House of Commons Energy and Climate Change Committee Electricity Market Reform Fourth Report of Session 2010–12 Volume II Additional written evidence Ordered by the House of Commons to be published 25 January, 2 and 15 February, 15 March and 27 April 2011 Published on 16 May 2011 by authority of the House of Commons London: The Stationery Office Limited The Energy and Climate Change Committee The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies. Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test) The following members were also members of the committee during the parliament: Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Nerys Welfoot (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant), Emily Harrisson (Committee Support Assistant) and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected] Published on 16 May 2011 by authority of the House of Commons London: The Stationery Office Limited List of additional written evidence 1 Dr Barrie Murray Ev w1 2 Swanbarton Ev w4 3 Ecolateral Ltd Ev w6 4 Combined Heat and Power Association Ev w10 5 Westinghouse Ev w14 6 Nuclear Industry Association Ev w15 7 Renewable Energy Association Ev w17 8 ESB International Ev w19 9 Association of Electricity Producers Ev w23 10 Welsh Power Ev w26 11 Scottish Renewables Ev w31 12 InterGen (UK) Ltd Ev w32 13 Renewable Energy Systems Limited Ev w35 14 Low Carbon Group Ltd Ev w39, w43 15 Institution of Engineering and Technology Ev w45 16 Grantham Research Institute and Centre for Climate Change Ev w47 Economics and Policy 17 Professor Michael Grubb, Cambridge University Ev w50 18 Alex Henney, EEE Ltd Ev w59 19 Mainstream Renewable Power Ev w64 20 Carlton Power Ev w65 cobber Pack: U PL: CWE1 [SO] Processed: [10-05-2011 17:30] Job: 009048 Unit: PG01 Energy and Climate Change Committee: Evidence Ev w1 Written evidence Memorandum submitted by Dr Barrie Murray Summary This memorandum advocates the establishment of a centralised procurement agency for low carbon energy sources as the only viable option to secure an optimal least cost development whilst managing the many new and diverse issues associated with alternative energy sources. The previous efforts to promote competition in the electricity sector have moved the country into a position where we no longer exercise control over a key part of our national infrastructure. We are left with attempting to seduce potential generators with incentives under the guise of market reforms to build new capacity. The industry is controlled by foreign utilities whose only interest is profit and they use the threat of future shortages to extract more subsidies and are in a position to blackmail us. This contrasts with our neighbouring European partners who have retained national champions that have enabled them to thrive whilst maintaining an ability to exercise control. Given the wide range of issues that the sector faces over the coming years it will not be possible to effect an optimum development strategy through market mechanisms and some form of central planning and control needs to be implemented. End users and industry have to be able to input their needs and concerns. It is likely that the escalation of energy prices associated with the proposed EMR will put some companies out of business and reduce electricity demand. The proposals can only lead to higher end user prices and the government has to evidence why it believes prices will be lower than they would otherwise have been. How reliable is this assertion without knowing what investors plan to do when they will seek to maximise profit? Can we be certain what the rest of Europe will be doing during this period and why investors in new plant would choose the UK? Where are the academic economists that said that the market would solve all including the provision of adequate levels of investment? It is naive to believe that the targets and the required optimal outcome will all be delivered through manipulation of a carbon floor price. Nuclear must be the most cost effective way of meeting requirements to reduce emissions because of its high load factor producing three to four times more energy than the equivalent wind capacity. Nuclear should form a dominant proportion of the future plant mix and its contribution to reducing emissions should be recognised. But, how will its provision be made competitive when we purposely and openly disadvantage the alternatives of coal and gas generation. A further consequence of the proposed CCL on fuel will be to encourage energy intensive users to locate outside the UK. The current government agencies that exercise authority to commit the nation to crippling subsidies were not constituted with the necessary skills for their current engagements in negotiating and establishing an optimal way forward. 1. What should the main objective of the Electricity Market Reform project be? (a) The aim has always been to minimise the overall energy cost to end users whilst maintaining accepted levels of security. The end user payments also include a significant proportion to cover transmission and distribution as well as metering, administration and regulation and they can be expected to add significant extra costs to accommodate renewable sources. What’s missing in the current debate is how the optimum development is supposed to be established. The procedure prior to restructuring was to establish optimal coordinated generation and transmission development plans that took account of all the requirements including cost minimisation security, fuel diversity, operational efficiency and minimum risk. This was achieved using large scale LP formulations of the problem which over the years had become highly developed. It is to retain this ability to coordinate development that many informed countries have chosen the Single Buyer market model where a central procurement agency acts on behalf of all customers to establish supplies and facilities to meet their agreed needs. This enables overall government strategy to be incorporated with competitive tenders for new capacity aimed at developing an appropriate plant mix. It is difficult to see how this can effectively be managed by tinkering with current market arrangements were each player has the option to pursue their own plans. The long lead times for development confound the problem and introduce risk that has to be covered through market prices. It is a delusion to think that DECC or Ofgem are going to establish an optimal way forward by tinkering with market arrangements and CO2 prices. The costs involved and implications of failure are too great to rely on ad hoc trials of different market arrangements and someone needs to take control of the situation. A centralised market to coordinate the development of low carbon sources offers the best approach to deal with the many abnormal issues surrounding renewable development. This approach offers more scope and flexibility to address some of the technical problems associated with renewable integration and has parallels with the centrally managed balancing market. It must be arranged to foster competition through competitive tender in all time frames. Amongst the many other issues that need to be addressed are: — Should renewable energy sources receive special treatment related to balancing? — Should this balancing treatment be differentiated by renewable energy sources? — The market time frames that should apply recognising the intermittency. — The degree of optionality available to market participants. cobber Pack: U PL: CWE1 [E] Processed: [10-05-2011 17:30] Job: 009048 Unit: PG01 Ev w2 Energy and Climate Change Committee: Evidence — The requirements