Select Committee on Environmental Audit Minutes of Evidence

Supplementary memorandum from Innogy plc

1.  Could you clarify whether in referring to a "15 year life" in your response, you are referring to investment horizons, rather than the Renewables Obligation?

  The reference to a "15 year life" relates to the remuneration period over which a capital-intensive investment such as a wind farm would typically be assessed. For hydro projects this is likely to increase to 25 years or longer. Consequently, while the Renewables Obligation is proposed to be in place until 2027, there remains the risk that it could be changed by successive Governments as it will be implemented by an Order laid before Parliament rather than through primary legislation.

2.  Dr Count refers to Innogy supplying "25 per cent" of UK electricity. Could you confirm this figure?

  According to Ofgem[1], the acquisition of Northern Electric's supply business by Innogy in August 2001 increased Innogy's domestic electricity customer base to approximately 5.5 million, a quarter of the GB domestic electricity market by customer numbers. Innogy's supply business has approximately 19.6 per cent of supply to domestic electricity customers in Great Britain by volume and about a quarter of the supply market to Industrial and Commercial customers in GB by volume consumed.

3.  Please could you provide a note on the issue of planning consents in Wales? It would also be helpful if you could extend this note to include a comparative view on differences between England, Wales and Scotland.

  British Wind Energy Association (BWEA) figures indicate that since mid-1999 only four out of 18 wind farm planning applications in Wales have been consented; eight have been refused and six are still undetermined and awaiting planning inquiries or the results of planning inquiries. Two of these inquiries involve National Wind Power (our wind power subsidiary) sites, Cwm Llwyd and Gelligaer, which we submitted for planning in 1998-99 but neither has yet been determined. The planning history of these two projects is typical of our experience with wind farm planning applications in Wales.

  Cwm Llwyd was submitted with its comprehensive Environmental Impact Assessment (EIA) in December 1998 and was called in by the Welsh Office early in 1999, before the local planning authority could vote on it. We had to wait until January and March 2001 for the inquiry to take place (in two parts) and we are still waiting for the decision, though we were told several months ago that the Inspector's report and recommendation had been sent to the Welsh Assembly planning department. On a project the size of Cwm Llwyd (30 MW) each year's delay results in significant revenue losses.

  The planning application for our 20 MW Gelligaer project in South Wales was submitted (with its full EIA) in July 1999; although planning applications should be determined within 4 months it was 21 months before the application was considered. The planning authority, Merthyr Tydfil CBC, voted 18 to 12 in favour of the project on March 7 2001 and it was called in for inquiry on March 12. We have yet to be given a date for the inquiry, but it will be at least 18 months before an inquiry is held and the decision made.

  The success rate of wind farm planning applications in England is similar to that for Wales, but the Scottish planning system has been more willing to recognise the importance of the clean energy benefits that wind farms provide. DTI statistics show that seven out of 12 (ie 58 per cent) of the projects that won SRO contracts in 1994 were consented and operational by December 2000. By contrast only nine out of 31 (ie 29 per cent) of the projects that won NFFO3 contracts in 1994 were operational by the same date, ie December 2000.

4.  Please could you provide a note on how to promote awareness and public understanding among domestic customers?

  The carbon emissions issue is not an easy issue to get across to domestic consumers in a meaningful way. Many householders do not believe that their efforts would have a meaningful effect. Perhaps the challenge is to do for energy efficiency what has been done for DIY and gardening—ie a high profile investment in prime time broadcasting, either as programmes or advertisements. The cost would be high but a clever creative treatment could demonstrate the benefits. The benefits to households should be emphasised first, such as increased value of the property and reduced bills for example. The benefit to the environment could be concentrated on after that—ie the practical outcome for the environment resulting from the individual's actions, measured in a way that people can relate to.

5.  How might the Home Energy Conservation Bill affect Innogy as a company?

  The Bill concerns the Home Energy Conservation Act 1995 which places targets on District, Borough and Unitary Councils to achieve improvements in energy efficiency by 2010, for homes in their area. The Bill seeks to strengthen the Act by moving from ministerial guidance to a statutory duty. It seeks to bring about greater co-ordination to the problem of houses in multiple occupation through a system of licensing. There is no new policy associated with it and it will have no effect on public spending—the emphasis is on productivity improvements/reduction in bureaucracy and increased focus on energy efficiency and fuel poverty.

  The effect on Innogy/npower is likely to be limited to:

    —  requests from local authorities for EEC schemes/funding (and we have a limit on what we can allocate);

    —  a formal requirement for us to provide information on our energy efficiency programmes for each local authority, so that each can complete their HCA returns (this could be a cost issue if no centrally held database is developed by the Energy Saving Trust/Electricity Association); and

    —  requests for fuel poverty programmes in their area. Our Health Through Warmth programme and sponsorship of Warm Zones, which are partnerships with NHS and local authorities, put us in a good position to respond to these requests, however resources are limited and local authorities may make more demands than the industry can afford to support.

6.  What examples of grandfathering rights can you point to in European countries other than Turkey?

  In terms of an environmental example of the application of grandfathering rights, this was a guiding principle in the design of the Danish CO2 emissions trading scheme. The initial allocation of emissions allowances to existing electricity producers was grandfathered on the basis of historic emissions over the period 1994 to 1998.

  Grandfathering has also been used in the regulation of other industry sectors within Europe. Examples include the allocation of quotas under the EU and UK Milk Quota Regulations and the allocation of UK airport landing and departure slots.

7.  How much consideration has Innogy given to investment in other forms of renewable generation, such as biomass, and how do costings currently compare?

  Innogy has considered other forms of investment in renewable generation. The available resource and current economics of renewables dictate that onshore and offshore wind will form the majority of new build under the Renewables Obligation, although there is likely to be a requirement for capital grants to kick-start investment in early offshore wind projects. While landfill gas and small hydro projects are viable, the availability of suitable sites is the major constraint. Biomass projects are unlikely to be economic under the Renewables Obligation without both capital grants and agricultural subsidies. We anticipate that biomass projects would require a generation price in excess of £60 per MWh as compared with £25-40 per MWh for onshore wind.

8.  In your response you say that "CHP merits some support". Are you in favour of a CHP Obligation? If not, what form of support do you suggest?

  In the short term Innogy believes that the viability of CHP should be improved by modifying the NETA balancing mechanism through the adoption of a single cash-out price, reducing gate closure to one hour or less and allowing ex-post notification of contracts.

  The heat output and a significant proportion of the electricity output from CHP are utilised by the host site. Consequently, it is difficult to see how a CHP Obligation on electricity suppliers could be designed which would be an effective support mechanism, given that this could only be associated with surplus electricity sold through the wholesale electricity market.

  We believe that any medium-term support mechanism for CHP should recognise benefits of the associated carbon savings and translate these into a financial benefit to the plant operator.

  In the longer term, as emissions trading markets develop, increasing constraints on carbon emissions should mean that the value of carbon in such markets eventually becomes sufficient to ensure the appropriate remuneration of CHP plant. However, this is unlikely to happen in the current decade.

9.  You say that you "see less of the exercise of that secondary [environmental] duty from Ofgem". In what ways do you think Ofgem could take more account of this duty?

  The Utilities Act 2000 placed secondary duties on Ofgem to promote the efficient use of gas and electricity and to have regard to the effect of licensed activities on the environment.

  The general broadening of the duties of regulators to encompass economic, social and environmental effects is attractive in terms of promoting sustainability but inevitably blurs the edges of previously well-defined roles. Whilst it is desirable for all regulators to have regard for the environmental effects (or social or economic effects) of how they discharge their primary duties it is also desirable to have clarity in who is responsible for setting environmental policy and who is responsible for implementing it.

  The problem area is more likely to be in implementation where the actions of agencies such as Ofgem and the Environment Agency have the potential to overlap and potentially create conflict. Avoiding contradictory regulatory pressures on industry will require close ongoing consultations between them. If this does not happen the outcome will be increased uncertainty, risk and cost.

  The introduction of competition into gas and electricity markets is well advanced and regulation (essentially as substitute for competition) should now focus on areas of natural monopoly, the pipes and wires businesses. A broader range of secondary duties (social and environmental) should not be a reason for a regulator to remain in areas where their primary objective has been achieved. Although Supply is sufficiently competitive for Ofgem to remove price controls they have produced draft guidelines on Green Supply Offerings in the context of the Renewables Obligation which if followed would deter suppliers from promoting green electricity. That would not help deliver the challenging targets for renewable energy.

  Given their duty to promote competition, environmental areas where Ofgem should be focusing are:

    —  ensuring implementation of environmental policy does not unnecessarily distort or dilute competition in gas and electricity markets. Examples of this are inappropriate application of emission abatement standards and support for particular fuels or technologies;

    —  promoting the development of emissions trading mechanisms compatible with the existing gas and electricity markets;

    —  developing market mechanism that facilitate delivery of energy and environmental policy such as modifying NETA (and designing BETTA) to assist CHP and renewables; and

    —  assisting the development of energy services to deliver efficiency improvements by removing barriers such as the 28-day rule.

1   Source: August 2001: Innogy Holding plc's proposed acquisition of the electricity supply business of Northern Electric plc: A consultation paper by Ofgem. Back

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 8 April 2002