Memorandum by ScottishPower plc
THE ENERGY
WHITE PAPER
1. The white paper sets out to deliver some
ambitious and laudable, but potentially conflicting, policy objectives.
We welcome the clear direction and vision of a lower carbon economy
that the white paper sets out. However, the detail of implementation
remains somewhat uncertain, with many instruments and decisions
not crystallising until the 2005-06 period.
2. ScottishPower accepts the science of
climate change and we are already responding to the Government's
more environmentally focused agenda through our investments in
renewable energy and our commitments to energy efficiency and
fuel poverty. We have more wind farm capacity subject to planning
applications than any other UK developer and our aim is to spend
approaching £1 billion on new renewable energy generation
by 2010. We are already the UK's second largest operator of wind
farms.
3. At its heart, the white paper postulates
that UK energy demand can be met, during a period of significant
nuclear and coal plant retirements, by a combination of additional
renewable sources of energy and energy efficiency. ScottishPower
believes that this objective is achievable, but only if many of
the present barriers to both renewables and energy efficiency
are removed. We doubt whether the policy initiatives specified
in the white paper are sufficient in themselves to deliver what
is required.
4. We question whether the renewables aspiration
can be met without more formal targets, backed by an extended
Obligation and without more determined action on planning and
other barriers to development. We also doubt that the scale of
the challenge on energy efficiency is recognised. Whilst the white
paper acknowledges the upward pressure on prices that moving to
a low carbon economy will bring, we question whether the extent
of this pressure on end-user prices is fully recognised and is
being communicated sufficiently clearly to consumers.
5. Wholesale electricity prices have already
increased by over 20 per cent from their recently depressed levels,
in response to a tightening capacity margin, with further rises
forecast. This return towards "pre-NETA" wholesale price
levels may not be fully passed through to household energy bills,
but the cost of measures to encourage a lower carbon energy system
will be felt by all end users.
6. Achieving 20 per cent of supply from
renewables by 2020 will add 15 per cent to end-user electricity
prices in that timescale. Doubling the Energy Efficiency Commitment
in 2005-06 could add as much as 5 per cent to end-user prices
within three years. Finally, although the precise impact of carbon
trading is not yet clear, our initial estimates suggest an impact
of at least 10 per cent on end user prices.
7. Taken together with the costs of investment
in infrastructure, we estimate that the unit price of electricity
to end users is likely to rise in real terms by around 15 per
cent by the end of the decade. There is concern that, as these
price pressures begin to be felt, government or the regulatory
authorities will be tempted to intervene. This would deal a fatal
blow to investment intentions and severely hinder the development
of renewable generation.
8. Beyond these questions there are also two
other areas where we are concerned by the white paper's conclusions
and their implications for a reliable and affordable energy supply.
We are concerned that:
— risks to security of supply have
been under-played and security is therefore seen as a manageable
issue;
— coal-fired generation's role in dealing
with issues of intermittency on the network has not been recognised.
9. In the balance of this note we set out
our views on the detail of the practical steps necessary to encourage
development of renewable energy. It is also necessary to consider
other areas of policy that influence overall success. We therefore
set out our response under the broad headings of:
— renewable energy technologies;
— renewable energy & the planning
process;
RENEWABLE ENERGY
TECHNOLOGIES
10. ScottishPower is the second largest
wind farm operator, with the UK's most extensive development programme
for on-shore wind and is actively pursuing the potential for offshore
sites, as well as maintaining close contact with the developers
of other renewable energy technologies.
11. We fully support the Government's drive
towards generation from renewable sources. However, if the aspiration
of 20 per cent of supply from renewable sources by 2020 is to
become reality, even more needs to be done to remove barriers
to development of renewable energy schemes.
12. Sufficient on-shore wind resource is
available for the Scottish target for 2010 and subject to rapid
improvements in the planning process, this can be delivered. GB-wide
targets will require a major contribution from offshore wind,
which is not yet proven as a cost effective technology due to
the limited experience of construction and operation. Costs are
expected to be significantly higher, offsetting improved wind
yields and investors are also concerned about long-term support
from mechanisms such as the Renewables Obligation.
13. Government should create a firm target
now for the period beyond 2010, backed by the Renewables Obligation,
to give more certainty to ROC values in the later years and thereby
facilitate finance and improve the business case for developers
of offshore sites.
14. A significant proportion of generation
to achieve the 2020 "aspiration" will need to come from
alternative technologies to wind, where consents will inevitably
tighten. We do not believe there is yet a coherent and functioning
mechanism to ensure that the most promising new technologies,
such as wave and tidal, can move through the development cycle
to full commercialisation.
15. Whilst there is considerable R&D
funding available, a number of full-scale projects will need to
be demonstrated prior to uptake by commercial developers on the
scale necessary to bring costs within the present Renewables Obligation.
Additional capital grants are necessary to take promising new
technologies beyond the R&D stage.
16. A clear route-map to commercialisation
is also essential. It is important that funding is better directed
in proportion to the prospects of a technology becoming competitive.
This would require pre-identified criteria relating support to
key milestones, including full-scale testing and securing partners
such as utilities. It is noteworthy that immature technologies
were satisfactorily commercialised using the NFFO mechanism in
the past.
RENEWABLE ENERGY
AND THE
PLANNING PROCESS
17. Research for the Scottish Executive and
for the Scottish Renewables Forum shows strong public support
for wind power and that wind farms do not deter tourism. Operational
wind farms are well accepted in their localities but before development,
opposition from a minority is always vocal. Whilst members of
the public and bodies charged with the protection and preservation
of landscape and nature have a right to raise legitimate concerns,
the planning process needs to balance these rights, in a timely
and efficient manner, against the need for action on climate change.
18. We believe it is reasonable, given careful
site selection and early stakeholder engagement, to expect determination
of a wind farm planning application within twelve months. Even
in Scotland, where the NPPG 6 planning guidance is acknowledged
to be ahead of its equivalent in England & Wales, many projects
are taking up to two years, some even longer. More resources are
needed within Local Authorities and within statutory consultees
to enable more effective consideration of applications. Relatively
minor investment could have significant benefits in achieving
targets for renewable energy.
19. It is important to the achievement of
government's aims beyond 2010 that we make the optimum use of
our natural resources. Around 40 per cent of the Scottish on-shore
wind resource is currently excluded from consideration because
it lies within the Ministry of Defence's South of Scotland Tactical
Training Area.
20. MoD Tactical Training Areas should not
be treated as exclusion zones for wind farms. We believe it is
possible to develop significant capacity in these areas at specific
locations, perhaps with a few large wind farms, with no unacceptable
impacts on MoD operations.
21. ScottishPower has over 400MW of wind farms,
approved by local authorities but awaiting clearance in relation
to airport radar issues. Viable, safe solutions exist in countries
such as Denmark, Germany and the USA and a preferred solution
for the UK has been identified. A very practical step for the
Government would be to enable the relevant parties, including
NATS, BAA and the CAA, each of which has legitimate issues, to
join up their actions. Joined-up solutions, across Ministries
such as Transport, Defence, DTI and ODPM, where Government takes
full account of the down-side impacts of not addressing climate
change in a timely manner, would go a long way towards securing
the ambitious targets for renewable energy.
SECURITY OF
SUPPLY
22. The white paper sees the risks to security
of supply as manageable and the implied reliance on gas as the
major fuel for electricity generation is not seen as a problem.
We disagree. The events of this summer, where problems in France
created shortages in Italy and affected wholesale prices in the
UK, illustrate the issues surrounding dependence on external sources
for security of supply.
23. Recent blackouts on the East coast of
North America demonstrate the practical dangers of tight capacity
margins, yet in our view the present UK commercial arrangements
still do not fully provide a mechanism for preserving security
of supply at an appropriate level. Nor does the current policy
recognise the significant political risks of a misjudgement in
this area.
24. We are concerned that the potential
role of flexible coal-fired capacity in a world of intermittent
renewable energy has not been recognised and that such capacity
will disappear more quickly than present forecasts suggest. Coal
generation is particularly suited to helping maintain system stability
and we are concerned that emissions controls will be implemented
in such a way as to eliminate flexible coal capacity in a short
timescale or, at best, restrict its ability to operate effectively
in the Balancing Mechanism.
25. This may be a critical issue for system
stability in Scotland after 2010 with two base-load nuclear stations
and an effective target of 40 per cent of generation from (intermittent)
renewable sources by 2020.
26. We would strongly urge government to
consider introducing a capacity element into the wholesale price
to reward flexibility and ensuring that opted-out plant is not
constrained from playing a role in system stability as larger
percentages of intermittent generation are installed.
REGULATION
27. The white paper included a commitment
to undertake regulatory impact assessments, a review of statutory
guidance and a consultation on appeals against code decisions.
Rapid progress in these areas will help to create a climate where
government and industry can work more effectively together to
deliver the vision of a lower carbon economy.
28. Working effectively together requires
regulation to be more aligned with emerging energy policy objectives.
The need for action in this area is underlined by the proposals
for zonal transmission access and losses charges under BETTA,
which will be detrimental to the growth of renewables, undermine
past decisions to invest and have an exaggerated and discriminatory
effect on Scotland.
29. We welcomed the Department of Trade
and Industry's announcement that the Minister was not minded to
agree to the extension of zonal loss charges into Scotland as
part of a GB-wide market. If at some point in the future, a locational
element to charging for losses or transmission access can be justified,
any charges should be phased-in over several years, to prevent
slowing of renewable development and to recognise that previous
investment decisions were taken in the absence of any expectation
of locational charging.
30. We would welcome Ofgem's work being
better focused on areas that will help deliver the white paper's
targets. Zonal network charges, along with tradable grid access
rights and metering competition will do little to further the
white paper's agenda or provide benefits for end users.
NETWORKS
31. We welcome the recognition that major
investment in electricity networks is vital to meeting our long-term
goals on renewables and the agreement recently reached with Ofgem
on planning for initial investment within the Scottish transmission
system as a consequence of the Renewable Energy Transmission Study
[RETS].
32. It is important that we build on this
foundation and ensure that Ofgem confirms the necessary financing
for the whole RETS investment for the 2004-07 period. We need
a regulatory mechanism that incentivises an efficient infrastructure
but also accommodates strategic investment in networks to facilitate
rapid development of renewables. Developing networks solely in
response to short-term economic signals is likely to be inefficient
in the current environment and also in terms of meeting generators'
and government's timescales.
33. We also need to recognise that planning
constraints do not just apply to wind farms. The Northern Ireland
inter-connector consents took seven years to achieve and transmission
upgrade planning delays will hamper progress with renewable energy.
Government should recognise that improved planning guidance is
required for all areas of energy infrastructure and move swiftly
to provide it.
INVESTMENT
34. The scale of the task in moving to a
low carbon economy is significant and requires a step-change in
approach. Major investment will be required and although ROCs
are enabling on-shore wind farm investments to be made, potential
returns in other areas are well below the level necessary to justify
capital spending. Developers of renewable energy will find it
difficult to persuade lenders that policy instruments such as
the Renewables Obligation offer certainty when their role is due
for review in 2005-06. Investment also needs to take place against
a background where leading utility companies have suffered financial
distress in the post-NETA world and where lenders have become
owners of major generating assets.
35. The industry is in transition from a
period of incremental efficiency gains and falling prices to one
where the costs of necessary investment and reducing levels of
carbon in the system will need to be met by end users. Investors
will be concerned that as these costs begin to be reflected in
end user prices, government or the regulatory bodies will be tempted
to intervene. Such intervention would create considerable uncertainty
amongst investors regarding available returns and would at a minimum
raise the cost of capital, if not stifle development altogether.
36. More open recognition of these cost
pressures and acceptance that artificially low prices are unhelpful
to the Government's environmental goals would be a welcome development
and would go a long way to creating an appropriate climate for
the necessary investment.
October 2003
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