The House of Commons Select Committee on Trade
and Industry recently produced a report on its review of Energy
Security, asking whether the high level of diversity and security of
supply, with electricity generating capacity currently exceeding demand
by more than 30%, would continue as demand rose and as we attempted
to move away from fossil fuels. Interestingly, on demand, they took
a side swipe at the Performance and Innovation Unit, commentating that
‘we are at a loss to find any statistical
basis for the PIU’s assumed growth in energy demand of 2% per annum,
given that the rate of growth has been 0.5% for the past 20 years’.
Perhaps they were converted to the idea of demand
management? Certainly they noted that ‘it
seems to be widely accepted that the least costly way to achieve greater
security of supply than market forces can deliver is by reducing energy
use’.
However, they did not follow this up with a detailed
review of demand side measures which might keep growth down. They simply
reported that the Government ‘want
to slow the growth in demand and eventually to reverse the growth’,
and briefly surveyed some of the associated issues. This despite the
fact that some witnesses gave impressive estimates as to how much reduction
in demand might be feasible: for example an estimate by the Environment
Agency was 50% by2050.
Instead their main concern seemed to be on the
supply side, looking in some detail at each source in turn. They noted
that gas holds a key position, and that some commentators predict that
gas could form the energy source for 70% or more of the UK’s electricity
generation needs by 2020, ‘not only
because it has been cheap and easy to obtain, but also because it is
not clear that alternative fuels will be available’.
They noted that, on the basis of the DTI's projections, gas imports
would rise to more than 63 Mtoe (or 58% of demand) by 2010, and to 110
Mtoe (90%) by 2020. The primary sources of UK gas imports were seen
as being likely to be to be Norway,the Netherlands, Russia, Libya and
the Middle East. There was also the option of Liquid Natural Gas (LNG).
‘LNG storage could increase reliability
of gas supply for the winter peak demands. It can be shipped in from
as far afield as Australia, Qatar, Malaysia and Indonesia, but supplies
to the UK would most likely be sourced from North Africa and the Caribbean’.
Nuclear energy production was, they noted, predicted
to decline over the next 15 to 20 years ‘unless
circumstances, including Government policy towards that energy source,
change’; with its share of generating
capacity falling from the current level of about 21% to possibly less
than 17-18% by 2010 and to 7-8% by 2020. We look at some of the evidence
they took later in this section.
The still significant contribution to energy
needs from coal-fired electricity generation ‘will
become increasingly difficult to reconcile with the Government’s
environmental targets’. They noted
that ‘unless urgent action is taken
to sustain it, coal-fired generation will end in this country’,
and suggested that, in terms of security of supply, it ‘would
be unwise to allow any fuel source to disappear by default’.
Moderate Government investment in a clean coal demonstration plant
was therefore seen as sensible. They were also, sensibly, keen on
coal-bed methane sequestration.
Although they noted that renewable sources and
waste incineration currently contribute only 2.8% of the UK’s electricity
requirements, they recognised that the present Government was committed
to a target of 10% of UK electricity supplies from renewables, excluding
non-biodegradable waste, by 2010, ‘provided
the costs to consumers are acceptable’.
However, while generally supporting renewables,
they noted that ‘unlike other forms
of generation discussed so far, most renewable power plants are small-scale.
The creation of a large number of small-scale plants, possibly replacing
fewer, bigger power stations, will have repercussions for the electricity
transmission and distribution networks’.
They added ‘A critical feature of
most renewables is that they are energy sources and not fuels. The difference
lies in availability. Fuels are always available for use when required,
albeit at a price determined by the market. Energy sources are usually
intermittent, but are free.’
The main focus of the report however was on the
way the whole UK energy system was run, planned and integrated, and
on the impact of NETA: see below. Overall it is an interesting report,
highlighting the need to keep options open and steer the system towards
sustainability, but noting that this would be expensive- something which
consumers might not be prepared for.
System planning
The Select Committee noted that the Government’s
view that it was for the market to determine the mix of fuel and that
most of the witnesses called to give evidence also stated firmly that
they were opposed to the Government’s trying to dictate a fuel
mix, adding that ‘even those interest
groups faced with possible extinction of coal and nuclear power, while
arguing that the current mix was probably the best one for achieving
security of supply, did not suggest that the Government should impose
that mix. Instead, they pleaded for Government intervention to keep
options open, while leaving the final determination of fuel mix to the
market’.
The Committee, unsurprisingly, agreed. ‘We
consider that security of energy supply can be improved by retaining
a capacity to use a variety of different fuels to generate electricity.
Even if the exact mix of fuels is left to market forces, it is arguable
that the Government should, at the very least, take no action that
closes off options, and perhaps should be prepared to make adjustments
to its policies to keep options open’.
One way to increase the range of viable options
is of course to strengthen the transmission grid system, so that supply
and demand can be balanced more effectively around the country by a
range of sources. The Committee noted that the DTI had recently announced
a feasibility study of proposals to run a submarine cable from North
West Scotland down the West coast of Great Britain to provide a transmission
system for offshore and other renewable energy generation. They commented
that ‘this would appear to have great
potential to alleviate the problems caused by the North-South transmission
bottleneck and would provide a significant boost to the development
of renewables such as offshore wind and wavepower’
but, warned that ‘it seems to us that
the installation of hundreds of kilometres of cable in areas of some
of the most hostile seabed and surface conditions around the UK would
be a severe engineering test and could prove to be very cost-intensive’.
They reported that ‘Greenpeace had
suggested that the cable should be paid for by the Government, on the
grounds that existing, land-based power generating companies had benefited
from the earlier creation of the transmission/ distribution networks
using public money, and that providing offshore renewable power generators
with a similar infrastructure was only fair’.
But maybe that was expecting too much....
NETA- No One in Control
The real substance of the Select Committees report
was in the coverage of NETA, the New Electricity trading Arrangements.
They noted that there was broad agreement that NETA has reduced electricity
prices, but that it has clearly undermined renewables and CHP.
Ofgem believed that consolidation, so that
the administrative costs and the financial risks of balancing could
be shared, would counteract most of the disadvantages suffered by small-scale
generators, and it wished to concentrate on promoting this rather than
making alterations to NETA. The system was gradually settling in anyway.
But most of the generators disagreed. In effect, renewables generators
already pooled risk because, they were unable to deal with the expense
and complexity of trading themselves. David Milborrow for the British
Wind Energy Association told the Committee that ‘even if you
aggregated wind over the whole of the country you would still get a
significant penalty [for imbalance risk] in the order of £3-5/MWh’.
Both the Renewable Power Aaaociation and the CHPA supported the argument
that those who cause imbalances of supply should pay for them, but they
still believed that NETA unfairly discriminated against small-scale
generators, who had not caused the problems of the previous ‘Pool’
trading system in the first place. ‘The
reforms have been based around trying to address a large generator problem.
The inevitable casualty of that seems to have been that the impacts
upon the smaller generator have been somewhat overlooked in the process
of implementation.’
As well as putting forward arguments about whether
any individual wind farm affects the balancing of the system, the RPA
stated that in practice NGC ignored the output of small generators (of
less than 50 MW) in trying to balance the system, both on a de minimis
principle and because if it tried to take into account predictions from
so many small market participants it would suffer from "information
overload". Instead, it "forecasts
demand net of embedded generation and utilises the information provided
by large generating units in planning for system operation".
NETA made small generators comply with complicated and expensive administrative
arrangements designed to keep the system in balance when in practice
their contribution was ignored by those actually planning how to balance
supply and demand. The RPA concluded that it would not disrupt the balancing
of the grid if NETA were adapted to relieve the burden on small generators.
The Committee did not come down on the side of any
particular solution, but simply expressed the hope that the the DTI
and OFGEM would resolve the problem speedily.
The reason for the urgency became even clearer
when the Committee looked at the impact of NETA on investment in new
generation capacity, and on the role of standby and ‘mothballed’
capacity. In terms of having sufficient capacity to meet demand, the
DTI implied that at present there was no cause for concern; the recent
Seven Year Forecast made by the National Grid Company predicted that
generating capacity margins would remain in excess of 25% over the
period to 2007-08, taking into account the withdrawal of the Magnox
plants "as well as other closures". Ofgem pointed out that
the margin had been lower than 30% many times without causing any
significant problems in meeting demand; and it was confident that
if the margin did fall, market forces would come into play "as
that capacity margin comes down we would expect the forward price
for electricity to increase and to give people an incentive to invest".
However, Innogy argued that, as currently designed, NETA did not provide
sufficient reward for spare capacity that was used only for short
periods. Because such "bursts of generation" could not be
guaranteed to cover both the fixed and marginal costs of the plant
plus an allowance for a reasonable profit, it was increasingly unattractive
to invest in such spare capacity.
Moreover, currently owners of power stations have
to give the NGC only six months’ notice of plant closures and no
notice of mothballing.
Some witnesses suggested that market signals, and
particularly the premium which NETA places on flexibility, were leading
to inefficiencies and harm to the environment. Mr Byers of the RPA said
that there was probably five gigawatts of spinning reserve, so that
generators could quickly meet any expected imbalance in the system.
‘Before NETA we had about one gigawatt, now we run five gigawatts
just in case.’ David Milborrow from the BWEA attributed this
excess to the fact that NETA forced operators to run mini-balancing
systems, ‘mini national grids almost, ... each with their own
standby plant to balance out when supply does not meet demand’.
Mr Latif of the Gas Forum expressed concern that because NETA was requiring
generators to be switched on and off more frequently to balance the
system, the life of generating plant was being physically reduced.
The DTI told the Committee that ‘following
the introduction of [NETA] there are no longer any security standards
relating to generating capacity’.
However, it also noted: "A margin
in excess of 20% is usually considered to be healthy".
The Committee asked the Regulator whether Ofgem had any target, however
loose, for the margin of capacity over demand, given that one of the
requirements on the Regulator was to ensure security of supply, and
guaranteeing a comfortable but not excessive plant margin would seem
to be an element in fulfilling that duty. The Committee said that
they ‘were rather startled to learn
that Ofgem has no such target: it regards its task as being limited
to monitoring generating capacity and publishing this information
for the benefit of the market, so that the market can then act to
meet any shortage. Ofgem clearly did not believe that it should take
a view as to when capacity might be so low as to run the danger that
demand would not be met in the event of a breakdown of large generating
units’.
The Committee commented that ‘this
relaxed attitude is acceptable in many markets, where alternatives to
the desired products exist and where shortages can be met quickly, but
we do not accept that electricity falls within this category. It is
too important to both domestic and business customers; practicable alternatives
do not exist for many people; there is no guarantee that the current
level of mothballed plant will continue or be employable; and new generators
require a considerable lead-time for planning, construction and commissioning
before they come into use. At the very least, any shortage in capacity
could lead to quite severe short-term price shocks, especially if UK
suppliers had to try to meet demand by buying electricity on Continental
spot markets. We have not yet heard any evidence that leads us to believe
that the market is sufficiently far-sighted to guarantee enough reserve
generating capacity without some element of planning by Government or
one of its agents. This does not mean that we believe that Government
should try to dictate to the market; simply that someone, whether the
Department (which we would prefer) or Ofgem should take a strategic
view about what level of reserve capacity is necessary presumably, slightly
more than 20%, and should be prepared to use market mechanisms to encourage
the construction of extra capacity if necessary’.
Planning
One of the other major problem limiting the ability
of the energy industry, and the renewables industry in particular, to
develop new generation projects was the current planning system. The
Committee recognised that the Government was considering substantial
changes to the planning system in England and Wales to reduce delays
and uncertainties for major schemes. However, they noted that ‘most
on-shore renewables schemes are not large-scale and do not raise so
starkly the question of general public interest versus the rights of
local people as to fall under the revised planning system currently
under discussion. The problem is cumulative: no individual planning
refusal for a renewables scheme has a substantial effect on the achievement
of Government policy, but the fact that at present approximately 30%
of schemes in England and Wales are refused planning permission has
a huge effect, not least because it appears to have a major disincentive
on schemes being brought forward.’
The Committee reported that witnesses had differing
views about how to cope with the problem, some more prescriptive than
others. The Association of Electricity Producers suggested that Government
should either set regional targets for renewable generation developments,
which county councils would be required to take into account in their
planning of land use; or require councils to produce separate renewables
or general energy plans during the structure plan process, in a similar
form to minerals planning. The RPA was more cautious, and stated that
it did not advocate a dictatorial approach. Its preferred option seemed
to be to provide clearer planning guidance to local authorities (though
it did not state how the guidance should be enforced). A number of witnesses
commented enviously on the situation in Denmark where, they suggested,
renewable developments were seen by local communities to be a good thing,
as their own source of ‘green’ energy. These witnesses conceded
that, for historical and cultural reasons, it might be impossible to
reproduce this sense of community ownership in the UK, but they felt
that more might be done to explain to local residents the advantages
of renewable developments. The RPA believed that Government public information
campaigns about renewable power would be helpful.
Interestingly the Committee noted that, to date
only 11% of planning applications for schemes under the Scottish Renewables
Order (the Scottish version of the NFFO) have been denied. This is similar
to the average rate of refusal for all planning applications, but a
large proportion of those rejected have been wind farm proposals. In
response, the Scottish Executive has introduced National Planning Policy
Guidelines (NPPG 6), intended to support an increase in renewable energy
(RE) development in Scotland. This document details the steps to be
taken in gaining planning permission. NPPG 6 policy is based on ‘the
principle that RE developments should be accommodated throughout Scotland
where the technology can operate efficiently and environmental impacts
can be addressed satisfactorily’.
This means that the onus of making a case has now shifted from the developer
to the objector.
The Committee concluded that ‘Planning
problems so strongly recurred in the evidence given to us that we
conclude that the planning system currently forms a major obstacle
to the Government’s achieving its energy policy in respect of
both security of supply and environmental objectives. We concur with
those who thought that formal requirements to plan for energy developments
would be over-prescriptive, would potentially cause local hostility,
and might even be counter-productive in terms of raising land prices
if certain plots of land were identified for development. We believe
that a better way of proceeding would be considerably to strengthen
planning guidance in favour of granting permission to energy developments,
and for the Government to be prepared, if necessary, to call in more
planning applications to enforce the guidance’.
Conclusions
So where do we go from here? Is our energy future
safe? Will we be able to develop the new generation capacity needed
to support ourselves sustainably?
The Committee looked at whether or not the Government
would be able to meet its target of securing 10% of UK electricity supplies
from renewable sources, excluding non-biodegradable waste, by 2010,
and reported, unsurprisingly, that there was some disagreement about
this, with NETA being one of the main uncertainties. There were also
suggestions that Government policies such as the Climate Change Levy
and the Renewables Obligation were failing to support environmentally-desirable
developments or even, in some cases, actively hindering them. By contrast,
the Energy Saving Trust suggested that small-scale wind and biomass
plants could, on their own, probably generate about 10% of the UK energy
supply by 2020; and in the long term technologies like micro-CHP and
fuel cells had the capability of delivering the whole of the electricity
supply for the domestic sector (which it estimated as 30% of total demand).
The WWF cited the recent study published by Forum for the Future which
estimated that, even with a number of constraints, by 2020 30% (148TWh)
of electricity could come from renewables generation at less than 4.5p
per kWh. Mr McCarthy of Ofgem implied that he was cautious about the
potential for renewable power in the short-term. However, he noted that
the position of renewables would be revolutionised by proposals for
electricity storage now coming forward. Faced with this range of views,
the Committee commented rather laconically ‘While
not questioning the Government’s commitment to increasing the share
of electricity generation provided by renewables, we do not know how
the Government reached a figure of 10% as the target for 2010 and we
would like the reasoning clarified’.
But they noted that the National Grid Company and
the distribution companies as represented by the Electricity Association,
seemed confident that a 10% target would not cause insuperable problems
for the network. Clearly though the Select Committee felt that it was
not sufficient just to leave things to market forces, even modified
by the CCL and RO, and, as we have seen, they adopted a surprisingly
interventionist stance. As we report later, it also called for an early
decision on nuclear power.
Perhaps inevitably, the final issue raised by the
Committee was the institutional one. There had been plenty of evidence
of problems with the existing Departmental set up. For example, they
were told that DEFRA had been considering a scheme to award electricity
from biomass two ‘green certificates’ per kWh, one for its
renewables content, the other to recognise its agricultural benefit
(a ‘rural development certificate’), but this had failed because
of a divergence of approach between DEFRA and the DTI.
However the Committee was not convinced the creation
of a strategic energy authority would solve problems like this, although,
somewhat ritually, they strongly urged the Government ‘to put in
place a more transparent structure for the formal co-ordination of energy
policy development and implementation across Government’.
