Supplementary memorandum from HM Treasury
Response to specific questions from
the Environmental Audit Committee following the Economic Secretary's
oral evidence session, 12 May 2004
Could you set out the expected levels of investment
in CHP in 2004, 2005 and 2006 (excluding the one-off very large
Conoco development)?
The Cambridge Econometrics Study Modelling
Good Quality Combined Heat and Power Capacity to 2010: Revised
projections published in November 2003 suggests a figure of
6,350 GW for qualified power capacity for 2005. Cambridge Econometrics
were not asked to examine projections for 2004 and 2006 as it
was the 2010 projection that was of the most interest. In addition,
the work was done to inform the Emissions Trading National Allocation
Plan calculations, which used the UK Energy Model for which the
generators' part is generally run at five-year intervals. A copy
of the report is enclosed for your information.[1]
Does the Treasury consider that CHP could be exempted
from the Renewables Obligation in such a way as to have either
no effect, or only a beneficial effect on renewables?
Could the Treasury (a) confirm the cost of exempting
CHP from the Renewables Obligation; (b) set out the carbon savings
arising from the current level of CHP (4.8gw); and (c) set out
the forecasted savings in 2010 if the CHP target were met?
Do you accept that the Government has already
made a significant change to the Renewables Obligation in relation
to co-firing, and that it is inconsistent to argue against a small
change to benefit CHP?
The changes to the co-firing rules under the
Renewables Obligation were designed to encourage the uptake of
energy crops, In this context, co-firing of energy crops was seen
as a transitional measure to get energy crops grown in this country
for electricity generation. More time was needed to allow this
to happen—our original timescales under the Obligation (which
required 75% of the biomass element to be energy crops from 1
April 2006, and under which co-firing would have ceased to be
eligible for the RO after 31 March 2011) had been too tight and
needed to be relaxed.
It is also the case that only the biomass element
of co-firing receives ROCs. There is no support for the coal-fired
element.
We made these changes following the technical
review of the Obligation, which was carried out last autumn. To
support the review, we used independent consultants to assess
the implications for energy crop development (and for the Obligation
more widely) of adjusting the co-firing rules. In their analysis,
the consultants did not believe that (on the basis of revenue
streams from co-firing modelled for their study and the low margins
anticipated co-firing would have a material effect on whether
Flue Gas Desulphurisation equipment should be installed to meet
the sulphur constraints on a coal generating station under the
Large Combustion Plants Directive or on whether to retire the
plant.
The changes to the co-firing regime will have
a positive benefit to bringing forward more renewable energy through
the greater use of energy crops. By removing CHP from the Obligation
base we would be acting to reduce the amount of renewables capacity
expected to be brought forward as it would mean we would be expecting
10% renewables from a smaller base ie excluding CHP electricity.
It would mean providing some assistance to the development of
CHP at the expense of the development of renewables. The Government
is seeking to support both CHP and renewables in a coherent way,
rather setting one against the other. The Government is also already
supporting CHP using a range of measures including the tax system—through
enhanced capital allowances and an exemption from the climate
change levy.
DTI estimates (based on modelling work by Cambridge
Econometrics) suggest that exemption of CHP from the Renewables
Obligation is likely to result in around 284MW of new build CHP
by 2010. The carbon savings arising from this element of new build
CHP would be minimal (some 0.02 million tonnes of carbon). The
cost of this would in fact be very high. On the assumption that
the fuel displaced by the new CHP capacity would be gas, the cost
of carbon saved would be some £440 per tonne, considerably
more than the cost of carbon saved through the Renewables Obligation
and much higher than the cost of carbon saved through most other
measures designed to reduce carbon emissions. The Government acknowledges
that there is some uncertainty around some of these figures and
that others will have different views. The 2005-06 review of the
Renewables Obligation will offer a further opportunity to consider
these issues.
We estimate that compensating measures for renewables
would cost some £80-90 million pa by 2010 (depending on the
level of CHP achieved by then, in particular whether it met the
Government's targets) with this additional, cost of the Renewables
Obligation being borne by the consumer. This level of support
cannot be justified for an already mature technology. And the
level of support would continue to rise in line with the level
of support for renewables. There is no economic justification
for such a link given that renewables are generally new technologies
which, with support now, can expect to reduce their costs over
time. CHP, a mature technology, is not in the same position which
makes it difficult to see an economic rationale for such a measure
being taken.
Please set out your thoughts on the potential
role of CHP and biomass for new developments, in the light of
the latest RCEP report on this topic and its criticism that government
policies for this important energy source are fractured and misdirected
The Government found the RCEP report on the
role of biomass including the potential link with CHP interesting
and helpful. Defra are leading on this and have had initial contact
with other Government Departments on the feasibility of some of
the recommendations. They expect to be submitting a Government
Response within the next few months.
The Energy White Paper stated that consideration
would be given to creating a business target for energy efficiency;
and that the Government would consult on requiring applications
for power stations to give more consideration to CHP. What progress
has been made in these areas?
The Energy White Paper did not consider the
case for a specific business target for energy efficiency. It
did state that the Government would consider extending the Energy
Efficiency Commitment (EEC) beyond the domestic sector, perhaps
to businesses that do not pay the climate change levy. The EEC
consultation document, published last week by Defra, explains
why we have so far rejected a business EEC.
Defra commissioned studies into the feasibility
of an EEC for the business sector and on issues surrounding the
possible extension of the domestic EEC to those business that
do not pay the Climate Change Levy. The work included consultation
with interested bodies and the results were further discussed
with stakeholders. However, a number of concerns were raised—practical
and administrative difficulties of crediting energy savings for
business energy efficiency under the domestic EEC; equity issues,
including the possibility that domestic consumers might in effect
pay for business energy efficiency improvements; the potentially
high cost of addressing the business sector through the domestic
EEC for what appeared to be a low carbon return.
The Government has therefore concluded that
the inclusion of small business within the domestic EEC is not
practicable at this point. Options continue to be considered,
but in the immediate period support for energy efficiency improvement
in this sector will continue via other programmes, notably those
of the Carbon Trust. In addition, we will consider the feasibility
of an EEC for business consumers more widely as part of the review
of the Climate Change Programme later this year.
The Energy White Paper included a commitment
to review existing guidance to developers seeking consent from
DTI for large power stations, setting out the steps they need
to take to ensure economically viable opportunities for CHP are
fully considered. The existing guidance can be found at:
http://www.dti.gov.uk/energy/leg_and_reg/consents/powerstation_eng.pdf.
The review will aim to make the guidance clearer
about the information and evidence required from developers to
show opportunities have been properly explored.
Work to review the guidance is well advanced.
Publication of the re-drafted guidance for consultation, expected
earlier this year, has been delayed by wider policy questions
around power station consents. But a consultation paper is expected
in the next two months.
You promised to provide figures on the installations
covered by Climate Change Agreements, and on emission reduction.
In doing so, could you set out the baselines, targets, and total
reductions which have been made in each sector. Could you also
comment on the extent to which reductions can be analysed by each
policy instrument (especially the extent to which the impact of
IPPC regulations can be separately identified)?
The existing Climate Change Agreements (CCA)
scheme currently covers some 10,500 installations. It was originally
expected to deliver 3.3 MtC per annum (including the revision
of targets) by 2010. In fact the CCAs have already delivered substantial
carbon savings, almost three times more than the original target
and future savings will depend upon the agreements set for future
years. We estimate that a further reduction of 0.5 MtC per annum
will be delivered through the extension of the CCAs into new sectors.
The CCA scheme is not mandatory and it is up to businesses to
decide if they wish to participate in it. However, the cost of
the extension to CCAs is estimated to be £25 million and
it is also estimated that in excess of 1,000 installations may
benefit by new CCA eligibility.
I attach a copy of Defra's "Climate Change
Agreements—Sectoral energy efficiency targets" and
"Climate Change Agreements and the Climate Change Levy: First
target-period results".[2]These
give a breakdown of targets and reductions, this information is
also available on the Defra website: www.defra.gov.uk/environment/ccl
Could the Treasury set out what work is currently
being conducted on the possibility of short-term instruments that
might have an impact on the environmental performance of the aviation
industry, and what specific policy instruments are being considered?
The Government published The Future of Air
Transport White Paper December last year. This stated that:
"We must do more to reduce the environmental
effects of aviation. The UK will take action both internationally
and here at home, as well as meeting air quality and other environmental
standards and minimising environmental damage. Emissions trading
is the best way of tackling the aviation industry's greenhouse
gas emissions. Those responsible for emissions must keep within
set limits by reducing their own emissions and/or buying additional
`allowances' from others who reduce their emissions."
The White Paper also said that the Government
would continue to explore the role of further economic instruments.
Following discussions with stakeholders in light of the Government
paper "Aviation and the environment: using economic instruments",
one key constraint in designing effective economic instruments
designed to improve the environmental performance of the aviation
sector is international legislation, particularly in EU legislation.
Budget 2004 announced that the Government would therefore discuss
with the European Commission options for introducing greater flexibility
in European legislation regarding the application of economic
instruments to aviation.
Work on these policy measures in underway, though
the key priority is getting aviation into the EU ETS, where the
Government is working proactively with the Commission and EU partners
to develop a proposal.
Has the Treasury undertaken, with Defra, any specific
evaluation of alternative policy instruments for reducing F-gases,
including the scope for some form of tax or charge? If so, please
provide details.
F-gases are a greenhouse gas and are covered
by the Kyoto protocol, which the UK has ratified. The UK is committed
to meeting its Kyoto target of reducing greenhouse gas emissions
by 12.5% by 2008-12 from 1990.
At present in light of the proposal for a regulation
of the EU Parliament and of the Council on certain fluorinated
greenhouse gases (COM(2003)492), the Government is focusing on
this proposal. This is currently under active discussion in Working
Group and the Dutch Presidency is likely to be seeking a common
position by the end of the year.
The proposal is intended to assist the European
Community to meet its objectives under the Kyoto Protocol by introducing
cost-effective mitigation measures to reduce emissions of these
gases, and to prevent distortion of the internal market that could
result from differing national measures. This proposal covers
provisions on the containment, reporting, marketing and use of
F-gases and includes dates for phasing out certain uses of F-gases.
The UK is seeking the outcome that maximises
the environmental benefits in the most cost-effective way and
also minimise the burden on businesses and give them enough time
to adapt to new requirements.
When will the remit, aims and objectives of the
new revenue department be made public? Will the objective of promoting
sustainable development be incorporated within the new remit?
Considerable work is required to prepare for
the creation of the new combined revenue department, including
preparation of the necessary legislation. Work on the new framework
document and the annual remit is being taken forward as part of
that. A draft of the framework document will be available by the
time that the legislation is introduced. Consideration will be
given to the content of the first annual remit in light of progress
on setting up the new department and the outcome of the current
spending review.
How is the Treasury planning to contribute to
the review of the Sustainable Development Strategy? Does it have
any views as to how the strategy could be improved?
The Government launched its review of the UK
Sustainable Development Strategy on 21 April. HM Treasury, along
with other Whitehall Departments, contributed to the preparation
of the current consultation exercise for the Strategy Review.
As part of the Strategy Review, the Sustainable Development Commission
prepared a paper on the Government's progress on integrating sustainable
development in its activities. This piece of work has provided
a shared challenge to both Defra in completing the Review and
to other Government Departments.
With reference to HM Treasury the Commission
report noted the progress made in recent years with regard to
environmental taxes but highlighted the need for continued progress
in this area. It also called for the 2004 spending review to take
sustainable development into account. The outcome of the spending
review will be announced shortly. One of the cross cutting themes
that we have been considering is sustainable development and it
is our intention to use this process to further inform the Strategy
Review.
June 2004
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