Memorandum submitted by the Association
of Electricity Producers (U29)
1. The Association of Electricity Producers
(AEP) is the UK trade association representing electricity generators.
It has some 100 members ranging from small firms to large, well-known
PLCs. Between them they embrace nearly every generating technology
used in the UK, including not only conventional large-scale generation
but a variety of technologies, some of them innovative. Contact
details for the Association are given at the end of this paper.
The Association is keen to engage with the Government in shaping
future Climate change policy and welcomes the opportunity to contribute
to the Committee's inquiry into the UK Climate Change Programme
(CCP), as follows.
KEY POINTS
2. We would like to emphasise the following
key points at the outset of our submission:
— Within the draft UK National Allocation
Plan, the Power Generation Sector has been singled out to shoulder
the major burden of emissions reductions for the UK in Phase 1
of the EU Emissions Trading Scheme (EUETS).
— The assumptions, projections and
data on which policy decisions are based, and the procedures for
the allocation of allowances under the EUETS, must be transparent.
— Electricity prices will have to rise
if the Government's ambitions on climate change are to be achieved.
— We support the Government's use of
market-based mechanisms in its climate change strategy.
— The Government should ensure that
industry in the UK is not disadvantaged in relation to other Member
States whose National Allocation Plans under the EUETS are more
liberal.
— Government needs to create a business
climate that will encourage significant future investment in the
Power Generation Sector.
— We must have a clear, early indication
of how the Government expects to manage Phase 2 of the EUETS;
the Power Generation Sector has long lead times for investment
and cannot flourish when it is constrained by a lack of certainty
beyond the short term.
ENGAGING ALL
SECTORS IN
DELIVERING CLIMATE
CHANGE POLICY
OBJECTIVES
3. The Power Generation Sector has made
the largest contribution to the reduction in CO2 emissions
since 1990, as shown in the table below.
|
| Annual CO2 emissions (MtCO2)
| 1990 | 2002
| 2010
(UK NAP, May 2004)
|
|
| Power Stations | 198.5
| 158.2 | 139
|
| Other Sectors | 406.3
| 392.8 | 377
|
| UK total | 604.8
| 551 | 516
|
|
Even so, the Power Generation Sector continues to be a primary
focus of current policy instruments. The Government has chosen
to place the major burden of CO2 emission reductions
for Phase 1 (2005-07) of the EUETS on the Sector, but it needs
to make it clear to all industry sectors that, from 2008, carbon
reductions will have to be shared more equitably.
CHARTING PROGRESS
TOWARDS THE
UK'S 2010 TARGET
4. It is becoming increasingly clear that there is a
significant gap between forecast emissions of CO2 in
2010 and the Government's goal of a 20% reduction based on 1990
emissions. The Association has discussed the Updated Energy Projections
for the Power Generation Sector with DTI and Defra and has identified
some shortcomings in demand forecasting and the factors used to
convert fuel consumption into CO2 emissions. Both of
these could result in an upward revision of emissions, but it
remains unclear how Government intends to address the issues.
Given the importance of future energy and emissions projections
in assessing the likely impacts of both current and future Climate
Change Programme measures, it is essential that the underpinning
data and assumptions are transparent. Government needs to make
more information available and engage in more constructive dialogue
with industry if the projections are to be seen as credible.
THE EFFECT
ON ELECTRICITY
PRICES
5. Future electricity prices will be determined by a
range of factors including supply/demand balance and fuel prices
as well as the implementation of the Large Combustion Plant Directive
(LCPD) and the EUETS. Carbon is only one of the contributing factors.
The value of allowances under the EUETS is yet to be determined
and the extent to which this is passed through into final electricity
prices in the UK will be determined by the individual decisions
of the companies operating in the market. Nonetheless the implementation
of the EUETS must be expected to lead to some price increases.
6. However, it is the supply/demand balance that is the
most critical factor in shaping future electricity prices. With
continuing growth in demand and increasing environmental constraints
on older plant limiting supply, the point at which investment
in new power stations is needed will be brought forward. Prices
will have to rise from the levels of recent years to encourage
new power stations to be built.
CLIMATE CHANGE
POLICY INSTRUMENTS
7. The EUETS will be the climate change policy instrument
with the greatest impact on the energy sector over the next decade.
The Association supports the use of such market-based instruments
provided that they are 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.
However, the arrangements for Phase 1 have grown increasingly
complex and the lack of a harmonised approach across the EU to
the fundamental market rules may threaten the realisation of a
truly single market in carbon. The Government should ensure that
industry in the UK is not disadvantaged in relation to other Member
States whose approach to CO2 allowance allocation is
more liberal.
8. The lack of clarity in the UK and within other Member
States about the arrangements for the implementation of Phase
2 (2008-12) of the EUETS can serve only to delay investment that
is needed now to meet Kyoto requirements. The requirement to develop
National Allocation Plans for Phase 2 by September 2006 is too
late to provide investor confidence. The Government should aim
to secure clarity on the rules underpinning Phase 2 at an early
stage, to encourage future investment in the Power Generation
Sector.
9. The Renewables Obligation (RO) is another market-based
policy instrument that the Association supports. The long-term
stability of the RO mechanism is fundamental to maintaining investor
confidence and this has been aided by the proposed extension of
the Government target to 15.4% by 2015-16. It is important that
investor confidence in the RO is not undermined by the forthcoming
review by DTI in 2005-06.
10. The Government needs to continue to address obstacles
to the growth of the renewable energy industry that are beyond
the scope of the RO mechanism such as planning, connection to
distribution or transmission networks, financing, rates, disproportionate
regulation and public opinion.
11. The promotion of emerging renewables technologies
such as wave and tidal stream is also important if these are to
play their part in the longer term.
EU AND INTERNATIONAL
CLIMATE CHANGE
POLICY
12. 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.
13. Both the UK and the EU as a whole would benefit from
early clarification of the rules for Phase 2 of the EUETS and
the delivery of an efficient and liquid market in allowances.
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.
14. 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.
All leading industrialised nations need to play their part in
tackling the challenge of climate change. It is essential that
the USA and Russia are fully engaged and that those countries
with rapidly increasing emissions such as India and China also
play 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.
1 October 2004
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