Supplementary memorandum by TXU
TXU strongly supports the expansion of renewables
capacity in the UK. We provided written evidence to the Environmental
Audit Committee in January 2001 and this supplementary memorandum
provides additional information, arranged under the four areas
of focus which were itemised in the Committee's 3 December 2001
1. The impact of recent developments
in energy policy such as the New Electricity Trading Arrangements
and the Renewables Obligation.
The Renewables Obligation
1.1 TXU has welcomed the introduction of
the Renewables Obligation as a means to promote the much needed
growth of renewable energy. As one of the largest suppliers of
electricity to end consumers, TXU will be a major purchaser of
renewables under the Obligation. In keeping with our flexible
portfolio approach, and given the current shortfall in the market,
we intend to meet our target over a period of time and, where
economically viable, exceed it.
1.2 We are pleased that Government has addressed
many of the issues we raised in our consultation responses. Subject
to a few points of detail (which we have summarised under Section
2) we believe that the Renewables Obligation will result in an
effective and efficient system.
1.3 We support OFGEM's decision not to change
the fundamental rules for NETA, and believe that the balancing
market should continue to apply to renewable generation and CHP.
As these sources of generation become a larger part of the mix,
it will become increasingly difficult to balance the system economically
if special rules are applied. Furthermore, the balancing market
should be in the long run the most efficient way to deal with
these issues; we think it is best to improve operation of that
market rather than take trades and liquidity off-market.
1.4 The introduction of the NETA arrangements
was a major step for the UK electricity industry, involving significant
change for all market participants. We believe that most have
approached the inevitable uncertainties that a new market brings
in a positive and professional manner. Most importantly, confidence
and liquidity are beginning to grow and this will provide an important
backdrop to the development of new products and services by innovative
and forward thinking companies, benefiting consumers as well as
small generators. With a little more time we strongly expect that
small generators will be able to form partnerships and alliances
that enable them to play an important role in the market. We see
no case for fundamental change and look forward with confidence.
Indeed, in this respect we were pleased to announce recently two
such alliances with new entrant developer companies (Novera Europe
& Hainsford Energy). In both these examples TXU is providing
an ``enabling'' instrument that removes exposure to wholesale
energy price volatility from the small generator and protects
them from market based risks through a consolidation and aggregation
type approach to price and volume risk management. This has the
effect of enabling them to focus on the prospecting, planning
and construction of new opportunity.
1.5 The role of consolidators in the NETA
world is sometimes confused. The concept of a ``consolidator''
was specifically created to allow organisations without a supply
licence to buy and sell non-code generation by allowing them to
register Licence Exempt Generation in the Central Volume Allocation
systems (as opposed to Supplier Volume Allocation Systems). Those
participants who do have supply licences currently perform this
implicitly rather than explicitly as a ``consolidator''. TXU currently
performs this task for several small sites. This electricity is
netted off TXU's aggregate consumption in the relevant Grid Supply
Point Group before submission to the NETA central systems.
1.6 Consolidation was never designed to
facilitate Licence Exempt Generators placing Offers/Bids in the
Balancing Mechanism. Such operations require specialised IT systems
to capture the requisite data from the generator or customer for
onward transmission by the Registered Party (ie the person acting
on behalf of the Licence Exempt Generators) to the System Operator,
together with the relevant Bid/Offer prices and volumes. TXU has
developed a suitable software suite (FOCUS) to facilitate this
approach, although to date the necessary costs of this service
have tended to be unattractive to some users in the current wholesale
market conditions. In this context the ``costs'' are the extra
fixed administration costs which are charged for by the Central
services, and the counterparty contractual risks which have to
be managed by either the Balancing and Settlement Code Party (acting
for the Licence Exempt Generators or customers), or by the Licence
Exempt Generator or customers directly. As already stated, we
believe that partnerships and alliances will inevitably form and
play an important part in the market.
1.7 TXU would be very interested in responding
to any tender for the provision of consolidator infrastructure.
Given our knowledge and experience in developing our own in house
software for this type of application we should be able to make
a significant contribution to helping to develop these arrangements.
1.8 There is currently much industry debate
about the possibilities of making changes to NETA rules to facilitate
ex-post trading, a single cash-out price, and greater access to
Residual Cashflow Reallocation amounts. In November we provided
comments on these to the Energy Policy Directorate of the DTI.
These are summarised in the following bullet points;
prospect of moving to ex-post trading would be daunting, requiring
widespread and radical redesign of IT systems and newly consolidated
business processes as well as the renegotiation of thousands of
electricity supply contracts that have just been renegotiated
to reflect the NETA terms. A thorough debate took place on these
issues during the design of NETA. Now is the time to improve rather
than undermine the market's confidence in NETA in order to give
a further stimulus to liquidity and promote the necessary capital
and intellectual investment in new products and services.
Single Cash-out PriceDual
cash-out is fundamental to the design of NETA and certainly has
served to incentivise market participants to balance. Under a
single cash out model there is little incentive to balancewe
therefore believe that, effectively, this would result in the
reintroduction of central despatch.
Greater Access to Imbalance Revenue
SurplusThese monies result from BSC Party imbalances and
effectively offsets NGC Balancing Services charges. It would be
illogical for non-code generators to be paid from this source
whilst still avoiding Balancing Services chargesand if
they were to pay balancing Services charges they would be worse
off than they are currently.
1.9 We believe that many of the perceived
problems for small generators will be resolved by market operators.
TXU is already increasingly offering services to smaller players.
Liquidity and demand side participation will significantly increase
provided the market is allowed to evolve without intervention.
This will act to reduce prices to end customers and, together
with the introduction of the Renewables Obligation, we believe
that new services and greater liquidity will help to alleviate
many of the issues that are currently of concern to small generators.
2. Current policies to support renewables
(including R&D and capital grants) and the likelihood of meeting
Government targets in this area.
2.1 The Renewables Obligation places an
extremely challenging target on electricity suppliers for 10.4
per cent of total electricity sales to be sourced from renewables
by 2011. We believe that the level of the target will provide
sufficient stretch to preserve the value of the renewable obligation
certificates (ROCs) up to 2010/11. However we have identified
a number of concerns, discussed below, which will need to be addressed
if the target is to be achieved. This can only be delivered through
a sufficiently diverse portfolio of technologies and with the
combined support of the Government, the Carbon Trust, planning
authorities and regulatory authorities. This includes Government
support, such as enhanced capital allowances, for pump-priming
technologies such as offshore wind, photovoltaics and some biomass
technologies including co-firing.
2.2 In particular we believe that further
thought needs to be given to two key aspects in relation to the
Renewables obligation. These are the eligibility of renewable
technologies and planning issues. We expand on these two aspects
in the paragraphs below.
The Eligibility of Renewable Technologies
2.3 We particularly welcome the following
government decisions on eligibility within the Renewables Obligation:
The proposed treatment of hydro generation,
including the definitions of hydro plant and refurbishment provided
in the draft Statutory Instrument.
The ineligibility of electricity
generated from renewable sources outside of the UK.
The inclusion of advanced waste conversion
techniques although we believe the inclusion of mines gas is worthy
of further consideration (see paragraph 2.4).
The eligibility of biomass co-firing
in existing power stations, although we are concerned that the
criteria used will result in a considerable under-achievement
of this technology thereby reducing the potential for energy crops
and increasing overall compliance costs (see paragraphs 3.13 to
2.4 Substantial quantities of mine gas are
produced from redundant mine-workings, which are a significant
source of UK greenhouse gas emissions. As with landfill gas, the
best solution to this issue is for companies to be incentivised
to collect the gas as a fuel source for generation. Currently
the economics do not make such projects viable. The extent to
which the allocation of Renewables Obligation Certificates to
mine gas generation may or may not be used to support the technology
and reduce greenhouse gas emissions, as with landfill gas, should
2.5 Future amendments to the finalised definition
of eligibility will, if not done with great care, increase the
risks associated with the development of renewables. Excessive
widening of the definition risks stranding existing contracts
for other sources by enlarging supply, whilst narrowing the definition
would result in stranded costs for the contracts of the source
in question. It would reduce risk to renewable developers and
offtake purchasers if Government were to provide reassurance that
any changes in the definition of allowable renewable sources would
include an adequate period of notice. As an example, there is
current concern in the market place that Landfill Gas may lose
its ROC entitlement (because of increased pressure from Europe)
before the end of the first period. This perceived risk is seen
by a number of participants to be significant and is preventing
them from entering long-term off-take agreements.
2.6 We believe that a key challenge is to
create the onshore and offshore development framework required
to deliver the obligation. In order for the targets to be achieved
it is vital that offshore wind is capable of making a major contribution.
It is important to ensure diversity in the development of offshore
wind projects and that the full potential to develop such projects
is realised. We feel that the Crown Estates Commissioners should
redouble their efforts to promote offshore wind generation. This
affects both the number and size of sites made available, and
also the terms of development. It would be helpful to ensure that
planning consents give maximum flexibility for wind farms, consistent
with meeting strictly necessary requirements of the MOD, National
Air Traffic Control and other statutory consultees.
2.7 We believe the scope for onshore renewables
can be improved by streamlining the planning system, particularly
in England and Wales, and welcome the Government's Green Paper
on planning. There are plenty of opportunities for the kind of
small project that characterises a lively and successful market,
if the planning obstacles can be overcome.
2.8 In order to address the planning issues,
we believe that the existing national guidance (PPG22 in England
or TAN8 in Wales) should be updated to the more positive stance
along the lines of the Scottish policy NPPG6.
Furthermore, template Supplementary Planning
Guidance notes (SPGs) should be provided to District Councils
so that a simple framework of standard policies can be adopted
in most cases, reducing the amount of bespoke planning debate.
It would also be desirable to find a way to bring together regional
renewable assessments, regional planning guidance, County Structural
plans and District policies. This might involve new legislation
to set capacity targets by region or possibly the determination
of renewable planning applications at County rather than District
2.9 We do not favour the suggestion, made
occasionally, for the section 36 national planning system to apply
to much smaller renewables. We think that such a move might strain
the relationship between local and national authorities, perhaps
leading to local authorities to object to most applications, forcing
public inquiries. Also, feeding numerous small projects through
a single resource at the DTI could lead to bottlenecks. We see
that streamlining planning procedures (and particularly the interface
with environmental regulation) and creating a positive planning
environment as possible without removing local input by centralisation
of planning considerations.
3. The extent to which current developments
reflect "joined-up" working between the parties involved
(Government departments, OFGEM, etc).
3.1 Under this heading we would draw together
six issues where greater co-ordination of UK efforts and policies
would benefit success in developing and sustaining Renewable Energy.
These are competition in Scotland, additionality barriers to green
tariffs, co-firing of biomass from energy crops, off-shore wind
leases, renewables back-up from flexible coal generation plant
and metering requirements for photovoltaics. We provide details
in the following paragraphs. In addition, we believe that it is
important to ensure that the activities of the Carbon Trust and
Energy Savings Trust are not duplicated. In time, there may be
a rationale for bringing these activities together.
Competition in Scotland
3.2 There are significant competition issues
in Scotland that constitute an undue advantage to some Scottish
companies, and this will damage the competitive development of
renewables in Scotland. The wholesale electricity market duopoly
held by Scottish Power and Scottish & Southern effectively
prevents other players from entering the onshore renewables market.
The Scottish companies face no such restrictions south of the
border in the England and Wales marketplace. Unless remedied quickly,
the effect will be to gift a considerable advantage to the duopoly
players, allowing them to gain unjustifiably from market distortions
and greater recycling of the buy-out revenues to the Scottish
companies. OFGEM's work to introduce British Electricity Transmission
and Trading Arrangements deserves full support to ensure such
distortions are quickly removed.
3.3 We are also concerned that suppliers
in England and Wales may not be able to export renewable electricity
from Scotland, given the Scottish Power and SSE have interconnector
capacity reservations. This is clearly prejudicing growth and
innovation in the sector and we strongly support measures which
will improve access to the Scottish wholesale market. We also
believe that further steps to break up the Scottish duopoly should
actively be pursued.
Additionality Barriers to Green Tariffs
3.4 We welcome the PIU Energy Review and
are ready to contribute to the work of finding the best way to
meet environmental objectives. We agree with the PIU recommendation
that the proportion of electricity generated from renewable resources
should be significantly increased. Essential to successfully achieving
this will be the need to harness that most fundamental of market
forcesthe power of customer choice across available alternative
products and suppliers.
3.5 With an expanded role for renewables
likely to form a key plank of future UK energy strategy, the attitudes
of customers and local communities to proposals for new energy
developments will become of crucial importance. Because of their
size, most renewable energy planning applications are considered
in a local context, with wind and biomass projects having had
particular problems in obtaining planning consents. As the PIU
Report highlights, new challenges require new policies.
3.6 We believe that one very important market-based
catalyst for success in expanding the role of renewables lies
in the interpretation of the "additionality" feature
currently set out in the consultation paper. Under the proposed
interpretation of additionality in the draft guidelines, suppliers'
commitments under the CCL and Renewables Obligations would mean
that there would be no availability of renewable energy for sale
to customers through voluntary energy based offerings, other than
existing large hydro generation. As your consultation paper indicates,
suppliers would not be able to offer energy-based green supply
to domestic customers without unsustainable premium costs.
3.7 We do not believe that many customers
are likely to become interested in taking up contribution-based
offerings as an alternative. Such products have been available
for some years, but most customers have not seen them as attractive,
nor actively engaged in giving them much consideration.
3.8 In the short term, and into the medium
term, the route to achieving domestic customers' ownership, engagement
and participation in renewable energy sources will need to be
through energy-based green tariff offerings. These will help to
inform customers, and create the engagement and demand-side pull
that will be so important in enabling customers to play a vital
role in discussions on planning applications associated with renewable
energy projects which are local to them.
3.9 If energy-based green tariff offerings
can be made by suppliers to local customers from these projects,
informed and virtuous linkages can be made. These can help to
meaningfully accelerate the engagement by local communities and
improve the consents processes for renewables energy sources in
the UK. Improving numbers of consented local renewable projects
providing energy to local customers through verified energy-based
green offerings will help to reduce system losses. The arrangements
for transparency and verification should be sufficient to eliminate
unreliable or misleading claims.
3.10 What might stand in the way of these
virtuous linkages is an unsupportive interpretation of additionality.
With renewable energy sources in short supply in respect of the
Renewables Obligation, we believe that it is necessary to interpret
the DEFTA/DTI Green Claims Code in a different way when applying
it to energy-based green tariff offerings. These are not, paraphrasing
the words of that code, "standard practice anyway".
3.11 Accordingly we do not believe that
it should be the expectation that, as a general principle, energy
which is purchased by suppliers as part of their Renewables Obligations
should be precluded from inclusion in an energy-based green supply
offering. Rather we believe that, with arrangements for transparency
and verification in place, it better serves customers interests
and information to allow suppliers to offer energy-based green
offerings from renewable purchases made as part of their Renewables
Obligations. The alternative is stark, without this change there
are likely to be no attractive green tariffs on offer to UK customers
for several years, and active customer engagement in these vital
energy issues would be foregone.
3.12 However, we agree that it would be
appropriate to place some form of additionality restriction on
renewable green supply offerings and suggest that a date-stamping
approach is adopted. We believe that this should be consistent
with the 1990 baseline used in the Kyoto Protocol, which is the
main driver for reducing CO2 emissions. This would
mean that projects previously developed under business as usual
scenarios before 1990 and prior to the introduction of the Non
Fossil Fuel Obligation, would be ineligible for green supply offerings.
We would therefore argue that all renewable projects developed
before 1990 should also be excluded from green supply offerings
on grounds of additionality even if they are ineligible for ROCs
and/or CCL exemption. Any renewable green supply offerings made
to the domestic market should of course forego the CCL exemption
benefits as this would clearly be double-counting.
3.13 The date of 1 April 2011 for ending
the eligibility under the Renewables Obligation of all co-fired
biomass from energy crops will restrict the number of such schemes
that will be able to make the necessary returns on investment.
It is unrealistic to expect that major changes in agricultural
practice to produce sufficient energy crops will occur on these
timescales The agricultural sector will need to be convinced of
the business case for energy crops and see a long term future
for them. In order for maximum potential to be reached new harvesting
equipment, cultivation techniques etc will have to be developed.
The four year lead times of short rotation crops also need to
be reflected in the timescales especially as planting for 2002
is only likely to result in a few thousand hectares at best.
3.14 We believe that all energy crop technologies,
including co-firing, should be available as options for renewable
developers. It would be in keeping with the principles of the
RO that the market should be left to decide which renewable technologies
are most appropriate to deliver the obligation without artificial
restrictions. We would advocate that co-firing of biomass with
waste should also be eligible as well as with fossil fuel.
3.15 It would appear sensible to review
policy so that the deadlines for achieving a minimum percentage
of energy crops be extended substantially and integrated with
a scheme to promote the necessary agricultural developments. The
removal of the incentive would prevent economic payback being
achieved and the projects would not be started to the detriment
of the energy crop sector as a whole. We would suggest that this
should be extended to cover the projected growth period of the
obligation, which would allow energy crops to be established as
a viable agricultural activity and increase the overall demand
for energy crops when compared with the proposed 2006 restriction.
3.16 We would also advocate that greater
flexibility for co-firing should be allowed and that a lower de
minimis figure of perhaps 50 per cent for biomass comprising
of energy crops may be more appropriate. In particular we perceive
the restrictions on the ability to use agricultural wastes, such
as straw, as unhelpful.
3.17 We see no clear rationale to include
an end date for the eligibility of co-firing, which will deter
the development of energy crops rather than incentivise them.
The development of energy crops will evolve over several years
and if successful could be expected to near maximum potential
around the start of the next decade, which is also the end date
for co-firing. The removal of a major demand source for energy
crops at such a time will deter investment rather than stimulate
3.18 It would also be important to ensure
that other potential barriers to co-firing are not created and
the Environment Agency be encouraged to take a pragmatic approach
to the implementation of this technology.
Offshore Wind Leases
3.19 We are concerned that the guarantees
required by the Crown Estates under the terms of the offshore
wind leases will act as a barrier to entry to many offshore wind
developers and a major obstacle for the development of offshore
3.20 As a condition of the leases Crown
Estates propose that companies be required to offer a guarantee
of unlimited liability against third party damage. Under normal
circumstances third party damage would be an insurable risk except
that the Crown do not seem prepared to advise on which particular
risks companies should insure against. Consequently those companies
who are seeking the flexibility to use bank financing will not
be able to raise debt as this issue renders projects non-bankable.
3.21 It is vital that the Crown Estates
should not implement restrictions that prevent project financing.
Without the removal of this requirement we are concerned that
the number of offshore schemes will be substantially reduced and
will result in a small number of large developers extracting additional
upside by virtue of their size. This will reduce the market diversity
that Government is seeking to develop in offshore wind generation
and will have knock-on effects concerning any plans the Crown
may have for further offshore developments. It may also result
in a serious under-utilisation of the UK's offshore wind resource.
It is crucial to the success of the Renewables Obligation that
competition and diversity in offshore wind is established and
that the technology is able to deliver its full contribution.
Renewables Back-up from Flexible Coal Generation
3.22 Renewables improve UK energy security
by reducing dependence on (soon to be) imported gas but clearly
have their own security issues. They must be backed up by flexible
generation if they are to contribute fully to Britain's energy
3.23 By far the major source of flexible
backup power currently operating in the UK is the coal fired generation
sector. There are currently some 27,000 MW of coal capacity in
England and Wales, most of which now operates flexibly. Coal is
well suited to this role as it can be stockpiled cheaply at the
stations and utilised when needed. It is easy to match the regular
output from coal mines with the peaky requirements of flexible
3.24 The quantity of energy stored in the
coal yards of existing plant is orders of magnitude greater than
that in all other storage mechanisms available or in contemplation.
The coal sector is therefore an ideal back-up for renewables with
capacity to deal with the unpredictability of any conceivable
amount of renewable plant. At a technical level, there is no reason
why the lives of these plants cannot be extended indefinitely
with a moderate amount of maintenance investment.
3.25 In order to achieve environmental gains,
the long term average utilisation of coal-fired capacity will
have to fall. Some reduction of installed capacity may be a consequence
of this. However, failure to maintain a substantial stock of coal-fired
capacity would not only remove the most effective back-up for
renewables, but it would diminish considerably the optionality
available to the nation's electricity system. There are a number
of practical steps that could be taken which would help maintain
as much of this capacity as possible.
3.26 Perhaps the simplest such change would
be to alter the incidence of business rates and use of system
charges, both of which are levied according to plant capacity
rather than utilisation. We regard this as unfair, in that low
utilisation plants provide a valuable service to the rest of the
system and indeed to the nation generally by being available.
Charging pro rata to utilisation would be much fairer.
The differenceof several pounds a MWhwould be likely
to make a significant difference to the viability of maintaining
low utilisation plant in operation and to the ability of coal
to act as a back-up to renewables.
3.27 The other valuable step would be for
Government to continue to focus closely on environmental regulation
relating to coal plant to ensure that the necessary environmental
standards can be delivered at an affordable cost. Otherwise there
is a risk that the future operation of mid merit and peaking coal
plant may be inhibited, which would in turn impact on security
of supply and the availability of cost-effective backup power
for renewables. This work needs to encompass a number of themes.
3.28 The first necessary theme is a drive
for stability in environmental standards and an avoidance of constant
fine-tuning and the associated micro-management of plant operations.
This approach is resulting in an increase in costs without commensurate
environmental benefits. For example, to avoid this problem we
are working with the Environment Agency in developing a market-based
process for regulating NOx emissions; the draft report of the
Agency's consultants indicates that the cost benefit of this compared
with the Agency's "traditional" approach could be tens
of millions of pounds a year.
3.29 The second theme we would encourage
is a positive approach, where standards have to change, aimed
at promoting competition and continued operation in the coal-fired
sector. The Agency's work in 1998 and 1999 to develop the concept
of flexibility to incentivise the development of FGD and intensive
use of FGD plant while maintaining competition in the coal-fired
sector has been an excellent example of advancing energy policy,
environmental policy and the promotion of competition. This work
now needs to be built on to develop a post-2005 framework for
sulphur which continues the benefits of flexibility. Ideally,
this framework should also incentivise further FGD installation,
including on plant where the full limestone/gypsum process is
not suitable or economic, but where valuable improvements can
be obtained by other methods.
3.30 The third theme we would stress is
the need to focus on ensuring that energy and environmental policy
are brought together in setting new environmental standards, so
that improvements are cost effective and do not prejudice security
of supply. Careful cost benefit analysis should be applied to
any new standards. It is also important to avoid the temptation
to "gold-plate" the obligations laid down by EU legislation.
Metering Requirements for Photovoltaics
3.31 We believe that photovoltaic technology
is capable of making a valuable contribution to UK renewables
generation and welcome the Government's major market stimulation
programme for solar photovoltaics. TXU is also seeking to facilitate
photovoltaics and is the only electricity supplier to offer net
metering for photovoltaics installations. The economics of PV
are highly dependent upon receiving the value of Renewable Obligation
Certificates, including Renewable Obligation Certificates for
the energy consumed on site. However, Renewable Obligation Certificates
values are presently based on metered output, and meter change
costs will be a costly additional requirement for photovoltaics
technology. The settlement costs of half hourly metering are a
major obstacle to developing the potential of UK photovoltaics
particularly to smaller installations. We believe it would be
helpful if photovoltaics installations were able to receive Renewable
Obligation Certificates based upon standard profiles agreed with
OFGEM based upon historical meteorological data. The required
profiling work is therefore essential to pump-prime the technology
and in our opinion is best undertaken by an independent body funded
by Government or by the Carbon Trust.
4. The outcome of the PIU energy review
and the development of a sustainable energy strategy.
4.1 The recently published PIU Report is,
as expected, a report to Government. The Report makes the point
strongly that a national public debate is now needed as the next
step. It is, therefore, perhaps premature to describe the PIU
Energy Report as having an outcome. Accordingly the following
paragraphs summarise our views on steps that should be taken towards
the development of a sustainable energy strategy.
4.2 We believe that a key outcome of the
PIU Energy Review should be closer integration of energy and environmental
policy, so that energy policy is more closely directed to meeting
environmental challenges and environmental policy is formulated,
costed and put into effect in a clear energy policy context. Achieving
this would help deliver secure diverse and sustainable supplies
of energy at competitive prices, which we believe continues to
represent an appropriate policy goal.
4.3 Looking to the future, it seems inescapable
that carbon emissions will need to fall and that energy policy
needs to focus on this as a central assumption. While some of
this will be achieved by measures on the demand side (especially
in sectors such as transport), we think that the main focus of
policy needs to be on the supply side.
4.4 We believe that the best long term route
for delivering what is required is a significant and sustained
expansion of renewable energy as this will both deliver the required
environmental improvements and avoid excessive dependence on imported
gas supplies. We think that renewables are more likely to be deliverable
than the nuclear alternativeeven where the unit cost may
appear slightly higherbecause the political and financial
risk factors are inherently lower. Renewables are also more attractive
as a competitive market solution because more players have the
capability to deliver them, and there is a demand for such products
in the retail market.
4.5 The long term aim, we believe, should
be to create circumstances where renewables are able to grow as
an energy source with little or no subsidy and to this end we
support the renewables obligation as a mechanism to develop the
market. Post 2010 we are not sure that increasing the Renewables
Obligation beyond 10 per cent using the existing mechanism is
the most appropriate or cost effective way to encourage more renewable
energy. In view of the uncertainties, we suggest that the Government
should in 2007 review and decide on the most cost effective market
mechanism to support further development.
4.6 A key part of success will be the need
to create market space for renewable generation (offshore wind
looks the most promising technology) to increase not just to 10
per cent of the market, but in time to 30 per cent or more. Such
an outcome would not only reduce emissions but leave the UK with
a substantial slice of its electricity market supplied from a
source independent of oil or overseas monopolies. However, this
outcome would be prejudiced if there was a new dash for CCGT plant
and to this end we think that the Government should adopt a more
rigorous approach to consents, favouring renewable and CHP developments
and only giving permits for CCGTs and other plant where renewables
and CHP are not available in sufficient quantities. It should
not be sufficient for a developer to show that a CCGT is the most
economic option for him. The alternative would be to accept that
renewable generation can never find a natural place in the market
and must always be forced by quotas. We do not think that is the
right long term outcome.
4.7 It would also reduce the opportunity
for renewable generation if the lifetimes of the magnox stations
were extended. Whatever the merits of new nuclear build, TXU regards
magnox as part of the history of nuclear rather than the future.
In particular, the plants are not ideal as respects environmental
performance, generating much higher quantities of nuclear waste
and plutonium than more modern plants and requiring high marine
emissions from Sellafield when the fuel is reprocessed. We therefore
think the present schedule for their closure should be maintained
or, where the economics justify it in the case of individual plants,
accelerated as and when operational matters require excessively
expensive repairs or long outages.
4.8 TXU is willing to shoulder appropriate
risk in order to play our part in delivering a sustainable energy
strategy and we are developing a number of initiatives to facilitate
renewables growth. However appropriate support is needed from
Government in reducing risk of stranded investment by:
Ensuring the development of consistent
and efficient planning frameworks for both on and off shore projects.
Providing a stable and long term
definition under the Renewables Obligation of eligible renewables.
Determining any potential requirements
to increase the level of the RO post 2010-11 sufficiently in advance
for developers and energy suppliers to respond prior to the implementation
of any revised obligation requirements.
Arriving at solutions which give
sufficient consistency with EU mainland arrangements to enable
trade with other European member states.
4.9 However the need to avoid the risk of
stranded investments needs to be balanced with delivering long-term
renewables growth at a sustainable and affordable cost to the
UK. We believe that over time some renewable technologies will
become competitive whereas others will still require further support
4.10 While the acceptability of value "leakage"
to existing fully depreciated plant is primarily a political issue,
the prospect that it will force changes in the Renewables Obligation
will feed back into the assessments by market participants of
the likelihood of capacity being stranded. For this reason, we
believe that it would be particularly helpful if Government were
to clarify this issue.
4.11 We think the best solution would be
to reduce ROC generation for existing stations to a proportion
(say 25 per cent) of actual output after a certain time (say 15
years) from the start of generation. In our view this would considerably
reduce the risk that the system would "silt up" over
time with fully depreciated plant extracting most of the value,
while allowing some modest subsidy to continue to maintain availability.
This could also be combined with the eligibility of "refurbished"
plant to obtain increased or full ROCs for a further period of
time. Any change to the Obligation will need to allow the plant
that is developed later to have certainty across the first 15
years of its economic life.