Memorandum submitted by ESB International
Investments
ESB International (ESBI) welcomes the opportunity
to contribute to the Energy & Climate Change Committee's call
for written evidence on the future of Britain's electricity networks.
As a relatively recent entrant into the UK generation market and
as a party for whom network issues have proved a significant barrier
to the development of new generation projects, we feel we are
able to offer a unique and highly relevant perspective on many
of the issues raised by the Committee.
Our UK strategy commits ESBI to constructing 3GW
of new generation plant, consisting primarily of gas-fired combined
cycle plants (CCGTs) and an initial investment of 200MW of renewable
projects. While delivering an entry position to the UK market,
it will also help plug the emerging "energy gap".
With a background as the principle electricity
utility in Ireland and with diverse overseas interests, we have
been part owner and operator of Corby Power station since the
early 1990s and we are the 100% owner of the 400MW Coolkeeragh
plant in Northern Ireland. During 2009, we will be completing
the construction of the 840MW Marchwood plant in Southampton,
of which we were the developer and in which we have 50% ownership.
We have also recently announced our latest 850MW development at
Carrington, near Manchester, which will commission in 2013.
ESBI considers that optimising the utilisation
of Britain's electricity networks will play an increasingly important
role in promoting low energy prices, ensuring security of supply
and facilitating the transition to a low carbon economy and that,
as such, they are a crucial part of energy policy. ESBI's experience
in the GB market to date has revealed fundamental issues which,
if unaddressed, may undermine the achievement of these energy
policy goals going forward:
— An inflexible regulatory framework
which prevents timely connection. For various reasons, the
current regulatory rules for connecting to networks are not facilitating
the timely connection of new generation. The current framework
rewards old, inefficient, high emission generation while requiring
new entrants to wait up to a decade for connection and will not
meet the UK's needs going forward. While we support, and have
been actively involved in, the ongoing Transmission Access Review,
we continue to believe that fundamental change to the access rules
is required immediately. This change should deliver a regime whereby
network access is available equally to: all technologies; both
new and existing users without prejudice; and in a timely manner.
— A lack of co-ordination between planning
and energy policy. A significant barrier to entry into the
GB market to date is the lack of co-ordination between the planning
system and energy policy. The demands placed on Britain's networks
require large-scale investment in transmission and distribution
capacity. The system of regulation has, by and large, approved
investment but the planning system has led to long and unpredictable
delays. Unless the planning system can deliver investments in
a timely, predictable manner (and we hope the Planning Act will
support this) the GB market will become increasingly unattractive.
— An increasingly unclear policy framework
which increases risk. ESBI is in the process of designing
and placing contracts for new, efficient thermal power plant.
This is the plant that will be vital to balancing renewable output
and ensuring security of supply over the next twenty years and
beyond. However, a lack of clarity and foresight in the policy
framework have substantially increased the risks of investing
in the UK market:
— The requirements for Carbon Capture &
Storage (CCS) are unclear. We therefore have to acquire land in
expectation of how large a carbon capture plant might be and face
a substantial and unknown cost for getting the carbon into storage.
Further, we may need to retrofit new technology to new plant once
operational.
— There has also been widespread speculation
over possible relaxation in the implementation of the Large Combustion
Plant Directive (LCPD) provisions. Any such move could significantly
alter the attractiveness of investing in the UK generation market,
to the detriment of security of supply, competition, the achievement
of environmental objectives and ultimately to the interests of
customers.
— The requirements of the Industrial Emissions
Directive (and the final form of that Directive) are also unclear,
meaning we could conceivably be required to design plant to unknown,
but tighter environmental requirements for nitrous oxide, sulphur
dioxide and dust particulates.
— Interventions to promote or subsidise
technologies. We require a stable policy framework which provides
certainty for investors. A perception that the Government may
intervene to favour a particular type of technology fails to provide
this.
We have submitted more detailed responses to
individual questions, where we feel we can usefully comment, in
the attached annex.
RESPONSES TO
QUESTIONS
What should the Government's vision be for Britain's
electricity networks, if it is to meet the EU 2020 renewables
target, and longer-term security of energy supply and climate
change goals?
1. UK energy policy should reflect three key
objectives: low prices, secure supplies and facilitating the transition
to a low carbon economy. Networks are clearly a vital facilitator
of each of these three ambitions. In ESBI's view, the key requirements
of a policy framework are:
— Stability, transparency and predictability—Investors
such as ourselves require a stable regulatory regime and policy
framework. We consider this should be based on a clear and unambiguous
allocation of responsibility between policy makers, the clear
definition of objectives and relative priorities and an overarching
commitment to ensuring a level playing field for all. —
Clearly defined requirements on new entrants—It is imperative
that investors understand the requirements, both planning and
environmental, which they will be required to meet and are able
to design and construct plant accordingly.
— A well-functioning planning system—It
is important that the planning system works to facilitate the
investment that is needed to support market entry, and that it
does so in timescales which are consistent with investment timescales.
2. In our view, establishing a framework of
this sort should allow the challenges which will face networks
over the next decades and beyond to be appropriately addressed.
How do we ensure the regulatory framework is flexible
enough to cope with uncertainty over the future generation mix?
3. As we highlighted above, a stable and predictable
policy framework is vital to promoting investment in the UK both
now and in the future. To that end we would be concerned were
the Government to take steps to amend the regulatory framework
in all but the most pressing cases. In our view, a clear distinction
between independent regulator and government lies at the heart
of a well-functioning policy framework.
4. However, there are aspects of the regulatory framework
which would, in our view, benefit from immediate and fundamental
reform. We highlight three interrelated areas below:
— The most pressing issue is the rules
for allocating transmission capacity. The Committee will be aware
that plant seeking to enter the UK market often has to wait up
to a decade before it is able to connect. This situation is clearly
not appropriate and has fundamental consequences for energy security
and the connection of renewable and low carbon generation.
— There is also a clear need for the regulatory
framework to provide greater scope for transmission companies
to build wires in expectation of connections, to use innovative
designs to overcome planning challenges and to face financial
rewards and penalties for delivering, or not delivering, connections
within fixed timescales.
— Transmission access should be allocated
on an equal basis amongst all users of the network. For a sustainable
future generation mix to develop, all generation technologies
should be granted access equitably and new entrants to the market
should be able to acquire access on equitable terms and in viable
timescales. The existing regime provides no incentives for existing
users to relinquish capacity, even where there is little or no
chance of it being used in the future.
What are the technical, commercial and regulatory
barriers that need to be overcome to ensure sufficient network
capacity is in place to connect a large increase in onshore renewables,
particularly wind power, as well as new nuclear build in the future?
For example issues may include the use of locational pricing,
or the availability of skills.
5. In our view ensuring that the various aspects
of the technical, commercial and regulatory regimes interact effectively
is as, if not more, important than each individually.
6. Developing power stations requires a delicate
balancing act. As a developer, we must find a site that is likely
to secure planning permission, close to the existing transmission
system where it is not constrained or is likely to be granted
planning permission if needed to be upgraded. We also need to
ensure that the site is big enough for CCS, has relatively low
transmission charges and is near a gas supply (where appropriate).
We also have to make sure that we can get connected before our
planning consents expire. If one aspect fails, an entire multi-million
pound investment project can be jeopardised.
Considering each of the suggested barriers in
turn:
— We do not perceive any insurmountable
technical barriers to providing sufficient capacity to connect
either on or off-shore generation. There may be scope for more
innovative technical solutions to develop, though we see no reason
why these cannot be brought to market as they become commercially
viable.
— We are not convinced that there is a
need for wholesale reform of the commercial framework or regulatory
agencies which govern the industry and markets. There is little
doubt that there are areas in which both could be made to work
more effectively, but the costs (in terms of time, finance and
uncertainty) of the scale of change that would be required to
implement an overarching reform are unlikely to be justified.
— One of the most significant barriers
to providing network capacity is, by some margin, the planning
system. The current system fails to allow investments, even where
there is an unambiguous benefit to the country, to go ahead because
of local interests. The precedents of the North Yorkshire Line
(10 years) and the Beauly-Denny line (currently about 7 years
and yet to be resolved) are extremely worrying and, if unaddressed,
the planning system is likely to thwart aspirations for connecting
renewable generation. We note and welcome recent developments
under the Planning Act. We look forward to the work of the Independent
Planning Commission and the potential benefits it may bring in
delivering significant infrastructure projects in a more timely
manner.
7. Given its inclusion in the question we have
included our thoughts on locational pricing. In our view, the
logic of locational pricing, both economically and environmentally,
is sound. Locational prices reflect the balance of supply and
demand and encourage parties to locate generation closer to demand
centres. This promotes the efficient use of wires, meaning that
customers get more from the charges they pay. It also means that
fewer large transmission pylons, which have visual amenity and
carbon costs, need to be built. It is sometimes asserted that
locational charges discourage renewable generation build. However
the presence of a significant queue of generation (including large
amounts of renewable generation) implies that locational charging
is not having a detrimental effect relative to delays in connecting.
What are the benefits and risks associated with
greater interconnection with other countries, and the proposed
"supergrid"?
8. ESBI considers that the development of greater
interconnection between countries is likely to have beneficial
consequences for competition, security of supply and for the connection
of renewable generation; ultimately benefitting customers.
What challenges will higher levels of embedded
and distributed generation create for Britain's electricity networks?
9. ESBI is committed to playing a role in facilitating
the transition to a low carbon economy and recognises that meeting
challenging targets for the proportion of energy sourced from
renewable generation will require contributions from generators
of all forms of energy; both large and small. This has been reflected
by our Irish networks business which recently introduced new tariffs
to facilitate the connection of small-scale renewable and combined
heat and power generation.
10. The points made above about the need for transparent
and stable regulatory and policy frameworks apply equally to distributed
and conventional generators. In general, we consider that there
are far more similarities between large and small-scale generation
than there are differences. As such we consider that they should,
as far as possible, be treated equally and do not consider that
distributed generation will pose any insurmountable challenges
for Britain's electricity networks.
11. Britain's networks are at an important point
and we consider a change in mindset is needed. All too frequently
discussion focuses on why the existing rules prevent things, upon
which there is consensus that change is required, from being done.
We would prefer the focus to be on identifying objectives and
ensuring rules are established to meet them. We need to make sure
that our networks are going to be fit-for-purpose over the next
decades, which means making difficult decisions now.
How can the regulatory framework ensure adequate
network investment in light of the current credit crunch and recession?
12. There are companies, such as ESBI, which
are willing and able to commit to investing in the GB market.
When making those investments we need certainty that the infrastructure
required to get power to market will be made available in fixed
and predictable timescales.
13. While we note that the stable and predictable
returns offered by utility companies may be expected to continue
to make them attractive to investors, we agree that the credit
crunch may pose challenges for the regulatory framework. That
framework needs to ensure that those who are best able to deliver
investments are put in the position to do so. That may require
it to involve new infrastructure providers, to seek to promote
more innovative financial structures or to consider risk/reward
trade-offs. We consider that the regulator needs to give detailed
consideration to these issues as a matter of urgency, noting that
its current RPI-X@20 review of regulation provides a good opportunity
to do so.
March 2009
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