Memorandum by RWE npower
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.
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
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
(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
(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.
(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
(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
(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
(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
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.
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.
UK ELECTRICITY DEMAND
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
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
17 March 2006
118 Gas that must remain in the storage facility
to provide the required pressurisation to extract the remaining