Select Committee on Environmental Audit Written Evidence

Memorandum submitted by RWE npower plc


  1.  As one of the UK's leading integrated energy companies, RWE npower supports the Government's vision of moving towards a sustainable energy future. RWE npower, part of the RWE Group, is one of the UK's largest energy suppliers and we have a diverse portfolio of over 8,000MW of generation capacity in the UK. We sell our expertise in power generation in key markets and are one of the UK's leading renewable energy developers and operators.

  2.  We welcome the opportunity to contribute to the Environmental Audit Committee's inquiry into nuclear, renewables and climate change. We have not attempted to address every issue raised by the inquiry, but have focused on those parts of the inquiry to which we believe we can most usefully contribute.


  3.  The UK has benefited from a diverse energy mix which has helped to ensure security of supply through the balance of nuclear (around 16%), gas (around 31%) and coal (around 35%) generation. In recent years there has also been an increase in renewables, which now constitute between 2.5 and 3% of the UK generation portfolio.

  4.  Even with energy efficiency measures reducing demand growth below historic levels, we anticipate that peak demand will grow by almost 9GW between 2005 and 2015. During the same period, 7.5GW of nuclear plant (Magnox and AGR) is expected to be decommissioned as well as up to 4GW of older Combined Cycle Gas Turbine (CCGT) stations. This requires investment in 20GW of new plant by 2015 in order to maintain a 20% capacity margin. With peak demand then forecast to grow by almost 4GW between 2015 and 2020, and the retirement of old coal and oil plant under the Large Combustion Plant Directive (LCPD) by the end of 2015, the UK would require almost the same amount of new plant again to maintain security of electricity supplies.

  5.  The security of the UK's energy supplies has been under increasing scrutiny in recent months. Concern will increase following recent forecasts from the Met Office predicting a colder than average winter, and the Winter Outlook Report recently updated by National Grid will not silence all doubters. Much attention is inevitably focused on fears over supply in the immediate winter, but there is a need to consider the more serious concerns to electricity from 2008.

  6.  These concerns are avoidable with suitable infrastructure investment if action is taken now. Whilst the National Grid's Seven Year Statement shows substantial planned new capacity, very little of this is actually under construction. A major impediment to commitment is absence of clarity on two important environmental issues: LCPD and Phase 2 of the EU Emission Trading System (EU ETS) beginning in 2008, and also whether there will be any successor to the Kyoto Protocol or even any carbon trading post-2012.

  7.  We are concerned that the definition of a combustion plant currently being proposed under the LCPD will curtail the life of "opted out" coal plant even further. In summary, we have strongly urged the UK Government to implement the LCPD on the basis of plant="boiler", rather than plant="stack" at least for plant opting out under the terms of the 20,000 hour derogation. If the LCPD is implemented in the way currently proposed, the UK would be deprived of the security that retiring coal plant can provide during the challenging transition from a high carbon generation industry to a low one.

  8.  There is no clear view of the availability or cost of CO2 emission allowances from 2008, during the second phase of the EU ETS and therefore no market view of the value or cost of power. Yet the UK energy industry urgently needs to commence investment in new forms of generation to meet demand and further reduce emissions. We propose that the UK Government resolves the issue of the allocation to the electricity sector urgently, in advance of finalising the National Allocation Plan and submitting to the European Commission.

  9.  In light of such fundamental uncertainties, it is difficult to evaluate the outputs, costs and revenues for investment appraisal purposes with any degree of confidence. Any appraisal would need to factor in a variety of adverse regulatory scenarios or apply a marked cost of capital premium to reflect the risks. In these circumstances investment decisions tend to be postponed, the risk of supply disruptions inevitably increases and the costs of responding to shortage are ultimately higher. The principal impediment to effective markets and investment decision-making is uncertainty regarding the environmental legislative and regulatory framework.


Costs and Timescales

  10.  The investment costs of a new power station will necessarily depend on the specific characteristics associated with each individual project, such as siting and technical characteristics. It is also difficult to provide meaningful generation costs because of future fuel price uncertainties, costs of carbon and varying load factors. Assuming fuel prices over the long-term revert to reasonable fundamental levels, electricity from a new CCGT would cost in the range £33-36/MWh, while coal generation would cost £38-44/MWh. It would take about three years for a new CCGT to become operational once consent had been obtained, while a coal plant would typically require slightly longer, four to five years post-consenting.

  11.  Onshore wind costs are currently in the range of £600-750 per kilowatt and it takes around two years to plan, contract and build an onshore wind farm, following planning permission. The planning process typically adds a further three years. It is anticipated that new onshore capacity will be constructed at the rate of approximately 500-600MW per year in the short to medium term. The cost per unit of electricity generated by renewable technologies depends heavily on the load factor assumed, and hence is site specific. Therefore it is not possible to quote generic figures.

  12.  Offshore wind costs are typically between £1,300 and £1,400 per kilowatt with projects taking three to five years to plan and build, subject to receiving necessary consents and resolution of other issues including MOD/aviation constraints, offshore grid access, transmission system operator issues and the funding gap. It is anticipated that capacity in excess of 1,000MW per year of offshore wind generation could be built if the issues identified above could be addressed. Offshore wind through-life cost estimates also vary, in part due to relatively few sites having been built in the UK, but they are likely to be significantly higher than onshore wind. Marine (wave and tidal) technologies are in their infancy with through-life costs in excess of 10p/kWh, although it is anticipated that these will fall over time as the technologies mature, as they did for onshore wind.

New-Build Nuclear

  13.  New-build nuclear generation could form part of a diverse UK energy mix in the future and would go some way to reducing emissions. However, given the lead time necessary for planning, consenting, procurement and construction, it is unlikely that any new nuclear units could be available before 2015 and equally unlikely that a sufficient amount could be built sufficiently quickly to compensate for the LCPD-driven closure of coal plant.

  14.  Public mistrust of nuclear power also remains a factor. If the technology is to have a future in the UK, the debate must be conducted in the context of a clear long-term energy policy. There are real barriers to investment in new nuclear generation. Solutions need to be found to issues like technology licensing, the consenting process, site availability, sources of fuel supplies, decommissioning and waste disposal. The biggest barrier is economics, however. With a clear, long-term energy policy and climate change strategy the market will determine whether, and when, nuclear plant should be built. It is crucial, therefore, that attempts to stimulate new nuclear development in the UK must not create market distortions. This could undermine investor confidence in the whole market, risking security of supply in the near-term, and upset the balance and flexibility of our energy mix.


  15.  Renewables alone cannot fill the anticipated capacity gap, but should be seen as an essential component of the UK's electricity generation portfolio. Independent studies have shown that the current transmission and distribution system could accommodate at least 20% of generation from renewable sources and this proportion could be increased in the future as the design of the distribution evolves. Renewables have the potential to make a significant contribution to electricity generation in the UK, especially when the potential of onshore wind is combined with technologies such as offshore wind and marine (wave and tidal). However there are barriers, and these will only be overcome if the political will to address them continues.

  16.  Onshore wind development continues to be impacted by delays in the planning process, MoD and aviation issues, and the availability of transmission capacity. Policy in these areas should continue to be reviewed and may require amendment in the future. Grid capacity is also a major constraint. Government funded studies in 2003 for Scotland have indicated the action required and plans are now being implemented. However, Wales needs similar studies and more rapid implementation.

  17.  With regards to the technology itself, a sufficient number of wind turbine manufacturers are currently developing wind turbines of a size suitable for large-scale offshore wind generation. However the technology is not yet proven, and certainly the capability for build does not yet exist. For onshore development, the diversity of manufacturers and technologies is already adequate. However the build capability is not.

  18.  Without firm commitment to a wind farm build programme in the UK, it is difficult to see that the manufacturers will either sufficiently accelerate their offshore technology development programme, or put in place an adequate build capability. In order to accelerate the offshore technology development it may also be appropriate to incentivise owners and developers to support the process by including small demonstration projects of "first production" large scale turbines in the current build programme.


  19.  Microgeneration is in its infancy with only limited installations of micro-CHP, photovoltaics (PV) and micro-wind. Micro-CHP has the potential to become a mass market retail offering as over 1 million boilers are replaced per annum. We believe that PV and micro-wind are likely to remain niche retail products. All these technologies have the potential to make a contribution to reducing emissions. As the price of these technologies reduce, the uptake of them will be greater.

  20.  There are complications with all these technologies not least the arrangements for paying and settling the accounts for exported electricity and ROCs. There are also metering issues, reliability issues and warranty issues. In time if distributed generation becomes widespread it will have an impact on centralised generation. This is not likely to have a significant impact in the next 10 years.


  21.  Despite the widespread recognition of the challenging generation gap faced by the UK, investment even in CCGT new build, is not immediately forthcoming. Recent history, with a number of generators having faced financial difficulties as wholesale prices declined, as well as uncertainties over long-term energy policy and regulatory framework, have made potential investors reluctant to commit the significant levels of capital necessary. The Government must provide clarity on issues such as the EU Emissions Trading Scheme and the implementation of the LCPD as soon as possible.

  22.  For renewables, there has been increasing confidence amongst banks and investors about the risks as the forms of government support are becoming better formulated, proven and understood. Renewable technology manufacturers are consolidating and there have been a number of successful renewable project finance investments recently.

  23.  An example of the confidence of banks and investors in the renewables industry was RWE npower's innovative Zephyr Investments Limited transaction in 2004. Zephyr Investments Limited is a £400 million joint venture between RWE npower and two private equity investors (Englefield Capital and Arcapita). The company will own a UK portfolio of over 400MW of onshore and offshore wind farms developed and constructed by npower renewables by the end of 2006. The business is supported by a loan from a syndicate of 13 banks. A number of investors are actively seeking to make similar investments at present.

  24.  When considering changes to the Renewables Obligation, it is important not to undermine the current investor confidence. Nevertheless, it would be possible to encourage investment in offshore wind through targeted revenue support or supplementary contractual arrangements.

  25.  Government should aim to ensure that the construction of new nuclear power stations is an option that can be considered alongside the construction of other types of new power plant (such as CCGT). We believe that whilst it is right to seek to remove any barriers which may stop new nuclear from competing on level terms with other technologies, it would be wrong to force it into the energy mix. Markets are most successful when the participants are free to make investment decisions within a high-level framework set by Government, which reflects the overall objectives and limits but does not dictate the means of achieving them.

  26.  The UK is fortunate to have such diverse sources of energy as wind, gas, coal, hydro, co-firing biomass and nuclear and can continue to maintain the high standard of security that comes with this diversity of supply, through further investment, with clarity on urgent pieces of environmental regulation and the right policy framework. Such a framework would ensure that private capital would continue to meet the nation's energy needs in a secure, sustainable and cost-effective way.

18 October 2005

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