Memorandum by E.ON
SUMMARY
— E.ON believes that renewable energy
can make a significant contribution to meeting EU and UK energy
demand and to climate change targets.
— However, the UK's proposed share
of the renewable energy target poses major challenges, particularly
given the relatively short period between now and 2020 and the
limited contribution renewable sources currently makes to UK final
energy consumption.
— The extent to which it is delivered
will depend on whether some major barriers to investment can be
overcome and sufficient incentives exist to attract the very large
capital investment required not only in renewable capacity but
also the fossil plant required to back up intermittent generation
from wind and tidal resources.
— Even if a renewable share of electricity
of some 40% is achievable (which is not yet clear), the implications
of this for grid investment and performance are potentially very
significant and need to be clearly modelled, explained and understood.
— To ensure the most efficient delivery
of the target the UK's heat and transport sectors must contribute
a level of renewable energy commensurate with their cost effective
potential to avoid an excessive burden falling on the power market.
— The renewable targets are only credible
if the directive gives Member States flexibility in delivering
them; in particular trading in renewable allowances from a Guarantee
of Origin (GOO) trading scheme should not be unnecessarily restricted.
— The Government should publish its
estimate of the full cost to the consumer of meeting the target
in each sector.
— The main barriers to completing renewable
electricity projects are the time required to achieve planning
consent and the construction of major grid upgrades.
— Turbine manufacturing capacity will
need to be scaled up and vessel availability increased if the
level of offshore wind projects required to meet the target are
to be delivered.
— Changes in transmission access arrangements
are likely to be required but these must balance the need to connect
new renewable generation with the need to avoid inefficient constraint
costs.
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 achievable are both the EU's general 20% and
the UK's national 15% renewable energies target?
3. The UK's proposed share of the renewable
energy target poses major challenges, particularly given the relatively
short period between now and 2020 and the limited contribution
renewable sources currently makes to UK final energy consumption.
In 2007 renewable energy accounted for approximately 2% of UK
final energy consumption. Renewable electricity has grown significantly
since the Renewables Obligation was put in place in 2002 but nevertheless
accounts for only about 5% of electricity consumption at present.
Given that the Government estimates that the UK is likely to have
to meet 25% of the total EU additional cost, meeting the target
in full may be more difficult for the UK than for the EU as a
whole although particular Member States may have different issues
arising from their particular energy mix.
4. The extent to which the target is delivered
will depend on whether some major barriers to investment can be
overcome and sufficient incentives to attract the very large capital
investment required not only in renewable capacity but also the
fossil plant required to back up intermittent generation from
wind and tidal resources. However, this will require a very rapid
acceleration in investment in renewable energy sources over little
more than a decade, bearing in mind that the directive may not
be agreed until well into 2009.
5. The implications for the electricity
sector are significant given that a very substantial contribution—possibly
in excess of 40% of electricity consumption—may need to
be met from renewable electricity sources, largely in the form
of onshore and offshore wind and some biomass generation. This
level of target will require a number of significant barriers
to be overcome including grid access, planning and supply chain
constraints. In addition, a robust long-term policy framework
which will attract the necessary investment to the UK is required.
Such a large penetration of renewable generation also poses some
very major issues for the power system as a whole. These need
detailed assessment but given that wind generation is variable
in output, a relatively inflexible source of power and only a
small proportion of total capacity can be relied on to meet peak
demand, a large volume of more flexible fossil generation will
be needed to maintain system stability. These issues will need
to be addressed in the strategy which the Government has indicated
it will publish next year after the directive has been agreed.
6. The full potential of renewable heat
and transport sources will need to be utilised to avoid an excessive
burden falling on the power market. The heat sector is currently
the largest consumer of energy and accounts for approximately
43% of the UK's final energy demand. This sector has historically
received little attention. However, there is substantial renewable
potential from heat technologies which BERR is currently addressing
following its Call for Evidence.
7. Given that the targets are expressed
as a percentage of final energy consumption, a key objective must
be to ensure that effective energy efficiency policies are in
place to ensure that total energy consumption is reduced or at
least growth contained, which would reduce the absolute level
of renewable investment required to meet the targets.
8. The deliverability of the targets would
be improved if the Directive allowed flexibility in how the target
is met. We support provisions in the directive for importing renewable
energy from states adjoining the EU, provision to take account
of investment in large tidal schemes, and for trading of Guarantees
of Origin (GOO) certificates across the EU, although, as currently
drafted, trading will be largely at the discretion of Member States.
If the targets are to be met in a sustainable way which is acceptable
to consumers, a key component must be the cost effectiveness of
delivery which will be enhanced by the ability to trade renewable
energy effort via GOO certificates. We note the conclusions of
the recent Pöyry report on behalf of BERR on the compliance
costs of meeting the 2020 renewables target which states: "On
the basis of the Commission burden sharing, the cost to the UK
increases by around 34% from €5.0 billion to €6.7 billion
if trading is not a viable alternative."[1]
Trade in GOOs must not be unnecessarily restricted.
9. In addition appropriate financial support
mechanisms will be required to incentivise investment. It is imperative
that current renewable investment plans are not delayed or discouraged
by uncertainty about the policy framework. On this basis, E.ON
UK would prefer to see a continuation of the Renewables Obligation
(RO) as the primary financial support mechanism for renewable
electricity which will need to be developed further if the target
is to be met. However we do not rule out other forms of support
for very large long lead-time capital projects such as the Severn
Barrage.
How coherent are these proposals in the context
of the EU's energy policies in general and the Third Energy Package
in particular?
10. The renewable energy targets could have
the effect of diverting investment from other potentially more
economic means of delivering carbon savings. Under this scenario,
it would raise the overall cost of achieving the EU's climate
change targets, which would not be consistent with the EU's objective
of maintaining an internationally competitive economy. It will
be important to ensure that support for renewables results in
reductions in technology costs which reduce the long term cost
of renewables. Furthermore there must also be adequate incentives
to invest in other low carbon technologies and Member States must
aim to meet in full the targets set out in the Energy Efficiency
Action Plan.
11. It is important that all the elements
of the green package form a coherent whole. In particular the
EU's 20% renewable energy target and the 20% GHG emissions reduction
target and the associated reductions in emissions required under
the EU ETS have to be consistent. An unexpectedly high level of
carbon abatement from the renewables target could deliver the
reduction effort expected of the EU ETS. This could significantly
reduce demand for EU emission allowances (EUAs) and result in
a low or zero carbon price, reducing incentives to invest in or
operate other lower carbon technologies. As the green package
is considered by the Council and European Parliament, it will
be important to ensure that the targets maintain a credible price
for carbon.
To what extent are these targets capable of improving
the EU's security of energy supplies?
12. E.ON UK agrees with the Commission that
achievement of the Renewable Energy target would improve the EU's
security of energy supply in that renewable energy will reduce
dependence on imported gas and oil and contribute to diversity.
However, this may to some extent be balanced to the extent that
the EU or the UK becomes reliant on a large proportion of relatively
new technologies, such as offshore wind, which may be less reliable
in operation in its early stages of commercial deployment. Policies
to deliver the target should include a focus on ensuring long-term
reliability.
GRID ACCESS
How effective has the existing legislation (2001/77/EC)
been in encouraging grid access for renewable energy generators?
13. In general the existing legislation
has had little effect in encouraging grid access as its provisions
state that Member States "may also provide for priority access
to the grid system of electricity produced from renewable energy
sources".[2]
Whilst the existing Directive does state that the transmission
operator should give priority to renewables when dispatching plant,
this is not relevant to the self dispatch market based approach
within the UK which allows renewable generators themselves to
determine when they want to generate. The UK's current access
arrangements are technology neutral and seek to prioritise those
projects that are able to use the system the soonest. The transmission
operators have obligations in their licences that do not allow
them to discriminate between technology types.
14. Growth of renewable generation that
is connected to the distribution network has been steadily achieved.
The main issue with obtaining a distribution connection is overcoming
local project specific connection and grid reinforcement issues.
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?
15. The main transmission-related barrier
to the growth in renewable generation is the lead time associated
with achieving planning consent for, and the construction of,
major grid upgrades. This can often be many years longer than
the development and construction time required for an onshore
renewable generation project. BERR and Ofgem have commenced a
review of transmission network access in the UK, to look at ways
in which the capacity of the existing network can be further shared
between existing and new generation projects in advance of and
in parallel with the need for further upgrades to the electrical
network infrastructure. The main balance to strike is between
the ability to connect additional generation, the costs to the
consumer associated with constraining off generation owing to
insufficient network capacity and the need to maintain network
reliability and safety for security of supply.
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?
16. The level of use of system charging
in the UK is determined on a cost reflective basis. This means
that parties that are seeking to use the transmission system bear
their appropriate share of the costs that they impose on the transmission
network. This provides a locational signal that helps to ensure
the long term economic efficiency of the network, where generation
that is located further away from demand must pay more as more
network is required to transport the energy to the demand centres.
17. In the UK the main demand centres are
in the south of the country, with the majority of the onshore
renewable development occurring in Scotland. There is presently
a ∼10GW queue of renewable generation
projects in Scotland that are at various stages of development
and seeking to connect to the grid. In the context of the overall
UK energy market, the higher use of system charge in Scotland
does not itself appear to be a barrier to bringing these projects
forward. Conversely renewable generation projects seeking to connect
in the south, closer to the demand centres, are encouraged to
do so as they would incur lower use of system charges.
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?
18. In the UK, the transmission companies
have a licence obligation to plan reinforcement and operation
of the network in accordance with the Security and Quality of
Supply Standard (SQSS). This is a deterministic standard that
ensures that an appropriate balance between the requirements to
connect additional generation, the costs associated with constraining
off generation owing to insufficient network and the need to maintain
network reliability and safety for security of supply is achieved.
It is worth noting that a cost benefit analysis supplements the
deterministic standard to aid determining an appropriate and acceptable
level of constraint costs.
19. The SQSS is presently being reviewed
by the three transmission licensees in the UK to determine the
appropriateness of the assumptions made in the standard for modelling
intermittent generation sources, such as wind. The extent to which
the SQSS can accommodate additional renewable generation depends
on the assumptions made on the diversity and load factor of the
renewable generation sources, particularly intermittent generation,
and the difference in cost between additional network reinforcement
and network constraint costs arising from insufficient network
to secure demand.
20. In order to connect to and use the transmission
system in the UK, a party must hold an agreement with the transmission
operator for Transmission Entry Capacity (TEC). The TEC is provided
on an "invest and connect" basis, whereby appropriate
network reinforcement is completed before a generator is permitted
to connect and export to the network. This ensures that the level
of network constraint costs will not be unduly increased, as these
costs may not be borne by the party that is connecting, but instead
are paid by other market participants that are not deriving a
direct benefit from the connection of that generation, giving
rise to an indirect subsidy. The issue of constraint costs is
significant in the UK pay as bid market mechanism for managing
network constraints.
To what extent is further co-ordination of National
Regulatory Authorities needed?
21. In our view, it should be left to national
regulators to approve national grid access arrangements in light
of the requirements of EU legislation, guidance or codes developed
at the EU level, except where trade across Member States is an
issue. Coordination of approach can be achieved through the European
Network for Transmission System Operators (ENTSO) and the Agency
for Cooperation of Energy Regulators (ACER) proposed in the third
package.
How far do current regulations inhibit access
to the grid?
22. The primary cause of delay in terms
of grid access has been the extended timescale for securing planning
approval and for construction of transmission upgrades. Some improvements
in transmission access arrangements are possible but these need
to be at an acceptable cost to the consumer, as discussed above.
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?
23. The EU should in principle move toward
a more harmonised approach to renewable support as this would
be consistent with an efficiently functioning internal energy
market. However, shifting to a fully harmonised approach now would
create uncertainty for investors and render the targets more difficult
to achieve. Therefore we can expect both quota based systems such
as the renewable obligation and feed-in tariffs to continue to
operate across the EU to meet the 2020 targets. Nevertheless the
draft directive does enable, subject to certain conditions, trading
between Member States despite different support schemes being
in operation. Allowing the trading of GOOs will not only provide
the flexibility to facilitate credible and efficient renewable
investments, but will lead to a degree of convergence over the
value of the renewable support schemes across the EU. However
the extent to which this occurs will be down to the market rather
than through regulation.
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?
24. In the UK, the RO has successfully stimulated
growth in the lowest cost renewable technologies including landfill
and sewage gas, co-firing of biomass and onshore wind. Before
the RO was introduced in 2002, the UK had less than 2% electricity
from renewable sources. Today renewables represents around 5%
of electricity. However the limited support available for renewable
heat to date has prevented this sector from fulfilling its potential.
25. The growth in renewables particularly
from onshore wind would have been substantially greater if the
planning system was more efficient, and we are supportive of the
government's reforms contained in the Planning Bill which are
designed to increase the efficiency of the process for larger
scale projects in particular. Furthermore growth in renewables
has been held back by grid constraints. Clearly this needs to
be addressed to ensure that projects can connect to the grid in
a timely and efficient manner. Without a significant investment
in the grid infrastructure, the UK will not be able to deliver
the 2020 targets.
26. The introduction of banding to the RO
has been required to stimulate investment in offshore wind and
dedicated biomass, two renewable technologies that have the potential
to make a significant contribution to the energy sector. Without
the changes contained in the current Energy Bill, offshore wind
would require additional financial support such as capital grants
to enable such projects to be sanctioned.
27. Renewable development in Germany has
been supported through feed-in tariff and this has led to a substantial
development in onshore wind capacity as well as other technologies
such as photovoltaics. However there has been limited offshore
development hitherto. This approach has been in place for longer
than the UK and planning and transmission constraints have been
less significant issues. Given that the UK has adopted the Renewables
Obligation which is incentivising large volumes of renewable development,
that its structure has been amended 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. Support for some technologies in Germany, for example
photovoltaics, have been extremely generous and we question whether
this would be seen as an effective use of customers' or taxpayers'
money in the UK.
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?
28. The challenge of delivering the renewable
energy targets will require a significant level of domestic effort
in each Member State. Nevertheless the ability to trade via GOOs
will help to minimise the cost of meeting the target. The development
of GOO trading is not conditional upon a harmonisation of support
mechanisms. The draft directive permits trading of GOOs even though
Member States will be operating different renewable support schemes.
In our view there are other more fundamental barriers which must
be addressed which we have discussed above.
To what extent would the enhanced use of Guarantees
of Origin certificates require the harmonisation of support schemes?
29. The trading of GOOs can operate alongside
mixed national support mechanisms. Therefore we believe that the
Renewables Obligation in the UK can operate alongside other support
mechanisms whilst still permitting the trading of GOOs.
30. As the directive is currently drafted,
a producer in Ireland who sold a GOO certificate to the UK market
would not receive the income stream from the feed-in tariff. Instead
the producer would be entitled to the value of the GOO which would
be determined through negotiation with the counter-party from
the UK. The GOO would count towards the UK contribution but would
be excluded from the production of renewables within the Irish
market. This demonstrates how two different support mechanisms
can operate whilst enabling the trading of the GOO certificate.
21 April 2008
1 http://www.berr.gov.uk/files/file45238.pdf Back
2
http://eur-lex.europa.eu/pri/en/oj/dat/2001/l_283/l_28320011027en00330040.pdf Back
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