Select Committee on Trade and Industry Written Evidence


APPENDIX 47

Memorandum by RWE npower

BACKGROUND

  1.  RWE npower, part of the RWE Group, is one of the UK's largest energy suppliers, with around six million customers and a diverse portfolio of over 8,000 MW 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 Trade and Industry Committee's inquiry into the Energy Review. We believe that the Review is timely if the UK is to have an energy policy framework which enables market participants to find cost effective ways of achieving further reductions in carbon dioxide (CO2) emissions, while ensuring security of supply through a diverse fuel mix for electricity generation.

  3.  We note that the Committee intends to concentrate initially on three questions and our response below focuses on the aspects of each question where we believe we can most usefully make a contribution.

A—THE PARTICULAR CONSIDERATIONS THAT SHOULD APPLY TO NUCLEAR NEW BUILD

  4.  We believe that Government should create a long-term energy policy framework that encourages the market to develop low carbon technologies including clean coal, renewables and nuclear. We are doubtful that there is a real prospect of achieving the Government's carbon reduction and security of supply targets without resort to all these technologies, as well as increased impetus to energy efficiency. We believe that new build nuclear could form part of a diverse UK energy mix. Provided the tests of economics and public acceptance are met, new nuclear could contribute to reducing emissions and reliance on imported fossil fuels. In fact, it is hard to see how the Government's carbon reduction targets can be achieved without, at least, the replacement of the existing nuclear fleet. However, given the limited lives of the Advanced Gas-Cooled Reactors (AGRs) (even with some life extension) and the definite closure of the Magnox plant, the first new nuclear plants would simply replace closing AGRs. It would be at least 15 (and more likely 20) years before the total proportion of generation from nuclear power could be increased beyond current levels.

  5.  It is notable that there is no absolute bar to the construction of new nuclear at the moment, yet no new nuclear plant has been built in the UK since privatisation. It is clear that the viability of nuclear depends on a partnership between the private sector and Government in which each party takes responsibility for those risks which it is best able to control. For example, private sector investment will be encouraged if there is assurance of:

    (i)  Enabling of pre-licensing of international nuclear reactor designs with the minimum of modification for the UK market, for "typical" site conditions. This would need to be coupled with a Strategic Environmental Assessment (SEA) for the industry, which would increase the probability of keeping generic policy issues out of the consent process for individual projects.

    (ii)  The development of a robust policy framework which underpins a value for CO2 emission reductions if the UK is to deliver a diverse long-term UK generation mix. Unfortunately, experience of the UK approach to Phase 1 of the European Union Emissions Trading Scheme (EU ETS) and LCPD in recent years is not encouraging. An allocation period of at least 15 years is required under the third phase of the EU ETS which is aligned to investment cycles in large-scale generation technology.

    (iii)  Mitigation of stranded development costs (a new nuclear programme would be expected to incur significant "launch" costs associated with licensing, planning and construction). There are a number of possible solutions for this, the most practical of which would be amendments to the current tax regime.

    (iv)  Enduring political support regarding the operation of nuclear plant.

    (v)  A clear framework for waste disposal, decommissioning and insurance issues.

  6.  The Energy Review Consultation paper noted the substantial volume of new capacity which will be required by 2020. If nuclear is to make its contribution to replacing this capacity, the above issues would need to be addressed immediately given the lead times for nuclear power stations.

B—THE IMPLICATIONS OF INCREASING DEPENDENCE ON GAS IMPORTS

(a)   The scale of gas dependence

  7.  We believe the Government's current assumptions about the growth in electricity demand appear to be unrealistically low. Indeed, "business as usual" could result in greater than 80% dependence on imported gas, and as much as 75% of electricity generation fuelled by gas by 2025.

  8.  Whilst we believe markets are responding to the challenge of providing secure gas supplies, it is understandable that the Government is concerned about such an outcome. Potential risks include:

    (i)  Increased possibility of supply shortages or price spikes due to political instability or major infrastructure failure. Recent experience has demonstrated that gas is increasingly a global commodity. The physical capability to import gas does not guarantee that it will be available.

    (ii)  Increased risk of price rises given the continuing linkage of gas prices to oil prices.

    (iii)  Failure to hit carbon targets as gas-fired generation replaces nuclear.

    (iv)  Loss of the ability for the electricity system to provide virtual gas storage by switching off gas plant and running plant using alternative fuels, a capability which has proved so valuable in the current winter when oil and coal plant substituted for gas-fired generation.

(b)   Possible Mitigation measures

  9.  Whilst some of the above risks can be mitigated by the diversification of gas sources and channels, significant issues remain. Additional means are likely to be required including:

    (i)  Reducing electricity demand through an increased emphasis on energy efficiency measures.

    (ii)  Continuation of development projects for additional operational storage.

    (iii)  Extended demand-side management arrangements.

    (iv)  Diversification of fuel sources for generation.

    (v)  Fuel storage diversification.

  10.  We believe a major contribution can be made by diversification of fuel sources and fuel storage.

(c)   Diversification of fuel sources

  11.  The UK is currently fortunate to have a diverse portfolio of generating assets. Environmental legislation and nuclear plant retirements are set to erode that diversity in the future. In general, vertically integrated generators have commercial incentives to maintain diverse portfolios by choosing from a wide range of alternative technologies. However, at current and projected relative fuel prices and construction costs, and in the absence of clarity over arrangements for pricing carbon, the preferred technology is likely to be gas.

  12.  We consider below what refinements to the market framework might assist the promotion of fuel diversity in both the short- and long-term.

  13.  Short- to medium-term diversity, as well as an adequate overall capacity margin, could be achieved by keeping existing plant that is technically fit open to contribute to meeting the growing electricity demand. This would maintain a diverse generation portfolio until such point where new, low carbon technologies (nuclear, clean coal, offshore wind, etc) are commercially and technically available. Appropriate allocations under Phase 2 of the National Allocation Plan (NAP) have an important part to play in promoting this outcome.

  14.  There is evidence that market participants are investing in the additional operational storage required as a result of the loss of swing from the UKCS. However, the provision of energy storage could be provided more cost effectively under a diversified electricity generation scenario. Coal (and oil) stocks can be maintained more cheaply than gas and can continue to provide security directly to the electricity system and indirectly to the gas system via diversion of gas from Combined Cycle Gas Turbine (CCGT) plant. Maintenance of coal plant also increases the opportunities for coal-fired carbon capture and storage (CCS) projects in the longer term by retaining coal supply infrastructure. In contrast, gas stocks incur expensive liquefaction or injection and "sterilised" cushion gas[118] costs.

  15.  As part of a balanced package to deliver the twin objectives of security of supply and carbon reduction, we support research into CCS projects. Given the inherent CO2 advantage of gas-fired generation, we believe that CCS is only a sensible priority for projects based on clean coal technology. However, considerable additional Government support (well beyond the £35 million currently committed) will be needed if CCS is to be in a position to contribute to a diverse national generation mix by 2020.

  16.  In order to ensure that a diverse fuel mix can be delivered, it is also essential that the Government review the planning and consents framework, including the environmental permitting process, for all types of generation whether new nuclear, renewables or coal and gas-fired plant. The present processes are becoming increasingly protracted causing uncertainties for investors and this needs to be addressed if the Government's desired outcomes are to be delivered.

(d)   Renewables

  17.  Appropriate modifications to the RO and/or other sources of financial support may be necessary to deliver a diverse range of renewable energy technologies, for example offshore wind. Therefore the feasibility of changes to the RO, to ensure that it continues to deliver value for money for consumers whilst protecting existing investments, may need to be considered.

(e)   Carbon Valuation

  18.  In order to promote diversity in the longer term, an early and credible commitment to the long-term framework for pricing carbon is required, beginning with a commitment to argue for a 15 year Phase 3 which will bring the mechanism into line with realistic investment cycles. This will enable investors in low carbon technologies and energy efficiency measures to make confident judgements regarding the investments whose viability may depend on a price for carbon. The carbon framework is also relevant to enabling companies to take prompt decisions between gas, coal and nuclear technologies for replacement plant. As noted above, in the absence of sufficient clarity over the long-term price for carbon, gas becomes the preferred fuel for new capacity across a wide range of fuel price scenarios.

  19.  Many of the technologies that contribute to diversity cannot realistically be online until the end of the next decade or later. Unless the Government signals its commitment to diversity by putting in place a clear framework, there is a risk that the market will overbuild CCGTs prior to the availability of diverse technologies. This in turn could undermine the willingness of operators to invest in new technologies, jeopardising the optimum level of diversity.

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

  20.  We are focusing our attention on heat-led microgeneration technologies, which we believe will provide customers with the greatest benefits and we are actively supporting first movers in ground source heat pumps in the UK. Although all microgeneration technologies have characteristics that suit certain property types or consumption profiles, we consider that electricity powered heat pump technologies have the potential to make a significant contribution to domestic space and water, with electricity effectively replacing other primary fuels in this market.

  21.  All projections indicate significant growth in microgeneration between now and 2020, possibly stimulated by the adoption of the technology in Building Regulations around 2010. Assessing the potential of microgeneration in the longer term (for example, up to 2050) is more difficult given the uncertainties involved. It is, for example, very difficult to predict the effect on average domestic electricity consumption of increases in the use of domestic electrical appliances or increased use of air conditioning over the next 45 years and the effect of this on overall demand. Nor can we predict the effect of the take-up of other technologies such as electric vehicles.

  22.  In terms of electricity generating and/or exporting technologies, there are currently three technologies at different stages of commercialisation that could potentially affect electricity demand. Photovoltaic (PV) capacity is a mature but expensive technology. Its electricity generation profile indicates significant export during the day at the time of lowest residential demand. Despite significant investments, electricity storage technologies which could take advantage of this generation profile are not yet commercially available.

  23.  The largest predicted growth in microgeneration capacity is associated with domestic combined heat and power (dCHP), which is assumed to penetrate the traditional central heating boiler replacement market. However, dCHP electricity output is limited to periods of high demand (it would only produce electricity during peak times of gas use (ie 6-9 am and 5-10 pm during the winter months). It therefore has the potential to lower electricity demand but only when the boiler is firing and only during winter months.

  24.  Finally, micro-wind power is a technology in the early stages of development. It is doubtful whether it could make a significant contribution as urban wind speeds are unlikely to be adequate. There are also building regulation and planning issues which may restrict its development.

  25.  Our assessment at this stage, therefore, is that it is unlikely that microgeneration will significantly affect overall electricity demand in the medium term. Even under the most optimistic of scenarios, the characteristics of electricity producing microgeneration technologies mean that they are only likely to reduce peak electricity demand rather than reduce dependence on major generation.

  26.  Instead, we can foresee a situation where electricity demand actually increases. As the thermal efficiency of new houses increases many properties can be adequately heated using electrical heating systems (whether heat pumps or traditional storage heating). This move towards electricity may lead to reduced reliance on other primary fuels and increase fuel diversity, which may be attractive given present concerns over security of energy supplies.

17 March 2006



118   Gas that must remain in the storage facility to provide the required pressurisation to extract the remaining gas. Back


 
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