House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 16

Memorandum by EDF Energy

ABOUT EDF ENERGY

EDF Energy is one of the UK's largest energy companies. We are a vertically integrated company with a balanced portfolio of business throughout the energy chain—from generation through to supply. Most pertinent to this inquiry:

— We are the 5th largest electricity generator in the UK. We own and operate an 800MW CCGT (combined cycle gas turbine) power station at Sutton Bridge and 4 GW of coal-fired generation assets that are currently being fitted with Flue Gas Desulphurisation equipment, as well as CHP and renewable generation assets.

— EDF Energy is a major supplier of gas and electricity, with over five million electricity and gas customer accounts throughout the UK, supplied through our retail brands EDF Energy, London Energy, Seeboard Energy and SWEB Energy.

— We own and operate the electricity distribution networks serving London, the East and South East of England, which means that around one quarter of the UK population relies on our distribution networks for their electricity. This makes EDF Energy the largest electricity distribution network operator in the UK.

— We are a major owner and provider of private electricity infrastructures in the UK including those for the major London airports, the London Underground, the channel tunnel rail link, the Docklands Light Railway and Canary Wharf. We are also a partner in the Metronet consortium.

— We are part of EDF Group, a leading European utility and a world leader in nuclear generation.

EDF Energy is committed to finding the right balance between providing sustainable financial returns and investment. EDF Energy is pleased to have the opportunity to contribute to the Trade and Industry Committee's inquiry into the government's Energy Review.

Inquiry Question 1

PARTICULAR CONSIDERATIONS THAT SHOULD APPLY TO NUCLEAR NEW BUILD

EDF Energy welcomes the government's Energy Review and supports the need to put in place an energy policy that tackles climate change while ensuring secure energy supplies and affordable prices. We believe that as part of a diverse energy mix the construction of new nuclear power stations in the UK, particularly in view of the forthcoming closure of existing nuclear power stations, should be part of the solution to the challenges of reducing CO2 emissions, increasing security of supply and limiting energy price volatility.

There are a number of issues that need to be addressed and particular considerations that apply to new nuclear build. Our view of what these are and how they can be addressed is outlined below.

NUCLEAR COULD CONTRIBUTE SIGNIFICANTLY TO REDUCING CARBON EMISSIONS

1.1 CCGT is currently the preferred technology for replacing decommissioned generation capacity, because of low risk, short construction time and low capital investment. However, if this dominant technology continues to be deployed, the government may not meet its carbon reduction targets.

1.2 Nuclear power, through its whole life cycle, does entail some carbon emissions as the energy required to construct, fuel and decommission a nuclear plant may be sourced from fossil fuel generation. However, if one compares the CO2 emissions produced on average during the complete life cycle of a nuclear plant with the emissions produced by fossil fuel plants, the emissions, as reported by the OECD Nuclear Energy Agency, are from 11 to 22 gCO2/kWhe for nuclear against 385 gCO2/kWhe for natural gas plants and 755 gCO2/kWhe for coal fired plants.

1.3 As a result, replacing 10 GW of the UK's current nuclear capacity with CCGTs would result in a 4% increase in carbon dioxide emissions from 1990 levels.

URANIUM RESOURCES ARE SUFFICIENT TO SECURE THE SUPPLY OF NUCLEAR FUEL FOR LONG PERIODS

1.4 The present reserves of oil, gas and coal would allow, at the present rate of consumption in the world, consumption for about another 41 years, 67 years and 164 years respectively. These figures are rough estimates but world consumption is continuously increasing.

1.5 However, there is a consensus that oil scarcity might become a problem within 30 years, and that gas reserves might not last as long as foreseen, since consumption could increase faster than expected and gas could be used as a substitute for oil to provide liquid fuels. Coal is plentiful and well distributed around the world, but coal when burned is also the worst CO2 emitter and in addition requires additional treatment to minimise sulphur and dust emissions.

1.6 With the present world nuclear fleet and standard fuel cycle, uranium reserves would sustain nuclear generation for about 85 years if using only well known reserves at a price below 130 $/kgU, or for about 270 years if using all known resources. The next generation of reactors, known as Generation 4, with fast breeder reactors, will allow these periods to be extended to several thousand years.

THE REGULATORY FRAMEWORK NEEDS TO BE CLARIFIED TO FACILITATE PRIVATE INVESTMENT IN NUCLEAR

1.7 The government will be more likely to meet its policy objectives at minimum economic cost if it reduces regulatory barriers to the implementation of as many alternative low carbon technologies as possible and provides a stable long term policy framework, so that industry can make informed investment decisions from the maximum number of options at any one time.

THE PLANNING AND LICENSING PROCESS NEEDS TO BE CLARIFIED

1.8 If the electricity supply industry is to develop and construct a programme of new nuclear power stations, there needs to be a process that:

— Produces a clear statement of energy policy with broad political support that explicitly acknowledges the contribution nuclear power can make to an economically sustainable low-carbon diversified energy mix;

— Provides for an appropriate degree of public participation in the consideration of the generic issues of new nuclear construction such that these issues do not have to be re-examined as part of the planning process for each potential site;

— Enables the site specific issues alone to be the focus of the planning process for each potential site;

— Results in the granting of the necessary licences, authorisations and consents within predictable timescales and in a manner that progressively reduces regulatory and project risk;

— Encourages competition by pre-licensing standard international designs with the minimum of modification for the UK market and allowing final selection of a site-specific design to be as close to the investment decision as possible; and

— Enables the decision to proceed with construction to be taken only when all significant design related consents, authorisations and approvals are in place.

1.9 Practical steps have to be taken to provide such a process, and in particular:

— All key approvals should be granted before the first plant order is placed;

— The preparation of a Strategic Environmental Assessment by the government for a new nuclear programme will be an opportunity to consult with stakeholders, reassure the public, and document the generic environmental impact of such a programme, and will allow the early identification of potential sites;

— The Nuclear Installations Inspectorate (NII) should be asked to assess a number of reactor designs. A procedure for pre-licensing that would allow a group of prospective licensees to come together at an early stage to present suitable designs for NII assessment should be favoured. A licensee will emerge from this group later, for the formal licensing application for a particular project;

— In addition to the pre-licensing assessment of the plant design, the NII should proceed separately to a pre-licensing assessment of potential sites;

— The NII pre-licensing and licensing arrangements should include opportunities for public consultations. This should mean, at the time of the Section 36 consenting process, that the public inquiry can focus primarily on local issues;

— The NII should be encouraged to review the European Utilities Requirements for alignment with its Safety Assessment Principles, and to take advantage of reviews conducted abroad by other safety authorities to speed up its own assessments; and

— There is a need for strong co-ordination across government departments of the inputs that will need to be made to the different parts of the process.

We believe that these measures are necessary in order to secure a long term regulatory framework, to render the process time controllable and to attract long term investors.

SITE AVAILABILITY WILL NEED TO BE ADDRESSED

1.10 For reasons of practicality and public acceptance, it is likely that the present nuclear sites would be the most appropriate for the development of new nuclear plants. A first assessment indicates that there is probably enough room across these sites as a whole to install a nuclear programme of 10 GW. However, appropriate arrangements will have to be made by the government to render this feasible.

1.11 Given that with new reactor designs accidental radioactive releases would be much lower than from the past designs, it should be possible for these new third generation reactors to be authorised on all existing nuclear sites.

1.12 On nuclear sites where plant decommissioning is in progress, all measures should be taken to avoid the dismantling of facilities, including overhead lines, and nothing should be done to prevent their re-use.

1.13 The government should make arrangements to ensure the sites are made available to investors at fair market value.

INSURANCE FOR NUCLEAR ACCIDENTS NEEDS TO BE CONFIRMED

1.14 Owners of new nuclear plant will require comfort that the existing limits on third party liability (the monetary limit is expected to be raised to €700 million in 2006) will continue to be applicable. The insurance market appears to have capacity to cover most risks within the proposed limits post 2006, although debate on some detailed issues is continuing.

NUCLEAR POWER PLANT DECOMMISSIONING AND DISMANTLING—A MATURE INDUSTRY

1.15 Decommissioning and Dismantling (D&D) is a normal phase in the life cycle of any type of power plant, the costs of which would be forecasted and accounted for at the design phase.

1.16 D&D of nuclear power plants is now a mature activity in a competitive market place, since tools and techniques exist, are accurately costed and are in use world-wide to perform this activity efficiently. There are two approaches in use—immediate direct dismantling, and safe enclosure, followed by dismantling.

1.17 Decommissioning is being performed successfully under the responsibility of the operator (such as EDF in France) or under the responsibility of a dedicated government agency (such as the Nuclear Decommissioning Authority in the UK).

1.18 Future reactors will be easier to decommission, because decommissioning is being taken into account to a greater extent than previously as part of the design process. This, and the nature of the newer designs, means that their D&D will produce much smaller volumes of waste. It should be noted that D&D activities do not produce high-level activity waste but rather quantities of low-level or very low-level activity waste.

1.19 Key success factors are:

— An efficient, appropriate, controlling organisation. The model generally applied is that the operators and government have arranged this, in agreement with the relevant authorities.

— Funding availability. Similarly, the operators recognise that they will be responsible for providing the funding, under a regime to be agreed with government, as described below. Regimes exist already in other countries that could be used as models.

— A clear licensing process. This is a crucial area that government can facilitate.

— Defined routes for D&D waste. Once produced by the D&D process, depending on their specific origin within the plant, D&D wastes are either radioactive, to be treated just like other radioactive waste described below, or non-radioactive general building waste. Two-thirds of D&D waste falls into this latter category. Agreeing the approach and final destination of radioactive waste will be another crucial area that government should facilitate.

WASTE MANAGEMENT SOLUTIONS FOR NEW BUILD REACTORS

1.20 There is extensive international experience of safely and successfully managing reactor waste; this experience is not a barrier but a positive asset for the development of nuclear production.

1.21 There is no basic difference between waste from existing and future new reactors, but volumes from a 10GW programme of new reactors would add less than 10% to the total existing radioactive waste in the UK requiring disposal.

1.22 Technology already exists, which can be deployed today, to manage high-level waste and spent fuel from nuclear reactors in two distinct ways.

— Fuel can be reprocessed. Potentially re-useable materials (plutonium, uranium) are segregated and are recycled for energy needs, using MOx fuel. This approach is currently being followed in France and Japan and it has been used in other countries in Europe (Germany, Belgium and Switzerland). High level waste is vitrified into a solid glass-like matrix to be contained within a stainless steel drum; this provides storage in passive and safe conditions for decades, within small volumes.

— On-site storage. Alternatively, fuel can be stored in engineering facilities awaiting future reprocessing or disposal.

1.23 Reprocessing in the UK has generated significant quantities of re-useable materials (plutonium and uranium), which could be recycled as MOx fuel; some of it is already being recycled in this way. The existing UK plutonium stockpile represents a valuable energy resource. Two new modern light water reactors could be fuelled for their full lifetimes using only this plutonium stockpile.

1.24 The picture for low level waste (LLW) is similarly consistent, as all countries with developed nuclear power programmes are either storing their LLW for near-surface or geological disposal (the choice often being largely a matter of strategic convenience) or have repositories in operation. France, Japan and the USA are among the countries that like the UK have major facilities for near-surface disposal of LLW that have been operating successfully for decades.

1.25 Modern repository designs, such as Drigg, are typically concrete vaults located in shallow excavations that will be covered over and securely sealed after operations cease. A typical concept for such repositories is that access to the completed facilities will be kept under institutional control for 300 years, after which time the emissions of the wastes will have decayed to background levels, such that free access to the land would be possible.

1.26 Worldwide, about 40 near surface disposal facilities have been safely operating during the past 35 years and an additional 30 facilities are expected to be in operation over the coming 15 years.

1.27 There are already funding models that have been successfully implemented in other countries, such as recently in Sweden, whereby operators fund the cost of spent fuel management and waste disposal. Potential UK operators recognise that they will take financial responsibility for this activity, under a regime to be agreed with government, as described below.

1.28 Society is the ultimate legatee of nuclear waste. Therefore, government must ultimately take title to the waste. Before taking their final investment decisions, operators will need to agree with government the timing, title transfer conditions and the methodology to derive the transfer cost.

FUNDING MECHANISMS FOR DECOMMISSIONING AND WASTE MANAGEMENT

1.29 There are two fundamental activities to be financed—radioactive waste deposit/disposal and power plant decommissioning.

1.30 Various financing models have been adopted by different countries—the most recent being that promoted in Sweden. However, the overarching requirement is that funds are collected in time to cover the disposal and decommissioning costs as they fall due—this is normally done by way of a payment or levy based on output produced, and collected from the operators by an entity isolated financially from the operators. There is either partial or a total control of that entity by the state.

1.31 The contribution rate is either fixed (in the US it is fixed at 1 US dollar/MWh) or revisable according to a budget estimate. In the latter case the order of contribution rate observed is also about 1 US dollar (~g1 Euro) per MWh.

1.32 A further consideration is to allow for the premature closure, for whatever reason, of one or more plants. This might mean that the full decommissioning fund would not have been provided. Various approaches have been adopted, ranging from formal guarantees by the operators to the amalgamation of the growing decommissioning funds across more than one plant—in order that sufficient for a closure is available at an early stage.

1.33 The approach to be adopted in the UK would need to be agreed between government and the operators, before the investment decisions, that would best incentivise investors whilst providing the safeguards required by all stakeholders.

IF THIS LONG TERM FRAMEWORK IS CLARIFIED, PRIVATE INVESTORS CAN SERIOUSLY CONSIDER NUCLEAR AS A COMPETITIVE OPTION

1.34 As soon as the regulatory barriers are removed and the procedures clarified, as identified above, there are realistic scenarios under which new nuclear build is economic when compared with the principal alternative, new CCGT plant. The main determinants of relative attractiveness, at the time of an investment decision, are the forecast prices of gas and of carbon emissions, and the expected costs and risks of the large capital investment required to build a nuclear plant.

1.35 Considering the present trend of gas prices, the serious concern around carbon dioxide emissions, and progress in nuclear design, the relative attractiveness of nuclear today is being given serious consideration.

1.36 There are strong indications today that new nuclear would be competitive. The regulatory framework needs now to be rendered fit for purpose so that implementation by private companies is feasible.

1.37 An important element in this framework is the visibility and predictability of the market price of carbon. If this is not clear, on the basis of firm, long term international agreements around target emission reductions and the trading of permits, then government should give serious consideration to creating and supporting contractual carbon price hedging mechanisms that will facilitate investment in all low carbon technologies, including nuclear.

Inquiry Question 2

THE IMPLICATIONS OF INCREASING DEPENDENCE ON GAS IMPORTS

What are reliable energy supplies (security of supply)?

2.1 Security of supply is the expectation by consumers that they will have access when they require it (physical SoS) to reasonably and predictably priced electricity and gas (economic SoS).

2.2 Economic SoS is the delivery of the required energy at a reasonable price, which is in itself a function of fuel diversity and fuel price (both its absolute level and its volatility). In terms of economic risks, it is clear that disproportionate dependence on a single fuel exposes UK electricity consumers to significant financial risks associated with gas price volatility.

2.3 Different classes of customer require different levels of security of supply. For example, some industrial and commercial customers may see interruption as an opportunity to earn revenue (or in the current market framework reduce transportation or transmission costs) through the provision of balancing services to the system operator or shippers/suppliers. In contrast, domestic customers are likely to view any supply interruption as a major inconvenience and consequently place a high value on supply continuity.

PHYSICAL GAS SECURITY OF SUPPLY

Characteristics

2.4 A number of factors contribute to physical gas security of supply including:

— diverse sources of gas;

— diverse, flexible and reliable infrastructure (import, production, storage, transportation);

— sufficient deliverability to meet peak demand (extreme cold weather);

— sufficient alignment and transparency in market mechanisms (eg cashout regimes) to allow available gas to flow to markets which require it;

— access to transportation infrastructure to allow available gas to flow to markets which require it; and

CURRENT RISKS AND THE UK POSITION

2.5 The key feature of gas security of supply in the coming years is the forecast decline in UKCS production and increasing reliance on imported gas. The magnitude of imports is forecast to be around 40% by 2010, 85% by 2015 and 90% by 2020[61]. In the current transitional phase from UKCS self-sufficiency to import dependence UK capacity supply margins are tight. However sufficient import infrastructure is being constructed by the market (eg LNG terminals at Isle of Grain and Milford Haven, IUK upgrade, BBL and Langeled pipelines) or is planned, so that forecasts indicate healthy supply capacity margins from known projects until at least 2012[62].

2.6 Along with increasing import dependence, concerns have also been raised regarding:

— the level of dependence on countries viewed, at present, as being politically unstable;

— the fact that new import infrastructure, whilst providing capacity, does not guarantee the physical flow of gas;

— the relatively low proportion of storage relative to UK annual demand compared with other European countries; and

— risks of physical failure of key elements of infrastructure, eg Rough storage facility, St Fergus and Bacton terminals.

2.7 We believe that, despite this increase in import dependence, a number of indicators imply that a reasonably high level of security of supply will be maintained. These indicators include:

— Predicted increase in number of import terminals. This will result in a more diverse set of physical locations for landing gas in the UK than currently exists.

— Around 30% of UK electricity generation capacity is gas-fired CCGTs, accounting for approximately 25% (25bcm) of UK gas demand. A significant proportion of these CCGTs are either on commercial interruptible contracts or can switch to alternative backup fuels. For as long as the UK retains a balanced portfolio of electricity generation fuels, at least until the closure of opt-out coal and oil plant by 2015 under the Large Combustion Plant Directive, the UK has a significant fuel-switching capability that can be used to reduce gas demand when necessary.

— The interaction between commercial storage facilities and the market means that, unless there is a physical supply interruption, normal commercial activity will ensure that typically they do not deplete until late winter, because forward prices will respond to perceived future supply shortages from reduced levels of gas in store and will signal the need for re-injection.

— Mechanisms exist to protect firm supplies and priority customers via market arrangements (eg the use of monitor levels which acts as a quasi strategic storage mechanism).

IMPROVING PHYSICAL SECURITY OF SUPPLY IN THE GAS MARKET

2.8 What is not entirely clear at present (other than via a supply licence obligation in respect of domestic consumers) is what level of security of supply either the UK government or consumers require. By this we mean which classes or magnitudes of events the gas market must provide protection against (severe weather, infrastructure failure, political cessation of gas supply) without resorting to enforced demand reduction. Combined with this uncertainty, it is unclear how much different classes of consumers are prepared to pay for the cost of overcapacity retained for occasional, emergency use (eg a strategic storage facility). Below we discuss a number of options that exist for influencing the level of security of supply in the UK gas market and give our views on them.

2.9 Political relations with major gas producing countries

The UK government, both directly and through the EU, can attempt to influence the governments of major gas producing nations to maintain gas supplies/develop appropriate market and contractual frameworks.

EDF Energy supports the sixth priority, "towards a coherent external energy policy", of the recent EC energy policy green paper[67].

2.10 Gas strategic storage

The economics of constructing a new long-range gas storage facility have been discussed in a recent report by Ilex for UKOOA[68]. They conclude that it is unlikely that a second storage facility with the long-range characteristics of Rough (2.8bcm facility with 190 days to fill, 67 days to withdraw) will be constructed because either gas prices are high and the cost of cushion gas (estimated at £2 billion) is prohibitive or gas prices are low and winter-summer differentials are unlikely to be sufficient to deliver an adequate return for the developer of this type of storage.

2.11 It has been suggested that, rather than the market providing a commercial long-range storage facility, alternative non-market funding arrangements could be used to ensure that such a facility is constructed (eg funded by NGG and the cost smeared across consumers, or those consumers whose supply is protected by the gas held in store). Such a concept is beset with difficulties, not least as to the conditions under which the facility would be used and the effects it would have on investment incentives. For example, it is unclear whether shippers would have normal commercial access to such a facility or whether it would be ring-fenced for emergency use only. If the former, its presence would damage the signals for commercial storage projects (new and existing) and additional import infrastructure. If the latter, it is unclear what definition of emergency would trigger its use, ie whether it would be emergency due to severe weather, infrastructure failure, market failure if gas failed to flow through other commercial import infrastructure, or economically damaging gas prices. If used to protect supply in any of these cases, the presence of the strategic store will reduce the ex-ante incentive on shippers/suppliers to contract for adequate levels of gas, capacity or storage to ensure security of supply for their customers, which in turn would reduce the incentive for investment in commercial infrastructure.

2.12 The effect of a strategic storage facility can also be reproduced using other tools, for example by interrupting particular classes of gas customers, CCGT fuel switching, etc[69]. However, the integrated nature of gas and electricity security of supply (the latter being dependent to a certain extent on continuity of gas supply) further complicates the issue. For example, commercial interruption of an electricity consumer, thereby reducing electricity demand and allowing a CCGT to reduce its gas consumption, could be a more cost-effective mechanism for improving gas security of supply, given that gas is the priority fuel, since, unlike electricity, it does not fail safe. Without detailed analysis of the UK energy system it is unclear whether a strategic storage facility, particularly one which is reserved for emergency usage, is the most cost-effective solution to resolve supply-demand imbalances in extreme conditions.

2.13 Even if strategic storage were deemed necessary, a further consideration must be whether the storage should be held at a national level or whether it could be most efficiently delivered at an EU level.

2.14 Whilst conceptually additional storage capacity increases security of supply, the reality of the situation is that the construction of a non-commercial facility would change the composition of infrastructure in the market in which it operated. As a result there is no guarantee that it would actually increase security of supply.

2.15 If, however, liberalisation of European gas markets fails and it becomes clear that mis-alignment of the UK market with continental markets persists, restricting the flow of gas to the UK even at times of high UK prices, the concept of UK strategic storage may need to be reconsidered.

EDF Energy does not support the construction of strategic storage facilities outside the normal commercial framework at this point in time.

2.16 Reforming the current arrangements for protecting physical security of supply to non-daily metered (NDM) customers

Originally, the safety net for NDM customers existed under the "top-up" mechanism which was an obligation on Transco to keep gas storage levels high to guarantee supplies to all firm loads. Such injections were, in practice, never necessary. This regime was replaced with the introduction of gas safety monitor levels which are used to guarantee supplies to domestic and priority customers. This transferred the risk from NGG to shippers, whose gas could now potentially be trapped in storage, and was accompanied by more penal cashout arrangements leading up to, and in the event of, an emergency. Furthermore, the removal of the "85% rule" that allowed NGG to interrupt supplies to interruptible customers in the event of demand reaching 85% of a one in 20 year demand event for energy balancing purposes means that demand-side response can now be accessed by NGG only in an emergency. Only a few of these users have interruptible supply contracts with shippers—the result is that there is now less chance that the flexibility offered by these customers will be used to manage demand prior to an emergency being declared.

EDF Energy supports the increased demand-side participation in securing supplies for NDM customers within an appropriate commercial framework. Market-based mechanisms—eg contestable contingency storage contracts—are preferable to mechanisms that distort commercial positions and that do not provide choice (as is the case with the current arrangements).

2.17 Removal of barriers within the EU that prevent the efficient flow of gas to those markets that signal it is required

European energy market liberalisation should help to remove market risks that gas does not flow through the import infrastructure in response to price signals. Combined with this, increased information transparency across the whole EU gas market will assist market participants in moving gas across Europe. Improved information provision in the UK relating to UKCS production and planned usage of import infrastructure would also greatly benefit the UK market. Effective "use-it-or-lose-it" regimes should apply to all import infrastructure across the EU and on border pipeline capacity rights. This includes UK import infrastructure.

EDF Energy supports the further liberalisation of European gas markets.

2.18 Reforming obligations on gas suppliers to protect security of supply

The current arrangements allow suppliers to source gas however and whenever they wish to supply their customer base, including relying on the prompt market. We consider any obligation on suppliers to contract in excess of seasonal normal demand or commit a defined percentage of their total gas supply to storage (for example, as a mechanism to force a requirement for increased storage) to be counter-productive. This is because it could constrain gas that would otherwise get to market in a similar fashion to the French and German rules that contributed, in part, to reduced gas flows to the UK this winter.

EDF Energy does not support any change in the current gas supplier security of supply obligations.

2.19 Increased stability in the regulatory environment

Regulatory intervention increases risks for market participants. In this phase of major investment, both in physical infrastructure and contractually, to bring new supplies of gas to the UK market, it is essential that a stable long-term framework is established and maintained. Continual regulatory intervention and change is damaging to security of supply, as witnessed this winter.

2.20 Planning and permitting

It is essential that planning and permitting processes for new gas infrastructure projects are streamlined where possible, to enable as rapid as possible a physical response by market participants to market signals.

Inquiry Question 3

THE CAPACITY OF MICROGENERATION TO MEET A SUBSTANTIAL PROPORTION OF UK ELECTRICITY DEMAND IN THE MEDIUM AND LONG-TERM

Definition of Microgeneration

3.1 It is useful to have a consistent definition of microgeneration. EDF Energy accepts the description in the DTI Microgeneration Strategy and Low Carbon Buildings Programme Consultation (June 2005) document which describes microgeneration as, "The production of heat and/or electricity on a small scale from a low carbon source."

3.2 EDF Energy believes that microgeneration, producing heat and/or electricity on a small-scale from a low carbon source has a role to play, using technologies such as:

— Electricity Generation:

— micro hydro;

— micro wind;

— solar photovoltaic (PV).

— Heat Generation:

— bio-energy;

— ground source heat pumps;

— thermal/active solar heating systems.

— Combined Heat and Power:

— fuel cells;

— Micro-CHP.

3.3 In terms of size, these units are placed in a domestic setting and have on average an output of 1kW, and a realistic 5kW maximum power output.

PERSPECTIVES ON MICROGENERATION

3.4 EDF Energy believes that diversity is the key to providing security of supply in a low carbon future. Some of the benefits of microgeneration include:

— increased power output capacity for UK market—albeit small scale;

— reduced power losses through proximity of production to demand;

— potential for use as a backup power source in the event of distribution failure;

— potential for reduction in carbon output depending on fuel source used; and

— greater customer engagement and thereby awareness of the value of energy.

3.5 It is therefore important that the right conditions are achieved for microgeneration to flourish and with the necessary encouragement through appropriately targeted incentives.

BARRIERS TO MICROGENERATION

3.6 There are many barriers to be overcome before microgeneration can make a contribution in the short to medium term. These include:

— Products available—In the current immature stage of product development, available microgeneration technologies have yet to achieve a customer friendly "plug and play" proposition. Health and safety issues also need to be overcome, with potential for increased electric shock hazard being potentially greater than with more traditional solutions.

— Economic—From a supplier viewpoint, as with any new technology the costs will be higher than for conventional sources until economies of scale can be developed. From the customer perspective, long payback periods imply that customers would not adopt microgeneration for economic reasons alone. The overall solution will also require backup supplies to be available when local generation is insufficient to cover needs, and to cover failure of the microgeneration supply.

— Planning—For some of the micro technologies, planning consent may be required, which can delay/put off potential users.

— Metering—At present all electricity exported into the network must be half-hourly metered. The industry is currently working on load profiles that could potentially remove the requirement for half-hourly export metering.

3.7 We believe that microgeneration should be supported up to the point when commercial products are viable. After this point the micro-generation technologies should be free to compete with other forms of generation to meet energy policy goals. We see no case for extending cross-subsidies from demand customers to those with microgeneration over the long-term.

3.8 As part of the Renewables Obligation 2005-06 Review we supported proposals to reduce the administrative burden on micro renewable generation to claim Renewable Obligation Certificates. The measures were the removal of the requirement for "sale & buyback" arrangements and the ability to allow agents to act on behalf of a number micro generators. Both of these measures we understand are to be brought forward for implementation in April 2007, which will provide an additional revenue stream for microgeneration installations.

3.9 Distribution Network Operators need to receive sufficient and timely information on microgeneration connected to their networks, to ensure that technical and operational risks are clearly assessed and understood, and that efficient solutions are identified and funded.

3.10 For widespread adoption of microgeneration to be feasible, the devices must be reliable, economic to purchase, and above all easy to maintain, with—crucially—sufficient trained maintainers/installers available.

3.11 In overcoming these barriers, much work is yet to be done to further develop and prove the efficiency of microgeneration technologies. In an update on its ongoing field trial of Micro-CHP, the Carbon Trust reported:

"Very preliminary results for Micro-CHP indicate its performance is not as encouraging as had been hoped at the outset of the trial. About a third of the Micro-CHP installations in the trial would appear to reduce emissions and about a third increase them with the remainder showing no discernable difference." (November 2005)

MICROGENERATION CONTRIBUTION

3.12 Currently all microgeneration technologies are at a very early stage of their development. There are predictive techniques available for estimating the take-up of new products, based on the behaviour of different segments of customers. However, these can be applied only when products are proven in use and are commercially available.

3.13 Even if one took the optimistic and unsubstantiated view that, at the present time, there were no longer any significant technical and economic barriers to the take-up of microgeneration products and one then applied such predictive techniques, the diffusion of innovation and customer adoption would be expected to play out from 2005 to 2025-30 before maximum penetration had been achieved. Even then only a proportion of households, perhaps less than 15%, would have adopted microgeneration. On this basis, microgeneration would account for no more than 5% of UK generation by that time. Nevertheless, we support continued investigation of the potential for microgeneration and a measure of government support to encourage development and deployment, so that performance and economics can be better assessed.

3.14 Some of the most optimistic microgeneration projections are from the Energy Savings Trust (EST). The EST has predicted a large volume of generation to come from micro CHP. However we believe that the number and unpredictability of the influencing factors (eg advancement of the technologies, speed and effectiveness of legislation, continued government subsidy) undermine the confidence of any such predictions.

3.15 The EST projects the contribution of microgeneration under optimistic market assumptions. Idealised factors include the confluence of all influencing factors, not the least of which is continuing government subsidy and an Energy Export Equivalence (tariff) that is favourable to the consumer. In addition, the projected demand for domestic electricity is assumed to be a constant throughout the projection model whereas in reality it must be recognised that the trend is towards increased demand to fuel the growth in electronic devices in the home.

3.16 The low current level of customer engagement, due to the barriers highlighted above, implies that for the foreseeable future customers will be responding to, not driving, any increase in adoption of microgeneration.

3.17 Growth potential in the meantime will be driven by those customers whose concerns about the environment are supported by sufficient income to enable them to invest.

EDF Energy

March 2006

60 Demand reduction is an integral component of gas security of supply, eg interruptible contracts, commercial demand reduction and self interruption in response to price signals all have a role in managing one in 20 year peak day demand in the current market. Back

61 National Grid Gas, Gas Transportation Ten Year Statement. Back

62 National Grid Gas, Gas Transportation Ten Year Statement. Back

63 Note however that in the Ten Year Transportation statement one scenario describes a rather different situation with the UK acting as a gateway and conduit for gas being imported into the EU. Back

64 National Grid Gas, Gas Transportation Ten Year Statement. Back

65 Storage, Gas Prices and Security of Supply, Ilex Energy Consulting Limited, 2005, a report for the UK Offshore Operators Association. Back

66 EDF Energy storage project tracker. Back

67 Green Paper-A European Strategy for Sustainable, Competitive and Secure Energy, Commission of the European Communities, 8 March 2006. Back

68 Storage, Gas Prices and Security of Supply, Ilex Energy Consulting Limited, 2005, a report for the UK Offshore Operators Association. Back

69 NGG has demonstrated that of the 30mcm demand-side response achieved this winter, 20mcm/day came from CCGTs fuel switching or self-interrupting. Back