Select Committee on Environment, Food and Rural Affairs Written Evidence

Memorandum submitted by Scottish and Southern Energy plc (U43)

  Scottish and Southern Energy (SSE) welcomes the Committee's decision to examine the policies of the United Kingdom Government to address the challenge of climate change and also the Government's activities in the international arena to drive forward the international response to the issue. SSE values this opportunity to submit written evidence to the Committee, and apologises for the fact that this submission is late.

  SSE is one of the UK's largest energy companies, with interests in the generation, transmission, distribution and supply of electricity and in the storage and supply of gas. It is the largest generator of electricity from renewable sources in the UK and has in place a £850 million programme of investment in renewable energy. Because its operations are entirely focused in the UK, this evidence will concentrate on the policy issues relevant to keep the "UK on track".


  SSE believes that the Government policy needs to focus on three key areas in order to achieve its aim of putting the country on the path to cutting its carbon dioxide emissions—generally agreed to be the main contributor to global warming—by around 60% by 2050;

    —  (the maintenance and development of a positive framework for investment in existing and new renewable energy technologies;

    —  (the achievement of a "step change" in energy efficiency across the economy; and

    —  (a major reduction in the carbon dioxide emissions produced by the transport sector, including aviation, which is responsible for around one quarter of the UK's total.

  As an energy company, SSE does not feel qualified to comment on transport matters, except to say that amongst its own environmental targets for 2004-05 is to reduce fuel consumption by company vehicles. More broadly, looking ahead to the period after a general election, there may be a case for consideration being given to combining transport, energy efficiency and energy policy in a single government department geared to tackling climate change.


  With regard to the framework for investment in existing and new renewable technologies, it is clear that the Renewables Obligation has been singularly successful. It was introduced in April 2002 to incentivise generators to produce progressively higher levels of renewable energy over time. SSE's plans to invest £850 million in renewable energy stem directly from it, and it is clear that it has led to the invigoration of the market for wind power.

  Against this background, it is encouraging that, in consulting on the terms of reference for its forthcoming review of the Renewables Obligation, the government has stated its wish to maintain confidence in the stability of the renewables support framework. This is vital, because financial analysts cite the legislative and regulatory framework as one of the key uncertainties associated with investment in renewable energy in the UK.

  Assuming that framework is maintained or enhanced—then there is no doubt that the appetite for investment in renewable energy is there. The key question is whether there are, in fact, other growing barriers in the way of allowing that investment to take place. The most visible barrier is planning. Indeed, almost two years ago, the Energy White Paper, Our energy future—creating a low carbon economy, stated that many of those who responded to the white paper consultation saw planning as one of the big obstacles to new renewables.

  There is a general acknowledgement that the UK has to meet its international and national statutory obligations to protect designated areas, species and habitats of natural heritage interest. Equally, there is concern that the natural heritage agencies are moving away from this point of consensus and seeking to impose greater and greater burdens on renewables developers. To ensure that the UK remains on the path to cutting its carbon dioxide emissions by around 60% by 2050, there will have to be further action to streamline and simplify the planning process for new renewable developments.

  While the planning process needs to take account of natural heritage issues, and developers have a responsibility to address these issues sensitively, it is also clear that the links between renewable energy, action on climate change, and the potential impact of climate change on the UK's natural heritage need to be made much clearer.


  An equally significant issue which has to be addressed is the fact that renewables technologies are at different stages of development. As such, some renewable technologies do require the support of a substantial programme of capital grants in order to speed up their technical and commercial deployment. At the same time, investors' current confidence in the durability of the Renewables Obligation has resulted in them investing resources in alternative renewable technologies for the medium- to long-term.

  Nevertheless, the economics of offshore wind remain uncertain and the costs associated with installing capacity are significantly greater than for onshore wind. Offshore wind must, therefore, be supported with capital grants as well as through the Renewables Obligation.

  Wave and tidal technologies are further away from technical and commercial deployment, but the UK has many of the qualities needed to develop a marine energy industry. Nevertheless, there is some way to go before wave and tidal technologies have completed the design, development and manufacturing processes that are necessary before they can be successfully deployed in an commercially viable way. They, too, must be supported by capital grants in addition to the Renewables Obligation. In summary, the future development of new renewable technologies will be dependent upon a sustained partnership involving companies, the Scottish Executive and the UK government.


  The first phase of the iEU Emissions Trading Scheme is scheduled to begin in January 2005, and it is intended to be a central plank of the UK's future emissions policies. It is founded on the principle that the traded carbon market can set a signal for the value of carbon reductions in the economy. The Government has made it clear that the inclusion of the electricity industry within the scope of the EU emissions trading scheme will put an incentive on electricity generators and suppliers to reduce emissions.

  The Government's recent announcement about the total number of emissions to be allocated to UK industry included welcome revisions to emission factors for coal and gas. Nevertheless, the principal concern with the introduction of the EU ETS remains the process. It seems likely that the level of emissions allowances per installation will not be known until the end of February, which is a position which most people will find very difficult to accept. Put simply, the ELI Emissions Trading Scheme is all about trading, but some companies are unlikely to begin to trade before they know how many allowances they will have and hence how great a surplus or deficit they will have. This is greatly hampering the development of liquidity in the market and is limiting investment in projects aimed at reducing emissions.

  As things now stand, the UK's National Allocation Plan is now 5.2% below final projections of business as usual in the UK, and the Government states that this sets a balance between the need to maintain a competitive economy and the UK's leadership on climate change. It believes that the emissions cap will take the UK beyond its Kyoto commitment and is "consistent" with the UK's domestic goal of moving towards a 20% reduction in CO2 emissions on 1990 levels by 2010.

  SSE believes that an EU-wide emissions trading scheme is an appropriate response to the climate change agenda. It believes that, over the long term, three key principles need to be observed:

    —  the process for implementing and monitoring the scheme must be much smoother than has been the process for determining the UK's National Allocation Plan—participants need to have the details as early as possible to allow emission reduction projects to be brought forward;

    —  (it is vital that the ability of the UK electricity generation sector to maintain security of electricity supply is not compromised during either the first or the second phases of the EU Emissions Trading Scheme; and

    —  while showing leadership in tackling climate change, the Government must safeguard the UK's position with regard to other participating states.


  SSE believes that the Energy White Paper was correct in its assessment that the "cheapest, cleanest and safest way of addressing our energy policy objectives is to use less energy". It also agrees with the White Paper that a "step change" in energy efficiency across the country is necessary and that it is reasonable to expect that energy efficiency can contribute around half of the emissions reductions the UK is likely to need by 2020. The White Paper also listed many of the opportunities that clearly exist for improving energy efficiency in homes, offices and businesses.

  It is clear, however, that the major barrier to substantive progress is behavioural, as one example illustrates. The majority of heat is lost through either the roof or the walls of houses but, although costs have fallen significantly, most properties in the UK do not have adequate insulation. The Energy Efficiency Commitment obviously helps to improve energy efficiency. But, without major changes to people's behaviour the contribution which greater energy efficiency will make to securing the necessary emissions reductions will be greatly (and unnecessarily) restricted.

  SSE believes, therefore, that there are two changes which should be effected.

  First, progressively greater incentives should be placed on property owners to ensure that their properties are well insulated. For example, this could be done by varying tax rates so that the owners of well-insulated properties pay lower stamp duty when ownership of the changes than poorly-insulated properties. Another example would be to levy lower council tax or business rates on properly-insulated properties.

  Second, it is vital to reduce the availability of appliances with relatively low energy efficiency. A new Eli voluntary industry committee aims to remove all "C" rated appliances from the market and introduce new higher ratings of "A+" and "A++". This voluntary industry commitment should be supported with formal backing from the government.

  It must be clear that this approach towards attaining energy efficiency objectives needs to extended well beyond the household sector. In particular, the public sector can demonstrate leadership in showing how energy efficiency can work in practice in new commercial and public sector buildings. The adoption of higher building standards is case in point. While the government is committed to raising standards over the next decade, and in doing so learning lessons from the standards achieved in other comparable countries, there needs to be much greater clarity about how to deliver this commitment in practice. The same is true of highly efficient combined heat and power (CHP) solutions. These are highlighted by the Government as a key energy efficiency tool yet they are seldom adopted for use in the government estate.

  In addition, the energy services model should be extended so that energy supply companies are able to establish longer-term contracts than 28 days with all customers and at the same time provide energy efficient products and services such as home insulation, energy efficient boilers, domestic appliances and low-energy lightbulbs. The two-year pilot programme announced by the Department of Trade and Industry earlier this year was a step in the right direction, but this is a complex area. Six months into the pilot period, only a limited number of energy services schemes have got under way. Nevertheless, SSE believes that in due course, the initiative—and customers—would benefit from confirmation that it will be extended to everyone.

  In conclusion, the fight against fuel poverty also needs to become energy efficiency-based. SSE has developed a proposal for a "Social Obligation", modelled on the Renewables Obligation. Its key principle is that there should be an incentive on energy suppliers to play their part in tackling fuel poverty by helping to make the housing stock more energy efficient so that homes are easier to power and heat. It believes that making homes more energy efficient is the only sustainable way to reduce fuel poverty and contribute to the government's emissions reduction ambitions.


  The comments set out in this letter may once have been viewed as radical. SSE believes that the urgency of the need to reduce emissions is such that they represent a sensible package of measures that would be effective within a foreseeable timescale.

25 November 2004

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