Memorandum by Centrica
CENTRICA AND
RENEWABLE ENERGY
1. Centrica has already made a significant
commitment to develop renewables assets as part of our energy
portfolio. In July 2003 we announced plans to invest in our own
renewable generation assets, primarily offshore wind farm developments
although we continue to keep other forms of renewable energy generation
under review.
2. We are currently investing in six offshore
wind farm developments, one of which, Barrow Offshore Wind, is
now operational. Two others, Lynn and Inner Dowsing (LID), are
under construction, and are expected to be fully commissioned
by the end of the year. Once operational, this will be the world's
largest offshore wind project.
3. Of the remainder, Lincs had its application
for consent submitted in January 2007, and we are awaiting determination,
whilst Race Bank and Docking Shoal will have their consent applications
submitted this year, based on detailed environmental impact assessments.
Barrow is a joint venture development with the Danish energy group
DONG energy; all other projects are wholly owned by Centrica.
4. We have two operational wind farms onshore
in Scotland, the wholly owned Glens of Foudland wind farm in Aberdeenshire,
and Braes of Doune wind farm in Stirlingshire in which we acquired
a 50% ownership from Airtricity in July 2007.
5. We are also investing in a range of power
purchase agreements with renewable electricity developers which
will increase the amount of green electricity that we buy through
offtake contracts in the UK over the next five years. These projects
cover a diverse range of technologies such as wind, landfill gas
and biomass generation.
6. Assuming they are all built, our existing
renewables plans will cost over £3 billion, and will provide
around 1.5GW of capacity. Centrica is currently looking at the
possibility of working with investment partners and would currently
expect to invest around £1.5 billion on our current development
portfolio. The EU 20% renewable target is likely to bring about
a significant increase in investment in renewable generation.
With 10% of the overall UK electricity market (including 23% of
the residential market), we expect to be one of the largest investors
in wind in the future and are currently evaluating a major step
change in our renewables investments.
7. Centrica are also investing and developing
a range of distributed generation technologies. We recently sponsored
a BERR report into the potential of microgeneration in the UK,
which showed that with ambitious policy measures there was significant
potential in this market for both renewable, and low-carbon technologies.
8. We are a leading framework supplier on
the Low Carbon Buildings Programme and have installed significant
photovoltaic installations under the programme. British Gas now
has the capability to install solar thermal products across the
entire country. Customers can take advantage of our eco save tariff
which rewards customers for exported electricity from solar photovoltaics
and small scale wind.
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?
9. The 2007 White Paper on Energy identified
two long-term energy challenges: to tackle climate change by reducing
carbon dioxide emissions both within the UK and abroad; and to
ensure secure, clean and affordable energy as we become increasingly
dependent on imported fuel. Renewable generation is already an
integral part of meeting these challenges and is playing a growing
role in Centrica's generation portfolio. Onshore wind is an established
technology that is already commercially viable. Offshore wind
is established and is approaching commercial viability against
fossil fuel generation. Both technologies bring diversity to Centrica's
and the UK's energy mix, helping to increase security of supply,
as well as reducing UK carbon emissions.
10. The growing evidence of the effects
of climate change in recent years has been matched by an increasing
global acceptance of the need for an international agreement and
a continuing significant reduction in global CO2 emissions.
11. The decline in UK continental shelf
gas production, meanwhile, which will see around three-quarters
of the UK's gas imported by 2015 against around 20% today, is
happening at the same time as record wholesale energy prices.
And around a quarter of the UK's power generation fleet, largely
dirty coal, will be retired under EU environmental directives
and will need replacing with new, cleaner low-carbon alternatives.
Renewable generation offers a solution and can make a significant
contribution to all these issues.
12. In spite of these challenges, however,
the most significant driver to an increased uptake of renewable
generation will be the EU's 20% renewable target by 2020, adopted
at the 2007 Spring Council and currently out for consultation.
Under the EU's basket arrangement for sharing targets, the UK
is likely to adopt a target of 15% of primary energy from renewable
sources by the same date.
13. Centrica believes that the UK target
is challenging but achievable. As yet, it is unclear precisely
how this figure will be achieved as the capacity of the three
different sectors (heat, transport and electricity) to deliver
is still being assessed.
14. It is our understanding that around
40% of the UK's total electricity requirement will need to be
generated from renewable sources. Wind power is currently the
most economically viable and scaleable renewable technology and
will play a major role in meeting the target.
15. In December 2007 the Government announced
plans for a major expansion of offshore wind development, opening
up the seas off the UK coastline for up to 33GW of wind energy.
The Government draft plan aims to develop up to 25GW of offshore
wind by 2020, in addition to the 8GW already planned.
16. After 2020, other technologies are likely
to be deployed including wave and tidal generation. These emerging
technologies will require early deployment support outside the
Renewables Obligation which is designed to deliver renewables
investment at least cost.
17. Centrica believes that a significant
contribution from small-scale renewable technologies such as solar,
heat pumps and biomass to the 2020 Renewables Target is also possible,
and that such a contribution would have the benefit of reducing
the risk of under-delivery against the target. Our experience
suggests that large numbers of smaller measures can also help
to deliver significant change against tight timescales.
18. Moving to a renewable electricity target
of around 40% would have a significant impact on UK security of
supply by dropping load factors for coal and gas plants dramatically.
Gas fuel use could drop by around 50% from 2007 levels by 2020-25
from a combination of wind and new nuclear build.
19. We accept that to date there have been
differences in the level of take-up of renewable energy across
different European member states, and that the UK has been slower
to invest in these technologies. Fundamentally, this is a reflection
of barriers to deployment such as grid connection, planning permissions,
public engagement and supply constraints. We expand on these issues
further in question 2.
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?
20. Centrica believes that the UK electricity
sector is capable of rising to the challenge of deploying renewable
projects at scale over the next decade, though this will require
significant effort from all stakeholders to remove barriers to
investment. Government will have a key role to play in creating
the framework which incentivises companies to deliver these projects.
21. It also requires that firm investment
decisions be made in the very near future on areas such as grid
and in many key elements of the supply chain. For this reason
it is of utmost importance that investors are clear of the Government's
ambitions in this area, and have confidence that these ambitions
will be unswerving.
22. In addition, an effective, streamlined
planning system which allows the delivery of both offshore and
onshore infrastructure is crucial. A new consenting regime will
be needed to better manage stakeholder conflict which has characterised
many developments in the past. Fishing, shipping and radar concerns
from MoD and NATS are among the potential barriers to the early
implementation of new wind projects.
23. Centrica is encouraged by recent amendments
to the planning system, proposed through the Planning Bill and
the Marine Bill, and hopes that existing planning system constraints
will be alleviated and the consenting timeline dramatically reduced.
Whilst due consideration for the environmental is key, it is important
that this is balanced with the need for renewable development.
24. Planning constraints: There are around
8 GW of renewable developments that are currently held up in the
UK planning system. This underlines the difficulty that developers
have in gaining consent to build their projects. Under the new
planning regime, the proposed IPC will need to be appropriately
resourced and directed to deliver sustainable development in order
to overcome the current planning bottleneck.
25. Grid connection: Many renewable projects
have grid connection dates that extend out to 2018 (for which
developers have to pay significant security costs) and it is clear
that the connection of an additional 25 GW of offshore wind in
line with government ambition will be extremely difficult without
a national, strategic approach to grid connection, which encompasses
a plan for strategic investment.
26. As identified in the Energy White Paper
and confirmed by the Transmission Access Review carried out by
Ofgem and BERR, access to the transmission system is a significant
barrier for both renewable and conventional generation. Currently
there is more than 40GW of projects (both renewable and conventional)
waiting to connect to the transmission system with connection
dates which extend beyond 2018.
27. To replace existing conventional generation,
and to provide necessary back-up to new renewable generation,
around 22.5GW of conventional power stations will need to connect
by 2020 in locations which are often remote and distant from centres
of demand and/or current generation locations. Centrica believes
that new access arrangements should support the connection of
renewable generation, but at the same time not undermine investment
in existing and new conventional generation, in particular as
intermittent renewable generation requires back-up from conventional
generation.
28. Going forward the grid needs to be made
fit for purpose and in particular, in addition to allowing for
increased connection, be able to cope with intermittent generation
and distributed generation.
29. Supply chain constraints: Developers
have difficulty in securing wind turbines and other equipment
for their projects due to the constraint in component supply such
as bearings, gearboxes, transformers, cables, generators, turbine
blades and towers. There are insufficient turbine manufacturers
to drive the necessary competition that would lead to the expedient
delivery of low cost turbines. The supply chain is experiencing
a shortfall in trained staff which will become a major issue for
the industry shortly. Centrica is optimistic that, if the investment
signals are there, confidence can be created in the long-term
nature of the renewables industry, and more manufacturers should
be attracted into the market, improving both supply and competition.
30. Public acceptability: If the likely
EU renewable targets and the UK share are to be met by 2020, public
acceptability of the need for investment, the cost of investment
and the physical impact of investments will need to be courted.
This will be of particular significance in the event of any economic
downturn when competing priorities on the public purse are more
exposed. Public education will be crucial to achieving this. Government
needs to take a lead in changing the terms of this debate away
from stark costs and impacts, to the need to reduce emissions,
increase diversity and reduce gas volatility, and the positive
societal benefits that this investment will have. The high level
of misinformation around renewables developments needs to be addressed.
31. Barriers to microgeneration include
the often high up-front capital costs, as well as regulatory issues
(including problems with planning and high transaction costs for
accessing ROCs), and a lack of consumer understanding about what
can be achieved in this area.
TECHNICAL LIMITS
32. It is likely that as the volume of variable
output (such as wind, wave, tidal, solar) reaches a very high
level of penetration, this may cause electricity system balancing
difficulties. At this point, the economics of the marginal renewable
project will become less attractive. It is not yet clear at what
level this will become an issue. This will result in conventional
gas generators supplying mainly peak power. The economic rationale
for such assets will therefore need to change from the current
baseload power model.
33. It is possible that electricity storage
may become economically attractive when the market reaches this
point as storage would be able to smooth the output from renewable
projects, potentially turning variable output into baseload power.
At high renewable penetration levels, this could reduce the amount
of conventional backup required to secure the integrity of the
system.
34. Alternatively, a breakthrough in demand
side management could lead to similar benefits, for example hybrid
cars that can charge overnight, household appliances remotely
switched off for periods of time, or other forms of dynamic demand
management.
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?
35. In Centrica's opinion, it is unlikely
that any new technologies would be commercially viable in the
short to medium term without government support for R&D and
deployment, and until the carbon price is high enough to support
these technologies against fossil fuels.
36. As power and carbon prices rise, it
is likely that the cost of more established renewable technologies
will move closer to conventional generation. Increased competition
should also drive down costs. Ultimately, Centrica would like
to see the carbon price driving the construction of all renewable
and low carbon technologies. Until that time, we believe that
the proposed banding of the Renewables Obligation will bring about
increased investment in large-scale renewable technologies in
an efficient and effective way. Microgeneration and distributed
generation technologies will require a separate support mechanism.
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?
37. Centrica believes that the Renewables
Obligation provides a mechanism that works well in our liberalised
energy market and has been successful in enabling investment in
large-scale renewables in the UK. This year in fact, the UK will
overtake Denmark as the world leader in offshore wind development.
38. We accept that some other European countries
have more renewable capacity available—and that in some
cases this is significant. Each country has varying motives for
implementing renewable energy programmes, with climate change
and security of supply being sometimes conflicting strategic objectives.
In the same way there are a wide variety of barriers to development
that exist across member states with grid constraints, local planning
consent, national planning decisions, consumer engagement, renewable
resource availability, and supply chain issues each having a different
impact in different countries.
39. The lack of development in the UK is
often compared to a high take-up in Germany where a system of
feed in tariffs is seen to have been effective in bringing on
significant renewable investment against a failing RO in the UK.
We believe that it is wrong to assume that this is because feed-in
tariffs work and the Renewables Obligation doesn't.
40. This fundamentally understates the additional
encouragement that German developers receive in the form of easy
and cheap access to the grid, low cost finance for developments
and relaxed planning constraints. By contrast, each of these three
areas represents a significant barrier to development in the UK.
41. Centrica strongly believes that those
calling for the replacement of the Renewables Obligation with
a feed-in tariff have failed to grasp the impact of these constraints.
We do not believe that a feed in tariff would have been any more
effective than the RO in bringing forward renewable capacity in
the UK.
42. Maintaining but reforming the existing
system will allow a continuous flow of investment, will maintain
investor confidence, and is consistent with the parameters of
a competitive market. Under a banded RO, suppliers will remain
obligated to deliver renewable generation, thus encouraging their
participation in renewables.
43. Any move to radically change the support
mechanism is likely to result in a market damaging hiatus in renewable
build, as investors struggle to get comfortable with new parameters.
It is likely that there would also be a negative impact on investor
confidence in the supply chain. This would occur just at the time
when we are trying to accelerate the development of projects and
could jeopardise the UK's achievement of the EU targets.
44. Building offshore wind costs around
three to four times that of gas-fired plant. To meet the targets,
therefore, industry will need additional government support through
a strengthening of the existing Renewables Obligation targets
and extending the timeframe past 2027. This will signal the long-term
nature of the UK renewables sector and, if set at the right level,
should encourage the necessary investment in projects, skills
and in growing a UK supply chain.
45. The RO has a fixed cost to consumers,
irrespective of the generation that takes place. In the early
years, high ROC prices were required to stimulate development
and so the value for money was low. In the new banded RO, we believe
that significant generation will be stimulated and that the value
to consumers will be much higher. It is important to remember,
however, that higher returns for early movers are vital to stimulate
the market, and that without them, investment in new technologies
may falter.
46. We do not believe that a support mechanism
should favour one particular form of renewable energy over the
others. We do recognise, however, that different technologies
are at different stages of development and support the proposed
banding of the Renewables Obligation to reflect this. This will
ensure that in future developing technologies such as offshore
wind, receive more funding than established technologies. As a
major offshore wind developer, Centrica has played a significant
role in helping to develop these modifications and supports the
implementation of technology bands.
47. The support framework for new large-scale
renewable electricity technologies via the Renewables Obligation
is at a justifiable level. This is based on the positive contribution
that technologies such as offshore wind can make to carbon emissions
reductions and also on the basis of helping an emerging technology
to benefit from cost reductions through increased deployment,
helping to deliver diversity and security of supply and in delivering
a robust energy supply chain to "UK plc". Centrica believes
that the same arguments hold true, in some cases even more strongly,
for smaller scale low carbon and renewable energy technologies.
48. In order to maximise the deployment
of microgeneration technologies, an appropriate support framework
is vital. Any effective support mechanism for microgeneration
will need to recognise the specific deployment issues involved,
and the differing needs of different microgeneration technologies.
It must both deliver an appropriately high level of support and
make it as simple as possible for the customer to benefit from
such support. These aspects are, in our view, more important than
the precise form of support mechanism chosen. It is important
that any support mechanism is funded in a way that aligns incentives
and avoids perversities. For instance, if energy suppliers were
required to fund the support mechanism themselves, they would
not have a strong incentive to develop the market.
49. Assistance could be in the form of either
capital support or revenue support. We see merit in both and would
work within either framework to deliver products to our customers.
The most often mooted revenue support mechanism is a feed-in tariff.
The effectiveness of this mechanism is likely to depend on the
level at which it is set, and its operation.
50. Suppliers, who have an existing relationship
with customers, are best-placed to administer a feed-in-tariff
scheme for microgeneration. Allowing suppliers to reclaim revenue
paid out to customers from a central fund is crucial. If the scheme
is not funded centrally, suppliers may be disproportionately disadvantaged
and unwilling to promote microgeneration technologies as a result.
The scheme could be funded from general taxation, although we
note the significant revenues that are likely to be raised from
auctioning emission allowances in the future and believe that
this could be a source of future support.
51. A feed-in-tariff for microgeneration
would provide an ongoing revenue stream for a defined period.
We believe that if the appropriate revenue were guaranteed, suppliers
and others would actively consider introducing services designed
to lower the capital cost of relevant technology.
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?
52. There is currently a queue of more the
40GW of projects of both conventional and renewable generation
that are waiting for a connection to the transmission system.
The current access rules are non-discriminatory. Irrespective
of technology, generators are connected on a first-come-first-serve
basis. A generator will only be connected once wider system reinforcements,
if required, have been completed.
53. The existing access regime is currently
being reviewed by BERR, Ofgem and the industry. As part of this
Transmission Access Review (TAR) the industry is looking at ways
of sharing access to the transmission system between conventional
and variable renewable generation, in particular wind generation,
to take into account their different operating characteristics.
54. In addition, the industry is looking
at technical networks standards (GB SQSS) to see how variable
renewable generation can best be taken into account when planning
and operating the transmission system.
55. Until now these standards have been
based on a system with mainly large-scale conventional plant with
an assumed 80% load factor (ie availability) when calculating
network reserve capacity requirements. The equivalent assumed
load factor for wind takes into account its variability and is
around 20-30%. (Both load factors are lower than actual availability
as planning for peak demand requires a more pessimistic outlook).
In practice, this means that some additional conventional reserve
generation will need to be kept on the network to maintain a sufficient
reserve capacity margin at peak demand when there is wind generation
on the network.
56. Regardless of any changes in these areas,
there will still be a requirement for significant network investment,
in particular in the transmission system, to meet the 2020 targets
and to accommodate the conventional and renewable projects that
are currently in the connection queue. Compared to conventional
generation, the amount of network investment is likely to be higher
for renewable generation because a large part of these projects
are naturally located in the most windy areas of the country,
which are at the periphery of the system.
57. Upgrading and extending the transmission
system can take many years, not least because of planning issues.
To avoid further delays in connecting both renewable and conventional
generation, Centrica believes strategic investment in the transmission
system should be considered, as outlined previously.
58. It is important that a balance is met
between conventional and renewable generation, not least because
the former is still required to provide back-up for renewable
energy which is mostly of a variable nature. Renewable generation
without adequate reserve or backup would have security of supply
issues.
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?
59. Since 2002, the Government has placed
an obligation on electricity suppliers to meet an increasing proportion
of their electricity sales from renewable sources. This Renewables
Obligation is 7.1% for 2007-08 and increases to 9.1% in 2008-09.
The effect of the EU target, supported by high and volatile fossil
fuel prices and UK climate change targets will see increased investment
in renewables in the future.
60. We accept that whilst wind power has
significant benefits, it is essential that projects are designed
to have minimum impacts on local communities and the natural environment.
61. One of the key drivers for developing
offshore wind is the environmental benefit. It is vital therefore
to identify any potential environmental impacts (positive and
negative) that may arise from such an offshore development. In
developing our projects, all potential impacts are therefore considered
and studied regardless of how realistic they may initially appear
to be. By taking this "worst case" approach, evidence
can be gathered by scientists and other marine experts to inform
on actual risks and how these may be mitigated against.
62. Similarly, we accept that the planning
system needs to take a balanced account of the global environmental
benefits of renewable generation against any potential local environmental
impacts. Renewable projects need to be appropriately sited and
the planning process followed. To date we have had a concern that
the balance of planning consent decisions has been in favour of
local issues rather than the national or global imperatives. We
trust that the remit of the IPC will support sustainable development
rather than prevent local environmental impact.
63. Developing energy assets requires close
liaison with local stakeholders, particularly in the pre-consent
planning stages and construction, but also during the following
years of operation. We engage widely with stakeholders to assess
the social and environmental impact of our renewables projects
and are committed to working with local communities at every stage.
64. Our approach is to deliver a proactive
and responsive programme of meetings with individual groups and
public exhibitions to engage with our neighbours and ensure that
their interests are taken into consideration. We circulate a wide
range of information such as scoping documents, which sets out
the basis for scientific studies, enabling interested parties
to comment and provide further information where necessary.
65. We focus our community investment on
education, working with local schools and other community organisations
to raise awareness of renewables and wider issues relating to
sustainability.
66. For example, we have supported the redevelopment
of the visitor centre at Gibraltar Point National Nature Reserve
in Skegness, near our Lynn and Inner Dowsing offshore development.
The reserve, which stretches from the southern edge of Skegness
to the entrance to The Wash, attracts around 180,000 visitors
each year. Another educational initiative has been to work with
local teachers in Skegness to help deliver useful lessons on renewables
and sustainability that help meet the needs of the National Curriculum.
67. In Barrow-in-Furness, near our Barrow
offshore wind farm, we have forged a partnership with Walney School,
supporting the school's ambitions to make engineering a key part
of the curriculum.
68. It is important to note that our work
with local communities over the past four years has demonstrated
a strong underlying support for the development of offshore wind
but that education is key to overcoming the many misunderstandings
that lead some to oppose or potentially be concerned about such
developments. Public opinion research for our current projects
off the Lincolnshire coast show 85% of respondents in favour of
the development with just 6% strongly opposed.
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?
69. At the current time electricity generation
from renewables is not commercially viable against fossil fuels
without government support. As the carbon price rises, and when
fossil fuel prices are comparatively high, the economic case becomes
more optimistic.
70. Support is currently provided to technologies
such as offshore wind in excess of the price of carbon avoided.
This is done where these technologies offer additional benefits
such as diversity of supply, technological learning and creation
of a UK export industry. Where other technologies provide similar
benefits then a similar level of financial support should be available.
We believe this is the case, for example, for a number of renewable
heat technologies. This is a significant opportunity, with a potential
market of many millions.
MICROGENERATION
71. The cost of microgeneration currently
appears high compared with centrally despatched plant. However,
direct comparison with centrally despatched plant is difficult.
Microgeneration avoids transmission and distribution losses, as
well as significant investment in grid reinforcement.
72. Manufacturing and installation costs
are projected to fall as volumes increase. It is difficult to
predict by how much as many of the technologies are in global
markets. The Renewables Advisory Board believes, for instance,
that the capital costs of photovoltaics could fall from £5,159/kW
in 2008 to £2,991 in 2025, a 44% decrease.
73. Fuel costs are uncertain for technologies
powered by gas, electricity or biomass.
74. Furthermore, microgeneration costs vary
greatly between different applications. For example, when dealing
with retro fit; solar thermal can cost between £1,000kW-£2,318/kW,
ground source heat pumps cost between £800/kW-£1,660/kW
and wind between £3,141/kW-£5,500/kW. The age and size
of property, its location and the point at which the decision
whether to install microgeneration is taken all have a significant
impact on economics.
75. For many of the consumers who have adopted
microgeneration thus far, cost is only one of a range of factors
influencing their decision. Reducing carbon emissions is the main
motivator for considering microgeneration, while reducing ongoing
bills is also important.
LARGE-SCALE
GENERATION
76. When comparing the costs of generating
electricity we use a levelised cost to compare costs over the
life of the asset. A levelised cost takes into account a number
of variables to give a consistent view on different technologies.
Capital and opex costs, long term market prices, station life
and capacity are used to calculate a real 2008 post tax figure.
Capital cost assumptions and levelised cost are shown in the tables
below.
Industry source capital cost assumptions
|
| £/kW
|
|
| CCGT | 600
|
| Pulverised Coal | 1,300
|
| IGCC | 1,400
|
| IGCC with carbon capture | 1,800
|
| Nuclear | 2,000
|
| Offshore Wind | 2,500
|
|
Levelised cost range—based on real 2008 post tax figures
at 8% discount rate
|
| £/MWh
|
|
| CCGT | 56-92
|
| Pulverised Coal | 55-80
|
| IGCC | 60-89
|
| IGCC with carbon capture | 57-85
|
| Nuclear | 50-70
|
| Offshore Wind | 74-110
|
| Offshore Wind incl. ROC | 37-55
|
|
77. The levelised costs are dependent on assumptions
on fuel input costs, in particular coal and gas.
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?
78. Centrica believes that meeting the EU's 20% renewable
target by 2020 will be extremely challenging but that the UK can
achieve a 15% target, assuming the removal of barriers, the existence
of an appropriate fiscal, policy and regulatory support framework,
and an imminent scaling-up of ambition in these areas. Whilst
the precise details are still to be finalised following a consultation
over the summer, this will be predicated on around 40% of electricity
generated from renewable sources.
79. That electricity target assumes a significant step-change
in the proportion of heat and transport sourced from renewables.
It is unlikely, therefore, that effort can be transferred between
the sectors on the basis of a cost analysis. All technologies
will have a significant role to play.
80. The costs to deliver some large-scale wind technologies
are rising due to increases in commodity costs such as steel and
copper, and restrictions in the supply chain, although the establishment
of a more competitive supply chain should help to drive costs
down in future. Whilst initial capital expenditure on offshore
wind projects are higher than fossil generation, the "fuel"
is free over the lifetime of the wind farm and not linked to a
volatile wholesale market or rising oil price.
81. Given the additional drivers of the need for diversity
and to counter volatile and high gas prices, therefore, power
generation is in a strong position to take up any slack in meeting
the target.
82. Going forward, the even more challenging climate
change target identified in the climate change bill of a 60% reduction
in CO2 emissions by 2050 (possibly rising to 80%), implies a significant
decarbonisation of the UK economy. At that point, for example,
cars are likely to be hybrid and be powered on electricity. It
is vital that whilst the focus is naturally on meeting 2020 targets,
the frameworks are established that will allow the UK to meet
even more demanding targets in the future. That points to an even
more significant role for de-carbonised electricity after 2020,
and is a powerful argument that cost should not be the only driver
in setting an investment framework.
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?
83. Centrica believes that the majority of the effort
required to meet a 15% primary renewable target in the UK will
come from a greater use of renewable sources of electricity. Estimates
suggest that the electricity sector will be required to deliver
around 35-45% renewables. The predominant technology is likely
to be wind as it is the only technology that can be deployed in
the necessary timescale in bulk.
84. We believe that there is some scope for part of the
UK requirement to be delivered via trading with other countries
but at this stage it is unclear how much trading will take place.
Trading across the EU could be a cost-effective way for the EU
as a whole to meet its targets, but this needs to be reconciled
with the need to keep existing investments in home countries on
track.
85. The Directive allows for limited trading with countries
outside the EU under strict conditions including the import of
the electricity generated. Centrica does not oppose this level
of trading, but we strongly oppose any amendment of the EU Directive
to allow more widespread international trading. We believe this
would undermine some of the objectives of the Directive, particularly
in reducing dependence on fuel imports, and security of supply,
and could significantly undermine investment within the EU.
86. Furthermore, meeting the UK target predominantly
from projects within the UK will have additional benefits in terms
of improving security of supply and building a domestic capability
and capacity in the renewables sector, bringing value to UK plc.
These benefits will be lost if the domestic target is diluted
through trading. Potential UK investors will need to be confident
that the UK government is serious about meeting the target before
committing resource in this country.
87. We also have a concern that the potential for trading
within the EU will not be known until the middle of the next decade.
We believe that the scale of the deployment required is extremely
challenging, and requires firm action to be taken in the short
term. Anything that throws doubt on the necessity for such deployment
will undermine chances of achieving changes of the scale necessary.
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?
88. The relative costs of renewables and other sources
of energy are clearly impacted by both the carbon price, and the
price of other commodities, most notably gas, oil and coal. As
the carbon price is expected to rise in the future, and fossil
fuel prices remain high and volatile, we expect that renewables
and other low-carbon technologies like carbon capture and storage
will become increasingly commercially viable in the future. The
dynamics of climate change and the need for fuel diversity, however,
coupled with a generation gap which offers a window of opportunity
to decarbonise the UK's power fleet, highlight the need to bring
on these technologies sooner rather than later. In order to do
that, government support is needed to bring these technologies
down the cost curve and enable early investment.
89. Centrica believes that the EU ETS is working extremely
effectively and that the carbon price is now a consideration in
any company's decision to invest in new power. The carbon price
is a direct result of the supply-demand balance, and the exceptionally
low prices in Phase I were a result of over-supply of allowances
rather than any fundamental problem with the mechanism itself.
As the cap on allowances tightens and the supply-demand balance
tightens, the price of carbon is likely to rise.
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?
90. Centrica does not have direct experience of biofuels.
We note that the Carbon Trust has recently identified that biomass
is best used for heating rather than electricity generation and
support this view. However, more work needs to be done on the
economics and supply chain risks of biomass, especially where
it is produced from specifically grown crops (albeit it is less
critical when using existing waste). This is a new commodity,
global demand is likely to increase dramatically, and as such
its future price and availability are extremely difficult to predict.
June 2008
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