HC 742 Electricity Market Reform

Submission to the Energy & Climate Change Select Committee’s inquiry on the Electricity Market Review

Note: this is a preliminary response only . As the EMR package was only published on 16 December, there has not been enough time to develop a full response with key experts across the company and we are still considering important details in the Government’s consultation documents. We will provide a final, definitive response before the Government’s deadlines.

1. Alstom supports the UK Government’s target of reducing emissions by 80% by 2050. We also agree with the assessment that – in order to meet the 2050 target – the UK power sector needs to be largely decarbonised by 2030.

2. In principle, we favour market solutions, such as the EU-ETS, but agree that there is a need for complementary regulation and incentives to support faster development of the low carbon economy. We agree with the Government that the existing market will not deliver the scale of long-term investment, at the pace we need, in particular in renewables, new nuclear and CCS, nor will it give consumers the best deal.

3. Our initial, high-level comments on the Government’s proposed EMR package are that we agree that the current electricity market framework needs reform. There is much in the Government’s proposed package that appears sensible and likely to help to deliver the objectives that Ministers have set.

4. We support the Government’s intention to establish greater carbon price certainty , providing it does not interfere with the successful operation of the EU-ETS. In terms of level, we are still assessing the Government’s three scenarios. We agree with the Government’s view that the key factor in the ‘effectiveness of the policy is the reaction of potential investors, and whether the mechanism is bankable’. That bankability appears to be uncertain and must therefore create an element of risk in the policy.

5. We agree that low carbon generation requires additional support in order to meet the UK’s decarbonisation targets. All low carbon technologies should be eligible, in order to encourage a diverse portfolio. The FIT with a Contract for Difference appears to be an effective proposal, but we need to consider further all of the possible implications for the market.

6. On capacity payments, we are still reviewing the Government’s proposals and considering the evidence in the Redpoint report.

7. On an Emissions Performance Standard, we have serious reservations about the Government’s proposal:

· The right EPS could help to drive CCS, but only if it is set at a level that does not discriminate between coal and gas.

· An EPS at a technology-neutral level from, say, 2020, could provide support to the deployment of CCS, increasing the diversity and security of supply by enabling continued, but decarbonised, use of coal.

· We therefore have serious concerns about the Government’s two proposed limit values for an EPS – both of which would only affect coal.

· That would inevitably result in a significant increase in the demand and price for gas as generators switch away from coal. That in turn would have an adverse impact on security of supply and would produce additional gas power stations without CCS - locking in avoidable CO2 emissions.

· With no new coal build, there would be a much smaller potential market for CCS. A likely consequence is that industry would reduce its investment in CCS.

· The CCS market would take longer to build. As economies of scale will be crucial to bringing the costs down, CCS would not be commercially viable until much later.

Interaction between the measures and with existing policies

8. Although we are still reviewing the consultation documents, it appears to be far from certain what the interactions will be between the four parts of the Government’s package and what effect they will have on existing policies. Until the interactions are better understood, it is difficult to make an assessment of whether the Government’s reform package will create enough certainty for investors.

Background on Alstom

9. As the supplier of around 25% of the world’s installed power generation capacity (and around 50% in the UK), Alstom has wide experience of power plant design and construction in over 70 countries.

10. Alstom offers technologies for all energy sources: gas, coal, oil, geothermal, biomass, hydro, nuclear, wind and solar. We have developed 12 CCS demonstration projects around the world.

11. Alstom employs over 6,500 people in the UK at around 30 locations. We are responsible for t he maintenance, refurbishment and operation of many of the country’s existing power plants, providing a full mix of power generation technologies, combining traditional and renewable energy sources with clean power solutions. Alstom is responsible for the construction of four of the six new gas-fired power plants in the UK providing close to 6 GW of new electrical power. We are also delivering three onshore wind farms.

12. We would be happy to provide further details on our developing thinking as the Committee’s inquiry progresses.

January 2011