Select Committee on Environmental Audit Appendices to the Minutes of Evidence


APPENDIX 46

Memorandum from Scottish Power plc

SUMMARY

  ScottishPower as one of the few UK utilities with practical experience across the complete energy supply chain in both the UK and also in the US, welcomes the opportunity to contribute to this inquiry. Energy policy should establish a long-term framework within which energy markets and regulation can be appropriately developed for a sustainable future. Our views on the headline issues on which this inquiry is focusing are as follows:

    —  The impact of recent developments in energy policy, such as the New Electricity Trading Arrangements and the Renewables Obligations, has been generally positive. However, certain issues such as the value of CHP and renewables under NETA, and the longer term strategic investment in electricity generation and networks need to be addressed as a matter of urgency.

    —  Current policies to support renewables are working well and have already created a more competitive market. This will assist emerging technologies such as off-shore wind. With a positive approach to network investment and planning procedures, the Government's target of 10 per cent by 2010 should be achievable.

    —  Current developments emphasise the need for "joined up" working between the parties involved such as DTI, DEFRA, Scottish Executive, and Ofgem. A long term energy policy framework would assist this process, to ensure for example that economic regulation is consistent with wider policy. This might require revised institutional arrangements such as the establishment of a separate agency with specific responsibility for energy policy issues.

    —  The outcome of the PIU Energy Review appears likely to provide strong support for further development of renewables and a step up in implementing measures to improve energy efficiency. However, we believe that there should be a continuing role for coal through the development of clean coal technology. This will ensure that the UK continues to participate in a major international market and hence that its future energy supplies are robust.

  A coherent long term energy policy which is market oriented and enables the value of each element to be properly taken into account is essential to ensuring that the UK has secure and sustainable energy supplies into the future, while meeting its environmental obligations. This will mean more support for new technologies to enable best use to be made of a diverse range of fuels, incentives to invest in the network to enable renewables targets to be met, and stable prices that properly reward both supply and demand side investment and protect customers from unnecessary price volatility. A sustainable energy strategy is likely to mean upward pressure on prices in the future.

1.  IMPACT OF RECENT DEVELOPMENTS

1.1  New Electricity Trading Arrangements (NETA)

  We consider that the overall effect of NETA on the UK electricity market has been generally positive. The operation of the balancing market has enabled a sound bi-lateral contracting base to become the foundation of the market. The initial volatility in balancing market prices has reduced and, while still penal, prices reflect the market value of imbalance. Sufficient power exchange liquidity has developed to enable market participants to reduce their exposure to imbalance costs.

  However, prices in the contract markets are currently well below the long run levels necessary to ensure that new investment is adequately rewarded. While forward prices in the market may eventually signal the need for new investment, it is by no means clear that this will occur sufficiently far in advance. The turmoil in the California electricity market last year indicates the result of relying on faulty market signals. In any event such cyclical behaviour whereby prices are below long run levels for a period (as at present) and then increase to above long run levels to encourage new investment, is unlikely to be in the best interests either of consumers or investors. What is required for a long-term energy policy is stable energy prices against which future investment both in the industry and the economy more generally can be planned with confidence.

  We recognise the problems suffered by CHP and intermittent renewable generators under NETA. However, it is important that all generators, large and small, fossil, nuclear or renewable have visibility of the value put on reliability of supply by the market. Final customers expect their electricity requirements to be met on demand, whether this comes from a renewable energy source or other. Therefore CHP and renewables should be assisted to comply with the incentives to balance, particularly if they are going to provide an ever increasing percentage of the market. To this end we welcome the initiatives being taken by the DTI and Ofgem to encourage and facilitate consolidation services for such generators. These will help to reduce their exposure to imbalance cash-out prices by combining their output with other generators and/or demands. At the same time, the value of CHP and renewables in helping to meet environmental objectives may need further recognition and support.

1.2  Renewables Obligation and Renewables Obligation Scotland

  In our view the Renewables Obligation and the Renewables Obligation Scotland represent good examples of how intervention to achieve a particular policy objective can be managed by a market-based approach. It also sets a good example in terms of long term certainty with the proposed level of the Obligation set out to 2011, the proposed minimum level set to 2027 and the statement from the Government that it has no plans to reduce the level of the Obligation once in force. The proposed Obligation, with the current buy-out price of 3p, when taken together with Climate Change Levy exemption will encourage the development of onshore and offshore wind generation but further support will be required for other technologies. This should be targeted at those technologies which have the prospect of becoming competitive to enable them to reach a stage of development where they can compete in the market.

2.  CURRENT POLICIES TO SUPPORT RENEWABLES

  The current policies to support renewables should enable the 10 per cent renewable target to be achieved by 2010, provided issues surrounding planning and network reinforcement are also addressed.

2.1  Planning Procedures

  A particular issue for renewables is gaining planning permission. While the onshore wind farm planning success rate in Scotland, with 66 per cent of wind farms gaining planning permission over recent years, is significantly better than in England and Wales over the same period this is still a major barrier to development. Government has recognised the important role that planning has to play if renewable energy targets are to be met and renewable energy planning guidelines in Scotland have recently been revised with the aim of striking the correct balance between local environment and Government energy policy.

  We welcome the progress that has been made in Scotland but still believe that further streamlining would be beneficial. It is important that any changes to planning processes fully take into account the associated network requirements to ensure that developments are not delayed because the network operator is having difficulty gaining planning permission for overhead line connections. ScottishPower recognises the importance of preparing the ground with local authorities, environmental organisations and local people before formal planning applications are submitted. In all our recent planning applications we have developed our proposals in consultation with these bodies before submission but still are faced with a prolonged process to obtain approval.

2.2  Network Connections

  Under present rules, the cost to renewable developers of connection to the electricity transmission or distribution network for otherwise suitable renewable generation sites will limit the development of renewable generation throughout the UK. This would make longer term targets such as 20 per cent renewables by 2020 unachievable. Therefore a long-term strategy is required to incentivise investment in the electricity network to support the future development of both renewables and distributed generation more generally, and guarantee an appropriate sharing of costs. This should take account not only of the location of renewable resources, which are largely in the north of the country, but also of the need for distribution networks to become more active as increasing generation is connected to them.

  There are a number of areas throughout the UK where it is clear that significant network reinforcement would stimulate renewable development. For example, our own network in the south west of Scotland is also likely to come under increasing pressure to accommodate further renewable energy developments and there will come a time when the existing network simply cannot cope unless a major infrastructure upgrade takes place. Network operators require a long term commercial and regulatory agreement to allow the infrastructure to be developed in a strategic manner as opposed to piecemeal, with costs being shared appropriately among all customers in the UK.

  To this end we believe that there would be benefit from a long term study of the requirements for the UK electricity networks against scenarios of future plant closures, renewable and other distributed generation developments, and increased demand side measures. A number of innovative proposals have recently been put forward, such as a sub-sea cable off the west coast of Scotland. While the costs and benefits of that particular proposal are currently being studied for the DTI, other possibilities including the use of such cables elsewhere and in other forms need to be considered. ScottishPower is currently exploring such a study with other network operators.

  In relation to some renewable network connections the capacity of the network to absorb additional generation may only be limited under certain concurrent conditions. A number of technical solutions are available which will constrain output of a renewable generating station during the times when network conditions limit the generation absorption capacity of the grid. ScottishPower operates such a system at its wind farm in Wales. The potential for non-firm connections should be taken into account by network operators and subject to consistent treatment by regulators to avoid perverse incentives being created by the different regulatory treatment of the costs associated with such technical solutions compared with reinforcement of the network.

2.3  Research and Development

  The current Research and Development support to renewables and other technologies appears to be spasmodic and requires to be focused to achieve the greatest environmental gain as opposed to supporting well-meaning technical initiatives. For example, the costs of photovoltaics and wave energy are likely to remain high in the medium term, especially when network connections are included for the latter. Studies of biomass suggest that its potential is low and expensive when combustion requirements are taken into account, yet it receives a sizeable share of the capital grants. On the other hand we believe that offshore wind will drop in price following the first round of construction and thereafter may not continue to need capital grants.

3.  ``JOINED UP'' WORKING

  The Government's Energy Policy Review has highlighted the many cross-cutting issues which a long-term framework raises. At present there are a number of Government departments and agencies which need to be involved including the DTI, DEFRA, Treasury, Scottish Executive, Welsh Assembly, Environment Agency, and Ofgem. Although a number of ad-hoc mechanisms have been set up for addressing the various issues across these bodies, there is no permanent institutional arrangements which will ensure a consistent approach especially as policy evolves over time.

  One possibility, which has been suggested by a number of parties, would be the establishment of a strategic or sustainable energy agency which would assume some of the policy functions currently residing in different Government departments and agencies. While this would have the merit of helping to ensure a consistent approach, we recognise the practical difficulties of establishing such an agency and the potential conflict with the statutory duties of existing bodies. Nevertheless such an agency deserves further consideration, even if it were to be restricted to a more advisory role.

  Consideration also needs to be given to the institutional relationship between the economic and environmental regulators such as Ofgem and the Environment Agency, and the policy makers within Government. At the very least, clear guidance needs to be given to these agencies in such a way as to ensure that overall policy is met. A more radical review might consider the extent to which these agencies' present duties are consistent with long-term policy and whether there is a need to redefine those duties.

4.  ENERGY POLICY REVIEW

  The key points in our response to the Energy Policy Review are:

    —  Working with the grain of markets is more appropriate than detailed regulation.

    —  The value of issues such as fuel diversity, building infrastructure and tackling fuel poverty needs to be recognised and rewarded within the market.

    —  Energy policy should establish a long-term framework which will deliver liquid markets attracting large players across the complete supply chain.

    —  The current regulatory regime will not necessarily deliver the desired outcome and will need to be reviewed to deliver the new policy aims.

    —  If a diverse mix of fuels is to be secured, in view of its cleanup costs coal will need support, such as a ``Coal Obligation'' or similar measure, preferably within the framework of a market reward system which recognises diversity.

    —  Renewables will grow initially but further support and targeted R&D will be needed to bring new technologies to the competitive market and to integrate these.

    —  Networks will need to be developed on a long term basis. The cost of this must be spread broadly and network operators must be incentivised to secure advantage by investing and operating more effectively in respect of the broad set of energy goals.

    —  Energy supply now encompasses tackling fuel poverty, helping increase energy efficiency etc and the reward system must reflect that.

    —  Customer awareness of the need for change/action is essential and Government, in partnership with others, like ourselves, will have a strong role to play.

4.1  Coal

  In advance of the outcome of the PIU Energy Review we would like to take the opportunity to re-emphasise the value of coal in supporting renewable development, particularly if gas is to assume the base load role that nuclear leaves. There are two phases to consider:

    —  A managed exit of existing coal generation would be beneficial as renewables grow. If such an exit is to be appropriately phased then cleanup will be necessary with the resultant expense. The alternative of building gas plant in order to provide only flexibility, and then close it well before its normal life expectancy, would appear to be imprudent.

    —  The development of clean-coal technology would enable a continuing role for coal in conjunction with gas and renewables. This would ensure that the UK continues to participate in a major international energy market and hence that its future energy supplies are more robust. The research and development to bring this technology to fruition will require support.

4.2  Energy Efficiency and Conservation

  To encourage energy efficiency and demand reduction in the domestic sector, we believe the following aspects of policy to be of greatest importance:

    —  Energy services development—We believe that the reform of the current 28 day rule will encourage suppliers and others to foster the development of new services that will integrate the benefits of energy efficiency with energy pricing, and encourage the leveraging of private capital for housing improvements.

    —  Demand side management—We believe there are gains to be accrued for domestic electricity customers (particularly those with electric space and water heating) related to the introduction of demand side management techniques in domestic properties. In some cases, intelligently controlled DSM can be used to optimise generation plant to minimise the amount of CO2 emissions further upstream in the energy value chain. We would be keen for Government policy to fully recognise the benefits of this via new regulatory and market incentives.

    —  Energy efficiency standards—The forecast growth in housing suggests an increase of 1.8m households by 2010 and a further increase of 1.7m by 2020. To arrest the growth in associated energy consumption from these new properties, it is extremely important that sufficient attention is focused on expanding the Labelling Schemes for Appliances and improving Building Regulations beyond their present levels. To implement any further changes, long term planning and advance notice from Government is an essential component of policy.

    —  Emergence of new technologies—We believe there is a future role for domestic scale distributed generation, though this should not be over-stressed at this stage. For photo-voltaics, we view this as an important energy source, but limited in scale and scope. In regard to Fuel Cells, we anticipate growth in this technology, but not prior to 2008 for domestic properties. For micro-CHP, we anticipate adoption within the energy market from 2003 onwards, with uptake dependent upon the forecast system costs and market incentives.

  To encourage energy efficiency in businesses, we believe the following aspects of policy to be of greatest importance:

    —  Energy services for businesses—We support the Government's initial objectives in this area via the introduction of Enhanced Capital Allowances for energy efficient technology and the formation of the Carbon Trust (with associated funding).

  Generally, the policy instruments appear to be in the right direction. However, if the Government has serious ambitions for customers outwith the Climate Change Levy Agreements to undertake investment in energy efficiency, it must scale its commitment accordingly. In practice, this means that the current £100 million being recycled from CCL funds should be increased towards a figure of £250 million or more to make a reasonable impact.

    —  Environmental taxation—The introduction of new levies and taxes for business customers must be managed very thoughtfully. Industry research suggests that the overall elasticity of demand for energy use is low, other than for selected applications and customer types, and tax increases in themselves are unlikely to have the desired effect of reducing demand. Any new environmental taxation proposals must consider the impact on competitiveness for UK industry and the compliance costs for suppliers and customers alike and their ability to meet initial objectives (often CO2 reductions).

    —  CCL Agreements & flexible mechanisms—ScottishPower supports the introduction of emissions trading initiatives to help towards more sustainable forms of generation. The flexible mechanisms developed in the future can also be designed to include the active participation of suppliers and customers as part of their energy supply agreement—even outwith those industries with CCL agreements. To enable this, customer information, carbon weighting of fuel, administration and trading must be made as simple as practically possible.

    —  Carbon Trust—We welcome the creation of the Carbon Trust. As the trust rolls out its operations, we anticipate that one of its key functions is to facilitate market transformation programmes to improve the uptake of current energy management technologies as well as new ones. The scope of activities for the Carbon Trust should be spread across the entire business sector rather than simply the needs of larger energy users. This would enable prospective customers to have a simple one stop shop for energy management needs and act as a good focus for all government programmes looking at energy productivity in business.

    —  Small and medium-sized enterprises—One of the key policy challenges for energy productivity is the ambivalence of small and medium sized enterprises to engage in efficiency and conservation measures. To make inroads to this challenge, small businesses require easy access for assistance from a body such as the Carbon Trust, good quality information for decision making and grants and incentives to make investment decisions straightforward.

    —  Demand Management & Distributed Generation—The Government should also keep under review the advantages and disadvantages of the separation of supply and distribution businesses. Important to the deployment of some new technologies for distributed generation and demand side management is ease of access to information and the management of control and monitoring systems in regard to the distribution system.

    —  Practical energy savings—Within the PIU papers for Energy Productivity, it is outlined that there is a very large opportunity to gain savings from the commercial and industrial energy sector. In theory, we agree with this position. In practice, however, to unlock these savings requires creative customer solutions in energy services, full coverage of all parts of the business market and economic incentives, as suggested above.

January 2002



 
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