Written evidence submitted by E.ON UK
1. E.ON UK is one of the UK's leading power
and gas companies, generating and distributing electricity, and
retailing power and gas to industry ands residential customers.
We generate electricity from a range of sources, including coal,
gas and oil, and from renewable energy sources including on and
offshore wind farms and biomass schemes. We are part of the E.ON
group which has interests throughout Europe and in the United
States. E.ON is the second largest nuclear operator in Europe
and one of the largest renewable generators. E.ON expects to invest
€6 billion in renewable energy in Europe and the United States
up to 2010 and to have 10GW of renewable capacity in operation
by 2015. In the UK we are developing a number of projects, including
a gas-fired combined heat and power plant at Grain, a proposed
new coal-fired power station at Kingsnorth, and offshore wind
projects either under construction or planned, including the 1000MW
London Array scheme in the Thames Estuary. We are also actively
engaged in developing carbon capture and storage (CCS) technologies.
GLOBAL GROWTH
IN ENERGY
DEMAND AND
FOSSIL-FUEL
USE
2. We very much welcome the Committee's
inquiry. The IEA projects in its 2008 Energy Outlook reference
scenario that global primary energy demand could grow by 45% from
2006 to 2030, with coal accounting for more than a third of incremental
global energy demand in non-OECD countries to 2030. Over half
of this demand growth is projected to occur in India and China,
with China expected to construct as much as 1000GW (1GW=1000MW)
of coal-fired capacity by 2030 (this compares with the 25GW of
coal-fired capacity currently on the UK system). As the IEA points
out, this level of growth in demand and in the use of fossil fuels
is not consistent with the reduction in global CO2 emissions required
to mitigate sufficiently the effects of climate change.
3. The global response to this must include radical
improvements in energy efficiency standards as the most economic
means of reducing CO2 emissions. More rapid deployment of non-fossil
fuel sources, including nuclear and renewable energy sources,
are also required, where countries have access to economic sources
of renewable energy or are in a position to support new nuclear
development.
4. However, it also needs to be recognised
that fossil fuels will remain a major source of fuel for electricity
generation. Coal in particular is both most widely available geographically
and has the longest-lived reserves at current consumption rates.
It will therefore inevitably be widely used by many developing
countries to meet their growing demand for energy. For developed
countries such as the UK, it can be an important component of
a diversified energy supply which delivers secure energy, provides
back up for intermittent wind generation, and avoids overreliance
on any single fuel source, such as imported gas.
CARBON CAPTURE
AND STORAGE
5. We therefore need to find ways of using
coal and other fossil fuels which do not lead to significant increases
in CO2 emissions to the environment. CCS technologies capture
the CO2 emissions from fossil-fuelled power generation, transport
and store them in suitable deep geological formations. CCS offers
an opportunity to break the link between new fossil generation
and increasing levels of CO2 whilst maintaining the many benefits
of coal-fired generation. Substantial deployment of CCS to fossil
plant from the 2020s onwards can play a major part in ensuring
that emissions of greenhouse gases do not exceed levels which
could create unacceptable risks for the global environment.
6. Developed countries such as the UK have a
responsibility to lead the international effort to develop, demonstrate
and deploy CCS and other low carbon solutions, and to facilitate
the transfer of these technologies to developing countries. The
UK and wider European energy sector has an important role to play
in this. E.ON's development and commercial deployment of reliable
sources of low or zero carbon generation, including wind, biomass
and marine sources of renewable energy, will help make these technologies
available on an affordable basis to developing countries as they
play their part in reducing CO2 emissions over the longer term.
The UK is also particularly well-placed to demonstrate CCS given
its experience with coal-fired generation and the availability
of depleted gas or oil fields on the UK Continental Shelf which
can be used for permanent storage. E.ON has also been devoting
substantial resources to develop carbon capture and storage.
7. The priority now is to demonstrate CCS
at a commercial scale which will then prove suitable for deployment
on coal-fired power plants in the UK and other developed countries
and then increasingly in the major emitting, developing countries
such as China and India during the 2020s.
8. CCS is not currently commercially viable,
and in fact costs have increased significantly in the last five
years, due in part to the increase in the costs of raw materials
such as steel. Energy companies cannot fund early demonstration
projects as the energy price, even incorporating a carbon price,
does not reward the investment. International co-operation is
needed, both between companies and governments. The EU has proposed
to fund 12 large scale CCS demonstration projects across Europe
and the recent European Council on 11 and 12 December has agreed
that up to 300M emission allowances from the EU Emissions Trading
Scheme (see para 12 below) should be available to Member States
to help co-finance these projects.
9. The UK Government has already initiated
a competition to fund one large scale CCS demonstration project.
The UK's current coal fired power stations are approaching the
end of their life cycle and these older less efficient plants
are not suitable for the demonstration of carbon capture. Consequently
the UK requires a new high efficiency coal fired power station
if we are to demonstrate this technology successfully and at reasonable
cost. E.ON has therefore entered a CCS project into the Government
competition at our proposed new power station at Kingsnorth. This
power station will use supercritical boiler technology and will
generate electricity 20% more efficiently than existing plants,
thereby producing 20% less CO2 for the same amount of electricity
generated. To proceed with the CCS demonstration, we will need
consent for the power station itself and we are currently awaiting
a decision from the Secretary of State for Energy and Climate
Change.
10. Once the technology has been demonstrated
both at scale and commercially (which will require additional
demonstrations either in the UK or elsewhere in the EU or internationally),
it will be available for retrofit either to power stations already
operating at that time or for installation with new projects.
Our preferred approach to rewarding CCS investment at that point
would be for the investment to be justified by avoiding the cost
of CO2 emissions imposed by the EU ETS (see para 12 below). Retrofitting
CCS before the carbon price is high enough to justify the investment
would require some additional Government support. In addition
the E.ON group has already stated that, once CCS has been commercially
demonstrated, it will not build any coal stations after 2020 without
CCS fitted.
11. It would not be rational to retrofit
the whole of Kingsnorth with CCS at this stage. This would both
be expensive, given the current state of development of the technology,
and would simply replicate the same demonstration technology several
times, with no opportunity for learning from experience. However,
once commercially demonstrated, we will fit CCS to the remainder
of the plant once regulatory and market conditions reward the
investment, as discussed in the previous paragraph.
12. The E.ON group also has a programme
of CCS development across Europe. E.ON is working to promote the
transfer of CCS to China, for example through collaboration with
Tsinghua University on the optimisation of post-combustion capture
processes—as part of the CAPRICE project—and through
active encouragement of Chinese and Indian partners' involvement
in our entry into the Government's CCS demonstration competition.
The UK Government CCS competition encourages technology transfer
as part of the judging criteria and we feel that this is a strong
point of our entry.
POLICY MECHANISMS
TO INCENTIVISE
LOW CARBON
TECHNOLOGIES IN
THE DEVELOPED
AND DEVELOPING
WORLD: THE
EU ETS AND PROJECT
CREDITS
13. The primary driver of low carbon emissions
in the power sector in the UK and Europe is the EU Emissions Trading
Scheme (EU ETS). This imposes a reducing cap on emissions from
the power sector and other large emitters and enables permits
to emit CO2 (emissions unit allowances) to be traded between participants
within the scheme. If the cap is set significantly below the level
of emissions which would have been required on a business as usual
basis, this shortage creates a carbon price which incentivises
use of lower carbon fuels and investment in low carbon technologies.
However, the EU ETS does allow market participants to invest flexibly
in a way which both meets the CO2 reduction targets but also allow
investment to support other policy objectives, such as security
of supply. It is therefore possible, within the EU ETS, to invest
in a limited number of coal-fired plants to maintain secure energy
supplies. Once CCS is demonstrated commercially, the EU ETS will
incentivise generators to fit CCS to such plants to avoid the
costs associated with buying permits to emit CO2.
14. The EU ETS is the only international policy
mechanism actively in use and can be extended to other developed
countries to broaden its global coverage. A number of other countries,
including the US, are expressing interest in developing similar
schemes which could be linked to the EU ETS, creating an increasingly
global cap on carbon emissions. It is not a suitable mechanism
to control emissions in developing countries at this stage and
is most suitable for economies with functioning competitive energy
markets but it could be extended to them at a later date. Its
flexibility in allowing a range of investments within an overall
cap is one of the features which could make it attractive to developing
countries.
15. The EU ETS can also assist with the
transfer of low carbon technologies in the interim period as it
permits the purchase of `project credits' to count toward the
reductions in emissions required by the scheme. Project credits
are CO2 reductions achieved by using the flexible tools Joint
Implementation/Clean Development Mechanism (JI/CDM) created within
the framework of United Nations Framework Convention on Climate
Change to ensure that the most cost-effective reduction potentials
were tapped throughout the world, not just in any one nation or
group of countries. Under the CDM, project activities in developing
countries which achieve CO2 savings which would not otherwise
have been made without the investment taking place can count toward
the quantified limits imposed on developed countries. This enables
developed countries to apply technologies, such as CCS, in developing
countries and supports the transfer of these technologies to these
countries, helping them achieve reductions in their own right.
16. The EU and the UK must deliver a substantial
proportion of its greenhouse gas reduction targets through domestic
action and not through project credits. However, excessive restrictions
on project credits could reduce the cost effectiveness of global
greenhouse gas abatement, and could undermine efforts to assist
developing countries with emission reduction projects. The appropriate
balance is a matter for governments to determine either at the
EU level in the case of the EU ETS or at national level in respect
of sectors not covered by the EU scheme.
SUMMARY
17. The continuing growth in use of fossil
fuels, including coal, is inevitable in the developing world to
meet their increasing demand for energy, irrespective of action
taken by more developed economies such as the UK. If the international
community is to achieve its climate change goals, it will be essential
to develop and apply technologies which will substantially reduce
emissions from fossil fuels. CCS is a means of breaking the link
between increased fossil fuel use and higher emissions. The UK
and other developed countries have a leading role to play in developing
and applying CCS and the priority now is for the UK to demonstrate
this technology at a commercial scale. CCS can only be demonstrated
on a new coal plant and we have therefore entered our Kingsnorth
project into the Government's CCS competition. The EU ETS is the
most efficient means of driving low carbon emissions in the EU
and can be extended to other developed countries and ultimately
to countries such as China and India to cap emissions at a global
level. In the interim, project credits allowed under the Kyoto
Protocol can play a valuable role in encouraging the transfer
of low carbon technologies (including CCS in due course) to developing
economies.
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