The Big Six Energy Companies

Memorandum submitted by EDF Energy (BSX 2)

About EDF Energy

1. EDF Energy is a part of the world's biggest utility company, EDF, and a global leader in low carbon electricity production. In the UK, EDF Energy is one of the UK's largest energy companies with activities throughout the supply chain. We provide 50% of the UK's low carbon generation, making us the largest producer of low carbon energy in the UK, avoiding emissions of 30 million tonnes of carbon dioxide annually.

2. Our interests include nuclear, coal and gas-fired electricity generation, renewables, combined heat and power plants, electricity and gas supply to consumers.

3. We employ some 15,000 staff and have over 5 million electricity and gas customer accounts in the UK, including both residential and business users. This winter we announced a price freeze guarantee for our standard energy prices, a measure which will benefit more than 90% of our customers.

4. Our multi-billion pound investment programme in the UK includes plans to develop four new nuclear stations in the UK at two separate sites. Collectively, those power stations will meet up to 40% of the UK's low carbon domestic electricity demand by 2025. Each of these developments will employ 5,000 people directly and across the UK supply chain during the construction phase, and 900 permanent employees upon completion.

5. We are actively preparing to deliver our investments now. We, and other investors, will be working closely with Government to maintain momentum and deliver a policy framework capable of delivering the investments in new low carbon energy infrastructure that the UK urgently needs.

Overview: A Critical Time for Historic Investment

6. The UK faces a profound energy challenge, seeking to both achieve challenging carbon reduction targets (reducing our carbon emissions by 80%, by 2050) and replace around 40% of the country's current generation capacity, which is scheduled to be decommissioned by 2025. The challenge faced by the electricity sector is particularly great, as the need to decarbonise the UK's heat and transportation sectors, will substantially increase electricity demand.

7. To achieve the legally binding requirement for an 80% reduction in carbon emissions established in the 2008 Climate Change Act, the UK electricity sector will need to be almost entirely decarbonised by 2050. In line with the view of the Committee on Climate Change, EDF Energy believes that significant progress towards this must be made earlier, by 2030.

8. This means significant investment in new low carbon generation and demand management tools needs to be made now, a capital investment which Ofgem has estimated is likely to total around £200 billion, by 2020.

9. As the Government's recently published 2050 Pathways report has demonstrated, in order to achieve secure, low carbon and affordable energy supplies, investment in a diverse energy portfolio is needed, including new nuclear, renewables, and clean coal and gas.

10. At a time of fiscal retrenchment in the United Kingdom, energy companies stand to make a three fold contribution to the economy, investing in a long-term, low carbon recovery. This will be achieved through:

· Investment in capital intensive infrastructure to provide the low carbon generation needed to decarbonise multiple sectors of the economy.

· Investment in innovative, demand led solutions for customers, to improve
energy efficiency and affordability, whilst lowering carbon emissions.

· Providing skilled jobs that will help offset reductions in public sector opportunities.

11 Delivering this will require a continuing and close working partnership between industry, Government and our customers. Fresh thinking from all parties will be required in securing timely solutions to the challenges faced in the sector and in the wider economy.

12. The remaining sections of this submission focus on what EDF Energy is doing through its investment in all three areas now, pointing to where timely action from Government is required to build momentum on the progress that has already been made.

Investing in People and New Generation Today

13. EDF Energy currently operates 8 nuclear power stations with a total capacity of around 9,000 MW. A number of these stations are due to retire over the coming years, and we will be seeking plant life extensions for some where it is safe, technically feasible and financially viable to do so.

14. As well as seeking these life extensions, we are advancing plans with our co-investor, Centrica, to invest upwards of £20 billion in 4 new nuclear power stations in the UK, at 2 separate sites. Final decisions concerning that investment will be taken subject to the right investment framework, which will be determined by the Government's expected reform of the electricity market (addressed separately below).

15. Important, initial progress is already being made. We completed stage 2 of our public consultation for our development at Hinkley Point in Somerset this Autumn, engaging some 3,000 people in the process. We aim to make a final planning application for Hinkley Point to the Infrastructure Planning Committee this Winter. Separate public consultation is also progressing independently at our second site for development, Sizewell, in Suffolk, where our work is staged behind that for Hinkley Point.

16. We have already placed 130 supplier contracts worth hundreds of millions of pounds, and we are working to engage potential suppliers early, so that they understand, and are equipped to meet, the unique safety and quality standards that a nuclear project requires.

17. Early investment is also required in developing the training facilities needed to grow a workforce and supply chain capable of supporting this investment. Both the 2009 Gibson Engineering Construction Review and annual productivity reports compiled by the OECD show that engineering and construction labour productivity in the UK lag behind much of Europe. Investing in training and development now, is therefore critical if low carbon solutions are to be delivered on time.

18. EDF Energy has already developed proposals to address this. Our plans include expanding our £3.5 million nuclear power academy in Gloucestershire, and developing two separate training campuses in the UK to help meet future needs. Further work is also being undertaken with sector skills councils to develop cross industry training initiatives, and to engage supply chain partners.

Investing in Customers and Demand Management Solutions

19. We will recruit 4,000 new people over the next 5 years across our retail business, in positions focused on resourcing the roll-out of smart metering over our customer base, providing front-line customer support and supporting our other low carbon solutions such as micro-generation, photo-voltaic panels and air source heat pumps.

20. As well as progressing plans to enhance our customer interface through significant investment in new customer systems, we have frozen our energy prices this Winter through to March 2011. That price freeze will benefit over 90% of our customers, which taken together with consistently high customer switching rates across the sector, reflects a market that remains highly price competitive.

21 We support the direction of Government's initiatives to roll out smart metering and develop a 'Green Deal' for domestic energy users, and we are already making preparations to deliver both policies, and are working with Government to refine important logistical issues now.

Smart Metering

22. We believe investment in smart metering is an important step in allowing customers to access the tools which will help them actively manage demand.

23. Delivering smart meters could cost upwards of £10billion across the industry, and will require 46 million units to be installed nationally. We expect to spend over £2billion across our customer base alone.

24. With the scale of this challenge in mind, we are already taking important, intermediate steps now to test similar technologies with our customers. Our eco-manager, available to our customers, already allows users to monitor and control home energy use across domestic appliances.

25. We urge the Government now to work closely with industry to actively consider and manage the logistical challenges involved with such a wide-scale programme, in preparation for future roll out. At this stage that should necessarily include efforts to deliver important central infrastructure such as the Date and Communications Company (DCC) as soon as possible.

Green Deal

26. We also believe the Green Deal can play an important role in incentivising energy efficient solutions. We believe that if the balance between affordability and effectiveness is right, the Green Deal stands to be an important measure in delivering wider public participation in energy efficiency, and will become integral to our customer strategy.

27. At this stage we have flagged the following issues with Government which we believe need to be addressed as part of the development of this policy. Much remains to be done to finalise important policy details to ensure successful delivery:

· We believe a much broader range of measures other than basic insulation could be included under the scheme.

· Consideration needs to be given to the complex challenges faced in extending this policy to the non-domestic, commercial sector.

· And finally, we do not believe that energy suppliers should be expected to manage the costs of loans and associated default risks, given the unprecedented high levels of investment energy companies are making elsewhere - i.e. in new generation plant.

The Right Investment Framework

28. The significant capital investment in metering, generation and energy efficiency detailed in this submission require investment frameworks fully geared to incentivising such low carbon investments.

29. Current electricity market arrangements were designed at a time when the UK had strong gas reserves, and no binding carbon reduction targets. Over the long term they will fail to incentivise sufficient investment in new low carbon activities.

30. In consideration of the levels of investment at stake, and the urgency of delivering this investment, it is critically important that steps are taken now to fundamentally reform the UK's electricity market. -

31. While various stakeholders have their own view on the exact reforms required, there is now a strong, emerging consensus that holistic, wide ranging reforms are needed.

32. EDF Energy believes that electricity market reform must create an electricity market that works for all stakeholders investing in low carbon generation. The market must appropriately reward industry for making the capital intensive, long term investment that the UK needs, whilst at the same time delivering affordable, and competitively priced, energy for consumers and users.

33. In line with that view, we believe a balanced package of reforms should include the following components:

· A carbon price floor, to ensure fossil fuel generators pay a fair price for the pollution they emit. A floor price could start at a low level, and rise over time, ensuring the true costs of carbon are reflected, as new generation comes on line.

· Introduction of low carbon capacity payments, to make sure enough of the right, reliable, low carbon capacity is built. In a market which will have increasingly high levels of intermittent supply from renewable sources, security will be increasingly valued by consumers. Investors should therefore be able to gain income from providing secure, available generation, alongside earnings from wholesale prices.

· Clear limits to the level and duration of any subsidies for specific technologies, to avoid distorting the energy market in the long term. In the absence of such limits, there is a risk that the electricity market will not deliver lowest cost electricity for consumers.

Concluding Comments: No Time to Lose

34. It is critical now that the right investment frameworks for new low carbon generation, and nation wide initiatives such as the Green Deal and Smart metering are set in place.

35 The CBI's own report No Time to Lose: Deciding Britain's Energy Future, published earlier this year, made clear the implications of any delays to investment in new low carbon infrastructure. It noted in particular that many investors remain 'wary of making final investment decisions over key parts of our energy infrastructure' which in turn runs the risk of 'pushing up likely future costs to consumers'. The report stressed the need for timely reform of the electricity market in particular.

36. As the company set to deliver the first new nuclear power station in the UK for over 15 years, EDF Energy like other major investors in clean coal and gas and other low carbon technologies, needs Government now to maintain a policy momentum equal to the scale of the unprecedented private investment being made across the energy sector.

December 2010