Select Committee on Environmental Audit Written Evidence

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 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.


  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 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.


  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.


  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.


  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

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