Eon’s Sara Vaughan answers your questions – Part 1

Sara Vaughan, image by Eon

Sara Vaughan, image by Eon

In the first of a new series of readers’ Q&A sessions, Sara Vaughan, Eon UK’s head of energy policy and regulation, tackles the burning questions you wanted answering. Eon is Germany’s largest energy company and is heavily involved in the UK market.

In the first of two parts, Sara talks about why the changes to the carbon reduction commitment could be a good thing, how to reform the energy market and the future of carbon capture and storage.

In the second part, to be published later this morning, she will discuss the obstacles to building new nuclear plants, how the UK measures up on low-carbon technology and the limitations of a carbon floor price.

Next in the hotseat is Ditlev Engel, chief executive of Vestas, the world’s biggest manufacturer of wind turbines. Send in your questions by the end of Friday, November 26th for consideration, to energysource@ft.com.

But for now, over to Sara:

Carbon reduction commitment

In view of the changes announced by the government as part of the spending review and the continuing uncertainty surrounding further impending changes, what is your opinion on the suggestion it might be better to abolish the Carbon Reduction Commitment altogether and replace it with a carbon tax?
Michael Hutchinson, partner in the environment group at law firm Mayer Brown

We believe that simplifying the legislation behind the CRC is a much needed step for business energy users because it reduces the substantial administrative burden by lessening the impact of some of the complex recycling processes that were originally envisaged for CRC. Levying CRC as a tax is likely to accelerate business investment in carbon abatement technologies by making investment decisions more transparent. However, the shift from recycling payments to a tax greatly magnifies the costs to business.

Levying CRC as a tax is likely to accelerate business investment in carbon abatement technologies by making investment decisions more transparent

Given this impact will be felt in the 2012 payment we hope that companies will, by then, be in a better position to absorb the substantial increase in the cost of CRC, although we appreciate this may put further strain on already stretched businesses. While CRC remains in the form it is, we are likely to see retailers and public sector organisations especially impacted. For public sector organisations this may be particularly hard to swallow at a time when the spending review is really starting to take effect.

As a result of the multi-tiered approach to carbon abatement, the current policies are creating an inconsistent playing field for businesses. We fundamentally believe that the UK needs to reduce its emissions for the good of future generations but there is an issue with the number of different mechanisms used – potentially also including the proposed carbon price floor, which could itself be implemented by way of a tax measure and would impact prices to business.  A European-wide market-based approach, such as through EU ETS Phase 3, could have given a better balance of UK competitiveness and stimulus for carbon abatement.

CCS

How do the economics of gas carbon capture and storage stack up against coal in power prices? More, less or about the same?
Nick Grealy, No Hot Air

I think the short answer to this is that no-one knows for sure yet because no-one’s actually done it – although there has been a lot of modelling.

As I think is fairly well known, we’ve been concentrating on coal with CCS in the UK with our Kingsnorth project and, before that, we were looking at an IGCC (Integrated Gasification Combined Cycle) project at Killingholme in Lincolnshire (where coal is basically ‘cracked’ into its component parts and a gas-fired power station is run on the hydrogen produced by that process).

We concentrated on coal for the reason you would expect – it produces around twice the carbon emissions of a modern gas-fired power station and so it was, and is, more important to clean coal up first. That’s especially the case as you look internationally, at the number of coal-fired power stations being built around the world. We do not have the right to stop countries using cheap coal power but we do need to make sure that coal can be cleaned up.

While we indicated that we would not proceed to the next stage of the UK Government’s CCS competition, we as a group still recognise the importance of carbon capture and storage and have another project – at Maasvlakte in Rotterdam – which is further advanced and is looking to prove CCS at a commercial scale.

Renewables

What needs to be done in the forthcoming electricity market reform to maximise the share of renewables in the UK’s future energy mix?
Nick Molho, head of energy policy, WWF

Where we have to start is the question of how we get the right mix of generation to ensure that the lights stay on, that bills are affordable and that we reduce carbon emissions.  Renewables is certainly part of that mix – and an increasingly important element.

We think we will see a significant growth in electricity demand as the direct use of fossil fuels is replaced for both domestic heating (so air and ground source heat pumps will replace domestic boilers) and for transport (through electric vehicles). That means that we need to see new nuclear power, more large-scale offshore wind power and also the development of carbon capture and storage to allow us to continue to burn fossil fuels – more cleanly – in the future.

We need to see new nuclear power, more large-scale offshore wind power and also the development of carbon capture and storage

For us to achieve that, we need clarity from the government on a future market framework that will enable us to invest in low carbon generation. We favour some sort of low carbon obligation (LCO) or other similar measure that incentivises clean power over cheap power by requiring suppliers to contract for low carbon capacity for a given percentage of their demand.

Energy efficiency

Given that legislation and policy will be driving the UK to be more efficient and use less power – in what is essentially a high volume and relatively small margin business – how is this likely to affect the current business model of energy providers?
Gareth Hughes, Utility Partnership Limited

This is a question that we’ve spent an awful lot of time debating internally and, indeed, you’ve hopefully seen our recent advertising campaign which tackles this question head on, asking, “Why on earth would an energy company want me to use less energy?”  Equally our campaign to help our customers get ‘energy fit’ continues to go down very well.

The fact is that, yes, energy companies are going to have to change – traditionally, energy was all about building big central power stations and working out how best to get that power into people’s homes through a one-way transmission and distribution system. While those centralised power stations are still going to be part of the future, it’s also clear that things are going to change substantially, with more emphasis placed on relationships with customers, who can take responsibility for their own energy usage for the first time.

Energy companies are going to have to change

We want to help our customers insulate their homes, moderate their energy usage (through changing their behaviour and through tools and information, such as smart meters that we can provide) and, if they are comfortable to do so, generate their own energy using solar panels or heat pumps that we will fit and maintain.

We also see a roll out of electric cars in the coming decades, necessitating both an increase in the generation of clean power and the installation of a network of charging posts (work that we’ve already started with the CABLED project in Birmingham and Coventry).

Energy trading

When Eon split out the UK trading business in 2008, it signalled a move away from the traditional vertically integrated business model – typical of firms such as Scottish and Southern Energy. Given the sector is littered with examples of the risks in running supply and generation activities as separate entities, what benefits do you see in heading in this direction?
Becca Harris

We set up a centralised energy trading arm with the primary responsibility of managing commodity risk and optimising what is in effect Europe’s broadest, most diverse and flexible power and gas portfolio. As ongoing liberalisation increases interconnection and correlation between markets across the continent, we believe that we’re in a much better position now to understand pan-European, as well global, market drivers.

We’ve also seen the benefits of having a centralised commodity risk management function, especially during the financial crisis.

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