APPENDIX 2
Memorandum from the BG Group
1. The BG Group welcomes the opportunity
to comment on the development of issues outlined in the Environmental
Audit Committee's report on Energy Efficiency published in July
1999, and subsequent policy developments. The Committee's report
presented a comprehensive overview on energy-related issues in
the UK, many of which are of direct relevance to the BG Group,
and Transco in particular.
COHERENT AND
EFFECTIVE ENERGY
POLICY FOR
THE UK
2. As we indicated in our previous submission
in December 1998, we believe there is limited value in assessing
the coherence and effectiveness of the Government's approach to
the efficient use of energy, in relation to established practice
and experience. Rather, we need to recognise that various factors
are creating the potential for a transformation in the nature
of energy supply systems and the forces which animate them. These
changes have far-reaching and potentially beneficial implications
for energy efficiency and energy conservation. This will necessarily
call for an overhaul of the established framework of policies,
programmes, regulation and institutions for promoting energy efficiency
in the context of sustainable development. Fitness for purpose
in this regard should be forward-looking and judged in relation
to the considerable potential for future improvement.
3. Some of these forces for change are:
— The complex "connected economy"—the
increasingly powerful enabling capabilities of IT and telecommunications
being used for novel applications and processes much greater in
scale, complexity and interconnectedness;
— Market liberalisation—A
specific example of the application of such complex new systems
is in the provision of the commercial infrastructure for Britain's
liberalised gas and electricity industries in which competing
suppliers are able to customise the supply of gas and electricity
to the preferences of individual consumers;
— The empowered consumer. The
effect of this form of market liberalisation is to transfer initiative
from the traditional monopoly supplier to individual consumers
now able to exercise choice in competitive, innovative markets.
This in turn, enables individual consumers to satisfy their functional
service requirements—heating, lighting, cooking, etc—in
the most flexible and efficient ways.
The interaction between complex consumer-responsive
energy supply systems and consumers exercising their preferences
in response to cost-reflective price signals should lead towards
maximum efficiency in the development and utilisation of the supply
systems and the related capital assets;
— Advancing technology—the
combination of market liberalisation, advancing technology and
current Government policy promise to create the conditions for
a transformation in our use of CHP technologies so as to achieve
both economic and environmental objectives.
4. More complex market-based energy supply
systems will require a holistic and more coherent responsive system
of regulation, which takes account of these political, social
and technological developments, if it is to be effective. Working
with the grain of liberalised competitive markets, economic instruments
can reinforce the achievements of energy efficiency objectives.
We therefore believe that, on the whole, regulation should be
goal-based and not prescriptive.
5. The conclusion of the Environmental Audit
Committee that the Government should put in place a sustainable
hierarchy for UK energy policy is attractive. However, the use
of energy per se is not an environmental "bad",
eg if the energy is produced with a minimal environmental cost,
as from renewable sources. The sole primacy of energy efficiency
within the sustainability hierarchy could possibly damage the
development of renewable technologies. The drive towards energy
efficiency must be equally matched by a comprehensive move towards
a lower carbon energy base in the UK. Thus, we believe the sustainability
hierarchy should have a zero carbon future as its primary target
and gas, as the least environmentally damaging fossil fuel, has
an important part to play in delivering that future.
6. The Committee's conclusion that the Government
has been providing mixed signals, albeit unintentionally, due
to the apparent tensions in its energy policy is reflected by
the experience of industry. For example, while the Government
has made national and international commitments regarding reductions
of greenhouse gases it has applied a "stricter consents policy"
for gas-fired power stations, the result of which runs counter
to these commitments. It might also be argued that energy regulation
has continued to press for lower consumer prices, which do not
reflect the true external costs of energy provision, and work
against the drive towards improved energy efficiency. Consumers
must be provided with cost-reflective price signals, which will
in turn lead towards maximum efficiency in the development and
utilisation of the energy supply systems and the related capital
assets.
7. At a broader level, the ability of the
energy regulator to balance the needs of electricity and gas customers
within the wider environmental agenda has not yet been tested.
For example, on a whole fuel cycle basis, electricity is not as
efficient a "fuel" as gas but at the point of use electricity
wins the "environmental argument" within these limited
parameters. As to whether the energy regulator is going to take
account of fuel chain issues or focus on "point of use"
when balancing the current and future needs of consumers will
be an interesting policy debate.
THE UTILITIES
BILL
8. Over the lengthy period of consultation
leading up to the publication of the Utilities Bill in January
2000, BG has consistently endorsed the Government's guiding principles
for regulatory reform, while suggesting improvements on specific
points. We have stressed the criticality of regulatory consistency
and predictability on the grounds that the perception of uncertainty
and risk has an important bearing on the capital efficiency of
both the gas and electricity supply systems. It is also imperative
that a framework for incentivising utility companies is developed
that works with the grain of the liberalised market.
9. We also want to see the proposed legislation
enacted because it is an essential pre-condition for the New Electricity
Trading Arrangements (NETA) and, in turn, for the prospective
abandonment of the Government's stricter consents policy for new
gas-fired power stations.
10. The Utilities Bill represents a unique
opportunity to set in place legislation which promotes greater
regulatory consistency and predictability enabling the energy
utilities to continue to deliver consumer benefits over the next
decade. It is critical that a more coherent, forward-looking and
flexible system of utility regulation, that rewards both customers
and investors, is delivered at the end of the Bill's passage through
Parliament.
ENERGY SERVICES
11. It has been questioned why the energy
services industry has not developed as quickly as anticipated
within the domestic sector despite so many new entrants on the
supply side. It has been BG's experience that the new entrants
to the industry are operating in a highly competitive market where
profit margins are slim and companies' objectives are focused
on market share. We hope and believe that this is a transitional
state for the industry and that the development of energy services
and other innovative energy efficiency measures, currently in
their infancy, will take place. We further hope that the development
of cross-industry structures, such as the Gas Industry Safety
Group, will encourage the new entrants to share the challenge
of delivering across a broader range of policy issues.
12. BG would also question the design of
the new Energy Efficiency Standard of Performance 4 (EESOP 4)
weighting scheme. The Utilities Bill makes Ministers responsible
for setting the level and social focus for future EESOPs and this
scheme will come into operation for the period 2002-05. The weighting
scheme is used to calculate EESOP performance scores. The ratio
for electricity has been set at 1 recognising the efficiency of
electricity at point of use but, as referred to earlier, taking
no account of the efficiency of conversion from the primary fuel
source. The application of an identical rate of 0.35 for coal,
oil and gas takes no account of the low carbon advantage of natural
gas nor the efficiency losses associated with conversion of each
fuel.
FUEL POVERTY
13. In our response to the Committee in
December 1998 BG informed you of a creative partnership scheme
which was being developed by Transco which aimed to tackle the
widespread problem of energy poverty. We are pleased to update
the Committee that in September 1999 we announced the Transco
Affordable Warmth Programme which aims to take 1 million homes
out of fuel poverty over the next five years. The benefits of
the Transco Affordable Warmth Programme were recognised by the
Government in the March 2000 Budget through adjustment of the
capital allowance system. Central heating systems leased under
the Transco programme will now qualify for capital allowances.
This is expected to significantly increase the level of involvement
by Local Authorities in the scheme.
14. Reducing the cost of leasing will help
ensure that the target of installing modern gas-fired central
heating in one million fuel poor households is achieved. As stated
in your July report it is important that appropriate indicators
are used to judge the success of such schemes. Transco is putting
in place systems which will enable it to assess the fuel savings
in terms of both the financial impact and emissions reduction.
15. This innovative scheme, designed to
work with the grain of the market, exemplifies the advantages
of goal-based rather than prescriptive regulation.
THE CLIMATE
CHANGE LEVY
16. While the Environmental Audit Committee
made several recommendations with regard to the Climate Change
Levy BG is surprised that the Committee did not recommend amending
the Levy to make it a carbon-based tax rather than an energy tax.
This would immediately take account of your recommendation that
electricity bought under verified green tariffs be exempted from
the Levy. BG views the Levy in its current form as a blunt instrument
whose design runs counter to the UK's commitment to reduce greenhouse
gas emissions. Indeed if the Levy was weighted differently it
could send appropriate signals to the market place removing the
need to restrict the application of the Levy in some markets "to
discourage fuel switching to more environmentally damaging fuels".
As it stands the Levy may actually promote movement to cheaper,
dirtier fuels.
17. Within BG Energy Services (a subsidiary
of BG Group plc that provides major energy users with a complete
range of gas infrastructure and consultative services, including
energy efficiency advice) we already have experience of prospective
clients delaying planned investment in high efficiency gas-fired
CHP and boiler replacement. This is due to the lack of clarification
regarding capital allowances for investments in projects reducing
emissions. Tax relief offered after April 2001 will curtail projects
planned in the interim.
18. The hypothecation of Levy revenues for
recycling back to industry is welcomed. Amendments to the Levy
in the future could ensure that the external costs of fuel use
begin to be accounted for in the price of the fuel.
19. Despite the poor design of the Levy,
BG has participated actively in the Emissions Trading Group in
developing the rules for the UK scheme which will operate within
the context of the Levy system. Indeed, under current estimations,
the proposed trading scheme is expected to be four times as effective
as the Levy in reducing emissions of greenhouse gases.
CONCLUSION
20. The BG Group welcomes the conclusions
and recommendations of the Environmental Audit Committee as a
means of encouraging Government to consider energy policy developments
in a holistic manner. As stated in our previous submission, the
liberalisation of utility markets and related multi-utility developments
promise a breakthrough from the commoditised supply of quantities
of individual utilities, on standardised terms, to the provision
of packages of utility services customised to the required service
standards of individual customers. We believe that this goal can
be best achieved, in the context of energy utilities, by a predictable
regulatory framework and one which works with the grain of, rather
than counter to, liberalised markets to incentivise entrepreneurship
and the development of these services.
April 2000
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