Memorandum submitted by Centrica
INTRODUCTION
Centrica was formed in 1997 when the former
British Gas plc was demerged to form BG Group and Centrica. In
the UK, it trades under its brand names, British Gas, Scottish
Gas and Nwy Prydain. It is the UK's largest energy supplier, supplying
gas and electricity to around 11 million gas and 5 million electricity
customers in the domestic sector and around 900,000 in the Industrial
and Commercial sector.
To support its supply businesses, Centrica owns
both gas and electricity production assets. In recent years, as
North Sea reserves have declined, Centrica has invested over £12
billion in new international gas supplies, helping underpin two
new pipeline projects, BBL and Langeled, and one new LNG facility
at Milford Haven. Its two gas contracts with Statoil and Gasunie
will deliver 10% of future UK gas.
British Gas is also market leader in delivering
energy efficiency advice and products to customers. Since 2000,
it has made nearly 3 million homes more energy efficient, equivalent
to 1 in 10 households in the UK. Around £200 million has
been invested over the last three years by British Gas in helping
customers save energy through our energy efficiency programme
(2002-05). We will be investing a further £500 million in
helping customers to save energy over the next three years (2005-08).
As part of an increasing environmental focus,
British Gas is also investing in microgeneration and micro renewables.
The company is working with Windsave on a domestic wind turbine
and trials are expected to begin in the new year. In partnership
with Microgen, British Gas will also be offering a microchp boiler
to domestic customers. British Gas has also signed a heads of
agreement with Ceres Power to develop the UK's first solid oxide
fuel cell boiler.
Centrica has a significant £750 million
renewable investment programme. A 26MW onshore windfarm in the
Glens of Foudland is already delivering power and is expected
to supply around 17,000 homes annually in Scotland with green
electricity. The company also has planning consents under Round
I developments for two offshore windfarms in Lynn and Inner Dowsing
which, when constructed, will be the largest windfarm in Europe.
Centrica is 50% owner of and 100% offtaker from
Barrow Offshore Wind, which is a 90MW offshore windfarm currently
being constructed in Morecambe Bay. First power is due to be delivered
by the end of 2005. This windfarm will produce enough electricity
to satisfy the needs of 75,000 customers.
Centrica is a major participant in the EU Emissions
Trading Scheme. Since the introduction of the scheme, Centrica
has traded 30 million tonnes of carbon dioxide, which represents
over 20% of the volume traded in the market.
CENTRICA'S
POSITION ON
NUCLEAR POWER
Centrica is a "technology neutral"
company. Our objective is to obtain cost effective, secure sources
of electricity for our customers, while playing our role in reducing
total carbon emissions. The very nature of the UK electricity
market means a mix of technologies is required to balance and
satisfy all the regulatory, economic, security of supply and environmental
demands placed on the electricity generation industry.
Consequently, Centrica has no fundamental issues
with nuclear generation which for many years has delivered secure
and carbon free electricity. However, nuclear build is not an
easy option and does not come without serious problems. These
include:
Public acceptance
For the public to support large scale new nuclear
build, it will be necessary to solve the outstanding long-term
nuclear waste disposal issue. It is for the government to ensure
that companies who own and operate new nuclear, do so in a safe
and effective manner.
Planning and build problems
Given the local and political issues that will
surround new nuclear build, we can expect the planning process
to be extremely complex, with no certainty that at the end of
the process consent will be given. The commercial risk is compounded
by the fact that a great deal of expense in building new nuclear
power stations is in the early stages of the project life cycle,
when the company involved in the development of the project faces
a number of costs associated with design, build and planning but
is not yet making a return on its investment. In the nuclear sector,
this period can take up to 10-15 years, compared to around 3-5
years for bringing online a new CCGT.
Waste and decommissioning
There is still no solution as to what to do
with the nuclear waste and we will have to wait until the newly
formed NDA delivers its proposed solution in 2006. Waste has significant
problems associated with it in terms of public opinion and long-term
safety.
Commercial
The time span involved to plan, build and make
a return on investment for new nuclear build is longer than other
forms of power and can take up to 50 years in total, (against
the total product life cycle of a CCGT of 25-30 years). Investors
would be wary of making such a long-term investment in any sector
let alone the UK energy market, which has been subject to numerous
policy changes over the last two decades.
To reduce the risk associated with new build,
the government would have to provide either upfront subsidy or
introduce a policy mechanism which forced retail suppliers to
source a proportion of their electricity supply from nuclear stations.
Both of these options would have a significant impact on the current
liberalised market. Combined with the Government's desire to increase
the Renewable Obligation to 20%, adding some form of nuclear obligation
on suppliers would mean that almost one half of the energy supplied
by private companies would be dictated by Government policy.
This would act to reduce the ability of suppliers
to compete with each other, thereby impacting the price consumers
pay, as well as reducing the potential of suppliers to source
the most efficient sources of fuel for power generation needs.
The impact of the EU emissions trading on the
development of less carbon intensive power production should not
be ignored. By rewarding electricity generators that produce less
CO2 for every unit of electricity produced, the EU
ETS builds the price of carbon into the power price and thereby
favours nuclear generation.
It is Centrica's view that in addition to a
decision on new nuclear build being made, real effort should be
made to ensure the success of the EU ETS which, if allowed to
work correctly, will deliver environmental savings at the lowest
cost to the consumer.
INQUIRY ISSUES
A. THE EXTENT
OF THE
"GENERATION GAP"
1. What are the latest estimates of the likely
shortfall in electricity generating capacity caused by the phase-out
of existing nuclear power stations and some older coal plant?
How do these relate to electricity demand forecasts and to the
effectiveness of energy efficiency policies?
1.1 Existing nuclear power stations in the
UK currently meet around 19% of electricity demand. However, there
has not been new build of nuclear power stations in Britain for
over 10 years and as most reactors close over the next 20 years,
this will leave only Sizewell B running until 2035.
1.2 Against this backdrop of declining nuclear
power, many coal stations will be closing as a result of the Large
Combustion Plant Directive (LCPD). With the implementation of
the Directive in 2008, coal stations that have opted out will
be allowed to generate for only a further 20,000 hours between
2008 and 2015, resulting in the closure of these plants by 2020.
1.3 Currently 40% of electricity generated
comes from gas. This could increase over time as some of the new
gas infrastructure comes on stream. Already the market is responding
to higher price signals and delivering new capacity. Two new CCGTs
have been granted planning consent for construction and more are
expected to follow.
1.4 The graph below shows Centrica's analysis
of the margin of power generation capacity over maximum demand.
Whilst margin is tight in the short term, it increases from 2008-12
as new gas infrastructure comes on stream and as renewables make
a greater contribution. However, assuming no new build, margin
begins to fall off by 2019-20 as the result of the closure of
the nuclear power stations and the effects of the LCPD.
1.5 Centrica believes the market will deliver
the necessary capacity when needed. However, it is important that
Government provides certainty in the regulatory framework going
forward. Investment decisions need to be taken over the longer
term but this is difficult in the current policy climate when
the future energy picture looks so unclear. We would therefore
urge the Government to give early clarification where possible
on Phase II of the EUETS and EEC3.
1.6 Energy efficiency will also need to
play an increasing role. However to date, the Government's record
on energy efficiency has been disappointing. The Energy White
Paper states that energy efficiency is the lowest cost carbon
abatement tool. Yet despite the fact that 25% of carbon emissions
come from the domestic sector, the Government has failed to introduce
incentives to encourage people to invest in energy efficiency.
Consideration should be given to how fiscal incentives—such
as stamp duty and council tax rebates in the domestic sector—and
capital allowances for the upgrading of existing commercial premises,
can be introduced to encourage the take up of energy efficiency
products.
1.7 British Gas and a number of Local Authorities
have been trialling a green council tax rebate. Under the incentive,
householders who install £175 of cavity wall insulation receive
up to £100 reduction off their annual council tax bill. The
"green home package" also provides a Home Energy Audit
as well as energy efficient light bulbs to the value of £20.
Initial response has been very encouraging, demonstrating an appetite
for energy efficiency home improvements that are linked to council
tax payments.
B. FINANCIAL
COSTS AND
INVESTMENT CONSIDERATIONS
2. What are the main investment options for
electricity generating capacity? What would be the likely costs
and timescales of different generating technologies?
2.1 Gas-fired combined cycle gas turbine
(CCGT) has been the technology of choice for new build generation
for the last 15 years and continues to be the most cost-effective
form of new generation. For a company like Centrica looking to
invest in new CCGT, a number of factors have to be considered
based on an assessment of growth in demand and supply side issues
and the difference between the market price of electricity and
its cost of production.
2.2 Another consideration is the treatment
of new entrants under Phase II of the EU Emissions Trading Scheme.
The EU ETS has the potential to be a very effective carbon abatement
tool. However, new entrants will be penalised if allowances are
not allocated on the same basis as incumbents.
2.3 In March this year, Centrica commenced
an invitation to tender process in order to evaluate the full
costs of developing a 1,000MW combined cycle gas turbine power
station, Langage located in Plymouth, Devon. The Invitation to
Tender is currently under way and we expect the evaluation of
the bid to be completed by the end of the year. However, a key
factor in determining whether Centrica proceeds with construction
will be an assurance from Government that new entrants will receive
allowances on the same basis as incumbents. This is essential
to preserve competition and to secure the commercial viability
of the project. We estimate that the effect of not receiving allowances
for Langage would mean we would have to go out into the market
every year to buy at least £30 million worth of allowances,
thereby putting us at a significant disadvantage to our competitors
who would of course get the majority of their allowances free.
2.4 Where available, the generating costs,
availability, reliability and efficiency of coal, nuclear, Gas
CCGT, offshore and onshore wind and wave and tidal can be found
below. The data shown are estimates only, and the performance
of individual sites may vary outside to the indicated data, but
it is representative of each industry, according to Centrica's
analysis.
|
Coal |
Nuclear |
Gas CCGT |
Offshore wind |
Onshore wind |
Wave and
marine |
| Cost of Generating p/kWh |
2.10-3.33 |
2.25-3.37 |
1.94-2.58 |
5.52-7.00 |
3.10-3.68 |
6.00-7.00 |
| Availability |
92% |
90% |
95% |
100% |
100% |
|
| Reliability |
84% |
71% |
90% |
96% |
97% |
|
| Efficiency |
36% |
30% |
45% |
38% |
30% |
|
| Estimated construction costs (£/kW) |
|
1,100 |
400 |
1,300 |
850 |
|
| Estimated ongoing operating costs (£/kW)—excluding fuel costs |
|
60 |
20 |
45 |
15 |
|
| Estimated fuel cost (£/MWh) |
|
3 |
27 |
0 |
0 |
|
| Estimated planning period |
|
5-7 years |
1-3 years |
2-3 years |
2-3 years |
|
| Estimated construction time |
|
5-10 years |
2-3 years |
1 year |
1 year |
|
Cost of Generation—The Royal Academy of Engineering—March 2004, University of Chicago—The Economic Future of Nuclear Power—August 2004, British Energy media statements.
Availability—Planned availability—Centrica estimate.
Reliability—Planned and unplanned availability—Centrica estimate.
Efficiency—Centrica estimate.
3. With regard to nuclear new build, how realistic and
robust are cost estimates in the light of past experience?
3.1 In the past, nuclear programmes in the UK and elsewhere
have significantly underestimated both the construction and lifetime
costs. In many cases, indirect costs such as insurance and underwriting
the back-end and fuel disposal liabilities have not been fully
accounted for. Prior to any reassessment of the nuclear option,
a comprehensive review of the true costs needs to be carried out.
4. What are the hidden costs (eg waste, insurance, security)
associated with nuclear?
4.1 Costs need to be explicit to ensure that the economics
of all generation technologies can be compared on a like for like
basis. This includes waste, full liability cover (and any government
caps must be transparent), training a new generation of technical
staff for large build program, licensing and approvals, design
selection (ie sunk costs), and a reflection of all capital costs
(ie charge of interest during construction).
5. How do the waste and decommissioning costs of nuclear
new build relate to the costs of dealing with the current nuclear
waste legacy, and how confident can we be that the nuclear industry
would invest adequately in funds ring-fenced for future waste
disposal?
5.1 There are a number of international models that have
tried to ensure funding has been set aside to ensure the back
end liabilities are dealt with. These need to be evaluated, and
ensure they are compatible to a liberalised market and deliver
on all obligations. The model would have to ensure the funding
is ring fenced and reflect the full lifetime costs and costs associated
with decommissioning and waste disposal.
6. Is there the technical and physical capacity for renewables
to deliver the scale of generation required?
6.1 Physical capacity is limited to sites being able
to obtain grid connection/capacity and planning permission. Windfarms
are considered to be the leading renewable technology. However
sites that are suitable for onshore windfarms are near saturation.
This has forced developers offshore which although has increased
costs will give access to better wind resource and allow construction
on a larger scale.
6.2 There are currently some limitations in the supply
chain with different countries competing for the same supply capacity.
It is therefore important that these suppliers have longer term
confidence in the demand for renewables in order to make the necessary
investment.
6.3 Technical capacity is limited by the intermittent
nature of wind. However as forecasting technology becomes more
sophisticated and the number of windfarms across the country grow
(creating a portfolio effect), power generated will become more
certain. It must be noted the amount of renewable generation capacity
necessary to displace the equivalent firm nuclear generation capacity
to the network, is substantially more and therefore considered
an inefficient substitute for nuclear generation.
6.4 Renewable generation also has difficulty following
on demand load requirements because of its intermittent nature
and inability to deliver large scale capacity.
7. If there is the capacity, are any policy changes required
to enable it to do so?
7.1 Any policy supporting renewables must provide an
expeditious and predictable planning process for renewable technology.
This ensures we can forecast and rely upon any capacity promised
for delivery.
7.2 Given the development times required for new technology
to become competitive, the Government must provide a stable environment
for economic support, with a focus on ensuring that any new techonogy
with potential is focused upon and developed as quickly as possible.
The Government must also ensure that such technologies can become
cost effective as quickly as possible.
7.3 Future capacity may be affected by a shortfall in
funding for Round II projects. It was the expectation of Government
and Industry that the costs of Round 2 offshore wind would fall
to £1 million/MW. This has not materialised for a number
of reasons including global rises in steel prices and problems
with early offshore farms under Round 1 which have made contractors
nervous. As a result, prices for subsequent developments have
risen, making companies reconsider their investments. Round II
projects are key to delivering the Government's renewable energy
targets and it is unlikely that the 10% by 2010 target can be
met without these projects going ahead.
8. What are the relative efficiencies of different generating
technologies? In particular, what contribution can micro-generation
(micro-CHP, micro-wind, PV) make, and how would it affect investment
in large-scale generating capacity?
8.1 Micro-CHP and micro-wind now offer real potential
with recent developments in technology. Microgeneration also has
the advantage that power can be generated locally thus reducing
loss in transmission. British Gas is already working with Windsave
on a domestic wind turbine with trials beginning later this year.
It is also working with Microgen on a microchip unit which is
expected to be available for sale from British Gas in 2007.
8.2 However, the key test will be the transition to mass
market which will be essential in terms of reducing costs. To
make this transition happen, a number of barriers need to be addressed,
including:
8.2.1 Cost constraints—the lack of demand
for microgeneration technologies has restricted the extent to
which the industry has been able to exploit scale economies and
learning effects in their production. Combined with the infancy
of the industry, and the significant expenditure on R&D associated
with product development, this means that the costs of these products
are currently very high and act as an economic barrier to their
uptake.
8.2.2 Information constraints—inadequate
promotion and provision of information on microgeneration and
the lack of a widely understood accreditation system for products
and installers, reduces the incentive for consumers to purchase
microgeneration products due to insufficient signals regarding
the quality and characteristics of these products.
8.2.3 Technical constraints—the lack of
metering arrangements that meet the needs associated with the
management of electricity distribution and the needs of the consumer,
and the lack of a comprehensive approach to dealing with the issues
surrounding the connection of microgenerators to the distribution
network, constitute barriers of a technical nature that could
be preventing take-up of microgeneration technologies.
8.2.4 Planning constraints—are currently
unclear as to what planning requirements are needed for installation
of domestic wind and solar power.
9. What is the attitude of financial institutions to investment
in different forms of generation?
9.1 Financing new nuclear is linked to the ability to
insulate construction/technology and decommission liability risks.
If the Government creates a clear stable operating framework,
the market will look at innovative financing solutions.
9.2 CCGT can be financed and constructed without government
intervention. As windfarms are a new industry, regulation is needed
to ensure financing is available for the industry. This is used
primarily to stimulate technological and manufacturing innovation.
Wind is expected to fall in cost over the long-term and be able
to compete with conventional technology, particularly as the EU
ETS successfully builds the price of carbon into power prices.
10. How much Government financial support would be required
to facilitate private sector investment in nuclear new build?
How would such support be provided? How compatible is such support
with liberalised energy markets?
10.1 If a stable policy framework is put in place by
the Government and certainty in forward power prices could be
given, then it is possible that nuclear could be economic. However,
price certainties on the timescales for new nuclear seem incompatible
with a competitive energy market. If the solution to this problem
was to move away from competitive market principles, Centrica
would not be in favour of this.
10.2 The long pay-back periods typical of new nuclear
plants may make it difficult to attract private sector investment.
11. What impact would a major programme of investment
in nuclear have on investment in renewables and energy efficiency?
11.1 The likely time at which first power would be delivered
from a nuclear programme is 10-15 years meaning that new nuclear
would simply be replacing current nuclear build which is coming
to the end of its life. This would not displace the need for renewables
which will continue to play an important part in the fuel mix.
11.2 However it is important that the Renewables Obligation
remains in place and any nuclear program or policy development
is independent of the Renewables Obligation.
C. STRATEGIC BENEFITS
12. If nuclear new build requires government financial
support, on what basis would such support be justified? What public
good(s) would it deliver?
12.1 Although nuclear is a zero carbon emitting technology,
when evaluating nuclear's contribution to the issue of carbon,
the mining and processing of fuel must also be considered. It
is a very industrial process.
13. To what extent would nuclear new build contribute
to security of supply (ie keeping the lights on)?
13.1 New nuclear build is one alternative in ensuring
security of supply, particularly given its compatibility with
a low carbon economy. However, the dynamics of energy procurement
are changing and with the decline of North Sea gas, the UK is
becoming more dependent on international sources of energy. As
such, the emphasis is gradually shifting from having a diversity
of fuel types to having diversity of supply of fuel.
13.2 This is especially so with gas. As North Sea reserves
decline we are looking further afield for our gas, from countries
such as Nigeria, Algeria and Russia as well as Norway and the
Netherlands where sources are plentiful. Global LNG provides important
diversity for Europe.
13.3 New infrastructure is being built to bring gas to
the UK, including two new pipelines—BBL and Langeled. Capacity
in the interconnector UK has been trebled and three new LNG import
terminals are being built.
13.4 Yet capacity does not guarantee supply. As the UK
becomes more dependent on transporting its gas though mainland
Europe it is increasingly important that European energy markets
are liberalised so that the UK can get access to pipelines. Centrica
continues to lobby both the UK Government and the EU Commission
to put pressure on National Government's to implement the Energy
Markets Directive (2003) and liberalise their markets.
14. In respect of these issues how does the nuclear option
compare with a major programme of investment in renewables, microgeneration,
and energy efficiency? How compatible are the various options
with each other and with the strategy set out in the Energy White
Paper?
14.1 There are clearly issues around waste management
and decommissioning which are exclusive to nuclear and complex
planning process can create delay in construction. However, successful
new build that does not over-run on costs, as all previous nuclear
construction programmes have, will add to diversity and security
of supply and deliver low carbon power generation.
14.2 It is important though that any decision on nuclear
new build does not overshadow or minimise the contribution that
can be made from renewables, microgeneration and energy efficiency
which have a major role to play in meeting energy policy goals.
It is widely acknowledged that energy efficiency is the lowest
cost option in delivering the Government's low carbon policy and,
together with renewables and microgeneration, should remain a
core part of Government's energy policy.
D. OTHER ISSUES
15. How carbon-free is nuclear energy? What level of carbon
emissions would be associated with (a) construction and (b) operation
of a new nuclear power station? How carbon-intensive is the mining
and processing of uranium ore?
This has been addressed under earlier points.
16. Should nuclear new build be conditional on the development
of scientifically and publicly acceptable solutions to the problems
of managing nuclear waste, as recommended in 2000 by the RCEP?
16.1 Centrica is not an expert in this area and does
not have detailed figures on carbon intensity of construction,
operation and uranium mining. We agree that nuclear power should
not be declared carbon free without a detailed analysis of the
carbon emissions from construction, operation and mining. However
this should be a level playing field. The emissions should be
examined by comparison to those involved in coal and gas-fired
generation.
3 October 2005
| 
