InterGen (BES0017)

InterGen welcomes this inquiry into the implications of Brexit for energy security in the UK. InterGen remains the only genuinely independent generator 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 and therefore bring a unique perspective to the debate on secure, affordable, and sustainable energy. InterGen is owned by two major international investors, representing two key classes of investment which the Government is seeking to attract to UK infrastructure investment, namely, pension funds (Ontario Teachers’ Pension Plan) and strategic investors from the People’s Republic of China (China Huaneng/Yudean).

InterGen is one of the UK's largest independent generators, operating a portfolio of three flexible gasfired power stations totalling 2,490MW; an investment of some £2.1bn. These stations are located at Rocksavage (Cheshire), Spalding (Lincolnshire) and Coryton (Essex). Additionally, in December 2016, at the T-4 auction, InterGen won a fifteen-year capacity market agreement to construct a 300MW OCGT, an expansion of the existing Spalding site. InterGen is also ready to build new H-class CCGT projects at sites in Spalding (Spalding Energy Expansion) and Essex (Gateway Energy). The new CCGT stations, which are shovel-ready, will cost around £800million to construct and create around 3,000 jobs over their three year build programmes.

The UK Government’s energy policies have been heavily influenced by ongoing policy developments at an EU level (e.g. the establishment of the Internal Energy Market (IEM) and EU state aid rules). Although leaving the EU will bear many challenges, InterGen also recognises the opportunity for the UK Government to review existing policies and identify areas where UK and EU objectives differ to ensure that going forward, UK policy is focused on domestic priorities.

For example, whilst we recognise the potential benefits of UK-EU interconnectors to GB consumers in the short term (through temporarily lower wholesale costs), we believe that additional interconnectors overall are inefficient and potentially detrimental to GB as a whole, both in the long and short-term. This is illustrated in a recent study by Pöyry[1], commissioned by Ofgem to evaluate the economic case for three proposed interconnector projects. The assessment identify a potential negative total GB welfare impact across all projects in a range of scenarios. This confirms the conclusions of the 2016 Aurora Energy Research report – Dash for Interconnection: The impact of interconnectors on the GB market[2], suggesting that excessive interconnection buildout can detract from affordability, decarbonisation, and energy security. We believe that Ofgem’s minded-to position to approve the proposed projects is untimely and should be re-evaluated once the outcome of Brexit negotiations are known.

Provided that interconnectors are in receipt of a number of network cost exemptions and access to subsidies/risk reduction products, such as the Cap and Floor regime, they will prove more economical to build and operate than domestic generation. However, to safeguard domestic interests, UK policy should ensure that all infrastructure providing capacity to the transmission system is treated on the same terms and that a true and fair assessment is made to determine the most economical, efficient and flexible types of generation/capacity. It is important that GB generation is not displaced unduly by electricity interconnectors that are developed and operated on an un-level playing field. Unlike interconnector projects, our existing and prospective sites operate on a merchant basis without the option to apply for a cap and floor subsidy to guarantee a level of return for investors.

Moreover, InterGen disagrees with the view that greater levels of interconnection supports security of supply, particularly at peak levels of demand, as this, depending on the price differentials across interconnected markets, potentially increases the level of exports at these times. In winter 2016, with a large proportion of the French nuclear fleet offline, the IFA’s extended period of reduced availability acted to benefit the GB consumer as they were shielded from the demand increase and associated price increase that would have resulted from exporting an additional 1GW to the continent. The effects on security of supply of interconnectors are therefore, at best, doubtful. This is particularly true when considering that the economic case for interconnectors are often underpinned by the current, and most likely temporary, policy arbitrage between the UK and EU markets. 

We have outlined detailed responses to two of the inquiry’s questions in appendix 1, attached below.

Please do not hesitate to get in touch if you have any questions or would like further discussion on any of the points raised above or in appendix 1.

25 August 2017

Appendix 1: Responses to questions as part of the Inquiry into the implications of Brexit for energy security in the UK

What are the implications of the UK's withdrawal from the EU for the UK's energy security?

The UK’s withdrawal from the EU will enable UK policy simplification and reduction of restrictions imposed by EU rules and regulations. The drive to deliver secure, affordable, and clean energy, as outlined in BEIS and Ofgem’s Plan for upgrading the Energy System, will be possible without conflicting UK and EU priorities. Today, differences in policy priorities between the UK and the EU are evident; the carbon price floor is an illustrative example. 

Furthermore, the UK Capacity Market is a key initiative to ensure security of supply. However, the EU imposed requirement for technology-neutrality has diminished the UK’s ambition for cleaner energy as diesel generators have been awarded contracts in place of less polluting new combined cycle gas turbine (CCGT) power plants. If the UK is no longer bound by EU state aid rules, it will be possible to make the mechanism more targeted at specific generation technologies, such as CCGT, thus strike a balance between secure, affordable, and clean energy. 

It will also be possible to better align energy priorities across the Government and industry. National Grid, in its role as System Operator (SO), recently published a report on System Needs and Product Strategy 2017[3], where five key future system needs are outlined:

–  Inertia and Rate of Change of Frequency (RoCoF)

–  Response

–  Reserve

–  Reactive Power/Voltage Support

–  Black Start

These priorities are currently compromised by the overarching directives and laws set at EU level. For example, interconnectors, which are heavily promoted at an EU level, intensify some of these needs and potentially displace technologies that may lessen them. Under EU targets, a minimum of 10% of total installed GB generation must be provided by interconnection by 2020 (binding) and 15% via interconnection by 2030 (non-binding). Maintaining these targets is not conducive with current UK system need nor increased energy security.

Moreover, ancillary services are becoming an increasingly important part of GB generator revenues. If interconnectors are able to compete for and displace domestic GB ancillary services this will likely force closures of current GB service providers and displace new build assets, adversely impacting security of supply or requiring higher revenues from other sources. It is worth noting that the ongoing balancing costs incurred by National Grid as a result of constraining inward interconnector flows in order to manage RoCoF via BSAD transactions was not reflected in Ofgem’s latest analysis4 of three proposed interconnector projects. This is a significant omission as it has a real time BSUoS impact that feeds through to the cost of GB consumers. 

What will be the effect of Brexit on UK-EU energy interconnection?

Under the EU Third Package interconnectors are exempt from GB network charges. This includes Transmission Network Use of System (TNUoS), Balancing Services Use of System (BSUoS) and transmission losses, which are paid by domestic generators. As a result, interconnectors enjoy an advantage of dual-status as both transmission assets and generators since they are also able to compete in capacity markets. Moreover, interconnectors are supported financially through Ofgem’s cap and floor regime, reducing the financial risk substantially, and may qualify for subsidies through the Connecting Europe Facility. Consequently, the current policy is in our view anti-competitive, particularly when also considering that generators in the UK are subject to higher carbon emission costs compared to other EU generators through the UK carbon price floor. It is our view that interconnector investment cases should be made on a level playing field with domestic generation to ensure that GB generation capacity is not displaced nor future investment disincentivised.

Leaving the EU will allow the UK Government, in its aspiration to facilitate competition, to review the current framework and its push for interconnectors. As mentioned above, through the implementation of the IEM, a combination of binding and non-binding targets have been placed on member states which support the drive towards the initiatives that these legislative packages seek to deliver on. Under EU targets, a minimum of 10% of total installed GB generation must be provided by interconnection by 2020 (binding) and 15% via interconnection by 2030 (non-binding). InterGen believes that interconnection under the current operating and development terms should be reviewed and that particular focus should be placed on the impact on GB generation and security of supply. We propose that the current terms afforded to interconnectors are not retained as part of negotiations and that they should be encouraged to operate, and indeed be developed, on a level playing field with other GB generation. 

Under the current framework, as evident in reports from both Pöyry and Aurora Energy Research, new interconnectors are likely to negatively impact overall GB welfare. Additionally, in Pöyry’s cost-benefit analysis of three proposed interconnectors, GB welfare impact is found to be highly sensitive to policy differences between the interconnected markets. Whilst some policy differences were modelled (carbon price and BSUoS), more analysis is needed in this area since much of the price differentials between the GB and European markets can be explained by policy differentials. With both UK and EU markets undergoing significant change, we believe that the economic case for any future interconnectors will have to be revisited once the full impact of Brexit is known. Only then can Ofgem confidently make a decision that is in the best interest of GB consumers.