Select Committee on Environmental Audit Written Evidence

Memorandum submitted by ScottishPower


Background on ScottishPower

  ScottishPower welcomes the opportunity to contribute to the Environmental Audit Committee's inquiry. As one of the UK's largest energy companies, we are pleased to offer our views on the issues identified by the Committee.

  These views are based on our practical commercial experience across the energy supply chain, including generation, transmission and distribution, and supply. In the UK, ScottishPower:

    —  operates some 6,200 MW of generating capacity, from a diverse portfolio of thermal electric, hydroelectric, renewables and CHP sources;

    —  is the 3rd-largest distribution company, operating and maintaining large power transmission and distribution networks;

    —  supplies energy and energy services to more than five million domestic customers; and

    —  is one of the leading developers of windpower, with 300 MW of onshore wind currently operational or under construction. Upon completion of our windfarm at Black Law later this year, it will become the largest in the UK. We are also in the final stages of seeking consent for our Whitelee windfarm, which will be the largest in Western Europe.

  Meeting the Government's 2010 and 2015 renewables generation targets of 10% and 15% respectively will require significant investment in plant and infrastructure. In meeting this challenge ScottishPower plans to invest £1 billion over the next five years in delivering a further 1,000 MW of renewable energy. In addition as part of the RETS programme of network reinforcement in Scotland, we plan to invest £190 million in the first phase of upgrading and reshaping Scotland's high voltage transmission lines.

  In partnership with AMEC and Ocean Power Delivery, we are also pioneering the development of marine energy in the UK. Current feasibility studies of the Pelamis wave energy technology could, with appropriate financial support, lead to the development of a revolutionary 22.5 MW wave farm.

  With substantial coal- and gas-fired generation assets, we believe there may be opportunities to develop and apply carbon capture and storage technologies in the UK, and we support the aims of the Government's carbon abatement strategy, announced in June 2005.

  Our industry and commercial experience gives us a valuable perspective on the impact of Government policy on the energy sector, and we hope this perspective and our projections for the future development of the energy market are of interest to the Committee.

Policy Context

  In the 2003 Energy White Paper, the Government set out four key objectives for future UK energy policy: moving to a low carbon economy; maintaining the reliability of energy supplies; promoting competitive markets in the UK and beyond; and ensuring that every home is adequately and affordably heated.

  ScottishPower has supported these policy goals and in particular believes that the Government's ambition to reduce carbon dioxide emissions by 60% by 2050 is achievable, but only if the correct market framework is implemented. Achieving a low carbon economy requires Government, regulators and business to work hand in hand to design the correct regulatory framework and market mechanisms for delivery. The existing mechanisms of the Renewable Obligation Certificate scheme, the Energy Efficiency Commitment and the EU Emissions Trading Scheme have already started to deliver the low carbon economy. However we encourage Government to continue to develop mechanisms with transparent and long-term outlooks, which serve to remove regulatory uncertainty. We believe that such mechanisms will stimulate investor confidence and that market based, tradable mechanisms, which are not technology specific, will be more effective at securing buy-in from companies and delivering security of supply.

  ScottishPower would support a move to bring industry and Government together to determine future mechanisms and would seek to be fully engaged in any such initiative.

  In its 2nd Annual Report on the Energy White Paper[363], the Government committed itself to:

    "giving the market as much advance notice and clarity as possible on the way new measures—particularly environmental regulation—will be implemented to inform decision-making and maximise the scope for efficient market response. There could be implications for security of electricity supply arising from the impending introduction of a series of European initiatives and Directives aimed at reducing pollution."

  We acknowledge the importance of environmental legislation in driving energy policy. This includes climate policies, such as the EU Emissions Trading Scheme, the Large Combustion Plant Directive and the Renewable Obligation, as well as measures to tackle pollution and environmental impact. In the UK the combined effect of environmental policy drivers has already had a profound effect on the generation mix in recent years, accelerating the growth of gas, hastening the retirement of coal plant, and delivering support for renewables. Whilst ScottishPower supports the environmental objectives that are driving this change in the generation mix, we believe that it is essential that advanced notice of environmental legislation is needed to ensure early market signals to aid investment decisions. Equally timely decisions around the future legislative environment are required to give investor confidence and secure adequate rates or return.

  In practical generation terms, the effect of the EU ETS and LCPD will be to increase commercial pressure on fossil fuel-based generation. Despite this pressure, in addition there has been a prolonged lack of clarity in respect of the LCPD methodology and confirmation of running hours. Equally for the second phase of the EU ETS, discussion is taking place as to the appropriate allocation mechanism. It is clear that such discussion and the subsequent decisions taken will benefit certain technologies at the expense of others. This presents a massive risk for investors and heightens the likelihood of incorrect investment decisions. Such an environment does not promote an optimal outcome and has the potential to affect security of supply and investor confidence. Therefore without early clarity on these issues there are clear implications for generators and the investment decisions that they need to make, at a time when significant changes in generation patterns are already taking place. For example moves from baseload operation to more flexible operating regimes are already under way.

  For policy-makers, the key challenge continues to be balancing the environmental policy priorities, and the mechanisms designed to achieve them against the commercial operation of the electricity market and the expectations of industry and investors. Again, we believe that an open debate between Government and industry is required, during which priorities and mechanisms to achieve them can be discussed. In any event such mechanisms should be long term and stable.

  In the longer term, there will need to be significant changes to the make up of generation in the UK in order to achieve Government targets on renewable generation and climate change. Given current environmental and economic pressures, it is difficult to see a long-term future for existing coal-fired generation, although clean coal technology and carbon sequestration may encourage new investment in coal. The other key determinant on the future of generation will be Government policy on nuclear new build or clean coal development.

  In determining the UK's future generation mix there are many options open. As the experiences of other countries suggests, there is no single technological route to follow. Under different scenarios, a variety of generation mixes can deliver a low carbon economy in the UK. ScottishPower believes that renewable technology has an important part to play in meeting the Government's targets and as such are currently developing a range of technologies and rewiring the electricity networks to accommodate more remote and diverse sources of generation. It is our belief that renewable, nuclear energy and clean coal are not mutually exclusive. No matter which large generation plant the UK deems to be most effective for meeting all requirements, including security of supply, renewable generation should and can play a significant part.

  The low carbon economy will come at a price—however it is constituted, the future generation mix that delivers the Energy White Paper's aims will require significant further investment. ScottishPower has stated consistently that delivery of the White Paper is likely to lead to a rise in unit prices of at least 15% in real terms by the end of the decade. Clearly, this excludes the recent effects of gas and coal prices on the wholesale markets. The costs associated with implementation of the environmental measures have yet to be fully factored into end-consumer tariffs and therefore there is potential for environmental legislation to impact upon the White Paper's other objectives around fuel poverty and UK competitiveness.

  Whatever the options pursued, each will have its costs; and all of the possible options will cost more than UK consumers currently pay. Investor confidence in the future development and direction of policy is therefore critical. Under any future scenario for the UK's energy needs, long-term signals will be required from Government in order to create the conditions for investors to discriminate between market risks and regulatory and environmental risk, and to ensure that these investments do not run the risk of becoming stranded assets by sudden or unexpected shifts in policy.


  In the UK, estimates of the likely shortfall in electricity generating capacity caused by the phase-out of nuclear plants and some existing coal plant prompts important questions about the security, diversity, and—importantly—the flexibility of future energy supply.

  The majority of independent studies point to a tightening supply margin in generation in the next five years or so, with the possibility of a generation shortfall occurring in the medium term.

  ScottishPower has its own views on the likely shortfall in generation in the future, but our views of the generation gap correspond broadly with independent analysis of the issue. In our view there will be a need for new investment in the medium term.

  The gap in future generation can be filled in a number of different ways, depending upon the energy market scenario, which develops. The measures taken by Government to address the UK's predicted shortfall, and industry's response, will determine future generation mix.

  Under all possible future scenarios, there is a strong role for further renewables development and action to deliver greater energy efficiency:

    —  on renewables development, the 2020 20% renewables target is challenging yet achievable with certain targeted measures (including an upward revision for the RO target beyond 2015). Delivery will mainly come from onshore sources such as wind and biomass (which we foresee will meet the majority of the 2010 targets) with the remainder met by offshore, marine and tidal. We broadly agree with the resource estimates identified by Government within the recent renewable obligation review, but at the same time highlight that additional measures are necessary to stimulate the offshore wind sector, and that it is imperative that market stability is maintained if onshore wind's contribution is to be fully realised.

    —  on energy efficiency, the Government's challenging targets will require a significant step change in activity. There is much progress to be made in reducing energy consumption as a means of curbing carbon emissions, as the White Paper envisaged, and Government must lead the battle for "hearts and minds". With this in mind, ScottishPower is engaged in the work of the UKBCSE in their consideration of tackling fuel poverty and maximising benefits in energy efficiency.

  ScottishPower is firmly committed to tackling energy efficiency and we were successful in exceeding our obligations under the first round of the Energy Efficiency Commitment. Although EEC has been a successful programme, relative to the performance of other programmes across Europe, the 1% reduction achieved through EEC is not sustainable and a doubling of energy savings under EEC2 will be challenging to deliver without a market mechanism to create more tradability and provide greater incentive for innovation.

  To achieve greater energy efficiency gains, the UK needs to go beyond EEC. We agree with assertions that there is the potential for 40% energy efficiency gains—but again the real challenge in respect of energy efficiency is convincing consumers of its value. Reductions in electricity use must be customer driven, as the market alone is not going to deliver a step change. Unless the Government can address, for example through fiscal measures, the slow rate of progress in this area, it is unlikely that the 40% reduction will be achieved.

  The Energy White Paper rightly identifies security of supply as key to the UK's future energy interests. The national importance of security of supply suggests the need for a mix of generating types.

  The strategic importance of flexibility in supply—as well as security and diversity—is often overlooked. It is a prime consideration. As the UK moves to a position of increased capacity from renewable generation and reliance on gas fired plant, it is imperative that the overall generation mix takes account of the issues with availability, flexibility and fuel sources in securing energy supply.


Financial Costs

  In recent years, costs studies from a range of sources have produced an equally diverse spread of estimates for the cost of different generation technologies. Across the board, however, taking into account differing cost assumptions (carbon, waste, support mechanisms), our view is that the aggregated costs of different technologies can work out broadly in line.

  The costs of generation and benefits of the associated carbon abatement are widely reported in a variety of previous independent studies. Our considered view reflects a range of costs for new generation plant, which for electricity, will occur within the following ranges (costs shown below prior to inclusion of environmental externalities):

  There is no lack of technological options. Adoption of technologies will be determined by timescales, and by the support mechanisms introduced/continued by Government. In defining its approach to differing generation solutions, Government should avoid confusing energy supply objectives with economic development objectives: the market should be concerned with the deployment of working technologies, rather than the pursuit of uneconomic or immature ones. Government should recognise the sensitivity of the market to any support for particular generation types. There should be a clear demarcation between the market structure and the support mechanisms for different technologies. As an example, ScottishPower believes that the Renewable Obligation Certificate Scheme has been a successful and effective mechanism, in that it delivers a market response to a Government policy objective.

Investment Considerations

  As outlined above, delivering the low carbon economy requires a climate of stability, clarity and long-term commitment from Government if industry and investors are to be able to make investment decisions.

  Investors need the security of long-term revenues. The risk of political interference or policy revision can undermine severely market and investor confidence. Wherever possible, market-based mechanisms to deliver policy—such as the Renewable Obligation and the EU ETS—should be enshrined in legislation and operated on a long-term horizon (perhaps 20-25 years). Continuous reviews of policy mechanisms can have the effect of damaging confidence in the long-term market, and thus threaten the very targets they are intended to support.

  Developers will enter the market depending on risk appetite, cash rates and the expected rate of return. Existing mechanisms, such as the Renewable Obligation, should not be disrupted. In that sense, parallel mechanisms in support of other technologies, such as clean coal or nuclear, should not be regarded as competing with renewables.

  Given the age of the UK's generation plant and the impact of environmental legislation, the long-term legislative stability is particularly important at the current time. Decisions about whether the UK will be a leader or follower in respect of technology are becoming increasingly pressing. Government has the ability to introduce additional mechanisms and support methods to determine this position. However the policy context will drive the adoption of a single or multi-technology solution based on the decision that Government makes in relation to the generation mix required.

  Opportunities exist in the commercialisation of a number of different technologies. Depending on the attitude of Government and industry the UK could play a role in their development. It should be noted that if the UK is not a technology leader, then there will be an impact on the timing and cost of new technologies entering the UK market.


  ScottishPower believes that BETTA market functions effectively in creating an openly traded market. Current issues and uncertainty in the market place, including security of supply, are often as a result of political and regulatory uncertainty. We believe that Government should set a broad market framework with clear and consistent market mechanisms and regulatory environment. Where possible such measures should be enshrined in legislation and be long term in nature. The market should then be left to deliver within the framework, with industry and investors managing market risk and Government managing political and regulatory risk.

  It is our view that such arrangements and stability will allow the market to deliver security of supply. It is clear, when looking at the Renewable Obligation, that it has been successful due to the long-term commitment of the mechanism and the extended lifespan keeping investment interest and support.

  However, we would suggest that there has to be a focus on joined-up Government working, both at regional and local level, if policy objectives are to be delivered. As an example, the Renewable Obligation has suffered due to local Government slowing down the planning process and regulation, for example transmission charging, making investment decisions uncertain.

30 September 2005

363   "Creating A Low Carbon Economy: second annual report on the implementation of the Energy White Paper", page 18, Department of Trade & Industry, July 2005. Back

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