Unrevised

Members present

Earl of Selborne (Chairman)

Lord Broers (co-opted)

Lord Dixon-Smith

Lord Hennessy of Nympsfield

Baroness Hilton of Eggardon

Lord O’Neill of Clackmannan

Lord Patel

Lord Peston

Lord Rees of Ludlow

Viscount Ridley

Lord Wade of Chorlton

Lord Willis of Knaresborough

Lord Winston

________________

Examination of Witnesses

Guy Newey, Head of Policy, Ovo Energy, Dr Laurence Barrett, Strategy Project Manager, E.ON UK, and Paul Spence, Director of Strategy and Corporate Affairs, EDF Energy

Q29 The Chairman: Welcome, gentlemen. We are very pleased that you have been able to help us with our inquiry on the resilience of electricity and its supply. Before we start, would you like to introduce yourselves and if any of you would like to make an opening statement please feel free to do so.

Guy Newey: I am Guy Newey. I am head of policy at Ovo Energy. Ovo Energy is a supply-only business, so we do not have generation assets as such and we tend to see some of these issues from the other end of the wire perspective, but they are obviously of concern to our customers. In general terms, we have quite a lot of concern about the direction of energy policy, and generation policy in particular, and I am sure we will get into the detail of that in terms of costs and other matters that are relevant to this inquiry about resilience and reliability. Ovo has 400,000 customers, which is up from around 120,000 about a year ago, so we are growing very quickly, which is probably indicative of some of the changes going on in the energy market at the moment.

Paul Spence: I am Paul Spence. I am director of strategy and corporate affairs for EDF Energy. As you probably know, we are the largest generator of electricity in the UK, producing it from our mix of nuclear, coal, gas and renewable stations. We also, like Ovo, are a supply company as well, supplying 6 million customer accounts. We are the largest supplier to industry and the fourth of the six large suppliers to domestic consumers.

You are probably also aware that as well as investing in the operation of the existing stations we have plans to invest heavily in four new nuclear power plants: two at Hinkley Point in Somerset and two at Sizewell in Suffolk. We are very aware that what we provide from our power stations is a commodity that is absolutely essential, more so than perhaps it was in the 1970s as part of the running of our economy. We are also dealing with an increasingly complex network and system, with the increasing amounts of renewables and intermittent renewables on the system. We are absolutely convinced that we need large companies able to take the long-term view and able to think across the operation of that whole system.

I should mention one other thing to the Committee. You will be aware that a number of our stations are off at the moment. Some of those are off for planned refuelling but four reactors are off at the moment. Those were a result of an issue we found with one of the eight boilers in one reactor at Heysham power station. We have taken off three other reactors of the same design in order to inspect them and see if we had the same issue in the boilers of those other reactors. Those inspections are going very well. We are about three-quarters of the way through and recently we updated the remit system to notify National Grid that we could maintain our expectation of a return to service between October and December of this year for all of the reactors. We expect to return three of the reactors at slightly reduced power in the first instance. That allows us to reduce the temperature in the boilers, which will then allow us to be confident that the mechanism that created the crack could not occur in those three reactors. Then we will look to increase power over the course of 2015 as we, if necessary, make modifications to those reactors.

Dr Laurence Barrett: I am Laurence Barrett. I work for E.ON UK. We are another major generator and supplier here in the UK. I am an upstream strategy project manager and I very much focus on the strategic impact of various policies and the market on E.ON and the industry as a whole. In the last few years, I have had quite a large involvement in E.ON’s response to the electricity market reform, for example.

Q30 The Chairman: Thank you very much. We will start by asking about your views on the capacity margin. We have heard today from National Grid, which has published this winter’s outlook for gas and electricity. The bottom line is that this year’s electricity margins have decreased compared to recent years, with the average cold spell margin expected to be 4.1%. Would you like to comment on this and say to what extent you feel that unexpected events or more outages—such as Mr Spence has referred to—might drive us into any difficulty or not?

Paul Spence: Perhaps I can start. I think National Grid, as part of its outlook, has said that it believes that the situation is manageable and it has used the mechanisms that it has in place through the supplemental balancing reserve and demand-side response to procure extra flexibility to protect the system. It is true that the plants on the UK system are ageing and that we need investment in new capacity. It is also true that we have a range of tools available to National Grid for the short term and for the longer term in order to make sure that we maintain sufficient supply on the system.

Dr Laurence Barrett: It is also important to put the reports in context. Although the 4.1% de-rated margin that National Grid talks about appears very tight compared to recent years, we have been through periods in our history with similar de-rated margins in the early 2000s, and the system was reliable and resilient at that time. It is also worth noting that there are a number of other functions that National Grid can call upon in terms of its existing services—the supplemental balancing reserve and demand-side balancing reserve that Paul talked about. Beyond that, the 4.1% is within the Reliability Standard that the Government have set for security of supply within the UK going forward; it is actually well under it. We believe that while margins are tighter than they have been in the last few years the system should be resilient. We do not foresee any problems this winter and we expect that National Grid will be able to manage the system in a forthright manner.

The Chairman: Would you like to comment on the outages in your own organisation?

Dr Laurence Barrett: The only outage that we have had is at Ironbridge. Some months ago we had a fire at one of the units at Ironbridge, which was in the process of converting to biomass to allow it to run out until the end of 2015. Both units have to close due to the large combustion plant directive, so due to environmental EU legislation. The result of that is that one unit is not returning to service but the other unit has and is operating until the end of 2015. Across the rest of our fleet, we maintain that we respond to the signals within the market, both in the longer term but also on the balancing market as well in order to ensure that we are delivering all we can.

Q31 Lord O’Neill of Clackmannan: Mr Spence, you are employed by a French organisation, which fulfils a slightly larger role in France in terms of electricity supply. Could you tell us what the margins are in France as against the UK? We are talking 4.1 and 2.5 or so is the de minimis. Can you give us any indication of what another country that we are associated with has to operate within?

Paul Spence: Lord O’Neill, I would need to come back to you with the precise margin of supply over demand in France today, or over this winter, but what I do know is that the reliability standard set for the UK is the same as the reliability standard set for France. I know there is more capacity in France today, some of which is then exported to its neighbours, but in terms of the standard that the grid operates to, we are aiming for the same.

Lord Dixon-Smith: I can understand the context of a 4.1% margin in normal seasons but in my book, as a farmer, there is no such thing as a normal season. The season that frankly worries me is the freak one, where the weather is quite capable of doing something far more damaging than 4.1%. Should we be as confident as we are? I accept the statistical average but what I am worried about is that that average is made up occasionally of some extreme events.

Guy Newey: That is always going to be the case in any system. The question is how much cost are you prepared to pay to have that 99.6%, 99.8% or whatever pushing it up? It is that extra cost that is the issue and that is why I think the historical examples are important, because what you would expect in the market over a cycle of 10, 15 years is that when things get tight, that provides a signal to invest in the market. That is certainly what we had in 2005-06, when we got down to about 5% or 5.1%. What happened afterwards is the market signal worked, we had a mini dash for gas and people went out and built lots of CCGTs, which gave us a bit more comfort. In fact, they probably built a few too many CCGTs. The question now is whether an intermittent higher system is more vulnerable and whether you are getting the signal going forward.

But there is another point to make. There is no strong signal in the market, for example, to build new CCGTs, gas-fired power stations, at the moment. There are lots of potential reasons for that and I do not think anyone has a definitive answer but one of them might be that peak demand in the UK is falling. It has been falling since 2005. Some of that is due to the recession but some of that is just due to our having got a bit better at managing peaks in terms of energy efficiency, as well as changes in the UK industrial pattern.

Lord Dixon-Smith: May I just follow that slightly? My concern is whether you have the mechanisms and the capacity to manage demand, because in the end that is going to become an increasingly critical factor. I am not sure whether at the moment the mechanisms are in place to make managing demand in a serious way play a role that in future is going to be—

Guy Newey: From Ovo’s point of view, we have a reasonable level of confidence in the systems that National Grid and others have set up to deal with short-term imbalances. There is a lot of potential in terms of demand-side management and we think—we are as confident as we can be at this stage—that it will not lead to the kind of interruptions that we saw in the early 1970s.

Q32 Lord Broers: I would like to follow up a bit on these nuclear plants, Mr Spence. Could you tell us a little more about how long it would take you to replace this boiler spine, if it turned out to be faulty, and whether it would need redesign? What are we talking about here? First of all, with the plant that has the problem and then how it would ricochet on. How long will it take to fix this problem?

Paul Spence: I can start by just explaining what we have found in the one of the eight boilers where we have found a defect that has turned into a crack. Essentially there was an original defect and then, because of the temperature this part of the boiler operates at, we have seen that crack grow. What we have been looking at is whether—

Lord Broers: Sorry to interrupt, but is there an actual leak at this crack?

Paul Spence: There is not a leak. This is not within any of the nuclear components. This is strictly the boiler associated with it. The first thing is that we have seen that crack grow. Our safety cases do allow for having such a crack, but we are looking to make sure we can satisfy ourselves that there is not a similar circumstance in the other seven within that one reactor and then within the same boilers on the others. As I said, we have been through an inspection using a mix of visual inspection and radiographic techniques, and we are three-quarters of the way through that inspection of the other boilers on the other reactors. We have not found any cracks in those others, so in that case the question of whether we need to do something about it is essentially moot. We do not need to look at repairs. We are making sure that we have a way of continuing to check that there is nothing to repair.

At the moment we have techniques to isolate the one boiler where we have this issue, so we can operate the reactor without that boiler being needed, which is what we did before we took it off for this inspection and what we are talking to the regulator about continuing to do. Then we will look with our engineering team at whether there is a way, and what that way is, perhaps to repair the one cracked boiler spine.

This only affects two of our stations—the first unit at Heysham and the unit at Hartlepool—because they were built as sister stations to a particular design. It is not something that affects any of the other of our fleet.

Lord Broers: If you could disconnect this one from the system, why have you shut down the plant?

Paul Spence: Having found the crack we wanted to make sure that we understood what the conditions had been that created that crack and whether or not it replicated elsewhere.

Q33 Lord Willis of Knaresborough: I am a little cynical here because when everybody seems to be coalescing around something that says it will work and it is good, I always look for the worst scenario situation. Lord Dixon-Smith mentioned the problems with weather. Imagine if we did not have these cracks in the summer period, when there is plenty of excess capacity over demand, but had it, for example, in 2013 when Northern Ireland suddenly was closed down because of extreme weather. If we had to take nuclear power stations offline then, we would be in a position where these whole new balancing services, which all of you have talked about as being the saviour, would come into operation. How resilient do you think the balancing proposals are, which you have all talked about as being our saviour? Are they good enough to take us through the real extremes, which we might get in unforeseen circumstances? You seem a bit complacent to me, if you do not mind me saying.

Dr Laurence Barrett: We are not complacent. We are definitely ensuring that our stations are available to aid in that resilience of the network. The two new services that National Grid have procured are only one part of the solution, and there are also existing services. We have interconnection. The de-rated margin means that you have a much greater amount of capacity on the system. The de-rated margin tries to take into account the fact that you might get breakdowns. So we have over 60, 65 gigawatts of plant on the system to meet that peak demand.

The other element is the de-rated margin takes into account, to a certain extent, weather effects, so it talks about average cold spell and adjusted demand. It does not go to the extremes of very unlikely weather effects but, coming back to Guy’s point, you have to find a balance as to whether you insulate your system against every conceivable outcome, because if you try you will not succeed. So you have to find a balance with the cost of ensuring that resilience.

To come back to your key question, about how resilient these new services are, they are not asking those providers to do anything that they cannot do. For example, the supplemental balancing reserve is asking those providers to be available through winter weekdays. That is what generation plant do day in, day out. This service is giving a different economic signal for when that provision is required but it is just doing what a generator does, so I do not think we should have any worries about its ability and capability to deliver.

It is the same on the demand side. We have a demand-side response. We have it in a number of other functions active already in the market, so we are just asking those demand side providers to do services that they can normally do. It is the way they have been procured that has changed.

Q34 Lord Willis of Knaresborough: Thank you for that, Dr Barrett, but both the demand side and the supplemental balancing reserve depend on somebody paying you or customers for not using electricity or for bringing that supplement on board. That is the taxpayer, I presume, so you cannot lose, can you, on this?

Dr Laurence Barrett: When a generator generates or a demand side reduces demand, they are always being paid to provide that service, whether it is through the normal electricity market and contracting from a generator to supplier, through the existing balancing services or through the new services that National Grid has. If you are asking generators to generate more to ensure that supply is matching demand then, yes, they are being paid for that service. The new services are a different mechanism for paying that but it is not an unreasonable part of the functioning market.

Guy Newey: You have a choice. You can either pay for an extra power station, you can pay someone to come on for the extreme winter nightmare scenario or you can pay somebody and say, “If this happens we will give you a cheaper price for your electricity for the rest of the year if you turn off for these couple of hours”. It is an economic choice. At the moment paying somebody to turn off is a cheaper option than buying in the new power station. It is just a case of how you balance those things. But that is something very different from cutting off a group of customers.

Paul Spence: If I may, I will go back to your question about complacency. We have talked a lot about the new mechanisms that National Grid has to manage this piece. As a generator my observation would be that the starting point is about making sure that we invest in maintaining the reliability of the plant that is already on the system, to make sure that the allowances that are made for the de-rating are conservative as well.

I know that my company has been investing over £1 billion each year looking after our nuclear stations and our coal stations, but also building a new combined site or gas station to be on the system and investing in renewables. So it would be unfair to talk about complacency. We know we need to invest in the existing system. We know the grid needs some short-term tools in order to manage through this period that we saw coming. Then we need investment in new generating capacity, which is what the electricity market reform arrangements—

Lord Willis of Knaresborough: But you have said in your evidence that this short-term fix basically prevents you making more long-term decisions, which prevent those short-term fixes, or have I misread your evidence?

Paul Spence: I need to go back and relook at our evidence because that is certainly not—

Lord Willis of Knaresborough: You have said, “We believe these measures can make an important contribution but they will not bring forward the investment needed to ensure security of supply over the longer term”.

Paul Spence: Over the longer term the measures that will bring forward that security of supply are the electricity market reform arrangements, so the contract for difference arrangement that we have recently concluded with the UK—we concluded it last year with the Government and got approval for Hinkley Point C—is an example of the arrangements that will make sure that there is investment in new capacity. The capacity auctions that we will see this winter are the way that we will make sure that there is efficient purchase of the medium-term capacity that we need. What we have here with the supplemental balancing reserve and with the demand-side response is a tool for National Grid to tune in the short term and make sure that things happen. It is a coherent package of arrangements that are designed to have the system managed through in a way that affordably delivers the right standard of security of supply.

Lord Willis of Knaresborough: But it maintains a high price to the consumer, does it not?

Paul Spence: It is done in the most affordable—

Lord Willis of Knaresborough: It is more than you are charging your customers in France.

Paul Spence: The cost of electricity in the UK is above the cost in France, that is true. France made some choices in the 1970s and 1980s about their generation mix and chose a nuclear mix, which has delivered reliable low-cost electricity for them. Here in the UK we have a different mix. We have less interconnection to France and we have seen the costs of electricity, in particular, driven up by the cost of fossil fuels over the course of the last decade, and we also now need to renew that system. That is the whole premise behind the electricity market reform arrangements.

Q35 Lord Rees of Ludlow: I would like to go back to the issue of the extreme events. Obviously your companies respond to market pressure and that depends on the insurance premium which the Government are prepared to pay for the one in 50 year event. Do you think that the incentives that you were given are sufficient to reassure the public who probably rarely care about the risk of catastrophe, even if it is a one in 50 year chance?

Dr Laurence Barrett: The basis of the decision on how much capacity to procure has come back through what is termed as value of lost load. So this tries to look at the value to the customer of having a service of electricity provision or not. It is an extremely complex calculation. It is different for every customer, varies depending on the time of year and varies through time itself. But it tries to find the appropriate balance between the cost of providing new capacity and the cost of not having that capacity and associated power cuts.

As we have talked about, that has generated our reliability standard of three hours of loss of load expectation. That is not three hours of customer disconnections. That is three hours where National Grid has to take extra actions beyond the normal market actions, and there are numerous services it can provide. They can do voltage reduction and maximum generation. Also, let us not forget the level of interconnection we have. That three hours loss of load has been determined. We are comparable to France as a connected market, with the same reliability standard. If you look slightly more broadly to other interconnecting markets, our reliability standard is more reliable.

The balance we have is consistent with the international standard out there for how reliable an electricity market needs to be. In the last few years, we have had a very high level of security of supply because of some of the aspects we talked about where the market responded, invested and then because of recession and reduction in peak demand, we ended up with a large amount of oversupply. It does feel consistent and it is the right balance between costs associated with providing capacity.

Lord Rees of Ludlow: It seems to me that we are all mindful of we are getting more vulnerable. We know the City of London could not survive for a day without electricity and so the downside risks—not just of bad weather but of some other problem with the grid—are potentially catastrophic, even if unlikely. I just wonder if the calculations take account of this change in the perception of extreme but catastrophic risks.

Guy Newey: Ultimately the decision of how reliable you want the system to be is a political decision. Make no mistake, energy companies want to keep supplying energy to customers for quite obvious financial reasons but also because it is the right thing to do. The Government have ultimately got to decide whether they want to have a system that is resilient to a one in eight year, a one in 100 or a one in 200. The more resilient you make the system the more expensive you make the system and the more gold-plating you have. You will never be able to completely remove risk of course, but that ultimately is a political decision about balancing costs overall to a system and the ability of bill payers and taxpayers to match those.

Paul Spence: Just to echo Guy’s point, it is a choice. I said in my opening remarks we—and I think all of us—are very conscious of just quite how critical electricity is to our customers and to the UK economy.

Lord Peston: Just to clarify: you are all three firms in the private sector? You are not social services?

Guy Newey: No.

Lord Peston: But the Government poke their nose in to get a social service element in by subsiding you to install more capacity than if you were simply paying attention to the interests of your shareholders. Did I get that right? That is what Professor Newey seemed to be saying categorically. You gave a very good analysis of the nature of the decision. Speaking as someone who used to do operational research, I know about this stuff and the cost goes to infinity if we take inventories. If you are never going to run out of anything and you are never going to be short of capacity, again the cost goes to infinity. The Government must be getting you to do things you would not do if your only interests were your shareholders, although I am going to add a gloss to that in a moment.

Guy Newey: The market has a lot of intervention and an increasing amount of it. It is important to get the distinction right between the Government making us do something and the Government paying for it, and in the overall scheme of the energy system it is not direct government money. They tend to make customers subsidise bits of kit, particularly on the generation side. Hopefully that provides some clarity.

Paul Spence: I am not sure I quite recognise your description of how things operate. At the heart of the UK energy system we have an energy-only wholesale market, which is the traded market. It pays a price for the short-run marginal cost of the electricity that we are producing and, at periods of tightness, sends a signal that you should build some more.

The Government and Ofgem have judged that allowing the market free rein may mean that too little gets built too late and so they have added on a component, which is about paying to have the capacity margin that the Government judge is required in order to make sure that we do not face blackouts before companies act and invest. That is a judgment about creating the most efficient market to make sure we have both energy supply and spare capacity available. They are the market rules that we operate within as private companies.

Lord Peston: As you know, since you know some economics, none of the great economic theorists have recognised what you have described as a free market, but that is by the way. I am not saying it is wrong, I am simply saying that their concept of a free market is slightly different. You are EDF, which is what we have in our house, and we are very happy.

Paul Spence: I am delighted to hear that.

Q36 Lord Peston: As another dimension to this, are there any reputational advantages to you by not being the supplier who fails to deliver? In other words, is there a further hidden benefit to you in that your shareholders want you to do something just because they want to be shareholders in a firm that does its job properly?

Paul Spence: I will talk for EDF, I am sure these guys will talk for their companies. I talked at the start about the fact that we are a large company that needs to take a long-term view. We do research and development about the evolution of the industry precisely because we know that what we want to do is to deliver what our customers need and want over time and all the time. I am very clear, I do not want there to be a shortage that means I cannot supply my customers what they ask of me. That is part of what I need to be in a position to do. But at the same time, as you said, I need to return a fair return to my shareholders and I need to charge for my customers a fair price for that, so it is about getting that balance right, operating in the market that the Government and the regulators designed for me.

The Chairman: We need to move on. I am sorry, I have a lot of people that want to come in. Lord Patel, if we can move on to your next one.

Q37 Lord Patel: My questions are mostly related to the capacity market. The key one being the role of the capacity market in balancing supply and demand. But the subset of that question is why we need a capacity market. Why can the wholesale market in electricity not deliver sufficient capacity? If we have too much capacity, will that not just result in higher costs for consumers? Can it not be a ploy for the companies on one hand to ask for more from the capacity market but at the same time mothball some of the gas plants to put further pressure on the Government?

Guy Newey: We remain pretty sceptical of the need for a capacity mechanism. As I said before, historically the market signal has been able to provide the signal for new generation. There is an open question about whether you have a heavily interventionist government policy making decisions all over the place that you need yet more intervention, but the question is whether you try to roll back that intervention or intervene anymore. It seems very odd that we are providing a subsidy to coal-fired power stations on the one hand and at the same time spending a lot of money trying to reduce carbon emissions on the other hand. Reducing carbon emissions is a very sensible aim but doing it by keeping coal power stations running seems extremely odd.

The effect of a capacity mechanism will be to add cost but that is back to that political choice about what price you want to pay for extra capacity, and the Government have decided that they think customers are willing to pay. It dampens—

Lord Patel: Sorry to interrupt, but presumably it is because the companies probably told the Government that they cannot guarantee meeting the capacity to the wholesale market.

Guy Newey: That is certainly the argument that has been put forward.

Lord Patel: Is it a correct argument?

Guy Newey: I question it. We look at it from a supply-only market; we are not building new generation. If you are making an investment, it is certainly advantageous to have the certainty that a capacity market adds, but that adds extra cost to the customer and it is a question of whether that is fair. The other disadvantage is the capacity mechanism dampens market signals. If you are an interconnector coming over with cheap electricity from Europe and you are thinking of buying something, you make some of your money at times of peak demand in the UK—the price goes up so it is advantageous to do it. That is part of your business case for building it. Capacity mechanism dampens that signal. It says, “Actually it is going to be a bit flatter so you are not going to be able to make that money”. Is that advantageous? Do we want all of our energy coming from within the United Kingdom? Again, that is a political choice but the overall effect is likely to be that it will add costs for customers.

Lord Patel: So whose policy is wrong: the regulator’s or the Government’s?

Guy Newey: The capacity mechanism is a government policy. It is important to put it in the wider context of where energy policy has been heading, which is intervention after intervention after intervention, and towards a much more planned generation system. I suspect that your next witness will talk about this in more detail.

If you move to a situation where the Government are deciding prices on every particular technology—whether it is offshore wind, onshore wind or nuclear power and so on—eventually you are going to have to give everyone a set price, so you make all the decisions in the market. That might give you a very reliable system but it might mean that you are also paying for a lot more generation capacity than you need to.

Dr Laurence Barrett: We also need to put this in context. We have talked very much about cost and security of supply. There is another facet to the policy direction, which is decarbonisation. That increases the complexity an order of magnitude. It is not just about looking at two items, which is difficult enough, it is that third one which interacts with those. The capacity mechanism is one of the policies introduced under the electricity market reform to help drive along policies through all of those elements: decarbonisation, affordability and security of supply. As a suite of policies it has the potential to deliver on all of those.

It is an intervention from the Government but it is an intervention that produces a market-led result. For example, contracts for difference could be very specific that each individual plant gets a price, but the main mechanism for contracts for difference is a competitive, market process. The long-term aim for that is to be technology neutral, such that all those technologies are competing on an equal basis. We believe that those market-led approaches are going to give you enough flexibility to respond to the almost inevitable changes that we are going to get as we go forward over the next 10, 20 years. But it also gives enough signal for investment to come forward.

The capacity mechanism is the same. It is a market-led mechanism. It is a competitive auction to procure capacity to ensure we have enough resource adequacy. It is done in a balanced way looking at the cost associated with that to try to find an equilibrium point, but it is a market-led approach and should therefore, we believe, deliver the best value for customers in terms of ensuring security of supply.

Q38 Viscount Ridley: Just to pick up on that last point and to come back to something Mr Newey said, it is very clear that we only need the capacity market mechanism because of decarbonisation. In a world in which decarbonisation was not a policy goal, we would find a different market mechanism to supply the resilience that we are after. For example, in such a world one would see much more gas being built at the moment because the gas price is going down, for example. Can you put a price on the degree to which we are buying resilience at the expense of affordability—to go back to a point that Lord Willis made—because of decarbonisation?

Paul Spence: Answering your second question first, I am not sure that there is a way to price the different elements of optimising a system which is about getting the most affordable, secure and low-carbon outcome. I have not seen analysis that allows you to deconstruct it in the way you ask.

As to your first point about whether we would still need a capacity mechanism if we did not care about the carbon intensity of what was being produced, I believe that we would. You have a market that is designed to clear supply and demand at a particular level, and the price is the signal that would do that. If we want insurance to make sure that there is excess capacity over and above what might be needed and to make sure the lights do not go out, then there needs to be some sort of a mechanism to make sure that that extra, over and above what the market would naturally build, happens. So there would be a need for some mechanism to achieve capacity, even if we were to put aside the decarbonisation element.

Viscount Ridley: Just to follow up on that, Mr Newey said it was an economic decision as to whether or not one goes for a supplemental balancing reserve, demand-side management or having extra power stations in the background. How much is that decision affected by the fact that renewables get priority on to the grid versus gas, for example?

Guy Newey: I am not sure that is right, in that renewables will tend to get on to the grid anyway because they have low marginal costs—when the wind blows they do not have to burn anything.

Viscount Ridley: But they would need to be subsidised to get to that.

Guy Newey: Yes, of course. That is the wider point. Obviously wind is being favoured in the sense that it is getting the wider subsidy. Back to the question of how much it is going to cost, the cost will be revealed when the auction is held later this year—the market will reveal its price for this amount of capacity. It is a market process but it is worth stressing that it is based on the Government deciding what they think demand is going to be in 2018, 2019 and going forward. Historically, Governments, or any kind of central bodies, have been pretty awful at that. If I can remember my history right, in 1970 the CEGB said that peak electricity demand in 1995 would be 100 gigawatts. It was about half of that. If we had built and contracted for 100 gigawatts we would have an extremely reliable system that was extremely expensive—which some might argue is where we ended up with the CEGB.

On your other point about capacity market and energy only market, I tend to be somebody who thinks that energy-only markets can work in terms of delivering security of supply. But there are plenty of examples of markets—this is nothing to do with climate change or carbon emissions—which have a capacity element. The Government have decided that it is worth having that extra bit of confidence and gold-plating because electricity is so central and that they are going to pay for it. It would probably be a consideration anyway, even if it was not climate change. It is an active debate. When privatisation first happened, we had a capacity element. Some people would argue that the emissions trading scheme was effectively a subsidy for power stations to keep open anyway. Paul’s point is right, you could design it any way. It is always a choice of how much are you willing to pay for that extra bit of kit.

Q39 Baroness Hilton of Eggardon: There was a brief mention of research and development and future technologies. Is there any prospect of electricity storage? We seem to have had conflicting evidence about electricity storage, which would overcome the intermittent quality of wind power, for instance. Do you see that as a viable option in the near future and do you think it would increase our resilience to various haphazard events which we have seen lately?

Dr Laurence Barrett: It does have the potential. Electricity storage on the scale that we might need to help the situation is in its infancy. It is in research and development. One of the elements of helping support that is to see if it can stand on its own two feet, to see if it can move down the path of cost reductions. It can benefit from advancements that are made in other industries, for example, the car industry, where they are looking at electrical vehicles. So there is potential in energy storage.

It is important to note that if you put that in the appropriate market framework and market-led framework, then once it has gone through that research and development period, where it has had support and funding to help develop it, it can then be seen whether it can compete on a like-for-like basis with the other forms of generation or demand-side management. Again, we are moving towards a technology-neutral response led by the market that sits within the framework that the Government have dictated. There is potential, but it is early days on energy storage.

Baroness Hilton of Eggardon: What about other future technologies? I think Mr Spence wanted to address that as well.

Paul Spence: All I was going to add to what Dr Barrett said was that we are members of the Energy Technologies Institute, which is working with Government on future systems evolution and on the different possible technologies. It is clear that there are some technologies out there that are hopes at the moment but are non-economic hopes. Those technologies include energy storage, more efficient solar photovoltaic technologies, biomass and smaller modular nuclear reactors. We are in transition in a system that is going to be about centralised generation as well as local generation, and we need research and development in all of those technologies from the sorts of companies that can do the future research but also then scale it up to large scale.

Baroness Hilton of Eggardon: But there are no short-term solutions to the current situation?

Paul Spence: I do not think anyone has found a magic bullet yet.

The Chairman: Lord Hennessy, do you want to come in on this one?

Q40 Lord Hennessy of Nympsfield: Can I ask a specific question of Paul Spence in terms of the technologies of civil nuclear power? Do you carry in your head, because it all rests on you—this one company—a list of “don’ts” from the tragic story of British civil nuclear power since 1945? Can you give us any feeling that this time round it is going to be the bonanza that I have been expecting since I read the Eagle comic in 1953?

Paul Spence: There are a lot of lessons to learn from British civil nuclear power and from global nuclear power. Rather than reeling off the list here and now I would be delighted to come back to you.

Lord Hennessy of Nympsfield: Give us the three highlights, the most important “don’ts”.

Paul Spence: The first I would say is that it is good to recognise that civil nuclear power is a global industry. You belong to and are part of that global industry in terms of the technologies you choose, the safety improvements that you adopt and the standardisation that can come from that—and therefore the cost—so there is one about not going off on your own path. There is a second about making sure that you have great people all the way through the company. There were some positives about what the UK civil nuclear industry did as it led the way, but there were also some areas where I think it lost sight of making sure it had people who were the best all the way through the world. There is a third one about making sure you can deliver what you promise. In my role in EDF Energy I rue what was said by the guy in the States about too cheap to meter.

Guy Newey: The big lesson for me on the British nuclear history is the danger of centralised planning and too few people—they were all men—making the decision about which particular technology to use. I am trying to remember the name of the Energy Minister at the time but when he announced the AGR project he said, “We have cracked it”. We then went off and followed that path for years and years, without—because it was a centralised system—anyone correcting it. We eventually spent I think £50 billion on our civil nuclear programme, which if it had been in the private sector would have been the biggest bankruptcy ever in the history of private business, because we did not have those correction processes.

The other argument is that we can just do what France does. They kind of did it quite well for some of the reasons that Paul indicated, but there are huge dangers. I know that in some of the evidence you have seen there has been a suggestion of the idea of a systems architect. Systems architects are just people making choices based on the information they are giving and without foresight going forward. But they may have the confidence that they have the foresight going forward, so they will say, “We have looked at everything and it turns out that tidal power or the EPR reactor is the right answer”; and off we go and spend a fortune on it.

Wherever you can get market processes and feedback going on, then we have a much better chance.

Paul Spence: If I may, just to add in defence of the civil nuclear industry, 20% or so of UK electricity today is being generated low-carbon and affordably from the nuclear power stations that are operating. It is not all a negative story. It is there, it is successful and it can be more successful in future.

The Chairman: We are getting near the end of this session. Lord Winston and Lord Broers wanted to come in, and then Lord Ridley has another question.

Lord Winston: Just a very brief question in view of time. I declare an interest as professor of science and society at Imperial College London. Paul Spence, could you just outline what you are doing about public engagement with regard to the cracks in your boilers? It would be quite helpful to hear how you are dealing with that issue.

Paul Spence: First of all, we have been very careful to communicate ourselves. We have obligations under the remit arrangements in terms of just telling people what they can expect from the system, but over and above that we have been doing work to communicate the science of what is going on. We have been working with universities like Imperial and Bristol to help us with that, and we are also working with the Science Media Centre to help us brief journalists and the media on exactly what is going on, what we are doing about it and—another plug for British engineering—the quality of the people who are working to find solutions to problems that people did not think about in the 1970s, such as how you inspect these components down a gap that is less than a centimetre, some 12 metres below you. You need to have brilliant scientists and engineers to be able to get in there and find out what is going on, and then work out ways to innovatively solve those problems. We are trying to communicate all of those things.

Q41 Lord Wade of Chorlton: You have described a very complicated industry so far to me, and I find it more and more difficult to understand how it is structured. What I would like to know within this very complicated system is, if the lights do go out and the City of London does not get any power, whose fault is it? Where does the responsibility ultimately lie? What can you do to make sure it never goes out? How reliant are you upon a government action or somebody else’s action to make sure they never go out? I want to know who ultimately would take the responsibility or who you would point to if the lights did go out.

Dr Laurence Barrett: If the lights go out no one wins, so I do not think you necessarily need to point the finger at any particular organisation. The Government are not going to come off well, energy suppliers are not going to come off well and National Grid—who have the responsibility of balancing the system—are not going to come off well. It is in everyone’s interest to try to ensure that we are doing the right things right for our customers, and one of those elements is delivering energy and electricity as and when they need it. We are not complacent about it.

Lord Wade of Chorlton: At the right price.

Dr Laurence Barrett: At the right price, yes. As we have talked about, there is a trade-off: there is always a trade-off between cost and delivering that security. We are all doing whatever we can in order to ensure that that does not happen, through National Grid’s new services and through investment in our plant, be that thermal, renewables et cetera. No one wants to see that happen and we believe that we are in a position where we will not see that happen.

Q42 Lord Broers: Can you give us a rough estimate of how much cheaper electricity is in France? Would you like to comment on whether you think the French nuclear plants would meet today’s safety standards, which we are applying to the new plant?

Paul Spence: Rather than making up the percentage that France’s power costs for domestic or industrial consumers are below the UK’s, I would like to write to you with the precise number on that. In terms of the safety of the technologies, we have been through a process for the station that we propose to build at Hinkley Point over the last five years with the Office for Nuclear Regulation here in the UK to get design acceptance for the EPR design. That is a design that is being built in Flamanville in France and it meets the safety standards here in the UK. It has learnt and built on the lessons of the last three or four decades of nuclear operations and it is also built on the lessons of Fukushima. That is the station that meets the current safety standards.

Lord Broers: They would be considerably stricter than the plants that have been running for decades there, I assume.

Paul Spence: We have this principle with safety standards that the risks are as low as reasonably practicable. The plants that were built have had safety enhancements over their lives as well. We spent £180 million across the UK nuclear fleet in the wake of Fukushima to install some flood protection and other improvements, learning the lessons of Fukushima. The safety expectations and the technologies have evolved and will continue to evolve.

Lord O’Neill of Clackmannan: How much over budget is Flamanville and how much more expensive would an EPR be to run than the other nuclear plants that it is now envisaged being constructed in the UK? Is it not the case that both the Finnish and French examples have been disasters in construction terms, safety notwithstanding, and that the running costs of these plants will be very high, to take account of the very high capital expenditure that has been incurred in the construction errors that Areva and others have been responsible for?

Paul Spence: It is true that neither of the projects at Olkiluoto in Finland or Flamanville in France are examples of what we want to see here at Hinkley Point. We have learnt a lot of lessons as a result of that and have built those lessons on how to do a project and how to do a project well. We have also learnt the lessons of the Olympics and have a stable design that has been approved by the regulator. We have had the team that will be involved in construction involved early. We are using new technologies, including 4D technology, to plan the construction. We have what we believe is a world-class team of people who will build it here in the UK. That is all designed to make sure that we have a successful project.

Lord O’Neill of Clackmannan: Did you not think that you had that in Finland and in France when you started these two projects?

Paul Spence: It is not for me to comment on what the Finns had in place; that was not a project that EDF was involved in.

The Chairman: I am going to ask Lord Ridley to ask the last question because we are running seriously out of time.

Q43 Viscount Ridley: I think, Chairman, I can be very brief because Mr Newey has given a very eloquent answer to my question already, which is whether or not we are going down much too much of a central planning route. The suggestion that the Institution of Engineering and Technology gave us that there should be a tsar who runs this, called a systems architect, is not a great idea, so unless the other two of you want to disagree with that non-endorsement of that idea, I will leave it at that.

The Chairman: Would any of you see a role for a systems architect?

Paul Spence: I think we already have three bodies: the Department of Energy and Climate Change, Ofgem and National Grid, all of whom have responsibility for looking across the system as a whole. You also have companies like mine that look across the system as a whole and try to form a view about what it needs and what it is going to look like. Personally, I am certainly not convinced that we need more beyond that.

Lord Peston: Chairman, I do not have a question, but when you provide the data to Lord Broers on the relative costs of electricity I take it you will allow for the sterling/euro exchange rate because the reason is the pound is too strong, of course.

The Chairman: I will just make one point, which is please do not send the information to Lord Broers, send to our clerk and then we will all get it.

Paul Spence: Of course.

The Chairman: I am grateful to you for having assured us that you will write to us on those specific matters on the cost in France. I think there was another matter we mentioned earlier. We have run out of time. I am most grateful to the three of you for having given us some very helpful evidence. You will have an opportunity to read the written record and if there is any alteration which is needed as a matter of fact, you will have an opportunity to do that. Thank you very much for joining us today.