Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by RWE npower (U3)

INTRODUCTION

  1.  RWE npower, part of the RWE Group and previously known as RWE Innogy, is a leading integrated UK energy company. Through our retail business, we are one of the UK's largest energy suppliers. We have over 8,000MW of generation capacity in the UK from our diverse portfolio of flexible, low-cost generation assets, sell our expertise in power generation in key markets and are market leaders in renewable energy development. We welcome the opportunity to contribute to the Committee's inquiry into the UK Climate Change Programme (CCP).

  2.  As a major European energy company with interests in electricity, gas and water services, RWE has a significant interest in the development of EU and wider international climate change policy. The company has played an active part in dialogue between industry and the EU institutions in the development of the existing policy framework. In Member States where we operate, principally Germany, the UK and Hungary, RWE has engaged pro-actively with policy makers to facilitate the efficient and cost-effective delivery of European climate change policy objectives, advocating the use of market-based approaches wherever these are appropriate. We fully support the Government's commitment to using market-based mechanisms where appropriate to deliver its wider energy and environmental policy goals.

PROGRESS TOWARDS THE UK'S 2010 TARGET

  3.  It is becoming increasingly clear that there is a significant gap between forecast emissions of CO2 in 2010 and the Government's aspiration of a 20% reduction based on 1990 emissions. Department of Trade and Industry (DTI) projections underpinning the National Allocation Plan (NAP) submitted to the European Commission in April this year suggest that, with current CCP measures, forecast UK emissions of CO2 in 2010 are 519mtCO2, 14.3% below 1990 levels, assuming full delivery of the Renewables Obligation and 8GW of CHP. The additional annual savings of 5.5mtCO2 pa to be delivered in 2010 through the EU Emissions Trading Scheme (EUETS) by the electricity sector increase the overall level of CO2 reduction to 15.2%.

  4.  However, we understand from discussions with DTI that further analysis of projected emissions from the electricity sector in 2010 suggests these will be around 6mtCO2 higher than previously forecast. Errors that we have identified in factors used by DTI and Defra to convert fuel consumption by the electricity sector into CO2 emissions will only exacerbate this position. Given the importance of future energy and emission projections in assessing the likely impacts of both current and future CCP measures, it is essential that these are fully transparent. Both DTI and Defra need to make further information available on the underlying assumptions and engage in more constructive dialogue with industry if the projections are to be seen as credible.

  5.  The Government also needs to accept that reductions in carbon emissions will be less than the UK national targets if it is more cost-effective for industry to buy allowances on the EU market than to reduce emissions through investment. This is implicit in the burden-sharing agreement between EU Member States, which implements the requirements of the Kyoto Protocol. This needs to be communicated as part of UK climate change policy.

ENGAGING ALL SECTORS IN DELIVERING CLIMATE CHANGE POLICY OBJECTIVES

  6.  In delivering climate change policy it is important to ensure that all sectors play their part. The electricity industry continues to be a primary focus of current policy instruments. However, there seems to be reluctance to engage other industries, the transport and domestic sectors to the same extent. If the UK's (and indeed the EU's) long-term ambitions on climate change are to be realised, then it will become increasingly important that other sectors become fully engaged. Policies need to provide sufficient advance warning so that these sectors can prepare to take their proportionate share of the burden. For example, the UK National Allocation Plan under the EUETS gives the message that whilst the UK wishes to lead on carbon reduction, UK industry other than the electricity sector will get the allocations it needs and so does not have to be concerned. It is the Government's prerogative to place all the burden on the electricity sector for the first phase (2005-07) but it needs to make it clear to all sectors that from 2008 carbon reductions will have to be shared more equitably.

  7.  It is clear that the achievement of the UK's climate change targets will require considerable investment by industry. Within the electricity sector the lead-time for these investments is typically three to five years, with payback periods often in excess of 15 years. The lack of clarity about the scope and specific targets for both climate change and energy policy both at the UK and EU levels, particularly in the post-Kyoto period, can only act as a deterrent to investment. This will lead to the less efficient use of capital and higher costs in terms of achieving policy goals.

EU EMISSIONS TRADING SCHEME

  8.  The EU emissions trading scheme will be the climate change policy instrument with the greatest impact on the energy sector over the next decade. RWE fully supports the introduction of emissions trading provided the scheme is designed to ensure the creation of an efficient and liquid international market in allowances and the delivery of carbon reductions at least cost across the sectors involved.

  9.  It is of concern to industry that with only three months to go before the start of the trading scheme, there is still considerable uncertainty regarding allocation to installations in the electricity sector, lack of clarity on underpinning energy and emission projections, the tax treatment of allowances, the functioning of the registry and technical issues relating to the operation of the emissions trading scheme.

  10.  The current status of the EUETS and its implementation serves to highlight many of our concerns regarding current climate change policy:

    —  The first phase of the scheme (2005-07) should be seen as a learning phase prior to the second phase (2008-12), which aligns with the delivery of legally binding Kyoto commitments. In this regard, we should not be over-concerned about the first phase targets and should not be requiring an almost-overnight reduction in CO2 emissions of 20% from the UK electricity sector.

    —  The lack of clarity in nearly all Member States about the second phase sectoral targets and allocation methodology can only serve to delay investment which is needed now to meet Kyoto requirements. The requirement to develop National Allocation Plans for the second phase by September 2006 is too late in terms of providing investor confidence.

    —  The achievement of a truly single market in carbon is threatened by the lack of a harmonised approach to the fundamental market rules—for example, the rules governing issues such as closure, new entrants, banking and auctioning which have been left to individual Member States. The outcome of the review by the European Commission due in 2006 only adds to future uncertainty.

    —  In the UK and a number of other Member States, the electricity sector is taking almost the entire burden of any emissions reductions in the first phase. The opportunity has been missed to engage other sectors, which need to play their part if the Kyoto targets are to be met. It is important that the second phase of the scheme adopts a level playing field in setting targets for both the traded sector as a whole and for individual sectors within the trading scheme.

  11.  It is clear that any increase in the burden on the electricity sector to deliver further carbon reductions will result in higher energy costs to industry as a whole and the energy intensive industries in particular. It is for these industries to comment on the prospective impact on their international competitiveness. It is also reasonable to assume that as the market value of carbon rises, there will also be an impact on wholesale fuel costs (such as a carbon premium for gas) as well as electricity prices. This will have implications for domestic energy costs as well as for other sectors and their response to climate change policy.

RENEWABLES

  12.  RWE npower believes that the Renewables Obligation (RO) is a good example of a market-based policy instrument. As the leading renewables developer in the UK, we are fully committed to playing our part in helping to deliver the Government's renewable energy targets. The completion of our first offshore wind farm at North Hoyle was a significant landmark for the UK renewables industry.

  13.  The long-term stability of the RO mechanism is fundamental to maintaining investor confidence and this has been aided by the recent extension of the Government target to 15.4% by 2015-16. It is important that confidence in the Obligation framework is not undermined by the forthcoming review by DTI in 2005-06.

  14.  Planning remains a significant challenge to delivering new renewables capacity at the rate needed to meet the Government's target. The first two years of the Obligation have seen a significant increase in the number of planning consents granted. However, we are particularly concerned about the ability of an increasingly influential vocal minority to frustrate the planning process, despite strong evidence that the majority of the public generally support new renewables projects. Government needs to give a much stronger lead in promoting the "hearts and minds" campaign for wind power.

  15.  Offshore wind is the key to achieving the required growth rate in renewables capacity. The RO review must ensure the longer-term financial viability of this technology. Investment in extending and reinforcing the national transmission system is also a critical path issue if the second round offshore wind farms located in pre-selected areas around the UK are to start to come on stream in the latter part of the decade.

  16.  The promotion of emerging renewables technologies such as wave and tidal stream is important if these are to play their part in the longer-term.

ENERGY EFFICIENCY ACTION PLAN

  17.  We support the view that energy efficiency measures are amongst the most cost-effective for delivering reductions in CO2 emissions from the perspective of the end user. However consumer apathy remains a major barrier to achieving policy goals in this area. The absence of innovative fiscal incentives aimed at changing consumer behaviour and encouraging engagement is a particular limitation of the current policy framework. Tighter building regulations and appliance standards have an important role to play to ensure consumers make the right choices. As a major player in the supply chain, there is a significant opportunity for Government to set an example through its own procurement policies and practices.

  18.  Energy efficiency is an area where a large number of Government departments and agencies have a role to play in delivering policy objectives eg Defra, DTI, ODPM, Treasury, Ofgem, Energy Savings Trust and Carbon Trust. It is apparent that more needs to be done to improve co-ordination between these various bodies to deliver a more consistent and coherent policy framework. There are also potential conflicts between the social, environmental and economic objectives of energy efficiency policy. We believe that refinement of policy instruments, including separation of the social and environmental goals, together with better targeting of resources could improve the efficiency and delivery of policy objectives.

  19.  Energy suppliers have made a major contribution to the delivery of energy efficiency improvements in recent years through a range of initiatives including Energy Efficiency Standards of Performance (EESoP), the Energy Efficiency Commitment (EEC) and Warm Front. We remain concerned about the significant burden to be imposed on suppliers through EEC2 (2005-08) and the sheer scale of activity compared with previous obligations. While EEC2 represents a doubling in the number of measures and significantly increases in carbon saved compared with EEC1, we have concerns regarding the capacity available to achieve this in practice and the impact on the affordability of energy. It has been disappointing that our experience in delivering energy efficiency measures and that of other energy suppliers has not been fully taken on board by Defra and, as a consequence, we have been unable to reach a consensus with Government on what constitutes a realistic level of energy savings and the associated costs.

  20.  EEC2 essentially preserves the current obligation framework. It requires double the level of energy savings compared with EEC1 and will impose costs on each consumer of around £10-12 per fuel per annum, roughly three times the level of EEC1. We are disappointed that the opportunity to consider moving to a more market-based approach providing appropriate incentives to both suppliers and customers to engage in delivering energy efficiency has been lost and hope this can be considered in the next phase covering 2008-11. Linking energy efficiency improvements with the EUETS or developing a "white certificate" scheme are potential ways forward.

  21.  Climate change agreements coupled with Climate Change Levy exemption are cited as having been the major route for achieving energy efficiency improvements in the industrial sector. However, there is little transparency regarding these agreements and evidence suggests that their economic robustness and consistency in terms of the carbon reductions achieved is open to question. Given the future linkage of the climate change agreements with the EUETS, it is important that the agreements are made transparent so that there is confidence that the allocation to the sectors with agreements is consistent with other sectors in the trading scheme.

  22.  The SME sector has proved difficult to engage within current energy efficiency initiatives, although consideration has been given to their inclusion within EEC. This is in part due to the wide range of activities covered and the need for tailored solutions. Consequently, this sector is probably best targeted through direct fiscal measures and incentives, building regulations and measures directed at landlords leasing office premises.

COMBINED HEAT & POWER (CHP)

  23.  RWE npower is a leading owner and operator of CHP plant in the UK. The combined effect of higher gas prices and lower electricity prices has had a major impact on the economic viability of the CHP industry in recent years, such that all major developers have disbanded their development teams and growth in the sector has stagnated. While electricity prices have begun to recover, gas prices have risen further, so that the economic position remains difficult for CHP plant.

  24.  The Government has introduced some support measures for CHP plant including CCL exemption, enhanced capital allowances and business rates exemption. With the exception of CCL exemption they have provided little or no financial benefit to the majority of existing CHP schemes. Consequently CHP capacity is currently around 5GW, well short of the Government target of 10GW in 2010. The Government also undertook to review incentives for CHP under the EUETS. However, the allocation proposals under the NAP do not result in any significant preferential treatment for CHP plant. In fact, all of RWE npower's CHP assets will be short of required carbon allowances due to the baseline methodology adopted. This can only further reduce CHP load factors and in addition will mean unfair treatment when compared with the proposed treatment of new entrants.

  25.  Exemption of CHP output from the Renewables Obligation has recently been considered as part of the Energy Bill. The Government rejected this and RWE npower welcomes the Government's commitment to review the treatment within the forthcoming RO review. However, based on the principle of clarity of purpose of regulation, it is RWE's view that it is inappropriate to use a mechanism designed to support renewables to provide indirect support for CHP plant.

  26.  If Government is committed to the achievement of its CHP target, then some form of direct support for CHP will be required. However, we would advocate that this must be explicitly linked to demonstrable environmental benefits to avoid the development of CHP schemes where the heat and electricity loads are poorly matched to the specific requirements of the host site. An immediate opportunity would be for Government to facilitate the capture of the full benefit of CCL Levy Exempt Certificates (LECs) by making LECs fully tradeable ie able to be sold separate from the CHP electricity.

EU AND INTERNATIONAL CLIMATE CHANGE POLICY

  27.  With its role as Chair of the G8 and President of the European Council in 2005, the UK Government has an import role to play in taking forward the Kyoto and post-Kyoto agendas.

  28.  Securing early clarity on the rules underpinning the second phase of the EUETS and ensuring the delivery of an efficient and liquid market in allowances has to be to the benefit of both the UK and the EU as a whole. Full access to the international project mechanisms must also be secured to enable carbon reductions to be achieved at least cost. The UK should also seek to ensure that all sectors play their part in reducing emissions, including the transport sector.

  29.  For the period beyond 2012 it is essential that UK and EU climate change policies are seen in the wider global context. The competitiveness of UK and European industry remains a priority. There is little point in the UK or the EU being a front runner in tackling the challenge of climate change if other leading industrialised nations fail to play their part. The impact in terms of economic growth and securing future investment is likely to considerably outweigh any environmental benefit. It is essential that the USA and Russia are fully engaged and that those countries with rapidly increasing emissions such as India and China are also playing their part. Consequently, the context for UK and EU climate change policies beyond 2012 must centre on achieving a new international agreement. This must be a priority for the UK and the EU over the next few years.

21 September 2004



 
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