Energy and Climate Change Committee
Oral evidence: Investor Confidence in the UK Energy Sector, HC 542 Tuesday 1 December 2015
Ordered by the House of Commons to be published on 1 December 2015.
Members present: Mr Angus Brendan MacNeil (Chair), Glyn Davies, James Heappey, Antoinette Sandbach, Julian Sturdy
Questions 66 - 130
Witnesses: Alan White, Director, Carlton Power Limited, Andrew Koss, Chief Executive, Drax Power Limited, Paul Spence, Director of Strategy and Corporate Affairs, EDF Energy, and Danielle Lane, Head of Regulatory and Stakeholder Relations, DONG Energy, gave evidence.
Q66 Chair: Can I ask the witnesses to state their name and organisation for the record, please?
Paul Spence: I am Paul Spence. I am Director of Strategy and Corporate Affairs for EDF Energy.
Andrew Koss: I am Andy Koss. I am the Chief Executive for Drax Power Limited.
Alan White: Morning. I am Alan White, Director of Carlton Power Limited.
Danielle Lane: Danielle Lane, Head of Regulatory and Stakeholder Relations, DONG Energy.
Chair: Thank you very much. I am going to begin with some questions for Drax. Can you please tell us the reasons behind Drax’s recent decision not to invest further in White Rose Carbon Capture and Storage? Was there any policy announcement in particular or was it the impact of more than one that brought about this state of affairs?
Andrew Koss: The impact was more than one issue. When we took the decision to invest in the initial design and engineering phase in December 2013, I suppose the regulatory climate and also the financial climate was very different. Over the course of the two years since that decision we have seen a number of regulatory changes, but also some rather sharp downward movements in commodity markets. In September we had to take the decision that we did not have the funds to continue to invest in the White Rose project, but we continued to support it, so we were happy for it to go ahead on our site; we just did not have the funds to invest directly ourselves.
Q67 Chair: You are saying it was a commodity market issue rather than any Government framework issue?
Andrew Koss: I would say it was a combination of the two, so regulatory changes and commodity market movements.
Q68 Chair: Were you surprised at the announcement last week that the Government were withdrawing the £1 billion of funding for the CCS Commercialisation Competition?
Andrew Koss: Yes, we were surprised and disappointed. We felt there was still support for CCS to go ahead. As I say, we were happy to support that project on our site and the other partners were proceeding, so we were surprised to learn of the announcement last week.
Q69 Chair: The Drax Group Operations Director, Peter Emery, was quoted as saying, “We’ve also got concerns about the Government’s future support on the low-carbon agenda and that’s left us in a position where we are no longer confident we can persuade our shareholders that this is an attractive investment”. Could you elaborate on that?
Andrew Koss: Back in December 2013 when we looked at our financial projections, we had the funds to invest in the White Rose project and also we hoped to do further conversions at Drax. At Drax we have six units. We have converted three of those from coal to biomass and we were hoping that there would be further support to do more. Where we got to was that, following a number of regulatory changes in commodity markets, we had to think about where we were going to invest and where we felt there was the best risk/reward return and also what was best for our shareholders. Unfortunately, that meant that we could not proceed with the White Rose project or our equity participation in that and what we are looking to do is focus on further decarbonisation at Drax.
Q70 Antoinette Sandbach: Can I just ask, in your risk/reward return, what kind of return are you looking for for your shareholders when you are assessing whether or not to invest?
Andrew Koss: One that reflects, I suppose, political risk. If there are regulatory changes, then clearly that will have an impact on the cost of capital for our investors and there needs to be a high reward in order to proceed with those projects.
Q71 Antoinette Sandbach: You spoke also about downward movements in commodity prices, so if you are talking in percentage terms of a return, what kind of ratio or risk to return are you looking for?
Andrew Koss: I would say typically you are looking at a return in low double digits.
Q72 Antoinette Sandbach: Do you think it is reasonable that a taxpayer who is maybe paying 20% of their income in tax should be funding double-digit return?
Andrew Koss: From a biomass perspective, and certainly when we look across the whole system cost, we believe biomass is one of the most affordable of the low-carbon technologies on the system. Compared to other renewable technologies, we believe there is definitely a case to have biomass within that mix.
Q73 Antoinette Sandbach: Is it your plant that is importing wood products from the US in order to fire it?
Andrew Koss: Yes, the majority of our biomass comes from North America.
Q74 Chair: Given your concerns about the Government’s low-carbon agenda, have you lost confidence or has confidence been dented in what you would see as the UK Government’s low-carbon agenda?
Andrew Koss: We understand the trilemma—keeping bills low, decarbonising the system and also ensuring security of supply. Those are competing aims. What we have seen with the new Government is a more subtle shift around affordability and security of supply. We feel biomass still ticks the box for each of those three objectives, but clearly what has come out in recent announcements is that there has been a shift to more security of supply and affordability.
Q75 Chair: A lot of the evidence we have had suggests that there is a lack of a long-term vision—there is no man with a plan, or woman with a plan, indeed—as a factor that is decreasing confidence. Would you agree with that—that there is a lack of a vision for energy in the UK?
Andrew Koss: What we would like to see, yes, is some long-term projections and some long-term visibility on things like the Levy Control Framework, so the cap on the amount that renewable projects receive support for. We would like to see longer-term projections on the carbon price floor and we would also like to see the assumptions underpinning those projections. I think that would give us much greater clarity about our long-term future.
Chair: Thank you. That is enough from me at the moment. Antoinette.
Q76 Antoinette Sandbach: I am going to move on to carbon and the Trafford project. Why do you think you are having difficulty securing finance for Trafford power station?
Alan White: It has taken longer than we had originally hoped, but we are making good progress. The way that the auction played out in 2014 and the general view of investors in terms of taking market risk—market price risk—means that we have had to revisit the structuring of the financing for the project on a couple of occasions. We have had starts and stops with potential investors, but we are making good progress now and we are expecting to make an announcement fairly soon in terms of our keystone investors.
Q77 Antoinette Sandbach: Do you think that the recent speech by the Secretary of State on the importance of gas has changed that approach?
Alan White: I would not say that it has changed it dramatically. There has always been the gas strategy there—DECC has had a gas strategy for a number of years—and what that gave was certainly the clarity that gas was going to be encouraged, and that is a very positive signal. Indeed, we have had reverse enquiries as a result of that speech, indicating that there is an interest in gas and a growing interest in gas. But the announcements made a couple of weeks ago will not directly affect or change the approach that we are taking on Trafford. We are where we are in terms of the capacity market auction price, the clearing price that we receive, and we are progressing on that basis. Those announcements may help future projects.
Q78 Antoinette Sandbach: You spoke about some issues around the auction originally in 2014. What were those particular issues that you saw as roadblocks or as problems?
Alan White: It was the first time an auction had been run, so everybody was feeling their way, so to speak. We had done extensive market soundings with investors before the auction, so we knew that we could take a lower price than others might have been able to accept. Yes, the result of that has meant that we have a significant part of our revenue stream coming from the market revenues, the electricity market revenues, rather than the capacity market, which attracts different types of investors; different investors have different appetites for risk.
Q79 James Heappey: Mr White, in October The Telegraph reported your colleague, Mike Benson, saying that security of investment had proved more difficult than you would have hoped, “Due to a combination of long-term policy decisions that had skewed the market and uncertainty caused by recent cuts to wind and solar subsidies”. Can you just explain the impact that the potential cuts to wind and solar had on your investors, because I would have thought that one might conclude that the Government was almost dashing for gas to the exclusion of wind and solar, so you might have taken more confidence from that?
Alan White: It comes down to the stability of Government policy and the long-term view that was mentioned earlier. When investors see changes happening to subsidy regimes that have been established and were being financed against and those regimes changing, it becomes unsettling and that nervousness then comes into an investor’s mind when they look at another opportunity.
Q80 James Heappey: So regardless of the love-bombing that the gas and nuclear industries have seen, to the exclusion of wind and solar, the sort of changes in subsidy regime in other sectors still make you nervous, regardless of the Government’s enthusiasm for your method of generation?
Alan White: The article in October was clearly before the speech by the Secretary of State, so if we take it in the context of when that article was published, yes, there is nervousness around and changes to policy can impact general market sentiment from investors in the energy sector. These are sophisticated investors that look across the whole industry.
Q81 Chair: Did last week’s CCS announcement add to that nervousness?
Alan White: It does raise a question. Just the fact that things can be changed very quickly, with seemingly limited notice, raises a question when you have investors who are looking at it. We have been engaged with the financing community now for 18 months on Trafford, prior to the auction in 2014, and we are expecting to get financial closure in the first quarter of next year.
Q82 Chair: Before we move back to some of my colleagues, is the feeling that it is their sector today but it could be my sector tomorrow? Is that a fair assessment?
Alan White: It is a little bit of that, if they can do that to them when they had had policy statements saying, “CCS was what we wanted to support” and that disappears. Certainly from the gas market, when you look at the nature of the capacity market regime, which is not a Contract for Difference—it is not a contract, it is a regime that has been established—yes, there is an arrangement there, but it is not an English law contract as such. The question comes in terms of whether something could happen to that.
Q83 Antoinette Sandbach: In terms of changes of policy, the coming in of the new Government and effectively the change of policy associated with that, it is pretty well priced into the market in terms of risk or at least it is seen by investors as being a political reality, isn’t it?
Alan White: It is certainly a political reality in terms of a change of Government means a change of policy, and I think investors understand that. Certainly, we have seen support regimes being maintained over successive Governments, established by one and taken on by another and so on. There is that feeling at times that there may be more to come in terms of changes. I think that is the concern. The electricity market prices that people are investing against in terms of market risk, certainly for our project, reflect the nature of the generation mix;, they do not reflect the risk associated with the political regime or Government policy.
Chair: James, were you wanting back in?
Q84 James Heappey: I just wanted to confirm that on the back of the reset speech from the Secretary of State, there was a sigh of relief among your investors and some confidence returns as a result.
Alan White: As I said, we have had reverse enquiries saying, “Yes, we would now like to know more about what you are doing in your project” so in that respect, yes, there has been an upturn in terms of investor appetite or certainly investor interest in the project.
Q85 Glyn Davies: I would like to ask one or two questions of Mr Spence of EDF. Clearly, we are interested in the impact on long-term confidence in the context of policy uncertainty, and that is the general background of where we are, yet we know that EDF—and indeed, the Chinese finance company that has come in with EDF—have shown very considerable confidence in the future. They are talking about absolutely massive investments in the future. Also, EDF has gone ahead with an onshore windfarm project in Scotland. It suggests that EDF has quite a strong level of confidence in the future. Is that a fair assessment of the EDF attitude?
Paul Spence: The first thing to acknowledge is something both Mr Koss and Mr White have said, which is that at the moment the generation market is a tough market. Prices are some 20% below where they were 12 months ago for the forward power prices, and that creates a challenge for us to fund projects and also to make a case to invest in future projects, so there is a challenge. But having said that, our view is that what the UK has, first of all, is a fundamental need for new investment, which helps us believe that there is an underlying case. Secondly, we see that there is a market framework that is investible, the combination of the Contract for Difference mechanism, the capacity mechanism and the price of carbon through the European scheme, but also the carbon floor price allows us to see tools, which the Government can use to make sure that we maintain security of supply and that we push towards low carbon. We can see a regime that we understand.
We see cross-party consensus in broad around that regime, so notwithstanding the tuning of changes, we see a general consensus about the need for investment, the shape that that investment should take and the support for the set of mechanisms. That allows us to be confident about the investments that we need to make and then to focus on making sure that we get those industrial projects right, that we can be sure that for the risks we are taking we can offer a fair return for our investors and then take an investment decision on those projects. That is true for a gas station that we have built under the previous regime; it is true for investments in existing nuclear; it is true for the Hinkley Point project and the follow-on projects, and it is true for the Dorenell Wind Farm as well. In each case, we have been able to satisfy ourselves that there is a good deal there.
Q86 Glyn Davies: But other energy companies or other investors have not taken such a positive view. We have just heard the position of Drax and there are a lot of other companies who have talked about a major lack of confidence. You have given us a general background, which is the wider range context of energy that has given you confidence. If you were picking one key area that the Government should focus on that has given you confidence and maybe could help others to have the same level of confidence, what would it be?
Paul Spence: We see a rational development of policy and we have been able to understand the decisions that Government have taken. We have been able to, if not predict perfectly, at least understand why the decisions are taken. A rational framework where we see perhaps less political risk of change, because we understand how things are being decided and done, allows us to be more confident about investing in it. What I would emphasise though—and it is, I think, the same point for all of us as investors—is that forward certainty is shaped by what the Government say and how far ahead we can see things like the Levy Control Framework, the plans for future rounds of the Contract for Difference auctions, the design and refinements, and the capacity market, knowing how those are going to be decided and done in future. That is what keeps us confident. It is a long-term journey. We have been on it for a very long time. We understand that we are taking long-term decisions. We are heartened when Government show they understand the same thing.
Q87 Glyn Davies: I am quite interested in this: we know that there was a certain sum of money within the Levy Control Framework and there is a real danger of us going through the ceiling on that, but when you are looking at the future it seems as if you are anticipating that there will be an extension to the Levy Control Framework and there will be more money available and there will be more Contracts for Difference coming along that tap into that. Would that underpin any future investment on your part?
Paul Spence: If I talk specifically about the Hinkley Point project, we are taking a decision about a power station that is going to provide 7% of UK electricity for 60 years when it starts operating. We have to look long term and we look at the commitment to decarbonisation through the Climate Change Act 2008; we look at the Energy Act and the Electricity Market Framework and we have to look longer term than a 2020 date for the Levy Control Framework. We have to form a view about what is going to happen to energy prices in the wholesale market and also the continuity of the framework.
Q88 Antoinette Sandbach: Obviously, I asked the question of Drax and I would like to ask it to you. You talked about a fair return for your investors; double-digit figures can be anything from 10% to 99%. Where would you put yourself on that?
Paul Spence: Our investment framework, like Drax, is that we look at each individual project and we look at the risks that we are taking in that project, so there is no one single vanilla number for all projects and we do not publicly declare the hurdle rates within that framework. But what we have said in the case of the Hinkley Point project, which is one of the big ones, is that because we are taking the construction risk on this very big project and one that is going to run over a number of years, we believe that a return a bit below 10%, but around 10%, is a fair project return for that. That is the number that is the basis for the Contract for Difference and it is the number that was scrutinised by the European Union as a fair number as well.
Q89 Antoinette Sandbach: In terms of potential investments going forward in the renewable energy sector, particularly in terms of onshore wind or other renewables, have the recent policy announcements affected your decisions in those areas? I appreciate you have made the decision on Scotland, but—
Paul Spence: The Dorenell project is one where we have bought into a project that has a Contract for Difference. In that case, we could look at it with the confidence that we understood the future revenues and therefore could engineer the project and test it. We have a pipeline of other projects about the same scale as our existing constructed, operating and consented projects. We are taking a view that it is worth taking those onshore and offshore projects forward. We will have to take a look at each case and take a view as to whether they are going to be successful in the competitive auctions and whether we can achieve a price that makes sense. But at the moment it does make sense for us to keep developing new projects.
Q90 James Heappey: It is just a very quick question on the willingness of the Chinese to invest in the new nuclear programme of the three power stations for which deals have been done or largely done: Hinkley, Sizewell and Bradwell. Hinkley, I understand the Chinese have come in with a 33% stake, Sizewell a 20% stake, but Bradwell a 66.5% stake. Why the variation in the stake that you are willing to take, in the stake that they are offering?
Paul Spence: If I may, you are right, those are the percentages that we announced that we have agreed with the Chinese as part of our strategic investment agreement in October. If I take that in steps, for the Hinkley Point project it is very clear that we are in the lead. It is for us to drive the successful construction, but the Chinese have invested and are coming in as industrial participants in that project. They will bring their knowledge of a project we are building with them in China, which is a very similar design. They are coming in as a junior partner in that project to start to learn about successful construction in the UK.
Q91 James Heappey: Sorry, I just want to come back, because that is not the impression that we had been given. The Government line, as I understood it, was that this was an entirely financial relationship.
Paul Spence: No, they have industrial expertise that they are bringing to this project. It will not be a huge number of people, but there will be involvement in the project. As I say, our aim is that they will bring their understanding of successful delivery of the EPR design, which is what is under way in Taishan. For the next project at Sizewell, which is intended to be the same design as Hinkley Point C, obviously changed for the different site specifics, we will lead the development phase; we will apply the lessons learned from Hinkley Point; we will work with the local community. We are the operators of the existing Sizewell B Power Station, so we know the community around there and we know what it takes to achieve consent, which I hope we will on that project as well.
When it comes to Bradwell, the Chinese firms have been keen to see if they can achieve licensing consent and then acceptance of using their design at Bradwell. They know that in order to do that they need to have learnt the lessons of how you build successfully in the UK; how you develop a project and then apply that in taking a lead role. We have also agreed that we will help them with the achievement of the licensing consent—so the review by the Office for Nuclear Regulation. Again, we have experience of the hundreds of thousands of man hours it takes to do that and we know how to operate in the UK regulatory regime. They want us to work with them on that, but they want to be in the lead on that next project.
James Heappey: The quid pro quo in all of this—
Chair: Sorry, James, forgive me. Julian.
Q92 Julian Sturdy: I would like to move, if we could, to DONG Energy. Ms Lane, DONG Energy recently announced that a final investment decision had been taken on the Walney Extension Offshore Wind Farm, which is obviously good news.
Danielle Lane: Yes.
Julian Sturdy: But also recently the Isle of Man agreement has come up. I know there is probably further investment to seek for that, but that was announced only a few days ago, wasn’t it?
Danielle Lane: Yes, Tuesday.
Julian Sturdy: Given that, it appears that the recent policy announcements are not affecting DONG Energy. Is that fair?
Danielle Lane: There are two things there. One is that we have an existing pipeline, Walney Extension being part of that, and Hornsea Project One being the last in that pipeline that were successful in gaining early CfD contracts. We have confidence that all those projects will go ahead and that they will be built successfully. The Isle of Man project was a lease that we won in a tender that the Island of Man ran almost 18 months ago now, I think, and we have recently signed a lease. I think what that shows is that the recent reset speech, where it indicated that there were potential auction rounds with offshore wind in them, gives us a signal that there could be something in the future and gives us the confidence to carry on the development activity, not just for the Isle of Man, but for the other Hornsea projects that would come after Hornsea Project One.
Q93 Julian Sturdy: What you are saying, is that the Secretary of State’s recent announcement when she talked about three further CfD auctions was the trigger for signing the lease on the Isle of Man?
Danielle Lane: The timing was coincidental, but it was helpful to know that there could be a future for offshore wind in the UK.
Q94 Julian Sturdy: Do you think that announcement gives enough confidence for investors to see a future in offshore wind?
Danielle Lane: There is a lot of detail to come, but it certainly helped set the framework. At this point, we know that there could be three future auctions, but we do not know what the volume of allocations at each of those auctions will be or what the budget available for those auctions will be. We entirely accept that there will be a downward pressure on prices, and that is exactly as it should be—there needs to be competition—but sitting here today those are the two areas that we are interested in getting further clarity on.
Julian Sturdy: So you are saying you would have signed the lease anyway, that it was—
Danielle Lane: I think we probably would have done.
Q95 Julian Sturdy: What does DONG Energy see as a good return on their investment in the marketplace at the moment?
Danielle Lane: That is an interesting question and it is not one that is very clear, because moving to a competitive world from the administered prices, we are sure that margins will start to be squeezed, so we expect a lower return than we would have done. For the previous projects, we are in the same kind of places with my colleagues here, where we have looked for around 10% also. But we do not publish projects because, as was indicated, we build a pipeline of projects across all markets, so you judge different markets differently and it will change depending on what is happening.
Q96 Julian Sturdy: But you think that return is going to fall?
Danielle Lane: I think it is going to be under a lot of pressure, because there will be a lot of interest in future auction rounds. If you are competing, we all have access to the same supply chain and cost base, so margins then come under pressure.
Q97 Julian Sturdy: You probably cannot say too much about this, because obviously there are competitors there, but do you have a clear idea of where you see it going to at a point where you can still invest? Is there a cut-off point? Is there a point of no return when the investment falls below?
Danielle Lane: I am sure there will be, but I think that is a decision for the board of DONG, rather than anything that I can comment on.
Q98 Antoinette Sandbach: Is the acceptance, I think pretty well across the board, that prices are going to fall in terms of the future CfD rounds a tacit acknowledgement that consumers or taxpayers have effectively paid too much in the past?
Danielle Lane: No, it is a representation of how the industry has been developing and how the learning by doing has had a big downward pressure on the supply-chain costs, but also the efficiency that companies like DONG Energy have now and the experience and learning we have in building offshore wind farms. There are clear examples in the energy sector of learning rates of around 15% and we believe that offshore wind is well on that, but we obviously need deployment in order to continue the cost reduction trajectory.
Q99 Antoinette Sandbach: It is as much about falling costs as it is about subsidy, if you like, or the support for the industry?
Danielle Lane: Yes. With the new technology, you need support to get it started and I think that has been seen across lots of different technologies. But support should not be infinite and you need to get to the point where you are cost-competitive, and that is the journey that offshore wind has been on, not just in the UK but in other markets. One of the major innovations and one of the big drivers for cost reduction has been the increasing size of turbines. We have recently commissioned Westermost Rough with a 6 MW turbine and we are looking at installing 8 MW turbines at Burbo Extension and then hopefully 10-plus MW turbines in future. Just by doing that, you are able to install less infrastructure, so you get a better return for each of the wind farms that you are building.
Q100 Chair: Can we move now to the energy reset speech by the Secretary of State? The Secretary of State noted in her speech last month, “We now have an electricity system where no form of power generation, not even gas-fired power stations, can be built without Government intervention”. Ms Lane, it almost follows on from the point you were making about support and costs or what have you, but the Secretary of State here is saying now that the support will be needed for all forms. What is your view on that situation? All four of you, but I will start with Ms Lane.
Danielle Lane: About the reset speech generally?
Chair: About the reset speech and the fact that, “No form of power generation, not even gas-fired power stations, can be built without Government intervention”.
Danielle Lane: I cannot comment directly on gas stations, because it is not a technology that we are actively involved in building, but I think it is fair to say that the market prices are such that it is very difficult to see a long-term business case without some kind of support. Certainly for offshore wind, we are still in a position where we need some support. As I have said, we are looking at making sure that that is for a limited period only and we would expect to move closer and closer to cost competitiveness with other technologies.
Alan White: The statements were absolutely correct in terms of the fact that you need support, given the low energy price and particularly for gas stations where we are reliant on the energy price for the majority of our revenue. There is no Contract for Difference to top up the revenue stream. It was acknowledged when the capacity market was brought in that it needed somebody to find what was determined as the “missing money” in order to attract investment in new generation and I think that is absolutely right. We do need some form of subsidy support arrangement for gas stations, and that is not likely to change in the foreseeable future, given that the depressed nature of the energy price will not support long-term investment. The price signals are not there for long-term investment.
Andrew Koss: Yes, I would agree with that statement, whether it is renewables or new gas build, it is likely to need some form of support. It cannot be supported in the current commodity price environment.
Paul Spence: The way we think about it is we see that there is a market in transition at the moment from the high-carbon system that we have had in the past to a decarbonised electricity system. As I said, we also see the need for investment in new capacity. The current wholesale market is not supporting that new investment. The Contract for Difference, the capacity market and the carbon pricing are the pieces that then provide support for future investment. The other thing that we would say is that what we have is a transition, but one where competition is being allowed to make sure that there is challenge on cost within technologies and then we hope, increasingly over time, between technologies.
Q101 Chair: It is quite fascinating, because this turns perceived economic wisdom in the UK—even in the last 20, 30, 40 years perhaps—that the market will sort all, on its head, but from the Secretary of State to yourselves the market will certainly not sort all, it seems at this particular moment in time.
I want to take you on a bit: a few of you have mentioned CfDs this morning. Do you think that projects without CfDs have been more affected by Government decisions and a lack of a long-term vision?
Danielle Lane: If you are somebody who did not win in the first round or the transition round for CfDs for renewables, then you are certainly in a position where you are not making investment decisions at this time, so in that sense, yes. I think it has been helpful, as I have said, that we have now been told there are future CfD auctions happening. It remains to be seen what the detail of those is, but it is encouraging that development activity can continue.
Andrew Koss: The CfD regime that has been introduced provides two clear benefits. The first is that they are private-law contracts, so I think investors recognise that they are less susceptible to regulatory intervention; that is a key benefit. The other is that there is protection against falling commodity prices. The CfD should reduce the cost of capital and should encourage more projects to come forward.
Chair: Thanks for that distinction. Anybody else care to comment on that point on CfDs?
Q102 Glyn Davies: Yes, a general question: inevitably you have touched on quite a bit of this in your previous answers, but if we are looking for investment against a background of some policy uncertainty, certainly in the short term, and if you break down the whole sector into immediate and the longer term, the three phases I have written down are project development, pre-construction as a construction phase and then the operational stage. Where do you think this policy uncertainty is going to have most effect and what sort of an effect do you think it is having on those three general areas?
Alan White: It probably has more effect on the development side than the rest. In terms of bringing projects forward, the Trafford project has been in development since 2008, so we have seen various policy announcements, changes and now the reset speech and the bringing forward of market reform in the capacity market. When we started Trafford in 2008, the capacity market had not been thought about; now it is there. In terms of uncertainty and lack of clarity or lack of a long-term vision, it is that piece, it is enabling people to start on that journey that policy needs to enable. Once you get to financial closure and into construction, that is a very different situation. You have made the decisions based on whether it is a capacity market contract, a CfD or anything else—any other form of support, and indeed with the market outlook. You have made that decision by the time you start construction and then going into operation you have built the market element into your forecast, so you have invested on the basis of that expectation.
Q103 Glyn Davies: Before the question goes to everybody else, the point I am looking at is those decisions you are taking for five, 10 years’ time now, is that an area where you are seeing some reluctance to make long-term decisions like that because of the policy uncertainty?
Alan White: No, we are certainly not stopping development activities as a result of policy changes. As was mentioned earlier, Governments come and go and policies change and so on, and we recognise that that happens. But you have to build that into your process as you are developing a project. You may start off down one track and then end up going down another because of the way a statement has been made, or there may be another support regime that comes in, like the capacity market for gas, that assists with the development. It can work both ways, but we are not stopping development activities as a result of any of the policy; things may just take longer.
Paul Spence: Like Mr White, we are definitely not stopping development projects. We have projects that are continuing with the framework that exists at the moment. But if I may just challenge very slightly your framing of that, I think to say “operate”—there is quite a lot of continuing investment, whether that is on build-out or on replanting of existing stations, or even just the basic investment to keep those stations running reliably over time. The other thing I would say is that the capacity mechanism in particular, with its year look-ahead and then three-year look-ahead, does provide a mechanism to make sure that we are investing and looking after what we already have on the system, as well as providing a framework that feeds the pipeline of new investments. Both of those are important if we are going to make sure the lights stay on.
Andrew Koss: In terms of development risk I think it is important we have visibility on Levy Control Frameworks, on budgets and on future CfD allocation rounds. It is now an allocation risk. Projects want to know how much budget is available so they can plan their developments. Once you go into a CfD auction, if you are successful, the construction and operation should be de-risk, so it is very much a development phase.
Danielle Lane: I am not sure I have too much more to add to that one.
Q104 Antoinette Sandbach: Can I ask how much the European energy policy framework affects your consideration, particularly given the approach that the Commission has taken over the next year or so, and whether or not that is influencing your action in the UK?
Danielle Lane: From our perspective, we are very interested in what comes out of the European Commission, but when you get down to the project level it very much depends on the country framework and how any initiatives from Europe have been implemented. I think for renewables we would not be where we are today without having had the 2020 targets, but I think we need to also see commitment from the national Governments towards any future development.
Q105 Antoinette Sandbach: Does that include devolved Governments as well?
Danielle Lane: I think it is any Administration that has any influence over any energy policy. You need support at all levels, and that is right down to your local community who are hosting the projects. As a developer, you cannot ignore the community. I do not think it stops at Europe or national Government or devolved Governments; it is right down to parish councils.
Paul Spence: I absolutely agree with Ms Lane on the fact that you have to think all the way from parish council to Europe and understand what is happening in each dimension. The other observation I would make, and it comes back to the starting questions, is that when I talk to others in Brussels or my counterparts in other European markets, they look with envy at the framework we have here in the UK and some of the forward certainty that we have. I am very grateful that I am here rather than in some of their markets, because it is a lot harder to invest there.
Q106 Glyn Davies: I have a whole series of questions I have written down to ask, but I have to go. I have a question to the Chancellor and it starts at 11.30 am, so I cannot miss that or I will be in very bad books with the Government, or at least with the Speaker probably. What I would like to do is ask about half a dozen questions—they are similar— and you can give us any information you want to give us in answer to whichever of these points you want. That will probably help us. How many projects have been pulled when you look at the programmes of your various companies? Have the project costs been affected by changes? Are you now seeking different sorts of funding? What are the consequences of this in the near and longer term? Do you see a decline in the number of projects coming through to completion and would this be reversible if there is an announcement by the Secretary of State on future CfDs and on the Levy Control Framework? Generally, what activity levels do you foresee now beyond the projects in the pipeline? We have touched on this before, but this is absolutely key to us, because it is the four or five years ahead that are impacted. There are a few questions racked up there—many of them are much the same thing—but it is over to you to make any points you want to us.
Alan White: If we look at the sources of funding, I think that is where we are seeing a change in terms of the investor make-up. We are seeing a lot more fund managers coming into this, so they are financial investors rather than traditional utility-type investors. Historically, it would have been utilities that were investing in these projects or industrial groups. Now it is very much seen as a financial opportunity, a financial investor market. That has—
Q107 Antoinette Sandbach: I am sorry to interrupt there.
Alan White: No, that is all right.
Antoinette Sandbach: Is that because the return, effectively a double-digit return when you compare it to other returns in the financial investment market, or even if it is below double digits—
Alan White: Financial investors have a different view in terms of return requirements and very much linked to the risk associated with the project. If it is a fully market price risk-based project, it will be a very strong return that will be required. If it is more supported, then you go down into the single-digit return. So it comes with the certainty of the income; there is a trade between risk and reward. Financial investors are very much driven that way, rather than a utility that might have a portfolio of plants, so that it can say, “Yes, this would fit with my portfolio”. Their investment horizon therefore tends to be a little bit shorter as well. The financial investors, because they are managing other people’s money, are therefore having to return that money in a relatively short period of time with a guaranteed return. That is the challenge for the finance investor market.
In terms of projects coming through, it will be interesting to see the outcome of this year’s capacity market auction and what happens in terms of any new-build projects coming through. Certainly from a gas point of view, I think that is the challenge—finding the slots that a new-build project can fit into, given what else is on the system.
Andrew Koss: I mentioned earlier that we would have six generating units at Drax. We would very much like to convert the remaining three that are still running on coal to run on biomass. We did have plans to do a fourth; that is on hold. What we would like to see, I think was mentioned in the Secretary of State’s speech; there were two references to pick up. One was on whole-system costs. These are the costs of balancing the system and also providing reserve to the system that are not currently included in any CfD strike prices and allocation rounds. DECC is doing a piece of work on that. We would like to see that published and we would like to see that fully reflected in any future auctions.
Also we would like to move to full competition. I think there have been a couple of mentions here about merging pots and driving the best competition and the best value for money for consumers and bill payers. We would very much like to see that. If those happen, we believe our fourth unit conversion particularly would be one of the cheapest, most affordable renewable technologies on the system, and we would be happy to invest.
Paul Spence: Let me come back to you with a fuller answer with some numbers behind it, but I have not seen any massive slowing in the number of projects that are being presented or coming through to us in terms of development opportunities at the moment. What I am seeing is a lot more questions, particularly on new gas developments, about what is the possible funding regime and whether there is going to be this fair comparison in the capacity market between gas generation and the small embedded generation that avoids some of the costs that the larger generators pay today. Then I am also seeing questions about the future regime that might apply for onshore wind projects. They are the areas where there are more questions now. But has it stopped projects in the development pipeline completely at the moment? We are not seeing that.
Chair: Ms Lane, any of the four to six questions that Mr Davies asked?
Danielle Lane: I think it is fair to say that for the offshore wind sector there are a lot of projects out there that have had a number of years in terms of development cost sunk into them, so there is a pipeline there that can compete in any future auction. In terms of actual investment, DONG Energy does have a long history of attracting third-party investors to our projects and we have seen those investors come from a range of different countries, but also a range of different investor classes. We have not seen any slowing of interest in that, but we do see more questions about what is happening. I think that is to be expected with any change of regime. We are confident that we can continue to attract investors to our projects.
Q108 Chair: Thank you. I am mindful now of the view of EDF that the UK was, in your experience, probably the best environment for investment; some cynics might say that our terms were easy. The UK has dropped from eighth to 11th place in the Renewable Energy Country Attractiveness Index. Just how real is the risk of capital flowing to other countries that are perceived as more attractive from that sort of stat, do you think, as a panel?
Paul Spence: Clearly, if that were to continue and if there are other places where we, as an international company, might invest, then it becomes more difficult to attract investment to the UK. So it does matter how we compare to other countries, whether it is for renewables projects or for energy projects in general. At the moment, the other statistic that perhaps got a bit of coverage recently was the World Energy Council view of the energy framework. It put the UK on negative watch. But even on negative watch, our framework was among the highest-rated in those global energy comparators, so we still have a competitive market for investors and for investment and we have a very strong reputation for the rule of law here in the UK.
Chair: Thank you. Anybody else on that stat, of the change from eighth to 11th?
Danielle Lane: I think it is a very similar position. We have activity in a number of different markets and we are looking to grow our footprint outside of Europe. The UK remains somewhere that we want to invest and we are investing, but there will be competition now from other countries.
Chair: Now for some clarity on matters, Mr Heappey.
Q109 James Heappey: Clear forward visibility has been the plea. Mr Spence very generously noted that there are other countries that would see us as already having that certainty. I am keen on your thoughts on what features that long-term clarity has for investors. What are you looking for?
Danielle Lane: I think if you look back over the last 10 or 15 years in the UK, there has been a very consistent narrative on the energy sector, and that has been very helpful in terms of explaining to investors what the UK wants. I think we have just been through a period where it has been a little bit less clear exactly what the Government are looking for. When you are explaining to people who do not sit in the UK what some of this means, when they only read the headlines or small press clippings, a bit of interpretation has to happen, which is that investment is still wanted and we are still looking at a renewable position. We are looking at other technologies as well. I think that is what we have been missing.
Q110 James Heappey: But even when we have had that consistency of thought from Secretaries of State Miliband, Huhne and Davey, which gave 10 years of pretty consistent energy policy thinking, none of the big ticket stuff that the energy mix really needed—nuclear, gas and carbon capture—happened. There was certainly no inconsistency in policy. Was that because the emphasis of the policy was wrong? Because those are the most important single developments, nuclear power stations, gas power stations and carbon capture.
Danielle Lane: It depends where you are sitting.
James Heappey: You might disagree, but that is where our mix lags behind most notably.
Danielle Lane: I do not want to take words out of Paul’s mouth, but I think there was a period when nuclear was not on the agenda. I think it has also been the case that the UK has been at the forefront of a market-driven approach, so it has been left to the market as to what was delivered. The big intervention with the Energy Ministers that you have just talked about was bringing forward a renewables obligation and saying, “Aside from the market, we absolutely want renewable energy to be growing in the UK”. That is why you have seen focus and growth in that sector, but potentially not so much in the other parts of the market.
Q111 James Heappey: I guess what I am searching for from the panel is the panacea, because there were 10 years of almost unbroken thinking on energy policy, which incentivised one part but absolutely did not incentivise the other, so we end up with an unsustainable energy mix where the wholesale price is lower than it costs to invest. Arguably, that is the product of that sustained period of thinking. What are we looking for that stimulates all parts of the energy generation mix and gives you sufficient clarity in all areas to be confident to invest in nuclear gas and renewables?
Paul Spence: I agree with Danielle on the first bit; a clear cross-party consistent long-term narrative is helpful, and I think that has helped us get to the point where we are on the cusp of the Hinkley Point investment decision. It has helped us get to the point where we are able to see those investments coming along. Could it have been faster? We are where we are.
Q112 Antoinette Sandbach: Sorry, can I just ask, does that hinge around the decarbonisation targets up to 2050 and effectively the carbon budgets being set out in order to meet that?
Paul Spence: I think it is helped by the clarity on the commitment to decarbonisation of our economy. That is one piece that we have seen consistently. It is helped by a consistent narrative on how energy is going to play its role within that, which is both the centralised and the decentralised. It is that whole story, seeing, if not absolute stability in that, understandable evolution of that. Then I think the third bit is the trilemma—you have climate, you have energy and then you have affordability. The third piece of this is looking as far forward as we can and being clear about what is affordable. The Levy Control Framework is the mechanism that is being used to exercise that lever. So understanding—if not exactly—what the numbers are going to be and how the decisions are going to be made about how much is in the Levy Control Framework is the piece that perhaps we would all like to see a little bit more of; where that is going next, as a way of—
Q113 Antoinette Sandbach: Can I ask Drax why that framework did not give you the certainty to go ahead in terms of your CCS investment, effectively?
Andrew Koss: The CCS was about us having the funds to invest. We were still very supportive of the project and the project sat outside of the CfD allocation. This was a bilateral discussion with the Government and it was also part of the competition. For us, it was about not having the funds to invest rather than the investment itself, which we were supportive of.
But I wanted to pick up Mr Spence’s point on the Levy Control Framework, and I do think this is an important point. The last Budget in March prior to the election contained a set of projections that had about £1 billion of unspent funds under the Levy Control Framework in 2020 and 2021. We then saw an update of those numbers in July after the election and it was suddenly £1.6 billion overspent. Then we obviously saw a raft of policy measures on the back of that.
Antoinette Sandbach: I could intervene and talk about that being the Department, but that might be a bit unfair.
Andrew Koss: However, for investors and for us it is very important. Again, we see the framework, we see EMR, and we see the Levy Control Framework carbon price floor, but when there are changes in the underlying assumptions and projections, that does provide uncertainty to investors. What we need is a projection of what the budget is going to be, and of the assumptions underpinning that so that we can plan around whether we feel there is enough budget to support further projects.
Q114 James Heappey: Should the energy generation plan come under the new Infrastructure Commission?
Paul Spence: We have argued for a long time that the Infrastructure Commission is a good thing and we are pleased that energy is one of the topics that they are looking at. At the moment though they are not looking at the generation component, they are looking at the aspects of the system operator and then the system itself. We have argued, and I think everybody I talk to in the industry says, “This is an interconnected system. You have to understand the whole system”. It is a sensible place for the commission to start, with a look at the whole system and how that is run. Whether that takes them in the future to look at the specifics of the generation piece—probably.
Q115 James Heappey: I cannot help observe that I am not sure there is a consensus about what long-term clarity looks like, because almost each sector requires something slightly different. Is that a fair conclusion to the last five or 10 minutes of questioning?
Alan White: I think certainly from the point of view of gas generation it is different because the support mechanism that has been put in place is a different type of regime. It is designed to find this missing money that is not available in the long-term energy prices to support investment. That is positive. The outcome of last year’s auction has given us a challenge in terms of raising the finance for Trafford, but we are making good progress. The uncertainty of future auctions and how those all pan out, means that it is a year on year decision whether a project is going to go forward or not. When you are looking at a project with 10 years or so development, you get to the end game and you think, “Right, I am now going into the auction” and it is almost a go/no-go sort of decision. That is a challenge for investors to sign up to a project beforehand, before they know what the outcome of that auction is going to be.
I think the support mechanism is there; that is positive. The statements that were made by the Secretary of State in the reset speech around certainly wanting gas and encouraging gas are positive. As for whether the Infrastructure Commission could do anything in terms of further encouraging gas, a lot of that comes down to what tangible support could be made available from Government, at the end of the day, beyond maybe the capacity market, whereas even that is a challenge for state aid rules and similar things.
Q116 James Heappey: I wonder whether what sort of emerges is that it is impossible to come up with a one-size-fits-all vision that gives all sectors the certainty that they need to invest. You almost have to set some targets for what the energy mix will be and then within each of those sectors—renewables, gas, nuclear—work out what levers there are to stimulate the necessary amount of investment. Is that broadly right so far?
Danielle Lane: Yes.
Q117 James Heappey: In that case, it might be useful to hear what the key lever would be to give you certainty in your sector. What is the key lever for offshore wind; what is the key lever for gas; key lever for biomass; key lever for nuclear? But I appreciate that EDF has a broader portfolio beyond.
Danielle Lane: I think that we have gone a long way for that key lever and understanding that there is still ambition for offshore wind in the UK. The reset speech gave an indication that there is future volume, and I think that helps. One of the things that I was thinking when you were talking is that it is not so much that you need an answer for everything in every sector, but that you need some kind of vision of the future. This Government did very well in telling us what they did not want, but there was quite a long period until the reset speech, when they told us what they did want. I think industry does not like a vacuum. That would be my message.
Alan White: In terms of the market reform and the capacity market process, we are going through another round of consultation at the moment with DECC on that, then in the reset speech there was an indication that it will be looked at again post this auction. That means uncertainty in terms of the final structure of that until the auction in 2017. That is the challenge that we have, that the industry is looking into in terms of saying, “I do not know what this auction is going to be driving towards”. It is getting that stability around the regime for gas that will be a key changer.
Andrew Koss: For biomass, I mentioned earlier a whole-system cost, so a level playing field. We are very keen to see the pots merged in terms of future CfD allocations and for us all to compete on a level playing field across all the technologies. We feel that gives us the best opportunity to compete for more biomass conversions.
Paul Spence: For nuclear, I think we have a framework that works. Clearly, the thing we have to do is to show now we can successfully deliver Hinkley, but also deliver cost reductions on future projects. I think there is a clear path forward on that. But I think I would agree with Danielle: give me a vision, but alongside the vision show me the steps of evolution. I think that some improvements in the way the market is set up at the moment could help move things forward faster towards technology neutrality; towards this point about understanding the costs on the system, and understanding therefore the cost that consumers might be asked to bear in the future. Once we have those, once we get competition and innovation working properly, I think we will have a good vision.
Q118 Antoinette Sandbach: I wanted to come back to Mr Koss. In relation to your call for a level playing field, do you think that should assess the carbon impact of biomass, for example, as opposed to wind, given the carbon budget that will be released next year? Clearly, what I am asking is how much of a level playing field you want with, for example, nuclear or wind, particularly when there is release of carbon, for example, when burning wood?
Andrew Koss: Biomass is recognised as being carbon neutral. What we have to do though is measure the carbon footprint from the forest to the power station, and that has to be below a certain level in order for that biomass to qualify as being sustainable. Yes, we are not saying we are zero carbon, we are low carbon, and if we are taking into account the full footprint across the supply chain—again, that is on a level playing field—then that would be acceptable.
Q119 Antoinette Sandbach: Would that not stop new technologies being supported and being developed that may lead to more innovative solutions in the future?
Andrew Koss: We recognise that there are established and non-established technologies. Clearly to bring non-established technologies forward and bring cost reductions, there may need to be some minima. I suppose there are mechanisms within the CfD allocation mechanism to support new technologies, so we recognise that. But if the focus is now on affordability, then clearly we need to be bringing the most cost-competitive technologies forward, recognising whole costs, as Mr Spence said, that feed through to the consumer’s bill.
Q120 Antoinette Sandbach: Do you think it is possible to move to a subsidy-free regime then?
Andrew Koss: On subsidy, again there is a growing debate about what subsidy-free means, and we have talked earlier about how low wholesale prices are and the fact that they do not encourage any form of new build. If we are talking about new gas as a default and we talk about subsidy-free in that context then, yes, I think it could be possible.
Q121 Chair: Thank you. We have heard some criticisms over the last six months of course on the way that Government have made announcements. Are there any lessons from where you sit on what could have been done better in that period? For that we will go to Danielle Lane, who took the first intake of breath.
Danielle Lane: I think there were some things that were well trialled. It was very well understood that things like onshore wind were going to be less attractive to the Conservative Government because of the manifesto commitments.
Q122 Chair: Did you expect the announcements in May that were made?
Danielle Lane: I do not think we did, and I do not think others did. I think it came very quickly and without much forewarning. I think that is something that makes things difficult to respond to and it does create nervousness in other areas. Certainly when those announcements were made there were a lot of questions from my headquarters in Denmark about what it meant, what it would mean for offshore wind and if there would be any retrospective changes. I think that is something that maybe would be a lesson learnt for me—try to give a bit of warning and be quite specific about what your changes mean, because it will have an impact on other areas.
Q123 Chair: How long did it take your head office in Denmark to understand what the announcements meant? I am not saying that is a particular nuance of Dong Energy.
Danielle Lane: They are very bright people. It was quickly understood that it did not have a direct impact on offshore wind, but I think we have been watching the market very carefully and the developments very carefully over the last six months to understand what the future looks like for offshore wind. As I have said previously, it was very helpful that we had some clarity in the reset announcement, but I think we are now looking to the detail. I would say we are still in a process of understanding what the changes have been since the May election.
Q124 Chair: Given what you have just said there, is there an increased nervousness then in your headquarters in Denmark about the UK environment?
Danielle Lane: We are certainly looking at it afresh. We have a secure pipeline up until Hornsea Project One, but the question then is what happens to the next projects? We are looking hard at how we will take those forward when the auctions happen and so on.
Chair: Mr Koss, do you have any particular views?
Andrew Koss: Yes. I would agree with Ms Lane—more clarity and transparency about what is coming. I mentioned the change in the Budget assumptions around the Levy Control Framework that triggered a raft of policy announcements in July. Clearly, more visibility around the assumptions and where that was going to lead would be a lot more helpful.
Q125 Chair: Was there much consultation with you as an industry as to what was going on, either formally or informally, with this announcement—what was in the Government’s mind—when these changes were coming? Was there anything that indicated to you what was happening?
Andrew Koss: Typically, there is debate around engagement with the industry. I think with the more recent ones that came just after the general election, from our perspective there was little debate about what was happening, particularly in the Budget announcement. But generally there is good engagement, particularly with DECC.
Q126 Chair: Did you find yourselves in a similar situation to Dong Energy, where there was increased nervousness and uncertainty and time to figure out what it all meant?
Andrew Koss: Absolutely, yes.
Paul Spence: Just to continue the theme, it is always most reassuring for our investors if we can tell them what the Government are going to say as they say it or in the run up to it, so we can say what is coming, because then they have a feeling that they can understand what is going on and therefore can take a judgment about—
Q127 Chair: Could you do that in the last six months?
Paul Spence: In some cases we could say what was coming; we could not say when it was coming. So there is a judgment about the tactics of timing. I understand—we understand—very well that our industry is political and therefore there are times when it is the politics that dictate when something is said. It would be naive to try to take that completely out of every decision, but giving us a sense of what is coming and a little bit of a sense of when it is coming is always helpful. Most of the changes that we have seen, I would say, we saw on that basis.
Perhaps what we did not always see was an understanding from within DECC of the commercial consequence of some of those decisions. If I could pick on a different example, the changes to the Levy Control Framework arrangements have an effect on some of our contracts with some of our industrial customers. I am not sure that was well understood before the change was announced and before the time to then make sure that that change could flow through into discussions with our customers, so closing that loop.
Q128 Chair: How did that experience affect your confidence?
Paul Spence: There is an element of it is a reality. I have never experienced a time when it has been perfect to know what is coming and when it is coming. I think in general we get a good sense of what is coming and when it is coming.
Alan White: Clearly the announcements that have been made recently in terms of gas are positive, from our point of view, in terms of encouraging investment and the Government saying that gas is required. As I mentioned earlier, policy changes or changes to support regimes that are there, whether it be the Levy Control Framework or whether it be the withdrawal of the CCS process, are unsettling for investors when they are looking at new projects. That, from our point of view, is where we see more of the nervousness that comes out of it.
Q129 Antoinette Sandbach: I want to come back on the underlying assumptions around the changes, because I think it has been made quite public that the anticipated Bill is around 6 GW of renewables funded by the Levy Control Framework, and that in fact what has been built in that time is about 8 GW. That must have been well known within the industry in terms of the volume of output. You are all working in the sector, you must be aware of what your rivals are doing, what has been consented and what has not. What was it about that that was not understood?
Paul Spence: I think we all have a good understanding of what physically is built. Some of the change in the Levy Control Framework related to the production rates from some of the intermittent technologies being higher than had been expected in the assumptions. That is more difficult to know—what everyone is getting from that.
The other thing that I think perhaps was more of a surprise is the distributor generation that none of us were involved in building—so particularly the solar. The pace of development of small-scale solar projects was something that, with hindsight, surprised us. The consequence of that on the Levy Control Framework was something we had not anticipated.
Q130 Antoinette Sandbach: Yes, and it may well have surprised the Government too. In terms of small scale, just so that we can put that in context, what do you mean by small scale? How are you defining that?
Paul Spence: Less than 5 MW.
Chair: Thank you. Before I bring this to a conclusion, I would just like to say that if you find yourselves with any change in confidence—given the ever-changing nature of Carbon Capture and Storage that we have heard in the last week alone—if you find any changes in your views or anything else you want to submit to the Committee after this evidence session or over the period we still have this inquiry live, please feel free to do so. Before I bring it to an absolute end, if you have any final remarks you would like to make or anything you would like to put on the record around investor confidence, this is your opportunity. We have spoken it out well this morning.
Thank you all very much, and thank you especially, Ms Lane, Mr White, Mr Koss and Mr Spence for your time this morning. It is much appreciated.
Oral evidence: Investor Confidence in the UK Energy Sector, HC 542 21