Memorandum submitted by RWE npower plc
INTRODUCTION
1. As one of the UK's leading integrated
energy companies, RWE npower supports the Government's vision
of moving towards a sustainable energy future. RWE npower, part
of the RWE Group, is one of the UK's largest energy suppliers
and we have a diverse portfolio of over 8,000MW of generation
capacity in the UK. We sell our expertise in power generation
in key markets and are one of the UK's leading renewable energy
developers and operators.
2. We welcome the opportunity to contribute
to the Environmental Audit Committee's inquiry into nuclear, renewables
and climate change. We have not attempted to address every issue
raised by the inquiry, but have focused on those parts of the
inquiry to which we believe we can most usefully contribute.
THE EXTENT
OF THE
"GENERATION GAP"
3. The UK has benefited from a diverse energy
mix which has helped to ensure security of supply through the
balance of nuclear (around 16%), gas (around 31%) and coal (around
35%) generation. In recent years there has also been an increase
in renewables, which now constitute between 2.5 and 3% of the
UK generation portfolio.
4. Even with energy efficiency measures
reducing demand growth below historic levels, we anticipate that
peak demand will grow by almost 9GW between 2005 and 2015. During
the same period, 7.5GW of nuclear plant (Magnox and AGR) is expected
to be decommissioned as well as up to 4GW of older Combined Cycle
Gas Turbine (CCGT) stations. This requires investment in 20GW
of new plant by 2015 in order to maintain a 20% capacity margin.
With peak demand then forecast to grow by almost 4GW between 2015
and 2020, and the retirement of old coal and oil plant under the
Large Combustion Plant Directive (LCPD) by the end of 2015, the
UK would require almost the same amount of new plant again to
maintain security of electricity supplies.
5. The security of the UK's energy supplies
has been under increasing scrutiny in recent months. Concern will
increase following recent forecasts from the Met Office predicting
a colder than average winter, and the Winter Outlook Report recently
updated by National Grid will not silence all doubters. Much attention
is inevitably focused on fears over supply in the immediate winter,
but there is a need to consider the more serious concerns to electricity
from 2008.
6. These concerns are avoidable with suitable
infrastructure investment if action is taken now. Whilst the National
Grid's Seven Year Statement shows substantial planned new capacity,
very little of this is actually under construction. A major impediment
to commitment is absence of clarity on two important environmental
issues: LCPD and Phase 2 of the EU Emission Trading System (EU
ETS) beginning in 2008, and also whether there will be any successor
to the Kyoto Protocol or even any carbon trading post-2012.
7. We are concerned that the definition
of a combustion plant currently being proposed under the LCPD
will curtail the life of "opted out" coal plant even
further. In summary, we have strongly urged the UK Government
to implement the LCPD on the basis of plant="boiler",
rather than plant="stack" at least for plant opting
out under the terms of the 20,000 hour derogation. If the LCPD
is implemented in the way currently proposed, the UK would be
deprived of the security that retiring coal plant can provide
during the challenging transition from a high carbon generation
industry to a low one.
8. There is no clear view of the availability
or cost of CO2 emission allowances from 2008, during
the second phase of the EU ETS and therefore no market view of
the value or cost of power. Yet the UK energy industry urgently
needs to commence investment in new forms of generation to meet
demand and further reduce emissions. We propose that the UK Government
resolves the issue of the allocation to the electricity sector
urgently, in advance of finalising the National Allocation Plan
and submitting to the European Commission.
9. In light of such fundamental uncertainties,
it is difficult to evaluate the outputs, costs and revenues for
investment appraisal purposes with any degree of confidence. Any
appraisal would need to factor in a variety of adverse regulatory
scenarios or apply a marked cost of capital premium to reflect
the risks. In these circumstances investment decisions tend to
be postponed, the risk of supply disruptions inevitably increases
and the costs of responding to shortage are ultimately higher.
The principal impediment to effective markets and investment decision-making
is uncertainty regarding the environmental legislative and regulatory
framework.
FINANCIAL COSTS
AND INVESTMENT
CONSIDERATIONS
Costs and Timescales
10. The investment costs of a new power
station will necessarily depend on the specific characteristics
associated with each individual project, such as siting and technical
characteristics. It is also difficult to provide meaningful generation
costs because of future fuel price uncertainties, costs of carbon
and varying load factors. Assuming fuel prices over the long-term
revert to reasonable fundamental levels, electricity from a new
CCGT would cost in the range £33-36/MWh, while coal generation
would cost £38-44/MWh. It would take about three years for
a new CCGT to become operational once consent had been obtained,
while a coal plant would typically require slightly longer, four
to five years post-consenting.
11. Onshore wind costs are currently in
the range of £600-750 per kilowatt and it takes around two
years to plan, contract and build an onshore wind farm, following
planning permission. The planning process typically adds a further
three years. It is anticipated that new onshore capacity will
be constructed at the rate of approximately 500-600MW per year
in the short to medium term. The cost per unit of electricity
generated by renewable technologies depends heavily on the load
factor assumed, and hence is site specific. Therefore it is not
possible to quote generic figures.
12. Offshore wind costs are typically between
£1,300 and £1,400 per kilowatt with projects taking
three to five years to plan and build, subject to receiving necessary
consents and resolution of other issues including MOD/aviation
constraints, offshore grid access, transmission system operator
issues and the funding gap. It is anticipated that capacity in
excess of 1,000MW per year of offshore wind generation could be
built if the issues identified above could be addressed. Offshore
wind through-life cost estimates also vary, in part due to relatively
few sites having been built in the UK, but they are likely to
be significantly higher than onshore wind. Marine (wave and tidal)
technologies are in their infancy with through-life costs in excess
of 10p/kWh, although it is anticipated that these will fall over
time as the technologies mature, as they did for onshore wind.
New-Build Nuclear
13. New-build nuclear generation could form
part of a diverse UK energy mix in the future and would go some
way to reducing emissions. However, given the lead time necessary
for planning, consenting, procurement and construction, it is
unlikely that any new nuclear units could be available before
2015 and equally unlikely that a sufficient amount could be built
sufficiently quickly to compensate for the LCPD-driven closure
of coal plant.
14. Public mistrust of nuclear power also
remains a factor. If the technology is to have a future in the
UK, the debate must be conducted in the context of a clear long-term
energy policy. There are real barriers to investment in new nuclear
generation. Solutions need to be found to issues like technology
licensing, the consenting process, site availability, sources
of fuel supplies, decommissioning and waste disposal. The biggest
barrier is economics, however. With a clear, long-term energy
policy and climate change strategy the market will determine whether,
and when, nuclear plant should be built. It is crucial, therefore,
that attempts to stimulate new nuclear development in the UK must
not create market distortions. This could undermine investor confidence
in the whole market, risking security of supply in the near-term,
and upset the balance and flexibility of our energy mix.
Renewables
15. Renewables alone cannot fill the anticipated
capacity gap, but should be seen as an essential component of
the UK's electricity generation portfolio. Independent studies
have shown that the current transmission and distribution system
could accommodate at least 20% of generation from renewable sources
and this proportion could be increased in the future as the design
of the distribution evolves. Renewables have the potential to
make a significant contribution to electricity generation in the
UK, especially when the potential of onshore wind is combined
with technologies such as offshore wind and marine (wave and tidal).
However there are barriers, and these will only be overcome if
the political will to address them continues.
16. Onshore wind development continues to
be impacted by delays in the planning process, MoD and aviation
issues, and the availability of transmission capacity. Policy
in these areas should continue to be reviewed and may require
amendment in the future. Grid capacity is also a major constraint.
Government funded studies in 2003 for Scotland have indicated
the action required and plans are now being implemented. However,
Wales needs similar studies and more rapid implementation.
17. With regards to the technology itself,
a sufficient number of wind turbine manufacturers are currently
developing wind turbines of a size suitable for large-scale offshore
wind generation. However the technology is not yet proven, and
certainly the capability for build does not yet exist. For onshore
development, the diversity of manufacturers and technologies is
already adequate. However the build capability is not.
18. Without firm commitment to a wind farm
build programme in the UK, it is difficult to see that the manufacturers
will either sufficiently accelerate their offshore technology
development programme, or put in place an adequate build capability.
In order to accelerate the offshore technology development it
may also be appropriate to incentivise owners and developers to
support the process by including small demonstration projects
of "first production" large scale turbines in the current
build programme.
Microgeneration
19. Microgeneration is in its infancy with
only limited installations of micro-CHP, photovoltaics (PV) and
micro-wind. Micro-CHP has the potential to become a mass market
retail offering as over 1 million boilers are replaced per annum.
We believe that PV and micro-wind are likely to remain niche retail
products. All these technologies have the potential to make a
contribution to reducing emissions. As the price of these technologies
reduce, the uptake of them will be greater.
20. There are complications with all these
technologies not least the arrangements for paying and settling
the accounts for exported electricity and ROCs. There are also
metering issues, reliability issues and warranty issues. In time
if distributed generation becomes widespread it will have an impact
on centralised generation. This is not likely to have a significant
impact in the next 10 years.
ATTITUDE OF
FINANCIAL INSTITUTIONS
AND INVESTORS
21. Despite the widespread recognition of
the challenging generation gap faced by the UK, investment even
in CCGT new build, is not immediately forthcoming. Recent history,
with a number of generators having faced financial difficulties
as wholesale prices declined, as well as uncertainties over long-term
energy policy and regulatory framework, have made potential investors
reluctant to commit the significant levels of capital necessary.
The Government must provide clarity on issues such as the EU Emissions
Trading Scheme and the implementation of the LCPD as soon as possible.
22. For renewables, there has been increasing
confidence amongst banks and investors about the risks as the
forms of government support are becoming better formulated, proven
and understood. Renewable technology manufacturers are consolidating
and there have been a number of successful renewable project finance
investments recently.
23. An example of the confidence of banks
and investors in the renewables industry was RWE npower's innovative
Zephyr Investments Limited transaction in 2004. Zephyr Investments
Limited is a £400 million joint venture between RWE npower
and two private equity investors (Englefield Capital and Arcapita).
The company will own a UK portfolio of over 400MW of onshore and
offshore wind farms developed and constructed by npower renewables
by the end of 2006. The business is supported by a loan from a
syndicate of 13 banks. A number of investors are actively seeking
to make similar investments at present.
24. When considering changes to the Renewables
Obligation, it is important not to undermine the current investor
confidence. Nevertheless, it would be possible to encourage investment
in offshore wind through targeted revenue support or supplementary
contractual arrangements.
25. Government should aim to ensure that
the construction of new nuclear power stations is an option that
can be considered alongside the construction of other types of
new power plant (such as CCGT). We believe that whilst it is right
to seek to remove any barriers which may stop new nuclear from
competing on level terms with other technologies, it would be
wrong to force it into the energy mix. Markets are most successful
when the participants are free to make investment decisions within
a high-level framework set by Government, which reflects the overall
objectives and limits but does not dictate the means of achieving
them.
26. The UK is fortunate to have such diverse
sources of energy as wind, gas, coal, hydro, co-firing biomass
and nuclear and can continue to maintain the high standard of
security that comes with this diversity of supply, through further
investment, with clarity on urgent pieces of environmental regulation
and the right policy framework. Such a framework would ensure
that private capital would continue to meet the nation's energy
needs in a secure, sustainable and cost-effective way.
18 October 2005
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