Written evidence submitted by InterGen (UK) Ltd (FEI0032)

 

 

Please find enclosed here InterGen’s response to the call for written evidence on Financing Energy Infrastructure. InterGen is one of the UK’s most successful independent generators having been in the UK constructing and operating 2.5GW of efficient gas-fired power plants since 1995.  We have a further 0.3GW under construction plus 2.0GW in development (which was project financed using the Capacity Market), including two battery projects set to be amongst the largest in the world. InterGen is therefore well placed to comment on the drivers behind investment in generation in the UK.

 

 

Executive Summary

  1. InterGen is committed to continued investment in the UK and believes it is essential that the Government continues to support the urgent reinstatement of the Capacity Market (CM) in order to maintain the UK’s attractiveness as a place to invest in all generation projects.
  2. The expense and delay to mooted new nuclear projects requires the Government to consider a new and cleaner way forward to meet climate change targets (including nuclear spent fuel). InterGen supports the introduction of subsidies for new, low carbon technologies to be built at scale – such as energy storage. Subsidy schemes are essential in order to attract the necessary investment from UK and overseas, and can be reduced in parallel with the technology deployment costs, as evidenced by the successes of wind and solar generation subsidies in the UK.
  3. Banks and investors do not have the appetite to invest to the levels to meet the UK requirements in low carbon generation as such projects generally do not have contracted revenues and are hence exposed to merchant power risk. Globally, such projects have not been invested in by banks over the last 20 years on a large scale.  Moreover, the alternative corporate Power Purchase Agreement (PPA) market is not believed to have sufficient liquidity to act as an alternative contracted revenue source.  InterGen therefore urges the committee to consider improving PPA market liquidity by mandating PPA’s between large suppliers and smaller generators, to enhance competition and bring forward projects not owned by traditional large utilities.  Without such change it is highly probable that the UK will not be the place of choice to invest in globally and money will be allocated by companies to other markets resulting in an investment shortfall.
  4. In addition, InterGen encourages the committee to consider re-allocating the money that would have been spent on nuclear Contracts for Difference (CfD’s) on alternatives including battery storage and increased amounts of offshore wind.  For example, by way of ensuring a modest or zero power price floor for these technologies such that they are not exposed to negative power prices. 

 

About InterGen

  1. InterGen remains one of the few genuinely independent generators active in the GB market, with a track record of developing, constructing and operating large scale thermal power generation projects. We have been active in the market since the 1990s.
  2. InterGen is owned by two major international investors, including China Huaneng (People’s Republic of China) – the world’s largest power generator with some 170GW of generation.
  3. As one of GB's largest independent generators, we operate a portfolio of three flexible gas-fired power stations totaling 2.5GW; an investment of some £2.1bn. These are located at Rocksavage (Cheshire), Spalding (Lincolnshire) and Coryton (Essex). Together they represent almost 2.5% of GB generating capacity. Additionally, in December 2016 at the T-4 CM auction InterGen won a fifteen-year agreement for a 300MW gas fired open cycle generation station at our Spalding site which is in construction and expects to commence operations in summer 2019. The 300MW OCGT was project financed – the first large scale project to be project financed underpinned by a CM award.
  4. InterGen is currently developing a c.750MWh battery storage project at its Spalding site in Lincolnshire.  This is one of the largest battery storage projects in the world and is construction ready.
  5. InterGen is also investing in a large scale project near its Coryton plant in Essex, the Gateway Energy Centre.  InterGen is currently in the process of seeking amendments to the existing planning consent to include a large scale battery storage development project of c.1.3GWh, as well building new flexible gas-fired power generation at the site. 
  6. InterGen’s Spalding and Gateway Energy Centre battery storage projects make InterGen one of the world’s leading developers of battery storage.

             

How do recent investment decisions on nuclear and trends in low carbon investment affect the UK investment outlook for energy infrastructure?  Is there a case for changing the Government’s current approach to delivering a low cost, low carbon energy system? How could the ‘nuclear gap’ be filled?

  1. The ‘nuclear gap’ provides an excellent opportunity for the UK to focus more fully on alternative clean, lower carbon energy that will be a lower cost to the consumer than the planned nuclear investments (with no long term waste issues).  InterGen considers that this gap can be filled through a combination of the following core technologies and support schemes:

a)      Existing and new wind (on and offshore) and solar generation, particularly utilizing GB’s world leading wind resources and onshore/offshore expertise. 

b)      Considered relaxation of onshore wind planning throughout the UK. For example, local or regional authorities could be given binding targets for modest onshore wind growth ensuring that the burden is shared by regions consistently – similar to low cost housing targets;

c)       Focus on increased levels of offshore wind investment (beyond announced future CfD rounds). Government should explore the possibility of diverting existing (and no longer required) nuclear CfD funding to continue to support offshore wind deployment.

d)      Large scale battery storage deployment in order to store the excess clean energy generated at times of high wind / solar and low demand and release such energy during periods of low wind / solar generation.  Such large-scale battery deployment would require a change in the Government’s approach as it is not currently supporting investment in deployment at such a scale (for example, the de-rating factors for batteries in the CM are high and the CM clearing price is not supportive of a developing technology);

e)      Continued support of existing and investment in new flexible gas plant to provide much needed flexible generation during periods of low wind / solar generation, via the CM.  Such generation is also more readily suited to providing fundamental grid support services. 

  1. InterGen does not consider that the use of carbon capture will become economically viable for gas plant and it considers that financial resources should be spent furthering renewable technology and energy storage. 
  2. To deliver this change and address growing trends in low carbon generation (in particular the move to subsidy free deployment), InterGen would urge Government to consider changing or amending its approach to ensure investment is forthcoming, namely:

a)      Existing and new wind and solar – subsidy-free generation can only be built if it is 100% equity funded or it secures a Power Purchase Agreement (PPA; a long term contract between a generator and supplier for up to 10-20 years) which enables debt financing.  Given the PPA market has historically had poor depth it is highly unlikely that major deployment of new wind and solar (or re-powering of existing assets) can take place without either “balance sheet” players undertaking such investment (which will result in independent generators having limited scope to enter the market, thereby reducing competition), a subsidy being in place (even a “zero” price floor to ensure that such generation is not exposed to negative prices), some form of guarantee scheme being implemented, or banks having the confidence to accept merchant power risk which they have historically not done.

b)      New nuclear - Subject to defense considerations (nuclear expertise in the UK), InterGen believes that further large scale new nuclear should be stopped given its expense (and ultimate cost to the consumer) and long term environmental waste and decommissioning uncertainties. 

c)       Large scale battery deployment – the current subsidy via the CM is low, typically around 10% or so of the total revenue stack for a large scale project.  This means that such projects need to be fully equity financed (this despite the technology being relatively new at scale and still carrying risk).  To encourage investment in large scale projects and ensure that the UK is a world leader in battery storage, we believe that an alternative subsidy regime should be made available – such as an enhanced CfD pot given the stage of development and deployment of this technology.   This CfD pot could be phased out as battery costs reduce to a sustainable level, as has been the case for wind and solar generation over the last decade.

d)      Existing and new gas – the Government should maintain their focus on reinstating the CM as soon as practicable. Should the market not be re-instated or a further legal challenge is made that results in long term uncertainty over income then an alternative mechanism to support gas projects should be launched (as the projects will be loss making otherwise).

 

How attractive is the UK energy sector for investment compared to other countries?   Are there particular technologies which are more – or less – attractive to investors under current arrangements?

  1. Currently, there are no technologies that are more attractive to invest in the UK than other countries.
  2. Investment in UK offshore wind is comparable with other European countries as a result of the CfD mechanism.  However, onshore wind is less attractive than many other markets due to their continued subsidy support mechanisms and there being no planning consent restrictions (such as those existing in England and Wales). 
  3. InterGen is currently constructing one of the only large scale projects in the UK to receive a 15 year Capacity Market Agreement, the open cycle gas plant at Spalding, Lincolnshire. The new plant is due to come online in summer 2019 and will be capable of generating 300MW.
  4. The total project cost is estimated to be in the region of £110million. InterGen financed the new gas plant using project finance, raising debt for the project on the back of the award of the 15 year capacity agreement.
  5. Traditionally, PPA’s were the mechanism by which finance could be raised for new, large-scale generating assets. Increasing amounts of subsidised renewables, combined with an industry that was increasingly vertically integrated, has dampened the need for electricity suppliers to enter into new PPA’s.
  6. The government recognised the need to intervene, so that investment in existing and new thermal plant was once again attractive and the lights would be staying on, resulting in the introduction of the CM to support continued investment in existing, flexible generation and bring forward investment in new, highly efficient projects such as InterGen’s Spalding open cycle gas plant.
  7. It is therefore essential, not just for plant that has an existing UK Capacity Market Agreement, but for the attractiveness of the UK as a whole as a place to invest, that the CM be reinstated as soon as practicable.  Should the market not be re-instated or a further legal challenge is made that results in long term uncertainty over income then an alternative mechanism to support gas projects should be launched (as the projects will be loss making otherwise).

How has Government policy improved the UK energy investment environment over the last three years? 

  1. No comment at this time.

What types of investor can we expect to finance future UK energy infrastructure? What are their criteria for investment, including on risks and returns?  Does it matter if investors for specific technologies are largely from overseas?

  1. Investors are driven principally by country and regulatory risk, and contracted revenues.  UK country risk, despite Brexit, is modest.  The regulatory risk level for the UK is currently high for flexible thermal plant as a result of the CM suspension.  Even if the CM suspension is lifted, the risk level would be medium at least given the heightened risk of sustained challenges by the likes of Tempus.  Additionally, the proposed wide-ranging changes to gas and electrical charging regimes run the risk of existing projects facing materially reduced returns (namely, Ofgem’s Targeted Charging Review and the proposed gas transmission charging changes being mooted under UNC 0678). Predictability of costs is often as important as the level at which certain costs are set. Continued regulatory revisions makes investors nervous. InterGen would urge more collaboration and joined up thinking between BEIS, Ofgem and National Grid in these scenarios.
  2. Traditionally, stable, long-term contracts underpin project financing which has been used to fund the majority of new gas generation, onshore and offshore wind projects over the last 20 years.  Without long-term contracted revenues banks will not lend and projects will need to be funded mainly from equity (and not debt).  This results in reduced competition as strong balance sheet players will have a natural advantage.  Moreover, equity finance is more expensive than debt resulting in higher costs to the consumer. 
  3. Revitalising the PPA market by mandating PPA’s between large suppliers and smaller generators, would give banks and lenders a level of comfort that would lead to greater investment, enhanced competition, and more innovative, independently-owned projects coming to fruition.

What role should the Government play in providing financial support and sharing risks for new energy infrastructure?  Are existing financing mechanisms, notably the Contracts for Difference, fit for purpose? Are there any practical issues, or potential unintended consequences, that could affect the feasibility of implementing alternative support models (such as a Regulated Asset Base)?

  1. InterGen considers that the existing CfD regime should remain in place with the auction approach providing value for money to consumers, whilst the contract supports financing of projects.
  2. InterGen has two of the world’s largest energy storage projects in development and as it stands the CM does not support the raising of debt or earnings stability for equity investors given the de-ratings of batteries.  InterGen considers that, in order to ensure the UK leads energy storage deployment, it should either include battery systems in the CfD scheme (which would be InterGen’s preference given its status as a new technology for the energy market) or increase the CM de-rating factor (in particular for long duration ≥4hour batteries; albeit the low CM clearing prices mean that this has no current benefit in terms of debt financing).
  3. An alternative to CfD and CM contracts is for the Government to explore the potential mandating of PPA’s (between developers/generators and large suppliers) or the introduction of a market maker. This would direct large, vertically integrated energy companies to look beyond their own assets to self-supply their customers. This would open up the market for investment in pioneering, low carbon projects not all owned and operated by the traditional large utilities. As well as potentially attracting investment from more diverse geographies, this will encourage more innovation, and allow smaller, UK-based companies to produce low carbon generating assets on a large scale.

What further steps should the Government take to increase investor confidence in the UK energy sector? 

  1. InterGen considers that BEIS, Ofgem and National Grid need to be more joined up on a timely basis on key matters.  Recent examples include the timing of the introduction of gas and electrical transmission system charge changes.  InterGen considers that such changes should be aligned with T-4 CM auctions to ensure that the additional cost can be factored into the CM pricing.  We believe this approach to be fair and equitable.
  2. With the lack of publically announced back-up mechanisms during the current CM suspension, there is severe lack of certainty for thermal plant in the UK.  This is stopping (or at the very least slowing down) material plant improvements.  Also, it is prohibiting investment in thermal plant to contribute to bridging the potential nuclear gap – arguably risking security of supply.  We believe that BEIS must commence work on a back-up mechanism and engage with industry on this (and not wait for a scenario whereby the EU finds against the mechanism as this will result in further time delay to investment). 
  3. Government should continue to engage with banks to ensure that policies support debt funding to maximize the funds available to energy investors.

April 2019