Uk Power Giants Generating Climate Change an Analysis of the Major Uk Power Companies

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UK POWER GIANTS GENERATING CLIMATE CHANGE AN ANALYSIS OF THE MAJOR UK POWER COMPANIES

A WWF-UK summary of the report by Innovest July 2005 To avoid the most serious aspects of climate change, we must ensure the rise in the global average temperature is kept below 2°C above pre-industrial levels – the critical “tipping point” for people, wildlife and habitats. Government and the business community must show leadership in changing the way we produce and use energy.

WWF-UK has therefore launched a major new climate change campaign, Stop Climate Chaos! which is calling

achieve 60 per cent reductions of CO2 emissions by 2020. And with good reason – the power sector is SUMMARY responsible for an estimated 37 per cent of global CO2 In a world where we are surrounded by real and emissions. perceived risks, it is sometimes hard to differentiate the serious from the frivolous and to work out how best to As part of its campaign, WWF has commissioned act for our future survival. Not just individuals, but Innovest to analyse the six major UK power companies. governments and companies also face this problem. Its report, UK Power Giants: Generating Climate Over the last 30 years, however, there has been a Change, ranks the companies in terms of their efforts growing awareness that one phenomenon – climate to reduce their CO2 emissions and their development change – poses a greater challenge than any other. of, and investment in, renewable energy programmes This is an issue the Prime Minister, Tony Blair, has and energy efﬁciency measures. The study has found: called “the single most important…that we face as a • a difference between the more forward-thinking global community”. companies – Centrica, Scottish and Southern Energy, and Scottish Power Plc – and the worst performers in the study – EDF, Powergen and Innogy; • a power sector that, while being fairly successful in meeting current minimum regulatory requirements, is generally failing to exercise sufﬁcient leadership or implement the changes required to address climate change; • that some UK companies are taking innovative and forward-thinking actions in reducing their energy use

and CO2 emissions, but are failing to apply the lessons learned across the full range of their operations; and • that the UK government has failed so far to provide the long-term framework and market conditions – especially a strong EU Emissions Trading Scheme National Allocation Plan – needed to encourage investment in a low-carbon UK economy. Results summary: Assessment matrix for the carbon risk of the six main UK power companies

EDF Centrica Innogy Powergen Scottish & Scottish Southern Power Energy Historic carbon intensity of production and operations.

Total GHG emissions (time-series)

Carbon emissions improvements

Greenhouse gas cluster

Consumer EE training (demand management training) and customer incentives

EE improvements

Energy efﬁciency cluster

Total renewable energy investment procured

ROC/RPS tariffs obligation

Non-ROC/RPS tariffs obligation, if any

RE planned investments

RE improvement

Renewable energy cluster

Top tier

Middle tier

Bottom tier BACKGROUND

The companies powering the UK As we turn on our lights, computers, televisions, radios different market conditions, was switching back to the and kettles, most of us give little thought to where our old coal-fired power and purchasing cheaper coal from electricity comes from, how it is generated and who is eastern Europe. It is clear, therefore, that in order to supplying it. Yet every year, UK homes and businesses meet this challenge of significant and swift CO2 use around 400,000GWh of energy. Contributing up emissions cuts, the government needs to take much to 2 per cent of the UK’s Gross Domestic Product and more radical action – and the UK power sector needs supplying more than 26 million domestic customers to be willing and able to respond. around the country, the power industry is a hugely significant part of the UK economy. It is also an industry The power industry in the UK now faces a period that is undergoing major change. Just 15 years ago, the of profound change: generation and supply of UK electricity was executed by • The government has set a target of reducing UK CO2 just one government-run company, the Central Electricity emissions by 20 per cent by 2010, and 60 per cent by Generating Board. Now, there are more than 40 major 2050, with 15 per cent of our electricity aiming to be private producers in the UK, using electricity from over sourced from renewable sources by 2015. 2,000 generating stations. And whereas, in the early • The UK is facing a potential energy crisis. Twelve 1990s, most electricity was generated by coal-fired nuclear power stations currently produce 20 per cent plants, with gas generators representing just 2 per cent of the UK’s electricity demand, but retirement of old of the market, in 2005 there are more than twice as plants means that by 2020 this will have shrunk to many gas as coal plants in the UK. At present, gas- 7 per cent from only three nuclear power stations. burning coupled with nuclear production – and a small New and renewable sources of electricity, as well as amount (around 3 per cent) from renewable sources more gas, increased savings from energy efficiency, – has overtaken coal as the major fuel source in the UK. and a reduction in UK energy demand, will be needed Nonetheless, the power sector currently accounts for to fill the gap. over 30 per cent of UK CO2 emissions. • Several government studies have concluded that the only solution is a significant alteration to the way Generating climate change the UK’s heat and electricity is produced and used. ii The international community is only now waking up • The government has made a start and introduced to the massive implications of climate change on the new regulations, such as the Renewables Obligation environment, business and the worldwide economy (RO) and the Energy Efficiency Commitment (EEC), – and the imperative need to reduce the emissions of but these are just a minimum and much more needs greenhouse gases into our atmosphere. Globally, the to be done. power sector is the single largest source of CO2 into the world’s atmosphere. One average-sized coal power plant releases about 11 million tonnes of CO2 into the air every year. The “dash for gas” was a major contributing factor to the fall in UK CO2 emissions in the 1990s.The government’s Energy White Paper (EWP) i in 2003 assumed this trend would continue. Yet, with some embarrassment, the government was forced to admit that CO2 emissions were in fact on the rise again, increasing by 2.2 per cent in 2003 and 1.5 per cent in 2004. The UK power sector, faced with DIGITAL VISION The potential financial and carbon savings possible – if the political will, and the foresight within the power sector, exist to make it happen – are immense. The risks, if the power companies do not adapt, are equally huge – to society, business and the environment. For example, in July 2005 Allianz, one of the biggest financial companies in Europe, announced it would be adapting its business at board level to account for the risk of climate change. iii

Who the companies are

Which Company Its household name

Centrica Centrica is the UK’s largest gas supplier, with an estimated market share of 64 per cent. Through its British Gas brand, Centrica claims to be the UK’s largest domestic electricity supplier. In 2003, the Centrica group’s turnover was £17.9 billion.

Scottish and Southern Energy Scottish and Southern Energy is involved in generation, transmission, distribution and supply of electricity to industrial, commercial and domestic customers as well as energy trading, gas marketing, electrical and utility contracting and telecommunications. The turnover in 2004 was £5.1 billion. The company serves in excess of 5 million homes and businesses in the UK.

Scottish Power serves around 6 million customers in the western US Scottish Power and across the UK. It provides electricity generation, transmission, distribution and energy supply services. Annual turnover at the end of March 2004 was c. £5.8 billion.

EDF EDF Energy is part of the EDF Group, which has business interests in several parts of Europe. EDF Energy was formed from the merger of London Electricity and the Seeboard Group. EDF currently claims to be the ﬁfth largest electricity generator in the UK, generating 7 per cent of the country’s electricity. It also distributes electricity to 7.8 million homes and businesses across London, the east of England and the south-east. The turnover in 2003 was c. £3.6 billion.

Powergen (now E.ON-UK) Powergen is now run by E.ON-UK, the world’s largest investor-owned utility. It is the UK’s largest electricity supplier, generating, distributing and retailing electricity to 8.1 million UK customers. The turnover in 2003 was c. £6.8 billion.

Innogy (currently RWE-npower) Innogy was created in 2000 as a result of a de-merger of National Power. In 2003, Innogy was acquired by the German utility RWE. RWE-npower supplies gas and electricity as a retail branch of RWE to 6.2 million customers. How the companies compared The companies were ranked according to three key “clusters” of criteria which affect their carbon risk – the development of and investment in renewable energy programmes; energy efﬁciency and demand-side energy management measures; and greenhouse gas policies and changes in their company emissions over time.

Ranking Company Summary results

1 Centrica The only clear-cut CO2 risk management leader.

2 Scottish and Southern Energy Exhibits long-term improvements in reducing CO2 emissions. Signiﬁcant development of new renewable energy projects and a comprehensive coverage of renewable energy programmes. Ranking should be viewed in the context of a relatively weak

performance with regard to overall CO2 emissions from power generation.

3 Scottish Power Also shows signiﬁcant improvements in CO2 emissions. Worst performer in terms of carbon intensity from electricity generation, indicating that this level of progress needs to be accelerated. High scores for energy efﬁciency programmes and progress on the Renewables Obligation, green tariff implementation and renewable energy policy.

4 EDF Poor performance with respect to CO2 emissions improvements, but earns top ranking for energy efﬁciency achievements and energy service provision to customers. A large-scale green tariff programme (13,000 customers) enhances its renewable energy proﬁle.

5 Powergen Very little improvement in CO2 emissions (1998-2004), although they are low relative to other companies. Ranked in the middle tier in terms of efforts to procure, construct and operate renewable energy facilities, and ranked the worst for progress against energy efﬁciency commitments.

6 Innogy Currently medium-to-low performance in terms of reducing

CO2 emissions and historically the worst. A large-scale green tariff programme improves renewable energy performance but ranked low on performance renewable and energy efficiency policies. UK greenhouse gas emissions In 2004, the UK government was obliged to Centrica stood out as the clear leader with respect to acknowledge that it was no longer on track to meet its the carbon emissions risk ranking. To a certain extent domestic CO2 emissions reduction target of 20 per cent this result is to be expected because Centrica mainly by 2010. The UK Climate Change Programme estimates generates its power from gas-fired rather than coal-fired that, with current policies, the UK will only just reach its plants. Even so, the results indicate a rather high carbon Kyoto target by 2012 – and that it will be one of only risk exposure for the sector as a whole, as the other two EU members to do so. There are some encouraging companies studied fell some way short of the Centrica signs from the power sector: emissions from power ranking. Scottish and Southern Energy and Scottish stations decreased between 1990 and 2004 by 15.5 per Power were the largest “aggregate” emitters of cent, while emissions from industry outside power greenhouse gases in 1998-2004, but, after Centrica, stations increased by 1 per cent in the same time they also demonstrated the greatest improvements in period, with a rise by 4.5 per cent between 2003 and their emissions over the same period. The ranking of 2004 alone. While this was in part due to better energy Innogy, Powergen and EDF in this section indicates that efficiency, the decrease was, however, largely due to these companies should currently be concerned about changes in the fuel mix – the UK’s “dash for gas”. their ability to comply with the EU ETS.

Energy efficiency The EU Emissions Trading Scheme (EU ETS) A recent government study found that the current The EU ETS, and corresponding carbon market, was potential for energy efficiency is approximately introduced across Europe in January 2005 as a way 30 per cent of energy demand – an amount that would of reducing emissions of CO2 and other greenhouse save UK consumers £12 billion a year. v The EWP gases by the power and other sectors. vii If used envisaged that half of reductions expected for the properly by the UK government, the ETS has the national target of 60 per cent by 2050 would be met by potential to impact significantly on UK power cuts in energy demand. In the spring of 2005 the companies by forcing them to seek cleaner fuels and government’s Energy Efficiency Commitment (EEC) technologies to reduce their CO2 emissions. By came into force in order to deliver these aspirations. vi putting a price on carbon, Companies in the Innovest study were judged according high-carbon investments become more financially to the extent to which they have complied with the EEC, risky for companies if the market is functioning informed consumers, and invested in new energy effectively. However, as a result of a lobbying efficiency technologies. EDF was the clear leader. campaign by the power industry, the present “cap” on Scottish Power and Scottish and Southern Energy were emissions is currently set so high in the UK’s National both in the upper/middle tier, and Innogy was the worst Allocation Plan that the ETS has little impact on performer. By the end of 2004, Innogy had achieved 68 shifting investment away from fossil fuels. Therefore per cent of its final EEC target. In contrast, EDF’s 2003 WWF is calling for a tougher NAP in the second Social Responsibility report disclosed energy efficiency phase of the scheme that starts in January 2008. (EE) investments of £69.53 million in 1994-2003, and by the end of 2003 it had achieved 80 per cent of its EE target. While Scottish Power and Scottish and Southern Energy were behind EDF in terms of energy efficiency measures already achieved, they showed the best improvement. Scottish and Southern Energy expects to save 12,000GWh of its output by 2010 through energy efficiency promotion activities. Renewable energy The Renewables Obligation (RO), introduced by the UK government to help it meet its Kyoto Protocol commitments, requires UK electricity suppliers to obtain 15 per cent of their electricity from renewable sources by 2015. Scottish Power, Scottish and Southern Energy and Centrica ranked highest with respect to compliance with the RO. Some companies – Innogy, Powergen and EDF – rely more heavily on the purchase of “buy-out”. iv These companies were ranked lower because their actions essentially shift the burden of investing in renewables onto fewer companies, instead of investing money into innovative renewable programmes which would stimulate the development of the renewable energy market in the future.

Key questions in the uptake of renewable energy programmes concern red tape (e.g. the length of time it takes for developers to move from design proposal to build) and “additionality” (action over and above current government legislation). Since the RO was created in 2002, some so-called “green tariffs” are sometimes not “green” at all, and some customers pay a premium simply to help companies pay to meet government regulations. © WWF/ Chris Martin BAHR CONCLUSIONS TIME TO ACT

The study found that: Key WWF’s asks of the power sector companies • a clear difference exists between the more forward- The report shows wide variations in performance by thinking companies – Centrica, Scottish and Southern, companies on both renewables and energy efficiency. and Scottish Power Plc – and the worst performers Therefore, WWF-UK is calling on the UK power sector in the study – EDF, Powergen and Innogy. to demonstrate greater leadership and implement the • Some UK companies have shown the ability to take following measures: innovative and forward-thinking actions in reducing • make no new investments in coal, close down the their energy use and CO2 emissions. However, the most inefficient and dirty coal plants and replace them six main UK power companies studied tended to bring with gas and renewable technologies; a one-dimensional view to their business – e.g. by • ensure investment in new renewable energy of at least developing an innovative green electricity tariff scheme 20 per cent by 2020; while failing to take strong action in tandem in the field • make an extensive commitment to increase energy- of energy efficiency or energy services. If the UK efficiency and uptake of gas-Combined Heat and power sector is to respond effectively to the challenge Power (CHP); of climate change, companies need to advance in all • support binding limits on emissions of CO2 through a areas, not just a few. strong NAP in the second phase of the EU Emissions • While the UK power sector is being fairly successful Trading Scheme; in meeting the minimum regulatory requirements • work with WWF and others to ensure that the imposed by government, as a whole it is not exercising government addresses the remaining barriers to sufficient leadership in tackling the challenge of climate energy services; and change. Rather, it appears that UK companies are • take a range of measures to encourage business and taking a “tick the box” attitude, rather than domestic customers to reduce their energy approaching the problem holistically. consumption. • Current UK government energy policies do not go far enough to achieve the real cuts in CO2 emissions, In addition, WWF is calling on banks, insurance nor do they adequately encourage business leadership companies, pension funds and other asset managers or long-term certainty for reaching a low-carbon to recognise, assess and respond to the financial risks UK economy. of climate change. This would involve lobbying government and influencing the corporate sector (specifically power companies) to respond to the challenges that climate change brings and encourage carbon-related criteria on their investments.

WWF-UK key demands of government Weak emissions caps and unpredictable government policies on climate change do not provide enough incentive for the poor performers to play their part in solving the global climate crisis. Therefore, WWF is calling on the UK government to implement the following measures:

• set challenging caps to CO2 emissions by the power sector in the UK National Allocation Plan for Phase 2 of the EU ETS (this will require a tight level of allocation and robust allocation methodology, in line with delivering on the national 20 per cent target by 2010); • influence other EU member states, through the i DTI. February 2003. Energy White Paper. Our energy future – creating a low carbon economy. presidency of the EU, to take similar action; • introduce fiscal and regulatory measures to encourage ii DTI. 1998. New and Renewable Energy: Prospects in the UK for the 21st Century; Royal Commission on Environmental Pollution 22nd suppliers to offer energy management services and Report; Energy: The Changing Climate. June 2000. create Energy Service Companies (ESCOs); www.rcep.org.uk/newenergy.htm; Performance and Innovation Unit • extend the UK Renewables Obligation to at least Report. February 2002. www.number-10.gov.uk/su/energy/19.html; DTI. February 2003. Energy White Paper. Our energy future – creating a low 20 per cent by 2020; carbon economy. • establish assessment criteria for what makes iii WWF/Allianz. July 2005. Climate change and the financial sector: an a credible and additional green electricity tariff agenda for action.

in the UK, such as the EUGENE Standard type iv Buy-out: a compensation price paid to Ofgem when there is not enough of Accreditation Scheme; renewable energy to go around and subsequently distributed among those companies that do comply with the Obligation. • take significant steps to reduce the UK’s energy demand by 0.2 per cent per annum up to 2020, v Performance and Innovation Unit Report. February 2002. www.number-10.gov.uk/su/energy/19.html such as increased support and investment for swift vi The EEC requires power companies to encourage and assist their and successful uptake of CHP and community domestic customers to make energy savings through installing heating; and measures such as cavity wall and loft insulation, energy efficient boilers, • support the call from WWF, FoE and others for appliances and light bulbs. The first (2005-2008) stage of the Commitment requires electricity and energy suppliers to achieve a a 3 per cent reduction in CO2 emissions year-on-year certain target in their customer efficiency, equivalent to an overall in order to meet the government’s own target of a cumulative household emissions reduction of 1%. In 2008-2011, the 60 per cent reduction by 2050. government proposes that this level should be doubled. In looking at these results it should be noted that the EEC does not require companies to actually install energy efficiency measures, but merely to Innovest provide the necessary equipment. The Commitment as it stands Innovest is an internationally recognised investment therefore does not necessarily lead to reductions in emissions. research and advisory firm. It specialises in analysing vii The ETS works on a “cap and trade” basis, by which each EU member companies’ performances on environmental, social state government sets a “cap” emissions from its power sector. Those companies unable to meet the target for emissions reductions must and strategic governance issues, with a particular focus buy “permits” from cleaner companies – thus setting up an international on their impact on competitiveness, profitability and market in trading carbon. share price performance. Innovest has developed a carbon-profiling database which enables comparisons of management strategies and emissions profiles to be made among companies in a consistent, systematic way. The database contains a series of variables to assess climate change performance, weighted according to their importance within particular sectors. © WWF / Kirsty WIGGLESWORTH © WWF-Canon / Anton VORAUER © WWF / Kevin SCHAFER © WWF-Canon / Michel GUNTHER

To download the Innovest report Cover Image © WWF-Canon / Adam OSWELL UK Power Giants: Generating Climate Change visit www.wwf.org.uk/climatechaos

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