Memorandum by the Electricity Association
1. The Electricity Association (EA) is the
trade association for the UK's major electricity generation, transmission,
distribution and supply companies. EA represents the UK industry
at both a national and international level.
2. Diversity of fuels and supply sources
are the key to achieving security of supply. Free trade and liberalised
energy markets can play an important role in achieving fuel diversity.
3. EA recognises that market mechanisms
may not always be sufficient to deliver policy goals and that
intervention is sometimes necessary. However, the industry has
longer-term investment horizons than many other sectors, and there
is therefore a need for greater clarity and transparency in the
policy and regulatory framework.
4. A balance must be struck between environmental
policy and supply security to ensure that fossil fuels, nuclear
power and renewables are all able to contribute to fuel diversity.
5. There is considerable scope for energy
conservation and the UK electricity companies are playing a positive
role. Efforts to conserve energy should focus more heavily on
the transport sector, where the issue has yet to be fully addressed.
6. New energy efficiency measures should
seek to minimise competitive disadvantage to the UK economy. Electricity
companies are playing an active role in combating fuel poverty,
but cannot solve the problem on their own. Collaboration with
other stakeholders and a range of Government initiatives is required.
7. Greater consistency is needed between
Government departments in the implementation on energy policy,
with a concerted effort being made to reconcile conflicts between
competitiveness, security and environmental objectives.
8. It may be desirable for Government to
charge one specific department with responsibility for overseeing
and co-ordinating energy policy, or possibly to establish a specific
body with this remit. Energy policy should also be subject to
periodic review at the highest levels of Government.
Given the imminent dependence of the UK on energy
imports, how can the UK maintain a secure energy supply? What
mix of fuels would maximise security?
9. EA believes that the key to security
of supply is diversity of fuels and supply sources. Free trade
and liberalised markets, both inside and outside the EU can play
an important role in achieving this diversity. The main threats
to security of supply are political disruption and politically
based restrictions on fuel sources, rather than a shortage of
resources. EA does not support a prescriptive framework policy
for energy imports; this would be likely to undermine trade and
distort the energy market.
10. EA does not believe that import dependency,
per se, represents a problem, as many other commodities are imported.
The UK electricity sector currently has a well-balanced fuel mix,
but it is recognised that if current trends continue, gas is likely
to dominate by 2020. This will raise concerns about fuel diversity.
However, the Government should keep options open rather than attempt
to direct a precise target fuel mix. As imported gas will increasingly
have to be transported to the UK over long distances, it is particular
important that progress is made towards liberalising the continental
11. Fuel diversity is not the only factor
in ensuring security of supplyelectricity and gas networks
also have a crucial role to play. In the past, price caps and
the RPI-X mechanism have provided effective incentives to maximise
cost efficiency in the network businesses. In the longer term,
the regulatory framework needs to encourage continuing investment
in an infrastructure that is sufficiently robust to maintain acceptable
levels of reliability. The regulatory system should also delivery
an appropriate balance between economic, environmental and security
objectives in the light of the likely changes in network systems
and their operation.
12. Environmental policy can impinge on
supply security and it is important that a balance is struck between
the two objectives. Coal, for example, can play an important role
in fuel diversity, but its future as a generation fuel is threatened
by EU environmental measures. The Large Combustion Plant Directive
and National Emission Ceiling Directives will inevitably result
in the early closure of some UK coal fired plant and the UK should
certainly not take action to implement the targets ahead of time.
13. EA believes that nuclear generation
is a key component in energy diversity and nuclear power stations
have an excellent safety record and are making a major contribution
to reducing CO2 emissions. Options for nuclear power should therefore
be kept open.
14. With regard to renewables and CHP, EA
supports their increasing use, both as a response to climate change
and as a means of increasing energy diversity and overall security.
The proposed renewable obligation is a good example of how intervention
to achieve a particular policy objective can be managed by a market-based
approach. EA welcomes the approach taken by the Government to
establish the first tranche of offshore wind farms.
15. In the UK, there is less long term financial
commitment to reducing energy consumption than to ensuring that
the country has an increasing proportion of environmentally benign
generators. Scope for energy conservation is considerable. EA
supports efforts to reduce UK energy demand, including improved
building regulations and appliance standards. EA proposed during
the Climate Change Levy (CCL) consultation process, that levy
receipts should be recycled to fund a range of measures, including
a programme of energy efficiency measures for the business sector.
16. Within the energy sector, electricity
companies have consistently adopted a positive approach to the
development and implementation of the Energy Efficiency Standards
of Performance (EESOP), and also the new Energy Efficiency Commitment
(EEC). The Commitment can be viewed as an effort to encourage
the development of energy service companies. However, there is
no mechanism for determining when this transition has occurred,
and therefore ending the need for the Commitment.
17. Efforts to reduce demand should not
focus only on energy providers; it is also important to address
sectors such as appliance manufacturers, architects, builders,
companies promoting new energy-consuming technologies and end-users.
18. However, efforts to conserve energy
should not focus solely on the electricity and gas sectors. Transport
is a growing sector in which demand reduction has yet to be fully
19. Measures such as the Renewables Obligation,
Climate Change Levy and enhanced energy efficiency targets will
begin to impact on customer bills by the end of the current financial
year. The Government's Energy Review needs to take account of
the political and regulatory issues that this will create, and
in particular, the potential impact on the economy and low-income
20. EA believes that new energy efficiency
measures should be designed to minimise competitive disadvantage
to UK business. With regard to the Climate Change Levy, the level
of recycling of CCL revenues should be increased and used for
implementation measures designed to help business. For measures
affecting emissions, EA supports flexible mechanisms, such as
emissions trading, in helping to achieve climate change targets.
Electricity companies have participated fully in the DETR (now
DEFRA) initiative to develop a UK pilot emissions trading scheme.
21. The need to eliminate the problem of
fuel poverty is now widely accepted. In the absence of favourable
changes in other contributing factors, such as rising incomes
or improvements in the housing stock, the numbers affected will
increase if energy prices rise. Direct actions to improve the
housing stock would therefore offset the effect of increasing
22. Electricity suppliers have been contributing
solutions to the problem, introducing their own initiatives and
working with Government, regulatory agencies, consumer groups
and charities. In 1999, EA established a Fuel Poverty Task Force,
with the objectives of promoting understanding of this issue and
providing a forum for the exchange of ideas between energy suppliers.
The Task Force comprises all the major UK electricity and gas
suppliers and has made a series of recommendations to Government,
participating in the development of a national fuel poverty strategy.
23. EA believes that, wherever possible,
the competitive market should be allowed to provide energy related
solutions to the problem, as competition fosters innovation, driving
down energy prices. However, while electricity suppliers will
play an active role, they cannot solve the problem on their own.
Collaboration with other stakeholders is required, including Government,
local authorities, housing associations, landlords, house builders
and the financial sector. Comprehensive solutions can only be
found through a range of welfare, taxation and incomes policies.
24. In recent years Government and regulatory
policy in the electricity sector has focussed mainly on driving
down costs in the short term, to the exclusion of longer-term
issues and externalities. In the early days of regulation, when
there was scope for increasing cost efficiency and for introducing
clean gas-fired generation, this agenda was compatible with security
of supply and environmental objectives. However, there is now
an increasing risk of conflict between policy objectives, as has
been recognised in the Government's decision to conduct an energy
policy review. For instance, renewable generation and combined
heat and power, which the Government is aiming to promote, appear
to be adversely affected by the design of the new trading arrangements.
25. The Government needs to set a high-level
policy framework for the energy sector and to take the lead in
determining how trade-offs in policy should be made. It is important
that this process is transparent, so that the problems of arbitrary
political interference are avoided. Ofgem and indeed other regulators
should consult with Government on security of supply, social and
environmental issues, with a view to contributing towards the
agreed objectives. In this way, the public interest can be taken
into account in regulatory policy.
26. One means of achieving this is through
the regulatory impact assessment process. With the increasing
importance of environmental and social policy in the energy sector,
it is clear that Ofgem will not have available all the information
required for a full RIA of each proposal. In such cases, a mechanism
should exist for Government to contribute to the impact assessment,
thus ensuring greater policy consistency.
27. EA believes that wherever possible,
energy policy goals should be designed around market-based mechanisms
with the removal of unnecessary regulatory barriers to competition
and innovation. However, it is recognised that market mechanisms
may not always be sufficient to deliver policy goals and that
regulation is sometimes necessary. Where such intervention occurs,
the industry needs clarity and transparency in the policy and
28. It is not always clear what constitutes
unnecessary regulation of the energy sector, EA supports the recommendations
of the Better Regulation Task Force, including the proposals that
Regulatory Impact Assessments should accompany new initiatives
in line with the Cabinet Office Guidelines. We believe that Government
should undertake further work on reviewing the effectiveness of
market-based solutions, taking account of the particular challenges
arising from externalities (such as environmental costs) and social
29. Investment in the electricity industry
has longer term planning timescales than in many other sectors.
The industry therefore needs a clear and transparent policy framework
to enable it to operate efficiently and cost effectively, which
sets out conditions for market operation and Government intervention.
Government initiatives should be fair between players, market
based wherever possible and with minimal disruption of resource
allocation. We believe intervention should be removed as soon
as sufficient progress has been achieved to meet a given policy
30. Policies affecting the UK energy sector
are currently developed and implemented by a wide range of players,
including various UK Government departments, regulatory bodies,
devolved authorities and agencies, and the European institutions.
It is important that these bodies work in unison and do not "compete"
to determine policy, setting policy by default in an ad-hoc manner.
31. Greater consistency is needed between
Government departments in the implementation of energy policies,
with a concerted effort being made to reconcile conflicts between
competitiveness, security and environmental objectives. It may
be desirable for Government to charge one specific department
with responsibility for overseeing and co-ordinating energy policy,
or possibly to establish a specific body with this remit. Whatever
institutional arrangements are used, it is important that energy
policy is subject to periodic review at the highest levels of
Government. Such reviews could take place on a five-year cycle.
32. The transport sector is the source of
an increasing proportion of both energy consumption and emissions.
It is therefore very important that Government ensures that current
and future transport policy is integrated with policy making for
the energy sector.
31 October 2001