Memorandum submitted by the UK Business
Council for Sustainable Energy
EXECUTIVE SUMMARY
The UK's Energy White Paper set out a new vision
for the Government's energy strategy—one that sought to
put climate change at the heart of policy.
We now believe a real step change is needed
both in the policy process and in the actual implementation, in
order to enable the practical delivery of a low carbon economy.
The direction set by the Energy White Paper
towards 2050 remains sound. The market structure, supported by
an appropriate policy framework can "keep the lights on"
while tackling climate change at competitive costs to the consumer.
What is needed is a reinvigorated policy approach on all levels:
energy efficiency, renewables, CHP and market-based instruments
such as emissions trading.
1. The UK Business Council for Sustainable
Energy (UKBCSE) welcomes the Committee's inquiry, and the opportunity
to comment on the important issues examined.
2. The 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).[371]
We are working to build a progressive consensus on many of the
issues shaping the development of sustainable energy in the UK.
3. The focus of this inquiry is particularly
welcome given the increasing realisation that climate change is
one of the most challenging and serious long-term problems we
face. Prior to the G8 summit, the international scientific community
gave the strong message that "the scientific understanding
of climate change is now sufficiently clear to justify nations
taking prompt action."[372]
The Council fully supports the necessity to reduce CO2
emissions by at least 60% by 2050 if we are to genuinely tackle
climate change.
4. Virtually all of the existing electricity
generation plant and much of the transmission and distribution
network that exists today will not exist in 2050. Existing power
plants will be replaced, and transmission and distribution infrastructure
for electricity and gas will be renewed and rebuilt. Within this
lies the opportunity to set the UK on the path to a low-carbon
future. The policy framework that Government sets, and the signals
this sends, will inform the investment decisions made by Industry.
5. We believe that the priorities identified
in the Government's Energy White Paper (2003) including energy
efficiency, renewables, combined heat and power, and emissions
trading can deliver the low-carbon economy anticipated. However,
what is needed is consolidation and renewed vigour across all
of theses policy areas if they are to deliver.
ENERGY EFFICIENCY
6. As the Energy White Paper stated, "energy
efficiency is likely to be the cheapest and safest way of addressing
all four objectives [of the White Paper]."[373]
Now, with the increasing attention on fuel prices, security of
energy supply, and economic productivity, the time is right to
move this agenda forward. As the numbers of household appliances
increases, irrespective of their efficiency, focus also needs
to also turn towards reducing energy demand. As the White Paper
also stated "the cheapest, cleanest and safest way of addressing
our energy policy objectives is to use less energy . . . reducing
demand puts less pressure on energy supplies."[374]
7. The Council believes that reducing energy
demand, and improving energy efficiency must remain central to
the Government's energy policy. Energy is not simply a commodity
to be consumed but a service that provides warmth and light. We
believe there remains considerable scope for the development of
commercial propositions for energy services that could provide
significant opportunities for demand reduction. Similarly, new
technologies such as microgeneration and smart metering could
play a stronger role in reducing household energy consumption,
while there remains significant potential for energy efficiency
measures such as loft and cavity wall insulation.
8. The Council believes that the right incentive
structure and regulatory framework could create extensive opportunities
for energy efficiency and demand reduction that would address
large elements of the climate change and security of supply agenda.
To this end the Council has convened a working group specifically
to address this and develop new thinking on taking forward the
energy efficiency agenda from the point of view of the energy
suppliers. However, this and other initiatives will only succeed
if they are supported by a reinvigorated approach from Government.
RENEWABLE ENERGY
9. Even in the most ambitious energy efficiency
and energy reduction scenarios, electricity and heat will still
need to be produced. As this memorandum highlights, much of the
infrastructure for generation and transmission in 2050 has yet
to be built, so there remains an important opportunity today to
set the UK on a less carbon intensive trajectory to the future.
10. The Council is confident that in the
future, renewable energy will play a very significant role in
electricity generation. The Renewables Obligation (RO) is successfully
enabling a progressive increase in investment in new renewable
generation. Industry is already investing on average £700
million in renewable energy per year, which is expected to rise
to £1 billion per annum by 2010.[375]
Although this investment is most apparent with onshore wind, we
can clearly see much greater generation from offshore wind in
the medium-term. Similarly, investments in tidal and wave are
being made that would not be getting the same support were it
not for the RO.
11. We believe that the target of supplying
15% of UK electricity from renewables by 2015 is achievable. However,
the broad integrity of the RO needs to be maintained, such that
any changes are well focussed and used to reinforce other important
Government targets such as those for energy efficiency and CHP.
The Council also believes that, provided the market conditions
are are right, it is quite probable that the proportion of renewables
in the energy mix beyond 2015 could significantly exceed 15%,
particularly as newer technologies become more cost-effective.
12. In order to ensure that renewable technologies
can develop to their full potential, the Government must be focussed
on removing some of the barriers that are preventing greater uptake.
With offshore wind there are a number of regulatory issues with
respect to transmission that need more policy focus, especially
if the anticipated 4 GW of generation from offshore wind is to
be achieved from 2008 onwards. Similarly, microgeneration and
decentralised generation face a number of planning, regulatory
and policy barriers that must be addressed if they are to fully
contribute to the renewable energy mix.
COMBINED HEAT
AND POWER
(CHP)
13. Combined Heat and Power (CHP) remains
the Government's unrealised low carbon technology. UK CHP use
has remained at approximately 6% of total electricity supplied
for the past 10 years. This is well below the EU average and compares
particularly poorly with other Members States who have achieved
levels as high as 40%. The scope for CHP in the UK is large: current
CHP capacity is around 6 GW however Government has recognised
a potential for up to five times this amount across industrial,
commercial and residential applications.
14. CHP provides one of the most cost-effective
carbon savings solution across all sectors of the UK economy.
For many energy-users CHP is the single measure that offers the
most significant opportunity to reduce energy costs and improve
environmental performance. CHP, operating on over 1,500 schemes
across the country, already contributes significantly to the reduction
of UK carbon emissions delivering savings of over 4-5 million
tonnes of carbon annually.
15. However, despite all the benefits of
CHP, the changes Government has introduced to the energy market
(in particular, the introduction of NETA in 2001) has caused the
virtual collapse of the CHP industry over the past five years.
The most important component in achieving the Government's 2010
10GWe CHP target, industrial CHP projects, is at a standstill.
16. The Council believes that the Government
must radically rethink current policies towards CHP and reinvigorate
its support for this proven, cost-effective and clean technology
in order to not only help industry to reduce energy costs, but
also to meet its security of supply and climate change ambitions.
MARKET-BASED
MECHANISMS
17. An ambitious energy efficiency and energy
reduction strategy, continued support to renewables, and reinvigorated
policies for CHP would dramatically reduce carbon emissions, bolster
security of supply, and potentially offer reduced energy costs.
In the context of progress in these policy areas, the need for
new generation capacity will become more apparent. In this case,
Council believes that the competitive market is best placed to
deliver that new generating capacity.
18. The market is can be an efficient means
of delivering of secure, sustainable and affordable energy to
consumers. Government then needs to reinforce this with appropriate
policy interventions. The Council would endorse the comments made
by the Energy Minister Malcolm Wicks MP on 25 May 2005, that:
"we do not believe Government is best
equipped to decide the composition of the fuel mix. We prefer
to create a market framework, reinforced by long-term policy measures
(such as the Renewables Obligation) which will give investors,
business and consumers the right incentives to find the balance
that will most effectively meet our overall goals."[376]
19. A number of significant uncertainties
still surround nuclear generation that go some way towards explaining
why the market has not decided to invest in new nuclear generation
capacity. These include public acceptability; AGR life-extension;
nuclear licensing; access to existing nuclear sites; planning,
decommissioning and longer term waste management. An energy review
may choose to address some of these, along with considering new
measures to revitalise delivery of the Governments CHP target,
strengthened action on energy efficiency, and, as appropriate
addressing barriers to new investment in microgeneration and offshore
wind. All of this will enable players in the market to make a
wider range of investment choices.
20. In order to achieve agreed policy objectives,
such as the reduction of carbon emissions, enhanced security of
supply and so on, we welcome the role of policy instruments that
are compatible with the competitive market. There are a range
of policies being used to send signals to the energy industry
in order to influence investment decisions such as the Renewables
Obligation. Also, most notably, the EU Emissions Trading Scheme
(EU ETS) set up this year has now put a price on carbon. The likely
future cost of carbon is now a key factor in investment decisions
in new power generation, and the Council welcomes and supports
the EU ETS for sending a significant signal to Industry that has
the potential to influence future investment decisions.
21. However, beyond 2012 there is a policy
vacuum regarding the EU ETS. A decision to invest in new generating
capacity is based on an investment lifetime of 20-30 years. Therefore,
before investment decisions are made, investors need to be reasonably
confident in the long-term stability of the policy framework in
which they operate. In order to be fully effective, and to truly
internalise the cost of carbon, the Government needs to provide
some certainty as to the long-term future of the EU ETS. We also
believe there is merit, in a long-term, science-based, EU-wide
cap, which would ensure that overall emissions from regulated
sectors are reduced on an agreed and appropriate trajectory.
THE INSTITUTIONAL
FRAMEWORK
22. The Council believes that the Government's
approach set out in the Energy White Paper, ensuring customers
receive secure, affordable and sustainable energy through a competitive
market can deliver the necessary carbon reductions to 2050. We
fully support these objectives and the direction set out in the
Energy White Paper. What are needed, however, are bolder and more
ambitious policies to reinvigorate that approach. We believe one
impediment to delivery lies in the current institutional arrangements.
23. The split of energy responsibilities
between DTI and DEFRA, the additional roles of ODPM, HM Treasury,
and within the broader climate change agenda, the Department for
Transport, gives the impression of fragmentation at a political
and consequently policy level. We welcome the recently created
Cabinet Committee on Energy and the Environment as a step towards
delivering this leadership and trust that the new focus will bring
with it a unity of purpose across Government departments and their
delivery agencies.
24. However, we believe there still remains
scope for new thinking on the institutional framework. We note
that the Government's Performance and Innovation Unit Energy Review
(2002) proposed that for the long-term the Government should look
to bring together responsibilities for energy, transport and climate
change policy in one department.[377]
25. In Australia, the institutional structure
for policy making is broadly similar to the UK, and energy policy
is largely a matter for the States. Both New South Wales and Victoria
have evolved some innovative arrangements for policy creation
and delivery. In the early 1990's the New South Wales Government
created the statutory Sustainable Energy Development Authority.
In 2004 this was merged into a new Government Department to create
the Department of Energy, Utilities and Sustainability with its
own Cabinet level Minister. In Victoria, the statutory Sustainable
Energy Authority Victoria (SEAV) was created from two predecessor
bodies in the mid-1990's. With its own Board, it reports to the
Deputy Premier and Minister for Sustainability and Environment
as well as the Energy Minster. It has an explicit policy role
and delivers a range of programme activity concerning energy efficiency,
renewable and CHP as well as fuel poverty. With both SEDA (as
was) and SEAV, traditional departments have found their policy
role occasionally tense, but Ministers have welcomed the focused
policy interventions it gives them.
CONCLUSION
26. The market structure, supported by an
appropriate policy framework can "keep the lights on"
while tackling climate change at competitive costs to the consumer.
What is needed is a reinvigorated policy approach on all levels:
energy efficiency, renewables, CHP and market-based instruments
such as emissions trading. The UK's Energy White Paper set out
the Government's vision, putting climate change at the heart of
the energy debate. We now believe a step change is needed in actual
policy drive and implementation, to enable the practical delivery
of a low carbon economy.
September 2005
371 UKBCSE members are: Centrica, EDF Energy, E.ON
UK, National Grid plc, RWE npower, Scottish Power, Scottish and
Southern Energy, and United Utilities. Back
372
"Joint Science Academies Statement: global response to
climate change", Royal Society, June 2005. Back
373
"Energy White Paper: Our Energy Future-creating a low carbon
economy", DTI, 2003. Back
374
"Energy White Paper: Our Energy Future-creating a low carbon
economy", DTI, 2003. Back
375
"Renewable Energy", National Audit Office, 2005. Back
376
http://www.dti.gov.uk/ministers/speeches/wicks250505.html Back
377
"The Energy Review", PIU, 2002. Back
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