Unrevised

Members present

Earl of Selborne (Chairman)

Lord Broers

Lord Dixon-Smith

Lord Hennessy of Nympsfield

Baroness Manningham-Buller

Lord O’Neill of Clackmannan

Lord Patel

Lord Peston

Lord Rees of Ludlow

Baroness Sharp of Guildford

Lord Willis of Knaresborough

__________________________

Examination of Witnesses

Dr Nina Skorupska, CEO, Renewable Energy Association, Professor Richard Green, Professor of Sustainable Energy Business, Imperial College London, and Professor Gordon Hughes, Professor of Economics, University of Edinburgh

Q80 The Chairman: Welcome to Professor Green and Professor Hughes. We understand that Dr Nina Skorupska is at the other end of the corridor giving evidence to a Select Committee of another place. They clearly are not running to time. Would you like to introduce yourselves first just for the record? We are being webcast so that will go on the record. If there is any opening statement either of you would like to make, please feel free to do so. Perhaps we could start with Professor Hughes.

Professor Hughes: My name is Gordon Hughes. I am a professor at the University of Edinburgh in Scotland and I have a large interest in energy economics. I have produced a piece of evidence, which I provided to the Committee a few days ago. I would like to tell a little story to illustrate the point that I was trying to make in that evidence and no doubt which will be repeated.

In my spare time, I run community broadband networks using wireless and a number of those relays that we rely on are a long way from power supplies, so we use wind turbines and solar panels in order to provide them with electricity. The requirement in terms of capacity to ensure that we can have a reliable supply is that we need, roughly speaking, 10 times the amount of generating capacity as our regular supply together with a relatively large number of batteries as well. Even if you scale that up to the scale of a grid, there are two lessons that come out of that—first, that you can always supply electricity demand using renewable energy and it can be made reliable; secondly, there are two concerns that you have: one, you need storage and, two, you have to put up with some pretty high costs. The theme that is underpinning the evidence I provided is essentially that we can have as much renewables as we want in the UK. It is a matter of how much we are willing to pay for it. The question is really one of managing what is an acceptable cost in terms of the other tradeoffs that are involved. Thank you.

Professor Green: I am Professor Richard Green. I am the Alan and Sabine Howard professor of sustainable energy business at Imperial College Business School. I am an economist. I have been studying the industry for 25 years. Nowadays most of my research is funded by the Engineering and Physical Sciences Research Council, including a couple of projects looking at the economics of energy storage. I notice some of the questions on the roster seem slightly more engineer than economist, but fortunately I was at a meeting of one of my EPSRC projects yesterday and was able to ask some colleagues, with the clerk’s permission, to share that information.

The Chairman: Thank you very much. You do not want to make any further statement?

Professor Green: No, I think not.

The Chairman: I welcome Dr Nina Skorupska hotfoot from the other end of the corridor.

Dr Skorupska: My apologies.

The Chairman: I gather this is the first time you have given evidence to a Select Committee and you seem to be doing it rather intensively today. Welcome.

Dr Skorupska: Thank you.

The Chairman: As you have come in the nick of time, would you like to introduce yourself just to say where you are coming from? We are being webcast so that will go on the record. If there is any opening statement that you would like to make, by all means do so.

Dr Skorupska: Good morning, everybody. My name is Nina Skorupska. I am the chief executive of the Renewable Energy Association. I represent, on behalf of our members, close to 1,000 members. Two-thirds of those members are small to medium enterprises. We are very keen to see renewable energy deployed in order to achieve our low-carbon targets both in 2020 and 2030 and we want to see that as part of a secure and resilient electricity market in the future. We believe that renewable energy can play a significant part in that.

Q81 The Chairman: Thank you very much. Shall I start the questions? I would like to ask a fairly general question just to start, and perhaps I could ask Professor Green if he would like to respond first. What do you feel are the largest risks to the electricity system resilience in the short and medium term? I am so sorry. I am looking at the wrong one. How much of the United Kingdom’s electricity is currently generated by renewables and how much of the United Kingdom’s electricity do you expect to be generated by renewables under the best-case and worst-case scenarios by 2020 and 2030?

Professor Green: I looked up the figures from the Digest of UK Energy Statistics last night. Onshore wind was 17 terawatt hours. I did not get the percentages but that would be approximately 5% of the annual total. Offshore wind was 11.4 terawatt hours. Marine – wave and tide – was 6 gigawatt hours, which are fractions of a per cent. Photovoltaic was 2 terawatt hours last year and rising strongly, I suspect. Small-scale hydro, just under a terawatt hour; large scale, 4 terawatt hours; biomass, various kinds of waste including sewage and the like, was just under 10 terawatt hours; and plant biomass, a significant portion of which will be burning wood chips in large existing power stations, was 9 terawatt hours.

The Chairman: Would the others like to add to that before we move on?

Professor Hughes: You asked about 2020 and going on. The Government has a target, roughly speaking, for generating 30% from renewable sources and it looks likely that they are, roughly speaking, on target in order to do that. Originally, it was largely going to be achieved through wind. That is slightly less important and biomass, burning wood chips, will be slightly larger. The share can probably go up above that and probably is expected to go above that to 2030, but I do not think any of us have a very clear idea of exactly what it will be.

The Chairman: Could you speculate as to what might be the determining factors as to whether these figures are achieved or exceeded? Are there any particular influences that you can predict will have a bearing on this?

Professor Hughes: It is sort of a race between costs coming down—so if the costs of electricity from renewable sources declines as a consequence of technological improvement—against the willingness to provide funds for subsidies. At the moment the subsidies that are provided are capped under an arrangement called the levy control framework, which is set up to 2021. The question will be: is that sufficient in order to provide at current costs the level of incentives for generators to make investments in what are quite expensive sources of generation?

The Chairman: Clearly, innovation is unpredictable by its very nature, but we have seen, for example, PV costs come down quite rapidly to a point where some would say that such solar energy may be competitive with other sources from coal and the like. Do you predict that there are other such technological improvements that might alter the balance completely? Is it feasible, rather than can you predict it?

Professor Hughes: I think the story about what is called grid parity for solar is slightly exaggerated. What has happened is that the cost of the modules, the basic electronics in it, have come down a lot because of economies of scale and better experience, but that represents about a half of the total cost of building a PV installation, certainly on a large scale. The other costs have not come down at all.

The rate of decline in costs for most of these technologies has followed a pretty clear path, which is that they come down gradually, they level off, and then in some cases they increase. I do not think there is at the moment any obvious reason to believe that that pattern will be vastly different for any of the other technologies or, indeed, for that, but again there can be in 10 years’ time some fundamental technical innovation that is not predicted at the moment.

Dr Skorupska: May I come in?

The Chairman: Please.

Dr Skorupska: It is true that deployment costs will come down, whether it is technology or getting the supply chain more efficient and also with establishing the acceptance of that technology. You asked what would constrain the ability of renewable energies to be deployed. Well, it is not having clear policies, having vastly changing views on how those subsidies will be deployed, and also not having aligned overall strategy intents across the different departments of Government. For instance, we could be seeing more from waste-to-energy schemes, but at the moment we export a significant proportion of our waste to countries that do take advantage of having waste-to-energy schemes such as Sweden.

In some respects, there are opportunities that are still yet to be fully understood and examined, but in principle we will see wind technologies and their costs coming down with scale and deployment and the supply chain improving. We are also seeing it with the different behaviours of people in accepting and adapting to renewable energy as a part of the future. Who would have thought that many farms now would consider it would be of value to become a small power station on their locations, using their farm waste and producing from anaerobic digestion gas to produce electricity. At the moment, it is a very small scale but in Germany we have seen the adoption of that being tenfold the scale that we see in the UK. We do need an alignment of policies and regulations across the different departments.

Q82 Lord Rees of Ludlow: I would like to ask a bit more about the relative prospects for the different technologies. Looked at naively, it seems that solar will have more rapid technological improvements as compared to wind. On the other hand, we in this country have a lot of wind and not much sun so that tilts the balance the other way. In the light of that, could you say a little bit more about the relative balance you would expect by 2030 between those two forms of renewable energy?

Professor Hughes: The most clear reductions in the costs of solar in particular have come in environments which are very different from the UK. They have come in essentially desert, high-insulation areas of the south-west of the United States and elsewhere. Even there, at utility scale, the figures that are put together by the National Renewable Energy Laboratory in the United States on a fairly regular basis over quite a long period show that the decline in prices stabilised and pretty much stopped in the early part of the current decade. The wind one stabilised and stopped falling significantly about five years earlier than that.

There is one potential innovation in other parts of the world that might matter and that is solar thermal; in other words, not photovoltaics but essentially large-scale use of insulation in order to use conventional thermal generation. That has, apparently, the prospects of coming down a lot more in cost. It is still relatively new as a technology. I do not think it is going to make a great deal of difference in Britain but on a world scale it might.

Professor Green: Concentrated solar thermal has the great advantage that you can relatively easily put in a heat store and so the generation is not available only at the moment when the sun is shining, which is a key concern for us. I am not an expert in future cost predictions so I will not stick my neck out.

Lord Rees of Ludlow: How far ahead do we have to look before we can talk about a DC grid all the way from southern Spain to the UK, thereby allowing us to benefit from sunnier parts of Europe?

Professor Green: The engineers are working on it. That was the meeting I was at yesterday. It would in many ways make more sense for us to have a share in some farms in Spain or even further south and the cables, but we are talking a decade or two at least, I would say.

Dr Skorupska: In terms of energy security and resilience, I believe that the deployment of solar within the UK is absolutely going to happen and would benefit the UK overall. The decentralised nature of these types of technology takes away the concerns of a lack of robustness of our overarching infrastructure; for instance, if a nuclear power plant does fall over. I have in my past 30 years of working in the energy industry run oil, coal and gas and been responsible for a nuclear power plant. We do see such large perturbations as we are seeing at the moment, the concerns for this winter, where three nuclear units are off because of boiler concerns; nothing to do with nuclear but just ordinary technology. Even in our northern latitude the sensors, the technologies around solar panels, as my colleagues have already said, is improving and will improve. It will cap but it is of value for the UK to have this decentralised energy incorporated.

Professor Hughes: Could I just comment? I simply do not buy that story at all and I have some directly relevant evidence. The Soviet Union in its old days developed long-distance DC grids over a very long way from Siberia to the Urals because they had lots of hydropower in Siberia and they had lots of manufacturing demand in Urals. It never worked properly and whenever we looked at the economics—and I did that on more than one occasion—it never made any kind of economic sense as well. It is very expensive to transport electricity rather than to transport the means by which you generate electricity. Unless you put a huge premium on essentially using the renewable sources rather than gas or whatever, it is always much better to transport gas.

Q83 Lord Rees of Ludlow: Could I ask one more question about other renewables, in particular waves and tides? These are clearly small players at the moment, but could you say a word about the Severn Barrage? This has been talked about a great deal. I know there are environmental problems, but there is also a cost issue that to me naively seems to be getting less acute given the Himalayan rise in the cost of nuclear. Do you think one should revisit the Severn Barrage?

Professor Hughes: The Severn Barrage is just a large hydro scheme, which is fed not by rivers but by the tide. Large hydro schemes can be made to work, undoubtedly. The trouble is that in order to make that particular one work you have to run it in two directions and mostly that is not normally the way that those kinds of things are done. I suspect what kills it is the environmental side of it rather than the underlying economics if you never had to worry about the environmental side.

Lord Hennessy of Nympsfield: I think I am right in saying that hydro was the first big natural source of energy that we invested in as a country after the war. Indeed, the Scottish system is called the hydro board, is it not? It seems to be a very small proportion. Is it because all the best sites in Scotland, Wales and the Lakes District have been used up or did we just lose sight of it?

Professor Hughes: Hydro is a wonderful source of renewable energy. It is controllable. It is storage at the same time as a generation capacity. We are not Norway is the simple answer. That is to say we did use most of the available glens. There are other glens but nobody is going to find that easy to do because essentially it means taking things where we have much stronger views about protecting the landscape at the moment. If we were going to do that, the thing that we would want to do is probably not go for classic storage hydro but go for pump storage. Given the availability of wind and other things, pump storage is a much better match in terms of the limited head capacity that we have. We are never going to get a long way with that. Norway operates 95% on hydro power and could have 100% hydro power if it wanted. We are just not Norway.

Lord Rees of Ludlow: Pump storage is shutting it up and letting it down, is that right?

Dr Skorupska: Yes.

Professor Green: Yes.

Q84 Lord Willis of Knaresborough: I would like to bring you back to PV because I was quite depressed by your response and your little argument. I sort of buy into the idea that if, in fact, you are transporting photovoltaic or solar energy over large periods that it is difficult to make the economic case for that, but I thought that the big breakthrough was going to be in local and distributed systems. I understood that the original problem was the silicon substrates, which were very expensive in terms of panels, but there was to be a breakthrough in two ways in terms of plastic electronics so you could print the photovoltaic circuits very, very easily and very, very cheaply. Another technology was, in fact, that it was going to be embedded in glass. Given that virtually every new building that goes up in this city alone is simply covered with glass, why has that not become a technology that has been worth really investing in and developing?

Professor Hughes: Let me take two comments. First, suppose you completely stripped out the cost of the PV module, which in effect is that we make it so cheap that it is an irrelevant cost. Even with what is left, on a large scale the cost of installing the rest is more than the costs of a gas-fired powered plant or the like. Just without any concern about the photovoltaic element of it, that kind of cost is relatively high.

In terms of distributed systems, we may have very different views about that and, therefore, my colleagues may well say different things, but the basic point here is at the moment these are untested. They are highly experimental in terms of the way they work and almost certainly they rely on imposing costs that we at the moment do not recognise on managing the grid in an efficient way. The costs of a whole lot of grid changes that we need even to account for our current renewables are very large and if we then want to go to a distributed grid with intelligent controls in place, it may indeed work but do not, please, underestimate the costs of doing so because that has to be met from somewhere.

Professor Green: It is worth pointing out that quite a lot of the costs that Professor Hughes mentioned are that you get direct current from your PV panel and your house runs on alternating current, but a lot of the iPads and computers and devices I see around the place want direct current, so we have to rectify it back inside the device, thereby adding to their energy consumption. One of the presentations I was at yesterday was very much starting the technical exploration with European Union funding to start putting in supplementary networks inside houses to give those devices, which are a very high proportion of the average house’s load, the type of power they want. Once you had made the transition—it is not quick; it is not easy—you could take PV from your panel, direct current electricity, into your secondary house network, give your devices what you need and save quite a bit of cost.

Dr Skorupska: I am particularly excited by what we see happening in Europe and is coming to the UK linked with distributed renewable energy deployment, which is the rise of the view regarding the role that storage will play. Most people think of storage being large-scale grid, multi megawatt, helping to balance the system, but we are seeing the rise and rise of the opportunities coming from the deployment and the build of battery complexes to also service our potentially game-changing electric vehicle market.

I am no expert around battery technologies so please, if you know more than me, step in, but the general principle could be that in the future a home would have an electric vehicle, which in itself acts as a storage facility anyway. But if you also have photovoltaics on your house, which is the direction I am personally going in, if after three years your electric vehicle’s battery starts to degrade for use within your car, those batteries can have a secondary market as cassettes going into a storage cask in your home and, therefore, being able to smooth out your own personal usage across the full 24 hours without the need to then export your PV or the need to pull your electricity from off the system.

This could potentially be a game changer. This is the picture we were seeing in Holland where a consumer previously is becoming a prosumer. We are seeing the encouragement of things happening with heat as well for houses that are off grid, but the view that you could also use renewable electricity and the concerns around its variability and the intermittency it may cause to the system or the need for massive grid reinforcement costs. You could also see electricity being used for hydrolysis and the storage of hydrogen and also for hydrogen to be stored in the gas grid itself. The uses are many, different and exciting. How close they are to being commercial, that is what we need to work out with developers and also have the conversation with Government, but it is definitely being able to move away from the picture that you can only solely manage resilience of the UK energy by having large centralised units of what we have got used to since the 1960s and earlier.

Q85 Baroness Sharp of Guildford: I have first to declare that I have no interest in this area because this is the first time I have participated in sessions. I have been in Australia for the last five weeks. Having said that, let me put two questions to the panel. First of all, are we making enough use or projecting enough use of geothermal? Is that a potential source of generation and should we be thinking more about that? Secondly, as an alternative to generating electricity—and looking at the projections forward for the use of electricity we are projecting that domestic heating will switch over very substantially to electricity in the future—have we really made enough use of efficiency here? The concept of the zero carbon house is one that has been around for some time, but are we really pushing efficiency in reserving heat or preserving heat within the domestic sector enough? Is this not a potential big source of saving electricity and could we make more use of that?

Professor Green: My prejudice is that we are not making nearly enough use of energy efficiency. The builders will tell you, “If we have to make our house more efficient the price to the customers will go up”. Some fairly basic economics would tell you the price that people are willing to pay for their houses and are able to pay for their houses will stay the same. If the cost of building the house goes up a bit, and it probably would, the value of the land underneath it goes down, which is what the builders hate, but the value of the land without permission to build a shoddy house is very low. If a local council gives a builder permission to build a shoddy house, the builder makes a lot of money or the landowner makes a lot of money. If you give them permission to build a decent house, they will still make quite a bit of money but just not quite as much. They will tell you that this is a really bad idea for the consumers.

Baroness Sharp of Guildford: It is building regulations that are vital here?

Professor Green: Building regulations could do quite a lot, plus councils taking a slightly firmer line at least in those places where there is enough slack in land values that the cost would come out of the developers’ pockets, still leaving them with enough to make it worth while, and not areas where the land is too cheap for that to be the case.

The Chairman: Did any of you want to comment on the first point, which was geothermal?

Professor Hughes: Yes. I actually financed a geothermal plant in one of my past jobs and the answer is almost certainly in the UK, no, we are not making enough use of it. Geothermal can be an extremely cost-effective form of generation. The availability of the resources, however, is a significant issue. The second thing is we do have to straighten out somewhat the question of access to all kinds of underground resources on land because geothermal is not very different from fracking in a different way. It does not cause earthquakes because you do not put it in under pressure, but you are in effect doing the same things. You are taking account of an underground resource and pumping water in and out.

Essentially, we have in the UK collectively to sort out how we distribute the benefits that come from using those underground resources, but most of the figures that are done where there are good geothermal resources have geothermal as being competitive with, in effect, hydropower as a relatively cheap form of renewables that can operate in current market conditions without subsidies.

Baroness Sharp of Guildford: When you say we have restraint on resources, the big problem, in terms of financing, is that neither Government nor the private sector—

Professor Hughes: No, it is whether there is sufficient heat underground.

Baroness Sharp of Guildford: Yes, so it is natural resources.

Professor Hughes: Basically, what you are doing is you are pumping down cold water. You get out hot water, extract the heat from it and then do that cycle. There are other forms; heat pumps do the same thing, whether ground source or air source heat pumps, which are another way of doing it.

Baroness Sharp of Guildford: But you are going very much deeper.

Professor Hughes: You are going very much deeper. You are going down perhaps several thousand meters.

Baroness Sharp of Guildford: Yes.

Q86 Lord O’Neill of Clackmannan: One of the sources of geothermal that has been suggested has been Iceland. Professor Hughes, you raised questions about long-distance transmission efficiencies and costs. Given that we do not know how much geothermal there is in Britain—from what I deduced there is not going to be an awful lot, but we know there is an awful lot in Iceland and people tell us that is where we want to go—do I take it from what you have said already that, in fact, the transmission costs and the efficiencies of transmission would be against us developing a relationship with Iceland with a view to taking advantage of their geothermal resources?

Professor Hughes: Iceland has both geothermal and hydro resources, in fact, in substantial order. Almost certainly if we were thinking about going wider beyond the confines of the UK, the logical first area to go to for renewable sources would be Norway to try to tap into the hydro resources that they have there, which is what is done, in effect, by Germany and Denmark over much shorter distances. The lengths of a sub-sea, high-voltage DC cable from Iceland to the north of Scotland and then into the grid are forbidding but not impossible, but I think this is part of the thing that one has to have a lot clearer set of incentives about what we are willing to pay for in terms of the overall costs of any of these solutions. At the moment, we do not look at it in a system-wide way. We look at each individual technology on its own rather than taking a broader perspective about what is the cheapest way of meeting various requirements.

The other thing that we need to bear in mind is geothermal is classically run as a base load source of electricity. It is a substitute for nuclear. It is not a substitute for the intermittency of wind. It is meeting a different part of the electricity demand and a part where essentially the premium that you would pay is much lower than the premium you would pay when you are essentially substituting for intermittency at high periods of demand.

Lord O’Neill of Clackmannan: It all depends on what you call incentives and some of us would call subsidies, is that correct?

Professor Hughes: Indeed. I would put it in a more general way: what are we willing to pay for our overall electricity system; in other words, the costs that we incur for the grid, for delivering electricity to the grid, and then distributing that electricity to the consumers who want to use it in this very uneven way that they want to use it.

Q87 Lord Broers: I have a question for Dr Skorupska about what you have observed. There has, in fact, been very exciting progress with solar cells in the past year, as you will observe with perovskite cells that have gone from an efficiency of 4% to 20% this year and are much lower cost in manufacture than the silicon cells. There is also the possibility of stacking these cells with silicon cells to accomplish up to 40% efficiency. That might be more expensive cells. My question for you is: where is the UK placed in this? Are we competitive? I have been hearing about this in America and Australia, not here. Are we competitive?

Dr Skorupska: In terms of being—

Lord Broers: In perovskite cells. Evidently, at the international meeting 80% of the audience was in the perovskite sessions and about 10% or 20% in the old-fashioned cell session.

Dr Skorupska: It is an interesting question that you ask because we want to see deployment of solar to address delivering a renewable energy agenda and many of the members of the REA are already deploying current technologies of where we have seen significant costs going down. At the same time, many of our members are pushing the boundaries and working with their suppliers, either coming from Europe or China or listening and looking at what is happening in the States, to see what the next generation of solar panels will be. As you say, it is very, very exciting.

Are we world leaders here in the UK on that technology? I would argue not. But are we potentially going to be a significant player in wanting to deploy that technology and delivering a robust renewable energy at a very good value? I think we are. As technologies develop and costs come down and, as you also may be aware, solar attracts the most favourable support from the public, in having and seeing that new form of generation appear we will see a real game changer with solar being deployed in this country.

Lord Peston: I must confess that I am a bit lost because I am not sure what question we are on, but that is another matter. I hope I do not have to remind our two professors of economics of the appalling record of economists in forecasting in this area, going back to Stanley Gibbons, but many others have forecast the, “Woe is me, we are going to run out of sources of energy long before any of us are dead even”. What I ask myself and I am asking you two, one of our questions I thought was to press you to tell us about what the position would be in 2030. Unless I have gone deaf, I have not heard anything specific from you about 2030. Maybe the answer to that, if I were sitting where you were, is to refuse to answer that question on the grounds that economists are not very good at that sort of thing. Do you wish to tell us what the position will be on best and worst case scenarios in 2030?

Professor Green: Certainly, the strong advice from the Committee on Climate Change is that by 2030 the electricity system should be largely decarbonised.

Lord Peston: Decarbonised?

Professor Green: Yes, which implies some mixture of renewables, nuclear power, and fossil with carbon capture and storage; some energy storage may be an efficient way of dealing with intermittency; some amounts of probably relatively old fossil plant that does not have carbon capture and storage, so the emission per megawatt hour is horrible but they do not provide very many megawatt hours. One of the sad things is that our oil plant has been shut down over the last few years because of sulphur pollution constraints. If we had been able to keep those open they would be nice and flexible for backing up wind generation. That is the mixture. In terms of the particular mix that we would need to hit the target, particular percentages are difficult to get. There is very much an upper limit to nuclear, unless you wanted to ramp them up and down, which Professor Nuttall behind me will tell you is not a good idea later. Potentially there is not such a limit to carbon capture and storage plant, apart from the fact that it does cost more to build. If you build it and you do not run it very much it becomes relatively bad value, which is why I say keep some old stuff unabated because you will not use it much and if you do not use it much the pollution matters less but the capacity is useful when you have it.

Renewables depends a lot on policy decisions, how cost effective the support is. If you decide that you do not want an onshore turbine and build offshore turbines to get the same amount of energy, each turbine that you save onshore costs you £300,000 a year in additional subsidies for equivalent offshore capacity at the rates over the next couple of years, so there are quite a few policy choices. There are also probably policy choices that can minimise the subsidy we pay for any given project, regardless of what the actual engineering cost of building it is.

The Chairman: Did Professor Hughes want to come in briefly? We are running a little behind now.

Professor Hughes: Yes. I will accept the aspersions on economists. They are partly true but they are not quite as true as you imply. I think that there is in this issue a major disconnect between what is wanted—which is, in effect, what Richard is describing—and what will happen. Basically, the projections made by the likes of the Committee on Climate Change are your best case scenario from their perspective. What will happen I do not think will look much like that because we will not follow a consistent path of policy towards those kinds of objectives. It will also turn out, I suspect, to be far more expensive than can be accepted by the population at large, in which case we need and we will find the need to have a very different composition of outcomes.

I spent a lot of time working in the former Soviet Union in the period immediately after it broke up, and I had endless projections to cope with about how all kinds of large great projects ought to be developed, none of which ever happened and none of which were ever required. Therefore, what we have to do is plan for a flexibility in policy rather than make massive commitments that have very, very long shadows and very long commitments to expense well into the future. I know Dieter Helm said, “Look, in the end gas is the future for the next 10, 20 years”. I agree with him. In effect, we will have a lot more gas being used in 2030 than most of the visions of decarbonisation suggest.

Q88 Lord Broers: This all relates to this question about how much decarbonisation of electricity generation is going to cost. How do you respond to the suggestion that the costs of decarbonisation are simply too high? Professor Hughes, you sent us a very interesting evidence paper in which you are arguing that the hedging and balancing costs are such that if we go for the percentage of renewables that we plan to go for it is going to increase the wholesale cost of electricity by 70%. You stand by that estimate, do you?

Professor Hughes: Yes.

Professor Green: Professor Hughes, I assume that you were working off a graph like this one from Ofgem, which gives the hedge price of electricity. I do not know if that is the particular report.

Professor Hughes: Yes, that was—

Professor Green: Yes, that is the price after doing the hedging, £50 to £60 per megawatt hour. The total price paid on average by domestic customers over that period was £118 per megawatt hour, of which about half is the cost of the wires. That was the cost of the electricity after having hedged it. Any time you enter into a forward contract, Lord Peston will confirm that you do not know what the price is going to be and it may turn out to be bad value, it may turn out to save you money or you may wish you had not hedged. One estimate of what hedging costs would be related to the difference between what somebody would sell you a forward contract for and what somebody would buy a forward contract for from you a year ahead or so. Ofgem have done reports on that—Wholesale Power Market Liquidity documents, for example—suggesting that hedging spread is between 1% and 1.5% from a base load or a daytime-only contract over the last few years. That would be about 50p to 60p. I did some modelling based on stuff we did earlier. One measure of volatility is the gap between the price just averaged over the day—each is equal—and the average price you have to pay weighted by the amount of consumer demand. Once all the plant is adjusted, that would be about 12% higher with the current amount of wind. If you take it up to 30% that gap goes to 18%. There is certainly going to be an increase in variability, as Professor Hughes very much says. I would be very happy with his estimate and it may be that wholesale hedging might go up 40%, so that would add about 40p per megawatt hour.

Dr Skorupska: If I could add the constraint payments, which is another way of looking at the cost of introducing variability, in 2012-13 we saw that the cost to consumers’ bills of managing and paying fossil plant, which received a significant proportion of all those costs, plus also costs to the wind generators to potentially back off from the market when it is a bit too windy, was under 1%. These numbers are very well known and tracked by DECC. In 2011 and 2012 the constraint payments were £325 million and the majority of that payment was made to coal and gas plants because of coal and gas plant behaviour. In fact, 90% of that, £289 million, went to coal and gas and only £34 million was paid to deal with wind. It is about understanding what those costs to the consumer will be in the future.

I would also like to pose a question back. What is the cost to the consumers of not doing these changes and introducing renewable energies? We are on a pledge to deliver 80% reduction of carbon by 2050 and now we have locked into the 40% reduction of carbon by 2030. My concern is not having clear, stable policies and a lack of transparency. One Member of the Committee had asked what is an incentive and what is a subsidy. I would also argue: what is a tax break? What is also another way of getting a level playing field of all the costs associated with delivering energy for the UK?

Lord Broers: But it is surely important that we understand the numbers and that we do try to come to some number for the increase in cost as a result of doing the socially responsible thing of increasing the number of renewable plants and our overall contribution for renewable. Could I ask you, Professor Green, what would be your bottom line number? Are you arguing that Professor Hughes’ calculation is not taking into account the delivery costs and, therefore, that dilutes the change of the wholesale cost of electricity? If so, what does he take his 70% down to—30%?

Professor Green: The work I did for the House of Lords Economic Affairs Committee six years ago showed an increase in cost for generation and transmission. Off the top of my head, based on the fuel prices of 2007-08, the cost of generation and transmission was going up by about 30% to 40%, which would be about 20% on the total price of electricity. I am not sure how that would relate to changes in the price of fuels since that point or changes in the costs of the renewables.

The work I have done on market prices implies that once the capacity is adjusted the market price probably does not change very much because it has to pay for all the other plants you get and that still needs the same amount of money. Then it is: what is the cost of the subsidy? At the moment, onshore wind costs £40 per megawatt hour more than current market prices, so if we got 10% of our energy from that, that would add £4 per megawatt hour to the average bill. You could perhaps say across various technologies £50 to £60 average extra, which, if that is a third, gives you £20 on the average bill. I am doing figures in my head as I am speaking. It would probably be rather better use of time to write a memorandum for the Committee.

The Chairman: Now that you mention time, we are running short of it.

Professor Green: Apologies.

The Chairman: I am going to ask Lord Patel if he will come in briefly.

Q89 Lord Patel: Briefly. You have all probably heard of Professor Dieter Helm. His evidence to us, which he put quite strongly, was that the current renewables cannot solve the problem of climate change. Further, he said that we should stop subsidising current renewables and invest more on R&D to improve future renewables; in the meantime, as regards the transition to gas, the world is awash with cheap gas currently, and this will reduce carbon emissions. He was quite robust in his evidence and I am hoping you will be equally robust in convincing otherwise or agree with him.

Professor Hughes: I unambiguously agree with him.

Lord Patel: I thought you might.

Professor Hughes: But the situation has to be seen in a slightly larger perspective. Renewables in the UK are a complete irrelevance in the world picture of climate change. Any technology that he is advocating has to work in China. The question you have to ask is: is this viable in Chinese circumstances? I spent a lot of my time working on Chinese energy problems. The answer to that is none of our policies are doing anything, apart from perhaps the promotion of carbon capture and storage, towards meeting that goal. Therefore, we would be much better off spending the money we are willing to spend to essentially ask the question: how do we decarbonise the Chinese electricity system? Because unless you do that, you can forget what we do here. Their annual growth in electricity capacity is greater than the UK’s or about equivalent to the UK’s total electricity capacity. There are more important things than worrying about wind in the UK.

The Chairman: Do any of the others want to respond to that?

Professor Green: Yes. China is critical and they are installing wind in a big way. Some technologies will get better by R&D. Some technologies have got to the stage where it is only going to be putting metal in the ground that leads to the experience which causes further cost reductions. The general argument that we should not do anything because we are so small compared to China is an instruction not to vote because in most constituencies other people will determine it. Certainly, doing everything with our technological resources, using a proportion of those resources to do China-friendly things, is almost certainly a good idea.

Dr Skorupska: Obviously, I will have a different view because I am a strong believer that we need to be deploying renewable energy now. We need to be working within Europe and particularly in the UK to show that we are leaders of wanting to live a low-carbon life. That is in the way that we deal with energy efficiency in our homes and in industry but also in the way that we determine to reduce our need on fossil fuels.

I believe gas should be seen as a transition fuel. My concern is that if we put all our eggs in one basket, which is the gas basket, we will never wean ourselves off gas because come 2030 we will have to have lost and started to put carbon capture and storage on gas. The question is: is carbon capture and storage even anywhere near commercial viability? I can say that wholeheartedly because I worked on it 10 years ago and we are no further forward. For me, that strategy of let us just do gas and put money into R&D is kicking the can up the road and the UK should not be seen to be doing that. There is a cost-effective way. We have to invest in our generation fleet now because of the decades of lack of investment in there. Why not just invest in it being a low-carbon future and renewable energy has to play its role in that? We can be world leaders on marine, that is absolutely the case, but yet we still do not have those supportive mechanisms to make sure we get tidal and marine away.

I do agree the UK Government should absolutely be working with China and using our engineering know-how along with some fantastic Chinese engineering know-how, which is deploying more renewable energy than they are doing in the other types of technology. It is not an either/or; it is an and. We have to do it and they have to do it.

The Chairman: Did Lord Patel want to come back?

Lord Patel: Yes, it was about the cost-effectiveness and the Government’s approach to renewable. Is it cost-effective?

Dr Skorupska: We have to make decisions and we want to see deployment now. We do know that if we deploy in volume we see costs coming down. The question back is: what is the cost of not doing it? Lord Stern made that case quite clearly that by taking action now, making our homes efficient, introducing renewable energy potentially in the homes and in industry, we absolutely decarbonise in a cost-effective way.

Professor Green: On cost effectiveness—

Lord Patel: On supporting the renewables.

Professor Green: Yes. The Government could make it more cost effective. At the moment it pays the same price for a unit of output for all wind farms commissioned in the same year. Some of them will be in very windy places and will have rather lower cost. If we followed the German scheme—about the one sensible bit of German energy policy—and paid less for wind farms in really windy places, they still make enough money. They can make more money than in moderate wind places, but we do not give them quite so much profit over and above what they need.

The Chairman: This will have to be the final contribution, from Lord Rees.

Q90 Lord Rees of Ludlow: Going back to the question of R&D, you were rather relaxed about us not being a leader in the latest solar PV technology. Do you not think it would be better if we were to have a real boost in R&D and try to be leaders there?

Dr Skorupska: It is about where we want to put our resources and I agree, R&D. I hate to labour the point. I was a managing director of a research and development team within Npower where we had limited resources and you had to pick which ones you believed that you would make the most difference in. You had to decide: what do we want to be leaders in? Which ones do we want to have a watching brief in? We have to be knowledgeable buyers but I do believe we need to pick some technologies to be leaders in. I cannot answer whether it is just solar but I definitely know it can be marine technologies.

Professor Green: One of my colleagues at Imperial who works on solar PV got her fellowship at the Royal Society this year. I will check with her whether we are active in that area.

Dr Skorupska: That would be good.

The Chairman: Thank you. I apologise to Lord O’Neill particularly who had one last question but we are a little behind the curve now. It is because we have had an interesting session. We have had a lot of questions to follow up and we could have extended this session, I am sure, for a very much longer time. Thank you to all three. Professor Green particularly, but perhaps others as well, has further written evidence that you have agreed to submit and we look forward to reading that. You will, of course, get a copy of the typescript to make minor alterations if you feel the record is inaccurate. Thank you once more to all three of you for helping us this morning.