Memorandum by Water UK (CC60)
INTRODUCTION
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—the whole industry will be
affected and needs to face the challenge of climate change proactively.
A healthy environment is vital to the industry, as it is what
we depend upon for our success.
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 700,000km 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.
As a major energy user, with total carbon equivalent
emissions of over 670,000 tonnes per annum we can play a crucial
role in helping Government meet its CO2 reduction targets.
We can also help progress the Government's targets for renewable
energy schemes and help reduce methane emissions.
ENERGY USE
AND THE
REGULATORY REGIME
In the pre-budget report, Government confirmed
its decision that IPPC should be the criteria for entering into
negotiated agreements. This means that the top ten most energy
intensive sectors—apart from the water industry—will
be able to agree targets with Government and receive an 80 per
cent reduction in the rate levy. This is clearly an anomaly.
The water industry is subject to one of the
most detailed regulatory frameworks of any industry and is the
subject of regular independent monitoring. It is not however subject
to IPPC—because at the time of developing IPPC it was agreed
that the regulatory burden on the industry was already so great.
Energy use in the industry is driven by regulatory
requirements, both in terms of 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 which need to improve coastal
discharges, are expecting energy use to increase by 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
a duplication of regulation.
IPPC IS NOT
A MEASURE
OF ENERGY
INTENSITY
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 climate change—but
requires a balanced and integrated consideration of all environmental
impacts. In fact Lord Marshall noted "IPPC coverage is not
a good way of identifying energy intensive users".
We understood the superficial attraction of
IPPC as a convenient "peg" for Government in that it
does contain a specific requirement relating to energy efficiency.
However the regulatory regime of the water industry provides an
equal requirement in this area.
In view of the size and energy intensity of
the water industry we believe that by entering into a negotiated
agreement we would be able to make a significant contribution
to reducing the emissions of carbon dioxide. We are extremely
disappointed by the Government's decision not to engage with the
industry in a negotiated agreement which we believe, given the
right incentives, could provide excellent value for the UK in
reducing greenhouse gas emissions.
THE IMPLICATIONS
OF THE
LEVY
At the new rates announced in the pre-budget
report, the climate change levy will cost the water industry £26
million per annum, based on current energy use and mix of energy
sources.
Recycling of the levy via a 0.3 per cent reduction
in NICs would result in the return of only £2 million. The
tax is therefore anything but "neutral" for the water
industry, which would be subsidising other sectors.
The water industry could well face the largest
bill of any one sector—and a significant proportion of turnover—0.4
per cent. It is the only energy intensive sector not eligible
to enter into an agreement. The water industry, and its customers
will essentially be subsidising those energy intensive industries
which threatened to abandon production in the UK. The basis of
negotiated agreements is therefore anything but environmental.
The levy will be introduced very soon after
the periodic review of water and sewerage prices has been completed.
Ministers and Ofwat have made it clear that they wish to see prices
fall where possible. At the same time, increased environmental
quality is expected, resulting in an extremely tight price regime
for the industry—in fact it is not certain that the investment
necessary can be carried out under the regime suggested by the
regulator.
The levy would mean that, as well as paying
for capital improvements required by regulations, companies will
pay an additional tax on the running of that plant. This will
undoubtedly compromise companies' capital programmes and will
add to the pressure on jobs in both the water sector and others
which are dependent on it.
In order for the levy to succeed, it must deliver
maximum carbon reduction at minimum cost. A full survey is needed
to consider the different contributions that can be made by different
sectors, and the associated costs. Only then should the Government
enter into agreements with relevant sectors.
AN APPROACH
TO THE
LEVY FOR
THE WATER
SECTOR
The Government should reconsider an alternative
approach to operating the climate change levy for the industry.
An approach is required which is equitable, results in higher
energy savings, and does not penalise customers.
An 80 per cent reduction in the levy would free
£20 million across the industry which could 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 number of projects could be bought 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 could also increase renewable sources of energy
and reduce methane emissions.
November 1999
| 
