Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 4

Memorandum by Progressive Energy Limited, the Northern Energy Initiative and Wansbeck Energy Company

SUMMARY:

  There is a case for maintaining the current mix of the different sources of primary energy supply, coal, gas, nuclear, oil, and renewables, to ensure both security and diversity of supply. The UK has a large resource of coal, which is recognised as a stable commodity because it is available from a number of countries: coal should play a key role in maintaining a secure, diverse electricity supply.

  By sequestering the CO2 produced, the use of coal together with "cleaner" conversion technologies, is no longer inconsistent with environmental sustainability.

  Renewable technologies are receiving substantial support, but even with this, they are unlikely to contribute the bulk of the required capacity.

  The Government should consider market stimulation measures for cleaner coal power stations with carbon dioxide sequestration. No other option offers the same overwhelming advantages as coal-based IGCC power stations, including the stimulation of the hydrogen economy.

  We support a "New and Renewables Obligation" that recognises the potential of gasification technology to provide secure, diverse, sustainable energy through the use of coal, and to deliver the substantial environmental benefits associated with CO2 capture and sequestration.

1.   Given the imminent dependence of the UK on imports, how can the UK maintain a secure energy supply?

Security

  The primary sources of energy are, oil and gas, coal, nuclear, and renewables. These will be considered in turn.

  (a)  Oil and Gas

  The European Commission Green Paper Towards a European Strategy for the Security of Energy Supply predicts that the European Union will become increasingly dependent on external energy sources and that based on current forecasts, dependence will reach 70 per cent in 2030.

  BP in their submission to the PIU, projected 80-90 per cent dependence on imported oil by 2020 for the UK: it is likely that UK continental shelf gas production will decline from 2004, by 2010 the UK's import requirement could range from 30-60 bcm/annum, (compared to a Transco base forecast demand of 112bcm/annum), and by 2020 up to 80-90 per cent of the UK's gas could be imported. This has implications not only for the power generation sector but also for other sectors. In particular, security of supply could be adversely affected in the transport sector where there is currently almost no fuel diversity.

  Norway will probably have little capacity to contribute to the projected shortfall. The majority of its gas reserves have already been contracted up to 30 years out to customers in Belgium, France, the Netherlands, Germany, Spain, Austria and Poland.

  Figure 1 compares the level of imported gas implied by BP's submission to the PIU, with the assessment of levels of uncontracted gas from Statoil and the Norwegian state, which together account for the majority of Norwegian gas sales. The relatively small levels of uncontracted Norwegian gas will be required by all customers, not just the UK.


  Clearly, oil and gas will soon be mainly sourced from outside of the EU, and without indigenous supplies, the UK will become vulnerable to political disturbances in those areas.

  Importing 80-90 per cent of the UK's oil and gas by 2020 would also have a significant adverse impact on the UK Balance of Payments, as well as affecting UK Taxation Revenue, Employment and Investment.

  The recent paper presented on 17 October to the PIU Energy Project Advisory Group, Energy Scenarios to 2020, concludes that in some scenarios the UK dependence on gas for electricity could rise to above, 75 per cent and that more diversity is required to ensure security and diversity of supply.

  (b)  Coal

  The UK and the world have extremely large coal resources as shown in Figures 2 and 3. The UK also has a coal extraction and supply industry capable of matching world coal prices when delivered to UK power station sites.


  As well as access to significant indigenous reserves, coal has the advantage of being a comparatively stable primary energy product to import, which has demonstrably less price volatility than oil or gas, and where there is little constraint on continued availability.

  (c)  Nuclear

  The UK has much experience in nuclear power, but the predicted generation cost from new power stations is very high. The safety record of UK nuclear power stations is good, and the more modern designs are returning high load factors. A closure programme for the older (Magnox) stations has been announced, and by 2010, the contribution of nuclear power to the overall energy mix will be reduced by over 3GW, leaving a gap to be filled from elsewhere. Further plant closures may be expected in the following decade.

  (d)  Renewables

  Many potential sources of renewable energy have been identified. Several of these can play a part in an energy mix, and the Government has provided a number of financial mechanisms to stimulate their use. There are a number of barriers to wider exploitation, mainly associated with economic performance and the match to energy market needs, but also the need to take into consideration wider issues (eg effect of wind farms on the landscape). Such financial mechanisms will need to continue if renewables are to make a significant contribution and few commentators predict that a high percentage of the market is possible over the next 20-30 years. The security of renewable energy is implicit.

DIVERSITY

  Forecasting the future is difficult: DTI Energy Paper 68 gave a projection that indicated that the proportion of electricity generation fuelled by natural gas would progressively increase, with around 25 per cent of existing capacity (mostly coal and nuclear) being replaced by natural gas technologies over the next 20 years.

  This would lead to about 50 per cent of the UK's primary energy being dependent on gas, and about 64 per cent of electricity generation being dependent on gas. The reduced diversity exposes the UK economy unnecessarily to future political and price shocks.

SUSTAINABILITY

  Energy Paper 68 predicts that the UK needs to build 15 per cent additional generation capacity in the next decade, and 25 per cent over the next 20 years in order to meet the increasing demand and to replace ageing nuclear plant, old coal stations, and the first generation of CCGTs.

  Renewable technologies have a role in this additional capacity, and market mechanisms are being implemented to support a renewables programme. However, it is extremely unlikely that the renewables programme alone will be capable of meeting the new generation capacity requirement. There is a real opportunity for advanced "cleaner" coal plants to make a major contribution to a long term energy strategy; ensuring a balanced, secure mix of energy to the electricity generation, transport and other sectors in a sustainable way.

  There is a case for maintaining the current mix of the different sources of primary energy supply, coal, gas, nuclear, oil, and renewables, to ensure both security and diversity of supply. The UK has a large resource of coal, which is recognised as a stable commodity because it is available from a number of countries: coal should play a key role in maintaining a secure, diverse electricity supply.

2.   Is there a conflict between achieving security of supply and environmental policy?

  The technology now exists to provide bulk supplies of electrical (and other) energy from fossil fuels, in a manner that meets the objectives of "sustainability". This includes removal and sequestration of the CO2 in plant from which other emissions are very low.

  Amongst the cleaner coal technologies, IGCC technology is particularly capable of reducing the impact of future coal use on the environment. The potential exists for very low emissions of NOx, SOx, particulate and CO2. IGCC also brings within reach the possibility of a hydrogen economy in the UK.

  Gasification projects are increasingly proven internationally.

  IGCC plant are close to being competitive to natural gas CCGT in niche applications, and the cost of CO2 capture is lower than alternatives.

  By sequestering the CO2 produced, the use of coal together with "cleaner" conversion technologies, is no longer inconsistent with environmental sustainability.

3.   What is the role of Renewables and CHP?

CHP

  Combined Heat and Power (CHP) opens the possibility of improved energy utilisation, with efficiencies of up to 90 per cent being achievable. There has been a useful uptake in the Industrial Sector over the past six years or so, and the more commercially attractive CHP schemes are now operating. Many of the more marginal Industrial CHP schemes have recently floundered, following the introduction of the New Electricity Trading Arrangements. Many Smaller Industrial CHP schemes struggle to meet the requirements for "Good Quality", and uptake can thus be expected to be slow. The advent of so-called Micro CHP, suitable for the very small end of the market, lacks a widespread UK sales and servicing network, and capital and installation costs are such that they require a payback time beyond the financial horizons of most potential users, such as hotels, small factories and large houses. Because most of these are designed to be used only with natural gas, even if uptake was more widespread, the effect on UK gas demand would be small, as modern combination gas boilers already recover over 78 per cent of the available heat.

RENEWABLES

  Many renewable technologies will need to make an important contribution to meeting future energy needs, but a number have a limited and finite resource base.

  (a)  Landfill Gas

  A high proportion of the recent renewable capacity has been landfill gas schemes. The UK uses landfill for around 60Mte/annum. This represents an ongoing potential for new capacity of only 60MW/annum. Because new landfill is being discouraged, particularly for methane-producing materials, this represents a reducing energy potential.

  (b)  Small Hydro

  Hydro power has been fully commercialised in the UK with only limited opportunities existing for future deployment.

  (c)  Sewage Gas

  This is a niche opportunity that has already been commercialised.

  (d)  Biomass

  Commercial plant size of 30MW is probably required to achieve economic projects, even with ROC support. Land use of 4 sq km of short rotation willow coppice per MW of capacity will constrain significant uptake and the very significant land usage for this form of generation to make any significant contribution will reduce the opportunity for other farming uses.

  The ambitious DEFRA target of establishing 21,700 hectares of short rotation coppice/miscanthus by 2007 would only support around 50MW of capacity.

  (e)  Wave Power/Photovoltaics

  Not yet commercial. Will need significant further development before they are likely to be able to play a more significant role in the renewable energy portfolio.

  (f)  Onshore Wind

  The ETSU report suggests that for a 400 kW machine an average wind speed of greater than 7 m/s at the hub height is required to achieve load factors in excess of 25-30 per cent. This would limit the area of England and Wales that is suitable to less than 5 per cent of land area. The preferred sites tend to be concentrated in National Parks and AONB, with consequent planning difficulties.

  (g)  Offshore Wind

  This is probably the most promising area. The first licensing round has attracted development proposals from 18 developers to generate 1200-1500MW of new capacity in 13 sites. However, it is not yet clear the rate at which commercial development will be achieved with support from Renewable Obligation incentives.

  Renewable technologies are receiving substantial support, but even with this, they are unlikely to contribute the bulk of the required capacity.

4.   Is any change of Government Policy necessary?

Coal—a national resource

  Support is required to enable coal to be used more generally as a feedstock in an environmentally acceptable manner (ie to produce "green" energy by sequestering the CO2 produced. This would allow the full benefits of access to secure, diverse and sustainable supplies of energy, and benefits to the UK economy.

Market Stimulation

  The Government should consider market stimulation measures in support of its policies in this area rather than promote a demonstration plant of some sort.

  On a like for like basis, the degree of market stimulation required to establish a major contribution from coal based plant is much lower than any truly viable alternative. No other option, including nuclear and renewables, offers the same overwhelming advantages as coal IGCC power stations. IGCC plant can:

    —  supply electricity in large volumes—it could be used to underpin energy diversity and security requirements by, if seen to be appropriate, meeting the total plant replacement needs forecast in Energy Paper 68 and elsewhere;

    —  provide clean energy at a very competitive price compared to alternatives—UK project applications have been considered in detail and considerable up to date cost information is available from other projects worldwide giving confidence in this statement;

    —  enable a clean primary fuel alternative to the current use of oil in the transport sector and gas for industrial and domestic use to be promoted—the availability of hydrogen in bulk, as required, at a price that is cheaper than dedicated alternatives, can in the medium term encourage and prime the introduction of CHP plant based around fuel cells for local application and hydrogen fuelled transport;

    —  be introduced quickly and with certainty—the technology has reached the commercial application stage and is available for deployment now, giving the opportunity to make an early impact on emissions, and to supply hydrogen for clean energy supply in the transport, industrial and domestic markets.

  IGCC technology is developing at the boundaries of traditional industries. Contributions are or can be made from UK companies in the traditional power industry companies, in the chemical processing industry and in the oil and gas industry. The links between these would be strengthened in responding to the UK market need if suitably stimulated, providing a platform for UK industry to compete in the rapidly growing and very large international market.

  Coal IGCC power stations, coupled with CO2 sequestration are a realistic, minimum cost option for delivering bulk supplies of secure, sustainable energy.

CARBON DIOXIDE SEQUESTRATION AND SUPPORT ISSUES

  If Carbon Dioxide is removed from an IGCC it can either be used for direct sequestration or for Enhanced Oil Recovery. The use of Carbon Dioxide for Enhanced Oil Recovery is well established and projects would deliver policy benefits in maximising the potential oil recovery from the UK Continental Shelf with a positive impact on Security of Supply, UK Balance of Payments, Taxation Revenue, Employment and Investment. There is a window of opportunity and early action would be required. Government could stimulate action through investment in efficient infrastructure. Infrastructure investment could be offset by revenues from CO2 sales or emissions trading.

  The base technology for Carbon Dioxide sequestration is currently being proved in the Sleipner project in the Norwegian sector of the North Sea. The cost of Carbon Dioxide capture and sequestration from IGCC is lower than for alternatives at around $20/tonne Carbon Dioxide. This translates to an increase of around £6/MWh in the required electricity price assuming normal commercial financing criteria are applied. At present there is no market mechanism to encourage investors to make the investment required. A strategy to utilise undersea sequestration also requires Government support to define planning and licensing rules.

CO2 can be captured more cheaply using IGCC than from any other fossil fuel technology: British industry can start construction of new IGCC power stations immediately, developing the track record to compete in a large international market.

  The Government should consider market stimulation measures for cleaner coal power stations with carbon dioxide sequestration. No other option offers the same overwhelming advantages as coal-based IGCC power stations.

5.   How should the Government influence commercial decisions in order to achieve a secure and diverse supply of energy?

  Two routes are proposed in order to provide the right climate for change, which, together will achieve the stated objectives of delivering:

    —  secure, diverse and sustainable supplies of energy at competitive prices;

    —  a reduction of the impact on the environment and the securing of sustainable use of natural resources;

    —  the promotion of fair and competitive energy markets in the UK and EU.

  The two routes proposed are designed in the first instance, to stimulate the right technological choices, and secondly, to facilitate environmental prudence.

TECHNOLOGICAL INCENTIVES

  Initially, the future of coal in the national energy mix needs to be secured and encouraged. IGCC is approaching "commercial" status in some niche applications in the UK, but in order for there to be a more general application of coal-based cleaner coal power stations, a small amount of support is necessary. This is a necessary first step, and will permit the early construction of a number of advanced cleaner coal power stations, providing:

    —  a level of security for the coal industry

    —  increased fuel diversity

    —  environmental benefits on a short timescale

    —  the growth of technological and engineering expertise in the UK

    —  confidence in IGCC technology to be built up

  These power stations should have, by design, the option for low cost CO2 removal to be retro-fitted with minimal disturbance, as soon as a sequestration route is available. IGCC provides this opportunity through precombustion CO2 removal.

ENVIRONMENTAL INCENTIVES

(a)  CO2

  The advantages of removing and sequestrating the CO2 from fossil-fired power stations have been described above and elsewhere. In order for advantage to be taken of the national asset of conveniently located storage capacity for CO2, some infrastructure needs to be constructed. Early definition of licensing and planning regulation is needed in order to encourage early private sector involvement.

  The planning mechanism allows environmental acceptability to be tested under public scrutiny for its acceptability to be endorsed.

  A small level of support for removing and sequestrating the CO2 is required to promote the construction of suitable cleaner coal power stations. We estimate this to be in the order of £6/MWh or around $20/tonne of CO2 removed.

(b)  Hydrogen

  The goal of moving toward a hydrogen economy is clear, with the environmental advantages for national energy use well established. The Government should introduce appropriate mechanisms for priming early development in this area. These could include fuel duty for hydrogen powered vehicles to promote uptake particularly to enable urban emissions issues to be addressed.

FINANCIAL INSTRUMENTS

  Renewables already benefit from a premium through the Renewables Obligation Scheme. Examples of routes through which such a premium for other technologies (in particular the "green coal" option) might be provided include:

    —  a "Low Carbon" obligation (extension of the existing renewables obligation)

    —  Climate Change Levy

    —  Carbon Tax

    —  Emissions Trading

  Of these, the extension of the Renewables Obligation to be a "New and Renewables Obligation", in order to support the introduction of low carbon emissions technologies has clear merits. Adding a percentage of nuclear and clean coal (say 25 per cent), and possibly other appropriate technologies to a "New and Renewables Obligation" Scheme would ensure a secure, diverse and sustainable energy mix at minimum cost. Support would then become available that recognises the potential of gasification technology, and its ability to provide "green" energy from coal and waste feedstocks.

  The existing scheme places an obligation on all licensed suppliers of electricity to purchase a specified amount of their electricity from a defined list of technologies that qualify. In order to encourage the use of these technologies, a sliding scale has been introduced: three per cent of sales up to March 2003, rising to 10 per cent of sales by March 2011. This is effective, but has the effect of actually discouraging the use of technologies not on the list, even though their environmental performance would be equal to or better than the qualifying ones, and the cost of implementation lower.

  We support a "New and Renewables Obligation" that recognises the potential of gasification technology to provide secure, diverse, sustainable energy through the use of coal, and to deliver the substantial environmental benefits associated with CO2 capture and sequestration.


 
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Prepared 27 August 2002