Memorandum submitted by InterGen UK
EXECUTIVE SUMMARY
1. InterGen welcomes the opportunity to
respond to the Energy and Climate Change Select Committee's enquiry
into the future of Britain's electricity networks. InterGen fully
supports the Government's commitment to reach the EU renewable
targets by 2020, though we believe that the nearer term issues
of security of supply must be given equal weighting when making
policy decisions.
2. The future of Britain's electricity networks
is currently an unknown, and InterGen understands that the landscape
must evolve to connect a changing generation mix. Generators must
be able to provide clear, long term investment signals to the
network operators, to ensure that transmission infrastructure
investment is directed to where it is required. Likewise, renewable
and thermal generators need to have a stable regulatory and market
environment in which to operate and grow, to secure investment
in the UK in the future.
3. The Government must ensure that new thermal
generation development is not impeded alongside the intended increase
in generation from renewable projects. The operating characteristics
of renewable generation are difficult to predict and wide geographical
spread means that it lacks the certainty and flexibility of thermal
generation. Consequently, construction of new thermal generation
is essential to maintain a stable electricity network, ensuring
domestic and industrial supplies. In addition, newer and cleaner
thermal generation such as gas-fired power stations can deliver
carbon savings with respect to replacing older, less efficient
coal plants in the UK. InterGen sees diversity of fuel source
as a critical factor in ensuring security of supply in Britain
for the next decade and beyond.
ABOUT INTERGEN
4. InterGen is the UK's largest independent
gas-fired power producer—providing 6 per cent of the UK's
average electricity demand (2.4GW of efficient CCGT) through our
three UK power stations which are amongst the cleanest and most
efficient gas fired power stations in the world. InterGen has
developed one third of the UK's newly installed electricity generating
capacity in the last 10 years, investing £1.4 billion, and
supplies enough power for over three million UK households.
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?
5. InterGen believes that the Government's vision
should be the development of a co-ordinated programme to reduce
carbon emissions across the board; a vision that includes electricity
generation and transmission, industry, transport and energy efficiency
savings right down to domestic level.
6. InterGen is committed to the UK and seeks
to continue to build on its investment. InterGen fully supports
the Government's commitment to reaching the UK's climate change
objectives. However, InterGen believes that thermal plant construction
which will immediately address the forecast energy supply gap
in the UK must be given equal weighting when Government and regulators
are developing policies for a sustainable electricity generating
future.
7. The Energy Markets Outlook report (DECC,
December 2008) states that by 2016 UK supply and demand projections
will mean that around 30GW of new thermal generation will need
to be built and be in operation just to maintain a secure operating
margin. The nature of current renewable generation projects in
the UK (for example wind, onshore and offshore) is largely intermittent
and unpredictable; thermal generation is required alongside new
renewable generation due to its flexibility, reliability and rate
of construction.
8. Renewable generation in the UK is currently
supported by the Renewables Obligation (RO). Recent reforms to
the RO have extended the lifetime of this scheme to ensure that
the UK continues to be an attractive place to invest in renewable
generation technologies. InterGen is concerned that long-term
security of supply may be jeopardised if the Government does not
recognise that new thermal generation must be developed alongside
new renewable projects for the lights to stay on into the next
decade. Investment in the electricity networks should support
all generation types that reduce the overall level of carbon emissions
from the UK, i.e. high efficiency gas displacing coal. InterGen
believes that investment solely directed to those areas that will
help the Government achieve its 2020 renewables targets, will
create market distortions, false economy and stranded assets.
9. As previously stated InterGen welcomes
the Government's long-term vision for a low carbon economy and
positioning the UK to become market leaders in the development
of renewable technologies. Whilst it is important that the current
economic climate should not diminish those objectives, the UK's
energy security—both in the short and long term—should
also be at the heart of Government policy.
10. InterGen believes that, given the current
economic climate, greater clarity and guidance from the Government
on its energy infrastructure priorities is necessary in order
to ensure that both its ambitious targets and the UK's energy
needs are met.
How do we ensure the regulatory framework is flexible
enough to cope with uncertainty over the future generation mix?
11. InterGen believes that a stable, regulatory
framework in the UK is paramount, in order to preserve the value
of current generating projects and networks, and to ensure that
investment in the future can be secured. Whilst the regulatory
framework should evolve to manage the changing future generation
mix, such changes should not occur at the expense of existing
users of the system.
12. Whilst there is currently some uncertainty
over the future generation mix, it is widely acknowledged that
a significant volume of new generation will need to be built in
Britain to meet forecast demand in light of the planned closures
of ageing nuclear plants, and coal stations which have opted-out
of the large combustion plant directive (LCPD). An estimated 12GW
of coal plants will be closed by 2015 or sooner due to LCPD restrictions,
along with 7GW of nuclear plant closures prior to 2020 (Energy
Markets Outlook Report, DECC, December 2008).
13. Firm and accelerated grid connection
dates are required in order to secure investment in new thermal
and renewable generation. The present lack of medium-term power
station development to meet the potential 2015 shortfall is mirrored
by a lack of grid development as the current electricity network
was not designed to handle the projected changing generation mix
and the uncertain timing of new nuclear. The present availability
of medium term grid connections is very poor: InterGen has offers
for connections in 2022 and 2023. This makes continued investment
in the UK very difficult in comparison with some other jurisdictions.
14. National Grid, Ofgem and DECC are currently
trying to address grid queue issues via the Transmission Access
Review (TAR). InterGen have supported this process and have submitted
consultation responses and liaised with DECC and Ofgem to try
to reach a workable solution. The six TAR modifications were formed
in April 2008, and the industry has had only a short amount of
time to review, develop and consult on the proposals. The complexity
of the long-term proposals have hindered a full assessment but
InterGen believes that they will, if adopted in their current
state, actually delay rather than accelerate much needed investment
in the UK generation fleet. Further, each of the long term proposals,
CAP 165 and CAP 166 remove any existing transmission access rights
for current UK generation. InterGen believes this could be potentially
devastating not only for securing new investment but also for
preserving current generation and supply stability in the nearer
term.
15. InterGen has submitted its views on
the TAR to Ofgem, DECC and National Grid, stressing that new thermal
and renewable generation projects should be accelerated through
the grid connection queue on the basis of viability. To avoid
discrimination and market distortion this acceleration should
be on an even-handed basis and should not prioritise specific
generation types, especially those that already receive direct
support via the Renewables Obligation. Security of supply will
be a critical issue during the next decade and it is vital that
the TAR does not jeopardise the ability of investors to address
that gap.
16. It is InterGen's view that if NGET exercised
its rights under CAP150 (Capacity Reduction) and grid funding
was provided on the basis of anticipated (rather than contracted)
generation, no further reforms such as the six TAR proposals would
be required. InterGen's view is that comprehensive changes to
the regulatory regime are not required: enforcement of existing
NGET rights to accelerate viable projects in the connection queue
and the construction of grid anticipating generation rather that
awaiting contracted entry would be sufficient.
How can the regulatory framework ensure adequate
network investment in light of the current credit crunch and recession?
17. The current economic climate in the
UK will undoubtedly pose a risk to securing investment in new
generation and therefore impacting much needed upgrades of the
electricity networks. InterGen has traditionally raised non-recourse
project finance from London and European banks to fund up to 80
per cent of its projects. We believe that infrastructure lending
such as this, while long term, should be seen favourably within
the banking sector and should be among the first areas to recover.
Government support of bank recovery will remain as crucial to
electricity investment as it is to other sectors.
18. The recent report by ENSG "Our Electricity
Transmission Network; a vision for 2020" estimated that
£4.7 billion will be required to upgrade the transmission
network alone in the UK to meet 2020 targets. As previously stated,
InterGen believes that in order to secure continued investment
in Britain's electricity networks (via construction of new generation
types, both thermal and renewable) there must be a stable regulatory
framework. Creating incentives or enforcing barriers to entry
will mean the UK will jeopardise its twin objectives of securing
security of supply and delivering its 2020 targets.
19. Securing investment of the size needed
to upgrade Britain's electricity networks will require the Government
and Ofgem to ascribe to the same objectives if investment is to
be encouraged and distributed across the system in a way that
is fair and transparent.
RELEVANT AREAS
OMITTED FROM
THE SCOPE
OF INQUIRY
20. Current proposals sitting with the European
Commission to help reduce carbon emissions across the EU will
have a huge impact on existing thermal generating assets in the
UK. The proposed Integrated Pollution Prevention and Control Directive
(IPPC) could result in limitations on the NOx emissions from both
coal and gas fired power plants. This is in addition to the restrictions
already imposed under the LCPD which will result in the closure
of an estimated 12GW of UK coal plant before 2015. If the IPPC
comes into force in the UK, it will exacerbate security of supply
concerns if improvements to the transmission queue are not urgently
addressed.
21. Uncertainty about the future of Carbon Capture
and Storage (CCS) is currently an obstacle for investors and power
plant developers. Planning requirements for new gas and coal fired
generation specify a requirement to be "ready" for CCS
technology at new generation sites; however this technology is
as yet untested and unproven. CCS is therefore particularly difficult
to plan for and more importantly, to secure finance for. InterGen
supports the development of CCS technology, but only with full
Government support and financial backing.
22. The new Planning Act 2008 will bring
into force a number of National Policy Statements (NPSs) which
will inform the decision-making approach of the new Infrastructure
Planning Commission (IPC). Once more, it is vital that the Government,
IPC and Ofgem are joined-up in their objectives before the NPSs
are published. Adopting a new planning policy that favours specific
types of generation and therefore does not encourage investment
in both thermal and renewable generation will further jeopardise
Britain's joint objectives of securing supply and delivering 2020
targets.
23. In addition to the current uncertainty
around transmission access reform in the UK, the Government has
recently announced obligations for both generators and suppliers
in the UK to deliver carbon saving under heat and energy-saving
strategy (which includes current and future schemes such as the
Carbon Emissions Reductions Target and the community energy savings
programme). InterGen intends to submit its views on the above
policies that will reinforce concerns about long term regulatory
uncertainty and how this affects generators ability to invest
with confidence in the UK.
CONCLUSION
24. InterGen acknowledges that there are
many challenges for both the Government and the industry to ensure
that the dual objectives of security of supply and the 2020 renewables
targets are met. It is essential that both of these issues are
not viewed as mutually exclusive—any change to the regulatory
framework must be flexible enough to support both objectives.
InterGen would be happy to provide further written evidence or
oral evidence to support the views expressed here.
March 2009
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