Select Committee on Environmental Audit Minutes of Evidence



APPENDIX 1

Memorandum from the Confederation of British Industry (CBI)

  The CBI whose membership includes a wide range of energy consumers of all sizes, as well as energy producers, welcomes this opportunity to voice its concerns about the Governments policies regarding energy efficiency.

  We are concerned that Government energy efficiency policy and associated programmes do not sufficiently:

    —  recognise that the different sectors of industry have different capabilities and understanding of energy efficiency issues, and so have to be treated differently when it comes to policy measures in this area;

    —  understand and tackle energy efficiency in non-energy intensive companies, particularly those in the service and commercial sectors.

  The CBI's recent response to the DETR consultation on the Climate Change Levy (CCL) energy efficiency package (document attached) focused particularly on the above two issues. We have pointed out that the more energy-intensive firms, for whom energy is a large percentage of overall costs, naturally have more expertise regarding their use of energy and how to reduce it. These companies also tend to have already made investments in energy efficiency as it makes good financial sense for them to do so. The less energy intensive companies, on the other hand, not only lack the knowledge and expertise in the field of energy efficiency, but also often lack the will and financial incentives.

  As we have suggested in our response to the CCL energy efficiency package consultation, one way of increasing efficient use of energy in the non-energy intensive sectors would be to prioritise the £50 million energy efficiency fund towards helping such companies. We have also recommended that the smaller, less energy intensive companies should be given advice on how to make use of the Enhanced Capital Allowances scheme also on offer as part of the CCL energy efficiency package.

  Past experience has shown that training and the dissemination of information to the above-mentioned commercial and service sectors is not enough to entice them to take action. This type of assistance should be coupled with actual help with the implementation of energy efficiency measures. This help could be in the form of grants or tax breaks.

June 2000

Annex 1

ENERGY EFFICIENCY MEASURES UNDER THE CLIMATE CHANGE LEVY PACKAGE

CBI RESPONSE

EXECUTIVE SUMMARY

  1.  We welcome the increase in the revenues allocated to the promotion of energy efficiency measures, announced in the Pre-Budget Report, but there are a number of critical issues that need to be addressed on the spending and allocation of the £50 million energy efficiency fund, and the £100 million enhanced capital allowances (ECAs):

    —  There must be a recognition of the differences between the various business sectors, in terms of energy use, size and behaviour, and energy efficiency package should be designed and allocated accordingly;

    —  Government should prioritise the energy efficiency fund towards companies who would otherwise lack the awareness, incentive, and resources to reduce their use of energy;

    —  Companies, both within and outside negotiated agreements, should be able to benefit from the ECAs;

    —  There should be complete transparency about the amount of revenue used to promote business efficiency, over the lifetime of the levy, and the commitment to revenue neutrality should be observed;

    —  There should be early and regular review of the effectiveness of the scheme;

    —  The energy efficiency package must be focused on changing business behaviour, and not on supporting other initiatives which are not specifically related to business use of energy;

    —  The energy efficiency fund should not only be used for providing advice and consultancy, but also for providing assistance with implementation;

    —  The coverage of ECAs should be extended to include more technologies, to maximise potential energy savings and effective integration with the energy efficiency advice provided; and

    —  ECAs should be available to ESCOs and landlords, in order to facilitate the implementation of energy efficiency measures.

  2.  Above all, Government should ensure that all parts of the package maximise the implementation by business of energy efficiency measures at minimum cost.

INTRODUCTION

  3.  The CBI has expressed concern that the CCL proposal announced in the 1999 Budget was fundamentally-flawed as a cost-effective way of encouraging business to help the UK meet its Kyoto commitments, since:

    —  The proposals appeared to be shaped less by environmental goals and more by a wish to reduce employers' labour costs;

    —  Government had decided to commit itself to a levy on business energy use, before finalising its overall climate change programme;

    —  The burden of the levy fell only on business, and did not extend to the domestic consumer, unlike in other EU states;

    —  The proposals were not adequately focused on tackling carbon emissions, and promoting changes in behaviour in the non-energy intensive businesses; and

    —  The design of the levy lacked any provision for emissions trading, despite the importance placed on it in Lord Marshall's report.

  4.  The Pre-Budget Report in November 1999 went some way to address these issues, though concerns remain and much work is still needed on key details. The proposed increase in CCL revenue recycled specifically to promote business energy efficiency was a welcome move, but further work is needed on the proposals in the DETR consultation paper.

THE GUIDING PRINCIPLE

  5.  The CBI believes that the guiding principle for the measures considered in the current consultation should be to maximise the implementation by business of energy efficiency measures at minimum cost. In order to achieve this, the package should aim to:

    —  maximise changes in behaviour;

    —  promote competitiveness;

    —  and target businesses which lack incentives to improve energy efficiency.

  6.  We are concerned that Government proposals (as stated in the consultation document) on the allocation of the energy efficiency fund and enhanced capital allowances do not chime in with this principle.

MATCHING ENERGY EFFICIENCY MEASURES TO BUSINESS NEEDS

Differentiating between business sectors

  7.  Business use of energy is not homogeneous, and therefore a wide range of measures, processes and technologies will need to be supported. It is not simply a question of the differences between energy intensive and non-energy intensive business users (EIUs and non-EIUs), but also of the differences, for example, between different SMEs.

  8.  We believe further work is needed to understand better the different needs of business energy users than is suggested in the consultation paper and indeed this might be an early initiative for DETR to undertake. However, it is important to make some general points.

Non-Energy Intensive Users

  9.  Some 60 per cent of business energy use is accounted for by non-EIUs, ranging from major firms in, say, the service and commercial sectors, to SMEs. These firms either lack the financial incentive or face other barriers to managing their energy use more efficiently, yet it is often argued that potentially significant savings remain to be tapped among such firms.

  10.  We welcome the emphasis in the consultation on supporting SMEs, but would suggest that it is wrong to exclude larger, non-energy intensive businesses (say, in the service sector) which might lack expertise but have the capital available to implement new measures and make significant savings.

  11.  The proposal to ensure that help and advice is available to SMEs in a form they can use, backed up by encouragement, is helpful but likely to be of limited value, particularly for smaller SMEs who may often lack the internal resource to implement measures. Above all, the package to SMEs should include implementation, and not just consultation and advice.

  12.  The package of support measures must also recognise that the specific needs of the smallest SMEs may be different from other SMEs. Work commissioned by the Energy Saving Trust (not yet published) suggests that the former are looking for a very simple approach provided by a body familiar to them (eg a utility rather than a specialist consultant). The study also suggested that, for this sector, short-term fixed price contracts with an energy service company (ESCO) would be preferred to other options such as shared savings schemes and interest free loans for energy efficiency investments.

Energy Intensive Users

  13.  EIUs in general already have a strong commercial incentive to understand their use of energy and manage it efficiently. Where investment is needed to capture further efficiency gains, it may still make economic sense to make such investment, but the pay-back periods may be longer than for previous investments, making them commercially less-attractive.

  14.  Equally, although the CCL rebates linked to negotiated agreements (NAs) provide an incentive to invest in energy efficiency improvements, the improvement targets will be challenging and will put pressure on cash-flow for NA firms which by and large operate on small margins in competitive, internationally-traded sectors. Some EIUs may not even be able to negotiate an energy efficiency agreement with Government, subject to current discussions about extending eligibility criteria beyond the proposed IPPC basis.

PRIORITISATION AND FAIR USE OF THE ENERGY EFFICIENCY PACKAGE

£50 million Fund

  15.  Due to their high energy costs, and attention to energy issues, EIU companies, and those covered by NAs (most of which are EIUs), already have a good knowledge of their energy use and the energy efficiency measures that they could implement. The support (audits, consultancy, and implementation) should therefore be directed, in the main part, to companies that fall outside this group. Priority should be given to small companies which lack the resources (both in terms of specialist staff and finances) to implement energy efficiency measures, and the financial incentive.

  16.  The fund for which £50 million has currently been set aside should, therefore, be prioritised towards supporting initiatives aimed at firms outside the CCL negotiated agreements. Consideration should, however, be given to making some of the £50 million fund available to help firms in NAs identify ways of exceeding their targets (where they wish to do so).

  17.  It must be noted that non-profit organisations cannot, by their nature, be eligible for ECAs. We therefore recommend that this sector, is also given favourable treatment with regard to the allocation of the energy efficiency fund.

Enhanced Capital Allowances

  18.  Lack of incentive and resources in the non-NA companies, could put them at a disadvantage at making full use of the ECA qualifying technologies. This imbalance should be addressed, in order to ensure fair and equal use of ECAs by all sectors.

  19.  There must be early and regular review of the use of ECA technologies, to ensure that some minimum levels of action among non-NA firms are being achieved. These reviews should be carried out in an independent and transparent fashion.

  20.  The list of qualifying technologies and processes for ECAs should be sufficiently broad to give non-NA firms maximum opportunity to benefit from investing in cost-effective measures (see recommendations on ECAs below).

  21.  The public expenditure allocation set aside to finance the ECAs should be sufficiently flexible to support the above requirement, and set according to what is cost-efficient in terms of delivering energy efficiency improvements rather than any more arbitrary Exchequer cap.

TRANSPARENCY IN OVERALL SIZE AND MANAGEMENT OF PROGRAMME

Amount of Revenue

  22.  Transparency over the amount of revenue used to promote business energy efficiency, now and over time is essential. Greater clarity is needed on how the amounts proposed were arrived at.

  23.  In addition, were the CCL to raise more revenue in total than is anticipated (which itself might suggest that the levy was failing to encourage improvements in energy efficiency), there would be a strong case to increase the total allocation of £150 million as part of the Government's commitment to revenue neutrality. Above all, arbitrary caps on the allocations for ECAs and other incentives to implement energy efficiency improvements must be avoided to ensure the most cost effective package of measures.

  24.  Greater clarity would be particularly welcome on the ECA funding profile over time. The provision for ECAs is due to rise in early years to some undefined amount as more firms make use of ECAs. It is then to be expected that the accumulated benefit of the ECAs will taper off in the future, subject to the turnover of technologies and processes eligible for ECAs. Any resulting decline in provision should also be made good by supporting additional worthwhile initiatives.

Regular Reviews of the Scheme

  25.  There should be early and regular reviews of the effectiveness of the scheme to ensure that the joint aims of maximising changes in behaviour, promoting competitiveness and targeting businesses which lack incentives to improve energy efficiency are being met cost effectively.

Devolved Regions

  26.  The CBI supports the Government's aim to take into account the individual characteristics of the newly devolved regions, when implementing the partnership element of the programme. However, it is important to ensure a consistent approach across the UK and that, if the funds are allocated via the block grants to the devolved powers, they are actually spent on promoting energy efficiency.

FOCUS ON CHANGING BUSINESS BEHAVIOUR

  27.  The energy efficiency package must not, as far as possible, deviate from its main focus: that of changing business behaviour. There is a danger that the funds made available through the CCL could be stretched too thinly and allocated to initiatives which, while worthy, may also benefit other energy users who do not have to pay the CCL. Thus while promoting renewables and development of low carbon technologies (as suggested in the consultation) is generally desirable, use of CCL revenue in these areas should be more clearly focused on those initiatives, that specifically relate to business use.

  28.  Therefore, we do not favour the proposal to use some of the funds generally to support renewables, R&D, and low carbon. However, it might be appropriate to do so where the initiatives are linked specifically to business use of energy (eg the implementation of on-site renewable sources of energy generation).

  29.  The CBI, is nevertheless, in full support of direct investment for the development of renewable energy technologies. We therefore urge government to include such measures in the setting of other related policies (eg NETA, and the renewables white paper).

  30.  We do not support the setting up of a new body, such as a low carbon trust, to distribute funds for R&D. This would take time to set up (probably two years) and waste precious funds unnecessarily. It is best to use an already established organisation (such as the Energy Saving Trust) to manage these funds, subject to a review of the effectiveness of such an organisation.

INTEGRATION AND SYNERGY BETWEEN INITIATIVES

  31.  There should be full integration between various initiatives to promote business energy efficiency schemes, both within, and outside the energy efficiency package under the CCL.

  32.  Most importantly, where provision of energy efficiency advice to business energy users is supported through CCL revenues, the measures identified as appropriate through such advice should as far as possible be eligible for support through ECAs.

  33.  There should be linkage with other measures (not considered as part of the consultation) to further increase the effectiveness of the proposals. These would include a requirement that the CCL should be billed separately on users' bills (to send an explicit signal to improve energy efficiency) and more favourable VAT treatment of energy-saving materials and products (as has recently been implement in other EU states).

  34.  The CBI recommends that an independent review of the effectiveness of existing initiatives, with specific regard to business energy use, should be conducted before deciding to use them as the basis for promoting energy efficiency under the CCL. There is a concern for example, that the EEBPP places too much emphasis on leaflet distribution, and not enough on implementation of measures.

ENHANCED CAPITAL ALLOWANCES-SELECTION OF TECHNOLOGIES

Increasing the coverage of ECAs

  35.  There should be a broader coverage of technologies and processes under the enhanced capital allowances scheme (ECAs), to maximise potential energy savings, and effective integration with the energy efficiency advice provided (as suggested above).

  36.  ECAs should certainly cover more than the five technology categories identified in the consultation, not least because there exist others which could deliver equal or higher energy efficiency benefits. These additional categories should cover building materials (such as insulation materials and glazing), which often have a very low cost-to-benefit ratio; and more systems (rather than simply technologies), such as building services control, which may be of wider relevance, for example, in the service sector.

  37.  Consideration should be given to stimulating the further development and introduction of new low energy products and services, by ensuring that business working in this field also benefits from ECAs for specific, verifiable R&D costs incurred in the introduction of new low energy products and services, as well as clean coal technologies.

  38.  In order to increase the number and scope of the technology categories nominated for ECAs, further specific consultation with industry is necessary. We believe that the selection and certification process should be a continuous and evolving one, with the list of technologies being reviewed at frequent intervals, and actively involving users and providers of energy-efficient products and services. We also recommend a system of grading for each technology, based on energy saving to cost ratio, incorporated into the selection procedure.

Upper and Lower Limits

  39.  The case for a lower investment limit for ECA eligibility is not clear. If a lower limit is imposed, a large number of energy efficiency measures could fall below this. In practice, it is likely that a "natural" lower limit will develop, anyway, as smaller SMEs may not be willing or able to benefit from ECAs.

  40.   The proposal to introduce an upper investment limit runs the risk of excluding technologies whose market penetration needs to be encouraged. In any event, the argument for such a limit- to rein back Exchequer cost- is in practice false. The CCL is supposed to be revenue neutral and currently due to raise far more revenue than is being allocated to promote energy efficiency: there is little chance of a net cost being imposed on the Exchequer. We do not believe that either an upper limit for investment or a ceiling "for market penetration" is necessary at this early stage in the development of the ECA scheme.

ALLOCATION OF ECAS TO LANDLORDS AND ESCOS

  41.  In many cases—for example, smaller SMEs and commercial tenants—it is highly likely that the business paying CCL will not be directly responsible for investing in or implementing new energy efficiency measures (only about 10 percent of office buildings are owned by the occupier). That function may be carried out by an ESCO, with whom the CCL payer has contracted for services, or the landlord, who may be responsible for providing the heating and ventilation systems in a property leased out to tenants.

  42.  It is important, therefore, that eligibility for ECAs should be made possible for ESCOs and landlords. In the case of ESCOs, as the unpublished research for the Energy Saving Trust suggests, utilities, for example, are keen to develop their energy service activities, but are currently more focused in winning customer loyalty by offering lower energy prices: ECA eligibility could provide a useful incentive to change this approach.

  43.  Past experience with regard to the contribution of ESCOs to the take up of energy efficiency technologies must also be noted—in particular with regard to CHP. ESCOs, through third party financing packages, have provided finance for more than 50 per cent of CHP plant in recent years. A significant proportion of future CHP installations in the UK is also likely to be financed in this way. Allowing ESCOs access to ECAs, therefore, will be critical in allowing business to achieve the economic and environmental benefits of CHP and end-use efficiency.

  44.  We believe it is important that the Government ensure there is complete transparency with regard to companies' spending on ECA qualifying energy efficiency technologies. This will eliminate the possibility of companies' misuse of the scheme to the detriment of others. It will also ensure that other unrelated costs, such as building refurbishment are not included in the invoices.

  45.  In the case of leased commercial property, it is often the landlord who has to invest in new technology to secure better energy efficiency. However, he does not get the benefit of such investment: tenants gain from lower running costs, but these are rarely large enough to be reflected in higher rents. Again, extending ECA eligibility to landlords could provide a greater incentive to investing in energy efficiency in commercial properties.

  46.  Although landlords, will be encouraged through ECAs, to implement energy efficiency measures, some will not. Advisory or educational programmes aimed specifically at raising awareness among tenants, could play an important role in spurring landlords into action. Landlords have a duty of care to their tenants, and it is in their commercial interest to meet their needs. Tenants, on the other hand, will benefit from the lower energy bills, once the energy efficiency measures are put in place.

  47.  ESCOs and landlords of commercial property should be able to qualify for ECAs. This may be more important in implementing energy efficiency use by SMEs and some service sector payers of the CCL than simply providing site energy audits and training.

February 2000


 
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