Select Committee on Environmental Audit Appendices to the Minutes of Evidence


APPENDIX 48

Memorandum from United Utilities

Introduction

  1.  United Utilities can offer a unique perspective on energy policy, since we include within our portfolio: an electricity distribution business; small independent gas transportation interests; an Energy Efficiency business working with Industry to reduce their energy consumption, a growing green energy business, promoting a range of renewable technologies, which is already responsible for 10 per cent of NFFO renewable energy schemes in England and Wales; over 60MW of generation associated with our water treatment assets; and sizeable landholdings in some of the wettest and windiest parts of the North West of England. As such we have significant technical knowledge and capability, particularly in small scale hydro and landfill, sewage and mine gas. We are promoting an off-shore windfarm development at Scarweather Sands off the coast of South Wales. All told, we are committed to developing at least a further 200MW of renewable generation by 2005.

  2.  We welcome opportunity to contribute to the Environmental Audit Committee's inquiry, thereby continuing our active contribution to the ongoing review of the UK's energy policy. United Utilities has made a number of detailed submissions in response to the Performance and Innovation Unit team's work. In our submissions, we talked in particular about the environmental challenges within the review. Our Chief Executive, John Roberts sat on the Royal Commission on Environmental Pollution, which reported the previous year. In this response we attempt to identify a number of specific actions that we believe would be helpful in those areas highlighted by the Committee.

The Energy Review

  3.  The PIU has delivered a thoughtful and balanced report with many positive and constructive proposals. In doing so, the policy review has rightly picked up that profound changes are needed to counter the continuing threats to the environment from past patterns of economic development. The Royal Commission concluded that a target of a 60 per cent reduction in greenhouse gas emissions by 2050 was required, and we are pleased such a striking target, deliberately intended to grab attention for a difficult area of policy, has focused the PIU's deliberations.

  4.  In its report there is welcome acknowledgement by the PIU that sustainable development should be the guiding principle for energy policy, of the need to move quickly to a low-cost, low-carbon energy system, and for substantial improvements in energy efficiency.

  5.  The report also acknowledges that resilience and flexibility is needed to address energy security, and that options need to be kept open. For example, it envisages a long-term future for coal, if only as back up to less reliable sources. The report does not see any pressing problems connected to increased dependence on gas (though some have suggested the report rather underplays the security of supply implications and need for investment).

  6.  Despite this flexible approach, it is United Utilities' hope that the Energy Review will lead to the publication of clearer projections of expected use of, and sources of, energy in subsequent periods. Looking only at the businesses within the United Utilities Group, this would be most valuable in:

    —  Confirming the extent and rate of change to the likely role of distribution networks, to move away from its traditional role as a passive delivery path from grid to consumer, into a system characterised by the active management of both the provision and uses of electricity.

    —  Demonstrating the longer-term prospects for continued growth in renewable technologies, which would justify research and development activity and partnerships between equipment providers and generation developers.

  7.  While the report rightly points out that it would not be in the UK's interest to go it alone on tackling climate change in advance of further international agreements, it recognises that there can be economic benefits to our leading the way. The growing world market for low carbon technologies offers real potential if the UK gains ``first mover'' advantage, investing in technology now, and exporting it in years to come. The Danish turbine manufacturing industry shows what can be achieved when policy is in synch with industrial development.

Current challenges

  8.  The report also highlights the immediate challenges we face before renewable generation can really take off in this country:

    —  A more strategic and streamlined planning system, rather than the present system which fails to place local concerns within a wider framework of national and regional need.

    —  The reorganisation and financing of electricity distribution networks.

    —  An excessive discount imposed on prices to small and intermittent generators following the introduction of New Electricity Trading Arrangements and the apparent lack of support for distributed generation activities

  9.  There is now an acknowledgement of the urgency of dealing with these new challenges; we hope that the most effective mechanisms for doing so are acted upon. Otherwise, whilst we were pleased to see the introduction of clear targets for renewable generation, some doubt must remain over achievement of the Government's 10 per cent renewables target by 2010 (let alone the increased target of 20 per cent by 2020). In addition there is also the increasing concern regarding the achievement of the 10,000 Mw target for new Combined heat and Power Plant owing to the current relationship between high prices in the gas market and low electricity prices—a relationship that undermines the economic viability of such schemes.

  10.  Given these barriers to potential energy developers, the real question is whether industry has the capacity to expand quickly enough to meet government's targets. So, what effective mechanisms can take up these challenges? It is important that market forces are used wherever possible. Failing this, the system of Renewable Obligation Certificates provides an excellent example of adapting markets to meet wider Government policy objectives. It may be that over time it will become obvious that ROCs need to be valued differently according to the technology employed in order to provide adequate incentive to develop newer technologies and assist them to achieve "critical mass" in terms of production volumes.

  11.  But it would be surprising if adapting market rules were by itself sufficient. Without deliberate action, we anticipate increasing difficulties in securing planning consent for renewable generators (and their associated electrical connections). Government intervention, as has already happened in the case of offshore wind generators, could be of great benefit. One approach might be for Government to charge regional Government Offices with delivering national renewables targets within their regions, co-ordinating actions across sectors, including a more strategic approach to planning.

  12.  It was concern over fragmentation and inconsistency of public policy and funding arrangements to date that led to the initiative we are taking to support renewable energy in the North West. We are working with regional partners to establish ``Renewables Northwest Ltd'', a not-for-profit company bringing together private and public sector interests. We want Renewables Northwest to work strategically, gaining political and public approval to pave the way for deployment of the new technologies. We will take this forward at a major regional conference at the end of March 2002.

  13.  In addition, it was encouraging that the PIU report stated that in light of the review the Government should initiate a national public debate about sustainable energy. We see value in a Government-led programme of public education to emphasise the benefits of such schemes, and to reduce concerns over local impact.

  14.  As owners and operators of the North West of England's electricity distribution network we have a close interest in incentives to facilitate new generation connections. We share the Government's desire to use market (economic) signals wherever possible to allow distributors to gain from taking a more supportive role with renewable generation, and for companies that make less effort to receive a lesser reward. To date unfortunately, the debate has been limited to cost recovery through connection charges. Even 'full-cost' recovery does not leave a distributor better off than if the development did not go ahead. A more positive incentive regime is needed for strategic network improvements to facilitate a large expansion of embedded (or distributed) generation.

Regulation

  15.  More generally, utilities companies are uniquely well placed to help deliver climate change targets, but we need appropriate backing from Government and a regulatory framework which takes more account of environmental impacts. The PIU's report understands that it will ultimately be private sector investment decisions that deliver the Government's new energy policy, which means introducing incentives as well as removing barriers.

  16.  In particular, we hope that Ofgem's next Distribution Price Control Review will begin to embrace the substantial shift in objectives likely to emerge following the Energy Review. We need to begin by identifying what it is that society wants from the distribution companies, and then to identify a suitable form of regulation to ensure that those requirements are met.

Conclusion

  17.  We believe that United Utilities can play a significant part in delivering Government policy objectives, especially through our development of renewable generation and the adaptation of our electricity network to reflect its changing functions. The more confident we can become that our business plans align with Government policy, the faster such changes are likely to occur. The Energy Review should lead to clear statements of Government policy objectives and guidance to regulators which encourages them to work with us to develop the regulatory environment in a way that rewards companies who work in step with that policy.

March 2002



 
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