Memorandum submitted by Centrica Energy
INTRODUCTION
1. Centrica welcomes the opportunity to
respond to the Environmental Audit Committee's inquiry on the
2007 Pre-Budget Report and Comprehensive Spending review. Our
response focuses on the Government's current environmental fiscal
strategy as it relates to both lower-carbon generation and energy
efficiency.
2. Centrica believes that environmental
fiscal strategy can play a significant role in promoting a more
sustainable society by sending appropriate market signals to influence
investment decisions and behavioural change. It is important,
however, that the practical limitations of fiscal drivers to change
are understood, and that environmental fiscal measures work together
in support of specific policy aims, and do not promote contradictory
policy outcomes.
3. Whilst we recognise the significant steps
that have been taken in recent years to utilise fiscal strategy
in support of environmental goals, we believe that there is room
for further improvement. It is also vital that such measures are
themselves stable and sufficiently long-term in nature in order
to provide the necessary long-term investment signals that are
needed in many cases.
TACKLING CLIMATE
CHANGE, CHALLENGING
TARGETS
4. We recognise that climate change is the
biggest single environmental issue the world has to face both
today and in the future. We note the assessment highlighted in
the Stern Review that the risks of the worst impacts of climate
change can be substantially reduced if greenhouse gas levels in
the atmosphere can be stabilised between 450 and 550 ppm CO2
equivalent. The implication of that is that stabilisation in this
range requires global emissions to be at least 25% below current
levels by 2050. We accept the validity of this argument. Further
stabilising at or below 550ppm CO2 would require global
emissions to peak in the next 10-20 years and then fall at a rate
of at least 1-3% per year.
5. Our view is that climate change is happening,
and that human activity is contributing to it, so we therefore
need to develop policies and action plans aimed at first slowing
and, eventually, stabilising the processes which are causing the
change. Whilst it may be difficult to achieve, we consider that
a gradual slowing and then reduction of global greenhouse gas
emissions is possible. We are committed to playing our part in
that process, and to actively supporting Government policy and
action plans aimed to achieve this.
6. As a leading energy company we are taking
steps to help reduce our overall impact on climate change both
directly through our own business activities, most notably by
decarbonising our generation, and also indirectly through supply
chain management and by helping our customers to use energy more
efficiently.
7. We believe that the shift to a low-carbon
economy will create significant business opportunities and that
the market for low-carbon technologies is potentially vast.
8. In order to incentivise the necessary
step-change in investment in low-carbon goods and services, a
clear policy framework that establishes a long-term carbon price
and therefore a long-term value in reducing emissions is required,
together with specific support mechanisms were necessary.
9. Clear and binding emission reduction
targets in the EU, and the UK, will underpin this framework by
giving industry the confidence to invest in more expensive lower-carbon
technologies and services. We therefore welcome the binding and
unilateral EU target to cut greenhouse gases by 20% by 2020, and
fully support the EU objective of a 30% reduction by the same
year if international agreement can be found. We also support
the introduction of legally binding targets in the forthcoming
Climate Change Bill.
10. We also support the EU's objective of
achieving significantly higher levels of renewable energy in the
EU overall energy mix. We are concerned, however, that the 20%
target is extremely challenging in the timescale identified. Consideration
needs to be given to the capacity of both industry and the planning
system to deliver, and the integrity of grid networks.
11. If a policy of high levels of renewables
across Europe is pursued, it will be important to understand the
interaction of policy mechanisms designed to achieve this with
the EU ETS. In particular, we would be keen to ensure that carbon
savings achieved through higher levels of renewable energy do
not undermine carbon savings that can be made through investments
in non-renewable but low-carbon technologies including clean coal
and microCHP boilers.
12. Challenging targets are necessary, although
not sufficient, to give industry confidence to invest in low and
zero carbon technologies. What underpins that confidence going
forward will be a policy and incentive environment that allows
the investment to take place to meet targets, coupled with the
removal of regulatory barriers including a simplification of planning
legislation.
13. In order to reach significantly higher
renewable energy targets in the UK, as well as greenhouse gas
reductions, government will need to achieve a step-change in its
climate change policy framework. We believe that given the right
framework, UK industry will make the necessary investment that
will enable this country to play a leading role in deploying to
a global low-carbon future.
IMPLEMENTING THE
STERN FRAMEWORK:
CARBON PRICING
14. We believe that the free allocation
of allowances to sectors which are able to recover the cost of
allowances through their received price is the EU Emission Trading
Scheme's fundamental flaw, and have strongly argued to mitigate
the negative competitive distortions caused by this. There is
clear evidence that the full opportunity cost of carbon established
by the EU ETS is passed through to the price power generators
receive via the wholesale market, and we would therefore support
full auctioning of allowances to this sector at least.
15. Centrica recognises that some free allocation
may be necessary in the short-term to those sectors facing international
competition that is not similarly carbon-constrained, in order
to prevent competitive distortions. If and when we progress to
a future in which all industry globally is similarly carbon-constrained,
the rationale for free allocation will be removed.
16. In the first two phases of the EU ETS,
non-free allocation of allowances by Member States is restricted
to a maximum of just 5% and 10% respectively. No auctioning was
undertaken by the UK government in Phase I and an auction level
of 7% has been announced for Phase II, which will be taken from
the free allocation that would otherwise go to the electricity
generation sector.
17. As this sector faces no international
competition and carbon costs can be, and are, recouped through
the received price, we agree that this 7% should be taken from
the generation sector. We would like to see the maximum 10% auctioned,
and, ideally, a significant increase in the proportion of auctioning
in Phase II allowed, although we recognise that this would have
required EU agreement.
18. From 1 January 2013, we strongly support
the elimination of any free allocation across the EU to the power
generation sector. In the absence of full auctioning across the
Scheme, we would like to see the EU move to instructing a minimum
level of auctioning in all Member States in Phase III, and the
UK government targeting auctioned allowances on the power generation
sector.
19. Centrica understands and accepts that
a balance needs to be struck between cutting carbon emissions
at home and abroad, and that the UK needs to show some leadership
in finding real carbon cuts at home. Project credits, however,
have an important role to play in delivering global emission cuts
which should be recognised.
20. Ideally, directly linking the EU ETS
with other emission schemes outside the EU will help to deliver
emission reductions at the lowest cost to the global economy,
and will aid development of a more liquid market. This should
only happen, however, when other schemes are established, and
when the principles behind those schemes as well as their operation
allow a direct linking.
21. In the absence of such direct linkages,
project credits from the CDM and JI markets can act as important
linking mechanisms and help to ensure that the EU ETS is not operating
in a vacuum from the global economy.
22. We believe that projects developed under
the Clean Development Mechanism deliver real and enduring carbon
emission reductions in developing countries which currently do
not have any emission reduction targets and, in the absence of
legally-binding targets, open a pathway to Kyoto for many developing
countries.
23. There is also substantial potential
for technology transfer from these projects to other countries
whether directly covered by the EU ETS or not. Allowing the use
of credits for compliance under the EU ETS supports these project
streams, supports innovation in UK business, and allows reductions
to be made at lowest cost.
24. The UK is emerging as a market leader
in the financing of these kinds of projects. Imposing low limits
on the use of credits within the UK damages the ability of UK
companies to invest in emission-reducing projects in the developing
world, and might check the development of this important new market.
25. To protect the credibility of the EUETS
and other international emissions trading, it is imperative that
projects are subject to rigorous accreditation to ensure minimum
quality standards are met. Within the CDM this role is carried
out by the UNFCCC's CDM Executive Board and we are confident that
this system is providing the necessary robust and rigorous assessments
of proposed projects.
26. Where practical and material we are
supportive of broadening the scheme to include other sectors and
gases. It is vital, however, that the increased level of allowances
as a result of broadening the scheme is robustly determined to
ensure that the over-allocation seen in the first Phase is not
repeated. Consideration should be given to running parallel schemes
for new sectors for an initial period.
27. Significant harmonisation across the
EU would help to remove the potential for any sector within an
individual country to become uncompetitive with respect to its
EU counterparts. Potential areas include accurate allocation,
use of project credits, sector coverage and key definitions including
that of installations covered by the scheme.
IMPLEMENTING THE
STERN FRAMEWORK:
TECHNOLOGY POLICY
Carbon Capture and Storage
28. The EU has adopted an objective to stabilise
global temperatures at 2 degrees above the pre-industrial average.
If this can be achieved, significant impacts to both biodiversity
and human society can still be expected. Above this rate, there
is a recognised serious risk of runaway climate change. There
is therefore an imperative to bring forward lower-emitting generation
as quickly as possible.
29. In parallel, the UK is facing a significant
power generation gap in the next 15 years. Whilst industry will
respond with new generation, the government policy and regulatory
framework will shape the type of investments made. In the absence
of clear direction, and as new nuclear can not be operational
in time to meet this generation gap due to its long build-cycle,
new generation will be heavily biased towards gas and unabated
coal.
30. The alternative is to allow unabated
coal plan to be built in the UK, with the associated significant
carbon emissions until such time as the technology is ready, and
it becomes economic. Current estimates are that this would imply
a sustained carbon price of around E50 a tonne, more than double
current EUETS prices. Giving the go-ahead to build new coal generation
without any associated carbon reductions through carbon capture
and storage will increase national carbon emissions.
31. We believe new coal generation should
be built with pre-combustion technology, committing to carbon
capture from the outset. This will give the best opportunity to
make an immediate impact on UK emissions through encouraging the
early deployment of cleaner generation to fill the expected generation
gap over the next decade. In short, it is difficult to see how
carbon reduction targets can be met without the early deployment
of carbon capture and storage.
32. As a result of government rhetoric around
ensuring the UK is a global leader on climate change, as well
as a stated desire for UK industry to develop carbon capture and
storage technologies, industry responded extremely positively
with a number of proposed projects. We believe around 3GW of IGCC
with CCS was targeted for operation by 2014.
33. Whilst pre-combustion capture technology
is available for deployment now in bulk, post-combustion capture
development is in its infancy and is several years away from commercial
development. The largest post-combustion plant worldwide is under
1/10th commercial size.
34. In that context, we were concerned at
the decision announced on the 9 October this year to exclude pre-combustion
technology projects from the Government's forthcoming UK CCS competition
in favour of post-combustion projects only.
35. Excluding pre-combustion capture technology
in favour of post-combustion capture technology means bypassing
a cheaper method for capturing carbon in favour of a technology
largely used to retrofit existing coal plant. Many existing UK
coal stations will be closed before the technology can be developed
to retrofit. Whilst we can understand the decision in an international
context we consider that there is a limited role for post-combustion
technology in the UK.
36. Global deployment of coal-fired power
plant in the next decade meanwhile will be substantial. Establishing
pre-combustion IGCC as a commercial reality in the UK, therefore,
which can then be exported, can make an enormous and rapid impact
on carbon abatement worldwide.
37. Given the not insignificant number of
unabated coal power stations that will continue to operate worldwide
over the coming decades, we accept an important role for post-combustion
technology and support its development. If the UK government is
serious about maintaining the UK's strong leadership role in climate
change, we consider that there is a strong case for supporting
both technologies to full deployment. That would give the UK the
best opportunity to become a world leader in CCS technology whilst
meeting domestic and international climate change targets.
38. Centrica does not believe that either
pre or post-combustion technologies will be commercially viable
in the short to medium term without government support.
39. In the longer-term, we believe that
the primary support mechanism for generation with carbon capture
and storage should be a carbon price established through the EUETS.
Given the political uncertainty surrounding the scheme going forward,
and the current Phase II price for carbon, a bridging mechanism
may well be required in order to bring projects forward sooner
rather than later. In addition, although the individual components
of CCS are not new, further support is likely to be needed to
reflect first-of-kind integration risks.
40. These mechanisms could include bringing
CCS into a properly functioning EUETS, which we are expecting
for Phase III of the scheme, enhanced capital allowances, perhaps
similar to those provided to good quality CHP, or direct funding
support, possibly from the auctioning of emission allowances or
the Environmental Transformation Fund, or allowing electricity
generated to be eligible for LECs.
41. It is important to note that the ongoing
higher-than-unabated-coal plant costs may be best supported by
a relatively modest ongoing mechanism rather than large up-front
capital grants. In this instance the project developer will continue
to take technology risk whilst the support mechanism provides
a bottom-stop to carbon market price risk.
42. Centrica is working with Progressive
Energy to develop an 850MW (nominal) Integrated Gasification Combined
Cycle (IGCC) coal fired power station with pre-combustion CO2
capture on a brownfield site on Teesside. We selected to develop
IGCC technology due to its superior economic and technical performance
when integrated with CCS. We have named the proposed project Eston
Grange.
43. If built, the combined plant will be
the UK's lowest emitting fossil fuelled power station, capturing
around 85% of the CO2 emissions from the power station,
with a full long term storage solution in the North Sea. It would
be nearly three times as clean as existing gas fired power stations,
and around six times cleaner than conventional coal fired plants.
44. This innovative project would be the
first large scale IGCC power station with CCS in the world. We
are intending to create a new CO2 disposal network
as part of the project which will eventually enable the disposal
of CO2 from other process and power plants in Teesside
and the North East, thus creating a unique infrastructure having
wider benefits to the area. The plant could also produce de-carbonised
hydrogen in bulk, providing a potential source for fuel cell and
other hydrogen initiatives planned for the area.
45. The Eston Grange power project is being
developed within a special purpose company; Coastal Energy Ltd.
Coastal Energy is a joint venture between Centrica plc (85%) and
Progressive Energy Ltd (15%). Centrica is a major UK energy supply
company better known through our British Gas brand, and Progressive
are a specialist power station developer. Ultimately the power
station will be fully owned and operated by Centrica, and will
provide electricity to our British Gas residential and commercial
customers. The CO2 disposal network is being developed
by COOTS Ltd, which is a 55-45 Centrica/Progressive Energy joint
venture.
46. We are committed to undertaking all
the necessary steps to enable a full investment decision to be
made around the end of 2008, which, if positive, would allow completion
and first electricity some time between 2012-14. Full economic
feasibility work and engineering design work is scheduled to take
place over the coming months, and we are detailing the purchase
contract for the land involved. We are working with our environmental
consultants on an Environmental Impact Assessment, and a planning
application to develop the project site on the South Bank of the
River Tees could come early in 2008. Provided the project proves
to be commercially and technically viable, we believe these measures
will allow us to make an investment decision with limited delay.
47. We are currently considering the full
implications of the government's decision to restrict the UK CCS
competition to post-combustion technologies. We are also considering
in parallel the potential for alternative transition support mechanisms
to recognise first-of-kind risks and the ongoing higher-than-unabated-coal
costs of generating, capturing, transferring and storing the carbon.
48. In order to progress our project further
we are looking for a clear statement of intent from Government
that the necessary support mechanisms will be forthcoming, although
the mechanisms themselves would not need to be in place until
a construction decision was made some time later.
IMPLEMENTING THE
STERN FRAMEWORK:
TECHNOLOGY POLICY
Microgeneration
49. Centrica is pioneering the development
of micro combined heat and power technologies and sources of renewable
and cleaner energy such as fuel cell powered boilers, heat pumps
and solar heating. We believe that these technologies can have
an important role in reducing domestic carbon emissions and cutting
customer bills.
50. These emerging technologies, however,
will need some support to become commercially viable. Any effective
support mechanism for microgeneration will need to recognise the
specific deployment issues involved, and the differing needs of
different microgeneration technologies.
51. We are aware of the current debate about
the potential for a feed-in-tariff for microgeneration to deliver
a significant increase in installed capacity. We are currently
considering which support mechanisms should be introduced for
microgeneration and are considering the potential for feed-in
tariffs for this sector as part of a wider policy review. Our
main concerns about a fit mechanism are the cost (significant
in Germany), the mechanism's ability to deliver the most effective
technology in the most efficient way, and the failure of the mechanism
to adequately drive down costs. We are also unclear about how
a fit would be introduced into the UK's competitive market structure.
52. In this context, we remain of the view
that the most appropriate and effective support mechanism for
domestic-scale microgeneration is some form of capital grant accessible
by households.
November 2007
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