Select Committee on Environmental Audit Appendices to the Minutes of Evidence


APPENDIX 19

Memorandum from British Sugar Plc

IMPACT ON BRITISH SUGAR OF THE PROPOSED CLIMATE CHANGE LEVY—THE NEED FOR FULL CHP EXEMPTION

1.  BACKGROUND TO THE USE OF ENERGY IN BRITISH SUGAR

  1.1  British Sugar operates nine factories in England processing the entire UK sugar beet harvest. Producing under an EU sugar beet quota allocated to the UK, British Sugar supplies approximately half of the UK's sugar requirements. Our sales are institutionally constrained by the fact that the UK sugar beet quota is fixed. The business has therefore been driven for many years by meticulous attention to costs.

  1.2  Sugar processing is among the most intensive energy users in the food sector. British Sugar alone accounts for 5 per cent of the energy used in the industry. Energy accounts for 11 per cent of our production costs (excluding the cost of buying the raw sugar beet whose price is fixed under the EU's Common Agricultural Policy) and it has always been in the company's interest to keep these costs to a minimum. All our factories are supplied by conventional CHP plants and have been since the early 1920's. This policy demonstrates the company's commitment to reducing energy costs wherever possible in order to maintain a competitive sugar industry in the UK.

  1.3  The company is now part-way through a programme of modernising our boiler houses to incorporate the latest technology in gas-fired, Gas Turbine/Heat Recovery Steam Generator equipment. So far we have invested £70 million in these replacement CHP plants in Wissington in Norfolk, Bury St Edmunds in Suffolk and Corby in Northamptonshire. We are also presently investing some £500,000 in feasibility studies for further plants.

  1.4  Not only do we have considerable expertise in the economics and operation of CHP, but we also strongly support the Government's objective to reduce greenhouse gas emissions as incorporated into the Kyoto Protocol obligations. The Committee may be aware that, despite the Government's stricter policy on consents for gas-fired power stations, British Sugar has, to date, been granted two Section 36 consents since February 1998 to facilitate this programme of replacement. We believe that our commitment to CHP has been a major factor in the Government's decisions.

2.  BRITISH SUGAR'S POSITION ON CHP AND THE CCL

  4.1  CHP generation is proven to be the most efficient in terms of reducing greenhouse gas emissions (apart from the nuclear option). The Government's support for CHP technology in order to achieve the Kyoto obligations is clear. They have also recently confirmed the increase in their target for CHP from 5GW to 10GW installed capacity by 2010 as further evidence of their desire to see an increase in the use of the technology.

  2.2  We believed that the levy as outlined in the 1999 Budget would have acted as a positive disincentive to the further development of CHP in the UK. The contradiction with the Government's stated objectives and the encouragement that has been voiced in relation to CHP seemed very clear. Prior to the Pre-Budget Report we stated clearly that not only should CHP be exempt from the levy but that the introduction of the levy would provide an ideal opportunity to make the uptake of such plant attractive.

  2.3  British Sugar has always believed that, as a matter of principle, the inputs to, output from the parasitic load associated with CHP plants should be exempt from the levy. Furthermore, electricity generated by CHP should be exempt when resold to final customers. These principles would provide an incentive to electricity users to seek out supplies from CHP operators as well as providing a financial incentive for industrial players to build such plant. CHP would be encouraged without any direct cost, but only some revenue foregone, to the Treasury. The benefit would be an unequivocal contribution to the reduction in greenhouse gas emissions. In this context we would note that OXERA has calculated that in order for the Government's CHP installation target to be met, an annual subsidy of between £345 million and £619 million would be required. Full tax exemption for CHP would provide the simplest support mechanism.

3.  PRE-BUDGET REPORT

  3.1  In his Pre-Budget Report on 9 November 1999, the Chancellor announced that:

    "The Government recognises the environmental benefits that the additional energy efficiency of combined heat and power (CHP) plant can offer. It therefore proposes to exempt electricity generated in `good quality' CHP plant from the levy."

(Para 6.46)

  3.2  In the subsequent publication of "Technical Briefing—No 2" issued by Customs and Excise, it is further explained that:

    "Electricity sales via an electricity supplier will, as for all other electricity sold via a supplier, be subject to CCL at the appropriate rate."

(Para 6)

  We are still awaiting the publication of the consultation document (promised by the DETR for week beginning 15 November) setting out the definition of "good quality" so we can make no specific comment about the likely application of the exemptions announced. However, it is clear that exemptions will apply only to fuel inputs to CHP, and to electricity used on-site or supplied direct to another customer.

  3.3  While British Sugar very much welcomes these exemptions, we are very disappointed by the decision to maintain CCL on electricity sales via licensed suppliers. We believe that this will frustrate the Government's own targets for CHP installation and CO2 emissions and have a major impact on our competitiveness. We note that electricity sales from renewables will be exempt and we believe that the environmental case for exempting CHP-generated sales is equally strong.

4.  THE NEW ELECTRICITY TRADING ARRANGEMENTS (NETA)

  4.1  British Sugar has always argued that the imposition of the CCL should be considered alongside the review of electricity trading arrangements, since the outcome of this process could also have a significant impact on the viability of CHP investment.

  4.2  In October 1999, the Government confirmed that the new trading arrangements would be implemented from Autumn 2000. It is intended that this should reduce the cost of electricity by c.10-15 per cent. This, combined with the imposition of CCL on electricity sales via Licensed Suppliers, will, indeed reduce the viability of further investments in CHP generation.

  4.3  In these circumstances it is unlikely that British Sugar will now be in a position to pursue its programme of investment in replacement, new technology, larger CHP as planned. We would be unable to compete in the market place, and therefore be unable to realise the value of the enormous investment required over a commercially acceptable period.

  4.4  British Sugar would, of course, continue to use CHP, which suits our production processes ideally. However, it would not be worth building plants which better match the process heat load and generate electricity surplus to our on-site requirements. For British Sugar the consequence will be to remove an innovative and crucial method of improving our competitiveness, bearing in mind that our output is limited by the Common Agricultural Policy. For the UK as a whole, the opportunity will be lost to make the uptake of CHP-generated electricity attractive to users.

  4.5  Annex 1 sets out an example of electricity exemption for sales of electricity from CHP plants, showing how the supplier and the CHP operator could gain more income while the customer receives cheaper electricity.

5.  THE GOVERNMENT'S CHP INSTALLATION AND CO2 EMISSION TARGETS

  5.1  If the Government's taxation policy effectively discourages larger-scale commercial CHP plant, it is difficult to see how its revised target for installed CHP of 10GW by 2010 can be achieved. Only 3.5 GW has been installed so far. ETSU's forecasts for CHP installation include our replacement plants in York and Cantley (Section 36 consents already received). The CHP output from these plants alone would account for 140MWe. ETSU believes that British Sugar could build similar replacement CHP plant at our remaining five factories which would increase CHP installation substantially. We believe that in frustrating the commercial application of CHP the Government runs the serious risk of being unable to reach its own targets.

  5.2  For the purposes of the CCL, the advantage of CHP lies in helping to reduce CO2 emissions. The full 10 GW of CHP would mean substantial savings. It makes little sense to prejudice such gains by applying CCL to electricity sales.

6.  THE COMPARISON WITH RENEWABLES

  6.1  The Pre-Budget Report states that the Government "intends to exempt electricity generated from renewable sources of energy from the levy". This is in line with its desire "to maximise the environmental benefits of the CCL" (Para 6.45). British Sugar believes that the same must be said of CHP installation. It is beneficial to the environment and its commercial development should not be discouraged by the imposition of the CCL.

7.  CONCLUSION

  7.1  The loss of revenue from the effects of NETA will make larger, heta matching with surplus electricity generation led CHP plants uncompetitive. To restore this competitive position, the Government should exempt all electricity sales from CHP plants. This will give a very real boost to the reduction in CO2 emissions and the achievement of the Government's CHP target.

December 1999


 
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