House of Commons - Environmental Audit

Select Committee on Environmental Audit Eighth Report

Fuel poverty

48. In our 1999 report on Energy Efficiency, we termed the continuing existence of fuel poverty a national scandal. Since then, there has been welcome progress in some areas, with the issuing of a Fuel Poverty Strategy in 2001 and the creation of a Fuel Poverty Action Group. The numbers of households in fuel poverty has also fallen to 3 million—a reduction of 2-5 million since 1996.[64] In its Fuel Poverty Strategy, the Government set a target to take the most disadvantaged households out of fuel poverty by 2010, and to eliminate it completely by 2016. This target is reflected in departmental Public Service Agreements.

49. In March 2003, the Fuel Poverty Action Group released its first annual report. One of its key conclusions was: "Current programmes, even if made more cost-effective, and if continued to 2010 and beyond, will not on their own be adequate to meet the Government's targets, and its statutory 2016 targets. It is the Group's judgement—subject to considerable uncertainty—that an increase in current programmes of at least 50% is needed. We are concerned that there is currently not enough Government drive to move the programmes forward and that the PSA targets for DTI and Defra on Fuel Poverty are rather weak."[65]

50. The White Paper includes no new proposals for reducing fuel poverty. We were also particularly alarmed that the Energy Minister—so far from being able to announce any increases in funding—told us that the DEFRA budget for the Warm Homes scheme was likely to be reduced.[66] We urge the Government to ensure that sufficient funding is available to deliver the 50% increase in current fuel poverty programmes recommended by the Fuel Poverty Action Group.

51. Fuel poverty continues to shape the Government's approach to energy policies. Indeed, the complex structure of the Climate Change Levy—levied as a downstream tax with exemptions for renewables—was adopted precisely because the Government wished to avoid increases in energy prices for domestic consumers. Similarly, increased competition and the introduction of NETA have led to significant falls in the real cost of energy over the last decade, and the DTI has acknowledged that much of the reduction in fuel poverty is due to this factor.

52. However, current energy prices are unrealistically low, and even the Government in its draft CHP strategy has acknowledged that electricity prices are likely to rise to pre-NETA levels within the next few years.[67] We were interested in the supplementary information provided by the DTI on the impacts of possible future increases in energy prices in terms of an increase in the number of households in fuel poverty.[68] We also noted the recent National Audit Office report on the Warm Front scheme, which highlighted the fact that only 14% of grants reach the least energy efficient homes.[69] As a DEFRA official acknowledged in his evidence to us, those countries which have pursued energy efficiency most aggressively are those where energy prices are high.[70]

53. While we entirely support the Government's drive to eliminate fuel poverty, we consider that the Government's approach needs to be revisited. The Government must re-evaluate the effectiveness of schemes to address fuel poverty, and ensure that—in the longer term—the domestic sector bears its proper share of the costs of reducing greenhouse gas emissions. The best way forward is for the Government to initiate a proper public debate on this issue.

Energy services and building regulations

54. In our 1999 report on Energy Efficiency, we emphasised the importance of developing energy services.[71] In the White Paper, the Government has acknowledged that little has happened on this score, and it proposes to establish a working party with OFGEM, energy suppliers and others to explore how to create an effective market in energy services.[72] We welcome this proposal, but regret that it has taken nearly four years for any action to be taken.

55. We also welcome the commitment to bring forward the review of building regulations. The Energy Minister expressed the hope that it that this would address not only issues of energy efficiency but also the role that renewables such as solar PV could play in reducing energy demands.[73] We entirely agree and would point out that the PIU recommended that we consider moving towards the concept of zero space heating requirement for buildings.[74] Error! Not a valid bookmark self-reference.

Energy systems and Ofgem

Grid distribution issues

56. Insofar as the thrust of the White Paper endorses a growing reliance on renewable energy and energy efficiency, it also endorses the view expressed by the PIU that a high degree of dependency on imported gas is not in itself an issue.[75] We accept this approach though it is obviously not without its own risks in terms of the security of supplies and, in particular, the price of imported energy.[76] In our view, these risks make it still more important that rapid progress is made on the agenda set out in the White Paper. Increased energy from renewables will have major implications for the National Grid, and attention has therefore tended to focus more on the infrastructure for electricity rather than gas.

57. The present structure of the National Grid has evolved for historical reasons—to transmit power from large and remote power stations long distances to population centres where it is required. In addition, the lower voltage distribution networks which feed off the grid are designed to provide electricity in one direction only—from the grid to individual homes and businesses. The growth of renewables will require major changes in this structure for two reasons:

New sources of renewable power in remote areas (eg large offshore wind farms off the coast of Scotland) will require major infrastructure investment in order to connect them to the grid.
The growth of many small renewable power sources within distribution systems (eg isolated wind turbines, biomass, CHP, solar PV and micro-CHP systems) will require investment in local network infrastructure - in particular to enable the more active management of networks as a result of two-way, rather than one-way, flows of electricity.

58. Large-scale investment is likely to be needed to modernise the grid to accommodate higher levels of distributed processing and major new sources such as offshore wind farms. This needs a clear strategy and charging framework. The White Paper does little to resolve these major issues or give direction to Ofgem.

59. With regard to the charging framework, we expressed concern in our report last year that Ofgem were treating major network generators differently to—and more favourably than—smaller distributed generators.[77] We welcome the Government's acknowledgement that this inconsistency exists.[78] We are not convinced that Ofgem's interim proposals—to allow renewable generators to spread over a number of years the "deep" charges which they alone have to pay—are adequate. In our view, part of the problem here is that responsibility for renewables is located in Ofgem with those staff dealing with supply and distribution, rather than those dealing with large network generation issues. Responsibilities for all forms of generation should be brought together within Ofgem in order to provide a coherent approach to charging issues and enable an appropriate balance to be struck between the interests of new and traditional forms of generation.

60. Ofgem's next distribution price review, to be completed in 2005, will be of enormous importance. The Government should set out clearly, as a fundamental objective for the price review, that positive and substantial incentives must be provided for all forms of renewable and distributed generation.

The New Electricity Trading Arrangements (NETA)

61. On the contentious issue of NETA, the Government's response to our report points out that an environmental appraisal was carried out in 2000 in the course of preparing the Utilities Act 2000.[79] We had already noted this. Our point—which the Government has failed to address—is that, had the environmental appraisal been carried out earlier, the inconsistency between its findings and the environmental objectives set for NETA by the Minister could have been taken into account and the proposals redesigned.

62. While we accept the Government's arguments that some beneficial modifications have been introduced since NETA went live, we also note that Ofgem have rejected many of the recommendations put to it by the Balancing and Settlement Code panel. We therefore welcome the proposals contained in the White Paper to strengthen the role of industry code panels and consult on a possible appeals procedure.[80]

63. Moreover, NETA remains a system for very big players, and because of the way that only licensed electricity suppliers can redeem ROCs, they are in a strong position to discount the Renewable Obligation premium and not pass it on to smaller renewable generators. In this context, the main mechanism proposed by Ofgem to remedy this problem—the concept of independent consolidation—has failed. Ofgem are currently developing a UK-wide electricity trading system (BETTA), and we hope this may provide an opportunity to incorporate further improvements to assist renewable generators.

64. The main reason for the dramatic fall in electricity prices over the last few years is the substantial excess generating capacity which NETA had exposed. But the Energy Minister pointed out that excess capacity is falling.[81] Indeed, as an indication of the Government's concern, the White Paper includes a requirement for Ofgem to produce six monthly reports on security of supply.[82] NETA was intended to produce a range of open trading markets—including long-term markets—so that the market itself would provide signals to trigger investment in additional generating capacity when necessary. However, apart from the very short-term spot market in electricity, transparent long-term markets have not developed. It is not clear that the market will indeed respond within the timescales necessary and there is now some debate on the need for further modifications to the NETA system—including the possibility of some form of capacity payments.

Emissions and carbon capture

65. In our sustainable energy report published in July 2002, we pointed out that emissions from the generating sector had risen rather than fallen, partly due to NETA. Demand for coal is still increasing on the basis of the latest available energy statistics.[83] While we accept that the contribution of coal will decline due to the introduction of the EU Emissions Trading System in 2005 and tighter regulatory controls coming into force over the next decade, the short-term environmental impacts are worrying.

66. In view of the fact that coal remains the most polluting form of generation, we note with some concern the proposals in the While Paper to provide direct investment assistance to the coal industry to help existing pits develop new reserves.[84] Such intervention also directly contradicts the reliance on markets which the Government espouses elsewhere. We note, for example, that the Government has not provided similar assistance for the recovery of coal mine methane.[85] Moreover, the White Paper also includes a commitment to set up an urgent detailed implementation plan to develop the use of carbon capture from coal-fired power stations in order to enhance oil recovery from North Sea reserves. It is interesting that the Government sees this as necessary because studies suggest that the industry would not view enhanced recovery as cost-effective.[86]

67. We expressed concern in our Pre-Budget Report that the Government's Climate Change Strategy for UK was seriously off-course, and current progress and future projections must be reviewed as a matter of urgency.[87] Data released by the DTI after the publication of our report showed that carbon emissions had fallen by 3.5% in 2002 compared to the previous year (150.4 MtC compared to 156.1 MtC). Pointing to this, the Treasury in its response to our report suggested that total greenhouse gas emissions in 2002 were some 15% below 1990 levels.[88] But we are not convinced that one swallow can make a summer. The following graph shows carbon emissions since 1990 and the 2010 target.

Source: Environmental Audit Committee

68. The Government has claimed that it is on track to reach its UK domestic target of a 20% reduction in carbon dioxide by 2010. But carbon emissions would need to fall to 132 MtC for this to happen, and the trend since 1997 gives no indication that this is remotely achievable. Moreover, the DTI has acknowledged that the particularly low value for 2002 is partly because that year was unusually warm—it was in fact the second warmest on record. We also note that the production difficulties facing Corus may also have had significant impact on reducing emissions during the year.[89]

64 The UK Food Poverty Strategy: 1^st Annual Progress Report 2003, DEFRA/DTI, paragraph 3.1. Back

65 Fuel Poverty Advisory Group. First Annual Report, 2002/3. Back

66 Ev12, Q86. Back

67 The Government's Strategy for Combined Heat and Power to 2010 - Public Consultation Draft, DEFRA, May 2002., paragraph 3.9. Back

68 Ev20, response to question 16. Back

69 Warm Front: Helping to combat fuel poverty, June 2003, National Audit Office, HC 769 2002-03. Back

70 Ev10, Q70. Back

71 EAC, Energy Efficiency, HC 159-I 1998-99, paragraphs 56ff. Back

72 The Energy White Paper, 3.35. Back

73 Ev8, Q50. Back

74 The Energy Review, Strategy Unit (Cabinet Office), February 2002, paragraph 7.25. Back

75 The Energy Review, Strategy Unit (Cabinet Office), February 2002, chapter 4. Back