Select Committee on Environmental Audit Written Evidence


Memorandum submitted by E.ON UK

INTRODUCTION AND KEY POINTS

  1.  E.ON UK is the UK's second largest retailer of electricity and gas, selling to residential and small business customers as Powergen and to larger industrial and commercial customers as E.ON Energy. We are also one of the UK's largest electricity generators by output and operate Central Networks, the distribution business covering the East and West Midlands. We are also a leading developer of renewable plant.

  2.  E.ON UK is part of the E.ON Group which is the world's largest privately owned energy service company. In addition to the UK, the Group has electricity and gas interests in Germany, Central and Eastern Europe, Italy, the Netherlands, Scandinavia, the USA and Russia. E.ON owns or has interests in 23GW of nuclear capacity, located in Germany and Sweden.

  3.  The electricity industry requires a massive investment in capital over the next decade to deliver reductions in carbon dioxide emissions, energy supply security and affordable prices. By 2015 up to 8GW of nuclear (subject to life-extension decisions) and 19GW of coal and oil-fired plant will need to be replaced.

  4.  Much of this plant will need to be replaced with low or zero carbon generating plant if the UK is to make effective progress toward its 2020 and 2050 goals for reducing CO2 emissions. We and other energy companies are already investing in renewable technologies, and are considering further combined cycle gas turbine (CCGT) construction. However, replacement of all closing plant by CCGTs would not be consistent with delivering the Government's target of a 60% cut in CO2 emissions by 2050, given that much capacity built in the next decade is likely to be still operating in 2050. We estimate that, under this scenario, CO2 emissions from the power sector in 2020 would be approx.150MtC or only 5% lower than in 2004. It would also significantly increase the UK's future dependence on gas imports.

  5.  We believe that, to achieve the 2050 target, a range of low carbon technologies will need to be deployed to diversify technical and economic risks. The wider the range of options available to companies, the lower the cost is likely to be to the UK of achieving its CO2 emission reduction targets. In this context, we do not see the pursuit of renewable technologies and new nuclear as mutually exclusive alternatives; they both have the potential to contribute to achieving national and global objectives.

  6.  We will therefore want to consider a wider range of investment options to achieve reductions in emissions and to diversify our portfolio of generating plant. These options could include coal and gas plant with carbon capture and storage, nuclear plant as well as new renewable technologies such as wave or tidal power and the increased use of biomass.

  7.  Government must create an environment in which companies can innovate and invest in a range of low carbon technologies. The Government needs to act soon to make additional options available. We believe that the Government's role is to:

    —  provide the right market framework to achieve government objectives within a competitive market environment. This should increasingly rely on long term broad ranging market based mechanisms, such as the EU emissions trading scheme, as the main driver to incentivise the most economic low carbon investments, encourage innovation in energy supply and support UK competitiveness;

    —  aim to achieve a broad international commitment to action to tackle climate change which shares responsibility across the major emitting economies; with any post-2012 agreement being consistent with investment timescales—10-15 years could be appropriate;

    —  resolve specific policy, legal, or institutional constraints which are limiting the choice of technologies;

    —  encourage the development and demonstration of emerging technologies with capital grants or similar support.

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?

  8.  In electricity, up to 8GW of nuclear (depending on the extent to which the lives of nuclear plants can be extended) and up to 19GW of coal and oil-fired generating plant, or about one third of total UK power plant, will close by 2014-15. This capacity will need to be replaced and about 7GW of additional capacity will need to be built to meet demand growth to maintain plant margins (the additional amount of capacity needed to help ensure demand can be met, allowing for plant breakdown and demand uncertainties) at current levels of around 20%. This assumes average growth in demand met through the Great Britain transmission system of 0.8% per annum, consistent with NGT's own base case in their seven year statement.

  9.  Bearing in mind that many of these plants may have operating lives of around 35 to 60 years, much of this plant will need to be replaced with low or zero carbon generating plant if the power sector is to contribute to a continued reduction in CO2 emissions in line with the Government's objective of reducing emissions by 60% by 2050 from 1990 levels.

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?

    —  What are the likely construction and on-going operating costs of different large-scale technologies (eg nuclear new build, CCGT, clean coal, on-shore wind, off-shore wind, wave and tidal) in terms of the total investment required and in terms of the likely costs of generation (p/kWh)? Over what timescale could they become operational?

  10.  Subject to developments in the market and the regulatory environment, the large-scale options that generators are likely to consider for the UK over the next decade are: gas-fired CCGTs, coal-fired capacity using clean coal technologies with or without carbon capture and storage, renewables (principally on-shore and offshore wind) and nuclear plant.

  11.  There may be additional niche opportunities for gas-fired co-generation and biomass, for example, but these are not likely to provide large scale development opportunities.

  12.  The estimated life-time cost of different technologies is each dependent on a range of estimated input prices and business risks. Therefore, the table below shows a range of lifetime cost estimates for plant commissioned in the next decade:


Generation Type Cost range p/kWh (2005 prices)
CCGT 2.2-4.9
Coal with FGD & SCR2.8-5.2
Carbon capture & storage3.3-5.6 gas
3.9-5.1 coal
Wind  Onshore
Offshore
4.2-5.2
6.2-8.4
Excludes costs of back-up capacity
Nuclear2.5-4.0



  13.  These estimated costs exclude any benefits which might arise from Government support, fiscal or regulatory measures. The following explanation may be helpful in understanding the ranges provided:

    (a)  CCGTs:  The expected cost of generation from new CCGTs is most heavily influenced by the future cost of gas and carbon dioxide emissions: the figures are based on a gas price in the range 20-40 p/therm gcv and carbon, 0-50

    /tCO2. The EU ETS is at a very early stage of development and there is currently no certainty that it will exist beyond 2012, which justifies the 0

    /t lower bound for investments commissioning around that date. At current gas prices of above 50 p/therm, CCGTs would be more expensive than the top of the range shown.

    (b)  Coal-fired plant:  We expect the cost of international coal to be less volatile than gas and so, for simplicity, have estimated the cost of conventional coal plant at a constant coal price of 1.4 £/GJ ncv, but the same range of carbon prices. Conventional coal produces approximately twice as much carbon dioxide as CCGT plant per kWh.

    (c)  Coal or gas generation with Carbon capture and storage: Commissioning large scale carbon capture and storage plant may become a real possibility in the next decade. This could be done either by fitting post combustion capture equipment to conventional gas or coal plant, or by building gasification plant of a variety of types. The technology for this is not yet proven at large scale and therefore the cost range reflects the uncertainties of the cost and reliability of such developments. The legal and regulatory environment does not yet exist for off-shore storage of carbon dioxide and this would need to be settled before large scale investment was committed. Carbon capture and storage is only likely to be deployed if there were to be a belief in the long-term market value of avoiding carbon emissions.

    (d)  Wind:  On-shore and off-shore wind developments will continue to be deployed provided they are supported by the Renewable Obligation and capital grants, as at present. The cost range above reflects the variability between higher cost offshore sites and those onshore, before these support mechanisms. We expect the cost of sites to increase over time as the best sites are used first, but the costs offshore of equipment and installation should reduce as more experience is gained and larger units are installed. The economics of wind power are heavily influenced by the wind resource available at particular locations. Wind is intermittent and hence not directly comparable with other large-scale generation alternatives without including the cost of either back-up capacity or energy storage. The cost of supplementing wind capacity with additional resources is not that material at the current low levels of penetration, but would increase if it were to become a more significant proportion of the total system capacity.

    (e)  Nuclear:  The estimated cost of new nuclear developments is chiefly influenced by the uncertainties surrounding planning and regulatory processes as these affect expected capital cost, development and construction schedule and the competitiveness of the plant supply market. If the Government is able to mitigate the effect of these uncertainties promptly and effectively, then it would be feasible to commission new nuclear plant in about 10 years. The timing of new build would also be heavily influenced by price expectations in the gas and carbon markets.

—  With regard to nuclear new build, how realistic and robust are cost estimates in the light of past experience? What are the hidden costs (eg waste, insurance, security) associated with nuclear?   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?

  14.  Recent experience in Finland suggests that it is feasible to plan, license and begin construction of new nuclear plant to internationally accepted standards in a cost-effective manner within a 10 year period. Whether this experience could be repeated in the UK would be heavily dependent on the planning and regulatory processes which might be put in place to support a new build programme. Because of high first-of-a-kind costs and operational overhead, new nuclear build would be more cost effective if a programme of 8-10GW were to be built.

  15.  The accuracy of cost estimates for new nuclear plant is difficult to confirm until designs have been licensed for operation in the UK and the construction cost is firmed up in the light of tenders from suppliers. This is particularly true for new designs which have yet to be deployed commercially. The certainty of costs estimates could be improved if the licensing process permits progressive comfort to be gained that standardized international designs from competing suppliers will be able to be licensed for operation in the UK. A planning and licensing process which permits effective competition between suppliers should reduce final capital costs. A planning and licensing process which imposes unique design requirements in the UK would inevitably increase costs.

WASTE MANAGEMENT AND DECOMMISSIONING COSTS

  16.  Discounted waste management and decommissioning costs should make up a relatively small proportion of the total cost of electricity from new nuclear plants as these are designed with the aim of minimizing these costs over a 60 year operating life. However, investors will wish to be assured that a secure route for the safe disposal of long-lived high-level waste will exist at the end of a plant's life and that the Government will ultimately accept ownership and responsibility for such waste.

  17.  The costs of dealing with the UK's legacy waste and the decommissioning of existing nuclear facilities are expected to be much higher than for new build because of the early entry of the UK into a civil nuclear programme and the technology choices made in the past: eg Magnox, reprocessing.

  18.  Low level waste disposal would arise over the life of the plant and is expected to be disposed of in a similar manner to at present; costs would be met on a continuing basis.

  19.  Spent fuel and operational Intermediate Level Waste (ILW) could be stored at the plant, whilst it is generating electricity, and either disposed of periodically or at the end of the plant's life; additional ILW will arise at decommissioning. Reprocessing of spent nuclear fuel is currently uneconomic and is not a factor in considering future waste disposal routes.

  20.  The Government is the natural legatee of spent fuel and ILW because of their very long-lived nature and should have long-term responsibility for ensuring their safe storage or disposal. However, responsibility for the costs of long term storage or disposal is accepted by nuclear plant owners. Funding of a secure disposal route could be provided through, for example, a tariff on nuclear fuel used, in return for a commitment by Government to accept liability for long-lived wastes at the end of plant life.

  21.  Decommissioning costs could either be met through ring fenced funds established during the period of plant operation (as adopted in different forms in the UK, Sweden and the US) subject to independent audit and control or by ensuring there is sufficient provision on the owner's balance sheet (as in Germany). As part of any assessment of the role of nuclear construction, the Government will need to review alternative models and determine what is most appropriate in a UK context, bearing in mind which route carries most public confidence.

INSURANCE AND SECURITY

  22.  The nuclear industry meets the cost of statutory third-party liability insurance up to a cap (expected to be raised in 2006 to

700 million). The Government manages any very small residual risk through the high level of safety regulation imposed through the Nuclear Installations Inspectorate. The costs of the NII's activities and any changes to plant or operational practices it imposes are met by the industry.

  23.  The costs of plant security are generally met by industry as part of construction and operational costs. The costs of security of fuel fabrication and waste disposal are expected to be reflected in the price of these services. The effectiveness of security arrangements is overseen by the Office of Civil Nuclear Security, the majority (94% in year to March 2005) of whose costs is met by industry.

  24.  On balance, there do not appear to be hidden costs which could not be met economically by a nuclear new build programme.

    —  Is there the technical and physical capacity for renewables to deliver the scale of generation required? If there is the capacity, are any policy changes required to enable it to do so?

  25.  Renewable plant will not on its own be able to fill the capacity gap left by closing nuclear and coal plants. It may be possible to accelerate the construction of renewable plants somewhat by adjusting the level of the Renewables Obligation and by making additional capital grants available but the resultant cost to the consumer of providing this further level of support may not be justified and local planning and grid connection issues are likely to limit the total level of development.

    —  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?

  26.  These technologies, particularly micro CHP, may be able to make a useful contribution, depending on their economic potential. An HPMI Demand Analysis study funded by DTI (2004) estimates that by 2015 micro CHP could in principle meet up to 1-2.3GW of demand by 2015, and ultimately 12GW by 2030. However, at this early stage in its commercial deployment, the extent of take up is uncertain and in its early stages will depend significantly on Government support. Micro CHP, in common with other micro generation technologies, does not operate baseload so that a direct capacity comparison with, for example, nuclear is not appropriate.

  (3)   What is the attitude of financial institutions to investment in different forms of generation?

    —  What is the attitude of financial institutions to the risks involved in nuclear new build and the scale of the investment required?   How does this compare with attitudes towards investment in CCGT and renewables?

  27.  We would expect institutions providing finance, like all investors, to want to be satisfied that investment returns reflected the investment risks, whether these arise from market, energy policy or regulatory uncertainties.

  28.  Compared to CCGT and renewables, nuclear currently suffers high levels of political and regulatory risk arising from the uncertainties surrounding planning and licensing processes, the regulation of safety, waste disposal and decommissioning and perceived volatility in political support. The mitigation of many of these risks lies in the hands of Government. Investors' pricing of these risks will ultimately be heavily influenced by the success of Government actions in this respect.

  29.  To the extent that new nuclear construction relies on energy policy instruments, such as a carbon price created by an emissions trading scheme, investors will need to be satisfied that the energy policy framework is stable and not subject to changes which will undermine the project value. Similar issues arise in investment in renewables, which relies on stability in the Renewables Obligation.

  30.  We expect sufficient funds to be available for new nuclear build if these key issues of risk are addressed.

    —  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?

  31.  We do not expect the Government, in a competitive energy market, to provide direct cash subsidies for nuclear plant, given that it is a well established technology. However, any private sector company looking to invest in new nuclear plant is likely to want assurances from Government on a number of points:

    —  A long term commitment by Government and the EU to the EU emissions trading scheme as its primary means of incentivising low carbon investments. Investors would need to reach their own view on whether a particular price of carbon generated by the scheme was required to support new nuclear investment. That price would depend on other factors, including anticipated wholesale power prices and fuel costs, excluding the effects of the EU ETS;

    —  Efficient and effective planning and safety regulatory processes, which recognise the need to facilitate competition between the suppliers of plant and operational services;

    —  Government assumption of responsibility for the safe long term storage or disposal of radioactive waste (albeit with the cost funded by the investor);

    —  Government assurances that its policy toward nuclear plant decommissioning and plant lifetimes will remain stable, given experience in some counties where the Government has intervened to require early closure.

    —  What impact would a major programme of investment in nuclear have on investment in renewables and energy efficiency?

  32.  We would not expect to diminish our investment in renewables or energy efficiency, if we also committed investment to new nuclear construction. Substantial investment in a range of low carbon technologies will be required to deliver the UK's climate change targets. We do not see investment in all these areas as mutually inconsistent. In particular new nuclear plant would operate baseload and will replace existing nuclear plant. Investment in new nuclear capacity will avoid investment in gas-fired plant with higher CO2 emissions, rather than renewables.

C.  STRATEGIC BENEFITS

  (4)   If nuclear new build requires Government financial support, on what basis would such support be justified? What public good(s) would it deliver?

  33.  We do not expect the Government to provide direct cash support for new nuclear plant construction. However the Government has intervened in the market through the EU ETS to provide incentives to encourage investment in low carbon plant as a whole. Government guarantees or assurances to encourage private sector investment would be primarily justified on environmental grounds.

    —  To what extent and over what timeframe would nuclear new build reduce carbon emissions?

  34.  As a broad indication, CO2 emissions will be reduced by about 3Mt CO2 a year (assuming that nuclear is replacing CCGTs) for every 1 GW nuclear built (ie about 0.5% of UK 1990 CO2 emissions). A 10GW replacement nuclear programme would be equivalent to a 5% reduction in 1990 CO2 emissions.

    —  To what extent would nuclear new build contribute to security of supply (ie keeping the lights on)?

  35.  Nuclear power plant takes a long time to plan and build and, once built, operates at base-load; as such it does not contribute significantly to short-term security of supply.

  36.  However, diversity of fuel supply is also important for physical and economic security of the system. The raw material for nuclear fuel, uranium ore, can be obtained from a number of stable countries (eg Australia, Canada) and can be easily stored at a number of points in the supply chain. The cost of nuclear generation is insensitive to changes in the cost of fuel.

  37.  At present the UK economy is becoming increasingly reliant on gas an increasing proportion of which may be imported. Although supply security can be maintained with higher levels of gas consumption, this may pose economic risks as gas prices will begin to have a significant effect on the UK economy. This effect may be accentuated as the UK becomes more subject to continental gas market conditions where there is a strong correlation between gas and oil prices which is likely to persist for some time. Nuclear, as well as other fuel types such as coal, can reduce this effect.

  38.  We believe a balanced portfolio of fuels can contribute to maintaining security of energy supply at an acceptable cost, by diversifying risk and avoiding over-reliance on a single fuel.

    —  Is nuclear new build compatible with the Government's aims on security and terrorism both within the UK and worldwide?

  39.  This is a matter for Government to assess. However existing nuclear reactors have been operated for decades during periods of terrorist activity in the UK and elsewhere. Modern plants are designed to resist known risks of this nature.

  40.  Civil nuclear power plants are subject to international control to ensure that nuclear materials are not diverted to weapons use. Compliance with these safeguards would not be an issue in the UK.

  (5)   In respect of these issues [Q 4], 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?

  41.  We do not see investment in these options as incompatible. Indeed it is important that they are all available, as companies need the widest range of options to be able to deliver a low carbon economy at the lowest possible cost to the UK economy.

D.  OTHER ISSUES

  (6)   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?

  42.  A paper contributed to the ExternE project by AEAT of June 1998 suggested that, within the limits of accuracy and durability of such a study, the life cycle global warming impact of nuclear is broadly comparable with wind generation, for example, but importantly both produce a small fraction (<5%) of that from CCGT; coal produces broadly double that from a CCGT.**

**It estimated that the external cost of global warming (in mECU/kWh) on a life-cycle basis for various technologies is about 0.25, for wind; 0.37, nuclear, including fuel reprocessing; 12.9, CCGT; and 28.7 coal, including FGD and low NOX burners.

  43.  A market framework that prices the external cost of global warming emissions should progressively lead to innovative approaches for all technologies along their value chain, possibly changing these relationships.

  (7)   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?

  44.  We believe that a firm Government decision on its approach to the disposal of highly radioactive waste, which reflects the outcome of a thorough process of public consultation, is a reasonable precondition for any nuclear new build. However, this should not mean that a disposal site needs to be identified and put in place before new construction begins, since the first spent fuel and ILW is not likely to be exported from a new nuclear plant for many years in the future.

  45.  Other developed countries (eg Finland, Sweden, and USA) have agreed programmes for the long-term disposal of long-lived nuclear wastes; this should also be possible in the UK.

19 September 2005






 
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