Department of Trade and Industry
Room 1105
1 Victoria Street
London SW1H 0ET
Dear Ms Parkinson
Innogy welcomes the opportunity to provide aninput to the Governments consultation on energy policy.
I thought it would be helpful to put Innogysviews into the broad context. We aredetermined to provide our customers with secure supplies of electricity and gasat competitive prices and we believe that competitive markets are the bestmeans of delivering choice and value to the customer. We believe that Government's role should be to establish aframework, which balances the potentially conflicting policy aims of secureaffordable energy supply and tightening environmental controls.
We are keen to see a more joined-up approachto Government energy and environmental policy.Without a robust nationally 'joined up' approach it will be increasinglydifficult for the UK to take a leadership role within the EU on key energy andenvironmental policy decisions. Thisapproach will require a significant change in operation to ensure that allpolicy departments and agencies such as the Environment Agency and OFGEM arealigned with the delivery of a sustainable energy policy.
The Government has made a good start indeveloping policy to move towards a sustainable future in energy.
I hope you find our analysis and suggestionshelpful and I would be happy to discuss them with you in the weeks ahead.
Yours sincerely
Dr B M Count
Chief Executive Officer
This section summarises four key priorities for Innogy interms of what we would like to see emerging from the White Paper.
1.
Industry needs stability and a clear policyframework to plan and invest with no surprises at both a national and EU level
Government needs to facilitate a more joinedup approach to the development and delivery of energy and environment policy bydepartments and agencies.
Government should take a stronger role inmanaging the potential conflict between European and national legislation.
Government needs to establish a value rangefor carbon and for other greenhouse gasesthrough appropriate processes as a basis for policy making to support thetransition to a low carbon economy.This value for carbon should be used across all sectors, and allGovernment decisions should be tested against the range.
Statutory guidance to both Ofgem and theEnvironment Agency must be reviewed to ensure alignment with delivery ofsustainable energy policy.
There needs to be a balance between potentialconflicts of secure affordable energy and economic impact of the move towards alow carbon economy.
Other sectors must play their proportionatepart to ensure a low carbon economy is delivered in the most cost efficientmanner. Mechanisms are required toengage the transport and petrochemical sectors as well as the energy sector,which has made the major contribution to date in meeting
2.
We support carbon trading as a mechanism forproviding the least cost means of meeting carbon reduction targets acrosssectors and international boundaries. However it will take some time to resolvedesign issues and develop and implement a fully functioning trading schemewhich is compatible across EU Member States.Consequently it is unlikely to deliver real reductions in carbon emissionssignificantly above business as usual for the next decade.
Government needs to determine which approachwill be adopted to meet carbon targets.For example either a 'carbon budget' or a cost per tonne target.
Measures in the electricity sector should beout with but aligned to the market.Changes to the market should be designed to improve market efficiencyrather than to encourage segmentation in support of particular low carbonoptions.
Current energy policy consists of a range ofparallel instruments targeted towards single issues; the aim should be to movetowards a common framework which links low carbon options, e.g. renewables,CHP, energy efficiency, nuclear, based on the value range of carbon andallowing exchange or offset where appropriate.This will provide industry with flexibility to respond, thereby ensuringmore efficient deployment of capital and the delivery of objectives in a morecost-effective manner.
Within this framework domestic energyefficiency should be moved from the regulatory arena to the mainstream market,using incentives which reflect and reward the value of carbon savings e.g.through an offset to RO targets. Underthis approach, the Energy Efficiency Commitment should be ring-fenced asmeasure focussed solely on fuel poverty.
3.
As the transition to a low carbon economyproceeds, there is a need to ensure a secure energy supply and electricitysystem, which is robust to short term events (e.g. gas supply interruption,major plant break down).
Appropriate market instruments and improvements in the efficiencyof NETA should be put in place to ensure remuneration of flexible plant andmaintain sufficient peaking and reserve capacity over the medium and longterm.
In the longer-term security of supply relatesas much to fuel storage as to capacity.Coal has a major advantage in this regard. While it is important to avoidintroducing unnecessary costs into the market, it is essential to ensuresufficient capacity remains viable, otherwise it will close.
4.
Energy policy needs to take adequate accountof the current structure of gas and electricity transmission and distributionsystems and the significant implications this has on determining the most costeffective measures for moving to a low carbon economy.
Current Government focus is on improvingenergy efficiency. The existing networkcan deliver if energy efficiency is used to constrain its use and there istherefore little point in extensive refurbishment of the network.
Based on other distribution models (e.g. gasand food retailing), considerable benefits and efficiencies are likely to bederived from moving to an electricity system which incorporates utility scaleenergy storage and renewables generation at a local level.
When coupled with the adoption of lower costenergy efficiency measures such as insulation and A-rated appliances the carbonbenefits claimed for distributed generation systems can be still be obtained,but at significantly lower network upgrade costs. It is widely claimed that micro - CHP has the potential to offersignificant environmental benefits and could play a significant role inimproving energy efficiency. Howevermicro-CHP relies on the demand for heat to justify the benefits claimed.
Introduction
As a leadingintegrated UK energy company Innogy welcomes the opportunity tocontribute to the Governments consultation onenergy policy and fully supports the Government's vision ofmoving towards a sustainable energy future.We generate electricity and supply gas, electricity and other essentialhome services through our retail business npower. We operate and manage our flexible portfolio of power stations,run our own trading business and are developing innovative energy-relatedtechnologies, which will contribute to the transition to a low carboneconomy. Our energy portfolio is helpingto meet the increased demand for clean and sustainable energy generation andcontributing to the achievement of the Government's targets for renewableenergy, cogeneration and energy efficiency.Our wind power business National Wind Power has developed the leadingposition in the UK wind power market and Innogy Hydro continues to developsmall-scale hydro projects across the UK.We also operate over 10% of the UK's combined heat and power (CHP)plant. We believe therefore that we arein a strong position to provide a well-balanced input to the consultation.
Security of supply
We support the PIU view that there are noimmediate pressing concerns in relation to fuel supply risk and increaseddependence on gas. However, increaseddependence on imports in the long term gives rise to concerns regarding EUmarket liberalisation and the need to ensure UK access to supplies throughEuropean gas distribution networks.
We believe that minimum standards fortransmission security should be set and appropriate market instruments and/orprice signals put in place to maintain sufficient peaking and reserve capacityover the medium and long term. Theremay also be merit in changing the existing cost structure in relation to ratesand other fixed charges such that these move from being fixed to variablecosts, thereby recognising the security role of low utilisation coal- and oil-fired plant. We are concerned thatthe security of supply risks are just to be 'monitored' and believe that moreneeds to be done.
Suggested improvements in NETA which wouldfacilitate the above include: single cash out price and resources cost basisfor calculation of this price, ex-post contract notification, treatment offrequency response imbalance as deemed bids and offers, prohibition on theSystem Operator participating in the energy market, a proper market in reserveas opposed to the fragmentation of ancillary services and unified governanceunder a relatively independent body with recourse to the Authority only onappeal.
Utility scale energy storage is now technicallyproven and is expected to enter commercial service in the near future.
In the longer termsecurity of supply relates as much to fuel storage as to the level of surplusgeneration capacity. Coal has a majoradvantage in this regard. While it is important to avoid introducing unnecessarycosts into the market, it is essential to ensure sufficient coal capacityremains viable, otherwise it will close.In this regard, environmental legislation (e.g. Large Combustion PlantDirective, National Emission Ceilings Directive) must be designed andimplemented in a way as to ensure short-term environmental impacts do notthreaten security of supply.
Innogy believes that the Government should notintervene to determine the fuel mix, because intervention is likely to lead tosignificant market distortion and inefficiencies.
Climate Change
Innogy welcomes the PIU support for renewablesand low carbon technologies as a key part of the carbon reduction policy andthe recognition of the wider benefits in terms of security and diversity ofsupply. Ultimately the objective for Governmentshould be to deliver carbon savings at least cost to the consumer, but it isfor Government to decide what consumers are willing to pay.
There has been considerable criticism of NETAbecause of its impact on low carbon technologies such as renewables andCHP. It is our view that anyimprovements in NETA design should be targeted at improving the efficiency ofthe market processes rather than providing support for specific technologygroups. If there is to be support forparticular types of generation, such as renewables or CHP then this should beprovided outside the functioning of the energy market.
Large-scale investment will be required todeliver a low carbon economy. HoweverGovernment and regulatory intervention over the last decade has led tosignificant market fragmentation, which means that energy companies are lesscapable of undertaking such investment.Aggregation is inevitable if Government policy is to deliver thesustainable energy outcomes envisaged in the PIU Report.
Whilst we fully endorse the creation ofeconomic instruments as a means of putting a price on carbon these must ensurereduction of emissions at least cost.Carbon trading is unlikely to deliver real reductions in carbonemissions significantly above business as usual for the next decade.
In the longer term, as the value of carbon inglobal markets increases, we would advocate a transition to full emissionstrading with as wide sector and international coverage as possible as being themost economically efficient approach.The progress of EU energy market liberalisation should contribute toefficient carbon trading as well as security of supply.
International
UK energy policy must be set within thecontext of the European energy market. Government should take a stronger rolein managing the potential conflict between European and nationallegislation. Without a nationallyjoined up approach it will be very difficult for the UK to take a leadershiprole within the EU on key energy and environmental policy decisions. It shouldbe recognised that the competitive market in the UK can be constrained by thelack of competition elsewhere in Europe. The UK leads the world in liberalisation and cost effective energyproduction and supply. Nothing must bedone therefore which jeopardises this competitive position by forcing up energyprices to unacceptable levels or by helping overseas companies to operate inour market more easily than we can in theirs. We agree with the statement inthe PIU report that it would not be sensible to incur large carbon emissionabatement costs, harming the UK's international competitiveness, if othercountries were not doing the same.
CHP
The recently published Government strategy forthe promotion of good quality CHP is disappointing - it presents nothing newover and above existing mechanisms. Thecombination of high gas prices and low electricity prices together with thestructural issues of NETA, the Climate Change Levy (CCL) and the difficultiesof achieving a route to market mean that the Government's target of 10GW of CHPplant by 2010 is unlikely to be achieved without positive intervention.
To encourage investment in good quality CHPthe shortcomings of NETA should be addressed, as discussed above under securityof supply, and arrangements that wouldfacilitate a route to market implemented.Investment in new plant is only likely to occur when electricity pricesreflect market fundamentals so that the additional efficiencies and resultantcarbon benefits of CHP give rise to added value. While we would prefer the establishment of a common framework toachieve carbon reductions, as discussed above, an intermediary step towardsthis goal would be intervention through a CHP obligation.
Energy Efficiency
We agree with the PIU view that energyefficiency measures are the most cost-effective way of reducing carbon.
The development of domestic energy efficiencycan reduce our customers' bills, save carbon efficiently and provide newcommercial opportunities to our supply business. However energy efficiency is not an issue that attracts theinterest of most domestic customers and there is little economic incentive forthem to change their behaviour and reduce consumption.
The key requirement is to address thefundamental problems confronting domestic energy efficiency, namely that:
the recovery of the capital costs of energyefficient products cannot be guaranteed whist suppliers are unable to enterinto long term contractual arrangements with customers that include energysupply arrangements and;
the carbon savings achieved by energyefficient products are not recognised and are not rewarded.
Within the commercial and SME sectors manycompanies as yet lack the financial incentives to act and a combination ofinitiatives are required by way of loans, grants and access to credible energyefficiency advice in order to deliver the savings. Sourcing the advice from proven energy suppliers could alsoprovide a route for customers to access grants.
Renewables
We agree with the PIU view that there is aneed to expand the role of renewables to deliver a sustainable energypolicy. We believe that wind power hasa major role to play in contributing to the achievement of the Government'srenewable target for 2010 as it is the least cost, highest volume energysource. It has the potential to expandat an average rate of 1GW of installed capacity per annum over the next 20years. Given appropriate supportmeasures we believe that the PIU recommendation of an expanded renewablestarget of 20% by 2020 is achievable.The only substantial barrier to development and investment remainsdifficulty with planning consent. Thegeneral perception that public opinion opposes wind farms is not borne out bythe information gathered through independent surveys. The problems seem to be in regional and county authorities andsmall, vocal action groups. The present PPG22 allows planning authorities toweigh the national need for renewables against local impacts but fails to giveclear guidance to planning authorities on the importance of renewables inmeeting Government energy commitments.England and Wales need to take a lead from the Scottish guidance andpractice which has recognised the national benefits of renewables development.
Biomass provides an opportunity for an earlywin in terms of providing a fast and easy means of increasing renewablescapacity under the Renewables Obligation.Innogy believes that the potential for biomass co-firing to make asubstantial early contribution towards meeting the Government's renewableenergy targets will be substantially lost unless the timescales forrestrictions on the proportion of biomass which must come from energy crops arerevised.
It is clear that the Government's intention isto establish a fully competitive market in renewable energy.
Transmission, Distribution and Trading
Innogy believes that the costs of transmissionlosses are not effectively internalised in electricity markets.
Whilst the PIU review presents arguments insupport of a shift towards local generation, Innogy believes that this is notthe optimum way forward in the long term but that an alternative scenario basedon an incremental approach is more appropriate. Energy policy needs to takeadequate account of the current structure of gas and electricity transmissionand distribution systems and the significant implications this has ondetermining the most cost-effective measures for moving to a low carboneconomy. Innogy believes that the largecapital costs required to move to an electricity system with a significantlevel of distributed generation will impose an unacceptable price burden onconsumers. Alternative approaches can deliver similar carbon benefits at lowercost. A decentralised electricitysystem with significant generation volumes in the residential and SME sectorswill also inevitably lead to increased dependence on gas.
Local demand requirements are supported fromrenewable sources and localised storage facilities where possible;
Storage facilities are recharged when requiredfrom large-scale generation plants, which enjoy economies of scale in terms ofeconomic and environmental efficiency; and
Because of the potential of storage thelarge-scale plant can be scheduled to operate at off-peak hours, for examplewhen demand for gas is low, keeping prices down.
Contrary to the PIU report we believe that thecase for micro-CHP has been overstated in terms of the purported carbonbenefits, particularly in the context of the incremental electricityproduction, and that a thorough and transparent evaluation is required.
Nuclear
We support the PIU view that nucleargeneration makes a valuable contribution in reducing carbon, although the wasteissue remains unresolved. The fullcosts (of waste disposal and decommissioning) should be fully internalised.
Coal
The contribution that coal makes towardsdiversity, security of supply and flexibility for peaking plant means that ithas a long term role in a balanced fuel mix.Relevant issues have been considered above in our comments on securityof supply.
The technology exists to reduce SO2and NOx emissions from existing coal plant. However fitting Flue GasDesulphurisation (FGD) to coal plant reduces efficiency and in effect deliversa situation where more fuel is used and hence more CO2 generated forthe same electricity output. Thereforedecisions on the retrospective fitting of FGD and Selective Catalytic Reduction(SCR) should balance the conflicting outcomes of decreased SO2 andNOx against increased CO2.
We agree with the PIU view that the capture andsequestration of carbon requires a practical solution if coal is to have along-term role in a low carbon economy.Consideration should be given to supporting the development of thisoption through the DTI clean coal programme.
Innovation
Innogy believes that the UK's researchinstitutes are under-utilised and would like to see more effective 'workingtogether' in order to get important commercial technology to market, throughfor example the US MIT model.Government should create the market incentives for R&D expenditureinto new technologies rather than picking winners itself.
Institutional
We believesignificant changes in the way Government and its agencies work are required ifthere is to be real progress to achieving the joined up approach toenvironmental and energy policy development as advocated by the PIU review.While we commend the PIU report aspiration to bring together responsibilitiesfor energy under one Government Department, we are concerned that the proposedcreation of Sustainable Energy Policy Unit could simply add another layer ofbureaucracy to an already incoherent structure of institutions involved inpolicy making.
Industry needsstability and a clear policy framework to invest with confidence.