Memorandum from Water UK
SUMMARY
(a) The water industry is an intensive user of energy.
Energy costs account for over 13 per cent of turnover. The industry
ranks third in the list of energy intensive industries set out
in the Marshall Report.
(b) The industry is becoming more intensive
in its energy use in order to meet stringent EU and UK regulations
for drinking water quality and waste water quality. In some companies,
particularly those where additional coastal waste water treatment
is required, energy use is predicted to rise by up to 40 per cent
over the next five years.
(c) The industry is committed to reducing
energy consumption and utilising renewable energy where this is
possible. As a major energy user, with a total carbon equivalent
emission level of over 670,000 tonnes pa, it can play a crucial
role in helping Government meet its CO2 reduction targets, make
progress towards the Government's targets for renewable energy
schemes, and help reduce methane emissions.
(d) The water sector is a strong cohesive
sector, represented by a single trade association (Water UK).
The relatively small number of members give the sector potential
to initiate and participate in collective schemes for reducing
greenhouse gas emissions such as trading.
(e) The industry is regulated by many EU
directives so that at the time of the IPPC regulation it was considered
an additional and unnecessary step to make the industry subject
to IPPC.
(f) Water companies are regulated for energy
efficiency implicitly by the economic regulation regime administered
by Ofwat.
(g) The climate change levy will cost the
industry an estimated £25 million, with only £3 million
refunded through a reduction in NICs.
(h) The industry suggests that recycling
levy proceeds into energy efficiency and renewable energy schemes
would be equitable, result in higher savings and not penalise
customers.
INTRODUCTION
The water industry is the third most energy
intensive sector in the UK. Over 13 per cent of turnover is spent
on energy. It is used for treating and pumping drinking water
and waste water through 700,000 kilometres of water mains and
sewers. Energy use is governed by the requirement to meet domestic
and international standards, and is largely a function of the
nature and state of the water supply and waste water network.
The industry employs 46,000 people directly,
and has multiplier effects in sectors as diverse as engineering,
construction and IT.
As a major energy user, with a total carbon
equivalent emission level of over 670,000 tonnes pa, the industry
can play a crucial role in helping Government meet its CO2 reduction
targets. It can also help progress the Government's targets for
renewable energy schemes and help reduce methane emissions.
The industry does not, however, believe that
the climate change levy in its proposed form will reduce greenhouse
gas emissions in the most cost-effective manner.
THE WATER
SECTOR
Water UK is a strong sectoral trade association
with a relatively small number of large members. It represents
a homogeneous industry—all of our members are concerned
with exactly the same task. Water UK represents the regulated
water business only and all of our members face the same regulatory
pressures.
We also have a direct interest in mitigating
the causes of climate change. It is predicted that climate change
will have profound impacts on water resources and on wastewater
treatment. The industry recognises that it needs to face these
challenges proactively.
THE IMPLICATIONS
OF THE
LEVY
The climate change levy will cost the water
industry £25 million pa. This figure is based on current
energy use and mix of energy sources, and the indicative rates
proposed by HM Customs and Excise.
The industry is a large employer—46,000
employees—but recycling of the levy via a 0.5 per cent reduction
in NICs would result in the return of only £3 million. The
tax is therefore anything but "neutral" for the water
industry, which would be in effect subsidising other less energy
intensive sectors such as services or the public sector.
Ministers and Ofwat have made it clear that
they wish to see water prices fall where possible. At the same
time, increased environmental quality is expected, resulting in
an already extremely tight price regime for the industry—in
fact it is uncertain whether the investment necessary can be carried
out under the regime suggested by the regulator.
The levy would mean that, as well as paying
for the huge capital improvements required by regulations, companies
will pay an additional tax on the running of that plant. This
will undoubtedly compromise companies' investment programmes and
could lead to threats to jobs in both the water sector and others
which are dependent on it.
ENERGY USE
AND THE
REGULATORY REGIME
Energy use in the water industry is driven by
regulatory requirements, both for drinking water quality and the
need for increased treatment for waste water. In many cases energy
use is increasing as regulatory requirements become more stringent.
Some companies, for example those needing to improve coastal discharges,
are predicting an increase in energy use of up to 40 per cent.
Regulatory requirements are driven by EC legislation, for example
the Directives on Drinking Water, Urban Waste Water Treatment,
Bathing Waters, and Shellfish. The existence of these stringent
regulations was an important factor in the decision not to bring
the Industry as whole within the scope of IPPC in order to avoid
duplication of regulation.
In view of the size, nature and energy intensity
of the water industry we believe that by entering into a negotiated
agreement with Government we would be able to make a significant
contribution to reducing the emissions of carbon dioxide. Hypothecation
of levy proceeds into energy efficiency and renewable energy projects
would ensure that the industry can make its maximum contribution.
Current discussions have centred on the use
of IPPC as a criteria for entering into negotiated agreements
with Government. The water industry is subject to one of the most
detailed regulatory frameworks of any industry and is the subject
of regular independent monitoring.
IPPC is aimed at achieving a high standard of
protection for the environment as a whole. It is not targeted
at any one environmental impact—such as greenhouse gas emissions—but
requires a balanced and integrated consideration of all environmental
impacts. As noted by Lord Marshall "IPPC coverage is not
a good way of identifying energy intensive users".
We understand that IPPC contains a specific
requirement relating to energy efficiency. However the regulatory
regime of the water industry provides an equal requirement in
this area.
Work carried out by OXERA on behalf of the industry
concluded that the water industry is already subject to a degree
of energy efficiency regulation and target-setting.
Water is a network industry. The industry uses
energy to keep the whole network operating, not just particular
sites. Demand is driven by the nature and state of the whole network.
A site-specific IPPC approach to energy efficiency is not the
best way to make savings in the water industry.
AN ALTERNATIVE
APPROACH
Water UK suggests that Government should consider
an alternative approach to operating the climate change levy for
the industry. This approach would be equitable, result in higher
energy savings, and not penalise customers.
For example, even a eight per cent reduction
in the levy would free £20 million across the industry which
could be then be earmarked for energy efficiency or renewable
energy projects. Higher levels of reduction would deliver even
greater environmental benefits. Preliminary work being carried
out within the industry shows that a sizeable number of projects
could be brought forward as they would become economic at reduced
levels of levy.
This would provide a proper and efficient incentive
for companies to implement energy efficiency projects and switch
to renewable resources.
In return for this reduction, the industry would
agree targets to reduce energy on current projections. In meeting
these targets we would also increase renewable sources of energy
and reduce methane emissions.
Renewable energy produced by the water industry
should be excluded from the levy. Furthermore incentives to stimulate
energy efficiency such as CHP should be encouraged by the recycling
of levy revenues into tax credits for energy saving investments.
October 1999
| 
