Select Committee on Trade and Industry Written Evidence


Evidence by E.ON UK

  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. 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 also owns or has interests in 23GW of nuclear capacity, located in Germany and Sweden.

THE NEED FOR DIVERSE LOW CARBON INVESTMENT IN THE UK POWER SECTOR

  3.  The UK power sector requires major sustained investment in energy infrastructure to cut CO2 emissions and maintain security of electricity supply. Over the next fifteen years to 2020, 9GW of existing nuclear and 13GW of coal and oil-fired generating plant will close, which equates to one third of total UK power plant.

  4.  Much of this closing 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. However, although CCGTs plants produce significantly lower emissions than existing coal plants, they emit more CO2 than nuclear plants and replacement of closing plant by gas-fired CCGTs would result in emissions rising from 2016 onwards, once coal-fired plant opted out of provisions of the Large Combustion Plant Directive has closed by 2015. In addition, gas-fired generation could account for around 70% of UK power generation by 2020.

  5.  This outcome is inconsistent with the Government's objective of putting the UK on a path to cut CO2 emissions by some 60% by about 2050, with real progress by 2020. Such a high proportion of gas fired generation may also leave the UK economy excessively exposed to movements in world gas prices. Investment in renewables and energy efficiency on the demand side, while capable of making an important contribution, will not be able to close the gap. E.ON UK and other energy companies therefore need a wider range of low or zero carbon power plant investment options than are currently available politically or commercially. The wider the range of options to the power sector, the lower the potential cost of reducing CO2 emissions and maintaining security of supply is likely to be.

  6.  We see the main low carbon investment options on the supply side potentially available over the period to 2020 as:

    —  CCGTs: investment in CCGTs will be required in the short term to maintain supply security at the end of this decade and the early part of the next. We are seeking consents for plants at Grain and Drakelow;

    —  Renewables: we are already investing substantially in on and offshore wind and biomass and are evaluating tidal and wave technologies;

    —  Clean coal and carbon capture and storage: we are carrying out a detailed feasibility study for a project on the Lincolnshire coast; and

    —  Nuclear power: we are carrying out preliminary work on evaluating this as an investment option for E.ON UK.

  7.  On the demand side, existing policies are making only a modest contribution to constraining demand growth. More radical action is required to encourage improvements in energy efficiency. Further measures are also needed to realise microgeneration's potential to make a significant contribution to the UK's carbon reduction objectives.

HOW TO INCENTIVISE INVESTMENT IN LOW CARBON TECHNOLOGIES

  8.  Companies such as E.ON UK will efficiently deliver adequate investment in a diverse portfolio of low carbon assets provided there is a sustainable policy framework which is robust to future uncertainty, and regulators/Governments do not intervene to reduce investment returns, including via ex-post taxation. De-centralised investment planning should therefore remain at the centre of the energy market.

  9.  The key challenges for the Government are to deliver a sustainable climate change policy, and increase the low carbon investment options available to companies.

  10.  UK climate change policy must deliver the largest long-term economic signal to invest in low carbon technologies through a carbon price that is consistent with maintaining the international competitiveness of the UK economy. UK policy should focus on supporting the development of the EU emissions trading scheme as the key driver of low carbon investment and on establishing international consensus on action to tackle climate change, while recognising that this may either not be achieved or will take some time to deliver. The UK should therefore:

    —  give priority to making Phase 2 of the EU emissions trading scheme work well, by structuring it to:

    —  avoid carbon prices which will put the future sustainability of the scheme at risk. This could be achieved through adequate "safety valves" (eg banking and borrowing, ensuring effective clean development mechanisms, cash-out prices);

    —  share the burden equitably across countries and sectors;

    —  encourage investment by providing a free allocation to new entrants on the same basis as permits are allocated to incumbents, and by allowing the transfer of allowances from closed installations to encourage investment in new capacity; and

    —  allocate permits on the basis of benchmarking which does not discriminate against coal plant whether opted in or out of provisions of the LCPD;

    —  be prepared to use Phase 2 of the EU ETS as a vehicle to fund investment in developing technologies (eg through recycling of receipts from permit auctions);

    —  work for the earliest possible resolution of the international framework for reducing global carbon emissions to apply after the Kyoto period expires at the end of 2012 and define its relationship to and rules for Phase 3 of the EU ETS to run from 2013; and

    —  develop in parallel an alternative climate change strategy for the UK, in the absence of sufficient international agreement, aimed at continuing to reduce emissions but minimising the impact on the UK's international competitiveness.

  11.  It is important that the market is not undermined through the introduction of long-term subsidies and further obligations to pick technology winners. Government should:

    —  ensure that mature low carbon technologies—such as nuclear power and mature renewable technologies such as onshore wind—are subject to an appropriate regulatory regime which supports efficient and timely delivery of investments;

    —  support financially the development of emerging low carbon technologies (for example, carbon capture and storage, wave/tidal power) that have the potential to play a significant role in our future generation mix. Particular demonstration requirements should be identified and companies would then propose projects and compete for funds raised from the sale of permits under Phase 2 of the EU ETS; and

    —  confirm that the Renewables Obligation will remain in place in its current form but there is no intention to extend it beyond the current 2027 timescale.

  12.  Significant effort should be focussed on improving energy efficiency. Investment by suppliers is primarily driven by the Energy Efficiency Commitment scheme but an approach is required which provides stronger incentives for consumers to alter their behaviour, particularly through direct fiscal incentives, and supports innovation by suppliers. Microgeneration can also play a significant role, both on the supply and demand side. It can only fulfil this potential within a long term market framework which rewards its low carbon potential, and includes pump priming support for emerging technologies in the short term. The required measures are discussed below.

NUCLEAR: PARTICULAR CONSIDERATIONS THAT SHOULD APPLY TO NUCLEAR?

  13.  New nuclear plant potentially has a role in contributing economically to the UK's CO2 reduction targets and, in an era of high fossil fuel prices, to a diverse and secure energy supply.

  14.  It is a matter for Government to decide whether new nuclear plant should be available as an investment option. In a competitive energy market, decisions on investment in new nuclear power plants (and the extent of that investment compared to other options) should then be a matter for companies in the light of their assessment of the relative economics of nuclear and their value in diversifying risk, subject to meeting the local planning, licensing and other approval requirements which apply to nuclear power plants. The following issues would need to be addressed before it could become a viable investment option:

Public acceptance

  15.  Nuclear is a technology on which there are widely diverging views. Investors would need to be confident of broad public and political acceptance of new nuclear build through full consultation and debate, a White Paper and a positive statement from Government of the role it believes nuclear has to play in a diverse and low carbon fuel mix. Resolution of Government policy on radioactive waste disposal will be needed as part of the process of securing public acceptance.

Licensing and Planning Issues

  16.  Investment in new nuclear plant is subject to a wide range of planning and licensing approvals which can add substantially to project costs and investment risks. The Government would need to take steps to mitigate these risks if new nuclear is to be a practical commercial option.

  17.  In particular, the economics of new nuclear projects depend significantly on the UK licensing internationally available designs with limited or no modification and the ability of utilities to secure competing bids from alternative plant suppliers. The licensing process by the NII therefore needs to provide for the pre-licence design certification of a number of alternative international designs.

  18.  The various inter-related legal licensing and planning processes need to be arranged such that a programme of new nuclear plants is approved on a generic basis before site-specific proposals are considered. This will avoid duplication of effort and reduce costs across a programme and reduce risk for prospective developers, while allowing full public consultation on both generic and site-specific issues.

Carbon pricing

  19.  Assuming reasonable licensing and planning processes, we would expect investment in new nuclear plant to be a credible economic option given current expectations of fossil fuel prices and confidence at the time a final investment decision would be taken (at least five years hence) in a sustained value for carbon emission abatement.

Availability of sites

  20.  Suitable sites for plants within a new nuclear programme should be identified through the Government conducting a Strategic Environmental Assessment. If, very few suitable sites are identified, then the Government should consider how these can best be made practically available to prospective developers.

Waste management and decommissioning

  21.  Discounted waste management and decommissioning costs make up a 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.

  22.  However, investors would need 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 this waste. Resolution of Government policy on irradiated waste disposal and its intended method of disposal and/or storage would therefore be required before a decision could be made to proceed with a new nuclear plant project.

  23.  The Government is the natural legatee of spent fuel and intermediate level waste 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 a defined time.

  24.  Clear definition of responsibilities for disposal and storage of waste and for nuclear power station decommissioning, including arrangements for ensuring relevant costs are met by plant operators, will help give the public confidence that these key concerns have been properly addressed.

THE IMPLICATIONS OF INCREASED DEPENDENCE ON GAS IMPORTS

  25.  Increased dependence on imported gas is more likely to give rise to price risks than security of supply risks. The UK market will assume more of the characteristics of the continental market as the UK moves from a position of self-sufficiency and a relatively large number of domestic producers toward one of import dependence with a smaller number of large producers in the major gas exporting countries—Russia, Norway, and Algeria—accounting for the majority of gas supply. LNG will provide an important additional source of supply but its price and availability will be affected by demand for LNG in the US, South East Asia and Japan (which, unlike Europe, do not have the same access to imported gas delivered by pipeline).

  26.  The interrelationship between the UK and continental European and LNG markets will therefore strengthen with market conditions and prices increasingly affected by conditions outside the UK. UK gas prices should decline from their current price levels from around 2007, with the availability of additional sources of supply, but the price of oil will remain an important factor affecting continental and thus UK prices. In the longer term, we would expect gas prices to rise again as demand for gas rises in response to the EU ETS and similar policy instruments, new more expensive gas reserves have to be exploited, and new pipeline and LNG infrastructure has to be constructed. Prices may also be influenced by the commercial behaviour of the limited number of upstream gas producers.

  27.  Energy companies want to manage these risks by both diversifying their sources of gas supply and diversifying their sources of fuel for power generation.

  28.  Energy companies are already delivering the required investment in infrastructure (including storage, interconnection, and LNG processing) to maintain secure and diverse gas supplies to the UK. In the medium term the UK is better placed than many other European countries in terms of access to a geographically diverse range of sources of gas.

  29.  In electricity, additional gas-fired CCGTs will have to be built over the next few years to maintain adequate supply margins in the power market but E.ON UK will then want to consider diversifying its portfolio of low carbon power plant to avoid an unacceptable level of price risk in respect of its fuel purchasing costs and to continue reducing its CO2 emissions.

  30.  The Government should take the following steps to support diversity of gas supplies and diversity of fuels for power generation:

    —  it should ensure that a wider range of low carbon investment options for generating capacity are available; and

    —  while in future increasing volumes of coal for power generation are likely to be imported, it should continue, in the interests of diversity, to support the economic potential of the UK coal industry as a supply source.

  31.  Given that imported gas will account for an increasing proportion of UK requirements over the next few years, the UK Government should:

    —  support within the UK and the EU the construction of necessary pipeline, terminal and processing infrastructure needed to secure access to diverse sources of gas on global markets;

    —  facilitate the development of more gas storage in the UK by ensuring that the land use planning process fully and efficiently reflects the Government's energy policy objectives;

    —  promote the development of competitive gas markets and increased liquidity within the EU in a manner which does not disrupt investment in new gas resources and infrastructure; and

    —  work more closely with other Member States and with the Commission to develop constructive and effective relationships with energy exporting countries to promote trade, investment by European companies within a stable and transparent legal framework, and to encourage more competition in global energy supply.

MICROGENERATION

  32.  Microgeneration could provide a significant proportion of the UK's electricity needs, although it is too early to provide definitive estimates, as all microgeneration technologies are at a relatively early stage of development.  However, some studies by the Energy Saving Trust and others give an indication of the possible scale of microgeneration, with microgeneration contributing up to 20%—30% of UK electricity supply by 2050.

  33.  At present most microgeneration technologies are not fully developed although micro CHP using gas for electricity production and heating (such as E.ON UK's Whispergen product) has the most economic potential in the short term. Current micro CHP products are of nominal 1kWe electrical output and a market of 12-13 million homes is potentially viable with current energy prices. We would expect small scale wind to become economic in areas of high wind resource over the next ten years with solid-oxide fuel cells potentially having a role beyond that. Photovoltaic electricity is unlikely to be economic for widespread use for some decades.

  34.  As with large scale generation, the extent to which microgeneration contributes to UK electricity demand should be primarily driven by the market within a policy and regulatory framework which facilitates investment, removes regulatory barriers and supports the development of emerging technologies, although the support mechanisms will need to be appropriate to this distributed form of generation.

  35.  Government should fund emerging microgeneration technologies on a scale consistent with its support for emerging large scale technologies such as carbon capture and storage, offshore wind and marine, the key criterion being its potential contribution to reducing UK carbon emissions economically, and implement a regulatory and energy policy environment which actively supports microgeneration on a long term basis. In particular, the Government should aim to:

    —  minimise the high administrative costs which small scale electricity generators incur (for example the complex procedures necessary to acquire and process ROCs for small scale generating plants need to be simplified);

    —  ensure electricity customers with microgeneration receive fair market value in what they pay for electricity imports and are paid for exports, reflecting their daily profile of electricity imports and exports;

    —  ensure broadly equivalent fiscal treatment of low carbon technologies at the micro and macro scale; and

    —  support commercially available forms of microgeneration through building regulations; and ensuring that microgeneration is attributed the full value of abated carbon emissions, to the extent that this is not already covered through the value of electricity exports.

  36.  The forthcoming Government microgeneration strategy will provide an opportunity to assess progress toward these goals.

E.ON UK

March 2006





 
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