The Economics of Renewable Energy - Economic Affairs Committee - Contents

Memorandum by Centrica


  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.


  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.


  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.


  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


Pulverised Coal
IGCC with carbon capture
Offshore Wind

  Levelised cost range—based on real 2008 post tax figures at 8% discount rate


Pulverised Coal
IGCC with carbon capture
Offshore Wind
Offshore Wind incl. ROC

  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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