Select Committee on Environmental Audit Written Evidence

Memorandum submitted by Centrica


  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 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.


  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.



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.


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
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.


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.


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

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