Memorandum submitted by GE Energy|
GE Energy is one of the world's leading suppliers
of power generation and energy delivery technologies.
The businesses that comprise GE EnergyGE Power
& Water, GE Energy Services and GE Oil & Gaswork
together to provide a broad portfolio of product and service solutions
in all areas of the energy industry including coal, oil, natural
gas and nuclear energy; renewable resources such as water, wind,
solar and biogas; and other alternative fuels. In the UK, GE's
installed technology meets 18% of UK electricity needs and we
also supply to 13 of the 14 transmissions and distribution networks
in Great Britain.
GE Energy is part of General Electric, a global infrastructure,
finance and media company. GE is proud of its presence in the
UK since the 1930s. We currently employ over 18,000 people across
the UK and have invested over £10 billion in our UK-based
businesses since 2002.
This submission provides an initial assessment of
the Government's December 2010 Electricity Market Reform (EMR)
announcement and we look forward to providing our full response
to the consultation in due course. GE is keen to be part of the
current consultation which we believe provides a tremendous opportunity
for the UK to develop a world leading supply chain in low carbon
welcomes the Energy and Climate Change Select Committee Inquiry
into Electricity Market Reform which provides a tremendous opportunity
for the UK to build a world leading supply chain in low carbon
technologies. The Committee Inquiry can help to clarify the overall
narrative of the EMR project and consider the practical considerations
of policy change, so as not to undermine the basis of existing
investments or create unintended consequences.
year GE announced its intention to invest £99 million in
a new wind turbine-manufacturing facility in the UK; however the
right policy framework is required to support the investment.
Current proposals to transition away from the current Renewable
Obligation (RO) are based on efforts to secure long-term project
finance for renewables but could risk delaying the pace of investment
in offshore wind unless properly implemented. The Inquiry can
helpfully explore the potential for combining a price-based incentive
with a continued form of volume based obligation to support the
operational characteristics of offshore investment together with
the implications on long term trading arrangements.
widely, all fuel sources, including gas, will be vital ingredients
in the transition to a diverse low carbon mix. EMR can help to
lower the long-term costs of decarbonisation, primarily by "future-proofing"
and "de-risking" investments in low carbon technology,
however a coherent, stable policy framework is needed to allow
manufacturers and utilities to invest for the long-term.
What should the main objective of the Electricity
Market reform project be?
As a major UK manufacturing company GE wants to invest
and innovate for the long term. As a part of this we support the
view that reform is required to ensure that UK power markets remain
fit for purpose during the low carbon transition. The UK is the
only EU country to have set legally binding CO2 emissions
targets, however a range of recent reviews (DECC, the Industry
Regulator Ofgem and the Committee on Climate Change) have concluded
that current power market arrangements are unlikely to deliver
the necessary investments required to help meet them.
The current market structure encourages low capital
cost investments such as thermal power plants and has many features
that make low carbon investment (where returns on investment accrue
over time) unattractive or more expensive than necessary. The
result is that most of the new electricity generation plants built
under current arrangements tend to be gas-fired and that important
investments in wind, CCS, decentralised generation (CHP) and smart
grid have tended to be slow and overly expensive.
The EMR must therefore provide a more coherent market
and regulatory framework to address the fundamental problems associated
with investor risk and capital cost of investment is reduced.
Government can reduce investor uncertainty by removing investor
risk away from the market and thereby enable developers to more
effectively manage the operational risk of low carbon investments.
For reforms to be successful a central aim should
be to ensure that the implications of policy change are fully
considered and do not undermine or reduce the certainty for current
investments in low carbon technologies. Meanwhile, any new arrangements
are unlikely to deliver the quantity of low carbon generation
needed unless they are implemented quickly in order to meet the
tight timescales involved.
Do the proposed policy instruments offer a realistic
way of achieving energy security, low-carbon investment and fair
Actions to tackle energy efficiency have tended to
focus on demand-side opportunities to improve efficiency of buildings
and seek alternative forms of transportation; however they should
also focus on supply-side opportunities in the electricity generating
While there are undeniable tangible gains to be made
by focusing on the habits and choices of energy users, they can
be complex to address. Meanwhile the number of power providers
is considerably smaller than the number of consumers; supply-side
solutions can be found, agreed and deployed more quickly. As part
of a serious effort to increase efficiencies, it is important
to recognise the continued role of gas as part of the energy mix.
Gas offers half the emissions of coal and, with continued investment,
can provide important back-up to support the growing penetration
of renewable energy.
Efficiency opportunities exist along the entire energy
value chain in the form of gas turbine upgrades, smart grid technologies
and decentralised generation, and can be readily implemented.
In fact, as energy efficiency leads to a growing emphasis towards
electrical consumption supply side solutions will become even
For the electricity market to be attractive to the
full range of investors, it is therefore necessary to ensure that
there is a long-term price signal against which long-term investments
can be assessed. Current market interventions do not set sufficiently
long-term volume targets in any of the low carbon technologies
outlined above. The process must also be complemented by reform
of other systems that currently add delay or cost to infrastructure
investment including the planning system, grid connections and
combine with the rapid establishment of appropriate institutional
or governance arrangements that will need to be in place.
Will the Government's proposed package of carbon
price floor, EPS, FITs and capacity mechanism provide sufficient
transformation to achieve goal son climate change, security of
supply and affordability?
Proposals for Low Carbon Generation Revenue Support
Last year GE illustrated its belief that the UK has
a unique opportunity to become a global centre of excellence for
offshore wind by announcing a £99 million investment in a
new wind turbine-manufacturing site in Britain. It is hoped that
this investment could provide up to 1,900 clean energy jobs by
2020. Over the next decade the UK has the potential to create
a thriving low-carbon sector delivering jobs, domestic sales and
export opportunities, particularly in offshore wind.
To support this intended investment the right conditions
must be in place to maximise the UK's wind resource, namely policy
certainty. The current Renewable Obligation for example has to-date
proven to be an effective policy for encouraging the deployment
of renewable energy technologies by incentivising utilities with
strong balance sheets to invest in higher risk technologies such
as offshore wind. Whilst we understand that the proposals to transition
away from the RO are intended to make renewable projects easier
to finance in the longer term, there is a risk that the move could
have the reverse effect without the right financial support mechanism
The Electricity Market Reform process should consider
the continued use of both price-based incentives and volume based
obligations to support the operational characteristics of offshore
investment together with a technology-specific 'multiplier' that
specifies an appropriate level of support to encourage offshore
wind investment and other technologies. In the case of offshore
wind, deployment is largely driven by operational costs with maintenance
for offshore about three times the cost of onshore and therefore
financial support mechanisms must have a multiplier effect, for
technologies which deliver electricity at a higher cost to provide
additional support for offshore investors.
There is also a need to fully understand the implications
of any new financial support mechanism on long-term trading arrangements
as a requirement to trade into the same pool as less intermittent
generation could create unintended consequences. Since offshore
wind reflects higher operational risk, premiums of investors will
be higher and therefore require a higher tariff than may be provided
through a new mechanism. The RO motivates utilities to compromise
on project profitability in return for renewable generation; however
the risk profile of offshore wind is not compatible with investors
attracted by steady returns provided by private equity and pension
Should a decision be taken to move away from the
RO, GE is also keen to ensure that sufficient measures are taken
to ensure a smooth transition. This will include a greater understanding
of what basis Government will propose to grandfather the RO to
ensure some kind of "tailing" of the current two ROCs
towards the 2017 end date for accreditation.
Emissions Performance Standards (EPS)
In the UK, GE is a leader in the development, application
and design of IGCC power plants which employs gasification as
a key technology for pre-combustion carbon capture. We view the
concept of an EPS for coal plant as a viable regulatory supplement
and recognise the potential of this policy instrument to be introduced
as part of a broader process of power market reform.
The EPS can also deliver targeted outcomes by increasing
the future market opportunity for low carbon generation and CCS
in particular, by ensuring low carbon options are not undercut
by high carbon generation. This is particularly important as it
allows suppliers of CCS equipment, such as GE, to support investments
in the technology development and supply chain capacity now that
is necessary in order to begin deployment in 10-20 years' time.
Before an EPS can be introduced, the level and timing
must be carefully considered in order to take account of differences
in fuels and technology options and further detail on implementation
will need to be understood during the consultation process. Whilst
policy-making remains at an early stage, we would recommend that
the design of EPS should seek to be consistent with Best Available
Technology (BAT) at the time of implementation. For example, we
would be opposed to an initial standard that goes beyond the 360g
CO2/kWh as any standard set higher risks penalizing
fuel advantages provided by natural gas by unnecessarily increasing
capital and operating expenditures.
Carbon Price Support Mechanism(CPS)
We consider that a stable EU Emissions Trading Scheme
(EU ETS) is the most appropriate mechanism to achieve the UK's
long-term energy goals. However, low carbon technologies are disadvantaged
by low prices; they are capital intensive and require long term
visibility of the carbon market that values low or zero emitting
The carbon price on its own does not currently provide
a sufficient incentive to invest in supply chains for low carbon
generation as it has primarily been influenced by policy decisions
and requires supportive instruments to drive deployment of specific
technologies. This has reinforced an expectation of low carbon
prices caused by the system for allocating permits or the link
between carbon price levels and the current challenging economic
For this reason we believe that using the Climate
Change Levy (CCL) to create a carbon floor price will broadly
improve the prospects of low carbon technologies and the way business
invests. As with other aspects of the EMR, the implementation
of a CPS will need to consider the practical implementation issues
that arise, particularly by way of example for 'small emitters'
such as CHP installations that currently fall under the 20MW ETS
threshold and for which clarity over future policy is required
to support investment decisions taken today will be affected by
changes post 2013 when such a policy instrument is likely to take
effect. As such, GE looks forward to contributing the HM Treasury
consultation in February 2011.
Capacity Payment Mechanism
Significant penetration of renewable generation,
primarily wind and solar power, the retirement of fossil fuelled
generation and expanding demand-side participation, will necessitate
increased operating flexibility from the balance of the generation
portfolio that is secure, economic and maintains low emissions.
Current power market operating rules likewise need to evolve with
power system requirements.
Most notably, proper incentives must be provided
to market participants to encourage modified operations and investments
in flexible resources required. Included in this category are
capacity markets and payments.
While grids with increasing renewable penetration
will require more flexible thermal generation capacity, there
are insufficient market mechanisms to encourage and incentivize
the addition of flexible generation. The addition of such mechanisms
targeted upon specific types of low emissions technologies that
have peaking and/or flexibility capabilities would help to accelerate
growth in renewable penetration and would in turn contribute to
a cleaner energy future.
Currently, it is common practice for owners and developers
of thermal power plants to evaluate projects predominantly on
the combination of output, efficiency and maintenance costs to
arrive at a levelized cost of electricity. Given today's shift
to more cyclic operation of these assets, fewer plants are operating
in base load mode. Owners and operators can generate electricity
more cost effectively if they include high efficiency flexibility
and efficiency considerations in their evaluation models.
A form of capacity payment that places a value on
the availability of capacity will be critical to achieving secure,
economic operation of power grids in the near future, while ensuring
environmental targets are not compromised. This can help identify
a future sales volume whilst encourage investors to develop or
purchase the low carbon solutions to meet this market need and
provide innovative opportunities to encourage the demand-side
to bid into the electricity market. For capacity payments to be
effective, coherence with other area of policy such as Ofgem's
Review into the Liquidity of the Electricity Wholesale Market
will be essential to ensure the policy instruments is effective.
Will market reform increase political risk for
investors or create certainty?
At GE, it is important for us to be in a position
to offer our customers a range of power generation and energy
delivery options. Underlying this is the regulatory certainty
that will allow us to take investment decisions and have the confidence
to take long-term view over the next 30 to 40 years.
Our customers have to be able to have the right regulatory
framework in terms of business and technology proposition that
would allow them to invest. We feel that the DECC EMR proposals
that combine market principles with "prudential oversight"
form a good basis on which to ensure the UK's security of energy
supplies but must fully consider the practical implementation
issues so as to avoid unintended consequences.
Long-term policies will be critical to encouraging
investment throughout the value chain as they demonstrate a clear
commitment to the deployment of renewable energy technology. Projects
such as offshore wind have a development cycle ranging from under
a year for smaller solar projects to ten years or more for large
scale projects. Meanwhile investments in manufacturing also have
a long development cycle. It can take several years to fund, build
and tool a plant, and a number of years of operation are required
to justify the investment.
A long-term incentive policy will foster a robust
project pipeline and supply chain that will ultimately reduce
the cost of low carbon technologies, such as renewables. This
will also increase the associated benefits of economic development
as more manufacturing forms around natural local clusters.
EMR in the international context
GE recognises the development of the UK's low carbon
economy will benefit from the ready availability of renewable
energy and coal clusters that are prevalent in the UK if the appropriate
policies are in place.
The UK has often led European thinking in electricity
market design, from privatization to liberalization which means
it is well placed to drive the innovation required to meet its
energy challenges. The current reform process will be keenly observed
in other member states; however, these benefits will only arise
if the UK system has sufficient regulatory arrangements in place
At the same time that the UK Government is considering
electricity market reform, the European Commission also has a
role to encourage Governments elsewhere in Europe to review their
electricity markets to ensure the market reform process in the
UK is more coherently aligned with other markets. The costs of
meeting UK Government objectives are likely to be significantly
reduced over the longer term if policy objectives are more integrated
with the single European market.