Memorandum submitted by Centrica PLC
INTRODUCTION
1. Centrica plc was formed in February 1997 when
the former British Gas plc was demerged to form BG Group plc and
Centrica. In Great Britain, Centrica trades under its brand names,
British Gas, and Scottish Gas. It is the UK's largest energy supplier,
supplying around 10 million gas and six million electricity
customers in the domestic sector and has over one million supply
points in the non-domestic sector. It also owns upstream gas production
and (predominantly low carbon) power generation assets to support
its supply businesses.
2. We welcome the opportunity to respond
to the ECC committee inquiry into low carbon technologies in a
green economy. The development and deployment of low carbon technologies
will be essential in tackling climate change and can also provide
an important driver for economic growth.
3. The Government's climate change targets
and accompanying carbon budgets are welcome and set challenging
but achievable goals for the UK. A wide range of technologies
will have to play a major role in meeting these targets from nuclear
power stations to solar cells on people's roofs. For many of them,
further support will be necessary to achieve the level of penetration
required to meet the targets in time. Government must strike the
right balance between providing a clear and supportive framework
whilst not picking particular technologies. We believe that with
the right incentives, a competitive market will encourage businesses
to take calculated risks and bring forward a range of new technologies
in innovative ways and at lowest cost.
4. Centrica has made substantial investments
in a range of low carbon technologies including its recent £2.3bn
nuclear deal with Edf energy for a 20% stake in British Energy,
and we will continue to do so as long as the market signals are
there.. Our response outlines the different technologies we are
investing in, what we believe the potential is, and what some
of the barriers are to greater take up. Currently we believe that
nuclear, offshore wind, microgeneration and some demand-side technologies
have the greatest potential to reduce our emissions at lowest
cost. However, we welcome the Government's recent announcements
on Carbon Capture & Storage and look forward to seeing the
detail of the proposals when they are published.
Which technologies have the biggest potential?
Has the Government done enough in its stimulus package? What is
needed to achieve the development and deployment of them?
NUCLEAR
5. We believe that nuclear power has a crucial
role to play in meeting CO2 emission reduction
targets while ensuring energy affordability and security of supply.
To this end, on 11 May 2009 we announced that we had
reached an agreement to acquire a 20% interest in British Energy,
the operator of eight existing nuclear power stations in the UK,
for £2.3bn. EDF and Centrica will also form an 80/20 joint
venture to pursue a planned programme to build four new nuclear
power stations in the UK. We therefore welcome the Government's
recognition of the role of nuclear support the current facilitative
actions in progress by DECC and regulatory bodies to encourage
successful deployment of new nuclear power stations.
6. Twenty five per cent of the UK's power
generation fleet is scheduled to close by 2020 as a result
of the Large Combustion Plant Directive and nuclear retirements.
New power generation will be necessary to close the energy gap
and nuclear, which meets climate, affordability and security of
supply goals, will play a key role. Nuclear has a long development
time frame—the first reactor could come on line in late
2017 or early 2018 at the earliest—so it is crucial
that work begins on new nuclear as soon as possible. We welcome
Government proposals to streamline the planning and licensing
systems including the introduction of the Infrastructure Planning
Commission, but it is important that progress in delivering these
programmes continues so that new nuclear can be built to the timescales
necessary.
7. Based on a UK fleet size of 25GW, the
Nuclear Industry Association predicts between 10,000 and
15,000 new jobs in nuclear related manufacturing and construction
for 25 years, in addition to the permanent roles created
for each station's 40-60 year operating life.
OFFSHORE WIND
8. Centrica operates the world's largest
offshore wind project and is currently planning or investing in
three other projects. Assuming they are all built, our existing
plans will cost over £3bn and we will have over 1.75 GW
of renewable generation capacity. We believe that with the right
policy framework, the UK electricity sector is capable of rising
to the challenge of deploying renewable projects at scale over
the next decade and we expect to continue to be a significant
investor in them in the future. However, meeting the UK's renewable
targets will require significant effort from all stakeholders,
and in particular Government, in order to remove barriers to investment
and implementation. We welcome the commitment the Government has
demonstrated to date and, in particular, the recent proposal in
the 2009 Budget to temporarily increase offshore wind support
to two ROCs. However, there remain issues around the streamlining
of the planning system, the transformation of the grid infrastructure,
the development of a competitive, UK based supply chain and continuing
commitment to an effective, long term economic support mechanism.
9. The Renewables Obligation has demonstrated
great success in taking the UK to the position of world leader
in offshore wind. This position will be strengthened through the
Government's recent announcement. This temporary support is essential
if the momentum that the UK has created in this sector is to be
maintained through the current economic climate. For the longer
term, we believe that new projects should be guaranteed 20 years
of support under the Renewables Obligation. This will signal the
long-term nature of the UK renewables sector and will encourage
the necessary investment in projects, skills and in growing a
UK supply chain. Existing projects should not receive support
beyond 2027 as this would not represent value for money for
consumers.
10. Whilst we welcome the recent proposals
to temporarily increase the ROC values, a range of other factors
remain which impact the viability of offshore wind investment.
We are working with the Government and the Regulator to address
these, but their cumulative impact is substantial and so all efforts
must be made to tackle them. They include: the role of Crown Estates
and its extraction of monopoly rents, the Transmission Access
Review; the Balancing and Settlement Code transmission losses
modification; the approved charging methodology proposal for Transmission
Network Use of System charges; access to the transmission system;
and the asymmetric nature of risk offshore since the generator
effectively takes the bulk of the risk of transmission failure.
We would be pleased to supply the Committee with more information
about these issues if required.
11. The deliverability of offshore assets
relies on the supply chain. This is also the area where there
is most potential for UK industry to benefit from the development
of renewables. However, in part due to increased global demand,
there are long lead-times and supply constraints throughout the
supply chain. For example, it can take up to three years to deliver
an offshore cable. Centrica welcomes the intervention of UK Government
to encourage new UK-based fabrication yards, and to prevent closure
of existing plants by providing financial assistance to those
companies that are struggling in the current economic climate.
The aim should be to reduce the UK's reliance on European companies
and suppliers further afield and grow an industry that already
has an increasing pool of demand. It is not clear that the proposed
offshore transmission regime is going to facilitate engagement
of the supply chain at an early enough stage to ensure that the
UK gets timely access to it for the necessary supplies, ahead
of its global competitors. This bottleneck could be one of the
greatest barriers to achieving offshore wind investment at a level
to meet 2020 targets.
SMALL-SCALE
DECENTRALISED ELECTRICITY
GENERATION
12. Centrica believes that large numbers
of small scale decentralised technology measures can deliver significant
change against tight timescales. To support this, we have made
substantial investments in a range of microgeneration technologies.
We now have the capability to install solar thermal products across
the entire country and we are a leading framework supplier on
the Low Carbon Buildings Programme (LCBP) and have installed significant
solar photovoltaic (PV) installations under the programme. We
believe that if designed in the right way and set at the right
level, the Feed-in Tariff for electricity and the Renewable Heat
Incentive can deliver the step change necessary to take microgeneration
into the mass-market mainstream.
Feed-in tariffs
13. A feed-in tariff for microgeneration
would provide an ongoing revenue stream for a defined period.
Suppliers have an existing relationship with customers and are
therefore best placed to administer a feed-in tariff. We believe
that if the appropriate revenue were guaranteed, suppliers and
others would bring forward an innovative range of financing solutions
designed to reduce the initial upfront capital cost of relevant
technologies and the mechanism design needs to allow for this.
14. We believe that the following principles
should be reflected in any eventual design of a feed-in tariff:
— The tariff must be simple for customers
to access with low administrative effort and minimal transaction
costs
— The costs of the tariff should be spread
equitably amongst suppliers, and it should not discourage individual
suppliers from driving take-up of small-scale generation
— The tariff should be flexible enough
that new technologies can be easily incorporated and that the
level can be adjusted so that both deployment levels are maintained
and the tariff is as efficient as possible
— The principle of grandfathering the tariff
for individual installations will bring much needed certainty
to the market
— The tariff should apply to production,
not to export and should be banded by technology, and size
— The levy should be raised on a p/kWh
basis
15. We believe that households who wish
to access a feed-in tariff should be eligible for early access
to smart meters. We do not believe that exemptions to paying the
levy should be built into the scheme and that any negative impacts,
for example on fuel poverty or competitiveness can be countered
through other policy mechanisms. We do not believe that installation
of all possible energy efficiency measures should be a pre-requisite
for receiving microgeneration support as this might have the perverse
impact of discouraging it. However, we do believe that a whole
house audit should be required at the same time as installing
microgeneration as it will provide the householder with the information
to take further steps to cut their energy use.
Renewable Heat Incentive
16. We believe that similar principles as
outlined above for a feed-in tariff also apply to a renewable
heat incentive. Biomass boilers will be a key technology to deliver
renewable heat and Centrica has acquired a 19% share of Econergy
Ltd, a company specialising in biomass installations.
Photovoltaic Panels
17. Recent changes in building planning
approval systems and building regulations are encouraging the
use of renewable energy in new buildings across the country. The
current market for solar PV is predominantly commercial, but it
is expected that the residential market will grow as a stronger
incentive is provided through the Feed-in Tariff. The European
Photovoltaic Industry Association believes that photovoltaic energy
could provide 12% of European electricity demand by 2020. Centrica
welcomes moves to provide appropriate support to allow this potential
to be realised. Our recent acquisition of Solar Technologies (ST)
makes British Gas the largest PV installer in the UK. ST are responsible
for significant scale installations including London's City Hall
and the HSBC head-quarters in Canary Wharf.
Micro CHP
18. MicroCombined Heat and Power (mCHP)
units operate in a similar manner as domestic central heating
boilers, but will also deliver cheap, low carbon electricity into
the home, whilst significantly reducing households' carbon footprint.
Current forecasts suggest that mCHP boilers could provide energy
bill savings for the average household of approximately 25% per
year and reduce annual household carbon dioxide emissions by up
to 2.5 tonnes. Over 80% of the 21 million centrally
heated homes in the UK are on the gas network and the overwhelming
majority of these homes will use gas as a heating fuel. Approximately
1.5 million boilers are replaced each year in Great Britain
and one scenario puts residential CHP as taking 30% of this market
by 2015. Collectively, the new mCHP boilers could save the equivalent
CO2 emitted by eight power stations. A significant
number of households use Liquid Petroleum Gas (LPG) boilers which
are virtually identical to conventional gas boilers so there is
no reason why LPG would not also benefit from mCHP, ultimately
further extending the reach.
19. British Gas New Energy has secured an
exclusive distribution deal with Baxi, which will see British
Gas services installing the Sterling engine mCHP boiler, known
as the Ecogen unit, which is more than 90% efficient and will
deliver significant carbon savings. In addition, Centrica purchased
a £20 million stake in Ceres Power, a company specialising
in the development of fuel cell mCHP units, in 2008. Due to market
in 2011, these appliances will represent a step change in mCHP
technology, enabling electricity to be generated 24hr a day, independently
from the heating function of the boiler.
Demand side
20. Centrica strongly welcomes the Government's
recent decision to deploy smart meters to every home by 2020 and
agrees that the supplier-led "central communications"
model where suppliers own and maintain the meter but all data
is managed and processed through a central body, is the most effective
route to do so We believe there is untapped potential for greater
degrees of load management. To fully exploit this, meters will
need to be accompanied by the installation of electrical appliances
which are able to respond to signals from them. Centrica has a
technology partnership with Vphase, a developer of energy saving
products for residential and commercial properties, which will
see Vphase products offered to British Gas customers.
21. In addition, we have developed a number
of unique innovation partnerships as part of our CERT (Carbon
Emissions Reduction Target) delivery programme. Our aim has been
to work with leading consumer product brands to encourage consumers
to save energy, both through the way the products consume energy
in use and increasingly in the way they are used by the end consumer.
The range of partnerships cover products we all use everyday including
washing machines, televisions, home phones and cable/satellite
boxes. Many of the energy saving features are invisible to the
consumer, as technology changes/product redesigns have enabled
the consumer importantly to just carry on using the products exactly
as they are. It is clear that CERT funding is a very strong motivator
to these companies and in most if not all cases the thinking has
become incorporated into their product plans and increasingly
into their medium to long term R&D work.
Industrial CHP
22. CHP provides poor CO2 emission
reductions compared to renewables, nuclear and carbon capture
and storage and is only modestly more efficient that new CCGT
plants. Much of the technical potential is not economically feasible,
and any short term gains are likely to be outweighed by the long-term
negative effect of locking businesses into fossil-fuel based heat
production. We believe the same arguments apply to non-biomass
district heating technologies.
23. Clusters of industrial premises with
steam demand present the best opportunities for CHP but such clusters
are limited in the UK. In compliance with Section 36 of the
Electricity Act, Centrica have investigated Industrial CHP potential
at each of the sites we have evaluated for new fossil fuelled
power generation. In these cases Industrial CHP has proven impractical
or uneconomic, even when existing support levels have been taken
into account.
24. Therefore, we believe that microgeneration,
renewables, nuclear and other technologies are more appropriate
for delivering the Government's ambition of an 80% reduction in
greenhouse gas emissions by 2050.
What is the potential role for public procurement
and policies such as the 2016 zero carbon homes target in
driving investment, development and job creation?
25. While having the right incentives and
policy framework is vital, demand-pull can play an important role
in bringing forward new technologies to the mass market. Due to
the scale of its procurement power, the procurement public sector
estate is uniquely positioned to catalyse this transformation.
Guaranteed large-scale procurers are able to negotiate lower prices,
bringing the costs down for all. The entire public estate should
commit to procuring sufficient on or nearsite generation to supply
at least 15% of its energy from renewable sources by 2020, consistent
with the UK's own renewables targets. This could transform the
microgeneration market enabling even greater take up by the commercial
and domestic sectors.
May 2009
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