Memorandum from Scottish Power plc
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
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
1.2 Renewables Obligation and Renewables Obligation
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
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''
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
4. ENERGY POLICY
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.
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 developmentWe
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
Demand side managementWe 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 standardsThe
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 technologiesWe
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 businessesWe
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
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
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 mechanismsScottishPower
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 agreementeven 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 TrustWe 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 enterprisesOne
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
Demand Management & Distributed
GenerationThe 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 savingsWithin
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.