Memorandum submitted by Scottish and Southern
Energy
Scottish and Southern Energy (SSE) welcomes
the Committee's decision to launch an inquiry to examine the options
for investment in meeting future requirements for new electricity
generating capacity and is grateful to have this opportunity to
submit written evidence to the Committee.
SCOTTISH AND
SOUTHERN ENERGY
SSE is involved in the generation, transmission,
distribution and supply of electricity and in the storage, distribution
and supply of gas.
It is the second largest generator of electricity
in the UK and the largest generator of electricity from both non-nuclear
and renewable sources. SSE owns and operates almost 10,000MW (megawatts)
of electricity generating capacity, including around 4,300MW of
gas-fired capacity, 4,000MW of coal-fired capacity and around
1,400MW of hydro-electric power stations and wind farms. In addition,
SSE has interests and investments in initiatives to generate electricity
from biomass, "micro" wind turbines, deep-water offshore
wind turbines, tidal power and solar photovoltaics.
SSE is also the third largest supplier of electricity
and gas in the UK, providing energy to over six million customers
in England, Scotland and Wales.
A. THE GENERATION
GAP
This paper looks at the impact of growing and
falling demand for electricity over the period to 2020. It should
be borne in mind, however, that the Energy White Paper's target
of a 60% reduction in carbon dioxide emissions by 2050 presumes
a 50% increase in the demand for heat, light and power. This underlines
the scale of the task ahead.
The UK currently consumes around 350TWh (terawatt
hours) of electricity each year, from around 76GW (gigawatts)
of generating capacity.
Growing demand
If demand for electricity grows at its current
rate by 1.5% per year for the next 15 years, the UK will be consuming
around 400TWh of electricity each year by 2020. It is reasonable
and prudent to assume that if coal-fired and nuclear power stations
are phased out as expected, the UK will have electricity generating
capacity comprising around 56GW in 2020, enough to produce just
over 200TWh of electricity—barely half of the requirement
if demand grows—and this assumes that there will be growth
in the capacity of renewable generation in particular.
Falling demand
If, through a radical set of new measures, demand
for electricity falls by 1.5% per year for the next 15 years,
the UK will be consuming around 280TWh of electricity each year
by 2020—which still leaves a shortfall of around 80TWh of
electricity production.
In summary, the UK is faced with a huge generation
gap. The successful implementation of energy efficiency measures
to reduce demand for electricity could reduce the size of that
gap, but a substantial shortfall would still remain.
This being so, it is vital that the public becomes
fully aware of the position. Amongst other things, this will then
allow a fully informed analysis of issues surrounding the development
of wind farms (and possibly nuclear power in due course). Closing
the generation gap will require a major programme of construction
in power generation, which will test fully public reaction. At
the same time, measures to reduce demand for energy require major
behavioural changes on the part of every citizen of the UK.
It is also important that every policy decision
is tested against its impact on security of supply. One example
illustrates the point. The so-called "closure" rules
on the EU Emissions Trading Scheme could lead to power plant being
allowed to keep all of its emissions allowance after closure,
thereby providing a perverse incentive to coal-fired stations
to close.
B. FINANCIAL
COSTS AND
INVESTMENT CONSIDERATIONS
Given the size of the generation gap that is
set to emerge over the next 15 years, the key priority must be
to invest in technologies capable of producing significant amounts
of electricity while ensuring the UK remains on a path to a 60%
reduction in its carbon dioxide emissions by 2050. At the same
time, as the Energy White Paper acknowledged in 2003, the best
way of maintaining energy reliability will be through energy diversity.
Main technology options
Setting aside financial and other considerations,
this priority implies investment in four main electricity generation
technologies:
— wind power, including onshore and offshore;
— combined cycle gas turbines, which consume
relatively low amounts of primary fuel for each unit of electricity
generated;
— gas- or coal-fired plant which has the
capability to capture carbon dioxide emissions; and
— nuclear power.
Of these technologies, onshore wind power and
combined cycle gas turbines are clearly "proven". Nuclear
technologies are more controversial, and part of the debate around
whether the UK should invest in new nuclear power stations would
undoubtedly centre on the precise technology to be adopted. For
example, the third generation of reactors is generally regarded
as being safer and more efficient than their predecessors. There
is no doubt that increased efficiency will help with waste issues
(see below), which will remain a key factor if investment in the
nuclear sector is to be revived. At present, very few are being
constructed elsewhere in the world and they may, in due course,
be superseded by a fourth generation of reactors, which is currently
undergoing design and testing.
Offshore wind power clearly has potential. Indeed,
SSE is working with Talisman Energy UK on the development of what
could be the world's first deep water offshore wind farm, 25km
off the coast of Scotland, in the Moray Firth. Nevertheless, the
difficulties should not be under-estimated. The UK's ambitious
programme for the development of offshore wind farms, as set out
in July 2003, is unlikely to be fulfilled, partly because the
costs of offshore wind developments have risen. There remain,
therefore, fundamental financial and technical issues which are
likely to restrict the part that offshore wind can play in meeting
the UK's energy needs in the foreseeable future. Additional support,
probably capital, is likely to be necessary for offshore wind
farms, although it is crucial that any such support does not distort
the development of proven renewable technologies.
As far as the capture of carbon dioxide is concerned,
SSE and three partner companies have just commenced engineering
design of the world's first industrial scale project to generate
"carbon free" electricity from hydrogen. The project
would convert natural gas to hydrogen and carbon dioxide gases,
then use the hydrogen gas as fuel for a 350MW power station and
export the carbon dioxide to a North Sea oil reservoir for enhanced
oil recovery and ultimate storage. While each of the component
technologies making up the project is already proven, their proposed
combination in this project is a world first. The full project
would require total capital investment of around £400 million.
It would also require an appropriate policy and regulatory framework
that encourages the capture of carbon dioxide from fossil fuel-based
electricity generation and its long-term storage.
SSE is also party to DTI Project 407, in collaboration
with others, which is aimed at assessing the potential to retrofit
super-critical technology to existing coal-fired power plant.
This technology increases combustion efficiency, thereby reducing
carbon dioxide emissions, and in addition can also be made ready
to capture emissions of carbon dioxide. Any new-build coal-fired
plant would probably be based on super-critical technology.
In summary, there are in practice very few proven
technology options for investment in the low carbon production
of electricity. It is, therefore, vital that there is in place
adequate support to enable investment in these technologies to
take place.
Other technology options
The costs of electricity generation capacity
fall into two categories: the construction costs and the ongoing
operational costs, including fuel costs:
The costs—capital
Typical new build costs for various technologies
(per kilowatt of installed capacity) range from around £450
for combined cycle gas turbine to around £800 for onshore
wind, around £900 for gas with carbon capture, and around
£1,500 (or more) for nuclear.
Any capital cost estimates such as this have
to be treated with a degree of caution. Given the specialist nature
of such construction projects, they are particularly vulnerable,
for example, to increases in the costs of labour and materials.
The degree of caution with which capital cost
estimates should be treated is obviously greater where technologies
are not proven. This means that the only technologies where costs
can be regarded as being reasonably certain at the present time
are combined cycle gas turbine, coal-fired plant and onshore wind.
The costs—operational
The operational costs of fossil-fuelled power
plant are dominated by the fuel cost. Any commentary on these
is, essentially, a forecast of future fuel prices. The higher
fossil fuel costs become, the more economic renewable and nuclear
power become. As any electrical system requires a mix of technology,
the cost relativity between coal and gas will determine the balance
between these two. While any investment case must take fixed annual
costs of manpower, rates and electricity grid charges into account,
they are often more likely to influence a decision to close a
power station than a decision to invest in one.
As far as nuclear power is concerned, the waste
processing costs associated with the fuel cycle are as uncertain
as the capital costs—and account also has to be taken of
decommissioning. The relatively low cost of fuel makes this operational
cost relatively less important than in fossil generation plant.
In assessing nuclear power, however, the costs of disposing of
radioactive waste and decommissioning are crucial in any assessment
of nuclear economics.
The timescales
It is becoming increasingly difficult, and certainly
much more time consuming, to secure consent to build any electricity
generating capacity in the UK. Even relatively uncontroversial
wind farms now take around five years to complete the development,
environmental assessment, planning, construction and commissioning
processes. It would take at least a similar period to build a
power station featuring combined cycle gas turbines. This being
so, it is anyone's guess how long it would take a proposal for
a nuclear power station to overcome each of these significant
hurdles.
At present, the only types of electricity generation
capacity which are being developed on a significant scale are
wind farms and a few hydro-electric power stations. This investment
is encouraged by the Renewables Obligation, providing an incentive
to build capacity not simply for environmental reasons, but to
help in keeping the lights on by providing increased diversity
and security of supply. The Renewables Obligation is, and should
remain, central to the delivery of zero carbon generation capacity
in the UK.
There is no other electricity generating capacity
being constructed in the UK, although consent has been granted
for the development of some gas-fired power station capacity.
A critical issue in the UK is the length of
time it is taking for any power generation development to receive
consent and be commissioned. Given the generation gap described
above, it is critical that these timescales are shortened as much
as possible.
The network
The fact that only electricity schemes using
renewable sources are currently being built in the UK has led
to questions about the impact on the management of the electricity
networks of a significant increase in the number of wind farms
in particular. There are no technical reasons why a substantial
proportion of the UK's electricity requirements—certainly
up to 20%—cannot be delivered by wind. While the level of
investment needed in electricity networks to accommodate this
new source of power will be substantial, it will not be unprecedented.
In view of the generation gap described above,
it is clearly critical that the electricity network upgrades that
are necessary to accommodate new sources of electricity receive
consent within a reasonable timescale. In practice, however, it
seems that delays to network developments are even greater than
for generation.
The attitude of financial institutions to investment
in different forms of generation
The attitude of financial institutions to any
kind of investment is determined by two principal factors:
— the availability, and cost, of capital
for investment; and
— a risk/reward analysis—the greater
the financial risk being undertaken, the greater must be the potential
reward.
Plainly, given the history of the nuclear industry
in the UK, not least events at British Energy in 2002, investment
in nuclear power would be placed at the high-risk end of the spectrum.
Electricity is a long-term business: electricity
generation plant is generally built to last for 25-50 years. The
risk/reward analysis needs to assess: the likely costs of primary
fuels over the long term; trends in prices for the power produced;
and possible developments in the public policy arena. In terms
of the latter point, three key developments—the Large Combustion
Plant Directive, the EU Emissions Trading Scheme and the Renewables
Obligation—have occurred in a single five-year period. This
is a period in which there has been a dearth of investment in
generation capacity other than renewables.
All of this makes any decision to invest in
electricity generation a very complex one. It is also worth bearing
in mind that there is no historic precedent in the UK for resolving
generation production requirements on this scale by means of a
market-led approach.
The Renewables Obligation has been very successful
in leading to investment in wind farms, hydro-electric schemes
and in the newer, developing technologies. A key test of any public
policy development impacting on the energy sector is that it should
not automatically lead to additional risks for existing players
in the electricity generation sector. A stable public policy framework
is essential to an industry that operates on such lengthy timescales.
There needs to be a period of respite from further policy or Directive
overload.
In this context, it is vital that if the UK
concludes there are strategic benefits to be derived from investment
in nuclear power, that investment is not encouraged by means which
distort the wider electricity generation market and discourage
investment in other technologies. In this respect, sentiment is
often as critical as substance. If, at any stage, there appears
to be any dilution of the government's commitment to renewable
energy, investment is likely to suffer—which will make the
problem of the generation gap even more pressing.
C. STRATEGIC
BENEFITS
Existing nuclear power has usually provided
a relatively inflexible, baseload generation. Its main advantages
lie in the fact that it provides fuel diversity and does not contribute
emissions of greenhouse gases. Indeed, this advantage is now recognised
via the EU Emissions Trading Scheme. There is, therefore, the
potential for nuclear power to form part of an integrated energy
policy.
At the same time, the disposal of radioactive
waste presents one of the main barriers to the development of
nuclear power and it is likely that a solution to this problem
must be identified before any new-build programme for nuclear
power stations is implemented.
The other major waste issue that has dogged
nuclear power is the large cost of decommissioning highly radioactive
equipment. The Nuclear Decommissioning Agency (NDA) is now responsible
for managing the decommissioning of all of the UK's existing nuclear
facilities. It is clear that the responsibility for and funding
arrangements for decommissioning any new nuclear reactors would
have to be clearly established before a new programme of nuclear
development could be undertaken.
All of this means that the advocates of nuclear
power have to be able to demonstrate that, including decommissioning
and waste costs, it would be economic for investment in the industry
to take place.
It is also vital, as stated above, that any
such investment is not at the expense of the other technologies
which can contribute to material reductions in emissions of greenhouse
gases, including those which are capable of leading to a significant
reduction in the demand for electricity.
D. OTHER ISSUES
There are two other issues which need to be
considered very carefully before developing and embarking on any
programme of support for new nuclear power: the level of carbon
emissions associated with the construction, operation and decommissioning
of a new nuclear power station; and public confidence in the nuclear
industry and, in particular, in the safety of the industry.
On the first point, emissions of carbon during
these processes are far from insignificant. On the second point,
it is clear that nuclear reactors are generally becoming safer
than they were, which is just as well given that they will have
to be protected against technical failure, human error and terrorism,
amongst other things.
E. SUMMARY
In summary, SSE urges the Committee to consider
the following key points in its assessment of how to "keep
the lights on":
— a very substantial "generation gap"
is emerging—and by 2050, virtually all of the country's
electricity generation capacity will have to be replaced;
— decision to begin to close the gap must
be made as soon as possible;
— the key priority must be to invest in
technologies capable of producing significant amounts of electricity
while ensuring the UK remains on a path to a 60% reduction in
its carbon dioxide emissions;
— additional support is likely to be necessary
for all the new technologies;
— the successful development of "carbon
capture"-type technologies will require an appropriate regulatory
and policy framework, as well as financial support;
— it is becoming increasingly difficult
to secure consent to build any electricity generating capacity
in the UK and it is critical that these timescales are shortened
as much as possible;
— it is critical that the electricity network
upgrades which are required to accommodate new sources of electricity
receive consent within a reasonable timescale;
— if the UK concludes there are strategic
benefits to be derived from investment in nuclear power, investment
must not be encouraged by means which distort the wider electricity
generation market and discourage investment in other technologies;
and
— the advocates of nuclear power have to
be able to demonstrate that, including decommissioning and waste
costs, it would be economic for investment in the industry to
take place.
There are two other critical points that the
Committee will wish to address.
First, it is vital that government policy overall
is designed to maximise reductions in carbon dioxide emissions
across all sectors, and not just electricity generation. In other
words, the burdens imposed by the Emissions Trading Scheme should
be such that management in every sector is given the impetus and
incentive to tackle carbon dioxide emissions.
Second, there is clear potential for policy
in microgeneration—such as rooftop wind turbines and solar
photovoltaics—to be developed so that it is seen as a demand-side
measure contributing to lower energy consumption targets. SSE
has submitted a response to the government's recent consultation
on its strategy for the promotion of microgeneration and the low
carbon buildings programme. It supports fully the government's
aim of developing a more strategic and co-ordinated approach across
government in order to help microgeneration technologies to fulfil
their undoubted potential—and would be happy to share its
response to the consultation with the Committee if that would
be helpful.
23 September 2005
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