Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Prospect
Introduction
1. Prospect is a trade union representing 120,000 scientific, technical, and managerial and specialist staff in the Civil Service and related bodies and major companies. In the energy sector, we represent scientists, engineers and other professional specialist staff in the nuclear and radioactive waste management industries, the wider electricity supply industry and, increasingly, also in the gas industry. Our members include experts developing carbon capture and storage technologies and those with regional responsibility for promoting sustainable energy systems. They are engaged in operational and technical management, research and development and the establishment and monitoring of safety standards, environmentally and in the workplace. We are fortunate in being able to draw on this broad range of knowledge and expertise to inform our views.
2. Prospect’s response to the Government’s consultation on Electricity Market Reform called for bold action to accelerate the development of low carbon energy. We believe that the draft Energy Bill largely meets this requirement. In particular, we agree that investors need to be given the strongest possible signals now and that current market arrangements will not deliver the scale of long-term investment needed. However whilst we generally welcome the Government’s approach, we have some comments on the proposals, as outlined both in the draft Bill and in Annex B—the draft operational framework for feed-in tariffs (FiT) with contracts for difference (CfD).
Contracts for Difference
3. The CfD model should, in our view, provide security for the development of novel technologies and, through long-term contracts, provide a secure base for the development of UK fuel sources. However, Prospect is not convinced that this should be based on rewarding operators for plant availability rather than actual output, since some other form of capacity payment would be more appropriate for encouraging load-following plant. It is also important that the process is transparent and does not favour vertically-integrated companies whose decisions mirror other large rivals rather than favouring diversity of supply.
4. We note that no strike prices have yet been set for CfDs and that none will be before next year. This is clearly a major gap in the information required for decision-making, which the Final investment Decision (FID) arrangements are designed to address. That said, we welcome the Government’s recognition that competitive price fixing may be difficult for new nuclear build and that the agreed CCS process already includes a competitive element. Therefore the process for setting strike prices in the period to 2017, essentially based on negotiation, is a pragmatic way forward and in our view preferable to an inflexible or formulaic approach. The fact that strike prices for renewables are likely to vary by technology in order to reflect different stages of market development is similarly sensible, though undoubtedly there will be difficult decisions to be made about prioritisation.
5. There are clearly trade-offs between the benefits of long-term price security and having sufficient flexibility to cope with rising costs. The Government is minded to link a proportion, though not all, of the strike price to a general inflation index rather than a more specialised index for each project. This is justified on the basis of reducing the administrative burden, and there is merit in this argument. However, in our view it would be helpful to model the financial impacts of various approaches before taking a final decision. The choice of CPI rather than RPI would not necessarily be our preferred basis for uprating, and we think that this needs to be reconsidered in the light of current discussions around changing the composition of the CPI and to achieve consistency with regulatory price control reviews.
6. The draft operational framework sets out three price setting options to manage financial exposure. Prospect’s preference would be for technology-specific targets as this is the most straight-forward approach that also ensures a balance of investment. However, the suggestion that the Government may not issue a CfD for flexible plant during this decade may be controversial as it would particularly impact on development of renewables.
7. We agree with the suggestion in the draft operational framework that CfD length should be 15 years for renewable technologies and no less than 15 years for nuclear. However, to offer CCS only a 10 year period will increase the costs of capital and make CCS a less attractive proposition. This 10 year period also sits uncomfortably with the grandfathering period provided for gas under the Emission Performance Standards proposals.
Capacity Market
8. Capacity payments should incentivise real availability so should be linked to the volume of generation available and to other services to maintain grid stability such as reactive voltage, location, speed of response to an unexpected rise in demand, and reliability. This requires establishing the factors that determine the value of spare capacity and rewarding the plant that meets those requirements. It is also very important that the shape of capacity payments is consistent with other incentives. Currently the market for responding to unexpected peaks in demand is highly inefficient as there is no predictable reward for constructing and operating fossil-fuel plant with low level and unpredictable patterns of operation. At present capacity is only rewarded when plant runs. Prospect’s view is that the economic dispatch model is the most efficient way of providing a long-term reward to generators who provide reserve capacity to cover intermittency. Rewarding generators for retaining capacity that can respond quickly to fluctuations in renewable power sources, such as gas, will be of increased importance as the proportion of power from renewable sources increases.
Emissions Performance Standards
9. Prospect broadly supports the introduction of emissions performance standards (EPS), not least because this acknowledges the continuing role of coal-fired power stations whilst incentivising emissions reduction. However, we are not convinced that the 450g/kWh is the appropriate immediate level to encourage investment in CCS. Given the advantages of CCS, we would wish to see consideration given to a higher target (perhaps in the order of 600g CO2/KWh) as a transitional measure to encourage investment in what remains a commercially unproven technology. This should be reduced once new nuclear and renewables capacity is operational. We also think it important that the EPS regime does not creates a perverse incentive not to invest in major efficiency measures such as efficient turbines or supercritical operation both of which reduce carbon emissions by 10%.
Final Investment Decisions
10. Prospect fully supports the intention to support early development proposals through a FID framework on a case-by-case basis to ensure that investment can get underway. However, it will be important to guard against opacity in this process.
ONR
11. We support the proposals for a single nuclear regulator with wider powers than those currently held through the HSE and for the objectives of that regulator to be focussed on the challenges posed by new build and decommissioning of redundant nuclear plant. Integrating the regulation of security, safeguards and transport with health and safety offers efficiency gains and clarity of focus.
12. We welcome the recognition that ONR must recruit and retain specialist staff. It is important that ONR is given the operational freedom to determine its own employment policies and package for all ONR staff. Staff in specialist support roles often require complex and rare skills and make a contribution to the performance of ONR that is just as important as that provided by inspectors. Clarity over the treatment of pensions for all ONR staff, including allowing those recruited after vesting date to join the Principal Civil Service Pension Scheme (PCSPS) would also assist this process during the evolution of ONR as a statutory corporation.
13. Prospect believes that the ONR board non-executive members should all have knowledge and experience of the nuclear sector and, since the commitment of all stakeholders is necessary, that it would be appropriate to include trade union representation on the board of the ONR. We support the option of including an HSE representative and we believe that close links with the HSE should be retained to enable consistent regulation of non-nuclear safety issues by ONR.
Devolution
14. Prospect recognises that the draft Energy Bill raises a complex interaction of reserved and devolved powers. We understand that the Scottish Government will be consulting with industry and other stakeholders over the summer, and we would expect the STUC and affiliated unions to be involved in this process.
Investment in Staff and Skills
15. Prospect criticised the Electricity Market Reform consultation paper for its failure to consider investment in staff and skills, both of which will be crucial to the delivery of EMR and to sustaining progress. This remains a key concern, particularly in the context of tight labour markets for engineering and specialist concerns. We are pleased to note therefore that a group of Sector Skills Councils has worked together to make an assessment of existing training provision and what more needs to be done. We are also pleased that the Green Economy Council has agreed in principle to convene a skills sub group to take this work forward. As previously indicated, a workforce strategy for new energy infrastructure will need to be located within the much wider infrastructure challenge that the UK faces over the next decade.
Role of Gas
16. It is clear that Government sees gas as the fall back option in the event of insufficient timely progress to develop new nuclear and/or renewables. Given the potential significant increases in gas prices over the remainder of the decade and the existence of efficient coal-fired plant that can be converted to biomass or can co-fire biomass, then there is a transitional role for coal even at costs of higher short-term carbon emission. We do have concerns that new gas build would create financial pressure to maintain higher carbon emissions in the medium–term as well as higher electricity prices compared to short-term bridging of the capacity gap by existing coal stations. The obvious danger is that once gas fills the gap, any impetus for other investment will be lost, potentially resulting in a new dash for gas. In the 1980s resulted in failure to create the correct incentives for investment in the UK and led to the development of technology overseas and the loss of high-skilled, high technology, high quality jobs.
Governance
17. Prospect’s preference continues to be for an agency that would take decisions out of the political cycle. We are conscious that five years is not a long timescale for purposes of investment in energy infrastructure, and this remains a cause for concern. Stability is essential to ensure investment.
18. In the absence of such an agency, we think that there is a need for absolute clarity about the role of the proposed group of technical experts to scrutinise the System Operator’s analysis, including in relation to the role played by Ofgem and the Committee on Climate Change. As the draft Bill notes, Ofgem will not hold the levers for delivering all outcomes. But we are also aware that the electricity distribution review for the period from 2015 (ED1) has commenced, with a strategy consultation paper expected in September. This clearly needs to progress in a synchronised way with the draft Bill.
19. The draft operational framework additionally proposes the introduction of an “independent expert” role in addition to the proposed panel of technical experts. It states that there are precedents for this in other European countries, and this is helpful. However, we do seem to be at risk of inventing an over-populated set of monitoring institutions and roles rather than accepting and addressing market failure in a more straightforward manner. The role and mandate of such an independent expert will need to be carefully considered in relation to the other proposed bodies.
20. The new Energy Strategy and Policy Statement should also help in this regard but the Statement will only reflect existing policy, with a different process envisaged for filling “policy gaps”. It is important that this twin track approach does not lead to confusion or lack of confidence in the stability of the Government’s position. The fact that there will also be short “policy outcomes” resulting from “high level strategic trade-offs” with greater legal force than other sections of the statement could be helpful, though it is not entirely clear what this statement means.
June 2012