20130511_LQ
Source: BBC TV
URL: N/A
Date: 11/05/2013
Event: Leading Questions: SSE CEO Ian Marchant talks about UK energy policy
Attribution: BBC TV
People:
- Douglas Fraser: BBC Scotland business and economy editor
- Ian Marchant: CEO, Scottish and Southern Energy
[This is an excerpt from the interview.]
Douglas Fraser: If we look at the way markets operate, one of the things that Ofgem, the regulator, looked into was a perception - and they found that there's some reality behind this, what they called "rocket and feather". The prices rocket up, when your wholesale prices go up -
Ian Marchant: They didn't, actually [inaudible] in reality -
Douglas Fraser: - they come down like a feather, when the wholesale prices fall.
Ian Marchant: Simply not true.
Douglas Fraser: Well, that's the perception - you're saying that Ofgem did not find that, that never happened?
Ian Marchant: I don't believe that any independent scrutiny would show that. I'll give you an example. We put prices up - as I think you mentioned - earlier, in last year, partly to cover future winter gas prices. They turned out even higher that we had assumed. The gas prices for the winter we've just come out of are the highest ever. We have not put prices up. Again. We have borne that. And there are lots and lots of examples of, you know, price spikes. We saw very high prices in the wholesale market at the end of March, because, you'll remember, it was pretty cold. Most of gas storage in Europe had been used. And we saw very high prices. We absorbed that. So there are examples where it's simply not true. I can prove the opposite.
What some of the superficial analysis ignores is the non-energy costs. About half of your electricity or gas bill is energy, the kilowatt-hours or the therms, and about half of non-energy, there's about a quarter-ish - maybe a bit more - is the network charges. They're doing that. [He makes an upward-sloping gesture with his hands.] They're going up - the debate is at what rate. And then there are all the non-energy costs, which are usually imposed on the industry by either politics or regulation. Support for renewable energy, support for energy efficiency, support for fuel poverty. I think they're all good, but those costs only go one way. And those - that 50% is just increasing inexorably, every year. And if you take that into account, that's the principle reason prices have gone up, at the rate they have.
Douglas Fraser: You've been very forthright about one part of that, which is one reason for the rising bills, the social tariffs to subsidise poorer customers, the green energy targets, home insulation - a lot of stuff getting loaded on you by government. Now, this is an industry - the whole industry, not just SSE - is used as target practice by public, by politicians, by the regulator. Has the industry been a bit of a patsy in allowing this to happen?
Ian Marchant: I think these costs being imposed on the industry - some are right, and I think, you know, the electricity industry should bear the cost of renewable energy. It's an energy cost. It should bear some of the cost of energy efficiency. There are some which I think are more social issues, where actually the tax and benefits system should -
Douglas Fraser: You're running government policy for them and taking the heat for them -
Ian Marchant: - on fuel poverty and some of the energy efficiency, if you - it's like that. So there's that philosophical point. And the other philosophical point is that there's an accepted political, large political consensus across parties - not everybody but large consensus - that we need to decarbonise our economy. I happen to agree with that. What it means, in the first 15 years or so, of that path, is the electricity bill bears the disproportionate cost, 'cause that's the cheapest place for society to pay it. And actually you're happier that I green up electricity than you drive your car less. And so - but there hasn't been the honesty to say "The cost to society of decarbonisation's fairly low, but it all comes here, initially".
So there are two reasons, I think, philosophically, why it is a problem. Your point about the industry being a "patsy", however, is because our house wasn't in order, we have struggled to resist.
Douglas Fraser: Let's look at the energy market more widely. You've said there's a very real risk of the lights going out. The government is significantly underestimating the scale of the crunch facing the country.
Ian Marchant: Yeah.
Douglas Fraser: What's the problem here, as you see it?
Ian Marchant: We have - we're at an interesting point in the cycle of the electricity generation market, because you're talking effectively about generation. We have too much - until very recently we had too much generation on the system. There are a number of reasons why that was the case. The biggest surprise was of course the economic recession. Electricity load has gone down four years in a row. It has never ever done that since records began. Normally, it goes up by .1 to 1.5% a year. It's gone down. We have more generation than we need. Therefore, the generation we've got isn't making any money.
So you've got that, but then you've got some environmental regulations coming from Brussels that go back to probably the late '90s was the formulation, which effectively takes a lot of generation off the system, not based on economics or need but on a basis of environemntal permitting. And that's started to happen. And we've seen power stations like Cockenzie and Didcot and Kingsnorth all shut in the last few weeks. So you have plant shutting - because it's not making any money, because it's got to - you have too much generation now and then you've got the third odd thing to throw in it is building new isn't easy, because financial markets are tight, so there's not much liquidity. And secondly, government have said that they will introduce new policy.
Douglas Fraser: But they've -
Ian Marchant: But they haven't actually introduced new policy. And, to quote Donald Rumsfeld, they have created a "known unknown". They have said "We will intervene, but you have to wait". So, what do you do? You wait. Who would build a gas plant, who would start building a gas plant today, on the basis that the market will recover, and the government will get its policy right? A board's going to say "Well let's wait till at least one of those has happened." And, to date, neither of them have happened. And so, although we said government are underestimating the scale of the problem, what we also mean is that the government's tardiness is making that problem worse. And government's said we don't need new capacity until 2018, to which my answer is "I hope you're right".
Douglas Fraser: SSE has invested very heavily in renewables. It was - it had a partnership in nuclear, it's pulled out of that, it's worried about the amount of baseload gas that's going to be required for when the wind's not blowing on renewables. Can renewables take enough of the load of what's going to be required in future?
Ian Marchant: I have always believed that renewables could do more than the, sort of, one end of the spectrum, but it's not the only answer. I think, if you take electricity, renewables can be - for a market the size of the UK, I think 30-40% from renewables is eminently achievable with today's technologies. But we will need other solutions. Now, one of -
Douglas Fraser: Is nuclear, for instance? You pulled out - is that going to get built?
Ian Marchant: I think - can I come on to nuclear in a minute? Because I think there is one - there is one bit of technology that people ignore, which is demand management. Because renewables are variable and intermittent, and demand is variable and intermittent but completely unconnected, if you get demand-side management, demand-side flexibility, you can get more renewables on the system. However, you will need a combination, I believe, of clean and cleaner fossil fuels, which is where carbon capture and storage comes in , and nuclear. My objections to nuclear, at the moment, are: it's the wrong technology at the wrong price from the wrong company, but we should wait. We can afford, as a country, to wait. There's a lot of interesting technology development in nuclear going on, both in Asia, where they are building to time and budget - we can't, in Europe, but they are - and in the US, where they're looking at, effectively, Generation IV technology, smaller reactors, easier and quicker to build. And I think the UK should say "We'll wait". We should invest in gas, renewables, demand-side management - and that buys us to 2025.