Memorandum submitted by Centrica
1. Centrica plc (Centrica) was formed in
February 1997 when the former British Gas plc was demerged to
form BG Group plc and Centrica. We are the UK's largest energy
supplier, with around 16 million customer contacts in the domestic
sector and around one million in the non-domestic sector.
2. We also own upstream gas production and
power generation assets to support our supply businesses:
— We own eight gas-fired power stations
including Britain's newest power station in Langage, near Devon.
— We are a leading developer of offshore
wind and were recently awarded exclusive rights to develop the
Irish Sea zone which provides us with the potential to develop
up to an additional 4.2 gigawatts of renewable electricity, representing
around £9 billion of investment.
— Centrica has already built and refinanced
the Lynn and Inner Dowsing wind farms on the east coast, and expects
to commence construction at the 270 megawatt (MW) Lincs offshore
wind farm development later this year. Docking Shoal and Race
Bank, Centrica's two other Round Two wind farm proposals, which
are awaiting consent, could add a further 1.1GW—enough to
power 760,000 homes.
— Centrica also plans to play a role in
the UK's new nuclear renaissance. We own 20% of British Energy,
through our Joint Venture with EDF Energy. Through this we are
undertaking the pre-development activities for a planned nuclear
new build programme, with the intention of constructing, and operating
and decommissioning four European Pressurised Reactors.
3. We welcome the opportunity to respond
to the DECC Select Committee Inquiry into Emissions Performance
Standards.
What are the factors that ought to be considered
in setting the level for an Emissions Performance Standard (EPS)
and what would be an appropriate level for the UK? Should the
level be changed over time?
4. We believe the introduction of an EPS
is an unnecessary policy instrument that risks causing unintended
consequences and putting up energy bills for consumers. If the
intention is to prohibit unabated coal, we believe Government
policy prohibits this anyway, through it's existing position and
that the Secretary of State will not sanction new coal plants
unless they demonstrate CCS technology. This has the impact of
a de facto EPS. In addition, planning policy means the Government
and other stakeholders can restrict the development of new coal.
Therefore an EPS is, we believe, unnecessary.
5. If the intention is to support clean
coal technology, we believe this is best done by supporting that
technology through the existing policy framework including a competition
and CCS incentive to support new plant. This will identify the
barriers to CCS development, uncover the costs of this emerging
technology, and share R&D and development learnings with the
broader sector.
6. If the intention is to support low carbon
generation investment more generally, this is best done through
the Energy Market Review. This is considering the appropriate
market arrangements and incentives for encouraging investment
to deliver decarbonisation and security of supply. Investors will
look at the long term investment case, predominantly considering
expected returns within that investment climate. Specific banning
of technologies may limit options for investors, but will not
consequently make specific alternative options more attractive.
Without proper support for near zero-carbon generation technologies,
investors are as likely to be attracted to gas-fired generation.
7. If the intention is to reduce carbon
dioxide emissions from the power sector, the sector is already
covered by the EU ETS, and EPS would provide no additional benefit
whatsoever.
8. Instead, the unintended consequence of
an EPS is likely to increase the costs of new generation investments
as investors place additional regulatory risk costs to them. This
is because the EPS would represent an additional "unknown".
9. Should an EPS be introduced, its level
should not be altered over time. Keeping open the option to change
the level would lead to significant investment risk for new and
existing plants.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
10. An EPS would bring no additional benefits
over and above the EU ETS. This is because the emissions from
the power sector are capped, so any additional efforts in Member
States to reduce their emissions simply means that other Member
States can increase theirs. We suggest that the EU ETS should
remain the primary CO2 reduction tool within the EU.
As such it remains unclear at this stage whether an EPS would
be required and if it is deemed necessary. In addition to capping
existing emissions, the priority should be to support investment
in low carbon technologies in order to decarbonise the power sector.
This can be achieved through establishing a framework that brings
forward low-carbon generation and R&D support for emerging
technologies such as wave and CCS.
How effective is an EPS likely to be in driving
forward the development of CCS technology? Should the UK's CCS
demonstration programme cover gas-fired as well as coal-fired
power stations?
11. Restricting certain fuel sources is
not a credible policy mechanism for encouraging investment in
other technologies. The challenges facing untested, unproven CCS
are linked to policy, regulatory, cost, technology development
and operational challenges; simply banning higher-carbon feedstocks
would not direct investment towards addressing those challenges.
12. Instead investment would either seize
up, leading to a security of supply situation, or be directed
in other, more proven technologies that are cost effective, for
example gas. The focus should be on developing and trialling the
technology before any mandation for it—direct or indirect—is
introduced. We believe in any case that if CCS can be made to
work on a commercial scale, and assuming the fiscal and regulatory
framework is supportive, investors will naturally use CCS technology
without mandation.
13. We see no reason why demonstration gas
projects should not also be eligible for the CCS demonstration
competition. In doing so however, the Government should not have
any high expectation that gas projects will come forward given
the high costs and unknown technology issues.
14. Similarly, the Government should not
provide additional regulatory intervention specifically to encourage
gas CCS; the global priority should be to develop coal CCS. Unabated
coal-fired power generation is a major contributor to climate
change, and developing this technology will be crucial to reducing
emissions in China, India and other countries. In many circumstances,
unabated gas-fired generation will be a key transition fuel, so
developing coal CCS must be the priority.
15. New gas generation capacity is needed
now to ensure sufficient flexible, relatively low carbon capacity
as heavily polluting coal, oil and inefficient gas plants close.
An Energy Performance Standard (EPS) ruling out certain technologies
is a blunt tool and much care needs to be taken in consideration
and introduction of it. An EPS which sets level equivalent to
that of, say high efficiency CCGT, would rule out many investments,
including possible peaking plant which may be beneficial to UK.
It might also have implications for CHP and other plants where
simple fuel efficiency is not the only factor considered when
optimising dispatch.
16. Given the challenge in the massive scale
of developments needed to get renewables and nuclear up to high
levels of penetration by 2020, and the fact that the only flexible,
large scale, balancing options proven to date is thermal plant,
such a ruling could lead to serious risks of capacity shortfall
and/or extreme pricing. The need for flexibility will increase
as greater intermittent renewables is built. Demand side and energy
storage options have potential to offer flexibility, but are at
very early stages of development and it is unclear how much or
in what timescale they can contribute.
17. We therefore believe it is too early
for any move which rules out new gas build without CCS, even applicable
post 2020.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
18. Yes. The introduction of an EPS risks
creating additional investor uncertainty. This is because although
the impact may be restricted to certain plants eg coal, investors
would be concerned that the Government could arbitrarily change
the rules and impact on other investments. This investor uncertainty
would raise the overall cost of projects, and therefore costs
to consumers, and would potentially inhibit the development of
new power generation including gas. Gas power plants are cheap,
relatively straightforward to build, and can play a key role in
the transition to a low carbon economy. This is because they can
fill any energy gap created by the closure of coal power stations
before sufficient renewables, nuclear and CCS can be built. In
addition, because they are flexible, they can be used to back
up intermittent wind generation and balance the system, maintaining
security of supply.
What is the likely impact of an EPS on domestic
energy prices?
19. An EPS would most likely increase domestic
energy prices. This is because the investor uncertainty associated
with an additional policy intervention would raise the overall
cost of projects, and therefore costs to consumers, and would
potentially inhibit the development of new power generation including
gas. Investor uncertainty would revolve around how the policy
lever would be used. There would be a concern that Government
could overstretch the EPS in order to meet stakeholder demands,
and then find circumstances in which it needs to relax the regulation.
For example, in the context of extreme price spikes, it may be
necessary to bring on existing coal or oil fired generation, albeit
for a very brief interval. This would require politicians relaxing
the EPS. All these uncertainties add risks to projects and therefore
costs.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010? Can greater use of Emissions Performances Standards
internationally help promote agreement on global efforts to address
climate change?
20. We do not believe an EPS would have
any impact in the international climate negotiations. Meaningful
and credible actions are far more meaningful than additional policy
objectives.
21. The UK Government has long-championed
it's CCS demonstration project within the international sphere
as an indicator of its commitment to the technology. However,
other countries will only take heed when we have a full scale
plant operating, actively capturing and storing CO2
that they will take notice and turn to the UK for expertise. The
impact of an UK specific EPS will be at best, marginal, and at
worst, meaningless to the international negotiations.
September 2010
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