Memorandum by Scottish Power Limited
SUMMARY
1. This memorandum is submitted on behalf
of Scottish Power Limited and ScottishPower Renewable Energy Limited
(together "ScottishPower"). Scottish Power Limited is
a subsidiary of Iberdrola SA. It is an energy business that provides
electricity transmission and distribution services, supplies more
than 5 million electricity and gas services to homes and businesses
across Great Britain (GB), and operates electricity generation,
gas storage facilities and associated energy management activities
in the UK. ScottishPower Renewable Energy Limited (the UK's largest
wind developer) is part of Iberdrola Renovables, which is 80%
owned by Iberdrola SA. Iberdrola Renovables is the largest developer
of renewables globally.
2. In summary, we would make the following
observations:
— Renewable energy can play a key role
in the UK's energy strategy. It can significantly reduce carbon
emissions and reduce the dependence on imported fuels.
— The main barriers to greater deployment
of renewable electricity are speed of planning decisions, access
to electricity grid connections and maintaining an incentive mechanism
which covers the investment horizon of the projects. To date,
grid problems have been about having the right capacity in the
right place; they have not been about dealing with the variability
of output. This will be the position for the foreseeable future;
while ensuring grid stability could eventually be an issue, there
are a number of actions which could be taken to mitigate it and
the problem would only arise once we had achieved many times the
current level of wind power utilisation.
— Wave, tidal and biomass renewable
technologies have great potential and policy should be improved
to speed their development. We would suggest increasing band multiples
for wave and tidal technologies or, alternatively, complementary
capital funding.
— We favour an early extension in the
duration of the RO beyond the current end date of 2027 for new
projects. Otherwise investment will soon dry up as the cut-off
date impinges on projects' economic lifetimes. We believe that,
with banding, the RO delivers the same economic effects as a feed-in
tariff support mechanism, without the very considerable complication
of cost equalisation between suppliers and the major disruption
and uncertainty which switching to a wholly new mechanism would
undoubtedly bring.
— The current rules for connecting
capacity are not sufficiently supportive of renewables, we support
changes to these rules such as the "connect & manage"
and "TEC sharing" proposals which are part of the current
Transmission Access Review.
— Electricity generation will be the
principal contributor to the proposed target of 15% overall renewable
energy by 2020. With the necessary supportive policy measures
we believe the UK can increase its renewable generation deployment
to a figure in the range 90 to 120TWh (25% to 33% of projected
UK power demand) by around 2020.
RESPONSES TO
SPECIFIC QUESTIONS
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?
3. Renewable energy plays a significant
and growing role in the UK's energy strategy. As a low (near zero)
carbon energy source, it makes a valuable contribution towards
the UK climate change programme. The use of renewable energy reduces
reliance on imported fuel products, which helps improve UK security
of supply and increases the diversity of energy sources. Public
and political opinion is also generally supportive of renewables,
perhaps because in many cases they are low not only in carbon
but also in other potential pollutants or environmental impacts.
4. For electricity, renewable generation
fits into UK policy for the reasons given above. They are supported
under the Renewables Obligation (RO)—a market based mechanism
which has proved highly effective in bringing forward investment
projects. Proposed changes to the RO, with the concept of "banding",
will see a balance of renewable electricity from different sources—helping
meet the needs of achieving a diverse supply and the development
of new industry sectors, especially in the offshore and marine
environment.
5. Our company has extensive experience
in the United States where we are one of the leading new renewable
developers (we have announced plans to invest $8 billion in renewable
projects in the next three years). In the US, the drivers for
policy development are also related to climate change, security
(especially energy independence) and economic development. Incentives
are provided via a combination of individual state-wide Renewable
Portfolio Standards (RPS) and a Federal Production Tax Credit
(PTC). For details of support schemes in individual states, please
refer to the Database of State Incentives for Renewables and Efficiency
www.dsireusa.com
6. All EU Member States have support schemes
for the promotion of new renewable electricity production. These
vary between certificate schemes (such as the UK RO) and fixed
feed-in tariff schemes (such as Spain or Germany). We think that
the fundamental indicator of the effectiveness of a support scheme
is the level of support rather than the details of the mechanism.
For onshore wind and a number of other renewable technologies,
the RO has been effective and sufficient in bringing forward investment;
the delays to deployment have arisen almost exclusively from difficulties
in obtaining planning permission and delays in getting grid connections,
7. For some other technologies, such as
offshore wind, deployment has been affected by higher than expected
costs and some performance issues. The banding of the RO is intended
to increase support so as to help offset these difficulties, though
planning and grid issues are also difficult offshore.
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?
Electricity generation
8. The main barriers to greater deployment
of renewable electricity are speed of planning decisions, access
to electricity grid connections and (increasingly) maintaining
an incentive mechanism which covers the investment horizon of
the projects. In common with other countries, the UK is also facing
supply chain problems, with worldwide demand for wind turbines,
the primary vehicle for delivering renewable energy targets, outstripping
supply and leading to long lead times. The fact that the UK has
little or no manufacturing capacity of its own tends to exacerbate
this problem.
9. Secondary barriers also exist. In the
case of economically marginal projects, the high and unpredictable
transmission charges from Scotland and the North (where the wind
resource is mostly located) to the main load centre in the South
have the potential to act as a barrier. There are also important
issues such as civil and defence radar, which are linked to planning
but need to be resolved by working the details through to ensure
that aviation safety and defence are not prejudiced.
10. It is possible to amend the UK grid
rules to allow better utilisation of existing physical infrastructure
in the short term (up to 2012). In the medium to longer term (up
to 2020) new grid (onshore and offshore) will be required to capitalise
on our rich renewable resource.
11. The electricity grid is a real time,
balanced system. To guarantee continued operation requires effective
forecasting and sound operational balancing of supply and demand
at all times. For this to occur, adequate plant margin must be
maintained by the grid operating company. The nature of complementary
non renewable plant will have to adjust in response to higher
renewable resources on the grid. The precise nature of this will
change over time, but a forecast of what this will look like is
informed by the current technical work currently taking place
by NGT as part of the SQSS review. There may also be a role for
demand side management (including DS bidding) to optimise renewable
electricity production.
12. As to technical limits on the amount
of renewable electricity the UK grid can absorb, we agree that
there is probably a level of input from wind power which can cause
difficulty in maintaining system stability. But there are a number
of steps that can be taken to mitigate this issue, including transmission
reinforcement, sensible location of back-up thermal plant, and
improvements to the design and control systems for wind turbines.
13. It is also clear that the level at which
these issues could cause significant problems is many times the
amount of wind power currently in place in the UK and well above
the level likely within the foreseeable future. For example, in
the last 10 years, renewable electricity production in Spain has
increased from just over 2,500 MW (mostly hydro) to in excess
of 15,000 MW (mostly wind) without any significant problems. We
would not envisage that the wind power level of about 20% indicated
in the Annex to this memorandum would present a significant problem
in this regard.
Heat and Transport
14. For transport the mandatory target for
bio-fuels will be extremely challenging, due to the intense competition
for such fuels from other industries, as will the targets for
heating and cooling (anticipated to be in the region of 10%) as
large-scale development in these sectors is not so advanced. A
separate renewable heat support mechanism may be required to develop
this sector.
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?
15. For existing renewable technologies
such as wind, there are some benefits from technological advance
and economies of scale to be achieved as turbine capacity increases.
These advances, however, are currently being offset by increased
costs arising from supply/demand imbalance and the commodity price
of raw materials. We expect that, even in the presence of a higher
carbon price, a continued support mechanism will remain essential
to attract renewables investment to the UK, at least in the medium
term. Further progress in streamlining the planning process; ensuring
cost effective grid access options and encouraging UK based manufacturing
(thus easing the supply chain issue) could all help reduce costs.
16. For new and fledgling technologies such
as wave, tidal, biomass, etc—policy has only fairly recently
sought to support these. All have significant potential and policy
should be improved to speed their development and roll out. A
good example is the considerable capacities achieved in Denmark
and Germany given the right market and policy conditions, combined
with Government support and leadership. We note the benefits arising
from "banding" mechanisms to these technologies and
wish to see the band multiples increased for wave and tidal technologies.
Where this is not possible, Government should consider complementary
capital funding, possibly achieved by revenues arising from ETS
auction proceeds. It will only be after there is experience of
rolling out these technologies at significant commercial scale,
that cost reduction through learning will begin to be achieved.
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?
17. The Renewables Obligation (RO) is the
Government's main support mechanism for the development of renewable
energy in the UK. Under the RO over 2GW of wind power alone has
been installed and available figures, up to the end of 2006,[161]
show that a further 2 GW from other renewable generation (comprising
of hydro, co-firing, landfill gas, municipal solid waste combustion,
sewage sludge digestion, and other biofuels and waste) has also
been deployed. This achievement demonstrates that the RO is effective
in delivering significant levels of renewable generation. Our
experience as a renewables developer has supported this view;
the RO has to date been sufficient to support onshore projects.
However, the years remaining in the current RO (which expires
in 2027) are beginning to impinge on the investment lifetime of
new projects, so investment will soon dry up unless there is an
increase in the duration of the RO for new projects beyond that
date.
18. The RO has not however generally been
sufficient to date to support emerging technologies such as offshore
wind and dedicated biomass. This will be addressed through the
introduction of banding, which enables the support amount to be
tuned to the technologies concerned. We note there has been much
debate regarding feed-in tariffs as a means of supporting renewables
investment in the UK. However, the banding proposals for the RO
deliver an almost identical set of economic signals, as support
will be targeted based on the specific needs per technology, while
the headroom principle controls the cost to the consumer in line
with the actual level of deployment.
19. It is vital that investors have confidence
in the returns they estimate at the time of investing. Industry
and Government have worked closely to develop the RO into a robust
and workable mechanism that supports investment. Furthermore,
we believe that introducing a feed-in tariff support mechanism
in the UK will be very complex, due to the need to equalise costs
across suppliers. Accordingly, we consider that introducing a
feed-in tariff for large renewable developments would not only
introduce significant new complication to achieve cost equalisation
but would bring major disruption and uncertainty through switching
to a wholly new mechanism. This would undoubtedly slow development.
We also doubt whether feed-in is the right solution for smaller
generators; it would seem easier to have a simplified scheme which
enables them to access the RO through their supplier with a higher
band for smaller renewables if necessary (a 2-ROC band has already
been proposed by BERR for the smallest micro-generators).
20. We should emphasise again that the support
mechanism is not at present the major impediment for renewable
investment in the UK. However, the levels of deployment, in any
technology, will not advance unless grid, planning and supply
chain issues are resolved.
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
compared to other?
21. Renewable generation may require more
investment in transmission and distribution networks per unit
of output than other forms of generation for two reasons:
(a) thermal or nuclear generation tends to operate
at higher load factors, so a given capacity of connection will
support delivery of more electricity; and
(b) much renewable generation will require to
be located a distance away from the main network and may also
require main network reinforcement whereas thermal generation
is likely to be located on or close to previous sites with sufficient
network access.
22. Once the required network infrastructure
has been provided to enable connected renewable generation to
run then the network will be capable of dealing with the intermittency
of renewable generation. The key however is the need to ensure
there is sufficient thermal generation available to provide the
necessary back-up for the intermittent renewable generation.
23. The current rules for connecting capacity
to the grid are not sufficiently supportive of renewables and
we support changes to these rules to facilitate connection such
as the "connect & manage" and "TEC sharing"
proposals which are part of the current Transmission Access Review.
The former involves offering generators a firm future connection
date subject only to local connection without being required to
wait for any deeper network reinforcement (with National Grid
managing any constraints that arise), while the latter achieves
a similar result through sharing of capacity by agreement between
renewable and local thermal stations.
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?
24. All future energy scenarios have external
costs—including development relating to nuclear facilities,
new coal power plant, gas power stations, electricity sub stations,
gas terminals, network connections as well as renewable energy
development. It is important that policymakers and other stakeholders
exercise a balanced judgement in matters of energy provision.
25. Some of the externalities, such as the
cost of carbon, are now reasonably easily quantified. Others,
like positive or negative impacts on security of supply are clearly
very important but are difficult to evaluate financially, as the
cost depends on the scenario which might arise. But many of the
impacts can only be addressed judgementally. This includes the
visual impact of wind farms and pylons; the impacts of the fuel
supply chain for thermal and nuclear stations; pollution from
thermal plants; and nuclear safety and waste issues. These issues
are all very difficult to compare with each other.
26. Indeed, we would question whether such
a comparison is meaningful. The essence of a diverse energy supply
is that a variety of technologies and approaches is used. So long
as the externalities in each case are appropriately minimised
and brought to an acceptable level, we would place the importance
of diversity above what must be a subjective ranking of the externalities.
27. All developers should show diligence
in the need to minimise externalities (including visual intrusion).
We have adopted a voluntary policy for Sustainable Windfarm Construction
that seeks to include all stakeholders in the decision making
process and avoids sites of high ecological value. It is right
that appropriate assessment be made of all developments for their
suitability in local landscapes. In doing so, the costs of doing
nothing about climate change should be borne in mind when assessing
planning priorities. So, for example, when a planning case gives
consideration to the impacts to scenic beauty due to a proposed
sustainable energy/low carbon development, it should also take
account of the effects that climate change may have for that landscape
eg due to rising sea levels.
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?
28. At present, renewable generation technologies
tend to be more expensive to deploy than either fossil fuel or
modern nuclear plants. That is why it is necessary to have a support
scheme, such as the renewables obligation, in order to ensure
that deployment continues. Quantifying the difference depends
on a number of factors, including:
(a) the cost of the renewable technology, which
varies from low cost approaches such as co-firing through mainstream
technologies like onshore wind, to the more expensive projects
such as offshore wind;
(b) fossil fuel and uranium prices;
(d) for fossil fuelled plant, the cost or carbon
or any abatement measures; and
(e) in the case of nuclear, the details of the
framework the Government is putting in place including the regime
for waste and decommissioning, the outcome of the generic design
assessment process; the speed of planning decisions etc.
29. These uncertainties make it hard to
quote precise figures for the cost difference with any confidence.
In relation to Carbon Capture and Storage (CCS) its operation
as a complete process on a commercial basis is yet to be demonstrated.
This further intensifies the uncertainty in any cost comparison,
though our current view is that CCS, like renewables, will continue
to need financial support (beyond that offered by the EU ETS)
for some time.
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?
30. We do not have comparable costs between
the electricity and renewable heat or transport sectors.
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?
31. Electricity generation will be the principal
contributor in making progress toward the UK target of 15% overall
renewable energy by 2020, proposed by the European Commission.
This is because the sector has the greatest potential for delivery.
However, this said, significant effort will also be required from
the heat and transport sectors.
Electricity
32. For electricity generation, we believe
there is scope to accelerate build significantly if the various
obstacles, which are currently slowing deployment, (ie grid, planning
and limited UK supply chain etc) can be addressed. The Ernst &
Young report on the impact of banding the Renewables Obligation,[162]
predicts that current policies have the potential to generate
up to 61 TWh pa of renewable electricity by 2020 (17% of projected
UK power demand).
33. ScottishPower analysis, which builds
on Ernst & Young projections, shows that supportive policy
measures[163]
can deliver increased renewable deployment in the range 90 to
120TWh (25% to 33% of projected UK demand) by 2020. This is demonstrated
in the table attached in the Annex to this memorandum.
34. In addition, the table also outlines
some of the barriers that will need to be addressed, and the supportive
policy measures which are required, to ensure that the potential
for these technologies is maximised.
Heat and Transport
35. The heat sector is an area with the
significant undeclared potential. To capitalise on this will require
new incentive regimes and the creation of new facilitating infrastructure.
We look forward to reviewing Government proposals for heat renewable
due to be published during the summer.
36. Although there is some scope for the
use of biomass in transport and selected heat applications, there
are serious questions as to the extent of sustainable biomass
supplies, given the competing demands of agriculture. Accordingly,
we do not see large proportions of total energy demand coming
from these sources.
Meeting the UK share of the EU target
37. We believe that as much as possible
of the UK target should be derived from domestic sources, and
that the RO can play a key role in achieving this, through its
flexibility to target support, extend time frames to offer sufficient
support for new investments and increase targets in line with
projected deployment (with headroom controlling costs).
38. However, we also see merit in allowing
the UK (and other Member States) to meet its trajectory and mandatory
targets via limited statistical transfers with other EU countries.
Such transfers should be on the basis of agreed bi-lateral undertakings
with other EU member states. This should enable stable cross border
investment to occur where required.
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?
39. Directionally, it is clear that a higher
cost of carbon would reduce the cost difference between renewable
energy and fossil sources. However, we judge it unlikely that
in the short to medium term the cost of carbon will rise to a
level where it could replace the specific support which renewables
currently need. In addition, the lower forward visibility of the
cost of carbon (which depends both on the number of permits, now
proposed to be set for eight years for 2013-20, and the demand
to emit which depends on economic growth and social change) makes
the CO2 price a more risky means of support than the RO.
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?
As an energy company, we have interests in biomass
renewable energy and have announced proposals to develop energy
crop biomass via willow coppice. We have no experience in the
transport bio-fuels sector. Costs for biofuels will depend critically
on the extent to which the food market competes for the same resources.
June 2008
161 http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm080109/text/80109w0037.htm080109104000073
House of Commons Hansard written answers for 9 January 2008. Back
162
Ernst & Young Report: Impact of Banding the Renewables Obligation-Costs
of electricity production April 2007. Back
163
By supportive policy measures we mean sufficient grid infrastructure,
long term support framework, planning reform and the development
of a supply chain industry in the UK. Back
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