Memorandum by E.ON UK
SUMMARY
— Renewable energy has an important
contribution to make to the UK's climate change targets. It will
also contribute to energy security by improving diversity of energy
sources and reducing dependence on oil and gas. However, in general,
renewable technologies are currently more expensive than alternative
sources of energy.
— The EU and UK should aim to achieve
reductions in carbon dioxide emissions at least cost and in a
way which takes account of the need to maintain secure energy
supplies. The optimum approach to achieve this is to encourage
development of all low carbon technologies on a consistent basis
through a single price of carbon.
— The targets set out in the proposed
EU Renewables Directive are inconsistent with this approach in
that they require a level of renewables which is likely to lead
to a higher cost of delivering CO2 emission reductions, given
the high cost of some renewable technologies compared to alternatives
such as nuclear or energy efficiency investments. However, it
is the case that energy efficiency improvements are difficult
to deliver in policy terms and that nuclear power is not accepted
as an option in some Member States.
— It is therefore essential that the
UK puts in place policies to achieve the targets which ensure
that the financial support required for renewables delivers as
much value as possible for the UK economy and for energy consumers.
— The Government should publish its
estimate of the full cost to the consumer of meeting the UK's
share of the EU Renewables target in each sector: transport, heat
and electricity.
— Government must provide a robust
long-term policy framework for renewable energy delivery, to give
investors confidence and to encourage development of the supply
chain. E.ON UK supports a market-based approach and would prefer
to see continuity in the existing policy mechanism based on the
Renewables Obligation.
— The main barriers for renewable energy
projects in the electricity sector are: the extended timescales
and uncertainties for reaching planning determinations; grid constraints
on the system which will need to be addressed through significant
new transmission investment; supply chain bottlenecks; and the
limited availability of engineers with the skills to develop,
construct and operate renewable projects. The reforms proposed
in the Planning Bill would help address the problems with the
planning system.
— Intermittent renewable energy sources
incur costs to the power system beyond those of the technology
itself. Large volumes of intermittent renewable generation may
lead to curtailing of renewable or baseload generation at times
of low electricity demand and high renewable generation. Moreover,
90% or more of intermittent renewable generation such as wind
will need to be backed up by more flexible fossil-fired capacity
to help ensure that sufficient generating capacity is available
at winter peak.
— Consideration has to be given to
how investment in that additional conventional plant is to be
incentivised and rewarded, when some of it may only run on an
infrequent basis.
E.ON UK
1. E.ON UK is one of the UK's largest retailers
of electricity and gas. We are also one of the UK's largest electricity
generators by output and operate Central Networks, the distribution
business covering the East and West Midlands. In addition, our
E.ON Climate and Renewables business is a leading developer of
renewable plant in the UK with 21 onshore and offshore wind farms
and a dedicated biomass power station currently operational, and
more in development.
2. Across the E.ON Group we currently have
renewable generation capacity in excess of 7,300MW. We have recently
doubled our investment budget into renewables to €6 billion
between 2007 and 2010. E.ON is looking to increase its overall
share of renewable electricity significantly by 2030 which will
assist the company in meeting its target to be 50% less carbon
intensive by 2030 (based on 1990 levels). Our answers to the Committee's
questions are as follows.
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. The UK's energy policy goals are to reduce
carbon emissions while maintaining affordable and secure supplies
of energy. Against this background, renewable energy has an important
contribution to make to the UK's climate change targets. It will
also enhance the UK's security of energy supply by diversifying
the UK's sources of energy and reducing the UK's dependence of
oil and gas where we are becoming increasingly reliant on imports.
However there are also disadvantages in terms of the costs of
many of the technologies and potential security of supply disadvantages
from a rapid expansion in relatively undeveloped technologies
such as offshore wind.
4. The UK should aim to achieve reductions
in emissions at least cost and in a way which takes account of
the need to maintain secure energy supplies. The optimum approach
to achieve this would be to encourage development of all low carbon
technologies on a consistent basis, so that those with the lowest
costs are deployed first, for example through a single price of
carbon. The EU Emissions Trading Scheme achieves this objective
by capping total EU CO2 emissions at a level consistent with the
reductions in emissions needed to address climate change, while
giving flexibility to market participants to invest in the most
appropriate way within it.
5. The targets set out in the proposed Renewables
Directive are inconsistent with this approach, since they require
a level of renewables which is likely to lead to a higher cost
of delivering CO2 emission reductions, given the high cost of
some renewable technologies compared to alternatives such as nuclear
or energy efficiency investments. However, it is the case that
energy efficiency can be difficult to deliver in policy terms,
and that nuclear power is not an option in some Member States.
6. It is therefore important that the UK
puts in place policies to achieve the targets which ensure that
the financial support required for renewables delivers as much
value as possible for the UK economy and for energy consumers.
7. While wind is an important renewable
electricity resource for the UK, the UK should adopt a portfolio
approach to renewables to avoid undue reliance on any one technology.
Biomass and marine technologies such as tidal power should also
have a role to play depending on the cost-effective contribution
they can make.
What are the barriers to greater deployment of
renewable energy?
8. The main barriers for renewable energy
projects in the electricity sector are: the extended timescales
and uncertainties for reaching planning determinations; grid constraints
on the system which will need to be addressed through significant
new transmission investment; supply chain bottlenecks; and the
limited availability of engineers with the skills to develop,
construct and operate renewable projects. The reforms proposed
in the Planning Bill would help address the problems with the
planning system. In addition, it is necessary to ensure continuing
confidence in the stability of the policy framework which incentivises
renewable energy investment.
9. In the electricity sector, we and other
developers are already progressing renewable investment rapidly,
given the economic and practical constraints, and to accelerate
this will depend on a number of practical barriers being removed
to facilitate investment and attract capital. The European power
sector requires investment on a very large scale in a number of
areas, so returns will need to be attractive compared to investment
elsewhere and UK Government policy to support this level of target
will need to reflect this. For E.ON and other companies to commit
to investments to approach this target will require a number of
obstacles to be addressed.
10. Government must provide a robust long-term
policy framework for renewable energy delivery, to give investors
confidence and to encourage development of the supply chain. While
reform of the Renewables Obligation (RO), as provided for in the
Energy Bill, will more effectively incentivise offshore wind,
clarity will be needed in the longer term framework. The Renewables
Obligation currently expires in 2027 but support will be needed
beyond that date if renewable investment is to be maintained throughout
the next decade. E.ON UK would prefer to see continuity in the
existing market-based policy mechanism but further changes may
be needed. This will need further analysis in the light of the
Government's consultation on delivery of the renewable targets,
expected in the next few weeks.
11. It is unlikely that the RO would be
a suitable mechanism for incentivising a large capital project
such as the Severn Barrage with very long lead times. Also, in
the heat market there are currently no policy mechanisms to encourage
renewable heat specifically and this will need to be addressed
as part of the Government's current policy work on heat.
12. Much shorter and more predictable timescales
for reaching planning determinations on renewable projects and
related transmission reinforcements will be essential if the UK
is to approach the renewables target. At present the lead times
associated with providing the required transmission reinforcements
are many years longer than the lead times for delivery of the
renewable projects themselves. Reforms in the Planning Bill, if
implemented and resourced, should improve the outlook for larger
scale renewable and transmission projects. The proposed Infrastructure
Planning Commission, the introduction of national energy policy
statements subject to full public consultation, and the single
consenting regime will help ensure that timely decisions are taken
on renewable (and indeed other energy) projects in a way which
balances national policy considerations and local impacts. However
delays to smaller projects, not defined as major infrastructure
projects, could increase the risk of missing the UK target. The
planning system must also enable decisions to be reached on smaller
projects on a more efficient and predictable basis.
13. The full cooperation of other Government
departments not directly responsible for planning, including the
Ministry of Defence with regard to military radar, will be necessary
to ensure that decisions on renewable projects can be reached
in an efficient and predictable manner.
14. Additional investment in the transmission
network will be required to connect offshore wind including off
the coast of Eastern England where the shallower depth of the
North Sea will permit most construction. This will require significant
construction effort in advance of actual projects proceeding.
However, transmission investment will need to be planned in a
coherent way which avoids abortive capital expenditure and which
reflects the actual deployment of new renewable energy resources.
We believe that Ofgem can approve the required level of transmission
charges to fund this expenditure within its current statutory
duties, but the Government could helpfully give Ofgem more specific
guidance under the statutory social and environmental guidance
it provides under the Electricity Act 1989.
15. The wind sector and offshore wind in
particular are affected by significant bottlenecks in manufacturing
capacity of turbines and the availability of vessels capable of
installing foundations and turbines in UK territorial waters.
Without a substantial increase in turbine production, there will
be delays to offshore wind projects including those enabled by
the Round 3 process announced by The Crown Estate on 4 June 2008.
Limited supply in the off-shore turbine market has constrained
growth and has contributed to higher costs. Over time we expect
the market to respond and this will be encouraged if there is
a clear long-term policy framework for supporting investment.
16. The renewable industry will also need
to attract people, particularly engineers, with the skills to
develop, construct and operate renewable projects and will need
to do so at a time when skilled people are increasingly required
in other areas of energy infrastructure investment in the UK and
elsewhere. The shortage of skilled engineers may limit the number
of projects which can be pursued in the UK. This will need to
be addressed by the industry itself and also by Government in
its forthcoming consultation.
Are there technical limits to the amount of renewable
energy that the UK can absorb?
17. The power system can accommodate a certain
amount of intermittent renewable generation without adverse impacts
on the stability of the system. According to the UK Energy Research
Centre's 2006 report on The Costs and Impacts of Intermittency,
the current design of the UK Grid should be able to accommodate
up to 20% of the country's annual electricity demand from intermittent
renewable energy sources before voltage and frequency issues begin
to impact system stability. Whilst wind turbines can provide response
to frequency dips (through the provision of more power), this
requires them to run at a sub optimal output and therefore requires
more turbine capacity to achieve a given level of total output.
18. In addition, in circumstances where
cumulative baseload and renewable generation exceeds demand (for
example on a windy summer's night) it will be necessary to curtail
either wind or marine generation or generation from nuclear and
fossil plant which are designed to operate baseload. These are
economic costs rather than technical constraints which could be
alleviated to some extent by improving the responsiveness of demand
to price signals of by increasing the level of UK interconnection
with other systems on continental Europe to allow power to be
exported.
19. Our analysis suggests that, at 50GW
of intermittent renewables, over 5% of its output or the equivalent
generation from baseload plant would need to be curtailed. We
anticipate that curtailing of output would commence at around
33GW of intermittent wind power (assuming just 10GW of baseload
plant). As baseload capacity increases, the level of output curtailed
will also increase and would therefore commence at lower levels
of intermittent generation.
20. In addition, because wind capacity can
be relied only to a limited extent to be available to meet peak
demand particularly during the winter, wind will need to be backed
up with more flexible gas or coal-fired generation, increasing
the overall costs of operating the power system. Overall our initial
analysis suggests that the capacity dependability of intermittent
wind power is less than 10%. In other words, if we wish to maintain
the same level of system security as today, for every 1GW of wind
power installed on the transmission system we would require 900MW
or more of conventional plant as back up capacity.
21. Consideration has to be given to how
investment in that conventional back-up plant is to be incentivised
and rewarded, when some of it may only run on a relatively infrequent
basis.
22. It is important that the estimated costs
to the UK of meeting the renewable targets are fully understood.
The Government should publish its estimate of the full cost to
the consumer of meeting the EU Renewables target in each relevant
sector: transport, heat and electricity.
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?
23. Technological advances are gradually
reducing the cost of production of renewable energy sources, but
there does not appear to be a technological breakthrough which
will lead to a dramatic reduction in costs in the near future
which would avoid the need for Government support. Improvements
are likely to be incremental and will only come about through
a coordinated programme of support through the R&D, Demonstration
& Deployment process. This should be designed to ensure there
are no support gaps in the innovation chain and that technology
push and market pull are both able to drive technologies to commercialisation.
24. Offshore wind technology continues to
rely on the technology employed on land despite the operating
characteristics prevailing at sea. This has resulted, for example,
in gear box failures which have reduced the availability of offshore
wind farms. Improvements in availability of offshore wind turbines
will improve offshore wind costs. Manufacturers need to respond
to the opportunities made available through the Round Three process
in the UK and devote effort to developing turbines specifically
for offshore conditions.
25. The Environmental Transformation Fund
(ETF) provides support for large scale demonstration and deployment
of new low-carbon energy technologies which are close to market.
However, if the deployment of emerging technologies is to occur
at the rate necessary to contribute to the 2020 target, Government
will need to commit a greater level of funding than promised to
date.
26. The Commission has proposed that revenue
from the auctioning of emission permits under the EU Emission
Trading Scheme (EU ETS) should be used by Governments to fund
demonstration of emerging low carbon technologies. E.ON agrees
that this mechanism could provide an assurance to investors that
funding would be provided at consistent levels and will not fall
victim to periodic Government spending reviews. However the key
goal is to ensure that a high level of funding is consistently
available over time.
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?
27. To date the RO has been effective in
stimulating investment for large renewable energy schemes in the
UK. What has inhibited the rate of renewable electricity growth
has been the planning regime, grid access issues and supply chain
deficiencies.
28. Renewable development in Germany has
been supported through feed-in tariffs and this has led to a substantial
development in onshore wind capacity as well as other technologies
such as photovoltaics. This approach has been in place for longer
than the UK and planning and transmission constraints have been
less significant issues. Given that the RO is incentivising large
volumes of renewable development, that its structure is being
amended under the Energy Bill to support a range of technologies,
and that transmission and planning constraints are being addressed,
we see no point shifting at this stage to a different support
mechanism given the disruption and uncertainty this would cause
for investors. In addition, support for some technologies in Germany,
for example photovoltaics, has been extremely generous and we
question whether this would be seen as an effective use of customers'
or taxpayers' money in the UK. Feed in tariffs do not channel
investment to the most economic operating sites, are complex and
carry their own administrative costs. In Germany over 500 separate
tariffs are needed to support different technologies at different
locations and complex arrangements are necessary to spread the
cost of this support across all suppliers.
29. The development of the EU ETS, and more
specifically the achievement of a credible and sustainable price
of carbon, will continue to incentivise the growth of the renewable
energy industry across the EU. The EU ETS is and should remain
the principal mechanism to incentivise investment in low carbon
technologies to meet the UK's climate change targets.
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?
30. There are a number of variables which
make it difficult to estimate accurately the required investment
in the transmission and distribution networks, not least the sectoral
target for renewable electricity and the location and type of
renewable energy source. However, there are a range of factors
which suggest that the investment required to deliver the renewable
energy targets could be substantial.
31. Intermittent renewable generation will
not displace significant fossil or nuclear capacity because of
the need for back up plant, as discussed in paragraph 20. Therefore,
a much higher total volume of new plant (replacement nuclear,
fossil and new renewables) will need to be connected to the system
than would have been the case. Whilst new gas, coal or nuclear
generation plant can in many cases be built on the same sites
as previously decommissioned installations, and may therefore
have access to adequate transmission infrastructure (except where
the capacity of the new plant exceeds that of the old capacity),
this is unlikely to be the case for new renewable installations.
32. Much future renewable build will be
in areas where the network is weak. For example wind farms tend
to be located in remote regions for best wind speeds and to avoid
planning issues concerning visual impact on dwellings (demand
in these areas is obviously low and the established network capacity
reflects this). The result is often a requirement for significant
new network infrastructure and associated indirect upgrades in
other areas.
33. Even with more investment, there are
always likely to be limits on the capacity of the transmission
system to transmit power from renewable and other sources of generation.
Reform of transmission access arrangements, which is currently
under discussion with Government and Ofgem, will need to balance
the need to connect new renewable generation and the need to avoid
imposing additional costs on the system by constraining off thermal
and fossil plant which NGC then has to compensate. Charging for
use of the transmission system should continue to reflect the
costs to the system associated with generating from renewables
and other generation at that location on the system. This will
help ensure that these costs are taken into account in the decision
where to site the project in the first place.
34. Again, this emphasises the need for
Government to publish its estimate of the full cost to the consumer
of meeting the EU Renewables target.
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?
35. Impacts on visual amenity are by their
nature subjective, and it is impractical to try and compare these
impacts with other pollution related impacts in a quantitative
way. The primary goal of the planning regime should be to make
the best judgment on these issues, taking account of the circumstances
of each case and to balance national and local benefits against
the adverse local impacts. At present the planning system does
not allow this judgment to be reached in a timely and efficient
way and lacks a clear and consistent expression of the need for
energy projects in terms of their contribution to the UK's energy
policy goals. The National Policy Statements proposed by the current
Planning Bill should clarify how different projects contribute
to these goals and will help the proposed Infrastructure Planning
Commission to make this judgment for each project.
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?
36. The chart below gives an indication
of the costs associated with each technology type. However, it
is important to make clear that these costs are based on one long
term view of both capital costs and fossil fuel prices, both of
which are subject to significant change. The costs estimated for
coal and carbon capture and storage (CCS) are the costs once CCS
technology is commercially established.
37. Most renewables are intermittent and
require backing up with conventional capacity as discussed above.
This makes them relatively more expensive than nuclear, gas and
coal when total system costs are considered.
How do the costs and benefits of renewable
electricity generation compare to renewables in the other key
forms of energy consumption—transport and heating?
38. There are a number of technologies within
the heat sector which may be able to produce renewable energy
at a competitive cost compared to the current cost of offshore
wind. These include some forms of biomass heating, biogas and
heat pumps (both air and ground source).
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?
39. Renewable electricity will not necessarily
provide the greatest share of renewable energy in the UK, although
it is currently the most developed sector. Progress on developing
renewable heat and transport has been slow to date, but more can
be done to accelerate this particularly in the heat sector. The
target should be shared between sectors on the most cost effective
basis.
40. Under the proposed Renewables Directive
each Member State is required to increase the proportion of its
final energy consumption from renewable energy sources by 5.5%
and by a further % related to the relative GDP of each Member
State. This means that the targets do not relate to the economic
renewable potential of each country. Thus there should be substantial
potential for investments in one Member State to contribute cost-effectively
to the target in another. Allowing more economic renewable investments
in other Member States to contribute to the UK target should help
bring down the overall costs to the UK and should help deliver
the overall EU target at least cost. We would very much support
this as it will reduce the cost to the UK consumer of meeting
the target.
41. In the Directive, provision exists for
trading across the EU of Guarantees of Origin (GOOs) (certificates
representing renewable output) to encourage the lowest cost sources
of renewables to be exploited at EU level. However this can be
restricted by Member States if they are concerned this will have
the effect of undermining delivery of national targets. Trading
needs to be developed in a way which will provide confidence that
delivery of national targets are not at risk. Countries most likely
to trade are those for whom delivery of the targets will be particularly
expensive and those who are likely to have significant economic
renewable potential beyond that required to meet their national
targets.
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?
42. A higher cost of carbon will benefit
those technologies with the lowest carbon emissions. Renewables
and nuclear would benefit in relation to more carbon intensive
technologies. This could decrease the level of support needed
under the RO or other support mechanism.
Would a more effective carbon emissions trading
scheme remove the need for special support of renewable energy?
43. Probably not. Although a higher carbon
price would reduce the level of special support for renewables
needed and, if the carbon price rose to a high enough level, could
make some technologies economic without support, a specific scheme
would still be required to ensure available capital was committed
to renewables to deliver the required target.
What are the costs and benefits of the present
generation of biofuels? Will there be a second generation of biofuels
and, if so, what are the estimated costs? What are, or are likely
to be, the carbon emission impacts of first and second generation
biofuels, and what are the other relevant environmental effects?
44. There are a number of sustainability
issues which will need to be addressed when assessing the potential
of biofuels. These include particulate emissions, local air quality
issues, the importance of monitoring `cradle to grave' carbon
emissions (including production and transportation emissions),
biodiversity issues and compatibility with food production goals.
12 June 2008
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