Memorandum submitted by the Association
of Electricity Producers
The Association's members include large, medium
and small generating businesses, representing between them virtually
all of the generating technologies used in the UK and the majority
of the UK's power production. Members operate in a competitive
electricity market and they have a keen interest in its success—not
just in delivering power at the best possible price, but in meeting
environmental requirements and expectations in respect of security
and reliability of supply.
The Association welcomes the opportunity to
respond to the Environmental Audit Committee's inquiry.
THE "GENERATION
GAP"
The Association takes account of the findings
of, for example, the Secretary of State for Trade and Industry's
Annual Report to Parliament on Security of Gas and Electricity
Supply in Great Britain, National Grid's Seven Year Statement
and its Winter Outlook Report and the work of the Joint Energy
Security of Supply Working Group ("JESS"). We do not
address in closer detail the idea of a likely shortfall in electricity
generating capacity because, through the operation of the wholesale
electricity market, we expect new generating capacity to be brought
on line to replace power stations that are taken out of service.
The Committee should note that the industry wants to provide new
generating capacity, but that the timing of new investment is
influenced not only by fundamental market signals, but also by
the way in which electricity companies judge political and regulatory
risk. Today, such risks are particularly significant in the area
of environmental policy.
The mix of generation technologies can be expected
to change in the future. The schedule for phasing out nuclear
power stations, for example, is a matter of public record, although
it may be subject to amendment depending on the outcome of applications
for life extensions for specific plant (eg the recent case of
Dungeness B). The future for coal plant is less easy to forecast
because it will depend partly on the way in which Government implements
the Large Combustion Plant Directive (LCPD) from 2008; the generating
industry has been waiting since November 2004 for the European
Commission to comment on the Government's proposals for implementation
of the LCPD. Plant that opts out of the LCPD can run for a maximum
of 20,000 hours between 2008 and 2015, but must close after that.
The future development of the climate change agenda at UK and
EU level and in particular, uncertainty about the way in which
Phase 2 of the European Union Emissions Trading Scheme (EUETS)
is to be implemented, also have a major influence on companies'
investment prospects.
Electricity demand appears to be growing at,
typically, about 1.5% per annum and this is roughly equivalent
to the output of an extra medium to large power station, each
year. Rising prices and energy efficiency policies may temper
demand, but, we note the forecasts of rising demand, reflected
by system users' expectations, in National Grid's Seven Year Statement
2005.
FINANCIAL COSTS
AND INVESTMENT
CONSIDERATIONS
An ageing portfolio of coal and oil fired power
stations and the steady retirement of nuclear stations suggest
a massive requirement for investment in new power stations in
the next 10 years. If the UK is to make effective progress toward
its aims under the Kyoto agreement and its 2020 and 2050 goals,
low or zero carbon emissions technologies will be required for
the new power stations. There is a wide range of technology options
available, but, in today's market and with present emissions reduction
measures, very few of those options make business sense to companies
that might wish to invest in low carbon electricity production.
One prominent option for new power plant is
the Combined Cycle Gas Turbine (CCGT). CCGTs are often the most
economic choice and they have contributed to significant cuts
in emissions in the past, but, replacement of nuclear with gas-fired
plant has and will continue to contribute to rising emissions
and also lead to a high degree of UK economic dependence on gas.
That outcome would make it more challenging to achieve the Government's
other energy policy goals.
Companies are already investing substantially
in renewable energy technologies, supported by the Government's
Renewables Obligation, but many would like to consider a wider
range of options to achieve greater reductions in emissions and
to diversify their portfolio of generating plant. This could include
new coal and gas plant with carbon capture and storage, new nuclear
capacity, new renewable technologies such as wave or tidal power
and the increased use of biomass.
Since the privatisation of the UK electricity
industry some 15 years ago, power stations have been funded not
by public corporations underwritten by Government, but by private
investors. The UK has a remarkably open and competitive market,
but, the way in which Government and regulators exercise their
influence over it is critical to investors' confidence—it
affects their willingness to make the necessary substantial, long-term
investment in the UK's generating industry. Capital will be deployed
where returns look most attractive and where risks are considered
to be manageable. Those who invest in the market choose fuels
and technologies that they expect to be competitive and capable
of operating within the constraints set by Government and regulators.
Present policies suggest that, in the period to 2015, the majority
of new generating capacity will comprise CCGT and offshore wind.
The generating industry requires an environment
in which companies can innovate and invest in a range of low carbon
technologies which reduce emissions, maintain security and deliver
competitive prices. In that context, the present range of options,
which is largely dictated by short term costs, makes the choice
of technologies somewhat narrow. A wider range of options could
cut the cost of reducing carbon emissions and help maintain security
of supply through greater diversity of fuels and technologies.
To that end, the UK's competitive energy markets should be complemented
with durable, market-based policy mechanisms designed to provide
investment incentives to meet the Government's goals. Those incentives
should have timescales consistent with the periods over which
investment returns are made in the electricity generating industry.
The Renewables Obligation is proving successful
in promoting investment in renewable energy and stability in that
mechanism is crucial to continued investment. Its status as a
primary policy instrument should be underlined by Government.
Government also needs to continue to address obstacles to the
growth of renewable energy such as planning permission and the
availability of suitable electricity distribution network infrastructure.
THE ATTITUDE
OF FINANCIAL
INSTITUTIONS TO
INVESTMENT IN
NEW NUCLEAR
POWER
The financing of nuclear power is more challenging
than that of most other generating technologies. Nuclear projects
face a stringent and time consuming process for planning consent
and approval of reactors, high development costs and a lengthy
timescale for construction. In a capital market where payback
periods are critical, these amount to major obstacles. There are
steps that the Government should take to remove or reduce these
barriers, so that new nuclear power can compete fairly with other
technologies for private investment capital. The Government should:
— make clear that it would welcome
the construction of new nuclear power stations;
— ensure that planning consents for
such stations are subject to the same considerations that would
face an application for any other large, industrial facility—thereby
eliminating the risk of additional delay for new nuclear power
stations, reducing development costs and the possibility of delay
in returns to investors;
— minimise the time taken for licensing
of new reactors by making clear that technology which had been
the subject of a robust approval process elsewhere (perhaps within
the EU) would not be subject to re-examination in the UK—for
example by ex-ante licensing of designs;
— ensure that there are no unnecessary
barriers to the future use on commercial terms of existing nuclear
power generation sites; and
— decide, as soon as possible, on a
solution for the longer-term disposal of nuclear waste.
If new nuclear power is to be developed in the
UK, the Association would expect it to be financed on a commercial
basis which, other than through normal competition, did not disadvantage
investments in other generating businesses.
GOVERNMENT FINANCIAL
SUPPORT FOR
NUCLEAR NEW
BUILD
The Association considers that it would be beneficial,
in terms of diversity, security of supply and reduction of greenhouse
gas emissions, if nuclear power were to continue to form an important
part of the UK's fuel mix for electricity production, but, the
Association has not made any proposals for Government to give
financial support for new nuclear power.
HOW THE
NUCLEAR OPTION
COMPARES WITH
A MAJOR
PROGRAMME OF
INVESTMENT IN
RENEWABLES, MICROGENERATION,
AND ENERGY
EFFICIENCY
The Government must assure itself that its Climate
Change Programme (CCP) provides a coherent suite of policy instruments
to define the UK's strategic approach to climate change, taking
account of the objectives set out in the Energy White Paper. The
Association will expect the CCP to give sufficient clarity about
the future of the carbon market to reduce investment risks, particularly
for large capital projects. We await the publication of the results
of the CCP Review at the end of the year with keen interest.
NUCLEAR WASTE
As stated above, the Government should decide,
as soon as possible, on a solution for the longer-term disposal
of nuclear waste.
21 September 2005
| 
