Memorandum by Centrica
GENERAL QUESTIONS
1. How achievable are both the EU's general
20% and the UK's national 15% renewable energies target?
The UK objective of 15% renewable energy by
2020 represents a challenging but achievable target. As yet is
unclear precisely how this figure will be achieved as the capacity
of the three different sectors (heat, transport and electricity)
to deliver is still being assessed. Centrica's interests in the
sectors contributing to the UK target are predominantly large-scale
wind projects, and microgeneration technologies, particularly
those providing heat. We offer the following brief comments on
the potential in each of these areas which are expanded on elsewhere
in this response.
Large-scale wind
It is our understanding that around 40% of the
UK's total electricity requirement will need to be generated from
renewable sources. Wind power is currently the most economically
viable and scaleable renewable technology and will play a major
role in meeting the target.
Centrica has already made a significant commitment
to develop renewables assets as part of our energy portfolio.
In July 2003 we announced plans to invest in our own renewable
generation assets, primarily offshore wind farm developments although
we continue to keep other forms of renewable energy generation
under review.
We are currently investing in six offshore wind
farm developments, one of which, Barrow Offshore Wind, is now
operational. Two others, Lynn and Inner Dowsing (LID), are in
construction, and are expected to be fully commissioned by the
end of the year. This is currently the world's largest offshore
wind construction project.
Of the remainder, Lincs had its application
for consent submitted in January 2007, and we are awaiting determination,
whilst Race Bank and Docking Shoal will have their consent applications
submitted this year, based on detailed environmental impact assessments.
Barrow is a joint venture development with the Danish energy group
DONG; all other projects are wholly owned by Centrica.
We have two operational wind farms onshore in
Scotland, the wholly owned Glens of Foudland wind farm in Aberdeenshire,
and Braes of Doune wind farm in Stirlingshire in which we acquired
a 50% ownership from Airtricity in July 2007.
We are also investing in a range of power purchase
agreements with renewable electricity developers which will increase
the amount of green electricity that we buy through offtake contracts
in the UK over the next five years. These projects cover a diverse
range of technologies such as wind, landfill gas and biomass generation.
Centrica believes that the UK electricity sector
is capable of rising to the challenge of deploying renewable projects
at scale over the next decade, though this will require significant
effort from all stakeholders to remove barriers to investment.
It also requires that firm investment decisions be made in the
very near future on areas such as grid and in elements of the
supply chain. For this reason it is of utmost importance that
investors are clear of the Government's ambitions in this area,
and have confidence that these ambitions will be unswerving.
Building offshore wind costs around three to
four times that of gas-fired plant. To meet the targets, therefore,
industry will need additional government support through a strengthening
of the existing Renewables Obligation targets and extending the
timeframe past 2027. This will signal the long-term nature of
the UK renewables sector and, if set at the right level, should
encourage the necessary investment in projects, skills and in
growing a UK supply chain. A high and visible carbon price going
forward would also help the economics of renewables.
In addition, an effective, streamlined planning
system which allows the delivery of both offshore and onshore
infrastructure is crucial. A new consenting regime will need to
better manage stakeholder conflict which has characterised many
developments in the past. Fishing, shipping and radar concerns
from MoD and NATS are all potential barriers to the early implementation
of new wind projects.
Microgeneration
The sheer size of the heat market as a proportion
of the overall energy market (around twice the size of the electricity
market in energy terms) means there is significant scope for the
heat market to make important contributions to both the 2020 Renewable
and 2050 Carbon Targets, both through continued energy efficiency
improvements and through the deployment of low carbon and renewable
microgeneration.
In order to stimulate the widespread deployment
of microgeneration technologies, an appropriate support framework
is vital. Any effective support mechanism for microgeneration
will need to recognise the specific deployment issues involved,
and the differing needs of different microgeneration technologies.
Barriers to microgeneration include the often
high up-front capital costs, as well as regulatory issues (including
problems with planning and high transaction costs for accessing
ROCs), and a lack of consumer understanding about what can be
achieved in this area. All of these barriers will need to be addressed.
The Government currently provides support to
some technologies such as offshore wind in excess of the price
of carbon avoided. This is done when these technologies offer
additional benefits such as diversity of supply, technological
learning, and creation of a UK export industry. Where other technologies
provide similar benefits then a similar level of financial support
should be available. We believe this is the case for a number
of renewable heat technologies.
Whilst the 2% additional innovation band for
microgeneration in CERT is a positive step, we do not believe
that this is sufficient to bring about a market transformation
in this sector, and do not believe that CERT should be viewed
as the primary support mechanism for microgeneration. Additional
assistance will therefore be required.
Assistance could be in the form of either capital
support or revenue support. We see merit in both and would work
within either framework to deliver products to our customers.
The most often mooted revenue support mechanism is a feed-in tariff.
The effectiveness of this mechanism is likely to depend on the
level at which it is set, and its operation.
Suppliers, who have an existing relationship
with customers, are best-placed to administer a feed-in-tariff
scheme. Allowing suppliers to reclaim revenue paid out to customers
from a central fund is crucial. If the scheme is not funded centrally,
suppliers may be disproportionately disadvantaged and unwilling
to promote microgeneration technologies as a result. The scheme
could be funded from general taxation, although we note the significant
revenues that are likely to be raised from auctioning emission
allowances in the future and believe that this could be a source
of future support.
A feed-in-tariff would provide an ongoing revenue
stream for a defined period. We believe that if the appropriate
revenue were guaranteed, suppliers and others would actively consider
introducing services designed to lower the capital cost of relevant
technologies.
Trading of Guarantees of Origin
There is scope for part of the UK requirement
to be delivered via trading with other countries but at this stage
it is unclear how much trading will take place. Trading across
the EU could be a cost-effective way for the EU as a whole to
meet its targets, but this needs to be reconciled with the need
to keep existing investments in home countries on track. The Directive
allows for limited trading with countries outside the EU under
strict conditions including the import of the electricity generated.
Centrica does not oppose this level of trading, but we strongly
oppose any amendment of the EU Directive to allow more widespread
international trading. We believe this would undermine some of
the objectives of the Directive, particularly in reducing dependence
on fuel imports, and security of supply, and could significantly
undermine investment within the EU.
Furthermore, meeting the UK target predominantly
from projects within the UK will have additional benefits in terms
of improving security of supply and building a domestic capability
and capacity in the renewables sector, bringing value to UK plc.
These benefits will be lost if the domestic target is diluted
through trading. Potential UK investors will need to be confident
that the UK government is serious about meeting the target before
committing resource in this country.
We also have a concern that the potential for
trading within the EU will not be known until the middle of the
next decade. As we have already stated, we believe that the scale
of the deployment required is extremely challenging, and requires
firm action to be taken in the short term. Anything that throws
doubt on the necessity for such deployment will undermine chances
of achieving changes of the scale necessary.
2. How coherent are these proposals in the
context of the EU's energy policies in general and the Third energy
Package in particular
There are four areas of the EU's energy policies
that will have an important bearing on the renewable energy targets.
These are the Emission Trading Scheme, energy efficiency, energy
liberalisation and energy security of supply.
Investment in lower-carbon technologies including
power generation will depend ultimately on a strong and visible
carbon price. The European Commission's proposals setting out
a framework for Phase III of the Scheme beyond 2012 strengthens
the ETS significantly.
Centrica welcomes those measures and hopes the
UK will use its considerable influence in Europe to ensure that
the Scheme is not weakened during its forthcoming negotiation
phase.
The most cost-effective solution to climate
change is to improve energy efficiency. The government has provided
a strong impetus for action in the UK, notably through the suppliers
CERT programme which will see energy companies spending £1.5
billion over the next three years promoting reductions in carbon
emissions and installing energy efficiency measures in customers'
homes.
At the EU level more action may be required
to ensure that other member states take greater advantage of this
underdeveloped source of lower carbon emissions.
The European Commission identified a number
of pre-requisites for adequate new entry by electricity generators
that do not exist in many continental energy markets. These include
access to electricity networks on non-discriminatory terms as
well as ensuring that the necessary network investments are carried
out.
The removal of these deficiencies is being driven
forward by the EU via its Third Energy Package. The Commission's
proposals for ownership unbundling remain the cleanest and surest
way of ensuring the necessary cross-border investments to deliver
security of supply, liberalised markets and the delivery of a
low carbon future. The UK is to be congratulated for its support
of the Commission's proposals.
Care will be needed at the EU level to ensure
that delivery of the EU targets for renewable energy does not
undermine the EU ETS which could be the basis of a global carbon
market, and the source of support for low carbon technologies
in the future.
3. To what extent are these targets capable
of improving the EU's security of energy supplies
Renewables could have a significant positive
impact on security of supply in the UK and elsewhere in the EU.
At the current time, around 25% of Europe's
gas needs are being met from east of the EU. Over the coming decade
both the UK and the EU are forecast to be increasingly dependent
on imported gas. By 2015 the UK will be importing as much gas
as it produced in 2007, although meeting the EU renewable target
will have some impact on this. Moving to a renewable electricity
target of around 40% would drop load factors for coal and gas
plants dramatically—gas fuel use could drop by around 50%
from 2007 levels by 2020/25 from a combination of wind and new
nuclear build.
This reduced UK gas dependency will increase
the diversity of the UK's fuel mix, and furthermore will mean
that a large proportion of its energy requirements come from sources
where the fuel is free. Given the need for conventional back-up
to renewables, additional conventional generation will need to
be planned for going forward.
GRID
4. How effective has the existing legislation
(2001/77/EC) been in encouraging grid access for renewable energy
generators
Directive 2001/77/EC on the promotion of renewable
electricity covers a number of areas, including renewable targets,
support schemes and grid system issues. With regards to grid system
issues, the UK has opted to provide non-discriminatory grid access
for all forms of generation and does not give preferential treatment
to renewable generation.
However, in practice renewable generators do
have priority with regards to the transportation of electricity
because by putting in expensive (unattractive) bids and offers
in the Balancing Mechanism, these generators are unlikely to be
constrained off when National Grid has to take action to balance
the transmission system.
It is important that a balance is met between
conventional and renewable generation, not least because the former
is still required to provide back-up for renewable energy which
is mostly of a variable nature. Renewable generation without adequate
reserve or backup would have security of supply issues.
5. 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?
As identified by the Energy White Paper and
confirmed by the Transmission Access Review carried out by Ofgem
and BERR, access to the transmission system is a significant barrier
for both renewable and conventional generation. Currently there
is more than 40GW of projects (both renewable and conventional)
waiting to connect to the transmission system with connection
dates which extend beyond 2018.
To replace existing conventional generation,
and to provide necessary back-up to new renewable generation,
around 22.5GW of conventional power stations will need to connect
by 2020 in locations which are often remote and distant from centres
of demand and/or current generation locations. Centrica believes
that new access arrangements should support the connection of
renewable generation, but at the same time not undermine investment
in existing and new conventional generation, in particular as
intermittent renewable generation requires back-up from conventional
generation.
6. 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?
Both renewable and conventional generators pay
for the use of the transmission system (Transmission Network Use
of System (TNUoS) charges) and for balancing services provided
by National Grid as System operator (Balancing Services Use of
System (BSUoS) charges).
The TNUoS charge has a both a locational and
a non-locational element. The locational element is to encourage
generators to connect in areas close to demand as this would require
less transmission infrastructure than generation located in more
remote or peripheral areas. The further away from demand, the
higher the TNUoS charge and in addition the more electricity is
lost as a result of transporting electricity over long(er) distances.
This is true for both renewable as well as conventional generation.
Centrica believes that the locational element
of the TNUoS tariffs is non-discriminatory and gives a transparent
investment signal.
In the UK constraint costs are already considerable,
in particular because of the high level of (renewable) generation
in Scotland compared to Scottish demand and the limited capacity
of the Scottish interconnectors. Under the current regime, these
constraint costs are socialised via BSUoS charges across all generators
and suppliers. A further increase in generation in Scotland will
most likely exacerbate the problem and result in even higher BSUoS
charges.
7. 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?
As much of the UK transmission system is coming
to the end of its asset life, in addition to the work needed to
extend the network for new projects, National Grid also has to
replace the existing network. This puts pressure on resources
and equipment. This has been exacerbated by the Regulatory requirement
to only invest in efficient and economic reinforcement, as signalled
by signed connection agreements.
The Transmission Owners have not been allowed
to invest strategically, ahead of the predicted growth in renewables,
and this is now impacting the ability to provide connections in
the required locations. Consideration should be given to allowing
Transmission Operators funding for planning and public inquiry
costs and perhaps even network reinforcement costs before individual
connection agreements are in place.
8. To what extent is further co-ordination
of National Regulatory Authorities needed?
It is important that the UK takes into account
the regulatory regime in other EU countries. There is a danger
that if the UK regulatory regime becomes too complicated and/or
creates uncertainty (for example the proposed offshore regime),
investors and developers will spend their money elsewhere.
9. How far do current regulations inhibit
access to the grid?
Getting planning consent is also a major issue
for both generators and National Grid and is being addressed by
the Planning Bill currently before Parliament, although it is
uncertain how effective this bill will be in addressing the problem.
As part of the Transmission Access Review the
industry, with National Grid, is making a number of improvements
to the existing transmission access regime. For example, changes
to the transmission access queue process have been made recently,
moving away from a solely first come first served basis to one
that also reflects a generation project's progress. This should
help a number of renewable projects, with consents, to leapfrog
other connections delayed due to issues such as planning.
SUPPORT SCHEMES
10. At what level should the EU be involved
in harmonising or regulating support schemes offered by Member
States to encourage renewable energy generation?
The EU target places a collective responsibility
on member states to tackle climate change. Each country has very
stretching targets with an appropriate share the burden of delivery
and the legally binding element of the framework ensures that
there is a significant penalty for inactivity. This means that
the EU regulation of the renewable energy framework is central
to ensuring that all countries deliver.
Individual member states can choose how to meet
their targets through a combination of relative effort on, for
example, energy efficiency, electricity and transport. This allows
each country to maximise the indigenous renewable resource and
ensures the most cost-effective delivery of the target. Having
decided how to meet the target, each country can implement national
support mechanisms that will best deliver the targets, taking
into consideration additional and non-fiscal barriers and the
extent to which they can be overcome. The RO, for example, works
particularly well in a liberalised market as in the UK.
The EUETS has taken a similar approach in setting
a national target, and then allowing individual member states
to deliver the target as they see fit, an approach we support
and which we believe to be successful.
We note that a major barrier to the delivery
of an increase in renewables is the need to ensure public acceptability
for both the costs of meeting the targets, and the physical impact
of, for example, significantly more wind turbines. This may be
more difficult to achieve if a forced harmonisation gives the
misleading impression the targets are a Brussels initiative.
11. 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?
There is no doubt that there is a marked difference
in the level of take-up of renewable energy across member states.
Fundamentally, we do not believe that this is a measure of the
effectiveness of the national support schemes, but is a reflection
of other barriers to deployment such as grid connection, planning
permissions and public engagement.
Each country has varying motives for implementing
renewable energy programmes, with climate change and security
of supply being sometimes conflicting strategic objectives. In
the same way there are a wide variety of barriers to development
that exist across member states with grid constraints, local planning
consent, national planning decisions, consumer engagement, renewable
resource availability, and supply chain issues each having a different
impact in different countries.
The lack of development in the UK is often compared
to a high take-up in Germany where a system of feed in tariffs
is seen to have been effective in bringing on significant renewable
investment against a "failing" RO in the UK. We believe
that it is wrong to assume that this is because feed-in tariffs
work and the Renewables Obligation does not as other factors are
at play.
This fundamentally understates the additional
encouragement that German developers receive in the form of easy
and cheap access to the grid, low cost finance for developments
and relaxed planning constraints. By contrast, each of these three
areas represents significant barriers to development in the UK.
Indeed, there are around 8 GW of developments
that are held up in the UK planning system, many renewable projects
have grid connection dates that extend out to 2018 (for which
developers have to securitise the costs), and there are no additional
finance benefits offered to developers outside the RO.
Centrica believes strongly that the development
of large-scale renewables should continue to be supported under
a reformed and banded RO.
Maintaining but reforming the existing system
will allow a continuous flow of investment, will maintain investor
confidence, and is consistent with the parameters of a competitive
market. Under a banded RO, suppliers will remain obligated to
deliver renewable generation, thus encouraging their participation
in renewables.
We believe that the RO provides a mechanism
that works well in our liberalised energy market and is not the
source of construction delays. We believe that with some modification
it is capable of being extended to meet the EU requirements. Any
move to radically change the support mechanism is likely to result
in a market damaging hiatus in renewable build, as investors struggle
to get comfortable with new parameters. This would occur just
at the time when we are trying to accelerate the development of
projects and could jeopardise the UK's achievement of the EU targets.
Mega-projects, such as the proposed Severn Barrage
project which have limited potential to be copied elsewhere and
are characterised by their enormous size, should be supported
outside the RO. If allowed into the RO scheme, these projects
will either produce a significant amount of generation thus potentially
flooding the market with ROCs (and causing a price crash), or
no generation, potentially starving the system of ROCs (and causing
a price spike). Either way, the existing system would be destabilised,
threatening existing investments.
12. 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?
There is currently a significant volume of renewable
power traded across EU borders and between member state and non-EU
countries. In principle, Centrica does not believe that this cross-border
renewables market will be affected by the existence of a variety
of support schemes. However we are mindful that as a price is
attached to Guarantees of Origin, it would be inappropriate for
existing projects to receive high windfall benefits resulting
from the EU mechanism. We therefore support the EU framework in
restricting the tradable GoO to new plant only. This would not
prevent the trade of renewable power from existing projects, but
the GoO would not be transferred.
We do not believe that investment is hampered
by a lack of market harmonisation. The barriers to investment
in the UK are well understood and include difficulties in securing
consent to build, connecting easily to the grid, and sourcing
generators and ancillary equipment in an appropriate timescale,
and are not to do with the support scheme.
13. To what extent would the enhanced use
of Guarantee of Origin certificates require the harmonisation
of support schemes?
Centrica understands that the design of GoO
trading arrangements is such that it does not require the harmonisation
of support schemes. In the long run, we would expect harmonisation
to occur as all low-carbon technologies are supported by the carbon
price.
However, the system as devised enables each
country to continue and through the system of "Prior Authorisation"
protect the national support mechanism. In the UK, once a project
has opted for the RO as its support mechanism, it continues to
get support until the end of the RO (2027). If the project receives
ROCs, the Guarantees of Origin are automatically presented for
cancellation and cannot be traded.
This therefore requires the developer of a new
UK renewable project to decide between the RO support and the
opportunity to trade Guarantees of Origin on the European market
(provided the UK Government has granted Prior Authorisation).
In this way, we believe that the EU mechanism does not require
harmonisation of support schemes.
21 April 2008
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