Memorandum from United Utilities
1. United Utilities can offer a unique perspective
on energy policy, since we include within our portfolio: an electricity
distribution business; small independent gas transportation interests;
an Energy Efficiency business working with Industry to reduce
their energy consumption, a growing green energy business, promoting
a range of renewable technologies, which is already responsible
for 10 per cent of NFFO renewable energy schemes in England and
Wales; over 60MW of generation associated with our water treatment
assets; and sizeable landholdings in some of the wettest and windiest
parts of the North West of England. As such we have significant
technical knowledge and capability, particularly in small scale
hydro and landfill, sewage and mine gas. We are promoting an off-shore
windfarm development at Scarweather Sands off the coast of South
Wales. All told, we are committed to developing at least a further
200MW of renewable generation by 2005.
2. We welcome opportunity to contribute
to the Environmental Audit Committee's inquiry, thereby continuing
our active contribution to the ongoing review of the UK's energy
policy. United Utilities has made a number of detailed submissions
in response to the Performance and Innovation Unit team's work.
In our submissions, we talked in particular about the environmental
challenges within the review. Our Chief Executive, John Roberts
sat on the Royal Commission on Environmental Pollution, which
reported the previous year. In this response we attempt to identify
a number of specific actions that we believe would be helpful
in those areas highlighted by the Committee.
The Energy Review
3. The PIU has delivered a thoughtful and
balanced report with many positive and constructive proposals.
In doing so, the policy review has rightly picked up that profound
changes are needed to counter the continuing threats to the environment
from past patterns of economic development. The Royal Commission
concluded that a target of a 60 per cent reduction in greenhouse
gas emissions by 2050 was required, and we are pleased such a
striking target, deliberately intended to grab attention for a
difficult area of policy, has focused the PIU's deliberations.
4. In its report there is welcome acknowledgement
by the PIU that sustainable development should be the guiding
principle for energy policy, of the need to move quickly to a
low-cost, low-carbon energy system, and for substantial improvements
in energy efficiency.
5. The report also acknowledges that resilience
and flexibility is needed to address energy security, and that
options need to be kept open. For example, it envisages a long-term
future for coal, if only as back up to less reliable sources.
The report does not see any pressing problems connected to increased
dependence on gas (though some have suggested the report rather
underplays the security of supply implications and need for investment).
6. Despite this flexible approach, it is
United Utilities' hope that the Energy Review will lead to the
publication of clearer projections of expected use of, and sources
of, energy in subsequent periods. Looking only at the businesses
within the United Utilities Group, this would be most valuable
Confirming the extent and rate of
change to the likely role of distribution networks, to move away
from its traditional role as a passive delivery path from grid
to consumer, into a system characterised by the active management
of both the provision and uses of electricity.
Demonstrating the longer-term prospects
for continued growth in renewable technologies, which would justify
research and development activity and partnerships between equipment
providers and generation developers.
7. While the report rightly points out that
it would not be in the UK's interest to go it alone on tackling
climate change in advance of further international agreements,
it recognises that there can be economic benefits to our leading
the way. The growing world market for low carbon technologies
offers real potential if the UK gains ``first mover'' advantage,
investing in technology now, and exporting it in years to come.
The Danish turbine manufacturing industry shows what can be achieved
when policy is in synch with industrial development.
8. The report also highlights the immediate
challenges we face before renewable generation can really take
off in this country:
A more strategic and streamlined
planning system, rather than the present system which fails to
place local concerns within a wider framework of national and
The reorganisation and financing
of electricity distribution networks.
An excessive discount imposed on
prices to small and intermittent generators following the introduction
of New Electricity Trading Arrangements and the apparent lack
of support for distributed generation activities
9. There is now an acknowledgement of the
urgency of dealing with these new challenges; we hope that the
most effective mechanisms for doing so are acted upon. Otherwise,
whilst we were pleased to see the introduction of clear targets
for renewable generation, some doubt must remain over achievement
of the Government's 10 per cent renewables target by 2010 (let
alone the increased target of 20 per cent by 2020). In addition
there is also the increasing concern regarding the achievement
of the 10,000 Mw target for new Combined heat and Power Plant
owing to the current relationship between high prices in the gas
market and low electricity pricesa relationship that undermines
the economic viability of such schemes.
10. Given these barriers to potential energy
developers, the real question is whether industry has the capacity
to expand quickly enough to meet government's targets. So, what
effective mechanisms can take up these challenges? It is important
that market forces are used wherever possible. Failing this, the
system of Renewable Obligation Certificates provides an excellent
example of adapting markets to meet wider Government policy objectives.
It may be that over time it will become obvious that ROCs need
to be valued differently according to the technology employed
in order to provide adequate incentive to develop newer technologies
and assist them to achieve "critical mass" in terms
of production volumes.
11. But it would be surprising if adapting
market rules were by itself sufficient. Without deliberate action,
we anticipate increasing difficulties in securing planning consent
for renewable generators (and their associated electrical connections).
Government intervention, as has already happened in the case of
offshore wind generators, could be of great benefit. One approach
might be for Government to charge regional Government Offices
with delivering national renewables targets within their regions,
co-ordinating actions across sectors, including a more strategic
approach to planning.
12. It was concern over fragmentation and
inconsistency of public policy and funding arrangements to date
that led to the initiative we are taking to support renewable
energy in the North West. We are working with regional partners
to establish ``Renewables Northwest Ltd'', a not-for-profit company
bringing together private and public sector interests. We want
Renewables Northwest to work strategically, gaining political
and public approval to pave the way for deployment of the new
technologies. We will take this forward at a major regional conference
at the end of March 2002.
13. In addition, it was encouraging that
the PIU report stated that in light of the review the Government
should initiate a national public debate about sustainable energy.
We see value in a Government-led programme of public education
to emphasise the benefits of such schemes, and to reduce concerns
over local impact.
14. As owners and operators of the North
West of England's electricity distribution network we have a close
interest in incentives to facilitate new generation connections.
We share the Government's desire to use market (economic) signals
wherever possible to allow distributors to gain from taking a
more supportive role with renewable generation, and for companies
that make less effort to receive a lesser reward. To date unfortunately,
the debate has been limited to cost recovery through connection
charges. Even 'full-cost' recovery does not leave a distributor
better off than if the development did not go ahead. A more positive
incentive regime is needed for strategic network improvements
to facilitate a large expansion of embedded (or distributed) generation.
15. More generally, utilities companies
are uniquely well placed to help deliver climate change targets,
but we need appropriate backing from Government and a regulatory
framework which takes more account of environmental impacts. The
PIU's report understands that it will ultimately be private sector
investment decisions that deliver the Government's new energy
policy, which means introducing incentives as well as removing
16. In particular, we hope that Ofgem's
next Distribution Price Control Review will begin to embrace the
substantial shift in objectives likely to emerge following the
Energy Review. We need to begin by identifying what it is that
society wants from the distribution companies, and then to identify
a suitable form of regulation to ensure that those requirements
17. We believe that United Utilities can
play a significant part in delivering Government policy objectives,
especially through our development of renewable generation and
the adaptation of our electricity network to reflect its changing
functions. The more confident we can become that our business
plans align with Government policy, the faster such changes are
likely to occur. The Energy Review should lead to clear statements
of Government policy objectives and guidance to regulators which
encourages them to work with us to develop the regulatory environment
in a way that rewards companies who work in step with that policy.