity market; this compares with less than 5% today and thecurrent Renewables Obligation target of 20% by 2020.

12. Three technologies are predicted to dominate the 2020 renewable electricity market: onshore wind,oVshore wind, and biomass with solid recovered fuels (waste). See figure 2. The size of the challenge may bejudged from the following table.



Bulk Electricity Onshore Wind OVshore Wind Dedicated Biomass & SRF

Installed today MW 1,850 394 576Already consented MW 3,760 3,282 748In planning MW 7,750 2,085 491% UK Energy by 2020 1.8 3.2 1.3Total MW req’d by 2020 13,000 18,000 4,000Indicative total capex £bn 13 36 6

13. On average we need to install slightly less than 1GW per annum of onshore wind, 1.5 GW per annum ofoVshore wind, and 250MW per annum of biomass and SRF. For comparison, over the next five years, Spainis expected to install 2.5GW per annum of wind and France and Germany 2GW per annum each (ref BTMConsult).

14. Other renewable technologies are expected to provide a total of 0.6% of UK energy. These include landfillgas, digesters, hydro, smaller barrages, wave and tidal. The UK leads the world in the development of waveand tidal power devices and RAB supports ongoing support for these technologies; their UK contribution by2020 is estimated to be at most 1GW but rapidly followed by very significant worldwide growth aroundthat time.

15. The Severn Barrage has not been included in our base case. RAB awaits the outcome of the current review.It has been included as one of our “more challenging” options for closing the gap to 15%. We understand that,if completed early in the 2020s, under the currently proposed EU rules half of its capacity could be attributedto the target; this would be about 0.6% of UK energy.

16. Policies

Given the size of the contribution expected of Bulk Electricity it is vital that current obstacles to rapid growthare removed. RAB will report later in more detail on many of these policy issues. For the timebeing wehighlight just some of the highest priority and most urgent issues which must be resolved:

— Urgent Grid Studies: Development of large capacities of onshore wind in Scotland, Wales and NIwill require substantial grid reinforcement. Equally connection of a further 15GW of oVshore wind,much of it oV the East Coast, will require design, planning and construction of several new 400kVtransmission lines onshore. Recent experience indicates that typically this takes 10 or more years;we are relying on the recently announced IPA to reduce this period. Nevertheless RAB believes thatstrategic grid studies must commence immediately and that regulatory barriers to funding of thiswork removed; arguably we are already starting too late.

— Planning and Radar/Aviation: The ongoing problems of gaining planning consents, particularly forwind farms, are well known and will continue to be addressed by RAB separately. Nevertheless therecent last minute objections to both on- and oVshore projects due to radar diYculties are preciselythe form of policy instability which seriously undermines investor confidence. It is RAB’s belief thatthere are technical solutions to radar problems, that these should be proven, and the issue of whopays for their implementation resolved; the cost is small relative to the size of capital investment thatindustry is being expected to make.

— Financial Support System: The Renewables Obligation has proved a successful mechanism and RABhas supported both its introduction and recent amendments. However it is designed to encourage20% renewable electricity and we are now seeking to double that contribution. Within the next twoyears industry will need a clear idea of what will follow the current RO. In particular, investors needconfidence that the renewables market will support investments made between now and 2020 wellbeyond the current RO mechanism which terminates in 2027.

17. Built Environment

18. Vision

Forecasting the 2020 contribution from renewables to energy use within the Built Environment has provedthe most diYcult challenge in developing this Vision. Whereas the rate of Bulk Electricity growth is drivenpredominantly by government policies, in the built environment we shall be reliant on uptake by very largenumbers of individuals, households and companies. These are the same entities that have to date beenrelatively slow to embrace energy eYciency measures despite reasonably strong economic incentives.



19. The expert group made estimates on both bottom-up and top-down bases. A wide range of figuresemerged with those working in the sector being more optimistic than the wider RAB group. We have adopteda forecast of approximately 5 Mtoe or 3.3% of total energy; this includes both heat and electricity, the majoritybeing heat.

20. RAB have divided properties within this sector into:

— New residential.

— New non-residential.

— Existing residential.

— Existing non-residential.

Given the uncertainty surrounding our forecast it is diYcult to predict the technology mix within this sector.However since the size of an installation is relatively small the number required is correspondingly large. Thefollowing table gives an indication of size of the contribution to the 5 Mtoe target from each of the sectors,and the breakdown of technologies and the number of installations needed for the existing residential buildsector by 2020:

Typical single Number ofdomestic installations

Contribution production requiredSector/Technology (Mtoe) (MWh pa) (thousand)

New build residential 1.1New build non-residential 1.0Existing build residential* 2.2Of which:

Photovoltaics 0.09 1.5 6801

Solar Hot Water 0.23 2.25 1,3002

Micro-wind 0.33 4/23 1,1703

Air Source Heat Pump 0.74 6 1,4404

Ground Source Heat Pump 0.81 10 9505

Existing build non-residential 0.7Total 5

* All analysis based on 26m existing homes

1 Approx 1 in 38 UK homes; this is x7% of 10 million homes CLG estimate to be suitable for installationin “Review of the sustainability of existing buildings”, 2006.

2 1 in 20 UK homes; this is x7% of 19 million homes CLG estimate to be suitable for installation in “Reviewof the sustainability of existing buildings”, 2006.

3 15% of 5 million rural homes installing a system generating 4MWh per annum ! 2% of 21 million urbanand suburban homes installing a system generating 2MWh per annum.

4 8% of 1.5 million gas boiler replacements made annually installed with an air source heat pump.5 15% of the 3.9m homes estimated to be oV the gas grid, ! 2% of 1.5m gas boiler replacements made

annually.

21. The UK is starting from a very low base in this sector. Germany, a country with a similar climate, is wellahead: supported by a feed-in tariV there are nearly ° million PV installations providing 1GWp. Last year theUK installed 270 units; Germany 130,000.

22. Policies

In the Built Environment sector it will be necessary to transform public behaviour. This is always challengingalthough we have seen very substantial positive changes in public perceptions of renewable energy in recenttimes.

24. It is possible to enforce change in the New Residential and New Non-residential sub-sectors by regulation.The Government’s announcement of Zero Carbon standards for homes in 2016 and commercial property by2019 is welcomed and RAB have assumed compliance in our 2020 Vision. This is forecast to provide about 2Mtoe per annum.



25. For existing buildings which will provide the remaining 3 Mtoe per annum, it will be necessary to usecarrots rather than sticks. We have identified a long list of policies designed to induce investment by propertyowners and RAB will again be reporting in greater detail later in the year.

26. As examples we highlight here just three policies which RAB believes deserve immediate consideration:

— Statutory targets to give investor confidence of new policy development if existing measures fail.

— Financial and fiscal strategy with significantly stronger and better targeted incentives in a range ofdeployment measures.

— Remaining regulatory barriers on planning and certification to be solved.

27. Bulk Heat

28.Vision

The use of renewables to supply large quantities of heat is eVectively limited to burning of biomass and solidrecovered fuels, preferably in combined heat and power plants (CHP) associated with heat networks orindustrial loads. We have estimated that 0.9% points of the 15% target could be produced from this source.

29. Biomass and Solid Recoverable Fuels Policy

As mentioned earlier, RAB believe that Government needs to follow up its recent review of Biomass resourceswith policy decisions which will assign the available indigenous and imported fuel resources to specific sectors.These policy decisions will need to take account of:

— potential indigenous production of energy crops;

— expected availability of indigenous SRF;

— potential imports of biomass, recognising concerns about sustainability, food production and globalcompetition for such fuels;

— the need to meet the separate EU 10% target for road transport fuels;

— the carbon intensity and cost eVectiveness of diVerent technologies; and

— the environmental impacts of the diVerent options.

In terms of meeting the 15% target it is largely immaterial which sectors benefit.

30. Transport

We have assumed that the RTFO of 5% biofuels by 2010 and the EU target of 10% by 2020 will beimplemented in full and that vehicle technology will constrain development beyond these levels. In 2020 2.7%points of the 15% target is expected to be contributed by Transport.

31. “Further Stretch” Options

In Section 3 we noted that the sum of contributions from the four sectors falls short of the 15% target by about1% point. RAB have identified three possible options to fill the gap but stress that delivery of each will presentfurther challenges beyond already stretching aspirations. The three options are:

— Installation of the Severn Barrage, half of which would count towards the 2020 target providedconstruction begins before 2016.

— A further 6GW of wind power, mostly oVshore, bringing the total oVshore capacity to about 24GW.

— A further 30% increase in energy production from renewables in the Built Environment sector. Thiswould need to be retro-fitted to Existing stock, and would probably require installation of district-wide heat networks.

32. Supply Chain—Opportunities and Challenges

In order to achieve this vision the capital investment from UK industry and property owners is expected toexceed £100 billion. It is imperative that the UK supply chain captures the maximum value and creates themaximum number of “green collar” jobs from this market.



33. Major opportunities are identified as follows:

Technology Expected Capital Investment Major opportunities for UK businessby 2020, £ billion

OVshore Wind 36 — Project development— Foundations— Installation, vessels, servicing— Grid connections— Turbines and components

Onshore Wind 13 — Project development— Civil engineering— Installation, servicing— Grid connections— Components

Bioenergy 6 — Energy crops and SRF— Technology, infrastructure— Transport

Built Environment 50* — Installation— Servicing

Wave & Tidal 3 — Technology development— Installation

Financial Institutions 100* — Investment— Re-financing, hedging etc

* Indicative; very dependent on technology mix.

34. In order to benefit from these opportunities the supply chain needs to have confidence in the creation ofa stable, growing market. Once again this will depend above all else on positive perceptions of political willand implementation of policy frameworks.

35. The supply chain for renewables will be a global competition: all EU nations will be pursuing similarambitions within their own 2020 targets. Other countries such as USA, China and India will be developingtheir own technologies and many have the advantages of cheaper labour costs. Nevertheless the UK leads theworld in some technologies, in our financial skills, and we have some of the most abundant natural resourcesin our wind, wave and tidal sectors.

36. To maximise our national share of wealth creation from renewables we must:

— Create a stable, growing market.

— Build on our existing pool of appropriate skills.

— Be flexible in interpretation of EU Procurement and State Aid rules.

37. Key Messages

— The 2020 target of 15% UK energy from renewables is achievable . . . BUT:

— This requires rapid development of a transformed energy framework with radically neweconomic, political and social drivers. Renewables must be at the heart of energy policy.

— Many new policies are required and some are very urgent.

— UK industry has the resources and investment required, provided it gains confidence in a stable,growing market.

— The prize for the UK industry is a substantial share of UK capital investment totalling some£100 billion, plus a share of a global market very many times as large.



Figure 1

CONTRIBUTIONS To 2020 TOTAL UK ENERGY BY %

2020 Vision

+6 GW offshore wind

+Severn Barrage

30% increase in built env’t

15.0%

2006

UK energy 150Mtoe – aggressive efficiency measures assumed

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

TransportBuilt environmentBulk heatBulk electricity

7.1%

0.9%

3.3%

2.7%

RAB 2020Base case

BAU

Figure 2

CONTRIBUTIONS TO 2020 BULK ELECTRICITY MARKET,TOTAL 7.1% OF UK ENERGY OR 40% OF UK ELECTRICITY

BULK ELECTRICITY – 40% generationfrom renewables

Onshore wind- 1,850 MW today- 3,760 MW consented- 7,750 MW in planning- 13,000 MW required- £13bn Indicative capex

% UK Energy: 7.1%

Offshore wind- 394 MW today- 3,282 MW consented- 2,085 MW in planning- 18,000 MW required- £36bn Indicative capex

Dedicated biomass & SRF- 576 MW today- 748 MW consented- 491 MW in planning- 4,000 MW required- £6bn Indicative capex

3.2%Offshore wind

1.8%Onshore wind

0.6%Other

1.5%Biomass & SRF (incl. co-firing)

24 April 2008



Memorandum by Scottish and Southern Energy

Introduction

Scottish and Southern Energy (SSE) is grateful to have this opportunity to submit evidence to the Committee’sinquiry into the EU’s 20% Renewable Energy Target. SSE is determined to play its part in meeting therenewable targets and, already the largest renewable generator, SSE has an internal company renewableenergy objective of 4,000MW set for 2013 in the UK and Ireland. Over £2.5 billion capital investment will bemade in renewable energy in UK and Ireland up to 2013, with around £500m equity investment in renewableenergy in new markets and technologies in the same period. It is also involved in the generation, supply,transmission and distribution of electricity and in the supply, storage and distribution of gas.

Looking forward, renewable energy has a vital role to play in delivering secure and low-carbon energy suppliesin the UK. Put simply, the benefits of moving to a more renewables based generation portfolio will allow theUK to benefit from reduced greenhouse gas emissions; reduced reliance on energy imports, particularly fromunstable regimes; reduced exposure of the energy system to fuel price volatility; and expanded businessopportunities right the way along the renewable energy supply chain.

That said, renewables alone are not the solution to tackling Climate Change sustainably. Politicians,policymakers and others should not underestimate the role that non renewable low carbon generation can playin reducing global emissions, whether through more eYcient use of fossil fuels, nuclear new build, or carboncapture and storage. If the world is to tackle Climate Change, all low carbon generation will have to beconsidered as part of the energy mix.

It is also vital to stress that overall energy demand reduction will be crucial in tackling Climate Change andmeeting European energy targets. Successful demand reduction reduces the overall scope of the challenge.

In this response, SSE has not responded to every question posed but taken a whole-approach to what thetargets mean in practice, the implications for meeting the target and what can be done to resolve thecurrent barriers.

What Could the Target Look Like in Practice?

The UK share of the European target

To meet its allocated share of the EU renewable energy target, the UK will need to deliver 15% of its energyfrom renewable sources by 2020.

An initial high-level assessment, conducted by SSE in partnership with the United Kingdom Business Councilfor Sustainable Energy (UKBCSE) supports the developing view that this could translate to:

— 10% heat (an increase of almost 70 TWh from current levels);

— 10% land transport (an increase of over 45 TWh from current levels); and

— up to 40% of electricity from renewable sources (an increase of over 125 TWh from current levels).

Modelling demand and consumption

For illustrative purposes, SSE has modelled a scenario looking at the impact of the draft Renewables Directivewhile assuming that energy demand across heat, electricity and transport remains at 2006 levels. While thisdoes not reflect current and future energy demand projections, it provides an insight into the scale of theincrease in renewable energy needed to meet the target, and the implications for the supporting infrastructure.

However, before analysing this information, it is important to understand that the electricity sector may haveto deliver more than 40% renewable energy if there is a significant increase in electricity demand; and/or theheat and transport sectors do not realise their renewable energy potential. In addition, as technologies develop,there is likely to be an increased pressure on electricity demand created by the emergence of mains poweredelectric cars, which would need to be charged up from buildings overnight. In addition, given the lack of anyGovernment policy on incentivising renewable heat, assuming a constant electricity demand and a significantcontribution from renewable heat or transport is far from certain.



Anyway, while assuming a demand level based on 2006 for 2020, the below table shows the breakdown ofexpected heat, electricity and transport energy consumption by 2020

Consumption (TWh) 2006 2020 (based on 2006 levels)

Electricity (conventional) 375 248Electricity (renewable) 18.78 (4.8%) 145 (36.9%)Total Electricity 393 393Heat (conventional) 730 661Heat (renewable) 4.52 (0.6%) 73.5 (10.0%)Total Heat 735 735Land Transport (conventional) 478 432Other Transport (conventional) 173 173Land transport (renewable) (% of all land transport) 2.09 (0.4%) 48 (10.0%)Total Transport 653 653Total Energy (conventional) 1,755 1,514Total Energy (renewable) 25 (1.4%) 267 (15.0%)Total Energy 1,781 1,781

This information is displayed below graphically:

(land)

ELECTRICITY

HEAT

Renewable electricity(4.8% of total electricity)

Renewable transport(0.4% of total land transport)

Renewable heat(0.6% of total heat)

(aviation)

TRANSPORT LAND TRANSPORT

ELECTRICITY

HEAT

Renewable transport(10% of total road transport)

Renewable heat(10% of total heat)

Renewable electricity(37% of total electricity)

ENERGY MIX 2006 ENERGY MIX 2020 (demand at 2006 levels)

Expected renewable electricity mix

To deliver the target, it is expected that the UK will need to generate a total of around 145 TWh of electricityfrom renewable sources by 2020, from less than 20 TWh generated in 2006.



SSE has made a preliminary estimate of the expected technology mix that could make up the renewableelectricity component if is delivered entirely in the UK. SSE expects that the bulk of the new renewableelectricity generation (around 75%) is likely to come from onshore and oVshore wind. This information isdisplayed graphically below:

Marine(<1 GW)

Micro (<1 GW)

Biomass(10 GW)

Severn Barrage(7 GW)

Hydro(2 GW)

Onshore wind(15 GW)

Offshore wind(25 GW)

SSE does not expect that the Severn Barrage could be delivered by 2020. However, we understand thatdemonstrable progress towards delivering the targets will be looked on favourably, so have included it inprojections. If the Severn Barrage does not get built, wind will likely fill the gap.

Implications of Delivering the Renewable Energy Target

The above information gives us an idea of where the UK needs to be, but the key is, of course, how to get there,and whether it is possible to get there, and in time. In the following section, SSE addresses the barriers thatneed to be overcome in order to achieve these targets. However, before doing this it is necessary to stress thatwithout the bulk of the following barriers being overcome, the UK will not reach these targets.

Renewables Obligation

The Government has a range of initiatives already in place that are making progress in encouraging the uptakeof renewable energy. For example, the Renewables Obligation (RO) has successfully underpinned renewableelectricity development in the UK, and will continue to be the key support mechanism for onshore andoVshore wind energy and biomass projects, and possibly marine projects in due course. SSE is also confidentthat the RO, with a higher target, and extended time period, will be an eVective mechanism to stimulateinvestment in renewable electricity to 2020 and beyond. However, the key is for Government to refrain fromexcessive tinkering with the RO, in terms of banding and other parts of its operation. Investor confidence isparamount for this mechanism to work long term.

Planning

The current planning system takes too long and is applied inconsistently and unpredictably, undermining theUK’s ability to address the challenges of security of supply and climate change. While we clearly do not expecta positive decision on all planning projects, we feel it is essential that planning decisions are made in a timely,transparent and accountable manner. With the sheer amount of renewable infrastructure needed to meet thetargets, and the fact that wind will be responsible for achieving the bulk of the 2020 targets, the currentplanning regime is, quite simply, not fit for purpose.

For example, under the current regime, analysis we have undertaken indicates that a new onshore wind farmcould require around 2–3 years of preparatory work, and currently the planning process can take up to 5 years,which will be followed by a further 1–2 years of construction. This does not take into account the time



associated with building new transmission infrastructure, which could in parallel take 3–4 years preparation,plus 2–4 years to construct, and again up to 5 years in planning.

As these indicative timescales show, new renewable projects, and the associated infrastructure, must beinitiated in the next year or two in order to make a significant contribution to the 2020 targets. We should notrevisit those matters that are already in train through a lengthy consultation process, but ensure that thecritical decisions can be made expeditiously.

It is for the reasons outlined above that SSE has supported the Government’s Planning Reform Bill andbelieve that the Bill’s proposed approach is a potentially significant step in the right direction, appropriatelybalancing concerns over environment, the economy and local communities, while providing the required levelof expertise needed for ruling on these complex inquiries through the vehicle of the Infrastructure PlanningCommission (IPC).

The reform package comprises enhanced community engagement; the establishment of an independentInfrastructure Planning Commission to determine all nationally significant infrastructure projects; NationalPolicy Statements setting out the policy framework against which decisions should be made; and simplificationof the energy consents and the Town and Country Planning regimes.

Overall, the proposed system oVers a better way of dealing with applications to build key nationalinfrastructure, at a time when we need it most. There are still issues to be ironed out in the Bill, such as theneed for end to end timescales for applications, and how the National Policy Statements will be applied indevolved administrations (where much of the renewables capacity will likely be located), but one thing is forcertain: if the planning system is not reformed adequately, the UK will not reach its renewable targets.

Network Issues and Flows

Electricity transmission infrastructure will be key to enabling the increased levels of renewable generationestimated throughout this response. Working with the UKBCSE, and the other two GB electricitytransmission licensees, SSE has examined the capacity of the existing GB transmission system toaccommodate new renewable generation without the construction of new overhead line routes. This is aninitial view with just the broadest of assumptions and without undertaking detailed system studies.

The diagram below is intended to give a general indication of the levels of renewable generation that could beaccommodated on the GB transmission system by 2020. It assumes completion of transmission upgradesalready in train (eg the Beauly-Denny rebuild and south west Scotland works) as well as completion of thoseworks expected to be achieved without protracted planning issues, eg relatively uncontentious re-conductoring and re-insulation work on existing tower routes, and substation extensions.



Capacity of the Transmission System to Accommodate Renewables

Existing transmission connected ~ 0MW renewable generation in 2008

Grid potential for additional renewable ~ 3,100MWgeneration in 2020

Renewable generation seeking ~ 1,811MWconnection i.e. contracted

Existing renewable generation in 2008 ~ 1,200MW(including 100MW pre-1990 hydro)



Existing transmission connected ~ 140MW renewable generation in 2008



Existing transmission connected renewable ~ 0MW generation in 2008



Existing transmission connected renewable ~ 0MW generation in 2008



Existing renewable generation in 2008 ~ 2,200MW(including 1,400MW pre-1990 hydro)

Grid potential for additional renewable ~4,200MWgeneration in 2020

Renewable generation seeking ~6,300MWconnection i.e. contracted

Levels of renewable energy generation that could be accommodated in 2020

Scotland 10,000 MW12

England and Wales 8,300 MW

Total 18,30013

There may be scope for this to be higher subject to further examination of generation scenario assumptionsin England and Wales. Rounding the indicative figure up to 20 GW for the amount of renewable generationthat could be accommodated in 2020 still however highlights a significant shortfall against the likelyrequirement for some 60 GW of renewable generation derived to meet the 15% overall target.

12 11,500 MW less 1,500 MW pre-1990 hydro.13 Includes some 2,000MW of existing installed renewable generation capacity connected since 1990.



High level assumptions used in analysis

1. Demand Severn Year Statement user demand data extrapolated out to 2020.

2. Generation Scotland: No contribution from Hunterston or Cockenzie power stations. Allother Scottish generation contributory.

England and Wales: All contracted generation proceeds and no closures (apartfrom Magnox nuclear and LCPD opted-out plant)

3. Planning Standard Apply current GB SQSS.

The intention is to give an indication of the potential for the existing GB transmission system in 2020(ie including upgrades that do not carry a high consenting risk) to accommodate additional renewablegeneration, and for that number (approximately 20GW) to be set against our estimate of the total volume ofrenewable generation (some 60GW) that we anticipate will be needed to contribute to meeting the 15% overalltarget for renewable energy.

While there is considerable capability in the potentially achievable 2020 transmission system there is stillnevertheless a substantial shortfall compared with what would be consistent with the 15% renewable energytarget. Detailed and coordinated study work by the three transmission licensees is therefore required toidentify appropriate reinforcements to deliver a transmission system capable of accommodating some 60 GWof renewable generation in 2020. In particular this work would quantify the trade-oV between more costlyoVshore transmission capacity versus more onerous barriers to associated with new onshore transmissionroutes (see indicative unit costs below).

In short, indications are that with appropriate funding mechanisms to enable the transmission works toprogress, and appropriate access and charging arrangements to ensure they are fully utilised, the transmissionworks in hand should be capable of accommodating some 20GW of renewable generation in 2020. Aco-ordinated study by the three transmission licensees should be supported to identify the further optimalreinforcements necessary to accommodate some 60 GW of renewable generation in 2020 and the futurefunding requirement for those works should be recognised now.

However, SSE must stress that the consenting and completion of the Beauly-Denny transmission re-build isabsolutely key to releasing the upgrade potential of the existing Scottish transmission system. By rebuildingthe weakest leg of a north of Scotland transmission ring it allows the other elements of that ring to be re-conductored and re-insulated (ie no new overhead line routes) to increase the capability for renewablegeneration in the north to some 6.4GW (cf 2.2GW already connected). The reinforced ring facilitatescollection of the output from onshore developments and the subsea island links are planned for connectiononto the reinforced transmission ring.

Back-up plant and demand response

By 2020, we will need some changes to the energy system to ensure that it can manage the increased amountof intermittent renewable energy electricity generation. SSE believes that there will be a need for some formof back-up for those times when renewable resources are not available. This could take the form of additionalthermal supply capacity, or more innovative approaches such as demand side management, or storage.

SSE estimates that at 2006 levels of energy demand, a total installed capacity of 130 GW would be needed asagainst the 76 GW currently installed today. We estimate that 61 GW of renewable energy generating capacityin 2020 would need to be supported by:

— around 9 GW of nuclear plant, and 31 GW of thermal plant to meet energy demand; plus

— a further 18 GW of capacity to manage intermittency at peak periods; and

— a further 10 GW of plant would be needed to provide a 20% plant margin.



The below diagram illustrates this data:

020406080

100120140

Plant margin 10 10Renewables back-up 18Renewables 8 61Thermal 48 31Nuclear 9 9

2006 generating capacity requirements (GW)


TOTAL 74 129

The UK currently has around 76 GW of electricity generation capacity, which means that there is currentlya healthy plant margin. Over the coming decade, as a result of the Large Combustion Plant Directive, andplants coming to the end of their life, over 22 GW of existing power stations are expected to close by 2020.This could result in a need for 75 GW of new build by 2020.

The location of the necessary backup plant, and the capacity of the network to allow connection need also tobe considered.

The importance of reducing energy demand

As discussed earlier, the 2020 projections for the amount of renewable energy to be delivered across each sectorare highly sensitive to the assumptions made about demand growth.

Although SSE will not focus on the detail in this submission, the extent to which energy eYciency policies areimplemented in the UK will have a significant impact on the amount of renewable energy that will be neededto meet the target. It is worth noting that the biggest opportunity for energy eYciency is in reducing heatconsumption, and is less likely to impact on future demand for electricity.

Addressing heat policy could be critical in meeting the targets

Given that heat is responsible for over 50% of energy usage, compared to electricity being responsible foraround 20% of energy usage, for each extra percentage of heat we make from a renewable source, we take 2.5%oV the renewable electricity target we need to get to in order to meet our European renewable targets. Giventhat there is at present no incentive for encouraging renewable heat but there is an Renewables Obligation(RO) for electricity, SSE believes that the Government must take action quickly to change this. While notwedded to a particular solution, SSE sees Government action here as a real opportunity to ensure a fairer shareof the burden for heat, in line with that of electricity and transport.

Making sure that eVort is equally distributed across all sectors of the economy is critical to ensuring the mostcost eYcient solutions are uncovered and to avoid creating market distortions. In the future, the three mainenergy markets for electricity, heat and transport should become increasingly inter-related. A harmonisedapproach will be essential to allow loads to shift between these markets. For example if electricity is to play apart in decarbonising the heat and transport sectors it must not be unequally burdened with the cost of carbonmitigation since this will distort this market and potentially prevent this solution from being developed.

Meeting the Targets and Beyond

If the above recommendations are implemented, SSE believes the UK has a fighting chance of reaching itstargets. However, it is imperative that Government action is clear, targeted and ambitious. Where there is aneed to consult on new areas, it is right that this is done, but it is important that consultations do not coverold ground, particularly if it delays action.



In the immediate term, we believe that there are a number of measures in train that are critical to delivery ofthe target, and it is important that the Government maintains a focus on implementing these, such as the newarrangements for the Renewables Obligation, and the current planning reforms.

SSE, also believes that there are potentially a number of measures that Government could implementexpediciously to facilitate progress towards the target. These include:

— expanding the end date of the RO beyond 2027 to ensure investor confidence is maintained;

— developing clear guidance to Ofgem from Government about facilitating renewable energydevelopment; and

— prompt delivery of transmission access reforms, including physical access and dispatch regimes thatallow achievement of the renewable energy targets, while maintaining a parallel focus on securityof supply.

A key area of focus must be realising opportunities to encourage timely new investment in the relevanttransmission infrastructure.

Emerging issues for further consideration

This paper provides a very high level assessment of the implications of delivering the renewable energy targetin the UK. However, SSE believe it vital that policymakers give full consideration to the following areas:

— Ensuring adequate network infrastructure:

(a) Transmission.

(b) Distribution.

— Ensuring the supply chain can deliver.

— Ensuring suYcient skills.

— Managing and communicating public acceptance of a significant increase of renewables.

— The technology, scale and location of peaking plant.

— The role of demand side management and storage to balance an increased proportion of intermittentgeneration.

— The availability, cost and sustainability of biofuels.

— The use of renewable electricity for heat and transport.

— The cost of implementing the renewable energy target for consumers.

— The uncertainties around the cost, availability and sustainability of biofuels, and how any shortfallin the biofuels area would be made up across the other sectors.

— The range of energy demand projection scenarios looking forward, and the implications for therenewable energy targets, including possible trends for an increased use of electricity for heating andtransport.

23 April 2008

Memorandum by Scottish Power Limited and Scottish Power Renewable Energy Limited

Introduction

1. This memorandum is on behalf of Scottish Power Limited and ScottishPower Renewable Energy Limited(together “ScottishPower”). Scottish Power Limited is a subsidiary of Iberdrola SA. It is an energy businessthat provides electricity transmission and distribution services, supplies more than five million electricity andgas services to homes and businesses across Great Britain (GB), and operates electricity generation, gasstorage facilities and associated energy management activities in the UK.

2. ScottishPower Renewable Energy Limited (the UK’s largest wind developer) is part of IberdrolaRenovables, which is 80% owned by Iberdrola SA. Iberdrola Renovables is the largest developer of renewablesglobally.

3. The Iberdrola Group operates in 40 countries worldwide and has interests in renewable electricitygeneration (wind, hydro, solar thermal, tidal), thermal electricity generation (coal, gas, nuclear), transmissionand distribution, gas storage and energy services. The overall Group has over 42,000MW of installedelectricity generation capacity and supplies energy to over 25 million points of supply.



General Questions


4. The targets set out in the Directive will be extremely challenging at both an EU and UK level. In particular,the UK has to increase the proportion of energy it derives from renewable sources from current levels ofaround 2% to 15% by 2020.

5. It is imperative that all sectors involved (electricity, heating and cooling and transport) play a part inreaching the UK’s renewable energy target. Although Government have not yet advised how this target willbe shared between the sectors, it is anticipated that the target for renewable electricity could be in the regionof 40% by 2020, almost a threefold increase on the current target of 15% renewable electricity by 2015.

6. Furthermore, the 10% mandatory target for bio-fuels will be extremely challenging, due to the needs ofagriculture and the intense competition for such fuels from other industries, as will the targets for heating andcooling (anticipated to be in the region of 10%) as large scale development in these sectors is not so advanced.Ultimately, this means that the targets for the electrical renewable technologies will be even more challengingin the short to medium term.

7. Delivery in the UK is already constrained by planning and grid access issues. The new target will increasethe urgency of addressing these issues and will also make it necessary to strengthen the supply chain. Solutionsto these problems must therefore be prioritised to ensure that progress continues to be made towards thetarget.

(ii) How coherent are these proposals in the context of the EU’s energy policies in general and in the Third EnergyPackage in particular?

8. These proposals will contribute significantly to the development of a lower carbon electricity supply andare consistent with the development of a liberalised EU energy market.

9. We are aware of the UK Government’s initial concerns that the 20% renewable energy target combinedwith a 20% energy eYciency target (as proposed by the Third Energy Package) would result in a low carbonprice, based on a 20% CO2 reduction. However, we understand that the latest assessment of the figures suggeststhat this is no longer thought to be a significant risk.


10. It is important that there is an appropriate mix of energy generation in the system and no over dependenceon any single generation technology. From a UK perspective, an increased component of renewable energywill reduce dependency on imported fossil fuels. However, it will be necessary to maintain suYcient back-upin the form of thermal plant. This must remain a fundamental part of the generation mix, in order to balanceout the variability of renewables.

Grid Access

(iv) How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energygenerators?

11. The Great Britain system for electricity is self despatched, so the priority despatch provisions of 2001/77/EC are not relevant; connected renewable generators have generally been able to run whenever they areavailable. The main issue has been the provision of suYcient infrastructure to connect the new renewablegeneration. ScottishPower has been at the forefront of this work, to which Directive 2001/77/EC is notrelevant.

12. The Directive also has optional provisions concerning priority access for renewables. While helpful inprinciple, these provisions need to be approached with some caution, since it is necessary that thermal plantalso has suYcient grid access and connections.



(v) To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is itconsistently a problem across all Member States?

13. In GB, the biggest constraint on renewable development is currently the planning process. However,gaining a grid connection is also an important constraint. The most important way to resolve this, as notedabove, is to improve the electricity network infrastructure. This requires both regulatory approval andplanning consent for new lines. The latter procedure can lead to long delays.

14. As an interim measure, it is also important to utilise existing infrastructure more eYciently andScottishPower is supporting a number of initiatives in the Transmission Access Review to this end.

(vi) How does Use of System charging affect grid access for renewable energy generators? How far can the differentlevels of renewable energies take-up in different Member States be attributed to Use of System charging and costsharing rules?

15. The locational Use of System charging methodology introduced in England & Wales in 2004 and extendedto Scotland in 2005 results in very high charges for renewable generators remote from the GB load centre inthe south east of England. The charge is largely based on a generator’s location and is designed to reflect thelong term investment cost of supporting additional generation at that location. Since there is a significantnorth-to-south flow on National Grid’s system reflecting the location of power stations near primary fuelsources in the north and the large load centre in the south east, then the locational charges reflecting thisimbalance are high in the north of England and in Scotland and low in the south. However, there are realquestions as to whether the current system achieves the desired outcome in an equitable manner.

16. Under the current system, a 100MW wind farm in the north of Scotland will pay £2.2 million per annumin transmission Use of System charges whereas a 100MW power station near London would be paid £0.6million per annum for connecting to the system. As, by their nature, renewable resources are often distant fromthe load centre then this locational charging methodology significantly increases costs for the GB renewablesindustry and is in our view disproportionate.

17. In terms of transmission charging, GB renewable generators are significantly disadvantaged whencompared with those in other Member States. Half the Member States do not charge generators of any typefor use of the transmission system on the basis that it is more appropriate to levy all of these charges directlyon suppliers. Of the Member States that levy charges on generators, half employ a usage or postage stampapproach and recover a substantially smaller proportion of system costs from generators than the GBlocational methodology. This group includes the renewable energy market leaders of Denmark, Germany andSpain, with Denmark further exempting renewable generators from the transmission charges.

18. The GB charging methodology is one of only six locational methodologies in Europe and the sharpnessof the GB locational signals does not bear comparison with other locational signals in Europe. The EuropeanTransmission System Operators (ETSO) concluded in their June 2006 “Overview of transmission tariVs inEurope” that average GB charges were only comparable to Greece, which also operates a locational chargingsystem. Greece, however, exempts renewable generation from transmission charges. The report alsoconcluded that charges in Scotland are significantly above the EU average, are at least five times above theGreek average and in Northern Scotland are in the order of 30 times greater than the Danish average.

(vii) What impact do the various systems of reinforcement planning and work have on encouraging renewablegeneration? How important is the issue of constraint in increasing Member States’ renewable generation?

19. Reinforcement and connection in the UK is provided under an “invest then connect” policy. This requiresthe need for the capacity to be agreed in a binding agreement and financial commitment provided by thegenerator prior to the connection works being started. Thus, the generator needs to have a high level ofconfidence in their project before they will enter into the agreement. This policy results in delays in generationbeing connected as well risk that often discourages developers from proceeding until their project is consented.

20. The current connection and reinforcement policy also requires the transmission and distribution systemoperators to provide terms for connection on a non-discriminatory basis, regardless of how advanced orrobust their project is. No allowance can be made for the likelihood of a project’s success and therefore thesystem requirements are often over designed, triggering excessive time and cost.

21. In the UK, Ofgem have allowed funding for grid infrastructure but the planning process is not facilitatingthe development and investment in power networks required to meet the 2020 targets. Integrated planning isessential to reconcile town and country planning issues and grid reinforcement programming.



22. This constraint has a significant impact as renewables growth is tempered by the need to accommodatetraditional thermal generation within a system of rules that were created for a significantly diVerent generationmix. For example, National Grid is cautious about modifications to the charging system that would adverselyaVect traditional thermal generation. While this is generally appropriate, such caution should not go as far asruling out significant improvements in facilitating the participation of renewables where this can be achievedat a proportionate and modest cost elsewhere.

(viii) To what extent is further co-ordination of National Regulatory Authorities needed?

23. In general, the problem does not involve additional co-ordination between National RegulatoryAuthorities as the development constraints on renewables are mainly at the national level. It is at that levelthat there is a role for the regulators.

24. In the UK, Ofgem have traditionally been cautious about allowing networks expenditure relating toclimate change policy. However, some change in this approach is now evident; for example, the RETsprogramme was approved, leading to significant infrastructure improvements to support renewables inScotland. But these developments were more appropriate to the UK’s previous target of 15% of electricity; tomake significant progress toward the EU 2020 targets will require more strategic thinking to facilitate a newregulatory regime especially for early (or advance) renewable investments that may be viewed as “at risk”. Tothis end, larger financial commitments are required from Ofgem. At the moment financial investment is onlybeing made if projects are coming to fruition. In some parts of Wales, for example, the renewable resourceexists, but development is slow coming forward as there is currently no grid suYcient to exploit renewableson a large scale.

(ix) How far do current regulations inhibit access to the grid?

25. Current regulations do not encourage existing generators to release or sell transmission capacity in theshort term nor do they take account of the intermittent nature of wind generation and the resultantrequirement for less infrastructure per MW of installed capacity than for conventional generation.

26. Medium to long-term capacity trading products need to be identified to encourage capacity sharing toenable more generation to be connected to the grid. Such products should provide suYcient access firmnessto enable developers to finance their generation projects and allow the owners of existing and new generationto negotiate their own capacity sharing arrangements. Non-firm access products should be developed whichcould oVer potential investors a reasonable degree of certainty of returns perhaps in conjunction with a firmproduct for part of the required capacity. This would facilitate the introduction of a limited connect-and-manage approach to connection to the transmission system. Non-firm access products have a key role to playin launching the marine renewables industry and ensuring that development of marine generation technologiesis not lost to other countries.

27. Network planning standards should be amended to allow renewable generators to accept a lower securityof connection than the current GB Security and Quality of Supply Standards require. This could both releaseadditional capacity using existing assets and reduce the cost of upgrades.

Support Schemes

(x) At what level should the EU be involved in harmonising or regulating support schemes offered by Member Statesto encourage renewable energy generation?

28. It is crucial that existing support schemes in each Member State are protected and that investor confidencein renewables is maintained through long-term support frameworks.

29. Each Member State should therefore have the freedom to choose a scheme to meet the specific needs oftheir domestic situation and in a manner consistent with the liberalisation objectives of the EC ie existingregulatory markets, industry commitment and cost/risk to the consumer.

30. However, there is merit in considering the potential of regional renewable markets ie for Member Statesthat form a closely interconnected market, or have similar support systems. This could provide additionalflexibility to ensure that the targets are achieved in the most cost-eVective way.



(xi) What impact have the various schemes in operation across the Member States had on encouraging renewableenergy? How have these schemes affected take-up both by producers and commercial and domestic consumers?

31. When assessing the impact on support schemes on encouraging levels of renewable generation, eachMember State must be considered in isolation. For example, the Renewables Obligation (RO) in the UK hasbeen highly successful in attracting high levels of investment in renewable electricity generating technologies,but issues beyond the RO, such as planning, grid and availability of wind turbines, have prevented theirpotential being maximised to the full.

(xii) Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Isnecessary investment hampered by lack of market harmonisation?

32. It is crucial that support schemes in each Member State are protected, otherwise confidence in investingin any EU renewables market will be eroded and targets will not be met. However, there is merit in theflexibility that cross border trading can bring in meeting overall EU 2020 targets in a cost eVective manner. Ifthis is done on a voluntary basis, investments should not be hindered by the lack of full harmonisation, asinvestors will be free to choose the market that is most beneficial to them (ie market will decide rather thanregulation).

33. Nevertheless, each country needs to reach their baseline target before advancing to a “free trade” system.This would ensure that Member States participate in achieving their targets and not simply purchase “credits”in an eVort to avoid implementing renewable development.

(xiii) To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation ofsupport schemes?

34. We think that any gains from the enhanced use of Guarantees of Origin (GoO) certificates are smallcompared to the damage that would occur to the level of renewables development as a result of disturbingcurrent support schemes. Any enhancement of the use of GoO certificates should be considered against thisbackdrop.

21 April 2008

Memorandum by the Sussex Energy Group

About the Sussex Energy Group

1. The Sussex Energy Group undertakes academically rigorous, inter-disciplinary research that engages withpolicy-makers and practitioners. The aim of our research is to identify ways of achieving the transition tosustainable, low carbon energy systems whilst addressing other important policy objectives such as energysecurity. We a group of 15 social scientists, working from a multidisciplinary perspective. Our core support isthrough a five-year award from the Economic and Social Research Council from April 2005, but also havefunding from a diverse array of other sources.

2. We welcome this inquiry into the EU 2020 renewables target. In our response to the Committee’s questions,we have spent most of the time on those questions in which we have particular expertise. This expertise derivesfrom our current research by a number of Sussex Energy Group team members. These include work on EUenergy policy (particularly the interaction of energy security and climate change), research on policies for thedeployment of low carbon technologies (including renewables), and work on incentives for electricity networkinnovation to support low carbon electricity systems. We would be happy to assist the committee further—including making ourselves available to give oral evidence.

General Questions


3. Both the EU 20% target and the suggested 15% target for the UK are ambitious. The latter is perhaps moreambitious given that the UK only sources 2% of its energy from renewables at present. To make substantialprogress towards meeting the UK target, policy will need to develop significantly from current practice in anumber of ways. There are three points we wish to emphasise here. First, there is a need to consider allrenewable sources of energy in determining how to meet the UK target—not just renewables that generate



electricity. Second, there is a need for more scrutiny of the consequences of the use of renewable transportfuels. We expand on these two points in the following two paragraphs. Third, there is a need to review the UKmechanism for supporting renewable electricity—the Renewables Obligation—and to develop a plan toswitch to a more eVective approach such as a feed in tariV mechanism. We discuss this point further in ouranswers to the Committee’s questions on mechanisms below.

4. Some organisations have provided a view about how a UK target could be met. For example, theRenewable Energy Association suggests that the full 20% of UK energy could be sourced from renewables inthe following way: 10% of transport energy demand from biofuels; 26% of heat demand—mostly from smallscale technologies integrated into buildings; and 49% of electricity demand sourced from an array oftechnologies at diVerent scales (Wolfe, 2007). Whilst we have not yet conducted such a detailed analysis of the15% UK target, views such as this oVer a useful counterpoint to the tendency to simply translate the renewableenergy target into an equivalent renewable electricity target. Downplaying the potential for renewable heat—and to a lesser extent renewable transport fuels—risks making the target more diYcult to meet and reduces theflexibility of government, industry and citizens to act. Furthermore, any target for the production of renewableenergy should be part of a strategy to reduce overall demand. The more successful the UK is at reducingdemand through eYciency measures, the less renewable energy will be needed to meet the target.

5. The scope for renewable heat is substantial in the UK, using solar hot water panels, biomass boilers andother technologies. For example, solar hot water panels (which can also supplement fossil fuels to meet heatingdemand) are commercially available. They are amongst the cheapest “micro-generation” technologies that canbe installed in homes, and can supply around 50% of annual hot water demand. Despite potential such as this,heat has not been treated seriously enough by policy makers in the past. Unlike many Northern Europeancountries, the UK does not have a tradition of district heating in urban areas. Part of this may be due to theavailability of natural gas. It could also be due to fact that the UK’s energy system is highly centralised—andpolicy debates are often dominated by discussions of electricity. It is only very recently that the policy systemhas begun to systematically think about the provision of heat (Department for Business Enterprise andRegulatory Reform, 2008). If heat is to be taken more seriously than in the past in the UK, new incentives willbe required. These should not only focus on renewable heat, but should also encourage the more eYcient useof fossil energy through combined heat and power. There may be scope for incentive analogous to a feed intariV for electricity in addition to the current preference for grant funding—something that is time limited andis not suitable as a long term policy.

6. The contribution of renewable transport fuels to the UK and EU targets needs particularly carefulconsideration. With the Renewable Transport Fuel Obligation now in place, the UK government faces thechallenge of ensuring that this policy contributes to a more sustainable energy system. SuYcient safeguardsshould be in place to ensure both environmental and social sustainability in the regions that produce thesefuels. While the carbon and sustainability reporting mechanism within the RTFO goes some way towards this,it certainly does not replace the need for a robust, transparent and independent certification system. It iscommendable that the government has commissioned reviews on the environmental sustainability ofinternational biofuels production and use, as well as on evidence of the displacement eVects of biofuels onland-use and overall savings in emissions. Postponing the RTFO until the release of these reviews might riskunnecessarily adding to the uncertainty already faced by biofuels industry, yet the UK government should beprepared to rapidly revise RTFO rules in the light of the latest evidence and press for commensurate changesin EU policy. With regard to biofuel imports, particular attention should be given to potential social impactsin biofuel producing countries. Within its reviews and discussions at EU level, the UK government shouldcarefully consider its current policy which supports the use of “1st generation” biofuels and the development“2nd generation” biofuels. The latter are widely considered to be far moire sustainable than the former. Whileexpert and stakeholder views on the topic diverge, the small contribution of 1st generation biofuels to CO2

reduction and the other risks of using these fuels supports the view that priority should be given to developing2nd generation technologies. In the short to medium term, this may mean that the 2020 target should mainlybe met through renewables for heating and electricity.


7. The 2020 renewables target is a coherent continuation of previous EU policies in the field of renewableenergy. Experience has shown that the 2010 targets already in place have resulted in positive developments inrenewable electricity and some progress in renewable transport fuels. These targets need to reviewed andextended if the progress to date in these sectors is to be sustained. As we note above, the need for review isparticularly acute for transport fuels so that the potential negative impacts of biofuels targets are minimised.



Progress in the use of renewable heating and cooling has been slow—partly due to a lack of specific targets andpolicies. This has meant that significant potential for renewable heating and cooling has remained untapped.

8. It is possible that the continuation of the existing Directives—and the adoption of an additional Directivefor the renewable heating and cooling sector—would have been better than a new Directive for all threesectors. The European Commission concedes that it might be more diYcult to ensure that Member States fulfiltheir national targets on the basis of an overall renewable energy target. The EC therefore highlights correctlythe need for legally binding targets (Commission of the European Communities, 2008a). However, the currentproposal does not include any provision for penalties if Member States fail in meeting their targets. The useof traditional infringement procedures before the European Court of Justice is insuYcient given the lengthyprocedures involved. A provision to ensure the legally binding nature of the proposed Directive is crucial toensure that the incentives for growth in all renewable sectors are maintained.

9. This leads on to another important issue that will aVect the successful continuation of EU renewable energypolicy and therefore EU energy policy as a whole. Any policy initiative in this area needs to be assessed clearlyagainst its intended policy objectives. To ensure the achievement of all three objectives of EU energy policy(energy security, environmental sustainability and competitiveness), the Commission has proposed a packageof diVerent proposals. While all of them taken together will address these core objectives, individual proposalswill vary in their focus. If individual proposals do not adequately take account of the overall objectives ofpolicy, there is a risk that successful progress will be hampered. Therefore, the renewables target needs to beclearly distinguished from broader proposals for a low carbon energy target.

10. The inclusion of other low carbon energy technologies (eg nuclear or carbon capture and storage, CCS)within the scope of the 2020 renewables target risks undermining its purpose and eVectiveness. During thepolicy debate on the climate-energy legislative package in the European Council on 28th February 2008, theUK government argued that an assessment should be made to see how the renewables target could be used topromote CCS.14 Yet, other instruments are being developed for the promotion of CCS at EU level. Thisincludes a publicly funded demonstration plant in the UK which is a contribution to the overall European goalof 10–12 such plants by 2015 (Commission of the European Communities, 2008b). The core objective of therenewable energy target is the stimulation of growth in the deployment of renewable energy sources in eachMember State. In this context any flexibility which allows Member States to use investments in other lowcarbon technologies or trading to meet their targets should be minimised. If flexibilities such as these areallowed, this would threaten the EU’s claim to be an international leader in international climate changenegotiations. It could also weaken the incentives for both renewables deployment and the growth of arenewables industry.


11. An increased share of renewable energy sources in the EU’s energy supply could improve the EU’s energysecurity in several ways The attainment of this target would considerably decrease the EU’s energy importdependence and would therefore reduce the exposure of European economies to fossil fuel price volatility.Scenarios carried out for the Commission show that if the target is met, fossil fuel imports would be reducedby 200 million tonnes of oil equivalent per year (European Commission, 2006).

12. However, it is important to note that energy security is not just a matter of maximising indigenous energyproduction and minimising energy imports. As we have argued in our submission to the UK government’sreview of nuclear power (Sussex Energy Group, 2007), energy security is a multi-dimensional issue. The extentto which particular strategies such as renewables expansion can tackle risks to energy security needs to beanalysed carefully. In addition to the potential impact of high fossil fuel prices or fossil fuel scarcity, there arealso important risks to security due to a lack of investment in domestic infrastructure, technology failures andeven civil unrest. The UK’s experience of the last two decades has shown that some of these other risks havepresented a more material threat to energy security than problems of import dependence.

13. In the electricity and heat sector, a higher share of renewable energy sources is likely to increase the shareof distributed energy generation. It is possible that this would, in turn, contribute to a more resilient energyinfrastructure with extensive redundancy. However, for this to happen, existing electricity networks (and newheat networks) would need to be developed and adapted to integrate more decentralised generation while atthe same time integrating new centralised generation capacity (eg oVshore wind). New regulations andcooperation procedures as envisaged by the EC are therefore of central importance to ensure energy securityunder such scenarios. An increased share of renewable energy sources can also substantially increase diversityin the energy system in terms of generation technology, fuel sources etc. and thus increase energy security. Aswith energy security, arguments for diversity have to be weighed up with care. Diversity is also a multi-faceted14 Remarks made by the UK delegation in the debate on Council Document 7010/1/08, 28 February 2008.



concept (Stirling, 2004). However, the advantage that renewable energy has is that it is a category that includesa wide range of technologies which generate in diVerent ways, at diVerent scales, using diVerent resources andvery distinct technologies. The development of this potential in a way that reflects this diversity would requiresupport policies that provide incentives for the development and deployment of a range of options. Thesewould include both new and less mature generation technologies—and not just on those technologies that arethe cheapest to deploy at the present time.

Grid Access


14. Grid access for renewable electricity sources remains a significant barrier in most Member States. This isshown, for example, by EU-wide surveys like the one carried out in the Commission funded DG-GRIDproject.15 However, the issue is more acute in some Member States than others. In the UK, the problem hasbeen particularly acute and has had an impact on the rate of deployment of renewables. This is despite evidencethat the deployment of renewables in the UK is nowhere near the level at which significant system constraintsshould be expected (UKERC, 2006). In Denmark—by contrast—there are now significant challenges for newrenewable generators wishing to connect. But this is a product of the past success of renewable generation(particularly wind power). Constraints are now being faced, and are being dealt with by innovative approachesto network co-ordination and control.

15. In general, European electricity networks have not been designed to integrate renewables. Thegeographical distribution of networks is not often well matched with that of renewable resources.Furthermore, operators of distribution networks are not used to connecting large numbers of renewablegenerators to their grid, some of which may have diVerent levels of variability than traditional sources. Withinregulatory regimes, there is often a tension between “incentive regulation” of electricity networks and the needto connect renewables for environmental and other reasons. Incentive regulation has proved eVective inmaking grid companies perform more eYciently in some countries—but the focus of this eYciency is shortterm. Seen through this lens, connecting generation which is of a diVerent type and in diVerent locations tomore “traditional” generation can seem expensive. This is because there are additional costs of systemintegration, grid extension and so on. However, if these costs were assessed from the point of view of a futurevision for a more sustainable electricity system, they may be seen as necessary investment to enable thetransition from the current situation. An important point to bear in mind is that whatever the shape of futureelectricity systems, the grid infrastructure in many EU countries will need to be substantially upgraded andreplaced in the coming decades.


16. Use of System charging is not the main factor influencing renewable energy take-up. The design of supportmechanisms for renewables is certainly more important. Nevertheless, network charging does play a role. InDenmark, for example, with its high share of new renewables, network access has not been a major issuebecause there is a mechanism for network operators to share connection costs between each other. In othercountries, where connection costs are attributed to individual networks and are not reflected in the regulatoryframework, this has been a barrier. This has been the case historically in the UK, despite some changes inregulatory rules to allow the costs of connection to be shared between generators and consumers. Even inGermany, uncertainty about grid connection in general and sharing of costs between plant developer andnetwork operator has in many cases undermined the feed-in support mechanism.

Support Schemes


17. Our view is that any move to harmonize support schemes should be considered very carefully. There aremany reasons why harmonization—which seems like a good idea for economic eYciency reasons—may notbe desirable. One of these is that some types of support mechanism are more amenable to harmonization thanothers. Tradable green certificate schemes (such as the UK Renewables Obligation) work best for large15 http://www.ecn.nl/en/ps/research-programme/energy-markets/dg-grid/



companies who are able to trade in volume. If this were the dominant mechanism for renewables supportwithin the EU, there could be a strong role for the EC in harmonising support schemes to encourage cross-border trading. Indeed, most proponents of EU-wide harmonisation of support systems argue in favour ofa certificate scheme to ensure compatibility with internal market objectives and to increase competitiveness.However, there are risks in placing too much emphasis on trading. The use of extensive trading to meet eitherEU-wide or individual Member State targets (such as the UK’s) risks undermining claims to leadership in theinternational negotiations to secure deep cuts in emissions. Other countries could conclude that MemberStates who intend to rely on trading are not—in fact—as committed to this leadership as they claim to be

18. Another issue for trading is that most Member States do not use certificate systems—and instead usealternatives such as a feed-in tariV policy. Since feed-in tariVs work by fixing the price paid to renewablegenerators, they are less amenable to harmonisation and can be more readily left to be implemented byMember States. In a recent policy document, the Commission noted that “well-adapted [their emphasis] feedin tariV regimes are generally the most eYcient and eVective support schemes for promoting renewableelectricity” (European Commission, 2008). This emphasis on “well adapted” mechanisms highlights anotherimportant issue that may make harmonisation diYcult: the success of individual support schemes depends onhow well they are embedded in the national or regional context. In other words, it is diYcult to see how thesame policy could be implemented in each Member State because of important diVerences of approach andstatus—for example, diVerent energy market structures, diVerent status of renewables deployment and so on.Harmonisation at this early stage would aVect investor’s confidence since most national support schemes inplace are relatively new.


19. Studies comparing national support schemes in EU Member States regularly show that feed-in tariVsystems are more cost eYcient and eVective than other mechanisms such as the Renewables Obligation indeploying renewables. One reason for this is that certificate systems are seen as more risky (because of theuncertainty about the future level of certificate values) than feed-in tariVs (eg Mitchell, Bauknecht et al, 2006).The contrasting experience of the UK and Germany is important here. In Germany, approximately 12% ofelectricity comes from renewables, whereas in the UK country the equivalent figure is around 5%. Accordingto the German Environmental Ministry, the average annual cost per customer of the German feed-in tariVwas about 26 Euros (£18) in 2006. In November 2006, Ofgem stated that the ROC system was costing UKconsumers about £7 per year at that time. This suggests that whilst German consumers are paying more, theGerman system is funding more renewable generation per pound spent.

20. As we noted earlier, tradable permits can be attractive because—like emissions trading—they are designedto meet a particular target. It can be argued that feed in tariVs are at a disadvantage because no target is builtinto this policy mechanism. Furthermore, feed-in tariVs has been that they do not expose project developersto price competition. As long as feed-in tariVs are high enough, experience shows that they have been eVective.The main question that needs to be addressed is how to set the level of feed-in tariVs so that this eVectivenesscontinues in a transparent and sustainability-oriented way. The level should also take into account economic,environmental and social desirability of each technology into account (Madlener and Stagl, 2005). Empiricalevidence from Germany shows that prices have come down due to competition between technology producersand a built in annual reduction in the price oVered to each technology.

21. Another feature of feed-in tariVs is that they can make substantial contributions to a more competitiveenergy market—through an increase in market participants. Feed-in tariVs with its secure support frameworkattract new, smaller actors as opposed to certificate systems where investments are largely dominated byfinancially strong incumbents. Even though the UK government has strongly defended its preference for theRenewables Obligation, this issue has now led to the announcement of a review of the arrangements forsmaller generators. As the former DTI admitted in May 2007, “the Obligation was designed to support largescale deployment of renewables and we do not feel that it is the best way to deliver the incentives that themicrogeneration industry require” (Department of Trade and Industry, 2007: 21). The inclusion of new actorssuch as individuals or cooperatives can at the same time increase public acceptance of renewable energyprojects which becomes increasingly important.




22. At this stage, the emphasis should not be on how to enable cross-border renewables markets but on howto establish strong national renewable markets. When there are strong national markets in most MemberStates, cross-border approaches may make sense. A focus on cross-border issues would distract from thenecessary removal of national barriers that constitute the major impediment for meeting national targets. Aswe have already noted, the need to maintain international leadership in the discussion on future reductionsin carbon emissions means that Member states need first show national progress before resorting to trading.Furthermore, the financing of renewable energy projects abroad could also endanger public acceptance ofrenewable energy sources and national support schemes. A major argument for national support of renewableenergy sources are local economic benefits in terms of job creation and tax income.

21 April 2008

Memorandum by the UK Business Council for Sustainable Energy

Introduction

The UK Business Council for Sustainable Energy brings together the key players16 in the energy sector todevelop an eVective dialogue with Government that can help strengthen the UK’s strategic agenda forsustainable energy.

The activities of the companies that support the Council collectively span generation, transmission anddistribution, and supply of energy. As a result, Council members are well positioned to provide insights intothe eVective delivery of the EU renewable energy target in the UK.

The Council believes that there is a crucial role for renewable energy in delivering secure and low-carbonenergy supplies in the UK, and we welcome the Government’s commitment to supporting the appropriatedevelopment of the UK’s renewable energy resources.

Energy companies are keen to play their part in delivering low carbon energy supplies, including renewables,and are committed to working with Government and others to ensure that the right support mechanisms arein place, and that key barriers are addressed.

The purpose of this paper is to:

— present the Council’s initial thinking about the implications of delivering a 15% renewable energytarget in the UK by 2020, with a particular focus on renewable electricity,17 including:

— the anticipated mix of renewable electricity technologies in 2020;

— wider implications of meeting the target on the electricity system;

— outline key “no-regrets” measures that should be implemented immediately to facilitate progresstowards the target; and

— highlight a range of issues that the Council believes would benefit from further consideration indeveloping the Government’s Renewable Energy Strategy.

Key Points

Importance of renewables: The Council believes that there is a crucial role for renewable energy in the UK in:delivering greenhouse gas emission reductions; reducing reliance on energy imports; and potentially reducingexposure to fuel price volatility. In addition, increased investment in renewable energy is anticipated to deliverexpanded business opportunities along the renewable energy supply chain.

Stable long-term policy framework: Action by Council members will underpin the bulk of delivery of the UK’srenewable energy targets. We are therefore keen to work with Government to help develop a clear and stablepolicy framework that supports the eYcient and cost-eVective delivery of renewable energy in the UK.16 Members of the Council include Centrica, EDF Energy, E.ON UK, National Grid, RWE npower, Scottish and Southern Energy,

Scottish Power, and United Utilities.17 The Council has separate but related work streams on energy eYciency and demand reduction, as well as the progressive

decarbonisation of the UK heat market.



Timely action: Delivering the UK’s share of the EU Renewable Energy target will be challenging, but webelieve it is achievable, provided that the Government does act in a timely manner to ensure the right supportmechanisms are in place, and that current barriers, such as planning and grid access, are fully and eVectivelyaddressed.

Cost: Delivery of the renewable energy target will have significant cost implications for consumers. This is inthe context of the Stern Review, which found that moving to a low carbon economy will require significantadditional investment in low carbon energy supplies including renewables in order to avoid the costsassociated with climate change. It is critical that these costs are understood, and communicated to consumers,and should form a significant part of the consultation on the Renewable Energy Strategy. Achieving aresponse that does not have a disproportionate impact on low-income households will be a crucial test forpublic policy in this area.

Importance of energy eYciency: Energy EYciency has a critical role to play in reducing the amount ofrenewable energy required to meet the target, and therefore the overall costs. Council members have a strongand important role to play in securing the uptake of energy eYciency measures, and we are currently workingwith Government to help inform key policies, such as the Supplier Obligation, as well as other areas such asthe Zero Carbon Homes, and wider energy eYciency measures.

Network implications: The Council’s initial view is that by 2020 around two-thirds to three-quarters of the newrenewable electricity generation capacity could come from oVshore and onshore wind energy. This will haveimplications for the supporting infrastructure needed to maintain energy system stability, including securingsuYcient generation capacity to manage intermittent supply from renewables.

Network investment: There is a need for significant investment in the network infrastructure to manage theincreased contribution from renewable energy, and to manage the associated peak capacity and operationaland system stability issues. Innovative approaches to optimising use of present network assets as well asnetwork expansion will need consideration, together with related regulatory questions.

Microgeneration: The Council expects to see a significant increase in microgeneration capacity, particularlyfor heat-based technologies.

Bioenergy: The extent to which bioenergy will contribute to the delivery of the target will depend on theavailability, cost and sustainability of biomass resources.

Trading: The Council believes there is a potential role for trading within Europe to encourage the cost-eVectivedelivery of the renewable energy target. However, when looking at the detail of how trading might beimplemented, it is important to note that a system that allows the UK to buy in a significant amount ofrenewable energy credits from other countries, may mean that the UK will not be in a position to realise thefull benefits associated with meeting the renewable energy target, including increased independence fromimported fuels and associated price volatility. Also, the current trading provisions in the draft directive are,at present, unlikely to deliver enough clarity for developers in suYcient time to enable significant tradingbefore 2020.

Consultation: It is important that the consultation allows for consideration of priority areas to be addressedto enable delivery of the 15% renewable energy target, including:

— Longer-term development needs for supporting network infrastructure:

— Transmission.

— Distribution.

— Managing the impact of intermittent generation on the system:

— Peaking plant.

— Storage and demand side management.

— Ensuring the technology supply chain has the capacity to deliver.


— Addressing the public policy implications of a significant increase of renewables.

— Understanding and properly communicating the cost implications for energy consumers.

— Understanding the pathway to a low carbon energy supply to 2050, including the possible role ofemerging technologies such as marine and use of low carbon electricity for heating.



Importance of Timely Action

Delivery of the 2020 renewable energy target will require swift action to ensure that: the supportinginfrastructure is in place; planning decisions are made in a timely manner; and that key issues such astechnology supply chain constraints are addressed.

The following table summarises the indicative times associated with the pre-planning, planning and deliveryphases of new wind and transmission infrastructure projects.

Table 1

INDICATIVE TIMING OF NEW WIND AND TRANSMISSIONINFRASTRUCTURE PROJECTS

Pre-planning Planning process Delivery

Onshore wind 2 years 5 years 2 yearsTransmission 3–4 years 5 years 2–4 years

As the following indicative timeline shows, new renewable projects, and the associated infrastructure, must beinitiated in the next few years in order to make a significant contribution to the 2020 targets.

Figure 1

INDICATIVE TIMELINE OF NEW WIND PROJECTS AND TRANSMISSIONINFRASTRUCTURE18

Onshore wind

Networkinfrastructure

Pre-planningPlanningDelivery

2008 2012 2016 2020

This highlights the importance of making critical decisions expeditiously, and not revisiting through a furtherround of lengthy consultations those matters that are already in train. In particular, energy companies arekeen that the Government, in parallel to the consultation on the Renewable Energy Strategy, maintains asharp focus on implementing the important initiatives that are currently underway.

Network infrastructure

In addition to planning and construction for renewable energy projects, there are also time implications ofnew network infrastructure, including identifying OVshore Transmission Owners, coordinating connectionbetween oVshore and onshore infrastructure, and then construction.

It is therefore particularly important that investment in necessary network infrastructure is facilitated in atimely manner to ensure progress towards delivering the 2020 renewable energy target can be made.18 This timeline is indicative, and clearly diVerent projects will have diVerent commencement and completion dates.



Planning Reform

The introduction of the Planning Reform Bill will be critical to facilitating the uptake of renewable energyprojects and the associated transmission infrastructure in a timely manner.

Under the current regime the planning process for a new onshore wind farm can take up to five years.

It is important that planning solutions are also available in the Devolved Administrations.

Support mechanism

The Government has a range of initiatives already in place that are eVectively encouraging the uptake ofrenewable energy. For example, the Renewables Obligation has successfully underpinned renewable electricitydevelopment in the UK, and is expected to be a key support mechanism for onshore and oVshore wind energyand biomass projects.

The Council is also confident that a strong Government commitment to a higher target and an extended timeperiod for support for renewable energy will continue to stimulate investment in renewable electricity to 2020and beyond.

We look forward to discussing with Government what other support measures would be appropriate,particularly at the household and smaller-scale level.

Beyond 2020

In addition to the challenge of meeting the 2020 renewable energy target, the UK must also ensure the optimaldelivery of the right infrastructure for a low carbon energy system to 2050. This will require a balance ofimplementing those “no-regrets” measures that can facilitate the uptake of renewable energy in the shorter-term to 2020, while ensuring that current activity doesn’t compromise the broader vision for low carbon andrenewable energy looking forward.

UK Share of the Target

To meet its share of the EU renewable energy target, the UK will need to deliver 15% of its energy fromrenewable sources by 2020. An initial high-level assessment by the Council supports the developing view thatthis could translate to:

— 10% of heat (an increase from less than 1% currently by almost 70 TWh).

— 10% of land transport (an increase from less than 1% by over 45 TWh).

— Up to 40% of electricity from renewable sources (an increase from less than 5% currently by over125 TWh).

Assumptions on future energy demand

The 2020 projections for the amount of renewable energy to be delivered across each sector are highly sensitiveto the assumptions made about demand growth.

The extent to which energy eYciency policies are implemented in the UK will have a significant impact on theamount of renewable energy that will be needed to meet the target. It is worth noting that the biggestopportunity for energy eYciency is in reducing heat consumption, and is less likely to impact on future demandfor electricity.

For illustrative purposes, the Council has looked at a scenario where energy demand across heat, electricityand transport remains at 2006 levels. While this does not reflect current and future energy demand trends, orthe impact of energy reduction policies, this approach does provide a useful indication of the likely scale ofincrease in renewable energy needed to meet the target, and also provides some important insights into theimplications for the supporting infrastructure. The scenario that we have chosen could act as a sound basecase for projections going forward.

The Council can see that there could conceivably be an increased pressure on the electricity sector to delivermore than 40% of total electricity from renewable sources if:

— there is a significant increase in electricity demand; and/or

— the heat and transport sectors do not achieve their potential to use renewable energy.



For example:

— It is possible that we will see an increase in demand for electricity in the UK if there is an increaseduse of electricity for heating and transport, which will increase the absolute volume of renewableelectricity required.

— If policies to deliver renewables in the heat and transport sectors are not as successful as hoped, thenthis would also add pressure on the electricity sector to deliver the renewables target. For example,current discussions about the sustainability of biofuels could have an adverse outcome on thedeliverable proportion of transport fuels from renewables.

Table 2

BREAKDOWN OF EXPECTED HEAT, ELECTRICITY AND TRANSPORTENERGY CONSUMPTION BY 2020

2020Consumption (TWh) 2006 (based on 2006 levels)

Electricity (conventional) 375 248

Electricity (renewable) 19 145(4.8%) (38%)

Total Electricity 393 393Heat (conventional) 730 661

Heat (renewable) 5 74(0.6%) (10%)

Total Heat 735 735Land Transport (conventional) 478 432

Other Transport (conventional) 173 173

Land transport (renewable) 2 48(% of all land transport) (0.4%) (10%)

Total Transport 653 653Total Energy (conventional) 1,755 1,514

Total Energy (renewable) 25 267(1.4%) (15%)

Total Energy 1,781 1,781



Figure 2: Energy mix in 2006

(land)

ELECTRICITY

HEAT

(aviation)

TRANSPORT

Renewable transport(0.4% of total land

transport)



(land)

ELECTRICITY

HEAT

(aviation)

TRANSPORT

Renewable transport(0.4% of total land

transport)



Figure 3: Energy mix in 2020(assumes no change in energy demand from 2006)

(land)

ELECTRICITY

HEAT

(aviation)

TRANSPORT

Renewable transport(10% of total land



(land)

ELECTRICITY

HEAT

(aviation)

TRANSPORT

Renewable transport(10% of total land transport)



Expected renewable electricity mix

To deliver the target, it is expected that the UK will need to generate a total of around 145 TWh of electricityfrom renewable sources by 2020 (8% of total energy), from less than 20 TWh generated in 2006.

The Council has made a preliminary estimate of the expected technology mix that could make up therenewable electricity component if it is delivered entirely in the UK. The Council expects that the bulk of thenew renewable electricity generation (over two-thirds) is likely to come from onshore and oVshore wind.



Figure 4: Expected renewable electricity generation in 2020 by technology (based on energy production)

Marine1% Micro

1%

Biomass16%

Severn Barrage12%

Hydro4%

Onshore wind24%

Offshore wind42%

If Government believes that it is appropriate to create the conditions in which a Severn Barrage might be built,the Council does not anticipate that it could be delivered by 2020. However, we understand that demonstrableprogress towards delivering the targets may be looked on favourably. We look forward to the outcomes of theGovernment study into the feasibility of a tidal power scheme in the Severn Estuary.

This project raises a number of important questions, including its environmental impact, likely cost-eVectiveness, the likely subsidy-levels required, the relative economics of other low-carbon investment. Inreality, if the Severn Barrage (or a similar scale development) was not delivered it would inevitable increasethe pressure to deliver more renewable electricity through other projects.

Table 3

EXPECTED RENEWABLE ENERGY MIX IN 2020: GENERATION ANDINSTALLED CAPACITY

Generation Total installed capacity 19

Technology (TWh) (GW) Load factor

OVshore wind 62 25 0.2820

Onshore wind 35 14 0.27Biomass 23 5 0.57Severn Barrage 17 7 0.26Hydro 5 2 0.35Marine 2 1 0.30Micro/Small-scale 1 1 0.10

TOTAL 145 55

The load factors for oVshore wind are based on BERR data from existing projects. It is expected that, overtime, the load factor for oVshore wind energy will improve as the technology develops. This does highlight theimportance of stimulating research and development into better performing technologies that generate morepower from the available resources.19 From BERR Energy Statistics, Capacity of, and electricity generated from, renewable sources—2006 figures used.20 This reflects the load factor of current oVshore wind farms that are in the commissioning phase. In the longer-term, we expect the load

factor for oV-shore wind energy to be higher, which means that delivering the target would require a lower installed capacity of oVshorewind energy than our initial assessment (based on our assumptions about demand for the purposes of this paper).



In developing this initial assessment of a possible renewable electricity technology mix, we have comparednotes with other bodies such as the Renewables Advisory Board, and have found estimates to be broadlyconsistent.

We welcomed the decision by Government to release the recent Poyry report on “Compliance Costs forMeeting the 20% Renewable Energy Target in 2020”. However, a number of questions arise from this reportincluding:

— the assumptions about the scale of biomass implementation which we believe do not fully reflectcurrent concerns about the cost, availability and sustainability of biomass; and

— some of the conclusions in the report related to the outcomes of trading, which appear optimisticfor 2020.

Implications of Delivering the Renewable Energy Target

Back-up plant and demand response

By 2020, we will need significant changes to the energy system to ensure that it can manage the increasedamount of intermittent renewable energy electricity generation. The Council believes that there will be a needfor some form of backup for those times when renewable resources are not available. This could take the formof additional thermal supply capacity, or more innovative approaches such as demand side management,or storage.

The UK currently requires around 72 GW of generating capacity to meet energy demand.21 We currently haveslightly more than that, with 76 GW of generating capacity currently installed.

The Council estimates that at 2006 levels of energy demand, a total installed capacity of over 120 GW wouldbe needed, compared to the 76 GW currently installed today. We estimate that the generation mix in 2020would include:

— 55 GW of renewable energy generating capacity;— 9 GW of nuclear plant,— 31 GW of thermal plant; plus— a further 17 GW of capacity to manage intermittency at peak periods;22 and— a further 10 GW of plant to provide a 20% margin.

Figure 5: Capacity requirements

0

20

40

60

80

100

120

140

Plant margin 10 10

Renewables back-up 17

Renewables 5 55

Thermal 48 31

Nuclear 9



TOTAL 72 122

9

21 This includes an additional 20% capacity of the total thermal capacity that would be needed to deliver the electricity demand.22 This calculation assumes that the 55 GW of renewable energy will deliver 10% firm capacity.



Over the coming decade, as a result of the Large Combustion Plant Directive, and plants coming to the endof their life, over 22 GW of existing power stations are expected to close by 2020. Initial estimates indicate thatthis could result in a need for around 68 GW of new build by 2020.

This also highlights the importance of considering the potential role that storage and greater demand sidemanagement could have in reducing the scale of investment in new supply needed.

The location of the necessary backup plant, and the capacity of the network to allow connection will needfurther consideration.

This highlights a range of issues that we believe will need consideration in the Renewable Energy Strategy,including:

— scale and location of back-up plant;

— capacity of the network to manage additional plant;

— ability of current market mechanisms to encourage suYcient and timely investment in back-up capacity;

— potential role of storage and greater demand side management, and the policies and mechanisms neededto encourage consideration of these alternative approaches;

— timeliness of investment for back-up facilities; and

— the additional costs associated with providing back-up services to the energy system.

Electricity transmission

Electricity transmission infrastructure will be key to enabling the increased levels of renewable generationestimated above. The three GB electricity transmission licensees that are members the Council23 provided apreliminary view of the capacity of the existing GB transmission system to accommodate new renewablegeneration without the construction of new overhead line routes. An initial view was provided with just thebroadest of assumptions and without undertaking detailed system studies. The following is a summary of theindicative guidance from the three licensees.

Figure 6 below is intended to give a general indication of the levels of renewable generation that could beaccommodated on the GB transmission system by 2020. It assumes completion of transmission upgradesalready in train (eg the Beauly-Denny rebuild and south west Scotland works) as well as completion of thoseworks expected to be achieved without protracted planning issues, eg relatively uncontentious re-conductoring and re-insulation work on existing tower routes, and substation extensions.

23 Scottish Hydro Electric Transmission Limited (SHETL), SP Transmission Limited (SPT), and National Grid Electricity TransmissionLimited (NGET).



Figure 6 – Capacity of the TransmissionSystem to Accommodate Renewables

Existing renewable generation in 2008 ~ 1,200MW

Grid potential for additional renewable ~ 3,900MW generation in 2020

Renewable generation seeking ~ 4,500MW connection i.e. contracted

Existing renewable generation in 2008 ~ 2,200MW

Grid potential for additional renewable ~4,200MW generation in 2020

Renewable generation seeking ~6,300MW connection i.e. contracted

Existing renewable generation in 2008 ~ 570 MW



Existing renewable generation in 2008 540 MW









Table 4

LEVELS OF ADDITIONAL ENERGY GENERATINGCAPACITY THAT COULD BE ACCOMMODATED IN

2020 ABOVE EXISTING INSTALLED CAPACITY

Region Capacity (GW)

Scotland 8England and Wales 8

TOTAL 16

There may be scope for this to be higher subject to further examination of generation scenario assumptionsin England and Wales. However, this preliminary assessment highlights a significant shortfall against the newrenewable energy capacity needed to meet the target.



The indicative numbers in Figure 5 are the result of a brief assessment by the transmission licensees based onthe following high level assumptions and are not based on detailed study work.

Table 5

HIGH LEVEL ASSUMPTIONS USED IN ANALYSIS

1. Demand Seven Year Statement user demand data extrapolated out to 2020.

Scotland: By 2020, no contribution from Hunterston or Cockenzie powerstations. All other Scottish generation still contributing.

2. GenerationEngland and Wales: All contracted generation proceeds and no closures (apartfrom Magnox nuclear and LCPD opted-out plant).

3. Planning Standard Apply current GB SQSS

The intention is to give an indication of the potential for the EXISTING GB transmission system in 2020 (ieincluding upgrades that do not carry a high consenting risk) to accommodate additional renewablegeneration, and for that number (approximately 16 GW) to be set against the Council’s estimate of theadditional generating capacity that we anticipate will be needed to contribute to meeting the 15% overall targetfor renewable energy.

While there is considerable capability in the potentially achievable 2020 transmission system there is stillnevertheless a substantial shortfall compared with what would be consistent with the 15% renewable energytarget.

Our initial analysis indicates that we will need around 50 GW of additional energy generating capacity to meetthe renewable energy target, in various sizes and locations.

Overall, with around 16 GW of existing capacity, it is expected that around 34 GW of additional transmissioncapacity will be needed to manage the increase in renewable generating capacity and associated back-up.

Detailed and coordinated study work by the three transmission licensees is required to identify appropriatereinforcements to deliver a transmission system capable of accommodating the total 55 GW of renewablegeneration we expect will be needed in 2020. In particular, this work would quantify the costs and benefits ofvarious transmission options (see indicative unit costs below).

Table 6

COSTS OF TRANSMISSION OPTIONS

Technology Cost (£ per MW of rating per km)

Onshore 400kV AC overhead line 200Sub-sea HVDC cable 1,000Onshore 400kV AC underground cable 2,700

The Council is aware of previous coordinated studies (Renewable Energy Transmission Studies (RETS) I andII24) undertaken by the three transmission licensees prior to 2005 with sponsorship by DTI (at the time).

The Council believes that a similar approach is again appropriate now. The Council therefore supports theinitiative by National Grid Electricity Transmission (NGET) and the Scottish transmission licensees to re-establish a RETS group with appropriate sponsorship by BERR that also brings together other interestedparties, especially generators to determine optimum reinforcements for future requirements where optionswould include new onshore and oVshore circuits. The Council is happy to facilitate cross-industry work inthis area.

The Council has provided its estimates for how new wind generation, in addition to that already installed, willbe distributed around the UK for inclusion in the background for such a study.24 Studies included: Connecting Renewables to the Grid—A Report by the Transmission Working Group of the Department of Trade &

Industry, November 2005.



Table 7

INITIAL VIEWS ABOUT THE LOCATION OF ADDITIONAL WIND ENERGYGENERATING CAPACITY BY 2020

OVshore wind Newcapacity (GW) Onshore wind New capacity (GW)

Scotland E 3 Scotland 7North E 3 Wales 2North W 3 Northern Ireland 1Central E 4 England 3Wales 2 TOTAL 13South East 3South West 5South 2TOTAL 25

Figure 7: Indicative location of additional windenergy generating capacity by 2020

7 GWScotland

1 GWN Ireland

Total new onshore supply13 GW

Total new offshoresupply25 GW

3 GWEngland

2 GWWales

3 GW

3 GW

4 GW

2 GW

3 GW

5 GW

3 GW

2 GW

The Council also made the following observations on the indicative guidance provided by the threetransmission licensees.

— The consenting and completion of the Beauly-Denny transmission rebuild is essential to releasingthe upgrade potential of the existing Scottish transmission system. By rebuilding the weakest leg ofa north of Scotland transmission ring it allows the other elements of that ring to be re- conductoredand re-insulated (ie no new overhead line routes) to increase the capability for renewable generationin the north to some 6.4 GW (around 2.2 GW already connected). The reinforced ring facilitatescollection of the output from onshore developments and the sub-sea island links are planned forconnection onto the reinforced transmission ring.

— Scottish Power Transmission (SPT) and NGET have programmes of reinforcements including re-conductoring and the use of innovative transmission devices to maximise the capability of existingAnglo-Scottish circuits and those further south.



— Indications are that with appropriate funding mechanisms to enable the transmission works toprogress, especially pre-application, environmental studies and design, as well as with appropriateaccess and charging arrangements to ensure they are fully utilised, the transmission works in handshould be capable of accommodating some 16 GW of renewable generation in 2020. Independentlyof longer-term review of transmission arrangements, it is essential that these shorter-term measuresare initiated and completed swiftly otherwise delivery of suYcient infrastructure capacity to supportthe 2020 target will be unachievable.

Looking Forward

In this submission we have outlined initial thinking about renewable energy potential to 2020 for the UK.

Clearly, targeted policy intervention will be needed to deliver the 2020 target.

Maintaining momentum

In the immediate term, we believe that there are a number of measures in train that are critical to delivery ofthe target, and it is important that the Government maintains a focus on implementing these, such as thecurrent planning reforms, and the new arrangements for the Renewables Obligation.

Short-term “No-Regrets” measures

The Council also believes that there are potentially a number of “no-regrets” measures that Government couldimplement immediately to facilitate progress towards the target, including:

— demonstrating commitment across all Departments to delivering the 2020 target;

— demonstrating Government commitment to continue its policies and measures designed to supportrenewable energy in order to ensure investor confidence is maintained;

— ensuring that in any revision of the existing statutory social and environmental guidance to Ofgem,Government gives a clear indication of the importance of Ofgem’s role in facilitating sustainableenergy development;

— swift resolution of shorter-term transmission access reforms to enable full use of existingtransmission infrastructure, and use of new transmission infrastructure as it is established; and

— early resolution of the Government’s and EC’s position on the use of biomass and biofuels acrossheating, electricity and transport.

A key area of focus must be realising opportunities to encourage timely new investment in the relevanttransmission infrastructure.

We have seen a new process of strategic planning for renewable energy in Scotland which has brought togetherinput from industry, regulators and planning to inform the National Planning Framework for Scotland (seeFigure 7). This could be usefully extended through the anticipated new system of National PolicyStatements—in particular those for Infrastructure and Renewables. At a very generalised level, this wouldidentify the likely renewable energy input, possible locations, and potential transmission upgraderequirements.

Emerging issues for further consideration

This paper provides a very high level assessment of the implications of delivering the renewable energy targetin the UK. We have identified priority areas basic to delivery of the 15% renewable energy target, and on thisbasis we would hope to see the consultation on the Renewable Energy Strategy give full consideration to thefollowing areas:

— Longer-term development needs for supporting network infrastructure:

— Transmission.

— Distribution.

— Ensuring the supply chain can deliver.


— Managing and communicating public acceptance of a significant increase of renewables.

— The technology, scale and location of peaking plant.



— The role of demand side management and storage to balance an increased proportion of intermittentgeneration.

— The extent to which trading between Member States will be facilitated.

— The use of renewable electricity for heat and transport.

— The materiality of the of cost of implementing the renewable energy target for consumers.

— The uncertainties around the cost, availability and sustainability of biofuels, and how any shortfallin the biofuels area would be made up across the other sectors.

— The range of energy demand projection scenarios looking forward, and the implications for therenewable energy targets, including possible trends for an increased use of electricity for heating andtransport.

Conclusion

The Council welcomes the Government’s commitment to increasing the uptake of renewable energy in theUK, and we look forward to participating in the upcoming consultation on the Renewable Energy Strategy.

The 2020 renewable energy target is challenging. Delivering this target will require clear, eVective and decisiveaction by Government to ensure a stable and supportive investment climate for renewable energy.

To give the UK the best opportunity to deliver the 2020 target, we believe that the Government should:

— drive the initiatives currently underway, including delivering the new arrangements for theRenewables Obligation and maintaining momentum on planning reform. Development and eVectiveimplementation of the National Policy Statements for Renewables and for Infrastructure will alsoprove central;

— quickly implement the “no-regrets” measures that do not require significant further consultation,such as strategic planning for the transmission infrastructure; and

— ensure that the consultation for the Renewable Energy Strategy is prioritised to focus on areas thatrequire further examination.

The Council looks forward to continued dialogue with the Government, Devolved Administrations andothers.

1 May 2008

Memorandum by the UK Energy Research Centre

Summary

To meet the EU 15% renewable energy target will be a significant challenge for the UK. It is important tounderstand that reductions in the UK’s total energy demand will produce proportional reductions in therenewable contribution required. Although self-evident, this simple fact is often overlooked. Indeed the UKhas to date failed to achieve any reductions in energy use, in fact the reverse is true: energy consumption inthe key sectors of electricity and energy for transport continues to rise steadily.

In addition to reducing the demand for energy, there will need to be a massive increase in the contribution ofrenewables to transport fuel (predominately biofuels), heat and electricity. This submission concentrates onrenewable electricity because UKERC has core competency this area. In Table 1, below, UKERC presents anillustrative scenario for the contribution of renewable electricity technologies towards the 2020 target. In thisscenario 41% of UK electricity will need to be generated by renewables, most likely dominated by wind power(28%) and biomass (7%). This will be extremely challenging both in terms of renewable energy generation plantinstallation rates and the world capacity to build and deliver the technology, and also in terms of integrationissues. Immediate and wide scale mobilisation of resources (human and otherwise) is required.



Table 1

AN ILLUSTRATIVE 2020 SCENARIO FOR THE CONTRIBUTION OF VARIOUS RENEWABLETECHNOLOGIES TOWARDS UK ELECTRICITY GENERATION25

2006 2020

Technology MW GWh LF % % Elec MW GWh LF % % Elec

Onshore wind 1,651 3,574 25% 0.9% 20,000 52,560 30% 13.1%OVshore wind 304 651 24% 0.2% 20,000 61,320 35% 15.3%Wave — — 0% 0.0% 1,000 2,978 34% 0.7%Tidal — — 0% 0.0% 1,000 3,679 42% 0.9%PV 10 7 8% 0.0% 571 1,000 20% 0.2%Hydro 1,522 4,605 35% 1.1% 1,522 4,606 35% 1.1%Biomass 1,837 9,946 62% 2.5% 5,350 28,119 60% 7.0%Severn26 — — 0% 0.0% 5,000 10,950 25% 2.7%TOTAL 5,324 18,783 40% 4.7% 54,443 165,213 35% 41.0%

Introduction

The focus of this inquiry is on 2020, but it is important to place the illustrative scenario presented in thissubmission in the context of longer term developments in the UK energy sector. Beyond 2020 it is possiblethat electricity will play a greater role in the transport sector (for example through plug-in hybrid electric andelectric vehicles) and for heating (through heat pumps, ventilation heat recovery and electric heating). Thiswould have knock-on eVects on energy demand and as a consequence it is important that the mix of electricitygeneration technologies in terms of carbon emissions, cost and security remains eVective in the long-term tomeet these targets.

It is clear that the brunt of contribution to the UK’s 2020 target of 15% of primary energy will fall to renewableelectricity generation.

If it is assumed that 10% of the UK’s transport fuels will be of renewable origin in line with the draft directive,then the proportion that needs to come from electricity will depend on the renewable heat contribution. It isimportant here to also recognise the potential for demand reduction measures. Heat demand, in particular, hasthe potential to be significantly reduced through a number of measures and an aggressive policy framework. Inthe scenario summarised in Table 1 we have assumed, perhaps optimistically, that heat demand in 2020 willbe reduced by 20% compared to 2006.

In theory a substantial proportion of UK heat could come from a combination of domestic solar waterheating, sustainable wood heating and other energy crops, plus the allowable contribution from heat pumps.

To give a feel for possible renewable heat consider an extreme case where 20 million households (the majorityof the UK housing stock) are fitted with solar water heating. Each system would contribute around 2000kWhper year or 50% of domestic hot water, thereby contributing about 5% of national heat requirements. In thiscontext and with policies to deliver such change, a 10% target for renewable heat is feasible.

Table 1 presents an illustrative scenario demonstrating the contribution of electricity towards the 2020 EUrenewables target. In this scenario it is optimistically assumed that in 2020 demand for electricity and transportfuel remains flat at 2006 levels and that demand for heat is reduced by 20% based on 2006 levels. Assumingthat 10% of the supply of transport fuels and heat is derived from renewable resources by 2020, the proportionof electricity required to meet the overall UK target for renewable energy of 15% can be estimated (assumingno significant changes to conventional plant eYciency). The result is that 41.1%27 of electricity must comefrom renewable sources. For comparison currently just over 4% of the UK electricity (and 1.3% of totalenergy) is derived from renewable resources. Let us now consider the diVerent renewable electricitytechnologies and their potential to contribute to the UK 2020 target.25 Following assumptions used to calculate contributions. Energy consumption based on BERR 2006 figures. 2020 energy consumption

scenario assumes that electricity and transport consumption remain flat and that heat is reduced by 20% because of demand reductionmeasures. This scenario is for example only and should not be construed as UKERC policy.

26 2020 figure based on estimate—not to be taken as UKERC policy.27 If the contribution of renewable heat towards total heat is increased by 5% (eg to 15%) then the contribution of renewable electricity

towards total electricity is decreased by approximately 10% and vice versa for a decrease in the contribution of renewable heat.



Wind energy is the most developed of the technologies. Given the excellent UK wind resource, installationrates have been disappointing with only 2 GW currently installed (including 0.3 GW oVshore)—accountingfor around 2% of UK electricity. On a positive note there is currently around 8 GW of wind capacity in theplanning system. Although unlikely, if all of this was consented, and built, it would be able to generate anadditional 7% of UK electricity bringing the total to 9%, and in principle this could be achieved within a fewyears. This leaves around a decade to install an additional 30 GW, assuming that there is suYcient space andwind resource to do so, which is enough to generate, in total, 28.4% of UK electricity. We understand thatUK policy anticipates that the majority of this capacity will be sited oV-shore (up to 20 GW in 2020), withpresumably the remainder on-shore. At around 3 GW per annum this represents an order of magnitudeincrease on current UK installation rates (0.24 GW per year averaged over the last five years). Germany hasachieved an installation rate of 2.5 GW per year averaged over five years between 2000 and 200528 (IEA data).Globally, over the same period around 7 GW of wind power was installed per year on average, possiblyindicating global wind turbine production capacity. Since the UK is not the only country with ambitious plansfor wind energy deployment meeting its ambitions are contingent upon the capability of world companies toexpand their wind turbine manufacturing capacity to meet this demand.

Wave energy The UK has the best wave energy resource in the EU, with 50TWh/year oVshore (equivalent to15% of UK electricity demand), 7.8TWh/year in nearshore waters and 0.2TWh/year on the shoreline.However, currently LIMPET, a shoreline device on Islay (operating since 2000), is the only UK devicesupplying electricity to the grid.

The European Marine Energy Centre (EMEC) opened in 2004, provides test facilities for oVshore testing. ThePelamis device was the first to be tested at EMEC, and Pelamis Wave Power (PWP) are currently installingthree devices (2.25MW) oV the coast of Portugal—the first oVshore wave farm. PWP also have consents andfunding for a farm oV the coast of Orkney (3MW), and are planning a 5MW farm at in the South West ofEngland in the WAVEHUB project. Wavegen, the developers of LIMPET, are currently installing a harbourwall device at Mutriku in Spain. In addition there are a number of other developers with funding for sea trialsin the next 12–18 months: Aquamarine, AWS Ocean, Ocean Power Technologies, and Wavedragon. Waveenergy is very much an emerging technology, with deployment at the MW level. Its development pathway isapproximately 15 years behind that of wind power.

It is estimated that 1GW of both wave and tidal current energy could be installed by 2020 in UK waters (seeUKERC’s Marine Technology Roadmap). This would require a rapid increase in deployment from 2012onwards. A deployment of 1GW of wave energy by 2020 in the UK would translate to 0.8% of the UK’s totalelectricity. The Carbon Trust predicts that there could be between 1–2.5GW of wave energy in Europeanwaters by 2020. There is a lot of activity and planned deployments in the UK, but it will be challenging to meetthe Carbon Trust/UKERC 2020 predictions.

Tidal current The Carbon Trust estimate that the UK tidal current resource is 18TWh/year, equivalent to 5%of UK’s electricity demand and about 10–15% of the total world tidal current resource. The technologies fortidal current generation show less variation than for wave energy generation, in which every device operateson very diVerent principles. Hence, it could be argued that the technology is nearer to market. Marine CurrentTurbines (MCT) is the only UK developer to have successfully demonstrated tidal current turbine technologyand have been operating a 300kW device oV the north coast of Devon since 2003. They have also recentlyinstalled the first commercial device (the Seagen project) in Northern Ireland which is rated at 1.2MW. MCTalso plan a 10.5MW tidal current farm at the Skerries between the Welsh mainland and Anglesey, which couldbe installed as early as 2011. A full scale tidal current test site has been established at EMEC, with Open Hydro,an Irish developer, testing a 300kW grid connected device.

Like wave energy, tidal current energy is an emerging technology, with deployments at the MW level, but hasthe potential to make a significant contribution to the UK’s renewable energy targets. It is estimated that 1GWof tidal current energy could be installed by 2020 in UK waters (see UKERC’s Marine Technology Roadmap).A deployment of 1GW of wave energy by 2020 in the UK would translate to 0.9% of the UK’s total electricity.The Carbon Trust has predicted that between 1–2.5GW of tidal current could be deployed in European watersby 2020.

Photovoltaics remain expensive but policies in both Japan and Germany have demonstrated that withappropriate market support significant capacity can be installed relatively quickly. Analysis by the PV EUPlatform estimates that 3% of EU electricity can be met in this way by 2030, which is considerably less thanGermany has already achieved (see UKERC’s Solar Energy Road map). In the UKERC scenario a 0.2%contribution (representing a 57 fold increase on current installed capacity) to UK electricity by 2020 has beenestimated.28 IEA data from Economic and Social data service.



Hydro electricity currently accounts for 1.1% of UK electricity through large (1%) and small scale (0.1%)schemes. The scope for new hydro schemes in the UK is limited because the majority of the resource hasalready been successfully exploited. For example, the potential for new hydro electricity in Scotland has beenestimated to be a maximum of 200MW.29 In the UKERC scenario it has been assumed that there is noincrease in the contribution of hydro electricity from current levels.

Biomass electricity currently accounts for approximately 2% of total UK electricity through a mixture ofbiomass co-firing at large coal power plants, combined heat and power plants and anaerobic digestion plants.Professor Gail Taylor (UKERC) has estimated that that biomass electricity could account for between 7% ofUK electricity demand by 2020.30

The Severn estuary barrage is currently undergoing a two year feasibility study to assess the cost andenvironmental impact of the proposed scheme. It is uncertain whether the barrage will be completed by 2020and what contribution it will make to UK electricity generation. In this response we have optimisticallyassumed that an 8 GW barrage will be partly completed by 2020 and at time able to generate up to 5GW, andthereby providing 2.8% of the UK’s total electricity. Of course if the Severn barrage is not contributing, forwhatever reason, then the onus will be on an alternative renewable technology to take up the slack.

Integration issues will become significant as renewable energy electricity penetration levels in the UK movebeyond 20% of electrical energy. There are a number of key issues associated with integration of 40%renewable electricity, including:

— connection charges and transmission charges;

— planning permission;

— new distribution lines and reinforcing existing lines;

— integrating renewable resources that produce heat and electricity—for example biomass CHP—sothat both outputs are used eVectively and eYciently; and

— system management and stability.

Research into these issues is underway but has not yet progressed to a suYcient level to give confidence as tothe technical and commercial consequences of very high levels of penetration. It is likely that 30–40% ofelectrical energy from renewables will require major investment in transmission and, possibly, distributioninfrastructure, and changes to operational practice.

Energy demand reduction is a mechanism through which the overall size of the EU 15% renewable energy targetcan be reduced in absolute terms (ie you would simply need to install less renewable energy capacity to meetthe target). The University of Oxford Environmental Change Institute31 (ECI) in their report to the RoyalCommission on Environmental Pollution (The Urban Environment report) examined the potential fordemand reduction from the UK housing sector in 2020 comparing the diVerence between a business as usualand aggressive policy scenarios with a focus on major carbon emissions reductions.

The findings of this report indicated that an aggressive policy scenario of demand reduction from the UKhousing sector could reduce overall UK energy demand by approximately 5%.32 In the context of the 15%renewable energy target this would reduce the absolute number by the equivalent of about 1%. The potentialfor demand reduction in the business and transport sectors is approximately the same. Therefore, if aggressivedemand reduction policies were applied in the UK housing, business and transport sectors then approximatelyone fifth of the 15% target might be delivered through energy eYciency.

Concluding Remarks

Even with optimistic targets for the installation of renewable energy generation technologies, meeting the UK2020 15% renewable energy target will be extremely challenging. Demand reduction could potentially reducethe size of the overall eVort required, but even with aggressive policies there is a large renewables gap that mustbe filled. This will be extremely challenging both in terms of renewable energy generation plant installationrates and the world capacity to build and deliver the technology, and also in terms of integration issues.Immediate and wide scale mobilisation of resources (human and otherwise) is required.29 Forum for Renewable Energy Development in Scotland: Scotland’s Renewable Energy Potential: Realising the 2020 Target—Future

Generation Group Report.30 Professor Gail Taylor, Bioenergy for heat and electricity in the UK—a paper for the OYce of Science and Innovation (in preparation).31 UKERC Demand Reduction theme is based at ECI.32 The diVerence in 2020 is 93 TWh (about 17%), with 20 TWh of electricity saved in appliances and 73 TWh saved in heat (mainly gas).



Memorandum by the Welsh Assembly Government

Introduction

1. Climate change is one of the biggest challenges facing the world today and the Welsh AssemblyGovernment is determined to play its part in tackling it.

2. “One Wales”33, the agenda for government in Wales, sets out the Assembly Government’s ambitions inrelation to tackling climate change in Wales and includes a commitment to “aim to achieve annual carbonreduction-equivalent emission reductions of 3% per year by 2011 in areas of devolved competence”.

3. “One Wales” also includes a number of commitments on energy eYciency and diversified renewable energygeneration.

4. The Renewable Energy Route Map for Wales, published for consultation in February 2008, is the firststrategic step to fulfilling our commitment. We believe that with Wales’ coastline, geography and climate, it isquite feasible for us within 20 years to produce more electricity from renewables than we consume as a nation.

5. With suYcient innovation and investment, the right Government framework and public support, Walescould produce some 33TWhr per year of electricity (its current consumption is around 24 TWhr) fromrenewable sources. Half of this would come from marine, a third from wind and the rest mainly fromsustainable biomass. And from the latter in its various forms, including waste, Wales could produce some3TWHt of renewable heat each year.

6. The UK has signed up to the 2020 EU target of 20% of energy requirements (electricity, heat and vehiclefuels) coming from renewable sources, including those linked to the waste cycle. Wales is committed to thistarget and can contribute significantly by taking advantage of our considerable natural renewable sources ofenergy—wind, tide, wave, hydro and biomass.

7. However, the first, most cost-eVective and immediate way we can reduce greenhouse gas emissions is tominimise our use of fossil fuel energy: for example by insulating our buildings to a high standard, purchasingthe most energy eYciency appliances, using green tariV electricity and making sustainable transport choices.

Renewable Energy Route Map for Wales

8. Renewable energy technologies are carbon-free or, in the case of bio-energy, carbon neutral. Renewablescan contribute to some of our heating needs especially through local combined heat and power (CHP),biomass and solar water heating. But the biggest impact on reducing heating requirements will come frompaying much more attention to energy eYciency in all our buildings. There is also scope to shape future actionto address issues such as fuel poverty: for example through increased eYciency measures and district heating.

9. In looking at future options generally, there is considerable scope for combining economic, skills and socialbenefits, with the environmental ones. Across the Assembly Government it is our intention to develop a strong“green jobs” strategy, building on previous skills and economic development initiatives. Working with ourcolleges, the relevant sector skills councils and the private sector we will wish to ensure Wales has the necessaryskills base to enable the rapid transition to a low carbon economy.

10. Increased generation from renewables in Wales could also provide specific support to the rural economythrough increasing the options for alternative energy for communities who are not connected to the gasnetwork. There could also be opportunities for new income streams for those who either install micro-electricity units in their homes, communities or land or, those who live in communities associated with majorrenewables developments.

11. Depending on decisions on harnessing tidal range power in the Severn estuary, the potential in Wales fromtidal and wave projects by 2025 could provide more than half of our current electricity consumption. Whilemuch tidal-stream technology is currently at a research and demonstration stage, and is unlikely to be in fullgigawatt scale operation until after 2020, there are a range of interesting projects which are already at or nearthe major commercial feasibility stage. These include the tidal stream and wave-power projects which areexploring sites oV Pembrokeshire and Anglesey.33 One Wales: A progressive agenda for the Government of Wales—

http://wales.gov.uk/about/strategy/strategypublications/strategypubs/onewales/?lang%en



Micro-generation

12. We published the Wales Microgeneration Action Plan published in March 2007 and we have subsequentlyissued a Planning consultation on reducing permitted development rights in relation to domestic properties.Research has recently been commissioned (jointly with the UK Department for Communities, and LocalGovernment) on the potential for micro-generation equipment on commercial buildings and the planningimplications of this. The final report will inform future changes to the planning consent regime in due course.The variable nature of most microgeneration technologies makes it unlikely that all the electricity producedwill be used at the time of generation. Until storage technologies improve, in the vast majority of cases, theexcess electricity will be fed back/exported into the distribution network gaining the benefit of utilities’renewable energy feed in tariVs (REFIT. ) The total annual energy produced from the strategy targets formicro-generation would be circa 0.45 TWhr each for heat and electricity.

Large Scale Distributed Generation (“Off-grid”)

13. Keeping the generation and use of electricity within a local community removes a large part oftransmission losses associated with centralised power stations (though there still needs to be connection to thenational grid to ensure power is available should the local generation fail.) This kind of local generation isparticularly attractive when it is based on renewable energy sources, resulting in community benefits andemployment as well as electricity, and innovative financing of such developments, especially by special purposeenergy supply companies (ESCos.) ESCos are usually set up by a public sector organisation to deliver energyeYciency, energy savings and/or sustainable energy. This can be done through a variety of diVerent initiativesor through a particular initiative, such as a CHP scheme. Such entities may well have a public body or quasi-public body nature. We are considering options on how this approach could be promoted in Wales.

Consenting Regimes

14. There are a number of diVerent pathways by which renewable energy projects are granted consent inWales. The scale and location of the project will aVect which route is taken and therefore which body has theability to decide on whether consent will be given.

15. Currently large onshore power station consents above 50MW (and oVshore projects above 1MW) are theresponsibility of the UK Department of Business Enterprise and Regulatory Reform (DBERR). TheAssembly Government and its agencies are consulted on such projects with local stakeholders being statutoryconsultees. Only the objections of local authorities can now institute a public inquiry. Consent for oV shoredevelopment can be obtained under the Transport and Works Act (TWA) if navigation lanes are aVected.Consents under the TWA are devolved to the Assembly Government. Consents granted in these ways areoutside the normal Town and Country planning system.

16. These provisions normally only apply to large scale projects with most renewables, including micro-generation projects, being a matter for local authority planning consent, with the Assembly Governmentholding call in and appeal functions which are used sparingly.

17. Onshore wind oVers the greatest potential for an increase in the generation of low-cost electricity fromrenewable energy in the short to medium term. Following extensive detailed technical work the AssemblyGovernment has established seven Strategic Search Areas (SSAs) where large-scale (over 25MW) onshorewind developments should be concentrated. These key areas constitute only a few percent of Wales” landmass.The characteristics used to define SSAs in the Assembly Government’s Technical Advise Note on Planningfor Renewable Energy (TAN 8) remain unchanged since 2005 and consequently the Assembly Governmentcontinues to believe that the seven SSAs remain the most suitable locations for large on-shore wind farms.

18. The SSA boundaries are at a “broad brush” scale. It is a matter for local planning authorities to undertakelocal refinement, taking into account local landscape, visual and cumulative impact issues to guide andoptimise initial development whilst ensuring that environmental impact is kept to the minimum. The AssemblyGovernment expects the relevant local planning authorities to include the revised boundaries of the SSAs intheir Local Development Plans.

19. Small-scale wind farms of up to 5MW if carefully sited can have minimal environmental impact andtherefore the TAN8 guidance places no geographical restriction on the location of such wind farms. Similarly,on brown field sites, wind farms of up to 25MW might be accommodated.

20. The potential for the development of wind power within urban/industrial areas in Wales is so far relativelyuntapped. We aim to strongly encourage the exploration of opportunities for wind developments of up to25MW in urban/brown field site areas.



21. OV-shore wind-farms are now normally consented by BERR under Section 36 of the Electricity Act 1989(using the provisions of the Energy Act 2004) with the Assembly Government being an informal consultee.Leases are provided by the Crown Estate where they own the seabed. Licences under the Food andEnvironment Protection Act 1985 (FEPA) are in Wales a matter for the Assembly Government.

22. Forestry Commission Wales (FCW) is undertaking the process of leasing the land which it manages withinthe TAN 8 Strategic Search Areas (SSAs) for major wind farm developments on a competitive basis. Thesuccessful wind farm developers in the bidding process have been oVered options for this land (whichconstitutes a very small fraction of the forested area of Wales) in respect of 945 MW of potential wind farms,requiring the minimum of tree felling. These development proposals will be subject to normal planning consentprocesses and will need electricity grid connections.

23. On 1 April it was announced that three companies have signed agreements with the Welsh AssemblyGovernment which will allow them to seek planning permission to develop wind farms.

24. FCW is continuing to work with potential developers in the remaining SSAs described in TAN 8 and aimsto announce the completion of further agreements shortly.

Planning Bill

25. From April 2009, subject to the proposals in the Planning Bill and their enactment by the UK Parliament,large scale renewable energy project consents (over 50MW on land and over 100MW oV-shore) in Wales couldbe determined by the proposed Infrastructure Planning Commission (IPC) rather than the Secretary of Statefor Business, Enterprise and Regulatory Reform. The IPC would take decisions in the light of National PolicyStatements, which would be prepared by the UK Government. The IPC will have the ability to grant a rangeof consents currently scattered throughout legislation, and would act as a “one stop shop” for theconsideration of major renewable energy projects. The Assembly Government continues its discussions withthe UK Government to ensure appropriate levels of involvement with the Assembly Government onapplications located in Wales and with special relevance to Wales. In addition, the Welsh AssemblyGovernment is continuing to discuss the mechanisms for appointing Commissioners in Wales with the UKGovernment.

Infrastructure

26. North and South Wales are served by separate east-west spurs of the electricity transmission gridnetworks, with mid Wales grid coverage being especially weak. Major new grid connections will be requiredin the more remote TAN 8 strategic search areas.

27. National Grid Transco and SP/Manweb (the distribution provider in north and mid Wales) have beenworking with developers, OFGEM and the Assembly Government to determine the most eYcient way toproceed. In both mid and north Wales, developers have been encouraged to discuss their plans collectivelywith the grid operators so that, rather than proceeding piecemeal as the current OYce of Gas and ElectricityMarkets (OFGEM) mechanisms may encourage, the grid companies can determine the optimum newconnections which need to be built. This work is still underway with long term grid connection oVers havingalready been made by the National Grid Electricity Transmission (NGET) for very substantial mid-Wales on-shore wind farm projects on the basis that mid-Wales would significantly benefit from a new 400kV grid linkinto England.

Overcoming Barriers

28. In south Wales, the main potential grid problems are the constraints on the electrical current capacity ofthe electrical grid links between south Wales and England because of the level of interest in building substantialnew gas fired and renewables (wind and biomass) projects. Quicker new connections in south Wales may beenabled by some of the ideas being considered under the OFGEM Transmission access review, includingcapacity auctioning (as already happens with gas connections) or the so called “connect and manage” oVers.These would enable new intermittent sources to be connected without the grid companies, and eventually theconsumers, paying high costs when the lack of a full capacity connection means that the source is not allowedto supply at its maximum capacity. However the Assembly Government still believes that OFGEM’s primaryduties and the grid connection rules should be changed to enable connection preference to be given to lowcarbon generation projects.



Funding Support

29. The Assembly Government is committed to the eVective use of the 2008–15 EU Structural Funds(Convergence) programmes in Wales and exploring generation opportunities, including those in marinerenewables. We wish to explore the possibility of utilising this programme to identify the prospects for anexemplar project for innovative tidal lagoons. And similarly for wave and tidal stream projects, we wish to seethis programme used to expoit the economic opportunities associated with the massive technologicaltransition to a global low carbon economy as well as exploring the exceptional international opportunities forWales in marine energy. A priority is also to develop the skills agenda to ensure as much research anddevelopment as possible is translated into business wealth generation.

30. It is the intention of the Assembly Government that the final Renewables Energy Route map for Walestogether with the wider energy strategy which we are preparing will become a key part of the UKGovernment’s national renewables action plan to deliver EU objectives on the promotion and use ofrenewable energy sources.

17 April 2008

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