Further Memorandum by British Energy (CC37B)
1. In light of the recent announcements
made on the Climate Change Levy by the Chancellor in the pre-budget
report, British Energy welcomes the opportunity to submit further
evidence to the Environment, Transport and Regional Affairs Committee
on this subject.
SUMMARY
2. In the absence of major policy interventions,
the power sector is unlikely to be able to make a further significant
contribution towards the UK's CO2 reduction target,
and indeed there are indications that carbon emissions are likely
to increase in the next decade even under the most optimistic
scenario.
3. Even after revisions, the proposed climate
change levy is expensive, does not focus on carbon and penalises
large-scale hydro and nuclear generation which emit no greenhouse
gases and consequently make a valuable contribution to the avoidance
of CO2 emissions. Logic dictates they should be exempt
from the levy.
4. The tax cannot guarantee the CO2
reductions that the Government has forecast. A scheme that focused
on tradeable permits could achieve a greater reduction in CO2
emissions at less cost to the business sector.
INTRODUCTION
5. Despite growth in electricity demand
in recent years, carbon dioxide emissions from the electricity
sector have declined, largely due to a significant shift from
coal to gas generation, and improvements in the nuclear sector,
which have led to higher electricity production. However, in the
absence of major policy interventions, the power sector is unlikely
to be able to make a further significant contribution towards
the UK's CO2 reduction target. Indeed there are indications
that carbon emissions are likely to increase in the next decade
even under the most optimistic scenario (see figure 1).
6. At present, the UK Government believes
that it can achieve the EU target of a 12.5 per cent reduction
in Greenhouse Gas (GHG) emissions on 1990 levels, for the period
2008-12. It is unlikely however to meet its commitment of a 20
per cent reduction in CO2 emissions for the UK. We
believe that the Government should now be considering what action
must be taken to maintain emissions reductions in the period beyond
2012. Increased generation from nuclear power could contribute
to this, although under current scenarios almost all the nuclear
stations will be closing during the period up to 2020.
Scenario Profile
Electricity growth 1.5 per cent to 2010, then
1.0 per cent to 2020
Nuclear follows existing decommissioning timetable
Hydro continues at historical levels
Any shortfalls that emerge are taken by extra
gas generation
Coal/oil gradually decline to about one half
of 1997 value
"New" renewables contribute 10 per
cent by 2010, 20 per cent by 2020
7. As outlined in our response to the Government
on the initial proposal for a CCL, British Energy believes that
the proposed tax is expensive, poorly focused and cannot guarantee
the CO2 reductions that the Government has forecast.
Critically, the revisions to the detail of the levy failed to
introduce a carbon-related element that would signal where reductions
need to be made.
8. With respect to the UK Climate Change
Programme, the recent changes made to the structure of the Levy
have done little to change our view that it is a missed opportunity
to tackle carbon dioxide emissions effectively. We are also disappointed
that the Chancellor did not refer to the considerable efforts
made by UK business to bring forward an emission-trading scheme
that could potentially benefit both the UK economy and the environment.
9. British Energy's view of how the CCL
and other mechanisms could best be used to further the aims of
the UK's Climate Change Programme and achieve significant CO2
emissions reductions focuses on the following areas:
— Implications of the changes to the
levy.
— A cap and trade scheme.
— The Climate Change Levy and Nuclear
Generation.
IMPLICATIONS OF
THE CHANGES
TO THE
LEVY.
10. Although the commerce and industry sectors
represent the largest source of CO2 emissions, Government
has decided to soften the impact of the levy on them. They have
also decided that the levy should not impact upstream on CO2
emitting generators, who contributed 27 per cent of the UK's emissions
in 1998.
*affected by Climate Change Levy
11. We are surprised that the Government
now believes that up to 4 MtC will be saved as a result of the
CCL in its revised form. This is considerably higher than the
original estimate of 1.5MtC, and there are few details of how
this is to be achieved.
12. The revenue cost per tonne of carbon
avoided has fallen from £1167 t/C to £250 t/C through
a reduction in the financial burden of the levy by £0.7 billion,
increasing the funding for end-use efficiency schemes to £150
million, and a vast increase in exemptions for energy intensive
users. This is a large reduction, but energy taxes are still a
costly, inefficient and uncertain means of achieving a reduction
in carbon emissions. The Government will need to implement further
measures of its environmental target is to be achieved.
13. British Energy supports the exemption
of renewable forms of generation from the levy in the interests
of diversity and greenhouse gas emissions. The exemption of electricity
generated from nuclear power is equally valid under these criteria.
14. From the experience of the non-fossil
fuel obligations in the UK, massive investment in renewables will
be required if the Government to reach its 10 per cent target
by 2010. Figure 3 shows that there needs to be an exponential
growth in new renewable capacity if the target is to be reached.
The most optimal developments have already taken place, and both
cost and planning issues need to be resolved in order to stimulate
the rapid development of the market that is required.
15. The exemption of renewables could provide
a marginal benefit of 0.43p/kWh to encourage uptake of new projects
by electricity suppliers, but as the levy is not placed on generators
they are unlikely to receive much benefit. The benefit they do
see is likely to be cancelled out by the regulator placing downward
pressure on the price of electricity.
16. Although the "good quality"
combined heat and power plans that qualify for exemption of the
levy are more efficient, they are still a source of CO2
emissions. The exemption of CHP should only be supported when
new plant is displacing or replacing older, inefficient carbon
intensive generation, as otherwise overall CO2 emissions
will increase.
CARBON TRADING
17. Unlike the CCL, carbon trading is focused
directly on the heart of the problem—carbon dioxide reduction—and
provides a guarantee that specific reduction targets will be achieved.
Carbon trading could play an important role in reducing the costs
to businesses of meeting negotiated emission reductions or efficiency
improvement targets set by Government.
18. The participation of electricity generators
in a trading scheme is essential to its viability. There are four
main ways in which this could be achieve, direct participation,
where generators could enter a trading scheme on the basis of
a negotiated GHG cut, an efficiency reduction target, or project
generated credits (the latter equivalent to permits) or by indirect
participation as sellers of carbon differentiated electricity.
Two of these methods of participation are discussed below.
DIRECT PARTICIPATION
OF GENERATORS
19. Any scheme involving direct participation
of fossil generators would need to take account of "business
as usual" replacement of existing power stations when establishing
their emission reduction or efficiency improvements targets.
20. The ACBE/CBI's proposed UK trading scheme
has been developed to reduce the cost to business users of energy
of meeting negotiated emission/energy efficiency targets. These
targets include their electricity consumption. It is therefore
logical that, if businesses chose to enter negotiated agreements
to cut emissions or improve efficiency, they are allocated the
permits associated with the electricity they sue. In this situation,
generators would still be a significant direct participant by
being allocated permits associated with the remainder of their
generated electricity. Both generators and business users of energy
could be incorporated in this way.
INDIRECT PARTICIPATION
OF GENERATORS
21. British Energy believes a better mechanism
for generators to interact with a UK trading scheme would be indirectly,
as sellers of carbon differentiated electricity to business users.
Carbon differentiation is absent from the levy, and this has caused
considerable disquiet in the community.
22. By including the 35 per cent of power
supplied by zero emission sources—both nuclear and renewable
energy—it would exert a stronger downward pressure on the
price of carbon than a scheme just involving the direct participation
of fossil generators. It would also give businesses an additional
mechanism they could choose to use to meet emission reduction
targets. This proposal would tie in with the new electricity trading
arrangements and promote demand for low carbon electricity.
23. It is worth noting that the benefits
of an indirect mechanism are not reliant on the emergence of a
viable trading scheme. So long as a negotiated agreement is in
place, then the indirect mechanism can be used as one option for
companies to reach their targets. This offers a simple and effective
response for those companies most affected by the levy.
THE CLIMATE
CHANGE LEVY
AND NUCLEAR
GENERATION
Emissions
24. In the UK electricity generated by nuclear
power prevented the emission of about 60 million tonnes of carbon
dioxide emissions this year. Based on the current fossil fuel
generation mix, each TWh of nuclear output avoids the emission
of 0.7 million tonnes of carbon dioxide, or 0.19 million tonnes
of carbon.
25. From a UK perspective, it is important
that this benefit is maintained, and if possible enhanced. We
believe that an exemption for nuclear would encourage users to
take the full allocation of nuclear available as we move into
new electricity trading arrangements. It would also encourage
further improvements in output that could, in British Energy's
case, under the most favourable conditions, lead to a maximum
extra annual saving in carbon of about 1.5 million tonnes of carbon.
PLANT LIFE
EXTENSION
26. Such extensions have been based on both
technical and economic evaluations. Subject to periodic review,
four of our stations are expected to run for an extra 5 years
beyond their original life: Hinkley B and Hunterston B (now to
2011); Heysham 2 and Torness (now to 2023). For every extra year,
these four stations will avoid the emission of about 6.6 million
tonnes of carbon, based on the current fossil fuel generation
mix, and a little less if, as expected, gas generation continues
to grow at the expense of coal. It is possible that the economic
case for further life extension would improve if the fossil generators
were to bear the true environmental cost via the levy/trading
mechanism.
NEW BUILD
27. Using the analysis presented in the
1994 Nuclear Review, and taking account of a full commercial environment
in which British Energy now operates, the levelised cost of new
nuclear build is about 3.9 p/kWh.
28. Under the most favourable conditions—benefits
of series production, reduced construction time, an international
licensing regime, amortisation over the full plant lifetime and
low discount rates—levelised costs can decline to about
2.6 p/kWh.
29. New nuclear build needs to be competitive
with the levelised costs for CCGT and these are currently assumed
to be 1.9 p/kWh. Under the most favourable conditions then, the
gap that needs to be bridged is about 0.7 p/kWh. The value of
the proposed levy on electricity is 0.43 p/kWh, which is a significant
part of the value that needs to be bridged. Unfortunately it is
not a carbon based levy, nor is it focused on the fossil generators
but on the business use of electricity.
30. For new nuclear build to be economically
viable, it is important that all forms of electricity generation
account for their environmental costs in the same way as nuclear
power. Under the climate change levy, the differentiation of electricity
by carbon content will support low carbon generation sources by
enabling all business users of energy the choice of where to make
emissions savings. In the absence of a carbon tax on fossil generators,
the proposed trading scheme offers some scope for differentiation.
November 1999
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