EON WATCH

EON on the EU’s 20% Renewables Target

In EON Parliamentary Statements on December 21, 2008 at 8:35 pm

Who:  Mr Michael Lewis, European Managing Director, E.ON Climate and Renewables

About:  Achieving the EU’s 20% renewables target.

To Whom:  House of Lords, European Union Committee (oral and written evidence provided)

Date of Oral Evidence:  18th May 2008

Link: Here

Details after the fold…

Summary

  • E.ON believes that renewable energy can make a significant contribution to meeting EU and UK energy demand and to climate change targets.
  • — However, the UK’s proposed share of the renewable energy target poses major challenges, particularly given the relatively short period between now and 2020 and the limited contribution renewable sources currently makes to UK final energy consumption.
  • The extent to which it is delivered will depend on whether some major barriers to investment can be overcome and suYcient incentives exist to attract the very large capital investment required not onlyin renewable capacity but also the fossil plant required to back up intermittent generation from wind and tidal resources.
  • Even if a renewable share of electricity of some 40% is achievable (which is not yet clear), the implications of this for grid investment and performance are potentially very significant and need to be clearly modelled, explained and understood.
  • To ensure the most eYcient delivery of the target the UK’s heat and transport sectors must contribute a level of renewable energy commensurate with their cost eVective potential to avoid an excessive burden falling on the power market.
  • The renewable targets are only credible if the directive gives Member States flexibility in delivering them; in particular trading in renewable allowances from a Guarantee of Origin (GOO) trading scheme should not be unnecessarily restricted.
  • The Government should publish its estimate of the full cost to the consumer of meeting the target in each sector.
  • The main barriers to completing renewable electricity projects are the time required to achieve planning consent and the construction of major grid upgrades.
  • Turbine manufacturing capacity will need to be scaled up and vessel availability increased if the level of ofshore wind projects required to meet the target are to be delivered.
  • Changes in transmission access arrangements are likely to be required but these must balance the need to connect new renewable generation with the need to avoid inefcient constraint costs.


1. E.ON UK is one of the UK’s largest retailers of electricity and gas. We are also one of the UK’s largest
electricity generators by output and operate Central Networks, the distribution business covering the East and
West Midlands. In addition, our E.ON Climate and Renewables business is a leading developer of renewable
plant in the UK with 21 onshore and oVshore wind farms and a dedicated biomass power station currently
operational, and more in development.
2. Across the E.ON Group we currently have renewable generation capacity in excess of 7,300MW. We have
recently doubled our investment budget into renewables to ƒ6 billion between 2007 and 2010. E.ON is looking
to increase its overall share of renewable electricity significantly by 2030 which will assist the company in
meeting its target to be 50% less carbon intensive by 2030 (based on 1990 levels). Our answers to the
Committee’s questions are as follows.
106 the eu’s target for renewable energy: 20% by 2020: evidence
How achievable are both the EU’s general 20% and the UK’s national 15% renewable energies target?
3. The UK’s proposed share of the renewable energy target poses major challenges, particularly given the
relatively short period between now and 2020 and the limited contribution renewable sources currently makes
to UK final energy consumption. In 2007 renewable energy accounted for approximately 2% of UK final
energy consumption. Renewable electricity has grown significantly since the Renewables Obligation was put
in place in 2002 but nevertheless accounts for only about 5% of electricity consumption at present. Given that
the Government estimates that the UK is likely to have to meet 25% of the total EU additional cost, meeting
the target in full may be more diYcult for the UK than for the EU as a whole although particular Member
States may have diVerent issues arising from their particular energy mix.
4. The extent to which the target is delivered will depend on whether some major barriers to investment can
be overcome and suYcient incentives to attract the very large capital investment required not only in
renewable capacity but also the fossil plant required to back up intermittent generation from wind and tidal
resources. However, this will require a very rapid acceleration in investment in renewable energy sources over
little more than a decade, bearing in mind that the directive may not be agreed until well into 2009.
5. The implications for the electricity sector are significant given that a very substantial contribution—
possibly in excess of 40% of electricity consumption—may need to be met from renewable electricity sources,
largely in the form of onshore and oVshore wind and some biomass generation. This level of target will require
a number of significant barriers to be overcome including grid access, planning and supply chain constraints.
In addition, a robust long-term policy framework which will attract the necessary investment to the UK is
required. Such a large penetration of renewable generation also poses some very major issues for the power
system as a whole. These need detailed assessment but given that wind generation is variable in output, a
relatively inflexible source of power and only a small proportion of total capacity can be relied on to meet peak
demand, a large volume of more flexible fossil generation will be needed to maintain system stability. These
issues will need to be addressed in the strategy which the Government has indicated it will publish next year
after the directive has been agreed.
6. The full potential of renewable heat and transport sources will need to be utilised to avoid an excessive
burden falling on the power market. The heat sector is currently the largest consumer of energy and accounts
for approximately 43% of the UK’s final energy demand. This sector has historically received little attention.
However, there is substantial renewable potential from heat technologies which BERR is currently addressing
following its Call for Evidence.
7. Given that the targets are expressed as a percentage of final energy consumption, a key objective must be
to ensure that eVective energy eYciency policies are in place to ensure that total energy consumption is reduced
or at least growth contained, which would reduce the absolute level of renewable investment required to meet
the targets.
8. The deliverability of the targets would be improved if the Directive allowed flexibility in how the target is
met. We support provisions in the directive for importing renewable energy from states adjoining the EU,
provision to take account of investment in large tidal schemes, and for trading of Guarantees of Origin (GOO)
certificates across the EU, although, as currently drafted, trading will be largely at the discretion of Member
States. If the targets are to be met in a sustainable way which is acceptable to consumers, a key component
must be the cost eVectiveness of delivery which will be enhanced by the ability to trade renewable energy eVort
viaGOOcertificates.Wenote the conclusions of the recent Po¨yry report on behalf ofBERRon the compliance
costs of meeting the 2020 renewables target which states: “On the basis of the Commission burden sharing,
the cost to the UK increases by around 34% from ƒ5.0 billion to ƒ6.7 billion if trading is not a viable
alternative.”1 Trade in GOOs must not be unnecessarily restricted.
9. In addition appropriate financial support mechanisms will be required to incentivise investment. It is
imperative that current renewable investment plans are not delayed or discouraged by uncertainty about the
policy framework. On this basis, E.ON UK would prefer to see a continuation of the Renewables Obligation
(RO) as the primary financial support mechanism for renewable electricity which will need to be developed
further if the target is to be met. However we do not rule out other forms of support for very large long leadtime
capital projects such as the Severn Barrage.
1 http://www.berr.gov.uk/files/file45238.pdf
the eu’s target for renewable energy: 20% by 2020: evidence 107
How coherent are these proposals in the context of the EU’s energy policies in general and the Third Energy Package
in particular?
10. The renewable energy targets could have the eVect of diverting investment from other potentially more
economic means of delivering carbon savings. Under this scenario, it would raise the overall cost of achieving
the EU’s climate change targets, which would not be consistent with the EU’s objective of maintaining an
internationally competitive economy. It will be important to ensure that support for renewables results in
reductions in technology costs which reduce the long term cost of renewables. Furthermore there must also
be adequate incentives to invest in other low carbon technologies and Member States must aim to meet in full
the targets set out in the Energy EYciency Action Plan.
11. It is important that all the elements of the green package form a coherent whole. In particular the EU’s
20% renewable energy target and the 20% GHG emissions reduction target and the associated reductions in
emissions required under the EU ETS have to be consistent. An unexpectedly high level of carbon abatement
from the renewables target could deliver the reduction eVort expected of the EU ETS. This could significantly
reduce demand for EU emission allowances (EUAs) and result in a low or zero carbon price, reducing
incentives to invest in or operate other lower carbon technologies. As the green package is considered by the
Council and European Parliament, it will be important to ensure that the targets maintain a credible price
for carbon.
To what extent are these targets capable of improving the EU’s security of energy supplies?
12. E.ON UK agrees with the Commission that achievement of the Renewable Energy target would improve
the EU’s security of energy supply in that renewable energy will reduce dependence on imported gas and oil
and contribute to diversity. However, this may to some extent be balanced to the extent that the EU or the
UK becomes reliant on a large proportion of relatively new technologies, such as oVshore wind, which may
be less reliable in operation in its early stages of commercial deployment. Policies to deliver the target should
include a focus on ensuring long-term reliability.
Grid Access
How effective has the existing legislation (2001/77/EC) been in encouraging grid access for renewable energy
generators?
13. In general the existing legislation has had little eVect in encouraging grid access as its provisions state that
Member States “may also provide for priority access to the grid system of electricity produced from renewable
energy sources”.2 Whilst the existing Directive does state that the transmission operator should give priority
to renewables when dispatching plant, this is not relevant to the self dispatch market based approach within
the UK which allows renewable generators themselves to determine when they want to generate. The UK’s
current access arrangements are technology neutral and seek to prioritise those projects that are able to use
the system the soonest. The transmission operators have obligations in their licences that do not allow them
to discriminate between technology types.
14. Growth of renewable generation that is connected to the distribution network has been steadily achieved.
The main issue with obtaining a distribution connection is overcoming local project specific connection and
grid reinforcement issues.
To what extent does grid access remain a significant barrier to increased consumption of renewable energies? Is it
consistently a problem across all Member States?
15. The main transmission-related barrier to the growth in renewable generation is the lead time associated
with achieving planning consent for, and the construction of, major grid upgrades. This can often be many
years longer than the development and construction time required for an onshore renewable generation
project. BERR and Ofgem have commenced a review of transmission network access in the UK, to look at
ways in which the capacity of the existing network can be further shared between existing and new generation
projects in advance of and in parallel with the need for further upgrades to the electrical network
infrastructure. The main balance to strike is between the ability to connect additional generation, the costs to
the consumer associated with constraining oV generation owing to insuYcient network capacity and the need
to maintain network reliability and safety for security of supply.
2 http://eur-lex.europa.eu/pri/en/oj/dat/2001/l 283/l 28320011027en00330040.pdf
108 the eu’s target for renewable energy: 20% by 2020: evidence
How does Use of System charging affect grid access for renewable energy generators? How far can the different levels
of renewable energies take-up in different Member States be attributed to Use of System charging and cost sharing rules?
16. The level of use of system charging in the UK is determined on a cost reflective basis. This means that
parties that are seeking to use the transmission system bear their appropriate share of the costs that they
impose on the transmission network. This provides a locational signal that helps to ensure the long term
economic eYciency of the network, where generation that is located further away from demand must pay more
as more network is required to transport the energy to the demand centres.
17. In the UK the main demand centres are in the south of the country, with the majority of the onshore
renewable development occurring in Scotland. There is presently a˜ 10GW queue of renewable generation
projects in Scotland that are at various stages of development and seeking to connect to the grid. In the context
of the overall UK energy market, the higher use of system charge in Scotland does not itself appear to be a
barrier to bringing these projects forward. Conversely renewable generation projects seeking to connect in the
south, closer to the demand centres, are encouraged to do so as they would incur lower use of system charges.
What impact do the various systems of reinforcement planning and work have on encouraging renewable generation?
How important is the issue of constraint in increasing Member States’ renewable generation?
18. In the UK, the transmission companies have a licence obligation to plan reinforcement and operation of
the network in accordance with the Security and Quality of Supply Standard (SQSS). This is a deterministic
standard that ensures that an appropriate balance between the requirements to connect additional generation,
the costs associated with constraining oV generation owing to insuYcient network and the need to maintain
network reliability and safety for security of supply is achieved. It is worth noting that a cost benefit analysis
supplements the deterministic standard to aid determining an appropriate and acceptable level of constraint
costs.
19. The SQSS is presently being reviewed by the three transmission licensees in the UK to determine the
appropriateness of the assumptions made in the standard for modelling intermittent generation sources, such
as wind. The extent to which the SQSS can accommodate additional renewable generation depends on the
assumptions made on the diversity and load factor of the renewable generation sources, particularly
intermittent generation, and the diVerence in cost between additional network reinforcement and network
constraint costs arising from insuYcient network to secure demand.
20. In order to connect to and use the transmission system in the UK, a party must hold an agreement with
the transmission operator for Transmission Entry Capacity (TEC). The TEC is provided on an “invest and
connect” basis, whereby appropriate network reinforcement is completed before a generator is permitted to
connect and export to the network. This ensures that the level of network constraint costs will not be unduly
increased, as these costs may not be borne by the party that is connecting, but instead are paid by other market
participants that are not deriving a direct benefit from the connection of that generation, giving rise to an
indirect subsidy. The issue of constraint costs is significant in the UK pay as bid market mechanism for
managing network constraints.
To what extent is further co-ordination of National Regulatory Authorities needed?
21. In our view, it should be left to national regulators to approve national grid access arrangements in light
of the requirements of EU legislation, guidance or codes developed at the EU level, except where trade across
Member States is an issue. Coordination of approach can be achieved through the European Network for
Transmission System Operators (ENTSO) and the Agency for Cooperation of Energy Regulators (ACER)
proposed in the third package.
How far do current regulations inhibit access to the grid?
22. The primary cause of delay in terms of grid access has been the extended timescale for securing planning
approval and for construction of transmission upgrades. Some improvements in transmission access
arrangements are possible but these need to be at an acceptable cost to the consumer, as discussed above.
the eu’s target for renewable energy: 20% by 2020: evidence 109
Support Schemes
At what level should the EU be involved in harmonising or regulating support schemes offered by Member States to
encourage renewable energy generation?
23. TheEUshould in principle move toward a more harmonised approach to renewable support as this would
be consistent with an eYciently functioning internal energy market. However, shifting to a fully harmonised
approach now would create uncertainty for investors and render the targets more diYcult to achieve.
Therefore we can expect both quota based systems such as the renewable obligation and feed-in tariVs to
continue to operate across the EU to meet the 2020 targets. Nevertheless the draft directive does enable,
subject to certain conditions, trading between Member States despite diVerent support schemes being in
operation. Allowing the trading of GOOs will not only provide the flexibility to facilitate credible and eYcient
renewable investments, but will lead to a degree of convergence over the value of the renewable support
schemes across the EU. However the extent to which this occurs will be down to the market rather than
through regulation.
What impact have the various schemes in operation across the Member States had on encouraging renewable energy?
How have these schemes affected take-up both by producers and commercial and domestic consumers?
24. In the UK, the RO has successfully stimulated growth in the lowest cost renewable technologies including
landfill and sewage gas, co-firing of biomass and onshore wind. Before the RO was introduced in 2002, the
UK had less than 2% electricity from renewable sources. Today renewables represents around 5% of
electricity. However the limited support available for renewable heat to date has prevented this sector from
fulfilling its potential.
25. The growth in renewables particularly from onshore wind would have been substantially greater if the
planning system was more eYcient, and we are supportive of the government’s reforms contained in the
Planning Bill which are designed to increase the eYciency of the process for larger scale projects in particular.
Furthermore growth in renewables has been held back by grid constraints. Clearly this needs to be addressed
to ensure that projects can connect to the grid in a timely and eYcient manner. Without a significant
investment in the grid infrastructure, the UK will not be able to deliver the 2020 targets.
26. The introduction of banding to the RO has been required to stimulate investment in oVshore wind and
dedicated biomass, two renewable technologies that have the potential to make a significant contribution to
the energy sector. Without the changes contained in the current Energy Bill, oVshore wind would require
additional financial support such as capital grants to enable such projects to be sanctioned.
27. Renewable development in Germany has been supported through feed-in tariV and this has led to a
substantial development in onshore wind capacity as well as other technologies such as photovoltaics.
However there has been limited oVshore development hitherto. This approach has been in place for longer
than the UK and planning and transmission constraints have been less significant issues. Given that the UK
has adopted the Renewables Obligation which is incentivising large volumes of renewable development, that
its structure has been amended to support a range of technologies, and that transmission and planning
constraints are being addressed, we see no point shifting at this stage to a diVerent support mechanism given
the disruption and uncertainty this would cause for investors. Support for some technologies in Germany, for
example photovoltaics, have been extremely generous and we question whether this would be seen as an
eVective use of customers’ or taxpayers’ money in the UK.
Will cross-border renewables markets be genuinely affected by the existence of a variety of support schemes? Is necessary
investment hampered by lack of market harmonisation?
28. The challenge of delivering the renewable energy targets will require a significant level of domestic eVort
in each Member State. Nevertheless the ability to trade via GOOs will help to minimise the cost of meeting
the target. The development ofGOOtrading is not conditional upon a harmonisation of support mechanisms.
The draft directive permits trading of GOOs even though Member States will be operating diVerent renewable
support schemes. In our view there are other more fundamental barriers which must be addressed which we
have discussed above.
110 the eu’s target for renewable energy: 20% by 2020: evidence
To what extent would the enhanced use of Guarantees of Origin certificates require the harmonisation of support
schemes?
29. The trading of GOOs can operate alongside mixed national support mechanisms. Therefore we believe
that the Renewables Obligation in the UK can operate alongside other support mechanisms whilst still
permitting the trading of GOOs.
30. As the directive is currently drafted, a producer in Ireland who sold a GOO certificate to the UK market
would not receive the income stream from the feed-in tariV. Instead the producer would be entitled to the value
of the GOO which would be determined through negotiation with the counter-party from the UK. The GOO
would count towards the UK contribution but would be excluded from the production of renewables within
the Irish market. This demonstrates how two diVerent support mechanisms can operate whilst enabling the
trading of the GOO certificate.

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