Business, Energy and Industrial Strategy Committee
Oral evidence: Decarbonisation of the power sector, HC 283
Tuesday 1 November 2022
Ordered by the House of Commons to be published on 1 November 2022.
Members present: Darren Jones (Chair); Alan Brown; Ruth Edwards; Andy McDonald; Mark Pawsey; Alexander Stafford.
Questions 39 - 72
Witnesses
II: Dan McGrail, Chief Executive, RenewableUK; Chris Hewett, Chief Executive, Solar Energy UK; Tom Glover, UK Country Chair, RWE; Richard Arnold, Policy Director, Marine Energy Council.
Examination of witnesses
Witnesses: Dan McGrail, Chris Hewett, Tom Glover and Richard Arnold.
Q39 Chair: We welcome to the table Dan McGrail, chief executive of RenewableUK; Chris Hewett, chief executive of Solar Energy UK; and Richard Arnold, policy director for the Marine Energy Council. On the screen, we welcome Tom Glover, who is the UK country chair for RWE. Good morning to all of you. Thank you for joining us this morning.
The Government’s energy security strategy did not set any long‑term targets for basically anything—onshore wind, offshore wind, solar or marine energy. It was pretty much left open in the energy security strategy. Is that a good thing or a bad thing? If it is a bad thing, what would your particular sectors want to see in terms of target-setting in the energy security strategy?
Dan McGrail: In short, it is a bad thing. I can see the reason why you would want to leave the landscape open from a Government point of view, but, fundamentally, the big elements, certainly of the renewable energy infrastructure that we need to build to get to 2035 and then beyond to 2050, are pretty clear right now. We know we want 50 GW of offshore wind by 2030, but 2030 clearly is not a cliff edge. We need to go towards 100 GW or beyond by 2050, which are the figures the Climate Change Committee is setting out.
In the context of a globally heating up market, which we are seeing particularly in a post‑Ukraine invasion world, countries around the world are starting to ratchet up their ambition for renewable energy deployment. Therefore, setting a context for 2035 and 2040, and beyond, is extremely helpful for industry to know where to prioritise investment in projects and in supply chains.
If I take offshore wind, for example, the future energy scenarios from National Grid predict around 70 to 78 GW by 2035. A signal around that would be helpful. Indeed, onshore wind and solar, which are important parts of the overall system, also need comparable signals. For onshore wind we would advocate—Chris can talk to solar—around 30 to 35 GW. For tidal, which is a new and emerging technology, where we can really be very successful and lead the world, we would welcome a target around 1 GW for 2035.
Q40 Chair: Richard Arnold, moving on to tidal and marine energy, there is a lot of confidence around onshore and offshore wind because we have built a lot of it. We know it works; it is in place; and it looks pretty good. We are really behind the curve in terms of your area, are we not? Is that why there have been no particular targets set in the energy security strategy?
Richard Arnold: The Government should be commended for setting a ringfence for tidal stream as part of AR4. We have not really had Government support since 2016, which has really hampered development. Despite that, in the results of AR4 we saw that tidal stream achieved about a 40% levelised cost of energy reduction from its estimated price in 2018 to 2022.
What we wanted to see in the energy security strategy was, as Dan mentioned, a 1 GW target. The ringfence was a welcome first step in realising the potential of this industry, but, as MEC, we have a job to do in making people realise that this is not something theoretical. There are turbines in the waters in Orkney and across the north of Scotland that are generating electricity for homes now.
This is a completely predictable renewable energy. You heard in the first session about some of the challenges around CCS and nuclear. Tidal stream could have a really important role in replacing the role that gas and nuclear play in the energy system.
Q41 Chair: Do you want to say anything extra about hydro storage as opposed to tidal energy? We heard earlier about how the grid and storage are going to be really important. We often talk about batteries. You probably talk about it, but we do not hear much here about hydro storage. Why is that?
Richard Arnold: It is in its infancy at the moment. One of our members, the European Marine Energy Centre, is doing some really interesting pilots around hydrogen storage and pairing that with tidal. Having that sort of consistent profile is really beneficial for storage. There are some studies that show that just two hours of energy storage combined with tidal effectively provides baseload to the energy system, which is the holy grail in a renewable world.
Q42 Chair: Chris Hewett, from a solar perspective, the same question: what would you like to have seen in the energy security strategy?
Chris Hewett: We should be honest and say the target-setting is really hard in this market. One of my frustrations with the energy security strategy was that it is still behind the curve of where the market is—particularly solar is a very fast-moving technology.
We made some scenarios for 2030 in June 2021. We published those. We thought a net zero-consistent target of 40 GW by 2030 was eminently achievable. The economics have changed. The energy security strategy did talk about a five-fold increase of solar, which is an oblique way of saying about 70 GW by 2035. That is probably about right.
In two years’ time, we will probably have a different number. What has happened is that the economics have flipped. Five years ago we were saying, “We want to decarbonise the power sector, but renewables are quite expensive and fossil fuel is quite cheap. What do we do?” Suddenly, it has flipped. The status quo is expensive, and the priority, for energy security reasons and for consumer reasons, is to get off gas as soon as possible.
It has been helpful at the same time. The costs of both solar and wind have fallen consistently over that time. We have now reached that tipping point where we are absolutely much cheaper than the fossil fuel-generating sector. We can probably almost go as fast as we—the sector—can fly, frankly.
The other concern I have with the energy security strategy is that it did not really talk about the onsite generation side of things. Again, from what we are seeing in the market, there have been double the installations of rooftop solar this year compared to last year. That is entirely driven by the energy price crisis. Those in the warehousing sector have said that they think we could put 15 GW of solar on their sector alone. There is an awful lot we can do there, which has not really been looked at yet.
Q43 Chair: Tom Glover, from an RWE perspective, you are making investment decisions and thinking about your pipeline over many, many years. Would it have been helpful to you to have more specific targets in Government policy or would it not really make any difference?
Tom Glover: It does make a difference. One of your previous panel members said that it takes 10 years to build an offshore wind farm from start to end. The 2030 50 GW target is ambitious and very welcome. I am already getting connections for 2033. I now need to be thinking about the 2035 target and 2040 target.
It would be extremely useful to have development timescales for solar and onshore wind as well. We have to deploy development capital at risk to develop those projects from greenfield projects and to be able to invest. Even a very simple development probably takes three to five years. If I want to put capital at risk on the development side, I will put more capital at risk, the more I know how committed you are to certain technologies.
I fully agree with the other panel members. The opportunities are immense. It is very clear that offshore wind, onshore wind and solar are going to be the backbone of getting us to 80% renewables or wherever we are going to get to. We already know those technologies are deliverable. As the last speaker said, just unleash us and it will come. It is the cheapest.
Q44 Chair: How do we unleash you?
Tom Glover: At the moment, if we think about what constrains us in terms of the delivery of those renewables, the first one is the grid. We talked about that on the previous panel. It is planning and consent. We have this flip-flopping between solar being good or bad, or onshore wind being good or bad. Honestly, it is good. People in the local area think it is good. It is the cheapest technology. We need that clarity that we are able to deliver it. That is unleashing us.
It is also about making sure that all the consenting and planning rules are in place to enable us to realise that potential, and it is about setting those targets and the resulting CfDs and delivery mechanisms so we can really meet the potential. If you solve those problems, those are what are limiting it. It is not the industry. We can get to that renewable target even more quickly, if those are resolved.
Q45 Mark Pawsey: Tom, you will have heard the discussion earlier about the role of fossil fuels, as we move from today to 2035, as a major generator. How do you see the role of fossil fuels? How is that going to work its way through?
Tom Glover: That takes a lot of my other team’s time. We are the largest gas-fired power generator in the UK, so we have to do the biggest change. We are fully committed to decarbonising our portfolio by 2035. That is going to happen in a number of ways. First of all, it is obvious that the amount of gas is going to reduce. The more that you increase renewables, the less load factor that gas stations will have anyway. If we do nothing, that will reduce the amount of emissions.
Then we need to look at the decarbonisation options for those gas stations. There are effectively two main ones. It is either carbon capture and storage on the back end of it or it is hydrogen burned into it. The whole industry is looking at this. We really need the Government strategy to work out what the total strategy is for decarbonising gas. Which ones are going to go to hydrogen? Which ones are going to go to CCUS?
Then there is a final bit, which is what I call the really difficult bit. This was mentioned by the CCC panellist in the previous session. The very last bit of gas is really expensive to decarbonise. There was an Aurora study done in 2021 that said the last 10 GW of gas cost £8 billion to decarbonise. That is just to get rid of 0.2 million tonnes of carbon.
At that point, we have to be pragmatists and say, “We are going to use that only in low-wind years and in high-demand years.” We should probably be looking for some negative emissions in the industry or elsewhere in the power sector that get us to net zero without an absolute blanket of no emissions anywhere, which could be extremely expensive for consumers.
Q46 Mark Pawsey: You spoke about carbon capture and storage as being a method of taking the carbon out. You heard the earlier discussion. Is it your view that the technology exists and is ready for deployment or are we some distance away from that?
Tom Glover: We are confident it will be deployed. There is a lot of work to get there. We have engineering studies, for example, at two of our most efficient power stations ongoing at the moment to work out exactly how that will happen. From a process perspective, that kind of technology is deployed in chemical factories already. Effectively, it is just putting it on the back end of a flue.
From our perspective, we are confident it can be delivered. There are lots of engineering challenges to deliver it. There are also lots of challenges about the transportation and storage of it and having the right network available etc. From our perspective it is doable, but there are challenges in the journey.
Q47 Mark Pawsey: Are you happy that the rate of development of new renewables will match the taking out of operation of fossil fuel sites? Presumably, you would not invest in upgrading a fossil fuel site right now because it is going to have a limited life ahead of it. Are you holding back on any investments because you can see renewables coming on? Are the two going to dovetail as far as the times are concerned?
Tom Glover: We are very pragmatic. To the extent that we thought there was going to be a gap, we were continuing to invest in our gas stations. We would prefer to put our money into low-carbon and zero-carbon technologies, so 90% of our investment is going into those kinds of technologies.
Of course, every gas station needs upgrades every five years—for example, a new hot gas path. We will continue to do that while we think the market is still there. If we see renewables not delivering quickly enough, we will continue to invest to keep those open and, if not, we will not.
Q48 Mark Pawsey: You just used the word “if”. What do you see and what are you planning to do?
Tom Glover: We have to make those decisions once every five years. We currently do it on a rolling basis, so we do not have to work out what we are going to do in 2035. Our current plan to decarbonise our gas fleet is to reduce its hours and be ready to have all our gas stations not running, running extremely small hours or decarbonised by 2035.
Q49 Mark Pawsey: Will you have them on one side and capable for use in the event of a huge energy challenge? Will you be mothballing these plants once they cease being used on a regular basis?
Tom Glover: We currently have no plans to mothball anything. It depends on what you mean by “mothballing”. Deep mothballing can be very costly to get back out of again. We would expect a certain proportion of our fleet to be running very low hours. If it is running very low hours, the decarbonisation options become very expensive.
We would run very low hours. Assuming there is compensation in place, such as a continued capacity market like we have today, we will keep them available. Of course, we are a business. We will not be able to keep them available if we do not think there is a realistic way of making money out of making them available.
Q50 Mark Pawsey: Dan, how do you see the decline in fossil fuels as we get to 2035? Will there be an important role for fossil fuel as we make the transition?
Dan McGrail: Tom’s picture of how this will unfold is a fairly accurate one. Clearly, the first job we have to do as a country is to increase the number of terawatt hours we can get out of renewable assets. That is clearly driven by building as much as we can. We know the cost is incredibly low so it is a no-regrets investment for us in offshore, onshore, solar and tidal. We have this growth curve, and each incremental power plant that we build with renewable assets is going to reduce the number of hours that one of Tom’s fossil fuel stations is running.
I also recognise—I did work in that industry previously—that thinking has been going on about this for a number of years both from a Government perspective and an industry perspective. The number of hours fossil fuel stations are going to be running by the mid-2030s is going to be very few, and therefore business models need to evolve to allow them to stay open. The capacity market was introduced in 2014, and that makes it work.
Q51 Mark Pawsey: Right now, are we delivering new renewable capacity at the correct rate to accommodate the increase in demand as well as the taking out of fossil fuel generation?
Dan McGrail: Yes and no. We are bringing forward enough development pipeline. Our development pipeline has grown enormously in the last few years. We have at least 86 GW of offshore wind development, which is ready to be developed over the coming years. The challenge is materialising those projects through the planning system and getting the grid connections for those projects in place in time. That is the “no” part of my answer, particularly on grid.
Q52 Mark Pawsey: The 2035 target has a caveat, and the caveat is “subject to security of supply”. Is that a get-out? Do you fear that it may be used as a get-out?
Dan McGrail: The hypothesis behind that question is somehow you reduce security of supply by building more renewables. When we build more renewables, we increase security of supply.
Q53 Mark Pawsey: We may not build them at a sufficient rate. You are confident we will, but the practicality is that planning consents are going to be difficult to get and we may not get there.
Dan McGrail: The Government are doing good work on planning. I am not saying it is solved, but we know that planning reforms are in the pipeline. We will see new national policy statements forthcoming soon.
I am confident that the planning regime will be in there. I am more concerned that the grid construction needs to be put in place and catalysed very soon. It is easy to underestimate just how much new grid capacity we need to deliver net zero. That is probably the big elephant in the room. How do you build a network that can accommodate this?
Q54 Ruth Edwards: Tom, you very kindly hosted the APPG for the environment on a visit to Rampion’s offshore wind farm. We discussed how the Government’s target for offshore wind was incredibly ambitious. In your view, as things currently stand, is it deliverable?
Tom Glover: No. If you take the 50 GW by 2030, looking just at my projects, RWE sits on probably one of the biggest offshore wind development project portfolios in the UK. The vast majority of those wind farms are not getting connection offers by 2030. That is just what is required to get to between 30 and 40 GW.
For our latest one under UK round 4, Dogger Bank South, our connection offer is currently 2033. We are working very hard with the Government, and we hope to bring that in to—I do not know—2031, but to get another 10 GW on by then, to go from 40 GW to 50 GW, is extremely ambitious, to be honest.
As Dan said, grid connection is one of the main issues there. I would maybe just add one little extra to Dan’s comment. One of the reasons why the offshore grid and planning connections are so difficult is because of the onshore grid. That goes back to planning. I am afraid—maybe I am slightly less optimistic than Dan—that we are not going to get those onshore grids planned and delivered as quickly as we would like.
Q55 Ruth Edwards: What can we do to speed up the rate at which connections are being offered?
Tom Glover: There are two things. In the very short term, it is about sorting out these national policy statements that other panellists have referred to. We still have not seen them published, and we need to get to the point where it is very clear that investments for renewables and investments to deliver net zero have some kind of priority over local issues. I know that is extremely difficult because local issues are very important as well, but we need to address that balance for the greater national good. That is one in the short term.
In the longer term, what we have had from the regulator and the transmission operators is insufficient anticipatory grid investment. We have not had enough that is looking forward, asking, “What do we want by 2035? What do we want by 2040?” and building the grid in anticipation of that coming. We now have the new offshore targets going way beyond what the grid was ever planned for, and then we ask, “Well, why are the grid connections not there?” It is not that surprising, is it? The transmission operator did not know that was what was required.
We need to think a little more strategically. There are quite a few investments that we would call no-regrets. You cannot go too far because it is still customers’ money. If we built all the wires we could ever want, we would probably be over-investing, but there is some happy medium there where we could do anticipatory investment that means we are ready to connect whatever renewables come when they come.
Q56 Ruth Edwards: Chris, how do some of the issues we have talked about, such as planning and grid connections, play out specifically around solar?
Chris Hewett: There are similar issues to those Dan and Tom have articulated. We have a very strong development pipeline. There are over 40 GW of utility-scale solar projects out there. They may not all get built because some may not get planning and some may not get grid, but that pipeline has grown hugely in the last two years through the covid period. That is there. It is harder to tell what the pipeline is for rooftop and onsite generation, but I know that is growing extremely quickly as well.
There are two things, I suppose. One is that the local planning system is working quite well, so 7 GW of that 40 already has local planning permission. Local democracy is working. You hear lots of talk about solar farms being unpopular. The stats say that the vast majority get through. On planning, there is less concern.
I totally agree about getting the NPFs out and getting that national priority in place as soon as possible. We know they are in draft; they just need to be pushed through the system.
On grid, we are encountering the same issues. In terms of the 7 GW that has planning permission, some projects are now getting letters from the DNO saying, “We thought we could connect you in 2025. Now it is 2028 or 2032.” That is happening across the piece. We have started to survey our members. There is now £1.5 billion of investment clogged up by those delayed connections.
That is also happening at the onsite and rooftop level. We will have warehouses or factories that want to put a megawatt of solar on their roof. The DNO will say, “We can accommodate only 200 kW” or, “You have to have an export limit because the local substation will not take it.” It is a mindset change, I suppose, for the grid. For me, anticipatory investment is absolutely the right word.
We need to think of this in terms of connectivity now. The real generation will be there and there will be plenty of development projects, whether it is off in the North sea or whether it is across the country as solar. If the connection is there, they will be able to deliver cheap electricity.
What has changed is that, previously, Ofgem would probably cautiously say, “We do not want to invest too much in the grid because that goes on consumers’ bills.” What we know now is that the quicker we can get this on to the network, the quicker we can get expensive and volatile-price gas off the grid. Therefore, that will deliver a lot of cheap power to consumers. Again, the economics have really flipped. The system has not really caught up with that yet.
Q57 Ruth Edwards: You have mentioned rooftop solar. What is your view on having tighter regulations on new-build residential or warehousing to insist on solar panels being part of those new projects?
Chris Hewett: The new part L building regulations are coming into force in the middle of this year and will be totally in force by the middle of 2023. From talking to house builders, our understanding is that that is certainly going to mean something like 3 kW of solar on every new build in England. That is kind of happening.
There is the future homes standard debate that is happening for the 2025 standards. It is really important that we do not go down the route of saying, “If you electrify heat, that is job done.” You need solar, heat pumps and other forms of electrified heat in those buildings. That is the next decision we want to see made, in both England and Scotland.
Q58 Ruth Edwards: You described problems in getting connections for some of the bigger rooftop solar builds. Will there be an issue there? Is that something we need to address or would they not be at scale?
Chris Hewett: That is definitely a question for the DNOs and Ofgem. It is speeding up that investment into upgrading our grid into something that is fit for the new technologies we are going to be having over the next decade. It was designed for a set of technologies that were built 20 or 30 years ago. We really need to accelerate that process.
Q59 Mark Pawsey: I want to stick with the planning system, because the energy security strategy put forward a series of proposals to try to speed things up. We have heard that some projects have taken 10 years from inception to delivery, but on average a wind turbine is taking four years and the Government want to get that down to one.
What is your assessment of the changes that are proposed, Dan? Are they going to make a difference?
Dan McGrail: Going from four years to one is potentially a slight overstatement of what is going to be materially achieved through the reforms that are put in place, but it can deliver that. If I just stick with offshore wind for a moment, the last six offshore wind farms to get consent in this country all required the Secretary of State to overturn the Planning Inspectorate’s decision. Clearly, something is mismatched.
National policy statements, which remove or reduce the risk of judicial review, are a really important part of that acceleration. That four years includes the judicial review period. If we can minimise the number of projects that get mired in that, that is going to help. The other part of the reforms that are being delivered through the Energy Security Bill are about optimising the process from the point of entry into the DCO review to the point of decision. Realistically, that is reducing from 18 months down to 12 months. Taken together, those aspects can make a material change for offshore wind.
For onshore there is still huge variability. Even in Scotland, where it has continued to be developed, there is huge subjectivity as to whether one planning authority reaches a conclusion versus another one. We have statistics that show that the discrepancy in the amount of time is enormous between some local authorities and others. We need consistent guidance.
If the Government’s recent decision to reintroduce onshore wind into English planning regulation allows for national policy statements to be developed—we sincerely hope the Government continue with that announcement—we can then start to see a more material change in onshore, but it really does need that clear top-down guidance.
Q60 Mark Pawsey: Do the Government’s proposals reflect public opinion right now? There was an application 10 years ago for onshore wind in my constituency. I saw a campaign the like of which I had never seen before. I am not sure the campaign would be quite as vociferous today as it was 10 years ago. Do you sense a change in public attitude?
Dan McGrail: You are quite right. It is more than a sense. We have done a lot of polling on this. We recently did a Survation poll based on every constituency in the country. Support levels for renewable energy and onshore wind projects are way above three quarters, so 75% of people will quite happily have onshore wind in their local constituency.
An interesting phenomenon in that polling is that the level of support is even higher in constituencies that voted for the Conservative party in 2019. The widespread support for onshore renewable energy is very significant.
Q61 Mark Pawsey: Chris, on solar, you mentioned the 40 GW that already has planning consent. I had a solar application come forward in my constituency and, again, there were very high levels of opposition. How are you managing to engage with communities in order to bring them onside and enable the results you have had?
Chris Hewett: The first point to make is that the figures for solar are similar to those that Dan cited for onshore wind. We have done the polling Dan has done as well. Solar is still the most popular technology out there. If you distinguish between solar farms and rooftop solar, it is still extremely popular.
We did some polling that looked at how people’s views of solar changed if they self-identified as being near a solar farm. It actually went up. When people live next to a solar farm, their opinion of solar improves. It is eight times more likely that their opinion of solar will improve than get worse after they live next to a solar farm.
Some of these campaigns are quite noisy. They quite often do not represent the vast majority of views even in that local area. There are all sorts of different cases. That is one thing to point out.
To pick up on the particular work we do on community engagement, all developers will talk to communities and demonstrate what is happening. Many will have improved biodiversity on the site. There is often some involvement of local wildlife groups and school visits on those sites to improve education. We are in the middle of updating our community engagement best practice to make sure we are doing the best we can.
When we talk about community engagement, it is not about engaging with the community to get it through planning and then going away. We are thinking about this as something that is going to be in your local area for 30 or 40 years. How does this become part of your local area? The vast majority are either ignored—it is not noticed that they are even there—or engaged with positively.
Q62 Mark Pawsey: In my constituency, I get the sense that people would be sympathetic to solar where there is marginal land. The Government are not particularly pursuing that route. There is a feeling that at this time, with food security being an issue, we want to be maximising the use of our good-quality farmland. How will any changes the Government are thinking about affect the delivery of solar?
Chris Hewett: Seeking not to site solar on the best farmland is already existing policy and practice in the industry. If you look at it from the farmer’s perspective or the landowner’s perspective, they are not going to want to put solar on land that they know is going to be suitable for very high-value arable crops etc. That really does not happen.
What emerged from the previous Secretary of State for DEFRA and had implied support from the previous Prime Minister was the idea of reclassifying land, so that some land that is not necessarily the best would be reclassified to say it is the best and, therefore, you would use the planning system to prevent solar farms from being built on it.
When that got into the media, there was only one organisation that supported that proposal that I saw. That was Net Zero Watch. Everyone else from all parts of the political spectrum, whether it was the IEA, a lot of free market think-tanks, the Labour party, the NFU or the CLA, said it was a bad thing to do to reclassify average to poor-quality land and call it best to stop solar.
We have not seen confirmation from the new Secretary of State, but I am hoping that proposal has gone the way of the previous Government.
Q63 Mark Pawsey: Richard, I have not met anybody who thinks that harnessing the power of our tides is not a good idea. How can we use that public support for what you advocate to make it happen?
Richard Arnold: Yes, I completely agree. As a maritime nation, the UK is strongly in touch with the ocean’s potential. We really welcomed in the energy security strategy the intent to speed up the consenting process for wind to one year. For tidal stream, the full consenting process can take from three and a half to five and a half years.
Once that is all in place, deployment can be really quick. Nova Innovation deployed its Shetland array within three years of getting its consent in place. We are really keen to work with Government to look to shorten that consent process.
One proposal, thinking strategically, is to allow the widening out of environmental monitoring when a project is being developed. That might be a way that key sites can be developed and get their licences a lot more quickly. At the moment they are prevented from doing that. It is only their project that they are allowed to monitor for. That would be a way of speeding up that process and getting more tidal stream in our waters.
Q64 Alan Brown: If we can return to the review of the electricity market arrangements that was discussed in the first section, Dan, I have long complained that, in terms of transmission charges, at present Scotland pays the highest grid charges in Europe. The average price is £6.42 per megawatt-hour in Scotland. In England and Wales, the average price is 49p per megawatt-hour.
I would argue that change is required. If we move to locational prices, is that the best option? Who would stand to lose and who would gain from locational pricing?
Dan McGrail: As an industry, we remain unconvinced that locational marginal pricing is going to deliver the kind of investment we need. We need about £175 billion in wind power alone to deliver the 2030 targets. We need to attract a huge amount of private capital.
Locational marginal pricing creates a volatile signal, which is going to change based on the decisions of industries, the behaviour of consumers and the locations of other power stations. That volatility, in and of itself, is going to be a barrier to investment and will, realistically, increase the cost of capital.
There is absolutely no question that it makes sense to locate renewable energy where the resources are, but we also need to take into consideration the fact that, in many cases, developers do not have the option. There is nothing that locational marginal pricing can do to change the fact that floating offshore wind farms will be in the middle of the North sea. Sending a signal based on location is not going to change that reality, and the resources are best in those locations.
What we need to see from REMA is a laser-sharp focus on how you unlock the investment, which will be about the consistency of the signals and the equity in the signals, and it will also take into consideration the point we started with: the big, significant element of the generation backbone of this country will be offshore wind, onshore wind and solar. Everything else around that is not going to be changed by locational marginal prices.
Q65 Alan Brown: Here is one of the arguments for locational marginal pricing. If you look at the highlands of Scotland at the moment, bizarrely, users there will pay a surcharge on electricity, but, under locational marginal pricing, with all this renewable energy being generated in the highlands of Scotland, lo and behold, prices drop and the consumers in that area see a reduction.
On the face of it, that is a great deal for the consumers in these areas. Is that the reality? You are talking about potentially scaring off investment. How do you quantify what the risks and benefits of locational charging really are?
Dan McGrail: It might be worth taking Tom’s point of view on this because he is probably a little closer to it as a generator. My observation would be that this works great theoretically. There are examples of this in parts of Sweden at the moment, where you have very low electricity prices in the north of Sweden. That is attracting certain industries to that location.
If you follow that through to its logical conclusion, if lots of industry locates because the electricity prices are cheap, the demand will go up and electricity will become more expensive. The volatility will correct itself.
The other point is that this is not new, insofar as there have been other places in the world that have tried locational marginal pricing. Texas is an example. Regen did a study recently that showed that the introduction of locational marginal pricing did nothing to change where renewable generation went, because ultimately the generators go where the resources are the strongest. That element of the business case outweighs any signal that comes from the locational price.
My fear is that, while it makes great sense in a spreadsheet, it is not going to change people’s behaviours and investment decisions, certainly when it comes to deeply rooted industry. If you have built a refinery or a glass manufacturing plant, and all of a sudden the electricity price is more expensive where you are, it is very difficult to relocate that because the electricity is cheaper somewhere else.
Q66 Alan Brown: Tom, what does it mean for you in terms of investment?
Tom Glover: You are right to talk about the distributional effect. Your opening question was about whether it would make prices cheaper for those in north Scotland. The answer is that it could, honestly. The problem is that you are going to have this complicated system. Theoretically, if you just look on a spreadsheet at locational marginal pricing on its own, it will result in lower prices for Scottish generators and Scottish consumers, and higher prices for southern generators and southern customers. That is if you just look at it as a single intervention.
You have to be really careful about that. First of all, you have to ask, “How politically acceptable is it going to be that a customer in London pays significantly more than a customer in north Scotland when they have had nothing to do with the investment in the transmission system?” First of all, you have to ask whether that is a realistic electricity charging outcome.
Then you have to look at the next level of costs that are not direct costs to consumers. Dan mentioned Texas. We are in fact now the largest renewable investor in Texas as well. I used to manage that portfolio. We used to add somewhere between 100 and 150 basis points, or 1% to 1.5%, extra return requirements on to a nodal price versus a national price. Basically, all your investors who are subject to this extra volatility are going to increase their capital return requirements. If you want to, for example, invest £100 billion in renewables, that 1% to 1.5% extra per year costs overall consumers £1 billion to £1.5 billion per year. You also have to offset that.
You also have to look at the counterfactual: what is the current charging regime? You mentioned that. From our perspective, it is not ideal. First of all, you should probably look at addressing the current charging regime and asking, “Is that fair?” Once you have the fairest and most economic current charging regime, you can work out whether LMP makes sense.
My final point—this goes exactly to Dan’s point—is that ultimately I build an offshore wind farm where there is a lease, not where there is a transmission line. Ultimately, I am going to put carbon capture and storage where there is a cavern or an old gas field that I can inject carbon into. I am not going to build, under current UK policy, many onshore wind farms in England. I am still going to build my onshore wind farm in Scotland.
Probably the only thing it is going to drive is building slightly less onshore wind farms in Scotland and putting more PV in England, if we are still allowed to do it. That is probably the only big change you are going to see. From our perspective, it seems a very complicated mechanism to achieve that.
Q67 Alan Brown: Does that also come back to greater anticipatory investment in the grid and trying to eliminate constraint costs as well?
Tom Glover: From our perspective, you have to be really careful when you look at constraint costs. There will be an efficient level of good investment that still has constraint costs because the constraint costs are lower than the costs of building more grid.
Generally speaking, if we wanted to electrify everything, we would say that we should really invest in more grid. Those bootstraps that we are talking about, going from Scotland down via the offshore wind farms into England, must make sense. That would enable us to have more investment in wind and renewables in Scotland, and all consumers in the country benefit from that.
Q68 Alan Brown: Dan, can I go back to you in terms of further market reforms? Should the UK be decoupling electricity from the price of gas? If so, what is the best way of doing that? That is a very hot debate at the moment.
Dan McGrail: To a certain extent it is already happening through the CfD. We have been using the CfD for the last seven years, and we have a big auction this year that will deliver a lot more capacity. There is an inevitable transition of renewable energy towards a fixed price and giving a lot of price certainty to the consumer.
Our nervousness—this is a wider message—is the pace of reform and ensuring that reform is done in a considered way. The marginal price design of the market, which clearly has been in place for a long time and is fairly homogenous across the world, is one which exists for sound economic reasons and helps balance the system. Clearly, we want to ensure that as much as possible of the value that comes from reducing the price of electricity through renewables is delivered as part of the consumer bill.
In recent times we have seen this topic rise up the agenda significantly, particularly in response to the incredibly high gas prices at the moment. What we have been saying as an industry is that we can move the remaining assets that are not currently using contracts for difference on to contracts for difference, in order almost to complete that decoupling in the energy market. You would effectively create that through an intelligent and industry-led transition away from the renewable obligations certificate and towards CfDs.
Instead what we have at the moment is this discussion that is in the Energy Prices Act and the Secretary of State having a considerable amount of control to cap prices, which is a concern that we in the industry uniformly share and are worried about. For us, moving to CfDs is the quick and appropriate solution to deliver as much of that decoupling as possible, as quickly as possible.
Q69 Alan Brown: Can I just move on? Richard, you have already said that you would like to see a target of 1 GW by 2035 for tidal or tidal stream. What reforms would you want to see to the CfD scheme to help emerging technologies in general such as tidal stream and maybe wave? Are further reforms to CfD needed?
Richard Arnold: The ringfence, as I mentioned, was a really important first step. Previously, tidal stream and wave energy could bid into the CfD process, but, because it is competing with wind and solar, it cannot compete on LCOE.
What is really important for us is that investor confidence is maintained. That can be achieved through committing to a target and then ongoing ringfenced support for tidal stream. Lots of our wave members think they will probably be ready to deploy in the AR7 or AR8 timeframes.
There is another thing that we want to see change in the CfD. There is a focus on LCOE and judging all renewable energy on its cost rather than thinking more broadly about its value. There are some really interesting studies happening at the moment on the energy system benefits that tidal stream can deliver to the UK’s energy system.
We would be keen for the Government to think more strategically about where we want to be in 2035, where we want to be in 2050 and what we want the renewable energy industry to look like in the UK, and then to work backwards from that. To get to that low-cost and secure renewable energy system might not need the renewables that are the cheapest tomorrow.
Wind and solar are going to make up the backbone of the future energy system, but the more intermittent renewables we have, the more important and more valuable the offer from tidal stream and wave energy becomes.
Q70 Alan Brown: For how long do you foresee a request for ringfenced money for tidal stream being required before you get to scale and really bring down cost?
Richard Arnold: We think by around 1 GW of deployment tidal stream will be cheaper than new nuclear. We will reach that point in 2035. Looking out to 2050, it will be around the £50 per megawatt-hour mark.
Tidal stream and wave should not really be compared with wind or solar. We are offering a very different service to the energy system. It is more accurate to compare us with gas or nuclear. We are not going to be delivering lots and lots of GW, but there is significant potential there. Supporting this industry not only reduces system costs but will create significant jobs and export opportunities for the UK.
Q71 Alan Brown: If you are talking about a strike rate-type cost and you are comparing to nuclear, what are you taking the benchmark for nuclear from?
Richard Arnold: We are using Hinkley Point C.
Alan Brown: Hinkley Point C is a 35-year strike rate, whereas you are getting a 15-year strike rate. There is not even a direct comparison, then.
Richard Arnold: Yes, we are going to be cheaper than Hinkley Point C by 2035.
Chris Hewett: On the REMA point, wind and solar are going to be the backbone of the system within 10 years. It will be completely different. It will be about the value of when that energy is generated and what demands are on the system at that point. Some of the solar contracts are done through PPAs. They are just sold to a corporate and sold to the public sector over the long term. That is a way of doing it that is similar to a CfD but in the private market.
You are also seeing that the profile of solar charging, whether it is rooftop or solar farms, matches the demand for EV charging. A lot of people charge their cars during the day, if they are parking at a workplace, for example. There will be a lot of flexibility in demand management in that system. I would hope that REMA would allow for that market mechanism to come into force. That is what our technologies, along with energy storage and demand-side management, can really deploy.
Q72 Alan Brown: Should there be a target set for long-duration storage? Should the Government be looking more at pumped-storage hydro and bringing that forward?
Dan McGrail: I am not particularly qualified to answer that question in terms of whether they should set a target. The key thing in the strategy was supporting green hydrogen. That has set a target. Clearly, the business models that will be supported by the Energy Bill, if that goes through, are vital to that.
Chair: I am afraid we have timed out. I am sorry to interrupt. I am sure there will be other things we might want to write to you about and some follow-up questions, if that is okay.
Thank you to all of you for your contributions today. That brings the session today to an end.