HC 742 Electricity Market Reform

ELECTRICITY MARKET REFORM

Submission by

WESTINGHOUSE ELECTRIC COMPANY

JANUARY 2011

ABOUT WESTINGHOUSE

Westinghouse Electric Company, a group company of Toshiba Corporation, is the world's pioneering nuclear power company and is a leading supplier of nuclear plant products and technologies to utilities throughout the world. Westinghouse supplied the world's first Pressurised Water Reactor in 1957 in Shippingport, Pennsylvania. Today, Westinghouse technology is the basis for approximately half of the world's operating nuclear plants.

Westinghouse is headquartered in Pittsburgh Pennsylvania and employs around 15,000 people around the world – around 30% of them in Europe. The company has three core business areas – nuclear fuel, nuclear reactor services and nuclear power plants.

Four Westinghouse AP1000 reactors are currently under construction in China - two on the Sanmen site and two on the Haiyang site. Construction on all four plants is on schedule and the first of these plants, at Sanmen, will send its first electricity to the Chinese grid in late 2013. Additionally, six AP1000 plants have already been ordered by customers in the US, with more in the planning stage.

UK regulators are currently in the closing stages of assessing the Westinghouse AP1000 in detail to determine if it meets the UK’s safety and environmental requirements.

Westinghouse has recently moved to a Regional organisation, reflecting the growing importance of business outside the US. One of the three regions is Europe, Middle East and Africa, and within that region, the UK is a key market. In the UK Westinghouse runs the Springfields site in Preston, Lancashire (where around 1650 people are employed), and the company recently agreed a 150 year lease to operate the site on behalf of the Nuclear Decommissioning Authority. The vast majority of the UK’s nuclear fuel has been made at Springfields, over a period of more than 50 years.

1. What should the main objective of the Electricity Market Reform project be?

The electricity market reform should be designed to deliver an electricity market which balances reliable supplies, low carbon emissions (throughout the full lifecycle of generation) and affordable electricity prices – both for domestic and commercial users.

In practice, this means giving clear signals to potential investors that selecting options which are low-carbon and/ or capable of providing reliable supplies will be rewarded in the future market framework.

Th e mechanism adopted must re cognise that many potential investments are long-term in nature (for instance nuclear projects will not generate electricity for 8-10 years, and then will operate for 60 years or more). They therefore need to offer policy stability over a period of decades. However it is not necessary to have specific detail on the exact level of market incentives out this far ahead – simply the confidence that the market framework itself will prevail and an indication of the levels of incentive being proposed.

A m arket-based approach within these constraints is important – so that whilst low carbon generation is prescribed by the market, it should then be left for the alternative low-carbon options to compete as far as practicable. In this way the technologies selected should represent the most cost-effective means of achieving the desired outcomes.

2. Do capacity mechanisms offer a realistic way of achieving energy security, low-carbon investment and fair prices?

Capacity mechanisms are certainly helpful in delivering electricity security, which itself is an important component of the wider energy security objective. It is ultimately the level of payments made under such a scheme, coupled with the balance between capacity mechanisms and other market features, which will determine whether the overall approach can deliver the combined objectives of security, low-carbon and affordability.

3. What is the most appropriate kind of capacity mechanisms for the UK?

We have no strong views on this matter – except that the mechanism adopted must be sufficient (along with others) to give confidence to investors that the benefits of large-scale, low carbon generation will be recognised and rewarded .

4. Should the system of Feed-in Tariffs be focused on particular technologies or maintain a wider technology-based view?

We have no strong views on this matter – but we believe that UK interests are best served by having a balanced mix of low-carbon technologies, and so the system should not preclude the development of any low-carbon technology which could – in time – become a cost-effective part of such a mix.

5. Will it be feasible to deliver EMR in one go, or will regulations and implementation be spread over time?

We have no strong views on this matter. However the approach taken must be sufficiently clear that investors may have the necessary confidence in the future shape of the market to proceed in the short term with development plans and, in due course, investments to bring forward suitable generation capacity. In many cases – where the plants will not themselves be on the grid for 8-10 years, the actual timing of market mechanisms themselves is less important than the strong signalling of their future existence.

6. Will market reform increase political risk for investors or create certainty?

We believe that electricity market reform, if carefully planned and developed with cross-party input, is an important cornerstone of the work to deliver a 21 st century energy market in the UK, which balances secure supplies, affordable prices and substantial reductions in carbon emissions.

If developed in this way, we believe that it will provide a strong level of confidence to potential investors, which in turn will help them to make the right investment decisions to bring forward that outcome.

With that in mind, we welcome the ECC Select Committee’s work to bring cross-party insights to this important issue.

7. Will the Government's proposed package of carbon price floor, EPS, FITs and capacity mechanism provide sufficient transformation to achieve goals on climate change, security of supply and affordability?

The mechanisms are all important, and will all be helpful in allowing potential investors to have confidence that reliable, low-carbon generation will be rewarded in the future. The extent to which the mechanisms are sufficient to impact on decision making will depend not just on the shape of the mechanisms but on the associated numerical values. A carbon floor price, for instance, is largely worthless if the price itself is trivial.

That said, we note that these mechanisms are all typical of the suggestions which potential utility investors have discussed as being helpful, so we have confidence that the direction being mapped out is sensible.

We also note that some utilities have talked of a reformed Renewables Obligation – to become a "low carbon obligation", and again we can see value in such an approach if carefully implemented to ensure that a good number of renewable projects are still brought forward. For instance a "Low-Carbon Obligation" within which some segment was "ring-fenced "for renewable s only, and some of which was opened up to any low-carbon technology, would be an option.

8. What synergies and conflicts will there be between proposed mechanisms and policies already in place?

We believe that it is possible to implement the proposed measures without undue conflict with existing ones. In this respect, there are two important areas:

Firstly – care must be taken in bringing forward the carbon floor price to ensure a smooth fit with the existing European Emission Trading Scheme. It is important neither to destabilise the ETS, nor to render the UK an unattractive location for investment.

Secondly – existing power generation projects, and those which are already well advanced, must not find themselves "stranded" in the move to a new regime. Such a situation would not be conducive to inspiring confidence in future investments (particularly those with long timescales for payback).

We believe both of these issues can be managed if carefully considered.

9. Will a carbon floor price be feasible in the context of EMR and at what level should it be set?

Westinghouse are not aware of any reason why a carbon floor price should not be feasible in the context of EMR, if carefully implemented . The level of such a price – and how the price will vary over time for years to come – is a matter for G overnment, having due regard to the insights of the utilities and other market experts.