House of Lords - European Union

Select Committee on European Union Written Evidence

Memorandum by British Energy

SUMMARY OF KEY POINTS

— Overall, there should be greater focus on the three key objectives of energy policy—greenhouse gas reductions, maintaining security-of-supply, and the provision of affordable energy for consumers—rather than on prescribing how these objectives should be met at Member State levels.

— The UK's national 15% renewable energy target is extremely challenging, bearing in mind renewable energy currently contributes just 2% of the total.

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

— Government interventions on this scale have far-reaching consequences. Most important is that they undermine liberalised markets and increase costs to the consumer.

— In the context of security of supply, it is worth noting that the relatively low connectivity of the UK with mainland Europe means it benefits much less than other Members States from developments in Europe.

— In setting the renewables target, little account appears to have been taken of alternative lower cost abatement options in the electricity sector such as nuclear and fossil generation fitted with carbon capture and storage.

— Planning is the biggest obstacle to connecting renewable generators to the transmission system, as the recent decision to reject the Lewis Wind Project (which would have been one of the largest developments in Europe) demonstrates. This needs to be addressed by the Planning Bill.

— The detailed implementation of policies and measures to deliver the targets and the costs involved have not been sufficiently considered and could also lead to unforeseen circumstances such as the undermining of the EU ETS.

— In terms of additional infrastructure, a significant amount of new fossil standby plant will be needed to cover low renewables production during certain periods of the year; a significant expansion of the grid network to accommodate a larger more dispersed generation sector will also be needed.

— A significant excess of generation could exist under periods of high renewable production and low demand; in this case it will be necessary to constrain off some plant to maintain system stability.

— Member States have indicated they are willing to take on specific targets and they should be allowed to develop support mechanisms that best suits their economic circumstances.

DETAILED RESPONSE TO QUESTIONS

ON TARGETS

How achievable are both the EU's general 20% and the UK's national 15% renewable energies target?

1. The EU's general 20% and UK's national 15% renewable energy targets are both extremely challenging, bearing in mind renewable energy currently contributes about 7% and 2% for the EU and UK respectively. The scale of the challenge is highlighted in Table 1.

Table 1

RENEWABLES CONTRIBUTION TO TOTALS

	2005 (1)	2020 BaU (2)	2020 EU Directive (3)
EU (% of total energy)	7	12	20
UK (% of total energy)	2	5	15
UK (% of electricity)	4 (4)		41 (5)
UK (TWh electricity)	17 (4)		150 (1)
References:

(1) Compliance costs for meeting the 20% renewable target for 2020, A Report for BERR, POYRY Energy Consulting, March 2008

(2) European Energy and Transport: Trends to 2030, EC, update 2005

(3) Draft Directive on the promotion of the use of energy from renewable sources, EC, 23 January 2008

(4) Digest of UK Energy Statistics (DUKES), July 2007

(5) Based on 368TWh electricity generation in 2020, Energy White Paper, May 2007

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

3. It is proposed that the 15% UK target will be delivered through three sectors: heat, transport and electricity. In the specific case of electricity the current 4% contribution by renewables will need to increase by an order of magnitude to about 40%, to deliver the UK's commitment under the draft Directive.

4. To meet the level of requirement suggested by the POYRY (1) analysis of 150 TWh in 2020 means:

— A growth rate of 20% per annum is required, twice the average growth over the period 1998-2006.

— An improved planning process, a grid that can respond to a high degree of variability, and a market structure that is sympathetically flexible, are issues that need to be successfully resolved. In the absence of these developments security of supply and economic well-being will be compromised.

— The RO, or any successor support mechanism, would have to provide sufficient incentive for all renewable technologies, and in particular offshore wind development.

— That supply chain bottlenecks in the renewable sector must be overcome if the extremely large number of new projects required are to be delivered in a timely fashion.

— A significant amount of new standby plant (ie non-intermittent, conventional plant) will be needed to cover low renewables production, for example, during periods of low wind. There also needs to be a financial mechanism to encourage development of standby generation, to levels well beyond those currently in the market.

— Excess of generation during periods of low demand is also a potential problem. Maximum output from the renewables could be 150TWh per year in 2020. Based on an average load factor of around 35%, which equates to 49GW of generation capacity in periods of high renewables yield compared to a low demand of around 27 GW (an excess of 22GW which would need to be constrained off). If we consider that in addition to this there needs to be thermal baseload generation (fossil and nuclear), then inevitably we must assume there would be a significant excess of generation. This is an important system issue that has yet to be fully considered.

It is important to note that this does not include the standby plant needed which would be significantly higher in the second case

How coherent are these proposals in the context of the EU's energy policies in general and the Third Energy Package in particular?

5. It is widely recognised that the "20:20:20" targets set, for the three areas of energy efficiency improvements, greenhouse gas reduction, and percentage contribution to energy consumption by renewable sources, is a huge challenge for Member States. In particular there are a number of concerns:

— Overall, there should be greater focus on the three key objectives of greenhouse gas reductions, maintaining security-of-supply, and the provision of affordable energy for consumers, rather than on prescribing how these objectives should be met at Member State levels.

— The detailed implementation of policies and measures to deliver the targets, and the cost involved, has not been sufficiently considered and this has led to considerable criticism amongst key stakeholders.

— There are also potential unforeseen effects. The emissions trading scheme (EU ETS) is a very effective market mechanism that can deliver emissions reductions across the economy through a credible and effective cost of carbon, and provides an important vehicle to engage with, and facilitate activities outside of the EU. Forcing industry to deliver the renewables target has two effects:

— The carbon savings would be more expensive than if they were delivered through the EU ETS.

— Emissions reductions through renewables undermines the need for emissions reductions through the EU ETS, putting downward pressure on the cost of carbon, thus weakening the incentives for abatement across the economy.

To what extent are these targets capable of improving the EU's security of energy supplies?

6. The technologies proposed to deliver these targets would improve security of energy supply. However, there are two aspects to security of supply, access to primary energy and variability of supply; both of these have implications for a modern economy. There are some important limitations:

— Indigenous fossil supplies in coal and to a lesser extent oil and gas have ensured access to primary energy for most for the last century. Today, dwindling indigenous oil and gas resources leaves indigenous coal and nuclear to provide a measure of secure supplies. Renewables can also contribute to this aspect of security of supply, although as indicated below, and with the exception of indigenous biomass, there are significant limitations.

— Wind power, the main renewables technology proposed to deliver the targets, is subject to the vagaries of meteorology and as such there are periods in which they cannot be relied upon to deliver the energy required—because of this variability, significant (fossil) standby plant is required on the system to ensure provision of electricity. Storage of electricity in the UK is very limited with hydro electric pump storage as our only viable form of electricity storage. The greater the wind component to the electricity system, the greater the standby plant needed, and the less efficient the overall system.

7. In the context of security of supply, it is worth noting that the relatively low connectivity of the UK with mainland Europe means it benefits much less than other Members States from developments in Europe.

ON GRID ACCESS

How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energy generators?

8. The Directive for Production from Renewable Energy sources has not had any real affect on grid access.

9. The rules for transmission use of system charges in the UK are the same for all technologies. The current system is split 20% "locational" and 80% "residual" ie a wind generator for example, will have to pay 20% and then the remaining 80% is socialised.

To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is it consistently a problem across all Member States?

10. The speed of implementing upgrades is slow mainly due to planning and partly due to uncertainties in timescales for gaining consent for new build schemes and the associated transmission connected assets.

How does Use of System charging affect grid access for renewable energy generators? How far can the different levels of renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules?

11. National Grid Transco has a licence obligation to promote competition, and thus benefit the consumer—to achieve this goal their charges are non-discriminatory against technologies.

What impact do the various systems of reinforcement planning and work have on encouraging renewable generation? How important is the issue of constraint in increasing Member States' renewable generation?

12. This issue is being considered by National Grid and by industry. Provision for 100% rated capacity for wind and hydro could be less cost-effective than dynamic management of the appropriately sized grid. The Ofgem/BERR transmission access review is ongoing alongside an industry review of code amendments, one of which considers sharing of capacity.

To what extent is further co-ordination of National Regulatory Authorities needed?

13. No comment.

How far do current regulations inhibit access to the grid?

14. The current regulations do not inhibit access, but planning does have a major impact, not only for renewables but all competing technologies.

ON SUPPORT SCHEMES

At what level should the EU be involved in harmonising or regulating support schemes offered by Member States to encourage renewable energy generation?

15. Government interventions on this scale have far-reaching consequences. Most important is that they undermine liberalised markets and increase costs to the consumer.

16. Member States have indicated they are willing to take on specific targets and they should be allowed to develop support mechanisms that best suits their economic circumstances.

17. However, the EU role is an important one:

— They should ensure that the level of subsidy provided does not distort competition across the region; they should also ensure that when a technology has become "mainstream" it should no longer receive a subsidy and be allowed to compete with other technologies on a level playing field.

— One idea put forward is to allow a new "renewables accounting" to emerge in which a technology such as coal (or gas) fitted with Carbon Capture and Storage is allowed to count towards renewables targets ie that it has renewable "status"; such an intervention would be a clear indication that the renewables target was set at too high a level for the timescale involved, and if this were to go ahead then all low carbon technologies, including nuclear should be part of this approach.

— A framework for any proposed "trading" of renewables across Member States needs an EU overview so that its development, were it to go ahead, balances domestic action with the need for the lowest overall cost solution.

— The EU should ensure that the renewable target should not compromise the drive for truly liberalised markets—the latter are at serious risk under the proposed level renewables, particularly in the electricity sector, if these continue to be subsidised over the long term.

What impact have the various schemes in operation across the Member States had on encouraging renewable energy? How have these schemes affected take-up both by producers and commercial and domestic consumers?

18. The UK is an island generator with limited electrical connectivity to Europe—we should therefore not draw analogies from the vast majority of Member States who do not face the same constraints as the UK.

19. There are a number of lessons learned from the development of the renewable sector in the EU over the last two decades or so:

— Setting targets, whether indicative or absolute does mobilise action but they must be complemented with policies and measures that address the nature and scale of financial incentives, planning issues, and grid connection.

— Governments should avoid picking winners—rather its role must be to create the financial, planning and technical regimes that encourage the successful technologies to emerge. So long as the government provides the enabling framework, the market will ensure the successful adoption of the most appropriate technologies.

— The German model whereby renewables developers are guaranteed grid connection and electricity sales at a premium price has proved particularly effective in delivering operating capacity. The obligation mechanism, favoured in a number of countries including the UK, with incentives and penalties, should also prove effective in this context but perhaps at a much lower overall cost to the consumer.

— Any new legislation must allow the possibility for polices and measures to evolve because the renewables sector, as well as some of the key underlying drivers for the industry, are dynamic, and will continue to be so for some years to come.

— It is important to address the institutional support for any scheme adopted ie the monitoring, verification and administrative support since this could involve significant additional costs.

— Once the financial incentives have achieved their aim eg cost convergence with traditional players, then these technologies must be judged alongside the traditional players, otherwise there is a risk of market distortions.

— Competitiveness issues between companies, and countries, have largely been absent from discussions on the development of renewables. Such issues are likely to be more prominent as the renewables sector grows into a significant contributor to the electricity mix.

— The development of national polices and measures must also reflect international developments in some areas. For example, there is strong interest in developing a major Green Certificate market across the EU, and this will provide additional impetus to the industry. Questions of parity will inevitably arise with pressure to harmonise policies and measures.

Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Is necessary investment hampered by lack of market harmonisation?

20. Support mechanisms for renewable technology deployment have been developed by Member States to suit their own economic structure. These technologies deliver a number of attributes to Member States which they will be keen to retain: electricity and biofuels for economic activity and social well-being; carbon reductions; and a measure of security of supply. These interests make the emergence of a significant cross-border renewable market less likely, and if this is the case, then a lack of market harmonisation is less important from an investment standpoint.

To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation of support schemes?

21. Further harmonisation of support schemes is not necessary so long as individual Member State schemes have been scrutinised by the EC, and Guarantees of Origin adhere to a required "standard".

8 May 2008