Select Committee on Environmental Audit Appendices to the Minutes of Evidence

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 press notice.

  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;

    —  Ex-post Trading—The 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 Price—Dual 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 balance—we therefore believe that, effectively, this would result in the reintroduction of central despatch.

    —  Greater Access to Imbalance Revenue Surplus—These 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 charges—and 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 3.18).

  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 be explored.

  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.

Planning Issues

  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 level.

  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 forces—the 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 it.

  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 wind.

  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 Plant

  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 security.

  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 plant.

  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 difference—of several pounds a MWh—would 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 alternative—even where the unit cost may appear slightly higher—because 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 post 2010-11.

  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.

March 2002

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