Select Committee on Environmental Audit Minutes of Evidence



FURTHER MEMORANDUM FROM THE DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS AND THE DEPARTMENT OF TRADE AND INDUSTRY

SECOND RESPONSE TO THE SEVENTH REPORT FROM THE COMMITTEE, 1998-99, HC 159, ENERGY EFFICIENCY

  In September 1999 the Government responded to the issues raised in the Summary of Conclusions and Recommendations in the Committee's Seventh Report on Energy Efficiency. This paper responds to a number of additional issues identified by the Committee, on which they would welcome further advice.

1.   We recommend that the UK, along with its international partners with the EU and the OECD seek to develop a set of indicators for national energy efficiency. These indicators should be based around:

    —  energy intensity (whole economy* and by sector);

    —  energy consumption by sector;*

    —  energy prices (by sector* including proportion made up of taxes);

    —  import/export balance of energy-intensive goods;

    —  incidence of fuel poverty*

    —  thermal efficiency of housing stock;*

    —  levels of investment in energy efficiency measures (all sectors, including contribution from public expenditure); and

    —  public expenditure on energy conservation and efficiency research and development.

  We note that a number of these (marked *) appear in the description of the Government's chosen sustainable development indicators that was published alongside the revised UK Sustainable Development Strategy. (Paragraph 19)

  The Government is working to ensure that useful energy efficiency indicators are available at national and international levels.

  As the Committee have noted, five of the eight national indicators which they have suggested are already included in the set of sustainable development indicators in "Quality of Life Counts (indicators for a strategy for sustainable development for the UK: a baseline assessment)", published by DETR in December 1999.

  Also, DTI produces an annual booklet of "Energy Indicators"; the 1999 version was published on 23 December 1999 and is available on the website at www.dti.gov.uk/epa/esi. The "Energy Indicators" booklet covers a range of indicators and includes a number on energy efficiency.

  The Government has produced energy efficiency indicators in a range of areas, where consistency of reporting can be assured. In those areas where consistency of information is more difficult, the Government will look to carry out research to identify what other energy efficiency indicators might usefully be established.

  The Government is actively encouraging the European Union and the International Energy Agency to develop energy efficiency indicators. Under the EU SAVE programme a large dataset of both energy consumption figures and related socio/economic variables such as industrial output, number of households, etc is being compiled. A booklet entitled "Energy Efficiency Indicators: the European Experience", outlining some of the analyses, was published in 1999. In addition, in December 1999, EUROSTAT published a booklet, "Integration—Indicators for Energy".

  In addition, the Government is encouraging the Commission to identify a key set of summary energy consumption indicators, to enable broad-brush comparisons across Member States to be carried out more easily.

  The International Energy Agency (IEA) has produced several analyses of energy efficiency comparisons, using indicators, in the last few years. Recent examples include "Indicators of Energy Use and Efficiency" (May 1997) and "The Link between Energy and Human Activity" (November 1997). The IEA are also working with the European Commission to extend the work being done through the SAVE project to other, non-European, OECD countries.

2.   We urge the DTI to publish its latest energy forecasts as soon as possible. (Paragraph 21)

  New energy and emission projections have been made available, as a Working Paper, alongside the draft climate change programme issued on 9 March. Putting these in the public domain has taken longer than we might have hoped—but as the Committee itself recognised in its Seventh Report, the issues are complex and the policy agenda has itself been moving, with knock-on effects to the projections.

  It clearly was important to ensure that the analysis was available to support the assessments within the draft climate change programme. We have done that.

3.   The programmes for industry provide information and advice rather than grant funding or tax incentives and this is unchanged under proposals for the Climate Change Levy. There appears to be some overlap between the best practice programmes and there may be value in reviewing them to assess whether a single programme might be able to offer economies of scale and a higher critical mass of expertise (they currently share a telephone hotline). (Paragraph 67)

  The Energy Efficiency Best Practice programme funded by the DETR is a well established and respected programme providing impartial advice and information on worthwhile energy efficiency measures; sectoral benchmarking information on energy use and consumption performance; and support for research, development and demonstration. It has very close links with the joint DTI/DETR Environmental Technology Best Practice programme through, for example, common membership of programme steering machinery. These links will continue and opportunities will be taken to develop joint activities (for example, the environment and energy Helpline) where this helps deliver a better, more coherent service to business and the public sector.

  In the 1999 Budget the Chancellor announced proposals for a £50 million per annum fund to promote energy efficiency and renewables. For energy efficiency, this is intended to be used to provide advice to businesses, particularly small and medium sized enterprises, and to support research and development of low carbon technologies. This support will build on information and advice already available through the Energy Efficiency Best Practice programme. In his November 1999 Pre-Budget Report, the Chancellor announced that, in the light of responses to the consultation on the Climate Change Levy, he was minded to increase the support for energy efficiency measures under the Climate Change Levy package.

  The enhanced capital allowance scheme is a new initiative aimed at boosting the take-up of new, energy efficient technology. It draws on the scheme currently running successfully in the Netherlands. The scheme will give companies 100 per cent first year capital allowances for energy saving investments. Businesses will be able to set this investment against their corporation or income tax bills. The Government is currently considering which energy efficient products and technologies might qualify, in the light of responses to the recent consultation exercise.

  Energy intensive sectors of industry will also be able to qualify for an 80 per cent discount in the rate of Climate Change Levy if they agree to energy or emission targets with the Government. The 80 per cent discount will act as a further incentive to companies to make investment in energy efficiency—if milestone targets are not met, companies will be required to pay the full rate of Levy.

  In addition, Good Quality Combined Heat and Power will be exempt from the Climate Change Levy.

4.   In addition to assessing the benefits of combining the two programmes the Government should consider whether the resources available are sufficient to make the best out of the introduction of the Climate Change Levy. (Paragraph 68)

  The announcement by the Chancellor of his intention to raise the support for energy efficiency measures under the Climate Change Levy package, from £50 million for 2001-02 rising to £150 million shows an increased commitment to the introduction of the Climate Change Levy.

  The £50 million fund is intended to:

    —  provide energy efficiency advice/audits to small and medium sized enterprises;

    —  promote the development of "new" sources of renewable energy; and

    —  encourage the research and development and take-up of low carbon technologies and energy saving measures through a "carbon trust".

  The £50 million fund and the enhanced capital allowance scheme need to be fully integrated into a wider package of energy efficiency policies and measures. This is in line with established programmes operating in other countries, which aim to speed up technological innovation and to facilitate the diffusion of new technologies by developing synergies between research, development and demonstration (RD&D) and advice programmes.

  The Government therefore intends to adopt a co-ordinated approach. Synergy between the various elements is vital to enable the various policies and measures to work together. The proposed programme elements are therefore designed to form a balanced, integrated programme.

5.   Given this broad experience of partnerships and SMEs we believe there is merit in Ministers asking the Trust to administer the fund for sustainable energy being created out of revenue from the Climate Change Levy. (Paragraph 69)

  The Government is in the process of taking views about how to put this programme together and the organisational structures needed to ensure its effective delivery. Final decisions will be made as part of the 2000 Spending Review.

6.   We recommend that the Government's work on the draft Climate Change Programme address the development of a clear, accurate and consistent way of expressing the targets and performance of its energy efficiency programmes. (Paragraph 73)

  Work on the draft climate change programme followed the course recommended by the Committee.

  The draft climate change programme, which was published on 9 March, summarises the scope for carbon savings from the different elements of the Government's proposed programme. It also lists the main areas of non-quantified action which are expected to add to the Government's core programme.

  A technical paper has been produced by officials in the Department of the Environment Transport and the Regions as an accompaniment to the draft climate change programme. It provides further details of the derivation of the carbon savings figures included in the draft programme. For each measure included in the draft programme it sets out the source of the data, the models that have been used, any key assumptions and uncertainties, and where further information may be obtained. The technical paper is available on the DETR website at http://www.environment.detr.gov.uk/consult/draftclimatechange/index.htm.

7.   We are concerned by the apparent lack of communication between Ministers and the Director General of Electricity and Gas Supply over the immediate and longer term future of the Standards of Performance scheme. We urge Ministers to respond to the request for clarity over their intentions set out by Mr McCarthy in evidence to us. (Paragraph 81)

  The position on the future of the Standards of Performance scheme is now clear.

  Following consultation, the regulator has announced new EESOP obligations (EESOP3) equivalent to £1.20 per customer per fuel per year from April 2000 to March 2002. This includes gas suppliers for the first time.

  Through the Utilities Bill it is intended that the power to set future EESOPs will pass from the Regulator to the Government, with the Regulator continuing to be responsible for oversight and implementation of the obligation. Since 1998 the Government has been developing its proposals for the future operation of EESOPs under the prospective new utilities legislation, in discussion with Ofgem, the energy utilities, consumer and other interested organisations. The Department published its consultation proposals for the future operation of EESOPs, and for the first new style EESOP, covering the period 2002-05 ("EESOP4") on 9 March alongside the draft Climate Change Programme. Further details are given below, in section 9.

  DETR, DTI and Ofgem officials are working closely together on the development and implementation of both EESOP3 and EESOP4. And Ofgem have sought to ensure that the proposals for EESOP3 provide "as smooth a transition as possible towards the arrangements provided under the Utilities Bill" (Energy Efficiency Standards for Gas and Electricity Suppliers 2000-02, para 4).

8.   We regard the elaboration and implementation of utilities reform as a matter of utmost urgency. We recommend that DTI publish the relevant Bill in draft for consultation, and perhaps pre-legislative scrutiny, as soon as possible. (Paragraph 83)

  The Utilities Bill had its Second Reading in the House of Commons on 31 January 2000 and is currently at Committee Stage. Both the proposals that the Bill is intended to enact and the use of the powers under the Bill have and continue to be the subject of extensive public consultation.

  Individual energy efficiency aspects of the Bill are subject to consultation in their own right. Examples include the current consultation on the levels and characteristics of the new Government-set Energy Efficiency Standards of Performance, and the statutory Social and Environmental Guidance to be issued in support of the legislation.

9.   We support the establishment of an enhanced Standards of Performance scheme for energy efficiency and we strongly recommend that obligations, both for electricity and gas, be imposed on the supply function rather than the distribution function in order to encourage the development of energy services provision. (Paragraph 84)

  The new EESOP3, which has been announced by the regulator, covers both gas and electricity, with the obligations resting on the suppliers.

  The consultation paper on the proposed Energy Efficiency Standards of Performance, which was published alongside the draft climate change programme, proposes an enhanced EESOP for 2002-05.

  Subject to the consultation and the further statutory consultation under the proposed provisions of the Utilities Bill, the Government proposes to set an Energy Efficiency Target, covering both gas and electricity which is set out in the consultation document. We estimate that this would reduce annual domestic energy consumption by around 11 terrawatt hours (this equates to about 2 per cent of annual domestic energy consumption in 1998) from 2005 onwards and yield a carbon saving of around 0.75 MtC/yr.

  In considering the future form of EESOPs, the Government considered the question of whether energy efficiency obligations would work most effectively through energy suppliers, or distributors. The Government's conclusion is set out in the consultation document on EESOP4:

    "The Utilities Bill provides that EESOP obligations may be placed on either licensed supply or distribution companies, or both. Whilst Government wishes to keep both options open, its view is that EESOP obligations placed on suppliers align better with the wider policy objective of fostering a strongly consumer-focused utility market, and build on the supply companies' direct relationship with consumers, and their interest in developing and marketing new energy services including energy efficiency. " (Paragraph 2.3—italics added)

  The consultation document went on specifically to address the issue of energy services as follows:

    "In the liberalised market, energy suppliers are likely to develop `energy services', combining energy supply and energy efficiency improvements, in seeking to retain existing customers and attract new customers. This is of value to consumers, giving them wider choice. The Government therefore proposes that companies will be able to meet their future EESOP obligations through approved EESOP programmes . . . linked to companies' wider marketing to consumers, including marketing of energy services . . ." (Paragraph 3.19)

10.   We recommend that a national database for energy consumption by geographical area be established, under the auspices of the regulator, to assist local authorities and others to fulfil their responsibilities and desire to promote energy efficiency. We believe this should form part of forthcoming legislation on utilities reform. (Paragraph 87)

  The Government is aware that access to energy consumption data is of interest to local authorities and others. The Government will discuss with the Local Government Association the precise requirements and will consider how they might be met in a cost effective way which is consistent with the availability of information, regulatory, licensing, and issues of privacy and data protection.

11.   We recommend that the Government takes steps to address the apparent lack of clarity in Clause 14 of the Local Government Bill regarding the legal capacity of local authorities to establish or run energy services companies. (Paragraph 97)

  Clause 14 of the Local Government Bill has now become section 16 of the Local Government Act 1999.

  Section 16 of the Local Government Act 1999 enables the Secretary of State to provide new powers for local authorities to form companies in pursuit of the delivery of Best Value. Use of section 16 to clarify the legal capacity of local authorities to establish or run energy services companies must relate to a local authorities existing functions in this area and could not be used to extend functions into areas not covered by existing primary legislation.

  The Government will consider whether there is a need for advice to local authorities on the matter.

  The Committee will wish to note that energy services do not have to be provided by a separate company.

  Looking forward, the current Local Government Bill includes new powers for local authorities to promote or improve the economic, social and environmental well being of their communities, and to develop comprehensive "community strategies". Amongst other things, these powers will increase the scope for local authorities to work with other bodies to co-ordinate and support energy services.

12.   We would urge the regulator in the difficult interregnum he described to have regard to the possibility that success in one area of his responsibilities—albeit a primary one such as reducing prices—might be reasonably argued to shift the balance he has to strike in favour of another area—such as promoting energy efficiency. (Paragraph 85)

  The Committee will recognise that this is a matter for the Regulator, however he has told us that he has taken steps within the existing statutory framework to provide further support for energy efficiency. As announced on 9 March, the Energy Efficiency Standards Scheme will be extended for another two years until March 2002, and will be expanded to include gas and second tier electricity suppliers. Funding for the scheme will be increased from £1 to £1.20 per customer per year, and the energy savings targets will be tightened compared with the previous standards. The Regulator has indicated that he will continue to have full regard to the importance of his statutory duty to promote energy efficiency in carrying out his duties ahead of the Government's statutory guidance.

13.   We believe that to assess the implementation of his duty to promote the efficient use of energy the Director-General of Electricity and Gas Supply, or a suitable agent, should examine the impact of the provision of advice on energy efficiency by energy suppliers in terms of outcomes achieved. (Paragraph 86)

  The Committee will recognise that this is a matter for the Regulator, however he has advised the following. Through the Social Action Plan, which was published in final form on 1 March 2000, Ofgem is taking steps to improve the provision of energy efficiency advice by suppliers. This work, together with improvements in monitoring, will enable Ofgem to assess the overall effectiveness of energy efficiency advice. Strengthened licence conditions and codes of practice proposed under the Plan should ensure improvements are made in the quality of advice and how it is promoted. The Plan also includes research, being sponsored by suppliers, to determine ways in which customers prefer to access advice, the extent to which advice currently given is appropriate, and how it is acted upon. Low income customers are a particular focus of this research.


 
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