House of Lords - Economic Affairs

The Economics of Renewable Energy - Economic Affairs Committee Contents

Memorandum by British Energy

(I) BACKGROUND

British Energy welcomes the opportunity to contribute its views to the House of Lords (HoL) Economic Affairs Committee Inquiry, The Economics of Renewable Energy, an issue that has the potential to have significant economic impacts on the power sector in the UK.

British Energy is the UK's largest electricity generator. We own and operate the country's eight most modern nuclear power stations, one coal-fired power station, four small gas plants and we also hope to develop wind generation projects. Our fleet of nuclear stations make the largest single contribution to tackling climate change in the UK. Carbon emissions from our coal plant are subject to the constraints of the EU Emissions Trading scheme. We provide electricity to the large Industrial and Commercial electricity market, which requires us to buy and sell renewable electricity to satisfy our supplier's obligation under the renewables obligation.

It is proposed that the EC's renewable energy target will be delivered from three sectors: heat, transport and electricity. In this Submission British Energy focuses on the cost implications of the targets on the electricity sector.

We have engaged fully in the climate change and energy policy debate over the years and have responded to many significant consultations and Inquiries, including the HoL recent Inquiry into the EU's renewable target. All our recent Submissions can be found on our website (www.british-energy.com).

(II) SUMMARY KEY POINTS

— There should be greater focus on the three key objectives of reducing greenhouse gas emissions, maintaining security-of-supply, and the provision of affordable energy for consumers, rather than on the delivery of particular types of technology.

— Renewables should form part of a portfolio of electricity generation in the UK but it should not be at the expense of the liberalised market. Government should minimise its interventions in the market as these can have far reaching consequences, not least the cost to the consumer.

— Current barriers to renewable electricity include the costs, which remain in the main higher than other low cost options, and the constraints of planning.

— Once a technology has demonstrated itself as cost competitive with existing technologies it should receive no further funding support. Any support beyond this is a distortion to the market and places additional unnecessary costs on the consumer. No such mechanism to limit support is in place.

— Bearing in mind there are now only 12 years to go before 2020, the original BaU renewables contribution of 5% would have been difficult to reach—achieving a trebling of this value (ie 15%) would seem extremely challenging, even with heavy market interventions and involve substantial additional cost to the consumer.

— A robust carbon price is needed to incentivise the market to make the necessary emissions reductions being sought by government to meet its targets, through the adoption of the most cost-effective low carbon options.

(III) DETAILED RESPONSE TO QUESTIONS

Question 1. How do and should renewables fit into Britain's overall energy policy? How does the UK's policy compare with the United States, Australia, Canada, and other EU countries?

1. Within Britain's energy policy there should be greater focus on the three key objectives of reducing greenhouse gas emissions, maintaining security-of-supply, and the provision of affordable energy for consumers.

2. Renewables provide one form of greenhouse gas abatement technology but there are other technologies and approaches that can deliver reductions in greenhouse gas emissions. These include nuclear and fossil fuel generation fitted with carbon capture and storage technology.

3. Security of supply is important from both the context of indigenous primary energy and the availability of energy on demand. Renewable technologies contribute to the former but in the case of the later, the effectiveness of a number of renewable technologies is reduced due to the fact that they can be extremely variable, requiring back-up generation when they cannot operate.

4. Access to affordable energy is central to this Inquiry so it is important to note that, in general, electricity from renewable sources costs the consumer more than other conventional technologies.

5. Renewables should form part of a portfolio of electricity generation in the UK but it should not be at the expense of the liberalised market. Government should minimise its intervention in the market as these interventions can have far reaching consequences. Depending on the initiative Government intervention can lead to increased costs to the consumer.

6. When comparing energy policies it is important to remember that the UK is in a different position when compared to other European Countries. The UK is largely an island generator with limited electrical interconnection to Europe thus variable generation requires significant back-up.

7. EU Policy is derived centrally and all Member States are involved in the process of determining energy policy. The Green Package introduced the draft renewables directive with the aim of delivering 20% of Europe's energy from renewable sources by 2020. The UK's national 15% renewable energy targets is extremely challenging, bearing in mind renewable energy currently contributes less than 2% of the total.

8. The renewable energy target will be delivered from three sectors: heat transport and electricity. Independent analysis (see Table 1 below) suggests that the largest single contribution is likely to come from the electricity sector, and implies about 40% of the electricity generated in 2020 must come from renewable sources.

Question 2. What are the barriers to greater deployment of renewable energy? Are there technical limits to the amount of renewable energy that the UK can absorb?

9. Current barriers to renewable electricity include costs, which are high for most technologies (please see question 7) and planning constraints.

10. Planning constraints are currently being dealt with under the Planning Bill and these will address planning issues across England and Wales. Planning reforms have taken place and are in force across Scotland.

11. Significant technical issues arise as a result of increasing the quantity of variable renewable generation onto the grid. As well as those issues specifically mentioned above there will be an increased requirement for fast response units or spinning reserve to load follow and potentially to cover periods when variable units are not available or do not export as expected. This results in additional cost to the system and ultimately the consumer.

12. Under a scenario where we are required to deliver a very high percentage of renewable electricity it is possible that there will be periods in the year when there is an excess of generation and it will become necessary for some stations to "spill" excess electricity to the grid or to force their closure, both of which result in a significant economic loss to the generator. This potential outcome does not appear to have been addressed by Government analysis to date.

13. National Grid is charged with control of frequency within very specific constraints and in order to do this they have contracts with plant that is specifically operated to maintain the frequency within these limits. An increased dependence on more variable renewable generation will increase the complexity of this balancing, and the cost to the system.

14. There is a capacity landscape for renewable energy which needs to be assessed region by region. This must also account for the cumulative impact on the land and visual aspects of renewable generation.

15. We are concerned about the inconsistency of interpretation by statutory bodies of the Habitats Directive. An example is the Scottish Ministers' recent decision on the application by Lewis Wind Power, in which British Energy is a joint venture partner. Lewis Wind Power and its advisors believe the interpretation in this case to be inconsistent with that in other parts of the EU. This may set an unnecessarily restrictive precedent, which could affect other projects.

Question 3. Are there likely to be technological advances that would make renewable energy cheaper and viable without Government support in the future? Should, and how could, policy be designed to promote such technological advances?

16. Currently under the Governments Renewables Obligation (RO) projects are not undertaken unless they are seen to be profitable. The current situation is particularly perverse as an economic rent is being paid to those organisations that have been able to obtain planning permission and access to the grid. This economic rent increases annually as the obligation on suppliers increase and developers are unable to build and connect new equipment to the grid. This means consumers are paying for the RO whether there is delivery or not. This situation is highly undesirable and needs to be addressed.

17. British Energy highlighted in their response to the consultation on the banding of the RO that we do not agree with the approach because:

— it will not adequately address the issues associated with the range of technology options and will create an uncertain obligation in which investor confidence is damaged;

— for developed technologies, such as onshore wind, it would be preferable to address the planning and infrastructure constraints first, since this would likely prove effective in delivering further development, before embarking on the reforms that may not deliver the desired outcomes;

— we believe a system of grants would be more effective for developing technologies. This could account for the project specific nature of these developments, and could reflect the cost reductions that occur as technologies evolve.

18. Onshore wind is now a mature technology with no significant further learning expected. According to some commentators[13],[14] it is now cost competitive without economic support with traditional power generation technologies when a carbon price is included in generation. (It should that there may be short term price increases in turbine price due to manufacturing constraints and the price of steel.)

19. Once a technology has demonstrated itself as cost competitive with existing technologies it should receive no further funding support. Any support beyond this is a distortion to the market and places additional unnecessary costs on the consumer. No such mechanism to limit support is in place.

Question 4. Has Government support been effective in leading to more renewable energy? What have been the most cost-effective forms of support in the UK and other countries and what should the balance be between subsidies, guaranteed prices, quotas, carbon taxes and other forms of support? Should such support favour any particular form of renewable energy over the others? For instance, what are the relative merits of feed-in tariffs versus the UK's present Renewables Obligation Certificate (ROC) regime?

20. It is worth noting that the 2% of energy for the UK in 2005 in Table 1 below is the result of a policy to promote renewable electricity through the NFFO and RO schemes since 1990; also, this figure has a significant contribution from hydro electricity which was largely built before 1990. Bearing in mind there are now only 12 years to go before 2020, the original BaU renewables contribution of 5% would have been difficult to reach—achieving a trebling of this value (ie 15%) would seem unrealistic, even with significant market interventions and substantial cost to the consumer.

Table 1

RENEWABLES CONTRIBUTION TO TOTALS


	2005(1)	2020 BaU(2)	2020 EU Directive(3)

EU (% of total energy)	7	12	20
UK (% of total energy)	2	5	15
UK (% of electricity)	4(4)		41(5)
UK (TWh electricity)	17(4)		150(1)

References:
(1) Compliance costs for meeting the 20% renewable target for 2020, A Report for BERR, POYRY Energy Consulting, March 2008
(2) European Energy and Transport: Trends to 2030, EC, update 2005
(3) Draft Directive on the promotion of the use of energy from renewable sources, EC, 23 January 2008
(4) Digest of UK Energy Statistics (DUKES), July 2007
(5) Based on 368TWh electricity generation in 2020, Energy White Paper, May 2007

21. The Government recently intervened in the market to adjust the renewables obligation and introduce banding. Key to any support mechanism designed to encourage deployment of any large scale technology is certainty. To intervene again and change the mechanism will further reduce investor confidence.

22. A feed-in tariff delivers capacity on the ground but it costs more than the RO and it requires perfect knowledge of the renewable electricity supply curve. Without this knowledge it is difficult to correct the tariff for significant changes in the electricity market particularly changes in fossil fuel prices and the carbon price, both of which are very difficult to forecast. A poorly functioning market intervention can increase cost to the consumer, distort the market, and may still fail to deliver the objectives.

Question 5. On top of the costs of building and running the different types of electricity generators, how much investment in Britain's transmission and distribution networks will different renewable energy sources require compared to other forms of generation? Are the current transmission and distribution systems capable of managing a large share of intermittent renewable electricity generation and, if not, how should they be changed? Are the rules about how we connect capacity to the grid supportive of renewables?

23. As identified earlier there are a number of constraints in the system currently on the flow of electricity between regions leading to grid congestion. This is particularly apparent in Scotland and between Scotland and England and this problem will become more acute as greater quantities of renewables are connected in these regions. It is important to note that the areas of highest natural renewable resource are also areas of low population and low demand for electricity, and often in regions of great natural beauty.

24. Particular renewable technologies require connection to the grid from more remote regions. This includes wind and marine technologies. As well as the issue with grid congestion there is a requirement to enlarge the network to more rural regions requiring either completely new transmission lines or an upgrade of the existing systems, bringing with it additional cost to the consumer.

25. Greater quantities of renewable technologies with higher degrees of variability on the grid will require more fast response units and/or more plant running part loaded. Part loaded plant is less efficient than plant running at full load and it is necessary to compensate this plant for running in this manner. The costs of variable generation will get smeared across generators through the Balancing Services Use of System Charge and will ultimately get passed to the consumer further increasing costs.

Question 6. How do the external costs of renewable generation of electricity—such as concerns in many affected rural areas that wind farms and extra pylons spoil areas of natural beauty—compare with those of fossil fuels and nuclear power? How should these be measured and compared? Is the planning system striking the right balance between all the different considerations?

26. External costs (or externalities) include issues such as emissions of pollutants, health impacts, visual impacts, noise, and land use change. The damages caused by these impacts are not integrated into the pricing system and are consequentially referred to as external costs.

27. The ExternE (Externalities of Energy) research project[15] of the European Commission defined external costs as follows: "An external cost, also known as an externality, arises when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group"

28. The ExternE project calculated the external costs of a number of technologies by member state and the UK specific figures are summarised in Figure 1.

Figure 1

ENVIRONMENTAL COSTS ASSOCIATED WITH VARIOUS TECHNOLOGIES[16]

29. Externalities of energy are of course not limited to environmental and health related impacts but may also result from macro-economic, policy or strategic factors not reflected in market prices such as security of supply, cost stability and broad economic impacts on employment and balance of trade. If such externalities were also to be internalised the effect would be positive for low carbon options such as renewables and nuclear power.

Question 7. How do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of "greener" fossil fuel generation with carbon capture and storage and how do these costs compare to renewable generation? What impact do these various forms of electricity generation have on carbon emissions?

30. The Governments Energy Review completed in 2006 prepared comprehensive models to deliver levelised costs of a number of major power generating technologies. The results from this analysis showed that with a carbon price nuclear is a very cost competitive form of electricity generating technology.

31. Figure 2 from the Energy Review shows the results of this analysis with the high gas price assumption[17] from the time of the analysis together with a €25/tCO2[18] carbon price. Nuclear is cost competitive on this basis. This analysis shows that a high carbon price has to be reached to make wind technologies cost competitive.

Figure 2

ENERGY REVIEW (CHART B6) BASE CASE COSTS WITH CARBON PRICE (€25/TCO2) AND HIGH GAS PRICE (53P/THERM) SOURCE: BERR ENERGY REVIEW, JULY 2006

32. Figure 3 extracted from a report by IPA Energy to the Renewable Energy Foundation[19] shows levelised costs in p/kWh. The cost ranges are as a result of considering carbon price ranges from €10-€50/tCO2. This clearly shows nuclear to be the emerging benchmark technology in this scenario. It should also be noted that the cost for wind technologies in this analysis makes onshore wind cost competitive without financial support in this scenario.

Figure 3

SEVERN BARRAGE COSTING EXERCISE, IPA FOR THE RENEWABLE ENERGY FOUNDATION, MARCH 2008

33. Figure 2 and 3 show levelised costs vary, depending on assumptions. It is important to note the there are high capital costs associated with building nuclear power stations that require long term certainty. Nuclear power is built in large installations typically over 1GW in size—this reduces the impact of having to construct multiple smaller installations. (Please see Appendix 1 for a calculation that shows that nearly 2,000 onshore wind turbines would need to be constructed to deliver as much output as Sizewell B, British Energy's 1.2GW nuclear power station in Suffolk.)

34. Levelised costs is only one tool that investors will consider when choosing whether to invest in new power generation technology. Whilst levelised costs are a quick means to compare power generation technologies there are a number of aspects they do not capture:

— Policy uncertainty (and the option value of waiting).

— Planning constraints.

— Price risks (fuel price, CO2 price, electricity price).

— Technical risks (capital cost, operating and maintenance cost, decommissioning and waste regulation, utilisation levels, build times).

— Financial risks (weighted cost of capital, credit risk, contractual risk).

Of these risks the electricity price risk is very significant for highly capital intensive projects such as renewables and nuclear.

35. Costs associated with Carbon Capture and Storage vary because there are no such systems operating at the current time.

36. As noted in our response to the Question 1, British Energy believes that reducing greenhouse gas emissions should remain a key priority for Government. For this reason we encourage Government to consider the marginal abatement costs of the different technologies considered:

— when considering life cycle emissions of variable renewable technologies it is important to factor in the emissions resulting from the requirement for part loaded plant or fast response reserve. This is particularly relevant at high penetrations of the technology; and

— the Governments CCS competition suggests that the CCS capture target is 90% which results in 10% of the carbon dioxide emissions being released. Together with a higher cost this increases the marginal abatement cost of this technology.

37. Figure 4, based on analysis by British Energy, shows the marginal abatement costs for a number of different technologies. Appendix 2 outlines the methodology and sources used to derive these costs. What this chart shows is that at current carbon prices (around €25/tCO2) nuclear is a viable economic option for delivering low carbon electricity and reducing emissions of UK greenhouse gases.

Figure 4

MARGINAL ABATEMENT COSTS OF VARYING LOW CARBON TECHNOLOGIES[21]

38. The carbon associated with balancing the system and back-up generation has to be considered, when calculating carbon savings as a result of the implementation of "variable" renewable technologies (particularly at higher penetrations):

— in order to balance a system with a high penetration of variable generation it is necessary to run some thermal plant at reduced load which means that the plant operates less efficiently and produces more carbon dioxide per unit of output. This plant is able to respond to fluctuations in generation from the variable plant and maintain the required frequency; and

— when variable generation is not producing power (periods of low wind or the tides are wrong) it is necessary to operate back-up generation that has been specifically built for this purpose. These are often fast response plant such as Open Cycle Gas Turbines which have lower efficiencies than Closed Cycle Gas Turbines.

It is necessary to account for these emissions in the policy to deliver higher proportions of renewable technologies as they are a direct result of the policy choice.

Question 8. How do the costs and benefits of renewable electricity generation compare to renewables in the other key forms of energy consumption—transport and heating?

39. Renewable energy from heat and transport have a number of complications associated with them:

— the use of heat from power stations leads to a loss of electrical efficiency unless the plant has been optimised for this purpose;

— it is not clear whether or not the developments required in renewable heat and renewable transport will come forward;

— the potential for renewable heat and renewable transport to contribute by 2020 is limited; and

— this places a significant burden on the electricity sector to deliver the overall UK renewable energy target of 15%.

Question 9. If the UK is to meet the EU target that by 2020 15% of energy consumed will come from renewables, will most of this come from greater use of renewable sources in electricity generation? If so, why? Should British support for renewables in other countries be allowed to contribute towards meeting the target for the UK?

40. For the reasons identified above, electricity from renewables will form a higher proportion of the UK's final renewable energy share. This results in significant impacts on the power generation sector including:

— higher costs, both for the technologies and managing the networks, which will subsequently be borne by consumers;

— requirement for more variable generation technologies;

— necessity for significant grid expansion;

— modifications to the market (through financial subsidies for some technologies) leading to greater price volatility; and

— greater possibility of stranded assets.

41. It should be noted that the burden sharing process for the renewables directive was not based entirely on the countries technological potential to deliver renewable energy but also on its ability to pay (through a link to the MS's GDP). For this reason all available economic tools should be allowed for MS's to deliver their renewables targets and this should include a measure of trading of guarantees of origin (or green certificates).

Question 10. How would changes in the cost of carbon—under the European emissions trading scheme—affect the relative costs of renewables and other sources of energy? Would a more effective carbon emissions trading scheme remove the need for special support of renewable energy?

42. As the carbon price increases it supports low carbon forms of generation including renewables, nuclear and fossil fuel fitted with CCS. As noted in response to Question 7, a higher carbon price is required to support wind generation according to the Governments figures.

43. A robust carbon price will incentivise the market to make the necessary changes, including the construction of low carbon forms of power generation in order to deliver the emissions cap. When it becomes economically viable to use renewables with only the carbon price as support then the market will deliver renewables. Until this stage should the Government wish to deliver renewable technologies then it will be necessary to provide additional support.

Question 11. What are the costs and benefits of the present generation of biofuels? Will there be a second generation of biofuels and, if so, what are the estimated costs? What are, or are likely to be, the carbon emission impacts of first and second generation biofuels, and what are the other relevant environmental effects?

44. It is important to successfully deliver a first generation of biofuels before the market is able to assess the potential for a second generation.

45. British Energy believes the Government should concentrate on the lowest cost abatement options first. There are limited gains to be had with biofuels in the near term and improving the efficiency of cars and encouraging consumers to carry out a modal shift to lower carbon intensity forms of transport should be addressed first.

46. The quantity of bio-fuels delivered will impact on the overall renewable energy target and possibly place additional burdens on other sectors involved in the targets. As noted earlier this is most likely to impact the electricity sector.

13 http://www.ukerc.ac.uk/Downloads/PDF/06/0706_Investing_in_Power.pdf in which the levelised cost of onshore wind is quoted as £39/MWh Back

14 Severn Barrage costing exercise, IPA for REF, March 2008 (see diagram later in this report) Back

15 http://www.externe.info/ English Press Release Back

16 Adapted from ExternE, Externalities of Energy, Volumes 7 and 8, EC (1999) Back

17 The high gas price assumptions from the Energy Review (53p/therm) have been chose as they better reflect today's gas prices. The fossil fuel prices in the Energy Review were lower than Governments most recent fossil fuel price projections Back

18 Today's carbon price is currently trading higher than this for phase 2 Back

19 Severn Barrage costing exercise, IPA for REF, March 2008 Back

20 A study on our Torness AGR Nuclear power station identified that there were approximately 5g/kWh of carbon dioxide released over the stations complete lifecycle (http://www.british-energy.com/pagetemplate.php?pid=251) compared to nearer 1,000g/kWh for coal power stations (POST note 268 http://www.parliament.uk/documents/upload/postpn268.pdf) Back

21 Sources: Based on Investment Analysis for Energy White Paper, Redpoint, May 2007, Data from Severn Barrage Costing Exercise, IPA for REF, March 2008. Notes: Left hand bar denote abatement costs for 2007 and right hand bar for 2031 Back

22 "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change" Timothy Searchinger et Al, Journal of Science, February 2008 Back

23 "Land Clearing and the Biofuel Carbon Debt" Joseph Fargione et Al, Journal of Science, February 2008 Back