Memorandum by EDF Energy
SUMMARY OF
EVIDENCE
The 15% renewable energy target for the UK is
extremely challenging. It will:
— significantly increase the cost of
delivering greenhouse gas emission reductions;
— create new security of supply challenges
(by increasing the amount of plant that must be built to achieve
a satisfactory capacity margin and increasing the volume of actions
that the system operator must take to ensure that supply and demand
are matched in real-time) if a very high percentage of intermittent
renewable electricity generation is built;
— create the need for radical change
in how the UK electricity and heat sectors are structured and
operate; and
— alter investment incentives for other
types of new plant including nuclear and clean coal fitted with
carbon capture and storage equipment both of which are important
elements of a low carbon, diverse, secure energy mix in the future.
Government's primary environmental objective
must be greenhouse gas emission reduction targets. The delivery
of the 2020 renewables targets must be a "stepping-stone"
that facilitates delivery of the UK's 2050 climate change target
in the least-cost manner. When deciding on the apportionment of
effort between UK sectors the cost-benefit of proposed measures
must consider the whole lifetime energy system cost.[3]
A target of 40% renewable electricity by 2020 will be extremely
difficult and very costly to deliver. All sectors should take
a fair share of the burden and the electricity sector should not
be used as the sector of "last resort" for delivering
the UK renewable energy target.
Given the large cost increases that customers
will face, delivering expensive renewables targets in the most
efficient manner possible is essential. The ability to trade renewables
certificates across national borders will help minimise costs.
The current draft Directive text restricts trade and should be
amended.
Renewable electricity delivery to-date has been
slowed by transmission access and planning issues rather than
the nature of the financial support mechanism. However, despite
this, we consider that there is a major question mark over whether
the Renewables Obligation is fit for purpose for delivering a
large, mandatory renewable energy target because:
— suppliers have the option to pay
the buyout and do not have to contract with enough renewable generation
to meet the target;
— if carbon price rises (and this was
not foreseen when ROC bands were initially set) existing ROC-eligible
projects will receive excessive support; and
— the size of the target will require
simultaneous construction of both expensive and lower cost projects
within each technology type[4]—RO
banding may prove insufficiently flexible to deliver simultaneous
construction in a cost-effective manner.
We support a full review of the most appropriate
financial support mechanism.
Whilst the existing transmission access arrangements
can be reformed to improve the allocation of existing capacity,
for example by enabling the sharing and trading of TEC,[5]
the key to accommodating much larger volumes of renewable generation
is the construction of new assets. Strategic investment ahead
of need is likely to be necessary to build these assets in time
to meet the 2020 target. Proposals in the Renewables Directive
for priority access for renewables are of concern because the
UK requires major investment in both new renewable and new thermal
capacity. Investor confidence must be maintained for investment
to occur in all technologies.
INTRODUCTION TO
EDF ENERGY
EDF Energy is one of the UK's largest energy
companies with activities throughout the energy chain. Our interests
include coal and gas-fired electricity generation, combined heat
and power plants, electricity networks and energy supply to end
users. We have over 5 million electricity and gas customer accounts
in the UK, including both residential and business users. We are
part of EDF Group, one of the largest energy companies in the
world. EDF Group maintains a large energy research and development
capability in-house.
EDF Energy already contracts with a wide range
of renewables generators, both bilaterally and via the Non-Fossil
Purchasing Agency, and in response to the Renewables Obligation
and consumer demand is aiming to develop 1000 MW of renewable
generation by 2012 as part of a wider package of environmental
initiatives contained in Our Climate Commitments.
GENERAL QUESTIONS
How achievable are both the EU's general 20% and
the UK's national 15% renewable energies target?
1. Both the EU and the UK targets are extremely
stretching. Without the ability to import significant volumes
of Guarantee of Origin certificates to meet the UK target we have
only limited confidence that the UK target will be met by 2020.
Trading would assist the UK in delivering its target in the most
cost-effective manner as described in the recently published report
for BERR by Poyry. The current draft Directive text will obstruct
trading and force the UK to rely almost entirely on domestic measures
to deliver its target, potentially resulting in higher costs.
2. Recent concerns surrounding the sustainability
of biofuels make it questionable whether the transport sector
will deliver its share of the target. Biomass resources are finite
and, even allowing for successful exploitation of indigenous resources
and imports from inside and outside the EU, they are likely to
make only a very limited contribution to UK electricity and heat
targets.
3. The majority of the electricity target
will be met by output from large scale on and off-shore wind farms.
Delivery of the electricity sector target is dependent on planning
reforms (to facilitate both large and small scale projects and
for transmission and distribution infrastructure), turbine supply,
adequate financial support, the right incentives for network operators
to invest in a timely fashion and public acceptance of high penetration
of wind energy both on and offshore. None of these elements is
assured as yet.
4. Heat sector renewable deployment is dependent
on adequate financial support, development of installer capacity
and public acceptance of new technologies. None of these elements
is assured as yet and will require time to take effect.
5. Our current understanding is that BERR
is considering a sectoral split of approximately 10% transport,
10% heat and 40% electricity. How the burden is allocated between
the sectors is within the control of the UK government. Redistributing
the burden such that a greater emphasis is placed onto heat would
reduce the logistical difficulties associated with major electricity
transmission system reinforcement and installing c.30GW of offshore
wind capacity in little more than 10 years. This could make the
UK target more easily achievable. It may also be more cost-effective
when considering the necessary decarbonisation of the heat, transport
and electricity sectors to deliver a CO2 emission reduction
target for the UK of 60-80% by 2050 to have a more balanced low
carbon electricity generation portfolio with a lower penetration
of intermittent renewable generation.
6. We consider it is essential that heat
pump (both air source and ground source) is an eligible renewable
technology under the Directive. In the long term, heat pumps are
likely to be the main low carbon technology for delivering low
carbon heat as biomass supplies are limited and the transport
of large volumes of biomass into urban environments is problematic.
The Directive provides an excellent opportunity to commence the
roll-out of this technology in the UK and develop a large supply
chain and installer base. The technology is developing, efficiency
is improving rapidly and units are now available that can be retrofitted
to conventional radiator-based heating systems found in most properties
in the UK. In other European markets annual deployment rates are
as high as 120,000 units per annum.
How coherent are these proposals in the context
of the EU's energy policies in general and the Third Energy Package
in particular?
7. There are a number of inconsistencies.
The proposal for priority access for renewable generation is discriminatory
and could threaten the investment in thermal generation which
is needed to replace closing plant in the UK. It could also lead
to higher costs for consumers if constraint costs are increased.
The trading proposals are so restrictive that they threaten the
current trade in renewable certificates and will prevent the free
movement of goods and capital across the EU—this is counter
to the move towards regional markets and then a single market
for power across the EU.
8. The renewables target will increase the
cost of the primary environmental objective of delivering greenhouse
gas emission reduction targets and will therefore exacerbate fuel
poverty. Although it now appears that the renewables target is
unlikely to crash EU ETS prices there remains a risk that EU ETS
price will be lowered significantly by the renewables target.
This risk could affect investor confidence in other unsupported,
more economic low carbon technologies.
9. Looking at UK energy policy in particular
there is a risk to carbon capture and storage (CCS) and nuclear
deployment if too great a renewable target is placed on the UK
electricity sector and delivered by intermittent renewables supported
by thermal peaking capacity. Given that the UK objective of a
60-80% reduction in CO2 emissions by 2050 will require
significant decarbonisation of the transport and heat sectors
as well as the electricity sector, most likely by the use of low
carbon electricity, it is essential that the UK embarks on a path
that provides the correct investment signals to meet this essential
longer-term target. Forcing a very high level of intermittent
renewables into the UK electricity generation fleet by 2020 could
delay investment in the technologies which will be required to
deliver the 2050 target (nuclear, CCS, more predictable forms
of renewable generation, heat pumps).
To what extent are these targets capable of improving
the EU's security of energy supplies?
10. At a high level renewable energy targets
will displace imported fossil fuels in the EU and improve security
of supply.[6]
However the targets will also create problems for the UK because
the primary means of meeting the proposed electricity sector target
will be intermittent onshore and offshore wind. Managing intermittency
will create additional costs for consumers (greater reserves held
by the system operator to ensure system balancing, backup plant
to provide reliable capacity at times of low wind speed across
the UK, lower load factors for conventional plant requiring higher
prices when these plant do run to recover their fixed and financing
costs over fewer running hours, etc). Lower load factors for the
conventional plant that the system will require in addition to
new renewable capacity is likely to lead to the construction of
low capital cost, flexible plant which is likely to be gas-fired
CCGT and OCGT. This in turn may prevent the construction of new
nuclear and coal plant with CCS and contribute to an increased
dependence on gas and reduction in fuel diversity in the UK than
would otherwise have been the case. This plant will have higher
CO2 emissions than coal with CCS or nuclear.
GRID ACCESS
How effective has the existing legislation (2001/77/EC)
been in encouraging grid access for renewable energy generators?
11. In the UK new renewable energy generators
are treated in the same manner as new thermal generation when
applying for access to the transmission system. Over the next
10-15 years the UK is likely to require in excess of 30GW of new
thermal generation to replace closing coal, oil and nuclear stations
in addition to 40+GW of renewable generation to meet the UK share
of the 2020 renewables target. Long lead times for connections
at present are a result of the time required to achieve planning
consent and then construct the necessary deep reinforcements to
transmission infrastructure. The current UK planning regime means
that major transmission reinforcements typically take approximately
10 years from initiation to completion. Proposals to reform the
planning regime and provide shorter and more certain timescales
for consent will reduce this timescale. Similarly the TAR (Transmission
Access Review) process could increase the efficiency of utilisation
of existing transmission assets (see below) but it is important
that the process of improving short-term access allocation efficiency
does not undermine long-term signals for investors.
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?
12. In the short-term in the UK, grid access
has delayed the construction of a number of renewables projects
that have been by brought forwards by developers in response to
the financial incentives offered, primarily, by the Renewables
Obligation. However this has led to relatively little "loss"
of renewable electricity because of the relatively low level of
the Renewable Obligation to-date. In the longer-term, National
Grid has indicated that it believes that it could construct sufficient
infrastructure to deliver the electricity sector share of the
UK target by 2020, providing it can make strategic investments
ahead of firm need being signalled by connectees (for example
to increase the general capacity of the system to flow electricity
from north to south or to accommodate onshore flows of electricity
from offshore wind farms). For this to happen, it will be necessary
for the currently proposed planning reforms to be implemented.
This approach of strategic investment by Grid will create a risk
of stranded assets, the cost of which would need to be recovered
from system users and ultimately consumers; however it is a pragmatic
and strongly desirable response to the challenge of dramatically
increased renewable electricity targets. Improvements should also
be made in the efficiency of allocating existing transmission
capacity to generators which could increase the amount of renewable
electricity in the short-term (but at a cost). "Sharing"
of the existing grid can be facilitated by a move to zonal transmission
access rights, rather than nodal (location-specific). A move to
zonal transmission access rights will facilitate trading to ensure
more optimal use of existing transmission capacity. However, TEC
sharing will have a relatively small impact on the level of capacity
that will be able to be connected and it will not resolve the
issue of the GB queue. What is also required is further major
investment in infrastructure.
13. A "connect-and-socialise"
type transmission model has been advocated by some renewable developers.
This would give them the right to nominally "connect"
even when the Grid could not take their power at all times, due
to deep reinforcements not yet being complete. When these projects
are constrained off the system they would receive full financial
compensation including lost renewable subsidy (RO) income. The
developer would thus be, financially, satisfied. Unrestricted
nominal financial access to the Grid of this type for renewable
generators creates the risk of very high constraint costs for
consumers and is unacceptable.
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 ?
14. Current TNUoS charging in the UK is
based on long-run marginal costs of increasing transmission capacity.
As a consequence generators located in the north of Great Britain,
distant from demand, face higher transmission charges than those
located in the south close to the major centres of demand. This
is economically efficient and reflects the cost of reinforcing
the system to accommodate their electricity. The UK has good onshore
wind resource in the north and lower resource onshore in the south
although high quality offshore resource exists both in the north
and south. If TNUoS charging were altered to either provide a
discount to renewables or to reduce the strength of the locational
signal more generally this would create a hidden subsidy for renewables
and other generation in what are naturally high TNUoS areas. The
latter would, perversely, penalise southern renewables developers.
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?
15. The UK transmission system requires
major reinforcement to accommodate new renewable generation. The
construction of new major transmission lines takes circa 10 years,
mainly due to the requirements of the existing planning process.
The Planning Bill should provide greater certainty on timescales
for transmission development and hopefully reduce the time to
develop new lines.
16. Typically new transmission investment
can only be made once an application for connection for additional
generation has been made. Given the existing transmission constraints,
very large increase in renewable generation capacity required
by 2020 and the long lead times to construct transmission assets
a more appropriate approach would be to allow strategic investment
ahead of need by transmission companies in areas identified as
likely to need reinforcement to accommodate power flows from additional
generation. Whilst placing some additional risks on system users
and ultimately consumers (from costs associated with inefficient,
underutilised investment) this sort of approach is needed if the
UK is going to have any chance of reaching its renewable energy
target in 2020.
17. As explained above, proposals for "connect
and socialise" type transmission access proposals in the
UK will cause very large constraint costs for consumers for little
environmental benefit, without offsetting benefits. They have
no merit.
18. High levels of intermittent generation
in the UK will create very volatile wholesale electricity prices
and require large volumes of "backup" thermal generation
because the capacity credit of wind (ie its probabilistic contribution
to meeting peak demand) is very limited. Increased interconnection
between the UK and the rest of the EU will reduce price volatility
(subject to the correlation of wind output across interconnected
markets) and could create further efficiencies if it is possible
to share backup generation across a wider geographic area.
To what extent is further co-ordination of National
Regulatory Authorities needed?
19. No comment.
How far do current regulations inhibit access
to the grid?
20. The current access arrangements do not
inhibit access to the grid for renewable generation relative to
other forms of generation. We do however believe that a number
of improvements could be made. These include:
— CAP 150 (Connection and Use of System
Code Amendment Proposal number 150) will allow National Grid to
remove "phantom" projects from the grid connection queue
(eg those for which planning consent has not been applied for),
remove over-booked capacity (where planning consent has been applied
for a lower capacity than the connection requested from Grid)
and put-back projects to a more realistic connection date where
it is the timing that looks to be an issue;
— CAP 131 which will introduce a requirement
on generators, new and old, to enter into financial commitments
("user commitments") to partly cover the cost of their
connection assets. This should cause the developers of generators
that will never be built to formally cancel their connection agreements
to avoid paying this commitment fee;
— Better operational utilisation of
the existing grid (eg using live line ratings rather than fixed
power line maximum transfer limits, particularly in Scotland);
— relaxation of grid security limits
in fair weather to a greater extent than at present (almost all
"customer lost minutes" at present are due to DNO issues,
implying that the transmission system may be over-secured). The
grid normally secures against the simultaneous loss of two Grid
circuits at once ("N-2") and only in very fair weather
does it secure against the loss of only one Grid circuit at once
("N-1"). In Scotland, N-1 is the standard that is worked
to far more frequently;
— increase the tensioning of lines
("hot wiring") to reduce sag and hence increase maximum
power transfer capabilities;
— increase the use of commercial intertrips
whereby a generator can be disconnected from the system in the
event of a transmission system fault (a form of "voluntary
TEC sharing");
— TEC[7]
sharing whereby the Grid would be divided into TEC sharing "zones",
within which TEC is not regarded as nodal but as a uniform commodity
with a one-on-one transfer capability between nodes within a given
zone (hence, TEC would become zonal, not nodal). TEC sharing at
an ex-ante, fixed exchange ratio of 1:1 would be possible between
locations within the TEC-sharing zone. Within each TEC sharing
zone, existing and new/proposed power stations could voluntarily
share TEC (perhaps via commercial agreements) and would only need
to have sufficient TEC in aggregate to cover their total, collective
generation at any point in time. This efficient allocation would
enable wind farms to group together and share TEC as their combined
output would never equal their maximum installed capacity and
also allow low load factor "back-up" generation to share
TEC with wind farms because they will almost never run simultaneously.
The concept of TEC sharing could also be expanded to a more dynamic
form of TEC trading; and
— introducing the concept of overrun
whereby generators would be able to purchase "non-firm TEC"
which would not come with the right to receive transmission constraint
compensation from Grid in the way of "bid" acceptance
monies when constrained off. Instead, when generating against
non-firm TEC, the generator would be billed the cost of any constraints
that it caused elsewhere, ie costs associated with constraining-off
other generators in order to make way for this output. Non-firm
TEC would be charged at a lower rate than firm TEC.
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?
21. The current proposals for trading in
the draft Directive are so restrictive that only very limited
trading will occur. Harmonisation of support schemes would help
to facilitate trading by removing some of the grounds for objecting
to more widespread trading by certain Member States. However,
national variation in charging for connections, access, etc and
national/regional power markets (reinforced by limited transmission
interconnectivity) make harmonisation problematic because the
support level for a particular renewable technology required in
one country may be very different to that required in another.
Looking to the longer term, low carbon technologies should compete
with each other based on the price at which they abate carbon.
The EU should be looking now at how renewables technologies move
from bespoke support mechanisms to support being provided by carbon
pricing alone. Contracts for Difference (CfDs) on carbon price
provide a method for preventing excessive support to renewables
if market-based carbon prices rise.
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?
22. The Renewables Obligation in the UK
has brought forward a large pipeline of projects. Delivery has
been delayed by transmission access and planning issues and not
the strength of the financial support signal provided by the RO.
Simple comparisons of FiT (feed-in tariffs) in other European
countries and the RO that conclude that the RO is inferior on
the basis that delivery has not been as high are much too simplistic
and ignore the wider issues associated with transmission access
and planning that affect projects in the UK.
23. Looking forwards though there is some
doubt as to whether the RO will be the most efficient support
mechanism for deploying large volumes of renewables in the UK.
The table below provides a high-level assessment of how the RO
and alternative support mechanisms perform against relevant criteria.
| Criteria | RO
| FiT | CfD[8]
|
| Build different technologies simultaneously
| Yes | Yes | Yes
|
| Efficiently support construction of low and high cost projects of same technology simultaneously
| No | Possibly | Possibly
|
| Prevent windfall to generators if carbon price rises
| No | Yes | Yes
|
| Guarantee delivery versus targets | No
| Possibly | Possibly |
| Integrate auction revenues into support mechanism
| No[9]
| Yes | Yes |
| Continuity for investors | Yes
| No | No |
24. On several criteria the RO appears to perform poorly
against the alternatives. For example, feed-in tariffs and CfDs
could prevent windfalls to generators if CO2 prices
rise, and feed-in tariffs and CfDs only trigger consumer cost
if capacity is delivered.[10]
Also the RO does not guarantee delivery of the target. We consider
it is essential that a full review of the most appropriate support
mechanism is undertaken and look forward to the government's consultation
on the development of the UK's Renewable Energy Strategy due in
the summer of 2008.
25. Demand for renewable electricity supply contracts
(business customers) in the UK were driven initially by the Climate
Change Levy Exemption Mechanism which offered a small financial
saving. This has been superseded more recently by corporate social
responsibility as the primary purchasing driver. Renewable electricity
demand in the domestic sector remains low. Going forwards it is
essential that Ofgem's green supply guidelines, the Carbon Reduction
Commitment and Defra's Corporate Greenhouse Gas Emission reporting
guidelines and electricity suppliers Fuel Mix Disclosure requirements
which use REGOs to demonstrate the renewable content on suppliers
labels provide a consistent message to consumers regarding the
environmental benefit of purchasing/supporting renewable electricity
deployment. The current Ofgem proposals for green supply guidelines
are inconsistent with the CRC proposals (because they would attribute
a CO2 benefit to LEC-backed electricity supply contracts)
and could create customer confusion.
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?
26. It is not yet clear how support will be provided
for development of projects within Member States to deliver against
the EU 2020 targets and then to allow the output to be traded.
One possibility is that Member State national support mechanisms
will be able to cross national boundaries as currently exists
for LECs and REGOs, ie UK consumers could directly fund a project
in another Member State with the ROCs, REGOs (and LECs) being
repatriated to the UK. If this model is followed then the presence
of different support mechanisms would have only limited impact
on cross-border trading although consideration of the impact on
existing investors within the RO would need to be carefully considered.
27. Investment will not necessarily be hampered by lack
of market harmonisation, rather the overall efficiency of investment
likely to be lower across the EU if the lowest cost opportunities
cannot be accessed by all countries through restrictions on trading.
However, looking forwards as the EU moves towards regional and
then a single market for power then the opportunities and incentives
for harmonisation will become greater as differences in renewable
economics within Member States become smaller.
To what extent would the enhanced use of Guarantees of Origin
certificates require the harmonisation of support schemes?
28. See answer above. Harmonisation is not a pre-requisite
to REGO trading if national support mechanisms can cross borders.
21 April 2008
3
This should include the additional costs of transmission, back-up
capacity and reserves to cope with intermittency, and costs associated
with the displacing more cost-effective methods of low carbon
electricity generation for the lifetime of the renewable generation
assets Back
4
For example, the cost of the 1st GW of offshore wind could be
much lower than the 30th GW due to factors such as water depth,
distance from shore, etc. Back
5
TEC = Transmission Entry Capacity, the product that defines volumetric,
instantaneous access rights to the transmission system Back
6
They may also displace indigenous fossil fuels such as UK coal
and German lignite. Back
7
"TEC" stands for Transmission Entry Capacity-the right
of generators to be able to inject power up to that specified
level, in MW, onto the Grid (or, where there is a transmission
constraint, to be compensated financially by National Grid for
not being able to operate, so that they do not lose profits-although
they should not exploit the constraint by asking for unduly lucrative
compensation. The compensation price is set by the generator as
his "bid" price to Grid). TEC at the moment is a static
MW figure that relates to a given generator at a given location,
or "node". Back
8
Contract for Difference Back
9
Support would have to provided separately, for example using capital
grants Back
10
Guaranteed headroom in the RO, once the target has reached a certain
level, should reduce partially the risk of excessive consumer
costs if delivery is not occurring Back
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