Memoranda submitted by E. ON UK (U11)
E.ON UK was formerly known as Powergen and retains
the Powergen brand for its residential and small business electricity
and gas retail business.
SUMMARY
Global warming is the major environmental challenge
faced by the UK and the international community and energy companies
have a key part to play in tackling the problem.
Government energy policy needs to achieve reductions
in carbon dioxide without putting security of supply and affordable
energy at significant risk.
If the UK is to achieve its 20% CO2
emission reduction target (as opposed to its Kyoto target) by
2010, policy measures will need to be strengthened.
Creating the policy framework to encourage the
investment needed to meet climate change and security of supply
objectives is the most important energy policy challenge facing
the Government. This will require a closer relationship between
Government, energy companies and their customers.
The Government and the EU needs to address urgently,
in discussion with the industry, the design of phase 2 of the
EU Emissions Trading Scheme and ensure it generates a sufficiently
high price of carbon to incentivise shifting from coal to gas-fired
generation. It is essential that Government maintains stability
in the RO mechanism and its technology neutral approach.
UK efforts to support carbon capture and storage
should be at least comparable to those to support renewable technologies
such as wave and tidal power.
The UK needs to maintain the nuclear option
but will need to address how the investment risks can be managed
so that private capital can be attracted to nuclear within a competitive
energy market.
A coherent set of policy measures are needed
to provide positive incentives on suppliers and customers to invest
in energy efficiency measures.
Domestic customers should be given stronger
fiscal incentives to invest in energy efficiency. We recognise
tax changes raise difficult political issues, but do not believe
that the Government will achieve its CO2 reduction
targets without taking some political risks.
The UK Chair of the G8 and Presidency of the
European Council in 2005 are an opportunity for the UK to encourage
more effective and concerted action at the EU and world level.
The review of the UK's Climate Change Programme is an opportunity
to ensure that this can be done from a position of effective domestic
action to reduce greenhouse gas emissions.
E.ON UK AND CLIMATE
CHANGE
1. E.ON UK is one of the UK's leading energy
companies, generating about 15% of the UK's electricity needs,
distributing electricity through its Central Networks business
to the East and West Midlands and supplying electricity and gas
to over 10,000 industrial consumers and, through its Powergen
retail business, to 8.5 million domestic and small business customers.
2. Global warming is the major environmental
challenge faced by the UK and the international community. The
UK Chair of the G8 and Presidency of the European Council in 2005
are an opportunity for the UK to encourage more effective and
concerted action at the EU and world level. The review of the
UK's Climate Change Programme at the end of this year is an opportunity
to ensure that this can be done from a position of effective domestic
action to reduce emissions.
3. Energy companies have a key part to play
in tackling the problem. Carbon dioxide (CO2) emissions
from UK electricity generation have declined by about 20% since
1990 but still account for about 30% of total UK emissions. E.ON
UK is investing substantially in measures to reduce CO2
emissions further. We are one of the UK's leading developers of
renewable energy sources with 170 MW of plant in operation and
a 60 MW offshore wind project at Scroby Sands off the Yarmouth
coast nearing completion. We are also co-firing biomass in two
coal-fired stations and have further offshore and onshore wind
and biomass projects under development. We aim to have about 1,000
MW of renewable energy in operation by 2010.
4. On the demand side, we are investing
in energy efficiency measures under the EEC scheme, and offer
energy efficiency measures as part of the commercial products
we offer to customers. We are also one of two managing agents
for Defra's Warmfront scheme focussed on consumers on low incomes
and the elderly. We are also developing micro-CHP technology for
domestic use and have recently announced our intention to purchase
80,000 Whispergen units for sale to the public.
CLIMATE CHANGE
AND OTHER
ENERGY POLICY
OBJECTIVES
5. Climate change will be a key driver of
energy policy for the foreseeable future, but this problem cannot
be tackled in isolation from other energy policy objectives. Government
energy policy needs to achieve reductions in carbon dioxide without
putting security of supply and affordable energy at significant
risk. Because there are potential conflicts between these objectives
at least in the short term, the transition to a much lower carbon
economy needs to be managed carefully, meeting these energy policy
objectives in a balanced way. The Government's Energy White Paper
published in February 2003 recognised this but did not fully set
out how all these objectives were going to be delivered in practice.
HOW IS
THE UK PROGRESSING
AGAINST ITS
CLIMATE CHANGE
TARGETS?
6. Latest Government estimates of how the
UK is progressing against its commitment to reduce greenhouse
gas emissions under the Kyoto protocol and against its domestic
target of a 20% reduction in CO2 emissions by 2010
compared to 1990 were set out in its Updated Energy Projections,
published in May. These estimated that UK CO2 emission
in 2010 will be around 140 MtC or around 15% lower than in 1990.
These projections continue to be updated in the light of comments
but it is important to note they assume the successful delivery
of a wide range of measures included in and additional to those
set out in the Climate Change Programme, and historically very
low increases in energy demand growth. A further major risk is
uncertainty about future fossil fuel prices and the relative price
of coal and gas which has a major impact on utilisation of coal
and gas plant and consequently on the power sector's CO2
emissions.
7. The projections suggest that the UK is
well placed to meet its Kyoto Protocol commitments but not to
meet its 20% CO2 reduction target. If the UK is to
achieve (or even approach) this target, policy measures already
announced will have to deliver the CO2 emission reductions
estimated for them and new measures or the strengthening of existing
measures will be needed. Without this it will be much more difficult
to achieve the more radical reductions (of around 27-33% in CO2
emission levels below 1990) the Government believes is needed
by 2020 to demonstrate UK international leadership and consistency
with the Government's aim of putting the UK on a path to a 60%
reduction by 2050. The review of the UK's Climate Change Programme
is an opportunity to review the effectiveness of policy but will
also need to address whether the UK's 20% target can be achieved
without putting secure and affordable energy at risk.
8. Policy needs to be demonstrably capable
of achieving the targets set. If it does not this creates uncertainty
about future Government action and the risk of late Government
policy intervention can undermine investment. If Government does
not judge it appropriate to take the necessary measures, for whatever
reason, it should adjust its carbon emission targets downwards
to ensure policy and targets are consistent, rather than maintain
them for presentational reasons.
DELIVERING THE
INVESTMENT TO
REDUCE EMISSIONS
9. Whatever specific targets are set, energy
companies will need to commit substantial investment in technologies—such
as renewables, CHP plants or gas-fired combined cycle gas turbines
(CCGTs)—to reduce the carbon content of emissions from energy
production, or in energy efficiency measures to reduce final energy
consumption by customers. Customers of energy will also need to
make significant investments in their own right if the radical
improvements in efficiency of energy use the Energy White Paper
said was required are to be delivered. Creating the right policy
framework to encourage this investment to come forward to meet
both climate change and security of supply objectives is the most
important challenge facing the Government.
10. To achieve this, the policy framework
needs to be stable and robust. This will require a closer relationship
between Government, energy companies and their customers. Energy
companies will need to be assured that policies put in place to
deal with global warming will last long enough to reflect the
period over which returns have to be made to reward the new investments
needed, and that, where change is needed, a transition is provided
to avoid undermining existing investments. Similarly customers
need strong and long-lasting fiscal and other incentives to reduce
their consumption.
11. Energy companies need to show Government
that they are investing reasonably against Government policy objectives,
minimising costs and managing risks effectively, and that, as
good corporate citizens, they re-invest the return not only to
reduce emissions further but also to improve social and environmental
conditions in other ways at the local and national level.
HOW SPECIFIC
CLIMATE CHANGE
POLICIES CAN
CONTRIBUTE
12. The Government has adopted a wide range
of measures to encourage both lower carbon energy production and
to improve energy efficiency use amongst industrial and domestic
consumers. We believe that priority should be given to ensuring
these measures deliver. A number of further steps are needed to
ensure that these policies are effective:
Emissions trading
13. The introduction of the EU Emissions
Trading Scheme has the potential to deliver emission reductions
efficiently and is a central policy initiative in reducing CO2
emissions. However, the scheme creates an EU wide market and its
effectiveness depends mainly on whether Member States as a whole
restrict carbon emissions through their National Allocation Plans
sufficiently to incentivise investment in carbon abatement. The
tighter the scheme, the higher the cost of carbon allowances and
the greater the incentive on operators to reduce emissions by
fuel switching, building new gas-fired capacity or other investments,
although this will also depend on the expected relative price
of coal and gas for power generation.
14. Plans submitted to the European Commission
suggest that, although the UK has put forward a plan that will
require a significant reduction of emissions from the UK power
sector (whether through abatement or purchasing allowances) of
5.5 MtCO2 below business as usual projections, the
plans of many Member States do not require reductions in emissions
that will put them on course to achieve their Kyoto protocol commitments.
The price of carbon in the first phase of the scheme from 2005
to 2007 may therefore be relatively low and ineffective in delivering
lower emissions. This is reflected in the current forward price
of carbon.
15. It seems unlikely that either the Commission
or the UK Government will be able to exert sufficient influence
over the content of individual Member States NAPs to alter significantly
this overall picture. This reinforces the need to begin to address
urgently with industry the design and structure of phase 2 of
the scheme (from 2008 to 2012) to ensure that this generates a
sufficiently high price of carbon to incentivise shifting from
coal to gas-fired generation, while providing for a continuing
but reduced role for coal-fired plant operating at low load factors
to support security of supply and avoid over-dependence on gas.
The rules for Phase 2 need to be established as soon as possible
as power station investments will need to be committed in 2005
if they are to begin operation in the early part of the second
period. Given the central role of energy companies in delivering
this investment, development of Phase 2 of the scheme should be
undertaken in close co-operation with industry.
Support for renewables
16. The Renewables Obligation is an efficient
mechanism for encouraging the construction of renewable energy
in the UK at reasonable cost to the customer. Nevertheless energy
companies will view any investment which effectively depends on
a Government sponsored mechanism as inherently subject to some
political risk.
17. It is essential that Government maintain
stability in the RO mechanism and maintains its technology neutral
approach. The terms of reference (on which the DTI is currently
consulting) for the forthcoming review of the RO should make clear
the limits of the review and confirm the Government's support
for the RO mechanism as a long-term mechanism for delivering renewables
in the UK.
18. A system of capital grants will need
to be maintained to provide sufficient support renewable technologies
such as offshore wind and dedicated biomass plants which are approaching
commercial viability.
19. Until the Government recently issued
its revised Planning Policy Statement on renewables—PPS
22—the local planning regime did not provide sufficient
support to renewables with a high percentage of projects failing
to mature. We welcome introduction of PPS 22 (we sponsored an
independent Renewable Energy Planning Panel report as a contribution
to its development) which will encourage local planning authorities
to clarify how and where renewable energy sources can be most
suitably sited within their areas. This should help develop identify
suitable sites and avoid abortive work. At the same time developers
need to identify ways of engaging more effectively with local
communities to get their support. We are doing this through our
Community Power scheme which encourages communities to come forward
with projects on land which they own. They can then put the rent
we pay for the land for community benefits.
Carbon capture and storage
20. Carbon capture and storage (or sequestration)
(CCS)—removing and permanently storing in underground reservoirs
such as depleted oil fields the CO2 emitted from fossil-fired
power stations—is an important longer term option for contributing
to reducing greenhouse gas emissions. It also enables us to make
use of fossil fuels, such as coal, which can contribute to security
of supply, while avoiding much of the environmental disadvantage.
We are actively supporting the Government's efforts to address
the legal and technological issues. UK efforts to support the
technology should be comparable to those to support longer-term
renewable technologies such as wave and tidal power.
21. Estimates vary, but, in broad terms,
CCS technologies can be regarded as a "same cost" alternative
to nuclear power. Given the substantial upfront capital costs,
carbon capture and storage may pose similar problems to nuclear
in attracting investment within a competitive energy market. However,
CCS has to date not received much public or political attention
in the UK, although it offers certain commercial benefits over
nuclear power (eg flexibility of operation). Any future consideration
of new nuclear build should therefore include CCS as a comparable
and possibly complementary option for delivering CO2
reductions in the medium term.
Nuclear
22. The Government has made clear that it
will not consider new nuclear construction without a further White
Paper on the issue. Nuclear power has the potential to generate
power with relatively little impact on climate change although
the high capital cost of the technology and the unresolved issue
of disposal of irradiated waste are barriers. We believe the UK
needs to maintain the nuclear option but to do so has to identify
a publicly acceptable route for disposal of irradiated waste and
to address how the investment risks can be managed so that private
capital can be attracted to nuclear within a competitive energy
market.
Energy Efficiency
23. The Government's energy efficiency action
plan explains how the Government expects to achieve energy efficiency
savings of 12 MtC by 2010, including 4.2 MtC in the domestic sector.
At present the major burden of delivering the target in the domestic
sector is placed on suppliers through the Energy Efficiency Commitment
programme. While this has proved an effective programme, it imposes
costs on suppliers and does little to obtain the engagement of
customers.
24. A coherent set of policy measures are
needed to provide positive incentives on suppliers and customers
to invest in energy efficiency measures. For example suppliers
and customers must be allowed to form longer-term relationships
which enable both parties to invest in the energy efficiency needs
of the customer and stronger incentives on customers to improve
the efficiency with which they use energy. The trial suspension
of the 28 day rule agreed with Ofgem will help suppliers establish
whether there is an effective market for the provision of energy
services.
25. However our experience with EEC suggests
that, even when subsidised by suppliers, customers are not currently
strongly incentivised to accept energy efficiency measures such
as cavity wall insulation or other more intrusive measures which
have the greatest potential to deliver energy efficiency savings
most cost effectively. We believe it is essential that domestic
customers are given stronger fiscal incentives to invest beyond
the reduced rates of VAT promised for various energy efficient
products in the Treasury's recent consultation on fiscal incentives
to promote energy efficiency in the domestic sector. This might
include banded rates of stamp duty to favour more energy efficient
housing. While we recognise tax changes raise difficult political
issues, we do not believe that the UK will achieve its CO2
reduction targets without taking some political as well as investment
risks.
Transport
26. The DTI's Updated Energy Projections
show that by 2010 transport will become the largest sector emitting
CO2 in the UK and that it is the most rapid area of
increase. The Government needs to consider what further steps
can be taken in the transport sector to arrest this growth in
emissions. We were pleased to hear the Prime Minister argue in
his climate change speech on 14 September that aviation emissions
should form part of the EU Emissions Trading Scheme second phase.
THE EU AND
INTERNATIONAL DIMENSION
27. The UK Presidency of the EU and G8 will
enable the UK to help set the international climate change agenda.
Concerted international action is essential to tackle climate
change effectively. Furthermore without such action the international
competitiveness of the UK economy may be put at unacceptable risk.
The UK Government should use the EU Presidency to strengthen EU
efforts to deliver its own Kyoto protocol commitments and to ensure
that phase 2 of the EU ETS is more effective than phase 1. While
the UK Government and the EU should continue its efforts to secure
international ratification of the Kyoto protocol, the absence
of the US is a serious weakness. The G8 should provide an opportunity
to explore other approaches to engaging the international community,
including the US as the world's largest CO2 emitter,
in effective action.
30 September 2004
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