Select Committee on Environmental Audit Minutes of Evidence



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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