Environmental Audit CommitteeWritten evidence submitted by EDF Energy

Key Points

EDF Energy continues to support the use of Carbon Budgets as important milestones on the path to meeting the UK’s statutory requirement to reduce its emissions by at least 80% from 1990 levels by 2050.

Delivering the Government’s Electricity Market Reform (EMR) package will be a key component in achieving the challenging targets set out in the carbon budgets. We welcome the progress that is being made in the Parliamentary scrutiny of the Energy Bill but we urge that Royal Assent is achieved as soon as possible in 2013 to help provide certainty for investors.

Gas-fired generation will play an important role in the transition towards a decarbonised power sector in the 2030s by providing the reliable and flexible backup generation required for balancing the electricity system.

However, further investment in any unabated gas generation plant, beyond the minimum that is required to bridge the gap to the transition to low carbon technologies, would introduce significant challenges in meeting the UK’s climate change objectives. Such investment substantially increases the risk that the UK’s long term emissions reduction targets will not be met, or at least not be met in a cost-effective manner.

We believe that the Government should continue to focus its attention on its EMR proposals and that it should aim to provide a clear and unilateral commitment of its low carbon intentions to investors.

We note that the Government’s intended review of the Fourth Carbon Budget, where it will consider developments in the EU emissions reduction trajectory, will occur in 2014. Although there appears to be a lack of apparent progress in international discussions on climate change, we would highlight that there have been recent advances at the EU level, including the publication of the European Commission’s Green Paper on a 2030 framework for climate and energy policies. It will be important for the UK Government to take into consideration any positive developments at the EU level during the review process. A potential lack of formal resolutions at the EU level at this stage should not in itself be used as a reason to revise the Fourth Carbon Budget. This is because the need for urgent action on climate change has not changed.

Should the Government find reason to make any changes to the Fourth Carbon Budget, it is important to note that even a slower path to decarbonise the economy will still require the UK to largely decarbonise the electricity sector by the early 2030s. As such, any review must not undermine the development of a policy framework to decarbonise the electricity sector.

EDF Energy supports Government proposals to assist those Energy Intensive Industries (EIIs) exposed to international competition, and therefore the risk of carbon leakage, as a result of the indirect costs of UK and EU climate policies. However, it is important that any financial support is proportionate and time-limited to drive the behavioural change required to permanently reduce emissions. In addition, care will need to be taken to ensure that the integrity of the EMR proposals is not undermined by creating the scope for ad-hoc exemptions.

About EDF Energy

1. EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. We provide 50% of the UK’s low carbon generation. Our interests include nuclear, coal and gas-fired electricity generation, renewables, and energy supply to end users. We have over five million electricity and gas customer accounts in the UK, including both residential and business users.

Introduction

2. EDF Energy has previously expressed its support for the Government’s decision to adopt the recommendations of the Committee on Climate Change (CCC) on the Fourth Carbon Budget. We maintain the position that a clear and stable long-term policy framework, as provided by the carbon budgets to date, will help inform the priorities for policy development and will assist in providing investors with the certainty they require to accelerate the delivery of low carbon investment.

3. The mainstream consensus of the need for urgent action on climate change has not changed, despite the lack of apparent progress in international discussions on the topic. It is crucial that the UK continues to make the transition to a low carbon economy in an affordable manner that will also ensure that the competitiveness of UK energy supplies is maintained.

4. There is general agreement within both industry and the Government that power sector decarbonisation by 2030, or soon thereafter, is necessary to meet the UK’s statutory requirement of an 80% reduction in carbon emissions by 2050. This is because low carbon electricity generation can be a key driver in the decarbonisation of the residential heat and surface transport sectors.

5. We note that the CCC continues to emphasise that “achieving this reduction [by 2050] will require a step change in the pace of UK production emissions reduction—now needed urgently.”1 It is therefore imperative that the UK Government maintains momentum on delivering Electricity Market Reform (EMR), which we believe will help achieve decarbonisation at least cost. Reform of the existing electricity market arrangements is necessary to ensure the market is capable of delivering the reliable diverse energy mix required to achieve the UK’s energy policy objectives. We believe that the Government’s proposals will provide the investment framework that is crucial for the low carbon investment that the country needs, and will keep costs down for consumers.

6. The planned Contracts for Difference (CfDs) will be a key component of ensuring value for money for consumers by shielding them from the damaging impacts of high and volatile fossil fuel prices. By reducing risk to investors, they will lead to a lower cost of capital and a reduction in bills compared with alternative mechanisms such as the Renewables Obligation.

7. EDF Energy believes that CfDs, in conjunction with the carbon price floor, are capable of working for all low carbon technologies (including renewables, nuclear and fossil fuels with carbon capture and storage) and, indeed, are designed to do so. These instruments will give all such projects the stable and reliable revenue they need to support the large upfront investment required. It is important that investors are allowed to make a reasonable return with an acceptable sharing of risk so that the final outcome represents a fair deal for both consumers and investors. We believe that the Government’s plans will help us, and other investors, to deliver secure, affordable and low carbon energy supplies.

Energy Bill

8. EDF Energy welcomes the progress that is being made in the Parliamentary scrutiny of the Energy Bill but we urge that Royal Assent is achieved as soon as possible in 2013 to help provide certainty for investors.

9. As part of the current Energy Bill debate, EDF Energy supports the introduction of a 2030 carbon intensity target in secondary legislation, as recommended by the CCC and the Energy and Climate Change Select Committee. This will help ensure that the required pathway to 2050 is both realistic and deliverable and will provide investors with greater confidence in the Government’s commitment to the transition to a low carbon economy. We believe that the target should exist within a range and be consistent with the trajectory of the carbon budgets. It should also be flexible enough to reflect periodic changes in assumptions and costs. However, the requirement for secondary legislation on this, and other points of EMR detail, should not be a reason for delaying the Bill’s progress.

Role of Gas

10. Gas plays a significant role in heating, with 81% of home heating2 fuelled by this source. We support DECC’s ambitions to move away from fossil fuel heating as over a third of the UK’s carbon emissions comes from the energy used to produce heat (more than from power generation).3 EDF Energy has long supported early action on renewable heat, as we believe that this is a sector which can make a significant and cost effective contribution to the UK meeting its 2020 renewable energy target, especially through the use of heat pumps.

11. EDF Energy is committed to delivering affordable, secure, and low carbon supplies based on a diverse energy mix, including nuclear and renewables. As part of this, we believe that unabated gas fired generation will play an important role in the transition towards a decarbonised power sector in the 2030s by providing the reliable and flexible backup generation required for balancing the electricity system.

12. Further investment in any unabated gas generation plant (whether fuelled by conventional or shale gas), beyond the minimum that is required to bridge the gap to the transition to low carbon technologies, would introduce significant challenges in meeting the UK’s climate change objectives. This is because while gas fired generation has lower carbon dioxide emissions than old coal fired generation, it is still a significant source of carbon emissions in its own right (unless it can be equipped with carbon capture and storage). In addition, as the UK increasingly starts to move to a greater reliance on imported gas, this is likely to lead to greater price volatility and long-term price uncertainty as global demand recovers from the effects of the recession. This will potentially lead to security of supply concerns that will need to be addressed.

13. We are therefore concerned by the Government’s introduction of a new 200gCO₂/kWh (in 2030) power sector carbon-intensity scenario in its Gas Generation Strategy4 (equating to 37GW of new CCGT capacity by 2030). Although we note that 200gCO₂/kWh is only a sensitivity analysis, we fear that it sends a mixed signal to industry. Investment in unabated gas generation plant substantially increases the risk that the UK’s long term emissions reduction targets will not be met, or at least will not be met in a cost effective manner. This is either because the carbon emissions from these new assets will be “locked in” or, alternatively, because it increases the risk of stranded assets.

14. EDF Energy believes that a 200gCO₂/kWh scenario in 2030 (in contrast to a 50g-100g scenario) weakens the signal for low carbon investment beyond 2020. We note that the CCC states that “in this scenario, the share of unabated gas generation expands to approximately 45% of the mix, at the expense of nuclear and renewable generation”.5 A 200gCO₂/kWh power sector carbon intensity target in 2030 would potentially mean that no low carbon investment would be needed in the 2020s, and the stop/start trajectory of investment would affect the UK’s ability to deliver decarbonisation at the lowest cost. We believe that the Government should continue to focus its attention on its EMR proposals and that it should aim to provide a clear and unilateral commitment of its low carbon intentions to investors.

Review of the Fourth Carbon Budget

15. EDF Energy is aware that the Government intends to carry out a review of the Fourth Carbon Budget in 2014 to ensure that the UK’s carbon targets are in line with Emissions Trading System (ETS) emissions reduction trajectory agreed by the EU. We believe that it will be essential for the Government to take note of the direction of policy development at that time.

16. Although the European Parliament’s voted recently to reject the proposal to “backload” 900m carbon allowances, we were pleased to note that MEPs defeated a procedural vote to move immediately to a Legislative Resolution. Since then, we understand that a decision has been made for the Environment (ENVI) committee to hold another vote on the issue in June (and in the plenary session in July). This suggests that the proposal is still a live concern at the European level. We also welcome the fact that that there is a now a strong recognition within Europe of the need for concrete legislative proposals to carry out structural reform of the EU ETS. For example, we note that there has been a recent letter signed by a number of Energy and Environmental Ministers calling for the European Commission to bring forward proposals by the end of the year at the latest.6

17. The European Commission, through its recent Green Paper, has also started to consult stakeholders to support the development of a new integrated climate and energy policy framework for the period up to 2030. It is recognised that the framework should ensure that the EU is on track to meet longer term climate objectives (ie reduce greenhouse gas emissions between 80–95% by 2050) and build upon the Energy Roadmap 2050 laid out in 2011. We support the efforts being made by the UK Government to move to a tighter 2020 emissions target and to secure a robust agreement for domestic carbon dioxide reductions across the EU that could lead to a binding international agreement on tackling climate change.

18. We note that the Government’s intended review of the Fourth Carbon Budget, where it will consider developments in the EU emissions reduction trajectory, will occur in early 2014. However, since this comes before the date that the European Commission has stated it is seeking to adopt legally any 2030 package (ie by the end of 2014), the Government needs to ensure it has enough information to undertake a complete evaluation of developments. It will be essential for the Government to take into consideration any positive developments at the EU level during the time of the Government’s review. A potential lack of formal resolutions at the EU level at this stage should not in itself be used as a reason to revise the Fourth Carbon Budget. This is because, as stated above, the need for urgent action on climate change has not changed.

19. Should the Government find reason to make any changes, it is important to note that even a slower path to decarbonise the economy will still require the UK to largely decarbonise the electricity sector by the early 2030s. As such, any review must not undermine the development of a policy framework to decarbonise the electricity sector.

Competitiveness Risks of Carbon Budgets

20. EDF Energy recognises that it is possible that some low carbon policies may have an indirect impact on energy intensive users through their effect on electricity prices. We therefore support Government proposals to assist those Energy Intensive Industries (EIIs) exposed to international competition, and therefore the risk of carbon leakage, as a result of the indirect costs of UK and EU climate policies. However, we would highlight that are many reasons why firms may wish to relocate production and agree with the EAC’s conclusion that “it is the overall cost burden, rather than energy costs in isolation, that help determine the risk of carbon leakage”.7 In addition, we note that recent analysis by the CCC suggests that “policies already announced by the Government should be sufficient to address competitiveness risks for energy-intensive industries to 2020”.8

21. We believe that UK Government relief for the indirect costs of the EU ETS and carbon price support mechanism should be targeted at those industrial sectors and installations where the evidence base suggests there is significant risk of carbon leakage and that the levels awarded are proportionate to need. In addition, it is important that any financial support is time-limited in order to drive the behavioural change required to permanently reduce emissions.

22. It is our understanding that the Government is currently examining the different options to determine eligibility for the exemption from the costs of CfDs for EIIs. While EDF Energy would continue to support targeted relief, we believe it will be critical to ensure that the integrity of the EMR proposals is maintained. We are concerned that if, for example, the primary legislation within the Energy Bill is diluted by creating the scope for ad-hoc exemptions.

23. EDF Energy believes it is also important to consider the time horizon over which the costs of the CfD regime will evolve. With the Renewables Obligation remaining the key driver for renewables investment in the near future, we believe it will be a long time before consumers will see any CfD related costs feeding into electricity prices. The first projects supported by CfDs are unlikely to have any discernable impact on consumer bills for at least another six or seven years. In such circumstances, we believe there are significant inherent risks associated with prescribing statutory solutions today for uncertain impacts that will arise so far into the future.

24. The Government is right to proceed with measures now to provide targeted relief against the indirect impact of the carbon price support mechanism (which came into effect in April 2013). However, we believe that it should reserve its position on how other EMR related costs should be dealt with until 2016, by which date the outcome of the post-2020 Durban Platform global climate change agreement should be known. Deferring a decision on EMR-related costs will allow Government to make a much better assessment of the impacts that it believes it should protect against, and also give it a better understanding of the potential for trans-boundary distortions.

16 May 2013