Ecotricity Group Ltd – Written evidence (UEM0072)

 

 

Clerk of the Committee

Select Committee on Economic Affairs

House of Lords

London

SW1A 0PW

 

 

Ecotricity Response to The Economics of UK Energy Policy: Call for Evidence

 

Dear Sir/Madam,

 

Introduction

 

  1. Ecotricity is an independent renewable energy generator and supplier, with around 180,000 gas and electricity customers. Our commitment to those customers is that the money they pay for their energy bills will contribute towards powering the UK by renewable sources.  We have followed this pledge since first generating renewable electricity in 1998, and are now at the forefront of new renewable generation with ongoing research into tidal power, storage and biomethane.

 

  1. Ecotricity welcomes this initiative by the Select Committee on Economic Affairs (“Committee”) to investigate the adequacy of current energy policy settings in the United Kingdom. We appreciate the opportunity to comment on these issues, and trust that our contribution will be of assistance to the Committee.

 

 

Question 1: What are the key economic challenges for the energy market which the Government must address over the next decade?

 

  1. The Government must actively make the UK energy independent.  It must also address the fundamental challenge of the energy trilemma: significantly increasing the penetration of Renewable Energy (RE) to reduce carbon emissions, whilst ensuring low cost energy and secure supply.  Ecotricity’s stated position is that government should aim for 80% of power generation to be renewable by 2030.[1]

 

  1. For this to occur, Government policy must substantively support investment in RE.

 

Question 2: Has the market and the Government responded effectively to changes in external circumstances, such as significant shifts in technology and prices?

 

  1. No. The Government has failed to respond to shifts in prices and technology.

 

  1. One major, and recent, example is the Government’s decision to provide billions of pounds in subsidies to the Hinkley Point C project: an outdated and expensive technology.

 

  1. In terms of shifts in prices, the CfD scheme has become more expensive due to lower than expected wholesale prices.  The CfD scheme is funded using the set budget of the Levy Control Framework. As the CfD has become more expensive, that budget has been forecast to deplete far more quickly than expected at the time it was set. The Government has failed to respond to changes in wholesale prices and reassess the Levy Control Framework, which as a result is not fit for purpose.

 

Question 3(a): What are the emerging technologies which could materially change the energy market over the next decade and beyond?

 

  1. The emerging technologies listed below have the potential to materially change the energy market in the years to come. 

 

    1. Storage: Storage devices (such as batteries) can generate significant value for owners, the network, and markets generally, offering ancillary services, bidding energy into a spot market, aggregating with other resources to provide capacity or energy, or enabling demand-side response by acting as a behind-the-meter generating unit.

 

    1. Anaerobic digestion: as stated by National Grid in 2009, renewable gas (through processes such as anaerobic digestion) could meet up to 50% of UK residential gas demand.  Ecotricity’s Green Gas projects use grass, and are an example of sustainable anaerobic digestion.[2]

 

    1. Smart systems: smart meters (currently being rolled out) are crucial to the future smart grids we need. Such smart grids are better able to integrate RE, respond to local shifts in demand and generation, and minimise transmission losses and RE curtailment.
    2. Electric vehicles: the electrification of transport would lead to significant increase in electricity demand, but would also provide storage capacity to the grid in the form of car batteries.

 

    1. Tidal: tidal generation (such as in the proposed Swansea Tidal Lagoon project and Atlantis Resources's MeyGen project) can provide reliable RE.

 

    1. Geothermal: accessing geothermal heat could provide renewable baseload power, especially in Cornwall.

 

Question 3(b): How should the Government promote research and development- could any shift in public funding improve the efficiency of the energy market?

 

  1. The Government’s current approach to innovation funding is a step in the right direction, and it has helped to support some very beneficial projects.  However, significant risk still remains for RE at all stages of the investment cycle.  We would support an increase in R&D spending for RE in particular.

 

  1. More immediately, it is of utmost importance that the levels of R&D funding British businesses can access through the European Union (e.g., the Horizon 2020 programme) be guaranteed by Government to continue post-Brexit. 

 

Question 3(c): How long might it take for new technologies to displace the established capital stock?

 

  1. This is the wrong question.  Instead, the committee should ask how new technologies can replace existing capital stock and what Government can do to expedite that process through policy changes.

 

Question 4: What should the future balance between the roles of the public and the private sector be? Is further expertise needed within Government to understand the issues and to negotiate with external investors and suppliers?

 

  1. We consider that the severity of the climate change challenge makes it essential that the UK lead the way in honouring international commitments made under the Paris Agreement and EU level targets.  We must also ensure that we do not fall foul of our own domestic commitments under the Climate Change Act 2008. 

 

  1. Following the EU Parliament’s ratification of the Paris Agreement, the UK Government must promptly follow suite and review what is needed in all sectors to meet the UK’s commitment.   This should be followed by an economy wide plan including legally binding sector-specific targets and policies, and regulations to ensure that this commitment is met. 

 

  1. Whilst the private sector will be key to implementing these changes, regulators must be empowered to enforce them. Further, the overall goal of bringing down greenhouse gas emissions must be a central tenet of future policy.

 

Question 5: Are returns for private investment in the sector adequate or excessive? How should the Government attract sufficient investment?

 

Adequacy of returns

  1. This varies significantly by technology.  The CfD contract for Hinkley Point C is an example of a project in which expected returns are excessive[3], unjustified and unnecessary[4].  At the same time, returns for many solar and onshore wind projects are marginal, and have been worsened by recent policy changes.  Across the industry, wind and solar projects that would have gone ahead now cannot, and that is because returns have been reduced by government policy.

 

Government attraction of investment

  1. The Government must change its current approach, which has created significant instability.  An example of this was removal of the Climate Change Levy exemption for RE was done without warning, at short notice, and without grandfathering. Such actions severely harm investor confidence and it is important that the new government not repeat this mistake with other policies. 

 

  1. In addition, it should do the following to attract much needed investment in British RE:
    1. maintain or extend the renewable heat incentive and feed-in tariff levels;
    2. end fossil fuel subsidies (and reform the capacity market);
    3. ensure a level playing field for clean technologies in the energy, capacity, and ancillary services markets;
    4. restore subsidy support and streamline planning processes for onshore wind;
    5. support onshore wind through a CfD auction;[5]
    6. restore the Climate Change Levy exemption for RE and;
    7. implement a sustained, significant and coherent green industrial strategy incorporating fiscal stimulus, so that the promise of BEIS matches its policies.

Question 6: What is the relationship between high energy costs and the loss of industrial capacity in the UK? What measures should be taken to address this?

 

  1. The loss of industrial capacity in the UK is not a new phenomenon: it has been happening since the 1950s.  The reasons for this are complex and multi-faceted, and include globalisation, cheap foreign labour and capital, and support by overseas governments for nascent industries (e.g., China and manufacturing).  Given that this decline has been a decades-long trend, we do not believe that changing energy prices have played a significant role. 

 

Question 7: What preparations could be made to cope with the risk of a shortfall in energy supply? What would be the cost to the economy of the breakdown of the existing system?

 

  1. The Government must set out a broad and ambitious renewable energy strategy.  Key elements of this plan should be the roll-out of green gas from anaerobic digestion, storage, and demand side response. 

 

  1. It is essential that the green gas produced in the UK is truly sustainable.  Our research has found that the best way to achieve this is using silage from grass grown as part of crop rotations and management of nature reserves.  This not only provides a domestic renewable source of gas, but also significantly improves soil quality and food security.  

 

  1. It is not clear what the Committee means when it asks about the “cost to the economy of the breakdown of the existing system”. If this is reference to the “breakdown” of the fossil fuel system and a transition to RE, then the question is based on a false premise: that transition will be a gain, not a cost.  Modelling by Cambridge Econometrics shows significant macroeconomic benefits of a green transition including an estimated 200,000 jobs in the renewables and electric motor industry[6]

 

Question 8: What alternate ways of pricing energy should be considered to reduce the burden of high energy bills, in particular on less well-off consumers?

 

  1. The costs of transitioning to clean energy (such as subsidies and the climate change levy) should not be paid through consumer bills, as this is regressive and disproportionately hurts those who can least afford it.  Rather, these costs should be paid for out of general taxation: they are a social goods and should be funded as such.

 

Conclusion:

 

  1. Ecotricity thanks the Committee for the opportunity to provide its views on the future of UK energy policy, and hopes that our comments are taken on board.  We also welcome any further contact in response to this submission.  Please contact Holly Tomlinson on 01453 769366 or holly.tomlinson@ecotricity.co.uk.

 

Yours sincerely,

 

 

 

Emma Cook

Head of Regulation, Compliance & Projects

 

5 October 2016

 

[1] For more information on our 2030 Vision for a Green Britain, please see https://www.ecotricity.co.uk/about-ecotricity/our-eco-credentials/our-2030-vision-for-a-green-britain

[2] See our written response to the Energy & Climate Change Select Committee Inquiry into renewable Heat and Transport for more details: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/energy-and-climate-change-committee/2020-renewable-heat-and-transport-targets/written/31945.pdf

[3] Stacey, K.  & Stothard, M. Why EDF’s Hinkley Point deal is potentially so lucrative, Financial Times, 4th September 2016 https://www.ft.com/content/70baa0ea-6493-11e6-a08a-c7ac04ef00aa

[4]http://www.solarpowerportal.co.uk/news/hinkley_c_unnecessary_to_meet_energy_and_climate_needs_says_eciu_report

[5] http://www.cornwallenergy.com/Opinion/Onshore-wind-needs-CfD-support

[6] Cambridge Econometrics, The Economic and Environmental Effects of a Low Carbon Future, 22nd April 2015 https://www.ecotricity.co.uk/content/download/695681/14935731/version/1/file/cambridge-econometrics-effects-of-a-low-carbon-future.pdf