Select Committee on Welsh Affairs Written Evidence


Written Evidence from Centrica

INTRODUCTION TO CENTRICA

  Centrica plc. was formed in 1997 after the former British Gas plc was demerged to form BG Group and Centrica. In the UK, it trades under its brand names, British Gas, Scottish Gas and Nwy Prydain. It is the UK's largest energy supplier, supplying around 11 million gas and 6 million electricity customers in the domestic sector and around 900,000 customers in the Industrial and Commercial sector.

  To support its supply businesses, Centrica owns both gas and electricity production assets. In the UK, a significant but declining proportion is secured through its own reserves, chiefly the Morecambe gas field. As its UK reserves decline, the company is investing over £12 billion in new international gas supplies. Centrica also owns Rough storage facility through its subsidiary, Centrica Storage Limited.

  Renewable energy is playing an increasing important role in Centrica's energy portfolio contributing both to delivering diversity of supply and helping to meet the Government's carbon emissions' targets. The company has committed £750 million in developing both offshore and onshore windfarms.

  Energy efficiency also has an important part to play in both reducing energy consumption and meeting the Government's environmental goals. Across the UK, since 2002 the company has so far installed around 26.4 million energy efficiency measures such as loft and cavity wall insulation. The company also invests in fuel poverty programmes to help its vulnerable customers and those who find it difficult to pay their energy bills.

  Centrica welcomes the Welsh Affair's Select Committee inquiry which comes at a time when energy related matters such as security of supply and the forward outlook for gas prices high are on political, business and consumer agendas.

1.  CURRENT AND FUTURE ENERGY NEEDS OF WALES

  1.1  As with the rest of the UK, affordable, reliable and clean forms of energy are essential for Wales to meet the demand of both consumers and the economy. This has been considered in more detail in the Welsh Assembly document: "Energy Wales: Route map to a clean, low carbon and more competitive Energy Future for Wales." A central tenet of this was that through its geographical and industrial structure there is real potential in Wales for major renewable projects and improving energy efficiency.

  1.2  Gas also plays an important part in the electricity mix in Wales. Centrica owns Barry Power Station, a 230MW gas fired power station on the outskirts of Cardiff. The power station offers flexible operations, typically starting up and shutting down on a daily basis depending on capacity demand to meet the demands of Centrica's customers.

  1.3  Fuel poverty is a concern given Wales's relatively high proportion of low income households and the age of the housing stock in some of its poorest areas. According to the most recent estimates, approximately quarter of a million people in Wales are defined as living in fuel poverty. The Government's Warm Front and energy suppliers' energy efficiency schemes are helping to insulate the homes of vulnerable people. However, many in owner-occupied or privately rented accommodation are slipping through the net and more needs to be done if the Government is to deliver on its targets to eradicate fuel poverty amongst vulnerable groups by 2010 and amongst all groups by 2016.

  1.4  Centrica remains committed to helping fuel poor households through its ongoing commitment to the Government's Energy Efficiency Commitment (EEC) scheme and its "here to Help' programme run in conjunction with Help the Aged and other charity partners, Centrica is also committed to improving the quality and warmth of social housing for those living in the most deprived areas. A number of schemes are operating throughout Wales and some 33,000 homes have benefited from direct assistance (mostly through installation of insulation) to date.

  1.5  Domestic energy consumption has increased every year since 1980 with 25% of emissions coming from the domestic sector. Energy efficiency is the lowest cost carbon abatement tool, and will play an important role in ensuring that the Government's carbon emission targets are met. Since 2002, British Gas has installed around 1.4 million energy efficiency measures in Wales through the Energy Efficiency Commitment.

  1.6  However, so called "able to pay" householders are still not being motivated to invest in energy efficiency products. British Gas and a number of Local Authorities have been trialing a green council tax rebate. Under the incentive, householders who install £175 of cavity wall insulation receive a one off reduction of up to £100 towards their annual council tax bill. The "green home package" also provides a Home Energy Audit as well as energy efficient light bulbs to the value of £20.

  1.7  So far Braintree Council, South Cambridgeshire, South Hams Council and most recently Taunton Deane Borough Council have all become involved in the scheme. We are in discussions with a further 20 Councils who are considering adopting the scheme. Initial take-up has been very encouraging, generating around 800 enquiries and insulation has been installed in over 300 homes. This clearly demonstrates that there is a clear incentive for energy efficiency products when linked to energy efficiency measures.

2.  CURRENT AND FUTURE ENERGY PROVISION OF ENERGY IN WALES

  2.1  Centrica supports diversity of energy sources in meeting the UK's energy requirements. It also believes that a UK wide-market based approach is best suited to meeting Government security of supply and environmental objectives. For example, the Renewables Obligation has been instrumental in incentivising investment in offshore and onshore wind, some of which are already operating and delivering energy to Wales. These include Westbury Windfarm Ltd's onshore windfarm in Ceredigion and the North Hoyle offshore windfarm owned by NWP Offshore Ltd.

  2.2  The construction of the Bacton-Zebrugge interconnector links us firmly to the North -West European market and therefore to a wider North- West European gas market, subject to influences from both the UK and Continental markets. It is now important to look at how the UK market might best integrate with a slowly converging European market.

  2.3  Fully competitive energy markets brings benefits such as customer choice and better customer service and can result in downward pressure on prices and considerable savings for end-users. The UK represents an excellent example of the benefits that competition can bring. Since the introduction of competition, the average domestic gas bill in the UK has fallen by 18% in real terms, whilst the average UK domestic electricity bill has reduced by 11%.

  2.4  The UK energy market is however facing some significant energy challenges. For decades the UK has been self sufficient in gas, and indeed producing gas that was surplus to Britain's energy needs. However, North Sea reserves of gas are declining more quickly than expected, which has resulted in the UK becoming a net importer of gas in 2004.

  2.5  This is having a direct impact on gas wholesale prices which have reached unprecedented highs. Over the last three years wholesale gas prices have increased by over 180%. As a result, all energy suppliers have been forced to increase their consumer prices. In September 2005, Centrica increased its prices for gas and electricity by 14.2%.

  2.6  Clearly higher energy prices have an impact on all our customers but particularly our vulnerable customers who are least able to afford higher prices. To offset the increase we have introduced a winter rebate of up to £60 for around 250,000 of our most vulnerable customers. To qualify for the rebate, customers need to be in receipt of specific Government benefits. The response to date has been good with around 140,000 customers qualifying for the rebate. Targeting also seems to be effective with over two thirds of customers being in receipt of two or more benefits. This is the biggest social initiative carried out by any UK energy company and comes on top of the existing £10 million British Gas Energy Trust which is helping customers in debt who need financial assistance to pay their bills.

  2.7  As new gas supplies come on stream in 2008 then we would expect to see downward pressure on prices. New pipelines are being built linking the UK to Netherlands and Norway and the Interconnector from Belgium to the UK has recently been expanded. New LNG import facilities are also being constructed as are new storage facilities. Companies such as Centrica are investing in new long terms contracts to bring international sources of gas to the UK.

  2.8  However, it is essential that EU energy markets liberalise and that there are no obstacles to the free flow of gas across Europe to the UK. The recent DG Competition preliminary findings highlighted the serious problems in European energy markets as a result of incumbent monopoly suppliers and lack of access to networks.

  2.9  We are pleased that the UK Government has made EU energy liberalisation a priority of its UK Presidency of the EU and it is essential that it keeps pressing the European Commission and other Member States to ensure effective implementation of the Directives throughout the EU. In the meantime there is clear evidence that UK customers are paying for the failure of EU energy liberalisation. A recent report by Global Insight estimated this cost at £10bn per annum as a result of the oil linkage that remains in some long term contracts with Europe. These costs are feeding through to UK energy prices as the UK imports more gas from Europe

3.  RELATIONSHIP BETWEEN UK GOVERNMENT AND THE WELSH ASSEMBLY

  3.1  Energy policy remains a retained Westminster power and Centrica believes that this should remain the case. We believe it is important to develop an integrated, broad energy generation and distribution strategy which reflects the need of all UK consumers and businesses as a whole.

4.  CURRENT AND FUTURE PORTFOLIO OF ENERGY PROVISION IN WALES

  4.1  Centrica believes that a mixed portfolio of gas supply and power generation is best served to deliver future security of supply. It is also important that the market and not the Government (devolved or otherwise) determine the "energy mix."

  4.2  However, intervention may be necessary to bring about results that a purely free market may not deliver. For example, the market may not favour less carbon polluting forms of power generation and in cases such as these, market based mechanisms such as the Renewables Obligation and EU Emissions Trading should be used. The EU Emissions Trading Scheme, for example, helps the transition to a low carbon economy happen at least cost to consumers.

  4.3  Below we look at some of the technologies and generation sources currently being considered in relation to energy policy:

5.  NUCLEAR ENERGY

  5.1  Existing nuclear power stations in the UK currently meet around 19% of electricity demand. However, there has not been new build of nuclear power stations in Britain for over 10 years and as most reactors close over the next 20 years, this will leave only Sizewell B running until 2035.

  5.2  Centrica has no fundamental issues with nuclear generation which for many years has delivered secure and carbon free electricity. However, nuclear build is not an easy option and does not come without serious problems.

  5.3  There is still no solution as to what to do with the nuclear waste and we will have to wait until the newly formed Nuclear Decommissioning Authority (NDA) delivers its proposed solution in 2006. Waste has significant problems associated with it in terms of public opinion and long term safety. For the public to support large scale new nuclear build, it will be necessary to solve the outstanding long-term nuclear waste disposal issue. It is for the government to ensure that companies who own and operate new nuclear, do so in a safe and effective manner.

  5.4 The time span involved to plan, build and make a return on investment for new nuclear build is longer than other forms of power and can take up to 50 years in total, (against the total product life cycle of a Combined Cycle Gas Turbine (CCGT) power station of 25-30 years). Investors would be wary of making such a long term investment in any sector let alone the UK energy market, which has been subject to numerous policy changes over the last two decades.

  5.5  It must also be noted, that if a decision is taken to go ahead with a new fleet of nuclear power stations, when licensing, planning and building is taken into consideration, they would not be on stream for at least another 10 years. Therefore, new nuclear build will have little impact of security of supply and carbon reduction in the short-term.

  5.6  To reduce the risk associated with new build, the government would have to provide either upfront subsidy or introduce a policy mechanism which forced retail suppliers to source a proportion of their electricity supply from nuclear stations. Both of these options would have a significant impact on the current liberalised market. Combined with the Government's desire to increase the Renewable Obligation to 20%, adding some form of nuclear obligation on suppliers would mean that almost one half of the energy supplied by private companies would be dictated by Government policy.

  5.7  This would act to reduce the ability of suppliers to compete with each other, thereby impacting the price consumers pay, as well as reducing the potential of suppliers to source the most efficient sources of fuel for power generation needs.

  5.8  The impact of the EU emissions trading on the development of less carbon intensive power production should not be ignored. By rewarding electricity generators that produce less CO2 for every unit of electricity produced, the EU ETS builds the price of carbon into the power price and thereby favours nuclear generation.

  5.9  It is Centrica's view that in addition to a decision on new nuclear build being made, real effort should be made to ensure the success of the EU ETS which, if allowed to work correctly, will deliver environmental savings at the lowest cost to the consumer.

6.  LNG

  6.1  LNG provides important diversity of gas supply sources for Europe, since it provides a way of transporting gas economically over longer distances. Currently the UK has only limited LNG import capacity at 4% of total supplies compared to 63% in Spain and 21% in France. With the construction of new terminals at the Isle of Grain and Milford Haven and the conversion of the LPG facility at Canvey Island this should increase to an estimated 20% by the end of the decade.

  6.2  Although global LNG supplies are expected to be tight over the next few years, there are many new LNG projects under development (eg Nigeria, Qatar). Large scale liquefaction trains and bigger ships mean that the economics of supplying LNG have improved. Many new projects are expected to come on line in response to the high levels of gas prices, particularly in the US. With the construction of new regasification terminals in North America and elsewhere, the gas market is becoming increasingly international and the UK will have to compete globally for future LNG supplies.

  6.3  In August 2004 Centrica announced a major 15 year LNG supply contract with Petronas of Malaysia. Commencing in 2007-08, the agreement will help to underpin the development of new import infrastructure, enhancing the UK's security of supply and deliver approximately 45bcm over the lifetime of the contract. The construction of the plant at Milford Haven will undoubtedly be good news for the local economy through the creation of hundreds of skilled jobs and contracting opportunities.

7.  CLEAN COAL TECHNOLOGY

  7.1  With the rocketing expansion of the Chinese and Indian economies placing a heavy reliance on coal as a source of power generation, the importance of clean coal cannot be underestimated. International Energy Agency forecasts have indicated that some 38% of the world's electricity will still be generated from coal by 2020.

  7.2  While gas prices continue to run ahead of coal, it will continue to draw interest from acquisitive power generation companies. However, it might become comparatively unattractive to those contemplating the arrival of the more punative phase 2 of the EU ETS. The key to its long term viability is the promotion of clean coal technologies.

  7.3  With Wales' history of coal mining, clean coal technology could play a key part in Wales' future energy needs. The Uskmouth power station in Newport already utilises flue gas desulphurisation—FGS—and is one of the cleanest plants of its size in the UK. Additionally, the necessary consents to fit FGS to Aberthaw in the Vale of Glamorgan have been obtained.

8.  WIND FARMS/RENEWABLE ENERGY

  8.1  As a major supplier of electricity, Centrica has a significant Renewables Obligation which we plan to meet by developing our own renewable assets, negotiating purchase contracts with renewable generators and participating in the ROC market. Centrica is the only supplier that has met its ROC target for both of the first two compliance periods (April 2002-March 2003 and April 2003-March 2004) entirely using ROCs, without having to resort to the buy-out option.

  8.2  Renewable sources of energy are important to UK security of energy supply. However it must be recognised that the Renewables Obligation is still in its infancy and it is therefore essential that there is no "tweaking" of the obligation in favour of one technology over another if investor confidence is to be maintained.

  8.3  In 2003, Centrica announced investment plans of £750 million for developing renewable generation assets, and is currently developing a 26MW onshore wind farm in Scotland, has a 50% stake in a 90MW Round 1 offshore wind farm at Barrow, and two further Round 1 offshore wind farms about to be constructed at Inner Dowsing and Lynn, off the Lincolnshire coast. Centrica is also pursuing three large Round 2 offshore developments in the Wash, bringing the total capacity of investment plans up to 1500MW.

  8.4  Although Centrica does not currently have any investment in wind energy projects in Wales, it is however aware of Wales' potential suitability for development of Wind energy projects. As in other parts of the UK, many of the areas which might be considered suitable for development of on-shore Wind energy fall within the boundaries of National Parkland—eg—Pembrokeshire, Snowdonia and Brecon.

9.  GEOTHERMAL/TIDAL AND WAVE/HYDRO ELECTRIC

  9.1  Centrica has no such assets or planned acquisitions in Wales and believes that these technologies are still in their infancy and are not yet commercially viable

December 2006





 
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