INQUIRY INTO THE EU’S 20% RENEWABLE ENERGY TARGET: EDF ENERGY SUBMISSION Summary of Evidence The 15% renewable energy target for the UK is extremely challenging. It will: significantly increase the cost of delivering greenhouse gas emission reductions; create new security of supply challenges (by increasing the amount of plant that must be built to achieve a satisfactory capacity margin and increasing the volume of actions that the system operator must take to ensure that supply and demand are matched in real-time) if a very high percentage of intermittent renewable electricity generation is built; create the need for radical change in how the UK electricity and heat sectors are structured and operate; and alter investment incentives for other types of new plant including nuclear and clean coal fitted with carbon capture and storage equipment both of which are important elements of a low carbon, diverse, secure energy mix in the future. Government’s primary environmental objective must be greenhouse gas emission reduction targets. The delivery of the 2020 renewables targets must be a “steppingstone” that facilitates delivery of the UK’s 2050 climate change target in the least-cost manner. When deciding on the apportionment of effort between UK sectors the cost-benefit of proposed measures must consider the whole lifetime energy system cost1. A target of 40% renewable electricity by 2020 will be extremely difficult and very costly to deliver. All sectors should take a fair share of the burden and the electricity sector should not be used as the sector of “last resort” for delivering the UK renewable energy target. Given the large cost increases that customers will face, delivering expensive renewables targets in the most efficient manner possible is essential. The ability to trade renewables certificates across national borders will help minimise costs. The current draft Directive text restricts trade and should be amended. Renewable electricity delivery to-date has been slowed by transmission access and planning issues rather than the nature of the financial support mechanism. However, despite this, we consider that there is a major question mark over whether the Renewables Obligation is fit for purpose for delivering a large, mandatory renewable energy target because: suppliers have the option to pay the buyout and do not have to contract with enough renewable generation to meet the target; if carbon price rises (and this was not foreseen when ROC bands were initially set) existing ROC-eligible projects will receive excessive support; and the size of the target will require simultaneous construction of both expensive and lower cost projects within each technology type 2 – RO banding may prove insufficiently flexible to deliver simultaneous construction in a costeffective manner. We support a full review of the most appropriate financial support mechanism. This should include the additional costs of transmission, back-up capacity and reserves to cope with intermittency, and costs associated with the displacing more cost-effective methods of low carbon electricity generation for the lifetime of the renewable generation assets 2 For example, the cost of the 1st GW of offshore wind could be much lower than the 30th GW due to factors such as water depth, distance from shore, etc.
Whilst the existing transmission access arrangements can be reformed to improve the allocation of existing capacity, for example by enabling the sharing and trading of TEC3, the key to accommodating much larger volumes of renewable generation is the construction of new assets. Strategic investment ahead of need is likely to be necessary to build these assets in time to meet the 2020 target. Proposals in the Renewables Directive for priority access for renewables are of concern because the UK requires major investment in both new renewable and new thermal capacity. Investor confidence must be maintained for investment to occur in all technologies. Introduction to EDF Energy EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. Our interests include coal and gas-fired electricity generation, combined heat and power plants, electricity networks and energy supply to end users. We have over 5 million electricity and gas customer accounts in the UK, including both residential and business users. We are part of EDF Group, one of the largest energy companies in the world. EDF Group maintains a large energy research and development capability in-house. EDF Energy already contracts with a wide range of renewables generators, both bilaterally and via the Non-Fossil Purchasing Agency, and in response to the Renewables Obligation and consumer demand is aiming to develop 1000 MW of renewable generation by 2012 as part of a wider package of environmental initiatives contained in Our Climate Commitments. General questions How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target? 1. Both the EU and the UK targets are extremely stretching. Without the ability to import significant volumes of Guarantee of Origin certificates to meet the UK target we have only limited confidence that the UK target will be met by 2020. Trading would assist the UK in delivering its target in the most cost-effective manner as described in the recently published report for BERR by Poyry. The current draft Directive text will obstruct trading and force the UK to rely almost entirely on domestic measures to deliver its target, potentially resulting in higher costs. 2. Recent concerns surrounding the sustainability of biofuels make it questionable whether the transport sector will deliver its share of the target. Biomass resources are finite and, even allowing for successful exploitation of indigenous resources and imports from inside and outside the EU, they are likely to make only a very limited contribution to UK electricity and heat targets. 3. The majority of the electricity target will be met by output from large scale on and off-shore wind farms. Delivery of the electricity sector target is dependent on planning reforms (to facilitate both large and small scale projects and for transmission and distribution infrastructure), turbine supply, adequate financial support, the right incentives for network operators to invest in a timely fashion and public acceptance of high penetration of wind energy both on and offshore. None of these elements is assured as yet.
TEC = Transmission Entry Capacity, the product that defines volumetric, instantaneous access rights to the transmission system
4. Heat sector renewable deployment is dependent on adequate financial support, development of installer capacity and public acceptance of new technologies. None of these elements is assured as yet and will require time to take effect. 5. Our current understanding is that BERR is considering a sectoral split of approximately 10% transport, 10% heat and 40% electricity. How the burden is allocated between the sectors is within the control of the UK government. Redistributing the burden such that a greater emphasis is placed onto heat would reduce the logistical difficulties associated with major electricity transmission system reinforcement and installing c.30GW of offshore wind capacity in little more than ten years. This could make the UK target more easily achievable. It may also be more cost-effective when considering the necessary decarbonisation of the heat, transport and electricity sectors to deliver a CO2 emission reduction target for the UK of 60-80% by 2050 to have a more balanced low carbon electricity generation portfolio with a lower penetration of intermittent renewable generation. 6. We consider it is essential that heat pump (both air source and ground source) is an eligible renewable technology under the Directive. In the long term, heat pumps are likely to be the main low carbon technology for delivering low carbon heat as biomass supplies are limited and the transport of large volumes of biomass into urban environments is problematic. The Directive provides an excellent opportunity to commence the roll-out of this technology in the UK and develop a large supply chain and installer base. The technology is developing, efficiency is improving rapidly and units are now available that can be retrofitted to conventional radiator-based heating systems found in most properties in the UK. In other European markets annual deployment rates are as high as 120,000 units per annum. How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Package in particular? 7. There are a number of inconsistencies. The proposal for priority access for renewable generation is discriminatory and could threaten the investment in thermal generation which is needed to replace closing plant in the UK. It could also lead to higher costs for consumers if constraint costs are increased. The trading proposals are so restrictive that they threaten the current trade in renewable certificates and will prevent the free movement of goods and capital across the EU – this is counter to the move towards regional markets and then a single market for power across the EU. 8. The renewables target will increase the cost of the primary environmental objective of delivering greenhouse gas emission reduction targets and will therefore exacerbate fuel poverty. Although it now appears that the renewables target is unlikely to crash EU ETS prices there remains a risk that EU ETS price will be lowered significantly by the renewables target. This risk could affect investor confidence in other unsupported, more economic low carbon technologies. 9. Looking at UK energy policy in particular there is a risk to carbon capture and storage (CCS) and nuclear deployment if too great a renewable target is placed on the UK electricity sector and delivered by intermittent renewables supported by thermal peaking capacity. Given that the UK objective of a 60-80% reduction in CO2 emissions by 2050 will require significant decarbonisation of the transport and heat sectors as well as the electricity sector, most likely by the use of low carbon electricity, it is essential that the UK embarks on a path that provides the
correct investment signals to meet this essential longer-term target. Forcing a very high level of intermittent renewables into the UK electricity generation fleet by 2020 could delay investment in the technologies which will be required to deliver the 2050 target (nuclear, CCS, more predictable forms of renewable generation, heat pumps). To what extent are these targets capable of improving the EU’s security of energy supplies? 10. At a high level renewable energy targets will displace imported fossil fuels in the EU and improve security of supply4. However the targets will also create problems for the UK because the primary means of meeting the proposed electricity sector target will be intermittent onshore and offshore wind. Managing intermittency will create additional costs for consumers (greater reserves held by the system operator to ensure system balancing, backup plant to provide reliable capacity at times of low wind speed across the UK, lower load factors for conventional plant requiring higher prices when these plant do run to recover their fixed and financing costs over fewer running hours, etc). Lower load factors for the conventional plant that the system will require in addition to new renewable capacity is likely to lead to the construction of low capital cost, flexible plant which is likely to be gas-fired CCGT and OCGT. This in turn may prevent the construction of new nuclear and coal plant with CCS and contribute to an increased dependence on gas and reduction in fuel diversity in the UK than would otherwise have been the case. This plant will have higher CO2 emissions than coal with CCS or nuclear. Grid Access How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energy generators? 11. In the UK new renewable energy generators are treated in the same manner as new thermal generation when applying for access to the transmission system. Over the next 10-15 years the UK is likely to require in excess of 30GW of new thermal generation to replace closing coal, oil and nuclear stations in addition to 40+GW of renewable generation to meet the UK share of the 2020 renewables target. Long lead times for connections at present are a result of the time required to achieve planning consent and then construct the necessary deep reinforcements to transmission infrastructure. The current UK planning regime means that major transmission reinforcements typically take approximately ten years from initiation to completion. Proposals to reform the planning regime and provide shorter and more certain timescales for consent will reduce this timescale. Similarly the TAR (Transmission Access Review) process could increase the efficiency of utilisation of existing transmission assets (see below) but it is important that the process of improving short-term access allocation efficiency does not undermine long-term signals for investors. To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is it consistently a problem across all Member States? 12. In the short-term in the UK, grid access has delayed the construction of a number of renewables projects that have been by brought forwards by developers in response to the financial incentives offered, primarily, by the Renewables
They may also displace indigenous fossil fuels such as UK coal and German lignite.
Obligation. However this has led to relatively little “loss” of renewable electricity because of the relatively low level of the Renewable Obligation to-date. In the longer-term, National Grid has indicated that it believes that it could construct sufficient infrastructure to deliver the electricity sector share of the UK target by 2020, providing it can make strategic investments ahead of firm need being signalled by connectees (for example to increase the general capacity of the system to flow electricity from north to south or to accommodate onshore flows of electricity from offshore wind farms). For this to happen, it will be necessary for the currently proposed planning reforms to be implemented. This approach of strategic investment by Grid will create a risk of stranded assets, the cost of which would need to be recovered from system users and ultimately consumers; however it is a pragmatic and strongly desirable response to the challenge of dramatically increased renewable electricity targets. Improvements should also be made in the efficiency of allocating existing transmission capacity to generators which could increase the amount of renewable electricity in the shortterm (but at a cost). “Sharing” of the existing grid can be facilitated by a move to zonal transmission access rights, rather than nodal (location-specific). A move to zonal transmission access rights will facilitate trading to ensure more optimal use of existing transmission capacity. However, TEC sharing will have a relatively small impact on the level of capacity that will be able to be connected and it will not resolve the issue of the GB queue. What is also required is further major investment in infrastructure. 13. A “connect-and-socialise” type transmission model has been advocated by some renewable developers. This would give them the right to nominally “connect” even when the Grid could not take their power at all times, due to deep reinforcements not yet being complete. When these projects are constrained off the system they would receive full financial compensation including lost renewable subsidy (RO) income. The developer would thus be, financially, satisfied. Unrestricted nominal financial access to the Grid of this type for renewable generators creates the risk of very high constraint costs for consumers and is unacceptable. How does Use of System charging affect grid access for renewable energy generators? How far can the different levels of renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules ? 14. Current TNUoS charging in the UK is based on long-run marginal costs of increasing transmission capacity. As a consequence generators located in the north of Great Britain, distant from demand, face higher transmission charges than those located in the south close to the major centres of demand. This is economically efficient and reflects the cost of reinforcing the system to accommodate their electricity. The UK has good onshore wind resource in the north and lower resource onshore in the south although high quality offshore resource exists both in the north and south. If TNUoS charging were altered to either provide a discount to renewables or to reduce the strength of the locational signal more generally this would create a hidden subsidy for renewables and other generation in what are naturally high TNUoS areas. The latter would, perversely, penalise southern renewables developers. What impact do the various systems of reinforcement planning and work have on encouraging renewable generation? How important is the issue of constraint in increasing Member States’ renewable generation?
15. The UK transmission system requires major reinforcement to accommodate new renewable generation. The construction of new major transmission lines takes circa 10 years, mainly due to the requirements of the existing planning process. The Planning Reform Bill should provide greater certainty on timescales for transmission development and hopefully reduce the time to develop new lines. 16. Typically new transmission investment can only be made once an application for connection for additional generation has been made. Given the existing transmission constraints, very large increase in renewable generation capacity required by 2020 and the long lead times to construct transmission assets a more appropriate approach would be to allow strategic investment ahead of need by transmission companies in areas identified as likely to need reinforcement to accommodate power flows from additional generation. Whilst placing some additional risks on system users and ultimately consumers (from costs associated with inefficient, underutilised investment) this sort of approach is needed if the UK is going to have any chance of reaching its renewable energy target in 2020. 17. As explained above, proposals for “connect and socialise” type transmission access proposals in the UK will cause very large constraint costs for consumers for little environmental benefit, without offsetting benefits. They have no merit. 18. High levels of intermittent generation in the UK will create very volatile wholesale electricity prices and require large volumes of “backup” thermal generation because the capacity credit of wind (i.e. its probabilistic contribution to meeting peak demand) is very limited. Increased interconnection between the UK and the rest of the EU will reduce price volatility (subject to the correlation of wind output across interconnected markets) and could create further efficiencies if it is possible to share backup generation across a wider geographic area. To what extent is further co-ordination of National Regulatory Authorities needed? 19. No comment. How far do current regulations inhibit access to the grid? 20. The current access arrangements do not inhibit access to the grid for renewable generation relative to other forms of generation. We do however believe that a number of improvements could be made. These include: CAP 150 (Connection and Use of System Code Amendment Proposal number 150) will allow National Grid to remove “phantom” projects from the grid connection queue (e.g. those for which planning consent has not been applied for), remove over-booked capacity (where planning consent has been applied for a lower capacity than the connection requested from Grid) and put-back projects to a more realistic connection date where it is the timing that looks to be an issue; CAP 131 which will introduce a requirement on generators, new and old, to enter into financial commitments (“user commitments”) to partly cover the cost of their connection assets. This should cause the developers of generators that will never be built to formally cancel their connection agreements to avoid paying this commitment fee; Better operational utilisation of the existing grid (e.g. using live line ratings rather than fixed power line maximum transfer limits, particularly in Scotland); relaxation of grid security limits in fair weather to a greater extent than at present (almost all “customer lost minutes” at present are due to DNO issues, implying that the transmission system may be over-secured). The grid normally secures against the simultaneous loss of two Grid circuits at once (“N-2”) and
only in very fair weather does it secure against the loss of only one Grid circuit at once (“N-1”). In Scotland, N-1 is the standard that is worked to far more frequently; increase the tensioning of lines (“hot wiring”) to reduce sag and hence increase maximum power transfer capabilities; increase the use of commercial intertrips whereby a generator can be disconnected from the system in the event of a transmission system fault (a form of “voluntary TEC sharing”); TEC5 sharing whereby the Grid would be divided into TEC sharing “zones”, within which TEC is not regarded as nodal but as a uniform commodity with a one-on-one transfer capability between nodes within a given zone (hence, TEC would become zonal, not nodal). TEC sharing at an ex-ante, fixed exchange ratio of 1:1 would be possible between locations within the TECsharing zone. Within each TEC sharing zone, existing and new/proposed power stations could voluntarily share TEC (perhaps via commercial agreements) and would only need to have sufficient TEC in aggregate to cover their total, collective generation at any point in time. This efficient allocation would enable wind farms to group together and share TEC as their combined output would never equal their maximum installed capacity and also allow low load factor “back-up” generation to share TEC with wind farms because they will almost never run simultaneously. The concept of TEC sharing could also be expanded to a more dynamic form of TEC trading; and introducing the concept of overrun whereby generators would be able to purchase “non-firm TEC” which would not come with the right to receive transmission constraint compensation from Grid in the way of “bid” acceptance monies when constrained off. Instead, when generating against non-firm TEC, the generator would be billed the cost of any constraints that it caused elsewhere, i.e. costs associated with constraining-off other generators in order to make way for this output. Non-firm TEC would be charged at a lower rate than firm TEC.
Support Schemes: At what level should the EU be involved in harmonising or regulating support schemes offered by Member States to encourage renewable energy generation? 21. The current proposals for trading in the draft Directive are so restrictive that only very limited trading will occur. Harmonisation of support schemes would help to facilitate trading by removing some of the grounds for objecting to more widespread trading by certain Member States. However, national variation in charging for connections, access, etc and national / regional power markets (reinforced by limited transmission interconnectivity) make harmonisation problematic because the support level for a particular renewable technology required in one country may be very different to that required in another. Looking to the longer term, low carbon technologies should compete with each other based on the price at which they abate carbon. The EU should be looking now at how renewables technologies move from bespoke support mechanisms to support being provided by carbon pricing alone. Contracts for Difference “TEC” stands for Transmission Entry Capacity – the right of generators to be able to inject power up to that specified level, in MW, onto the Grid (or, where there is a transmission constraint, to be compensated financially by National Grid for not being able to operate, so that they do not lose profits – although they should not exploit the constraint by asking for unduly lucrative compensation. The compensation price is set by the generator as his “bid” price to Grid). TEC at the moment is a static MW figure that relates to a given generator at a given location, or “node”.
(CfDs) on carbon price provide a method for preventing excessive support to renewables if market-based carbon prices rise. What impact have the various schemes in operation across the Member States had on encouraging renewable energy? How have these schemes affected take-up both by producers and commercial and domestic consumers? 22. The Renewables Obligation in the UK has brought forward a large pipeline of projects. Delivery has been delayed by transmission access and planning issues and not the strength of the financial support signal provided by the RO. Simple comparisons of FiT (feed-in tariffs) in other European countries and the RO that conclude that the RO is inferior on the basis that delivery has not been as high are much too simplistic and ignore the wider issues associated with transmission access and planning that affect projects in the UK. 23. Looking forwards though there is some doubt as to whether the RO will be the most efficient support mechanism for deploying large volumes of renewables in the UK. The table below provides a high-level assessment of how the RO and alternative support mechanisms perform against relevant criteria. Criteria Build different technologies simultaneously Efficiently support construction of low and high cost projects of same technology simultaneously Prevent windfall to generators if carbon price rises Guarantee delivery versus targets Integrate auction revenues into support mechanism Continuity for investors RO Yes No No No No7 Yes FiT Yes Possibly Yes Possibly Yes No CfD6 Yes Possibly Yes Possibly Yes No
24. On several criteria the RO appears to perform poorly against the alternatives. For example, feed-in tariffs and CfDs could prevent windfalls to generators if CO2 prices rise, and feed-in tariffs and CfDs only trigger consumer cost if capacity is delivered8. Also the RO does not guarantee delivery of the target. We consider it is essential that a full review of the most appropriate support mechanism is undertaken and look forward to the government’s consultation on the development of the UK’s Renewable Energy Strategy due in the summer of 2008. 25. Demand for renewable electricity supply contracts (business customers) in the UK were driven initially by the Climate Change Levy Exemption Mechanism which offered a small financial saving. This has been superseded more recently by corporate social responsibility as the primary purchasing driver. Renewable electricity demand in the domestic sector remains low. Going forwards it is essential that Ofgem’s green supply guidelines, the Carbon Reduction Commitment and Defra’s Corporate Greenhouse Gas Emission reporting guidelines and electricity suppliers Fuel Mix Disclosure requirements which use REGO’s to demonstrate the renewable content on suppliers labels provide a consistent message to consumers regarding the environmental benefit of purchasing / supporting renewable electricity deployment. The current Ofgem proposals for green supply guidelines are inconsistent with the CRC proposals
Contract for Difference Support would have to provided separately, for example using capital grants 8 Guaranteed headroom in the RO, once the target has reached a certain level, should reduce partially the risk of excessive consumer costs if delivery is not occurring
(because they would attribute a CO2 benefit to LEC-backed electricity supply contracts) and could create customer confusion. Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Is necessary investment hampered by lack of market harmonisation? 26. It is not yet clear how support will be provided for development of projects within Member States to deliver against the EU 2020 targets and then to allow the output to be traded. One possibility is that Member State national support mechanisms will be able to cross national boundaries as currently exists for LEC’s and REGO’s, i.e. UK consumers could directly fund a project in another Member State with the ROCs, REGOs (and LECs) being repatriated to the UK. If this model is followed then the presence of different support mechanisms would have only limited impact on cross-border trading although consideration of the impact on existing investors within the RO would need to be carefully considered. 27. Investment will not necessarily be hampered by lack of market harmonisation, rather the overall efficiency of investment likely to be lower across the EU if the lowest cost opportunities cannot be accessed by all countries through restrictions on trading. However, looking forwards as the EU moves towards regional and then a single market for power then the opportunities and incentives for harmonisation will become greater as differences in renewable economics within Member States become smaller. To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation of support schemes? 28. See answer above. Harmonisation is not a pre-requisite to REGO trading if national support mechanisms can cross borders.