Written evidence submitted by E.ON (CGE0036)
About E.ON
- E.ON is one of the largest energy companies in the world focussed on clean growth. As of 2016, we took the major strategic decision that our company would no longer own or operate large-scale, conventional fossil-fuelled power stations. Today, our business is focussed on supporting Governments across the world deliver the technology required for clean growth. We believe the future of energy is decentralised, decarbonised, digitalised and local, with customers in control.
- In the UK, we are a major employer with over 9,000 employees. In 2017, over 90% of the 4 billion KWh of energy we produced in the UK was from renewable sources. We have over 6 million customers in the UK, and over 31 million Europe-wide. Across Europe, we operate over 1 million km of energy networks.
- Over the last decade, we have invested more than £2.5 billion in to new renewable energy in the UK. In 2018, we commissioned our latest offshore wind farm in the UK, Rampion, off the coast of Sussex. The project generates enough clean energy to power half the homes in both East and West Sussex.
- E.ON is active in supporting homes and businesses become smarter and more energy efficient, enabling flexible demand response with technologies such as solar panels coupled with battery storage, virtual power plants and energy management systems. In the UK, we have installed more than one million energy efficiency measures in homes nationwide, saving more than 15 million tonnes of CO2 over the lifetime of those installations, and work with major brands and business across the UK and Europe to cut emissions and costs.
- E.ON is also a market leader in delivering good quality, efficient heat networks to major housing and industrial developments, such as the Elephant Park project in London which will deliver 2,500 carbon neutral new homes and the Blackburn Meadows energy hub in Sheffield which uses locally-sourced waste wood to run a heat network and also hosts one of the first grid-scale battery storage sites that supports the day to day efficient operation of the National Grid.
- E.ON also invest in and support new innovative technology start-ups and work with partners, such as Google, to provide innovative clean growth innovations for our customers. For example, the Sunroof project uses Google data to allow customers to more accurately predict the efficiency of installing solar panels on their roofs.
The relative importance of the four main areas identified in the Strategy, and whether the Strategy places the right weight on each of those sectors to deliver emissions reductions.
- Since the Climate Change Act was passed by Parliament in 2008, the UK has made progress in reducing its carbon emissions. This has largely been delivered by the power sector (responsible for over 75% of UK GHG emission reductions since 2012), driven by the billions of pounds of investment in renewable generation.
- There is a recognition within the Clean Growth Strategy that the heat and transport sectors now have to step up to the mark. We welcome this approach, but if the UK is to meet the fourth and fifth carbon budgets, there is an urgent need to develop new policies that are capable of achieving this step change. Without this, investors will not have the confidence to deliver the significant investment that will be required over the next decade.
- We believe the future for transport decarbonisation is electric and that the car manufacturing industry has the clear potential with the right policy framework to ramp up deployment of these ultra-low emission vehicles. There is perhaps greater debate about the technologies which are best placed to decarbonise the heat sector. However, given the significant decarbonisation which has already occurred within the electricity sector, it is clear that the electrification of heat has a lead role to play going forward.
- Regardless of which technologies ultimately serve to cost effectively decarbonise the heat sector, it is essential that the emissions associated with the inefficient use of heat are eliminated as soon as possible. There needs to be a significantly greater policy focus over the next decade on energy efficiency. Reducing the amount of heat that households and businesses consume will reduce the scale of the heat challenge, and therefore should be prioritised even more than it currently is in the strategy.
Progress on meeting carbon budget targets to date and areas where more progress is needed going forward.
- As set out above, we believe there has been good progress to date. The first two carbon budgets have been met and the UK remains broadly on course to deliver the third carbon budget for the period 2018-22. However, it is clear that new policies in heat and transport will be required if the fourth and fifth carbon budgets are to be achieved.
- It is positive that the Government has now formally sought advice from the Committee on Climate Change (CCC) on the UK’s long-term targets and in particular the date by which the UK should achieve a net zero greenhouse gas target. We also welcome the request for clarity as to how reductions in line with the Committee’s recommendations might be delivered in key sectors of the economy, as this should draw a greater focus on the requirement to decarbonise heat in the near term.
- However, it is perhaps a missed opportunity that the carbon budgets already set in legislation (Carbon Budgets 3-5 covering 2018-2032) are out of scope of this request. The Committee on Climate Change had (in 2016) already cast a level of doubt for instance on the role that a nascent shale gas industry could play in the context of the UK’s legally binding 80% GHG reduction target. An increase in ambition must surely increase scrutiny on an industry which would be looking to grow over the next three quinquennial carbon budget periods. Indeed, the recent Intergovernmental Panel on Climate Change (IPCC) report clearly indicates that limiting global warming to 1.5°C requires "rapid and far-reaching" transitions in land, energy, industry, buildings, transport, and cities. Global net human-caused emissions of carbon dioxide (CO2) needs to fall by about 45% from 2010 levels by 2030, reaching 'net zero' around 2050. It is difficult to see how this conclusion can be aligned with domestic shale gas development.
- With regards to power sector decarbonisation, our view is that we should broadly continue the current approach, however there should be no unnecessary barriers put in place which distort the market away from the lowest cost options such as onshore wind and solar. Furthermore, as subsidies are progressively removed from the system, it is important that the market framework is refined so that it is better able to encourage the deployment of local, community and individual
- household solutions. In particular, we believe there is an opportunity to incentivise investment which improves the Energy Performance rating of new and existing properties and unlock the significant potential of Green Finance which the City of London is in an ideal position to lead on to help fund the scale of investment required.
The extent to which current and future technologies can help to meet the carbon budgets.
- We believe that the technology currently available in the market place is already sufficient for meeting the fourth and fifth carbon budgets. What is needed is a strengthened framework to deliver the necessary deployment.
- In the power sector, wind and solar are already at a stage whereby they are increasingly viewed as mature low cost technologies. It is therefore important that policy design does not inhibit the deployment of these low cost options. The Government should therefore change its approach to Contract for Difference (CfD) auctions, and allow all low carbon technologies to bid to secure a long term contract. A technology neutral auction will in our view deliver exceptional value for money for customers in this regard, ensuring they pay no more than they have to in support of delivering future carbon budgets.
- As the electricity system becomes more decentralised, smarter and flexible, it will increasingly be able to support the deep decarbonisation required within the heat and transport sectors.
- We believe the electrification of transport will be the technology of choice in this sector, particularly for domestic road vehicles and light vans. As battery technology further improves, both in terms of cost reduction and range, alongside appropriately sited strategic public charging infrastructure, this will help to unlock the potential for heavy goods vehicles to also be supported by the electricity sector.
- Large scale deployment of Electric Vehicles (EVs) will provide a new source of flexibility for the electricity system, especially given that for many households, the utilisation of the battery for typical journeys will be low relative to the nameplate capacity of the battery. This can also help integrate more renewables onto the system than would otherwise be the case, via vehicle-to-grid services.
- Heat is the biggest challenge facing policy makers. However even here, there are no regret options which we encourage the Government to embrace, most notably around the important role of Heat Networks. A key advantage they have is that they are technology agnostic, and so over time as existing energy centres are retired, they can be replaced with the best low carbon solution available at the time. We see an important role for heat networks in both new build developments and other key strategic regeneration projects which local authorities and metro mayors are seeking to advance.
- Heat pumps are also an important technology which should play an important role in meeting future carbon budgets. Whilst it is widely accepted that this technology is well suited to the off-gas grid market, we also believe that it should play a key role in the on-gas grid market. However, one of the challenges it faces today is around cost competitiveness. This can be explained by a number of factors, which are not insurmountable. Firstly, it faces an unfair playing field compared to gas. Currently, almost all impact on the cost of energy due to policies designed to tackle climate change are weighted on the electricity sector. Gas is in effect being subsidised over electricity as a result of the lack of a carbon signal today. This is further exacerbated by the fact that heat pumps in the UK market today are a niche technology. If there was sufficient confidence within the supply chain
- that the market could be scaled, the cost of heat pump production and installation could be reduced significantly.
The uncertainty in future technologies’ contribution to emissions reductions, and how that uncertainty can best be incorporated into the Government’s carbon budgets.
- With the knowledge that we have today, we do not believe there is much uncertainty with regard to the solutions that will be needed to decarbonise the electricity system.
- As explained above, the greatest uncertainty is around the relative roles of heat pumps, greener gas and hydrogen. Some of the uncertainty will be linked to the speed at which the UK seeks to deliver a net zero energy system. It is unclear in this scenario how compatible a hydrogen based heating system is for meeting such a target.
- One of the driving forces around technology winners will be the relative economics of the competing heat options, as well as customer willingness to accept these technologies. As we have suggested above, we believe that the cost of heat pumps can fall significantly with scale and have argued that vibrant off-gas grid and new build markets can create the catalyst for this. In contrast, it is far from clear the extent to which hydrogen can cost effectively be deployed in the market. As we understand it, the further away you are located from the production of hydrogen and CCS facilities, the higher the cost of delivery to the end customer. It therefore would appear on the face of it that hydrogen may at best provide a solution in areas that provide a natural competitive advantage for the utilisation of the technology. We do not envisage a system whereby hydrogen is deployed universally across the country, which therefore poses a question regarding the long-term role of the existing nationwide gas infrastructure. It should also be noted that due to the different chemical and physical properties of hydrogen compared to natural gas, the common assumption that a hydrogen based economy could utilise the existing gas network infrastructure and avoid costs of new infrastructure is debateable.
How the development and deployment of technology can best be supported, and the extent to which the Government should support specific technologies or pursue a ‘technology neutral’ approach.
- Customers expect that the objectives of energy policy as set out by the Government should be met at lowest cost in the long run. As such we support a technology neutral approach in principle which uses the power of the market to enable the best low carbon technologies to win out. However, it is important to recognise that these principles only deliver an efficient outcome where there is a level playing field for all technologies to compete on. Where this is not the case, or where there are strong strategic reasons, intervention by Government may be required at least in the short term.
- A good example of this is offshore wind, where an emerging technology with the potential to be scaled has been nurtured by successive UK Governments since 2000. It was only from around 2016/17 that the benefits of this approach started to be reaped, with offshore wind now increasingly recognised as one of the lowest cost solutions available for decarbonising the power sector today.
- It can be argued that if there was a credible carbon price, all other support mechanism would be redundant, however being able to rely on a carbon price that is investable has been a challenge for policy makers for some time. This is why CfDs have played a crucial role in helping to unlock billions of pounds of investment in new low carbon generation. However, in designing that scheme, the Government has not fully embraced a technology neutral approach. We believe that if the auctions were conducted on such a basis, more renewable generation could have been procured at a cheaper price for customers than has actually been the case.
- In heat, there is currently no equivalent carbon signal, which means that fossil fuel sources of heating such as natural gas are in effect being subsidised. To address the fact that the externality to society is not being appropriately factored in, there has been a strong rationale for having a separate Renewable Heating Incentive (RHI). As the trend is increasingly towards removing subsidy, policy makers should look to develop more market based mechanisms to support deployment of low carbon technologies in the future. For example, the application of minimum housing standards in new and existing buildings can stimulate the deployment of cost effective low carbon solutions. The use of stamp duty incentives can achieve a similar outcome, and as with well-designed regulation, is technology agnostic, with a focus purely on improving the energy performance rating of buildings.
The relative priority that should be attached to developing new technologies compared to deploying existing technologies, including consideration of the costs and pollution involved in the decommissioning of technologies or infrastructure.
- We believe that the UK already has the technologies available today to deliver the Clean Growth Strategy.
- The focus should be on wind, solar and battery, heat pumps, heat networks, electric vehicles, energy efficiency and energy management systems which can optimise buildings and support much greater levels of demand side response. We believe a decentralised, smarter and more flexible energy system can deliver lower carbon heating and mobility without the need for significant reinforcement of network infrastructure or large scale conventional generation. This approach will further reduce the UK’s dependence on fossil fuels, supporting both the closure of coal and mitigating the need for higher carbon gas on the system as an alternative means of providing flexibility to the energy system. In this context, we do not believe that there is a role for shale gas production in the UK.
- Consideration will need to be given over the long-term role of the gas network if greener gas and hydrogen is limited to deployment in specific parts of the country. This should include the extent to which some of those assets may become stranded, the scope for decommissioning those assets, and how they are funded if they are decommissioned ahead of their expected regulatory asset life.
Examples of specific technologies whose development and deployment have been effectively supported so far, as well as those that show particular promise for meeting the Government’s carbon emissions targets or supporting the UK’s economy, or which would benefit from specific Government action, in the future.
- As explained in an earlier response above, offshore wind is a good example where Governments across multiple Parliaments have successfully supported a technology which has enabled it to move from a niche source of generation to the mainstream today. Without the constructive partnership between Industry and Government it is highly unlikely that the technology would have reached a level of maturity that has significantly reduced the cost of the energy produced from around £150/MWh to £57.50/MWh.
- The UK has also played a leading role in supporting the development of electric vehicles. The application of grant support to reduce the upfront cost of pure electric vehicles and hybrids and home chargers has provided sufficient consumer confidence to support the exponential growth of sales over the last few years. The setting of targets can also provide longer term signals to the industry to evolve business models, although we would strongly suggest that the date for banning the sale of the Internal Combustion Engine (ICE) should be brought forward from 2040 to 2030.
- There are lessons that can be drawn from the approach to electric vehicle deployment which we would also recommend being adopted to heating. We believe the 2019 housing standards review should require new homes to meet a lower carbon heating standard, enabling the success of the London Plan to be replicated across the country. This would provide a stimulus, free from subsidy, for heat networks and heat pumps, providing scale and the ability of those technologies to be industrialised to realise cost reductions in the same way that the offshore wind sector has been successful in recent years.
The role of the Industrial Strategy ‘Clean Growth Grand Challenge’, and what the Government should do to ensure it contributes effectively to meeting emissions targets.
- We welcome the mission to at least halve the energy use of new buildings by 2030. Delivering this mission is extremely important for decarbonising the heating sector. We believe that some of the technologies that will be applied in the new build sector will also be relevant in the retrofit market. For example, more innovative off-site construction techniques have the potential to be deployed at scale in the retrofit market, helping to provide new solutions for addressing the millions of homes that have solid wall homes with no insulation.
- Making homes smarter is also relevant for both new build and retrofit. Domestic energy management systems will enable all homes to be optimised, allowing the full integration of solar and battery, heat pumps and electric vehicles and the design or more personalised energy tariffs to change customer behaviour. All of this is relevant for transforming to a smarter and more flexible energy system.
October 2018