Written evidence submitted by EDF Energy – (DUE0075)

 

 

Executive Summary

  1. EDF Energy is part of the EDF Group and is one of the UK’s largest energy companies with activities throughout the energy chain.  Our interests include nuclear, coal and gas-fired electricity generation, renewables, storage and energy supply to end users. We have around five million electricity and gas customer accounts in the UK, including residential and business users.  EDF Energy welcomes the opportunity to provide evidence to this inquiry; our response focuses on those issues where we can offer specific comments of relevance.

 

  1. EDF Energy strongly supports the recent adoption of a net zero carbon emissions target for 2050 and we are aligned with the overall analysis by the Committee on Climate Change (CCC) on the likely scale of economy wide costs arising from a net zero target.  In the power sector we consider that deep decarbonisation can be achieved at acceptable long-term costs to consumers through a combination of large-scale deployment of renewables and baseload low carbon generation in the form of nuclear power.

 

  1. As a Group, EDF is making huge investments in low carbon electricity generation. EDF has been a pioneer in the use of Green Bonds, issuing around €4.5bn in Green Bonds since 2013 to support the development of renewable energy projects. In the UK, together with its partner CGN, EDF Energy is constructing Hinkley Point C (HPC), a 3.2GW nuclear plant with two European Pressurised Water Reactors (EPRs), capable of meeting 7% of the UK’s electricity needs. HPC is progressing on schedule and we are developing our plans to build an almost identical plant at Sizewell C.  Other major projects include the development by EDF Renewables UK of the 450MW Neart na Goithe Offshore Wind Farm, a £1.8bn investment. We are also investing heavily in R&D, both to support our low carbon generation activities and to develop low carbon sustainable solutions for our customers.  

 

  1. Sizewell C will deliver new nuclear at a competitive cost. We will achieve a 20% saving on construction costs and reduced project delivery risk by replicating the design of HPC.  The Government has recently published a consultation paper on a Regulated Asset Base (RAB) model to support the financing of new nuclear projects; this is a sustainable funding model that can attract private finance at a cost that represents value for money to consumers.   In this context it is important that investment in new nuclear is recognised as a sustainable and “green” form of investment.

 

  1. Deep decarbonisation of the power sector, alongside electrification of transport and heat, can deliver huge progress towards net zero.  HM Treasury has a vital role in this area through its responsibilities for the tax framework and through the provision of funding to support early deployment of low carbon technologies.  Carbon pricing will also play a major role.  Delivering the scale of investment and change needed for net zero will be a huge undertaking, requiring co-ordination across all areas of government to support the national programme.

 

  1. We welcome the planned HM Treasury review of the costs of decarbonisation and how these are allocated.  Delivering a “just transition” will be critical to securing popular support for the changes needed for net zero.  The power sector has led the way in decarbonisation and the large majority of decarbonisation costs have been placed on electricity consumers, with consequences for household and business energy prices and the economic case for electrification.  EDF Energy would support outcomes which gradually achieve a better balance in the burden of future costs. 

 

EDF Energy’s development of low carbon sustainable solutions for our customers

 

  1. Our R&D team has recently won funding from BEIS to develop a new approach to quantifying the thermal efficiency of homes, based on information from smart meters combined with weather data. The result would be cheaper, faster and more accurate than the existing methods which are relied upon to create an Energy Performance Certificate. It would allow house buyers to have a better idea of how much it would cost to heat the home and would also allow us to identify those homes that would benefit most from energy efficiency measures.

 

  1. Energy efficiency, costs and self-sufficiency are becoming top of mind for consumers, but they need clear guidance and support when it comes to taking action. EDF Energy is developing products and services to help people successfully understand and control their energy use via a rich range of simple, timely, personalised and actionable advice for householders.  Customers involved in the trial of our ‘Evolve’ app share their smart meter data, along with details about their home. This is combined with other information, such as weather, season, time of day and the region they live in and an algorithm then produces tailored information to the customer about their energy use. EDF Energy’s innovation accelerator, Blue Lab, which is running the trial, plans to add further features, including energy saving tips, budget tracking and push notifications about changes in their energy use, as the pilot progresses. 

 

  1. Working in partnership with British battery manufacturer Powervault, EDF Energy is offering existing solar PV owners the chance to earn more from their systems by purchasing one of the most advanced and cost-effective home battery systems on the market.  Powervault 3 is a smart battery that stores energy generated by solar panels during the day to use at night; it also has the capacity to store cheap energy from the grid, helping customers to reduce their electricity bills. The battery is offered as a standalone product or, can be combined with EDF Energy’s new grid services package. By adding grid services, customers will be allowing the energy stored in their Powervault 3 battery to form part of a network of small, domestic batteries across the country, which can be used to help balance the grid.

 

 

The economic opportunity

 

What economic costs and benefits does decarbonisation present for the UK?

How might HMT deliver a regionally balanced and ‘just’ transition across the UK?

 

  1. While there are always uncertainties in any long-term projections, we concur with the overall analysis by the Committee on Climate Change (CCC) on the scale of economy wide costs of net zero. We note that these costs are estimated without taking account of countervailing benefits from, for example, improved air quality and the potential to commercially exploit industrial expertise in low carbon technologies.

 

  1. The costs and benefits of decarbonisation will vary by sector. In the power sector it is increasingly clear that deep decarbonisation can be achieved at acceptable long-term costs to consumers through a combination of large-scale deployment of renewables (the costs of which have fallen substantially in recent years) and baseload low carbon generation provided mainly by nuclear power, along with some contribution from peaking firm power which could be in the form of natural gas with CCS or hydrogen.  While decarbonisation must be delivered across all sectors of the economy by 2050, it remains essential that the power sector continues to lead the way, providing the means of decarbonising other sectors, including, for example, through electric vehicles and the contribution of heat pumps to the decarbonisation of heat.

 

  1. We agree with the CCC view that in the long run the electrification of road transport can be delivered at a net economic benefit, but supportive policies will be needed for some years to help sustain early growth in the market for electric vehicles.  HM Treasury has a vital role in this area through its responsibilities for the tax framework governing motor transport, which has included significant taxation of fossil fuels for transport.  New approaches will be needed that will progressively replace the large revenue that Government receives from fuel duty. Simply replacing the taxing of petrol and diesel with taxation of electricity would likely inhibit the switch to electric transport and so should be avoided.

 

  1. Decarbonisation of heat presents major challenges, not least in consumer engagement and in the fair allocation of the additional net costs of the transition.  These costs can be contained through a strong focus on energy efficiency and measures to encourage growth in the market for highly efficient electric heat pumps should facilitate cost reductions through rising volumes. Again, HM Treasury will have a key role and we strongly welcome the announcement in the Spring Statement phasing out the use of fossil fuels in new homes from 2025.

 

  1. The above examples demonstrate the critical role of HM Treasury in determining how the costs of decarbonisation will be funded and where those costs will fall.  There is a growing recognition of the need to secure a “just transition” and greater popular appreciation of, and support for, the measures that will be required to achieve net zero.  We understand that, in line with a recent recommendation of CCC, HM Treasury plans to undertake a review of the funding and distribution of costs of achieving net zero for businesses, households and the Exchequer; this will be an important piece of work.

 

  1. A benefit of new nuclear in this context is the huge opportunity it creates for industrial benefit: investment in skills, supply chains and local and regional businesses.  At Hinkley Point C we are on track to achieve 64% UK content, with 6,500 jobs created so far, £1bn spent with regional companies in the south-west and 378 new apprenticeships to date.

 

  1. At the same time, EDF Energy is also facing the challenge of decommissioning our coal-fired power stations.  As we prepare for the closure of Cottam power station in September, we are supporting our workforce to transition to new opportunities; for nearly all of the employees, we have been able to accommodate one of their priority choices.

 

  1. To date, the UK’s decarbonisation policy framework has placed the large majority of costs on to electricity consumers. This leads to higher electricity bills for residential consumers and business and is counterproductive to encouraging consumers to switch to lower carbon forms of electric transport and heat.  To illustrate, policy costs on electricity bills will add several thousand pounds to the lifetime costs of a highly efficient electric heat pump.  This makes it much harder to compete with conventional gas home heating which is neither subject to a carbon tax or any material degree of decarbonisation policy costs, making gas heating artificially cheap compared to electric alternatives. 

 

  1. These issues should be thoroughly explored by the HM Treasury Review and, while there is no perfect solution to the allocation of decarbonisation costs, we would support outcomes which gradually achieve a better balance in the burden of future costs.

 

 

HMT's strategy

 

What is HMT’s current strategy, and approach to, UK decarbonisation, and is it fit for purpose?

How does HMT work with the Clean Growth Strategy and government departments to support decarbonisation? Is this working well?

How should HMT’s approach evolve to ensure the Government meets the legally binding carbon budgets (and the net-zero targets)?

What role should the 2019 Comprehensive Spending Review play in UK decarbonisation? What projects or measures should receive additional funds through this process?

 

  1. Today, HM Treasury’s role in decarbonisation policies is focussed on taxation and spending measures and, through its infrastructure finance responsibilities and close working with BEIS, facilitation of the forms of regulation and market intervention which are most likely to attract private sector finance and reduce the cost of capital for major low carbon investments.

 

  1. While there are many positive individual elements to HMT and wider Government actions on decarbonisation, we consider that the scale of challenge associated with delivering net zero now requires a Government-wide national programme with the efforts of different Government departments more closely co-ordinated and integrated than is visible at present. Within this, the overarching goal should be securing cost-effective decarbonisation and the delivery of a taxation and cost recovery framework which is economically and politically sustainable and supports just transition principles. While the costs of net zero are affordable in the context of the benefits it should bring, there should be no denying the scale of investment challenge which the target poses; for example the CCC estimate that to meet net zero power sector annual investment needs to be double the level of around £10 billion pa in recent years and investment in buildings decarbonisation needs to be around £15-20 billion higher than would be without a focus on carbon reduction[1].
  2. The electricity market reform (EMR) framework adopted in the UK since 2013 provides a valuable model for driving low carbon investment as it combines meaningful levels of carbon pricing (which provide technology neutral operational and investment signals in favour of low carbon assets) with a mechanism (the contracts for difference) which provides the revenue stability and predictability which are very important for large investment in generation assets.  It is no co-incidence that it is the power sector which has seen by far the largest progress in emissions reduction since EMR was introduced and the application of similar principles to other sectors of the economy would help to drive further progress.
  3. A diverse and balanced generation mix will be required to meet the challenge of delivering near zero emissions cost-effectively while maintaining a secure and reliable system.  Intermittent renewables, particularly onshore and offshore wind, should play a major role, providing up to around 60% of generation volume but there will also be a need for reliable firm low carbon generation and for flexibility through gas-fired generation or other sources such as demand side response or storage.  New nuclear can provide an important element of this generation mix and the value of reliability provided by low carbon baseload generation such as nuclear will make an increasingly significant contribution to minimising overall system costs as the carbon intensity of the power sector falls to near zero.

 

  1. The Government has recently published a consultation paper on a Regulated Asset Base (RAB) model to underpin investment in new nuclear power projects.  The RAB model is already applied to energy networks investments and it has also been used to provide a mechanism to deliver a lower cost of capital and better value for money for customers for major projects such as the £4.2bn Thames Tideway Tunnel (TTT).  At the TTT, engagement between the economic regulator, Government and the private sector has been highly effective in reducing consumer costs. Replicating this model can ensure the appropriate balance of responsibility is achieved between the public and private sectors, and that each sector is supportive of the other. It is essential that the public and private sectors are able to collaborate efficiently are to meet our shared decarbonisation goals. Use of the RAB model for TTT decreased the cost of capital to the project, thereby helped reduce the maximum estimated customer bill impact of the project from £70-80 per year to around £25 per year, representing a significant saving for the project.

 

  1. EDF Energy considers this to be a viable and attractive model for new nuclear which could be applied to our Sizewell C project. At Sizewell we expect to achieve a 20% saving on construction costs and reduced project delivery risk by replicating the design of Hinkley Point C (HPC) currently under construction.  We will benefit from being able to use the UK approved, frozen, EPR design being built at HPC and applying lessons learned during the HPC construction.  A RAB model for Sizewell would further reduce project costs by lowering the cost of capital and through the involvement of a wider pool of investors, such as pension funds.  The outcome would be the delivery of a major low carbon infrastructure asset at better long-term value for money for consumers.

 

  1. While the application of a RAB approach is ultimately a decision for Government and Parliament, we believe the model is also a potentially suitable approach to underpin future investment in a wider range of the large capital-intensive infrastructure which will be needed to fully decarbonise the energy sector.
  2. We believe that the Contracts for Difference (CfD) mechanism remains the right one to deliver further competitively priced investment in renewable generation. CfDs have proven to be an effective mechanism for financing investment in renewable generation.  By reducing investors’ price uncertainty, they have helped to reduce cost of capital.  In addition, repeated construction projects and the competitive pressure in auctions for renewable CfDs have helped to drive down costs and prices.  Government should maintain the programme of CfD auctions which will enable continued substantial growth in renewable generation through the 2020s.  Allowing the participation of onshore wind in these auctions would ensure that the most cost-effective form of renewable generation can play its full role in decarbonisation of the power sector; without the benefit of a CfD framework we expect very little new onshore wind development in the UK.
  3. Effective action on carbon pricing has been an important driver of the decarbonisation of the power sector in Great Britain and it is important that there continues to be a strong carbon price signal for the power sector up to, and beyond, the closure of unabated coal fired power stations.  The UK should remain in, or linked to, the EU Emissions Trading System after Brexit and should continue to use Carbon Price Support to provide the necessary additional driver to decarbonise the power sector. 

 

 

Green finance

 

What role do UK financial services firms currently play in the decarbonisation of the economy?   Are there any barriers (regulatory or otherwise) preventing financial services firms from delivering green finance or investing in ‘green’ assets? Do accompanying documents for ‘green’ instruments (bonds, funds, etc) articulate why and how the composite holdings within that instrument are ‘green’?

 

  1. Energy infrastructure typically is capital intensive with long asset lives and is therefore well suited to institutional investors looking for stable returns.  An important and very deep pool of potential investment is provided by pension funds seeking infrastructure investments. Typically these investors require a low risk and low volatility return that is linked to inflation and often that committed capital earns a yield for the duration of the investment (reducing appetite for assets that have long construction periods with no revenue stream). Typically, these investors will seek a risk allocation that does not expose them to risks that are beyond their influence; exposing them to these risks will result in an inefficient pricing of those risks.  The CfD regime for renewables, which helps insulate investors against power price risks which are beyond their control, has for these reasons proved highly effective in attracting increasingly low cost institutional investment into the renewables sector – helping along with other factors such as larger turbines and technology learning, to deliver the much lower cost bids which we have seen in CfD auctions in recent years.

 

  1. For investments such as new nuclear which have very long construction periods, and that exhibit remote probability but high impact risks, a form of targeted support such as the RAB model can be highly effective in reducing the cost of capital  For projects which can show a sufficiently low intrinsic risk profile, sharing risks between investors and end customers can also provide a more efficient financing arrangement as the reduction in investor risk leads to a significant reduction in the cost of finance and the benefit to end customers of a reduction in prices more than offsets the small cost of increased risk. 

 

  1. To assist with raising private finance at the lowest cost for new nuclear projects it would also be highly beneficial if funding for such projects were recognised as a sustainable form of investment.  If “net-zero” decarbonisation ambitions are to be achieved, nuclear generation is likely to form part of the solution for many countries.  The full life cycle impact of nuclear, including construction, fuel sourcing, operation, decommissioning and waste management, can be managed on a safe, sustainable, near zero carbon basis, assured by robust regulation. The critical contribution of nuclear to decarbonisation should be recognised in sustainable investment classification criteria.

 

  1. A sustainable finance accreditation for new nuclear can act as an important signal for equity and debt investors. This is particularly important for new nuclear because it is a new asset class for private sector financial investors. The Sizewell team has been discussing the case for nuclear with a wide range of potential investors, who have responded positively about Environmental, Social and Governance characteristics and sustainable credentials of new nuclear. Government has undertaken its own, positive, market soundings. From a practical perspective, a sustainable finance accreditation could provide access to a wider pool of capital and at a lower cost of capital; this would provide an important benefit helping nuclear projects meet their large financing requirements and the lower cost of capital would provide a direct benefit to customers through lower prices. 

 

  1. The EU taxonomy initiative currently under consideration is a vital reference point for the sustainable finance market, which is currently fragmented and non-standardised. The draft Taxonomy Regulation (as amended by the European Parliament and currently under consideration by the European Council) – and the draft taxonomy itself (as developed by the Commission’s Technical Expert Group (TEG)), currently exclude nuclear power generation.

 

  1. There are a number of providers of sustainable finance accreditation, multiple third-party assurers, and stock exchanges and index providers which implement different criteria and classifications of green and sustainable activities. Whilst expressed to be a comparative tool, the EU taxonomy is likely to set an important standard from which these others take their lead. Excluding nuclear from the taxonomy will have a direct effect on investor perceptions about whether nuclear can be considered a sustainable investment, leading to a decreased likelihood of investment. Moreover, nuclear would not be able to benefit from any sustainability-linked financial incentives based on taxonomy eligibility (as recommended by the TEG).  As the taxonomy will form the basis of the proposed EU Green Bond Standard, widely expected to become the market standard for rating green bonds, nuclear projects would not be able to take advantage of the pricing benefits associated with green bonds or other sustainable debt instruments.

 

  1. Notwithstanding Brexit, the EU taxonomy developments can have a significant effect on the ability of nuclear projects to raise the finance they need and the cost of capital for investment in nuclear, which will affect the ultimate cost to electricity customers. It is vital that the discussions currently in progress within the EU institutions result in a taxonomy that includes nuclear as a sustainable investment and the UK Government should continue to engage on this. Securing a sustainable finance accreditation will provide a major benefit allowing SZC to broaden and strengthen its investor interactions.

 

EDF Energy
 

26 July 2019

 

[1] CCC Net Zero  The UK's contribution to stopping global warming p.28-29