Memorandum submitted by the UK Business
Council for Sustainable Energy (U36)
INTRODUCTION
The UK Business Council for Sustainable Energy
welcomes this opportunity to submit memorandum to the Committee's
inquiry into the UK Climate Change Programme and commends the
Committee for undertaking the inquiry at a crucial time in the
development of the UK's climate policy.
The UK Business Council for Sustainable Energy
was formally launched in January 2002. Its mission is to create
and sustain a framework for high level policy engagement across
the energy sector on climate change, sustainable development and
the transition to the wider use of sustainable energy. It is one
of an emerging number of similar Councils with others being in
the United States of America and Australia.
The UK Council brings together major energy
businesses focused on the delivery of sustainable energy technologies
and services including renewable energy, energy efficiency and
energy efficient technologies such as combined heat and power
(CHP). The Council is working to build a broad consensus on many
of the issues surrounding the development of sustainable energy
in the UK. Business supporters of the Council include: RWE npower,
E.ON UK, Scottish Power, Scottish and Southern Energy, United
Utilities, EDF Energy, Centrica, Shell UK, BP and National Grid
Transco.
PROGRESS TOWARDS
THE UK'S
TARGETS
It is becoming 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.
Recent Department of Trade and Industry (DTI) projections suggest
that with current Climate Change Programme (CCP) measures plus
the additional reductions expected from the EU Emissions Trading
Scheme the overall level of CO2 emission reductions
will be 15.2% by 2010.
Identifying the measures needed to bring the
programme back on track to meet the 20% reduction goal will be
a key part of the Government's review of the Climate Change Programme.
The Council believes that more needs to be done in a number of
areas to bring the programme back on track.
Looking forward achievement of the UK's longer-term
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. Government needs to make early decisions
about the future direction of climate and energy policy to enable
the necessary investment planning by industry.
ENGAGING ALL
SECTORS
To avoid the damaging effects of climate change,
it is vital that the UK's long-term ambitions on climate change
are realised. It therefore becomes increasingly important that
other sectors become as fully engaged as the energy sector currently
is. In particular action needs to be taken to ensure that the
transport sector (including aviation) is playing its part in delivering
emission reductions. At present, the gains made in the last few
years from the power sector are being largely negated by rising
emissions in the transport sector.
We welcome the Government's intention to explore
options for bringing aviation into the EU Emissions Trading Scheme,
but more must be done to engage the road transport sector. This
is not an area where the Council has expertise but we are aware
of the work being done to promote the use of bio-fuels, which
would appear to present a good opportunity to make substantial
emissions reductions from the use of transport fuels.
COMMUNICATION
The Council believes that whilst there is a
general awareness of climate change amongst the population more
needs to be done to communicate the need to take action. Delivering
the Government's climate change targets will need the engagement
of individuals, be it supporting the development of a local renewable
energy development, purchasing various energy efficiency measures
for their homes, or being prepared to change their behaviour in
other ways.
More needs to be done to ensure that there is
positive messaging and reinforcement of the Climate Change Programme
and Energy White Paper targets. The Government needs to work more
closely with industry to ensure more positive and co-ordinated
messages are delivered.
EMISSIONS TRADING
The EU Emissions Trading Scheme (EU ETS) is
likely to be the climate change policy instrument with the greatest
impact on the energy sector over the next decade. The Council
fully supports the introduction of EU-wide emissions trading as
an effective means of delivering emission reductions.
The emergence of the EU ETS is already having
an impact on the energy sector as it develops the strategies and
systems to respond. However we shouldn't be expecting the scheme
to be doing too much too soon. The first phase of the scheme should
be viewed as a learning phase, but in the knowledge that the 2nd
phase will be much tougher than the first.
The success of the trading scheme depends on
the long-term signal it sends to industry. Currently we only know
the rules around which the first phase will operate (2005-07).
This is too short a time-period to make a real influence on industry's
investment decisions. Decisions need to be made quickly about
the structure of the 2nd and subsequent phases if the trading
scheme is to make a meaningful contribution to the Government's
targets.
RENEWABLES
The development of renewable energy is a key
part of the Climate Change Programme. This is being driven by
the Renewable Obligation (RO), a market based instrument that
is giving a real incentive to invest—as evidenced by the
hundred's of millions of pounds being allocated to renewables
development by a number of players in the energy sector. This
level of investment must be maintained if the government's targets
for renewables development are going to be achieved. This requires
long-term confidence in the renewables market. The recent announcement
to raise the target to 15.4% by 2015 has helped to bolster confidence
in the market and the need to maintain this confidence must be
considered throughout both the Climate Change Programme review
and the forthcoming review of the Renewables Obligation.
The current market favours wind as the most
cost-effective technology and there are concerns about the ability
of other technologies to reach the same level of commercialisation.
The Government needs to ensure that there are adequate resources
going into the development of other renewable technologies.
Planning still 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 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.
As outlined above Government needs to work more
closely with industry to ensure that there is more positive messaging
about the benefits of renewables.
The Council is working with a number of large
energy users who, for a range of reasons, want to purchase renewable
electricity from the market. The lack of transparency and clarity
as to the content of "green electricity" tariffs has
made this purchasing decision difficult. The existence of this
additional demand for renewable energy should, if developed in
the right way, help in achieving the governments target for renewable
energy—through for example providing sites for generation
that might not otherwise be developed. More needs to be done to
make information available to these companies as to the options
available to them.
COMBINED HEAT
AND POWER
The Government has continually recommitted to
its target to achieve 10GWe of CHP in the UK by 2010. However
the UK has yet to achieve its interim target of 5GWe by 2001.
Indeed at present CHP capacity is actually falling, despite the
potential the Government itself has highlighted to make much wider
use of this high efficiency technology.
To achieve this the Government will need to
counter the effects of the New Electricity Trading Arrangements
(NETA) that it introduced. This means it will need to fully deliver
on all the measures for CHP it set out in its 2003 Energy White
Paper (some of which were dropped by the time of its 2004 CHP
strategy), but also introduce innovative new measures designed
to secure the favourable market conditions for CHP that Ministers
committed to previously.
Without such measures, investor confidence in
other Government commitments (such as that to develop renewables)
will be weakened. The message will be conveyed that when the Government
acts to alter markets (such as NETA) it is not sufficiently committed
to its own public policy goals to put in place appropriate compensatory
mechanisms designed to secure them.
ENERGY EFFICIENCY
Energy Efficiency is expected to contribute
a significant proportion both to the current Climate Change Programme
and to the Energy White Paper—which indicated a doubling
of the level of energy efficiency to that expected from the current
programme. The Council believes that meeting these targets will
need the introduction of additional policies to really drive the
incentive to invest
The lack of consumer demand for energy efficiency
is a particular barrier. The Council believes that overcoming
this barrier requires a combination of education, communication,
regulation and fiscal incentives. Tighter building regulations
and appliance standards have an important role to play to ensure
consumers make the right choices and the Government can play a
significant role through its own procurement policy.
The Council also believes that fiscal incentives
such as stamp duty rebates—linked to the energy efficiency
rating of a property—could be a useful means of increasing
the uptake of energy efficiency in the domestic sector.
The main policy instrument for delivering energy
efficiency improvement in the domestic sector is the Energy Efficiency
Commitment (EEC). The first phase (EEC1) ran from 2002-05 and
Government is currently consulting on the design of the second
phase of the scheme (EEC2) to run from 2005-08. EEC2 represents
a doubling in financial commitment and a significant increase
in carbon saved compared with EEC1, and there are concerns regarding
the capacity available to achieve this in practice and the impact
on the affordability of energy. It will also result in costs to
each consumer of around £10-12 per fuel per annum, roughly
three times the level of EEC1.
The indications are that delivering the necessary
energy efficiency improvements through the current EEC structure
is going to become more difficult and more expensive. As currently
structured the EEC provides little commercial incentive for the
levels of investment in energy efficiency that are generated in
the renewables market. The Council believes that by re-thinking
the design of the current EEC a greater investment incentive could
be introduced. This could involve designing the EEC to look more
like the renewables obligation or introducing some form of white
certificates market. Changing the way that energy efficiency is
delivered would open the door for the development of new energy
efficiency packages and energy service offerings.
However, EEC can only function effectively if
there is effective consumer demand. This is why the Council has
welcomed the initial incentives the Chancellor has put in place.
However these are as yet limited, and much more will need to be
done to build a self-sustaining market.
EEC also plays a role in delivering the Governments
fuel poverty objectives, through the requirement for 50% of the
energy efficiency investment to take place in the "Priority
Group." The Council believes that this merging of objectives
results in less efficient delivery of either policy goal and we
believe there is a case for separating the fuel poverty objectives
and energy efficiency objectives. This would mean that effort
could then be focussed on solving fuel poverty through a more
targeted programme and allow for more flexibility in the design
of an energy efficiency programme.
Action also needs to be taken outside the domestic
sector, in particular the commercial and service sector. There
are no specific measures aimed at improving energy efficiency
in this sector, yet it is one of the fastest growing, in terms
of energy use and must be addressed.
Implementation of the Energy Performance in
Buildings Directive will result in all buildings requiring an
energy efficiency rating be displayed. This will help to draw
attention to energy use in the sector, but needs to be linked
with incentives, such as reductions in business rates, to encourage
the improvement of commercial buildings. There is also a need
to look at the enforcement regime for existing buildings, as many
do not meet the current building regulation standards.
EU AND INTERNATIONAL
CLIMATE CHANGE
POLICY
With its role as Chair of the G8 and President
of the European Council in 2005, the UK Government has an important
role to play in taking forward the Kyoto and post-Kyoto agendas.
The Council supports a clear long-term approach
to emissions reductions which is consistent with the level of
effort for climate protection, but under which new targets should
be achievable, and sustainable.
For the period beyond 2012 it is essential that
UK and EU climate change policies are seen in the wider global
context. The UK should look to pursue international leadership,
based on sound domestic action, on this agenda through its G8
and EU Presidencies.
With the Kyoto Protocol now likely to be ratified
by Russia, its subsequent entry into force will trigger the discussions
on the post-2012, second commitment period. It is important that
major emitting countries are fully engaged, including those countries
with increasing energy demand and emissions, such as India and
China—this will be central to achieving the Prime Minister's
goal to cut emissions by 60% by 2050.
Clear and early signals as to the long-term
direction of emission reduction policy will help business to plan
and make the investments necessary to achieve deeper emissions
cuts. In general, policies that stimulate significant and efficient
investment over a long period are most likely to deliver the desired
outcome in the shortest possible time.
The context for UK and EU climate change policies
beyond 2012 must centre on achieving a renewed international consensus
on the scale, direction and timeframe for global emissions reductions.
We believe this should build upon the Kyoto Protocol architecture
in order to build confidence and stability in new low carbon investments.
Lastly we support the Prime Minister's three
pronged approach to climate change under his G8 Presidency. The
Council has conveyed its willingness to help forge a strong business
voice with respect to the low carbon technology agenda the Prime
Minister intends to advance. Investment by energy businesses and
other players, will be essential for delivering outcomes on the
ground.
CONCLUSION
The Council welcomes this opportunity to submit
evidence to the Committee.
We believe that sustained, innovative and effective
action is needed to tackle climate change.
The UK has had an outstanding record to date.
The challenge is now to see this through for the long-term, and
build towards the major carbon reductions that the Royal Commission
on Environmental Pollution has so clearly indicated are needed.
8 October 2004
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