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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