Further Memorandum by the Electricity
Association (CC11A)
INTRODUCTION
The Electricity Association is the trade association
which represents the major electricity generation, transmission,
distribution and supply companies in the UK. The Association supports
the option of emissions trading in preference to taxation, as
it has the potential to deliver greater CO2 reductions
for a lower cost, and we continue to participate in initiatives
such as the ACBE/CBI Task Force to help develop this approach.
However, following the Chancellor's initial
proposal for a Climate Change Levy, and recognising that the Government
is committed to the Levy whether or not emissions trading is also
developed, the industry has also sought to offer constructive
views on making the levy more effective, particularly in view
of the Government's own manifesto target of a 20 per cent reduction
in the UK's CO2 emissions by 2010. As it was originally
proposed, the Government estimated that the levy would only deliver
a 2 per cent CO2 reduction from the business sector
by 2010.
The Electricity Association analysed the capital
cost of the carbon abatement measures which would be needed to
deliver a 20 per cent reduction in the CO2 emissions
of the business sector. This analysis suggested that the proceeds
from the levy at £1.75 billion per year for 10 years (up
to 2010) would equate to a capital sum in excess of that required
for the measures which could deliver the 20 per cent target for
the sector. The measures would have comprised energy efficiency
measures together with investment in renewables and CHP.
An approach which recycled most or all of the
revenues would have provided a number of benefits while also addressing
some of the criticisms levelled at the initial proposal:
— it would deliver a much higher level
of CO2 reduction from the business sector;
— it would deliver greater equity in
the business sector since the energy efficiency measures will
generally provide most benefits to the higher energy users; recycling
through National Insurance rewards the service companies at the
expense of the manufacturing /process companies;
— it would help to maintain UK industries'
competitiveness as, in due course, lower energy consumption through
energy efficiency measures offsets the effect of the levy on overall
energy bills;
— it would stimulate business and employment
opportunities in areas such as energy efficiency services, manufacture
of renewable technologies, CHP and non-fossil generation and develop
a new sector of exportable expertise.
The Electricity Association therefore proposed
that, if the levy were to proceed, all revenues should be recycled
into climate abatement measures. The analysis leading to this
proposition was sent to the Chancellor, and the Secretaries of
State at the DETR and DTI as part of the industry's lobbying position
on the Levy proposals.
Revised Proposals
In his recent Pre-Budget Report, the Chancellor
revised his proposals for the Climate Change Levy, reducing the
proposed levy rates and increasing the level of recycling for
climate change measures from £50 million per annum out of
revenues of £1.75 billion per annum to £150 million
out of revenues of £1 billion. He also proposed exemptions
from the levy for renewables and "good quality" CHP.
The Electricity Association lobbied for the
exemption for renewables in response to the original levy proposal
and we welcome the Chancellor making this change. In relation
to CHP, we recognise the desire to further promote high efficiency
projects and look to the proposals from HM Customs and Excise
on what constitutes "good quality" schemes to deliver
this. While commentators freely talk of "efficiencies over
80 per cent" for CHP, the DTI's published Digest of UK Energy
Statistics 1999 shows the average efficiency of operational CHP
schemes to have been 69 per cent in 1998 and that this average
has declined steadily from 75.1 per cent in 1994. This emphasises
the need for a test of good quality before exempting CHP schemes.
In addition, responding to one of the key issues
arising from the initial proposals, the Chancellor now proposes
that
"Those energy intensive sectors which enter
into legally-binding agreements to implement all energy saving
measures which are cost effective, will qualify for an 80 per
cent discount from the levy rates".
In effect for the energy intensive sectors,
the Government would be forgoing 80 per cent of the levy revenues
to ensure delivery of energy efficiency measures. This is equivalent
to revenue recycling into energy efficiency measures and should
represent a precedent for making the option of recycling available
to others in the business sector.
The Issue for Business
The key issue surrounding energy efficiency
for many years has been the apparent resistance to its uptake
by end-users, even though many measures would be "cost-effective"
and soon pay for themselves. For businesses, there is a range
of competing calls for investment which will be judged in terms
of the potential net benefit for the business. Thus, for example,
it may be that money spent on a promotional campaign to generate
extra business is more profitable to the company than investing
in an energy efficiency project, even though the efficiency project
is cost-effective in itself.
The introduction of a climate change levy should
encourage some level of greater energy efficiency than would be
the case without it, but its overall impact should be viewed against
a general background of falling energy prices. For electricity,
this is particularly the case since the introduction of the levy
is likely to coincide with the reform of the electricity trading
arrangements which, the DTI has predicted, will lead to a 10 per
cent reduction in wholesale electricity prices.
The UK's targets on climate change require absolute
reductions in emissions, not simply reductions against a "business
as usual" growth trend. Against this level of ambition, the
substantial revenues from the climate change levy represent a
significant opportunity for delivering further energy efficiency
and other climate change abatement measures such as non-fossil
generation and high performance CHP. The Pre-Budget Report recognises
measures other than energy efficiency in proposing that the recycled
£150 million might also be used to "promote the development
of new sources of renewable energy".
CO2 Targets
In examining the possible effectiveness of revenue
recycling, any possible CO2 reductions have to be compared
with the Government's targets for reductions. The table below
shows the "business as usual" forecasts of emissions
in the UK Climate Change Programme consultation paper published
in October 1998, taking account of measures already agreed.
|
| End-Use Sector | CO2 Emissions (MtC) 1990-2010
| Change |
| Domestic | 43
| 38 | -12%
|
| Business | 87
| 85 | -2%
|
| Transport | 38
| 40 | +5%
|
| Total | 168
| 163 | -3%
|
|
If, in allocating the overall 20% CO2 reduction
target, the Government opted for 20% emissions reductions in each
sector, savings beyond the "business as usual" forecasts
would be required.
For the business sector:
|
| 1990 CO2 emission |
| = 87 MtC |
| Target in 2010 | = 87-20%
| = 69.6 MtC |
| Business as usual emission in 2010 |
| = 85 MtC |
| Further reduction needed | = 85-69.6
| = 15.4 MtC |
|
Recycling Revenues
The Chancellor estimates that the increase in energy prices
because of the Levy will lead to reduction in carbon emissions
of up to 1 MtC pa. It is estimated that a further 1 MtC pa or
so will be delivered through recycling £150 million of the
Levy revenues into energy efficiency measures and through the
exemptions from the levy for renewables and "good quality"
CHP. In addition, the Negotiated Agreements with the energy intensive
users are anticipated to deliver a further 2 MtC pa reduction.
Analysis by the Electricity Association indicates that capital
costs for cost-effective efficiency measures, renewables and CHP
are each typically around £1000 per tonne pa of carbon abated.
The Climate Change Levy is now proposed to raise £1 billion
per year, or £10 billion over the ten years to 2010. Therefore,
using a very simplistic comparison of capital costs and levy revenues,
the revenues could provide significant opportunities for implementing
desirable climate change abatement measures to save around 10
MtC pa by 2010.
This, together with the behavioural effects of the Levy and
the Negotiated Agreements, would result in emission reductions
due to the business sector approaching Government's 20 per cent
target.
Models for Recycling Revenues
Two possible models for recycling the Climate Change Levy
revenues are discussed below.
i. One model would use revenues to provide, say, 50 per
cent funding of projects. The measures could be delivered either
by direct grants or grants via energy service companies (ESCOs).
The latter route would be particularly suitable for SMEs. The
distribution of the funds would be overseen by a special body
to ensure standards, in a similar way to that in which the Energy
Saving Trust oversees the domestic energy efficiency projects
undertaken by the public electricity suppliers.
ii. An alternative approach would be to build on the current
proposal giving reduced levy rates to sectors entering into voluntary
agreements with Government. This could be to give companies exemptions
from the levy related to their investment in appropriate climate
change measures of various types. This would permit companies
to invest in measures in their own or in other companies, such
that an element of trading occurs, improving the cost-effectiveness
of emission reductions. This could include support for renewables
companies or other abatement measures, in addition to energy efficiency.
It would also provide incentives for energy aware businesses,
such as energy intensive companies or ESCOs, to seek opportunities
in less energy aware businesses, including SMEs.
Benefits of Revenue Recycling:
An approach which recycles most or all of the revenues in
this way provides a number of benefits:
— it delivers a much higher level of CO2
reduction from the business sector;
— it helps to maintain UK industries' competitiveness
as, in due course, lower energy consumption through energy efficiency
measures offsets the effect of the levy on overall energy bills;
and
— it stimulates business and employment opportunities
in areas such as energy efficiency services, manufacture of renewable
technologies, CHP and non-fossil generation and develops a new
sector of exportable expertise.
November 1999
| 
