APPENDIX 8
Memorandum from British Sugar plc
INTRODUCTION
In its press release of 24 February the Environmental
Audit Committee invited written evidence on a number of broad
topics related to its earlier report "A Sustainable Energy
Strategy? Renewables and the PIU review", and the Government's
Energy White Paper, published also on 24 February. In this Memorandum,
British Sugar has responded to two of the broad topics identified
in the press release, as follows:
(a) review key proposals in the White Paper
in the light of the Environmental Audit Committee's recommendations
in its July 2002 report and the Government's response".
In this section we have referred specifically
to Combined Heat and Power (CHP) and our Memorandum to the Committee
of January 2002[25]
(d) identify the implications of the White
Paper in terms of the specific actions now required of each relevant
government department".
In this section we have covered the development
of biofuels, in particular bioethanol, in the road transport sector.
We have also referred to our Memorandum to the Committee of January
2003 in the context of the Committee's enquiry into the Pre-Budget
Report 2002[26]
1. CHP
The White Paper
British Sugar welcomes the Government's clear
re-statement of its commitment to the target of having 10,000
Mega Watts of installed CHP in the UK by 2010. Unfortunately,
despite the well-known difficulties facing CHP development in
the UK, the White Paper contains no new measures, which will deliver
the Government's CHP aspirations. This represents a missed opportunity.
It is vital that the forthcoming CHP strategy addresses this policy
gap and British Sugar's suggestions are made below.
NETA
As noted in the White Paper, "some changes
have already been made". Unfortunately, gradually making
a system which disadvantages small, independent generators, a
"less bad system" is not what is required. It is very
difficult for small players to engage in the governance of an
industry dominated by large players whose interests are clearly
not served by increasing independent CHP and renewable generation.
It is for Government to support this effort or its policy objectives
will inevitably be frustrated.
The flaw at the heart of NETA is the penal dual
imbalance cash out system. Until this penalty system is removed
there will continue to be a cross subsidy from small CHP and renewables
generators to large vertically integrated firms. This cross subsidy
inhibits the Government's envisaged changes to the UK generation
base. NETA is currently delivering record levels of profitability
for the supply arms of the large businesses while generators are
in difficulty. Setting targets, while allowing a market system
which takes no account of environmental and supply security factors
to continue, will not give desirable results. This is evidenced
by the intervention required to support Britsh Energy and will
again become obvious if the "wrong" coal fired plants
(ie those with FGD) are next to go bust.
NETA must be reformed into a system under which
the electricity industry works with Government rather than against
it. Only when this is done will the more sustainable industry
envisaged in the White Paper be delivered.
British Sugar suggests that the Government uses
the opportunity presented by the forthcoming BETTA legislation
to implement reforms of the electricity market. Under these reforms
the environmental performance, diversity and long term security
which the Government values could be rewarded, rather than simply
addressing short term pricing. This would include giving the "encouragement
to CHP and renewables", which the initial implementation
of NETA has failed to deliver.
Power Station Consents
The Government expects that in parallel with
increasing renewable generation there will be a continuing switch
from coal to gas with a significant part of the new gas burn being
CHP. The White Paper power station consent clause lacks teeth
in this respect.
British Sugar suggests that developers should
be required to build "economically viable" CHP as a
fraction of their proposed power station capacity, rather than
just showing that they have "considered" it, in order
to be granted a consent for a CCGT.
Emissions Trading
British Sugar has been a strong advocate of
Emissions Trading as a mechanism and welcomes the White Paper
putting an Emissions Trading System (ETS) at the heart of future
policy. The UK tried to get a lead in this field by implementing
the UKETS and measures to encourage CHP were implemented in that
pilot scheme. Unfortunately, this work may be in vain with the
EU compatible scheme being implemented (post 2005), if the work
is not done now to ensure that the scheme will encourage new CHP
build rather than simply putting power prices up. It would be
a tremendous missed opportunity if the ETS simply works to feed
money to the operators of existing coal fired plant in the medium
term.
British Sugar suggests that the Government should
move decisively to use the opportunity presented by the first
National Allocation Plan under the new ETS to actively promote
CHP. It can do this by putting allocations aside for new CHP plants
rather than making developers buy allowances from operators of
old coal fired plant. Failure to do this could lead to delays
in CHP build, higher power prices and windfall profits to coal
fired generators.
Climate Change Levy (CCL)
Since our last submission to the committee on
this subject in January 2002, the completion of the CCL exemption
for CHP first announced by the Chancellor in November 1999 has
been put in place by the Government. British Sugar welcomes this
move. In the intervening three years the position has continued
to evolve. The forthcoming Cogeneration Directive (2005) may mean
radical revision to the scheme used to deliver the CCL benefits
in the UK (the CHPQA system) and then the EU Emissions Trading
Directive will undermine the whole basis for the CCL from 2008
onwards. The Government should act now to ensure that the signal
given by the CCL exemption is seen by industry to be maintained
through these major changes.
British Sugar suggests that from 2008 the Government
changes the CHP CCL exemption to an equivalent one which values
the "fuel free" portion of a CHP plant's power output.
This "fuel free" portion would then be valued in the
same way as renewable output so that a mechanism akin to the renewable
obligation can then be used to deliver new CHP build at minimum
cost. This mechanism should then only be abandoned when the CHP
target has been met and a mature emissions trading scheme exists
which will then ensure the ongoing success for lower carbon generation.
This strategy should be made clear by Government this year, or
the current uncertainty about how the Government intends to use
the Cogeneration and Emissions trading legislation will guarantee
that no more CHP plant is developed.
2. BIOETHANOL
IN THE
ROAD TRANSPORT
SECTOR
For ease of reference we attach a copy of our
Memorandum to the Committee of January 2003, "The Case for
Bioethanol". Rather than repeat the points we make in this,
we will concentrate on the issues relevant to the White Paper.
The White Paper and biofuels
British Sugar is delighted that the White Paper
deals very specifically with energy issues in the transport sector
(c.f. Chapter 5—Clean Low Carbon Transport). We have been
disappointed in the past that energy policy appeared to concentrate
exclusively on power generation. As the White Paper points out,
over 21% of greenhouse gas emissions come from road transport.
These emissions have risen by 5% since 1990, and this upward trend
is continuing. The White Paper suggests (Chapter 2—The Environment)
that 13% to 16% of the total carbon savings in the UK by 2020
will have to come from the transport sector. The measures to deliver
these savings are suggested to be voluntary agreements with the
automotive industries on low carbon vehicles and the increasing
use of biofuels.
Bioethanol and CO2 emissions reduction
Our earlier paper of July 2002 pointed out that,
on a lifecycle basis, the use of bioethanol derived from conventional
crops like wheat or sugar beet would reduce CO2 emissions by about
50%. This conclusion was based on historic, worldwide research
available at the time. Since then, further research by Sheffield
Hallam University, combined with the use of high quality CHP and
modern plant design, suggests that the CO2 reduction available
from these "conventional" feedstocks (wheat, sugar beet
etc) would be increased to over 70%.
We also note that in the White Paper, the Government
suggests that potential carbon savings could be even greater than
this using woody lignocellulosic feedstocks (eg forestry residues,
coppice crops and waste). At the moment, the presumption appears
to be that these woody, lignocellulosic feedstocks would be converted
into biofuels using technologies such as hydrolysis and enzymatic
fermentation. However these technologies are still in their developmental
stages and even when commercialised would be very expensive.
In the case of woody lignocellulosic feedstocks,
recent work also at Sheffield Hallam University, has concluded
that similar (or even higher) CO2 emissions reduction could be
achieved by burning the cellulose (straw, wood etc) in high performance
CHP boilers, rather than by trying to ferment it.
The lignocellulosic fermentation technologies
currently under development should only be introduced in the future,
as and when they become commercially available, and assuming their
costs can be made competitive with alternative processes.
The potential for increasing the use of biofuels
We have made it very clear that the Government's
autumn announcement of a 20p/litre reduction in fuel duty on bioethanol
will not be sufficient to introduce a viable and sustainable UK
bioethanol industry. To enable investment to take place in an
adequately scaled and fully viable industry in the future, the
duty reduction would have to be increased to at least 26p/litre.
Furthermore, as we have pointed out, the parallel
with biodiesel, which already has a reduction of 20p/litre, is
flawed as the only available feedstock for viable biodiesel production
at this duty level is recovered waste vegetable oil. Supply of
this is limited and will never bring about the volume production
that will be required to meet the White Paper's carbon reduction
savings targets. There is also no comparable waste feedstock available
for bioethanol. Waste conversion for bioethanol will in the future
rely on the new and expensive fermentation technologies.
Actions required by each relevant Government department
During the course of our work on the potential
for developing a UK bioethanol industry, it has become clear that
the overall responsibility for Government policy in this area
is not clear-cut. We have had equally intensive (and rewarding)
interaction with the Treasury, Customs & Excise, DfT, DTI
and DEFRA. Although dealing with five Government Departments clearly
makes it considerably harder work to achieve rapid progress, we
believe each of these Departments has a necessary and legitimate
role in biofuels in covering their own specialist responsibilities.
It would, however, be more satisfactory if those accountabilities
were more clearly specified for each, and perhaps also if one
single Department had overall accountability for biofuels.
We believe that DfT, DEFRA and DTI are convinced
by our case for bioethanol on both environmental and economic
grounds. However, it is not clear whether Treasury shares this
conviction. Nevertheless, the fact remains that none of the environmental
and other benefits will be achieved unless an adequate fiscal
incentive is provided by the Government. If the Treasury is waiting
to see what will happen at a 20p/litre duty reduction, we fear
that valuable time will be lost when real CO2 emissions reductions
could be made towards our national targets.
March 2003
Annex
REVIEW OF THE EU SUGAR REGIME—2003
BACKGROUND
— Following agreement in the EU Council
of Agriculture Ministers in July 2001, the current conditions
applying to the EU Sugar Regime will continue until July 2006,
but a review of the arrangements will be made by the Commission
in 2003.
— Sugar was never intended to form
part of the Mid Term Review of the CAP, but decisions made in
the MTR will inform the review and reform process for sugar.
— There are a number of internal and
external influences which have led to calls for a radical overhaul
of the Sugar Regime.
THE UK'S
UNIQUE RESPONSIBILITIES
IN THE
SUGAR SECTOR
— Alone among the EU member states,
after importing about 10% of its supplies from the EU, the UK
sugar market is supplied by a combination of domestic beet production
and cane imported from the developing countries.
— The overall UK sugar market is approximately
in balance between cane and beet supplies and domestic consumption.
— Through the Sugar Protocol and the
Cotonou Agreement, the UK Government has a long-standing commitment
to maintain preferential access for ACP sugar. This commitment
should not be undermined by the UK Government's policy of liberalising
the CAP and the Sugar Regime.
— The EU is the world's second-largest
importer of sugar (after Russia). Two-thirds of this (about 1.1
million tonnes) is imported into the UK from the ACP countries
and from the world's least-developed countries (the LDC's) under
the "Everything But Arms" agreement.
— The domestic economies of the ACP
and LDC countries are dependent on the preferential agreements
in place for sugar, in particular guarantees of stable prices
on a multi-annual basis which provide a sound basis for long-term
investment.
— The UK cane refinery is the largest
in the world and is the largest private sector employer in the
London Borough of Newham, one of the three most deprived boroughs
in the UK.
DOMESTIC BEET
PRODUCTION
— The UK beet sugar industry is one
of the most efficient in Europe.
— Sugar beet productivity is consistently
in the top quartile of EU rankings.
— The UK processing industry is the
European leader in terms of both cost efficiency and technical
innovation.
— The industry supports over 20,000
jobs throughout the economy.
— Sugar beet production in the UK benefits
the environment.
— It is a valuable break crop for cereals.
— It supports biodiversity and bird
life.
— Applications of fertilisers and agro-chemicals
have been greatly reduced, (in some cases by over 90%).
— The UK industry does not produce
surplus beet quota sugar, and so does not contribute to the European
surpluses exported onto the world market with export subsidies.
— The UK industry does, however, have
to help pay for the subsidised exports of surplus quota sugar
which originate from other EU countries.
— About 15% of operating costs and
15-20% of capital expenditure in the UK beet processing sector
are attributable to meeting environmental and social standards.
THE UK CONSUMER
— Consumers benefit from stable supplies
produced to high quality, social and environmental standards.
UK food manufacturers benefit from highly specialised silo management,
technical support and from the diverse product range available
from the cane and beet processors.
— The UK market benefits from diversity
of supply—imports from the EU via UK merchants, imports
from the ACP and LDCs, and domestic production.
— BUT historically, price reductions
have remained in the supply chain and not been passed through
to the consumer in the price of finished products—the case
for sugar is similar to the current case for coffee.
THE WORLD
SUGAR MARKET
— The so-called world sugar price is
in fact a residual market price at which surplus sugar is traded
internationally. It does not reflect costs of production but supply
and demand on that residual market, and is highly volatile. The
world price is usually well below average production costs even
of efficient producers.
— At current world prices, the sugar
industries in the developing countries the EU wishes to support
would be unable to compete, and would therefore disappear.
— World prices are low mainly because
of the 10-fold increase in exports from Brazil (to over 10 million
tonnes) in the last 10 years. This trend is continuing.
— Brazil has been able to expand its
exports to the world market only because of repeated massive devaluations
of its currency which have artificially reduced its production
costs. The Brazilian sugar industry has also been supported by
cross subsidy from their heavily Government-subsidised bioethanol
industry.
— Almost all sugar producing countries
in the world support their industries in one way or another precisely
to avoid the swings in commodity prices that remain such a scourge
today.
— Only Brazil would be able to compete
in an open world market, without domestic protection.
UK GOVERNMENT OBJECTIVES?
— To help the world's poor? —taking
away the stable prices that the ACP and LDC countries have now
will increase world poverty.
— To lower prices to UK consumers?—price
reductions have not been passed on to the consumer of finished
products containing sugar.
— To bring sugar into line with CAP
reform?—reform in the sugar sector must be managed in a
balanced way if further hardship is not to be inflicted on an
already ailing UK agricultural industry.
25 See A Sustainable Energy Strategy? Renewables and
the PIU Review, Fifth Report of Session 2001-02, HC 582-II, Ev
162-3. Back
26
See Pre-Budget Report 2002, Fourth Report of Session 2002-03,
HC 167, Ev 40-2. Back
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