Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by the Greater London Authority
Introduction
1.1 The Greater London Authority (GLA) welcomes the opportunity to respond to the ECC Select Committee’s call for evidence on the Draft Energy Bill. The need to ensure the UK’s energy security is pressing, and it will be vital for our economy and our environment that Government reforms help deliver a sustainable, long-term and low carbon future.
1.2 If Government policies are to succeed nationally, then it is vital that they succeed in London. The Mayor of London is committed to ensuring that 25% of London’s energy is provided through decentralised energy systems by 2025. This is the most practical and cost effective way of sourcing low and zero carbon heat for use in densely built up areas, such as London. We strongly hope that the Energy Bill, when it is published later in the year, helps create the framework that will allow this important objective to be reached.
1.3 The GLA responded to DECC’s consultation in March last year, making suggestions to help ensure that the reforms in the Energy Bill work well for the people, and the future economy, of the capital and help the Mayor achieve his commitments. This response to the ECC Committee’s call for evidence is essentially a reiteration of that response, laying out the key concerns the GLA has with the newly-published Draft Energy Bill and how these can be addressed. We look forward to working with the Committee and with DECC to make sure the Energy Bill is a success.
Demand-Side Management
2.1 Currently there is no effective mechanism to support demand-side management and demand-side response, nor to support decentralised energy. Without such a mechanism it is likely we will see an unnecessary increase the level of base load electricity thanks to the diminishing incentive to invest in carbon-saving, demand-side measures, including decentralised energy.
Feed-in-Tariffs and Heat
3.1 The current Feed-in-Tariff (FiT) proposals take no account of heat, although available waste heat and heat production in combined heat and power is integral to electricity production. We believe that low carbon electricity generating plants, which provide useable heat, should be eligible for an uplift under the FiT to reflect the cost of the transmission of the heat to its point of consumption.
Electricity Market Reform
4.1 Electricity Market Reform (EMR) must ensure that small players in the electricity market can compete effectively—this will be vital to increase competition and encourage decentralised energy (DE) initiatives. The current measures set out in the Draft Energy Bill could seriously compromise the ability of small players in the electricity market to compete effectively, as the proposed FiT Contract for Difference (CfD) model only accommodates large scale electricity generation. There is, at the moment, no suggestion that the model will be developed or deployed so as to support the level of demand-side management and distributed generation capacity that is potentially available, and we would urge DECC to commit to this.
4.2 The proposed CfD system is complex and takes no account of the fact that smaller generators rarely obtain the prevailing wholesale price for their power because of the smaller packets their power is sold in, and because of their inability to obtain proper access to the complicated and risk-related electricity market. This means that the wholesale price at which the CfD FiT operates will be too high for smaller generators and they will not gain the same level of support as the larger generators or any support at all. It will place them at a further competitive disadvantage relative to large scale electricity generation.
4.3 Furthermore, the measures in the Bill do not currently attempt to reform the complex systems in the current electricity market which prevent smaller generators and electricity suppliers from competing effectively. The market is illiquid, which has the effect in particular of it being difficult to sell smaller packets of power, and this liquidity problem has not been effectively resolved. The New Electricity Trading Arrangements introduced in 2001 introduced costs risks and complexities that the Bill currently does nothing to remove. The addition of the new CfD FiT system simply adds another layer of complexity upon existing layers of complexity.
4.4 The GLA therefore believes that the Bill should reform the current market effectively to enable smaller players to participate in it. This will introduce more competition and also help the agenda for introducing low and zero carbon heat. The production of low and zero carbon heat could be threatened by the present proposals, particularly when they are combined with the existing costs risks and complexities inherent within the electricity market.
Decentralised Energy
5.1 The Mayor is committed to seeing 25% of London’s energy provided through DE systems by 2025—the most practical and cost effective way of sourcing low and zero carbon heat for use in densely built up areas, such as London. The production of electricity within the same process as produces the heat (combined heat and power) is an important feature of DE production, and the revenue from the electricity sales is often crucial in establishing these schemes on a viable basis. The measures in the Draft Bill, as they currently stand, will have the effect of making it more difficult for DE schemes to obtain a realistic market price for the power produced.
5.2 This will be more apparent when the CfD FiT regime is applied to new renewable electricity schemes in 2017. Instead of a support regime which is tailor-made to meet the needs of smaller scale renewable electricity production, new schemes could be required to operate in an unsupportive CfD FiT regime. The result is likely to be a sharp fall in new investment in renewable generation, including in London.
The Future
6.1 London’s future economy is absolutely dependent on a cost effective, responsive and secure electricity supply. Achieving this will be dependent upon the successful inter-action of four crucial requirements:
Cost effective timely electricity connections.
Adequate capacity in the electricity distribution network that anticipates demand.
Decentralised electricity production feeding directly into the local electricity distribution network. This will relieve the stress on the distribution system, reduce the need for new distribution infrastructure to meet demand, and can act for demand side response purposes, helping at peak times.
Heat networks which distribute the heat produced in combined heat and power systems, and other heat sources, and store it and/or distribute it to consumers according to demand. This is an effective demand side response tool, as well as being the most cost effective means of producing and distributing low and zero carbon heat in densely populated areas.
6.2 It is therefore vital that the Energy Bill, and the Government’s subsequent energy policies, remove the barriers preventing smaller-scale producers from entering the market, ensure that DE is supported and commercially viable, and see the necessary investment in infrastructure strategically planned for and delivered.
June 2012