Memorandum submitted by Statoil|
Statoil welcomes the opportunity to comment on the
Electricity Market Reform. The UK energy market is important for
Statoil being the largest importer of natural gas to the UK and
as an investor in offshore renewable projects in the UK.
We are furthermore evaluating the opportunity
to establish a new CCS business in UK as storage provider for
CO2 from third parties.
Following the publication of the consultation on
the Electricity Market Reform on 16 December 2010 we are currently
evaluating the proposed measures in more detail. In general terms,
we believe that regulatory stability, transparency and predictability
are key priorities for the substantial investments required to
achieve the transition to a low-carbon economy.
The present response is based on our initial views
and our view of the how the UK energy market should be structured.
Where possible we have give some initial views in the details
questions and provided these in the Annex below.
An Electricity Market Reform should facilitate and
promote a diversified energy portfolio that allows for the most
cost efficient CO2 reduction measures and a secure
and affordable supply of energy. In particular this should take
believe that the transition to a low carbon economy can only be
achieved in a cost effective manner through the continued commitment
to include natural gas in its fuel mix. In the short term, natural
gas can contribute to decarbonisation through fuel switching,
especially by replacing coal with gas in power generation. In
the medium term, natural gas is a good match for renewables as
a complement to intermittent wind and solar energy. In the long
term, natural gas with CCS promises to be a destination fuel for
the power sector.
use of CCS related to power production and industry emissions
is required in the long term perspective to achieve sufficient
GHG reductions from power production and other industries.
wind has the potential to be an important contributor to low carbon
energy production as UK has significant offshore wind resources.
Changes made to funding regimes for renewable energy should allow
for differentiated investor profiles and avoid costly and time
consuming changes to the administrative process.
Emission Trading Scheme should remain the main instrument for
curbing emissions, as it provides the most effective measure to
deliver targeted GHG reductions and at the same time provides
a predictable framework for the industry in the long term, rewarding
the most carbon efficient solutions. However, Statoil fully recognises
that the EU ETS does not currently provide sufficient investment
incentives for development and demonstration of new low carbon
The current set of proposals from Government on reforming
the Electricity market are complex and overlapping, and must also
be considered in light of potential changes to promote market
liquidity as well as changes to the balancing regime and transmission
charging regime. As such we are continuing to analyse the impact
of the proposed measures, and we would wish to provide a more
detailed view when we have evaluated them in more depth. Should
you wish to discuss our finalised views in more detail please
do not hesitate to contact us.
What should the main objective of the Electricity
Market Reform project be?
As an investor in energy supply, Statoil believe
a main objective of the Electricity Market Reform should be to
ensure that the correct investment signals are sent to investors
along the value chain from generators to upstream and new sectors.
The energy industry requires long term infrastructure investment
and as such some degree of regulatory certainty is required by
Statoil appreciate the Government's recognition of
the important role conventional natural gas fired generation will
continue to play in the long term future of the UK energy market,
both as a capacity reserve and back up generation source but also
as a generation technology in its own right. Statoil sees natural
gas as a vital measure to deliver a sustainable pathway to reduce
CO2 emissions and maintain energy security. Without
natural gas the cost burden of reducing emissions from production
and use of energy will be considerably higher. It is therefore
important that the Government continues to signal a need for secure
long term natural gas supplies to the UK and ensures that the
market for natural gas remains viable and effective.
Do capacity mechanisms offer a realistic way of
achieving energy security, low-carbon investment and fair prices?
The main purpose of the capacity mechanism is to
ensure that the necessary back up generation can be constructed
or that demand side response mechanisms can be enabled. With a
larger share of intermittent (wind) generation capacity and inflexible
nuclear generation and potential CCS, there is a significant requirement
for flexible generation. This is likely to be based on natural
gas. We can see a merit in the model that is proposed by DECC
where an obligation is placed on a central body to maintain a
set capacity margin - and the model is based on volume and a targeted
approach: besides being technology neutral, this mechanism would
send the correct investment signals as it ensures an improved
pricing of marginal capacity and a guarantee for the necessary
investment pay back period. However, we are looking in more detail
at how these measures, aimed at encouraging the building of flexibility
and responsiveness, will fit with those other measures in the
package that are designed to discourage the use of fossil fuels
such as natural gas, which remains the best candidate to provide
Should the system of Feed-in Tariffs be focused
on particular technologies or maintain a wider technology-based
The current support system for renewables is based
on offering targeted support levels depending on the maturity
of the technology. In our view, a targeted support mechanism will
be necessary to mature emerging technologies for the UK to be
able to exploit its renewable potential, especially for offshore
Although we agree with the Government's aim of promoting
a diversity of technologies as a means of achieving improved security
of supply, our experience as a large industrial company has taught
us that attempting to push forward large scale projects before
the technology is sufficiently mature can be very costly. Industry
must be given sufficient incentives, but also sufficient time
to mature commercial projects.
It has been our view that the current support mechanism
for renewable generation is an adequate mechanism suitable to
promote future capacity. Hence we have not seen the merit in changing
the system and have been concerned that changing the support system
could introduce uncertainty for the investor.
Of the proposed Feed-in models, we would favour a
Premium Feed-in, as this has most in common with the existing
model, retains the exposure for generators to the electricity
market and is the easiest to implement. We understand the Government's
objective to attract a larger investor base, but are concerned
that the proposed Contract for Difference that by its very nature
limits investors' exposure towards the electricity market, can
reduce the attractiveness for industrial investors. Hence, in
order to attract investors with different risk profiles, we would
recommend that investors were given the choice between models
(Premium Feed-in or Contract for Difference).
Furthermore we are concerned about the proposal to
set support levels through auctions. We do not see that it will
give the long term investment signals that investors need to develop
offshore wind sites.
Will market reform increase political risk for
investors or create certainty?
We agree with the Government that in light of the
challenges the UK faces over the next decade, it is important
to ensure that the policy and support mechanism is fit for purpose.
From a gas producer's perspective, regulatory stability
is essential, as the timescales and lead times in the industry
are very long. It is therefore key that the EMR signals a positive
message to companies who would seek out, develop, produce and
deliver new natural gas volumes.
We are concerned that the changes proposed for renewable
revenue support are more radical than necessary - especially the
proposal to set renewable support levels through auctions, as
we are not convinced that this will give the long term investment
signals that investors will need to develop offshore wind sites.
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 extent to which any of the discussed packages
will provide transformation leading to policy goals depends on
the levels of each measure and on their mutual interaction. As
described above, we have concerns about the proposed changes to
the revenue support mechanism, and would propose that investors
that are willing to have a larger exposure towards the electricity
market than under a Contract for Difference, are allowed that..
A larger flexibility in the support mechanism would ensure that
investors with different approach to risk will be attracted, which
will be to the benefit to renewable investments in the UK.
Statoil remains to be convinced that the EPS is the
best method for enabling CCS and other low carbon generation technology
to develop. Mandating standards before technology is ready could
have detrimental effects on the energy mix of the UK and may not
lead to the most efficient outcome.
In addition to the elements of the proposed package,
ensuring a properly functioning and liquid market, a well functioning
balancing regime and a suitable transmission charging regime will
be important to be achieve the goals.
What synergies and conflicts will there be between
proposed mechanisms and policies already in place?
Statoil supports a high global price on CO2
and sees the EU Emission Trading Scheme (EU ETS) as the main instrument
for cost efficient GHG reductions in the EU, both in the short
and long term perspective. The EU ETS provides the most effective
measure to deliver targeted GHG reductions, and at the same time
provides a predictable framework for the industry in the long
term, rewarding the most carbon efficient solutions.
Although Statoil recognises that the EU ETS does
not currently provide sufficient investment incentives for development
and demonstration of new low carbon technologies, a UK carbon
floor price should be thoroughly assessed against its potential
impact on the EU ETS. We are primarily concerned with the potential
side effects of double regulation aimed at the same policy goal,
which could undermine the effectiveness of current regulation
for emissions reductions in the EU and increase the costs of emissions
reductions. Harmonised cooperation at EU level through lowering
the EU ETS cap is recommended to develop a more robust CO2
price across the EU.
Additional measures are necessary to push renewable
technology development and make renewable energy production economic
viable. Similarly, additional measures are required to speed up
development and commercialisation of CCS in the short term.