Memorandum submitted by Centrica
INTRODUCTION
1. Centrica welcomes the opportunity to
respond to the Environmental Audit Committee's inquiry on the
Treasury's Pre-Budget Report 2005. Our response focuses on the
Government's current environmental fiscal strategy as it relates
to energy and environment policy, and how we believe it could
be strengthened.
2. Centrica believes that environmental
fiscal strategy can play a significant role in promoting a more
sustainable society by sending appropriate market signals to effect
behavioural change. It is vital, however, that the practical limitations
of fiscal drivers to change are understood. Furthermore, it is
important that environmental fiscal measures work together in
support of specific policy aims, and do not promote contradictory
policy outcomes. Whilst we recognise the significant steps that
have been taken in recent years to utilise fiscal strategy in
support of environmental goals, we believe that there is significant
room for further measures.
EU EMISSIONS TRADING
SCHEME
3. Clarity and stability are equally important
for the EU ETS. Phase II is presenting tougher CO2 reduction targets,
greater price risk as there are fewer free allocations available
and an increased need for new entry to ensure security of supply.
4. Government has been able to alleviate
investor uncertainty by giving early consideration and clarity
on some key issues under Phase II and Centrica welcomes the recent
confirmation that some free allowances will be available for new
entrants in Phase II. We believe it is important that the UK Government
works with the European Commission to achieve tough and stringent
CO2 targets in Phase II National Allocation Plans (NAPs) of all
Member States.
5. Centrica holds that both high standards
in the verification process and the application of penalties where
this has not occurred are crucial to the integrity of the EU ETS.
Therefore, we encourage the UK government to work hard with the
other Member States to ensure this is true for all installations
and so maintain investor confidence in the Scheme.
6. The EU ETS has become a major factor
in investment decisions therefore it is necessary that there is
some clarity on the long-term existence of the EU ETS beyond 2012.
Centrica welcomes the actions the UK government took at Montreal
to begin this process and encourages the UK government to continue
this process so that investments can be made in new generation
capacity in the UK and in CDM and JI projects.
HOUSEHOLD ENERGY
EFFICIENCY
7. The Energy Efficiency Commitment (EEC)
is the principle policy mechanism driving improvements in household
energy efficiency. It requires electricity and gas suppliers to
achieve energy saving targets through promotion of improvements
in domestic energy efficiency to domestic customers by encouraging
and assisting energy savings from the installation of energy efficiency
measures in their homes. Improvements made under this mechanism
are not limited to suppliers' own customers.
8. EEC is a major contributor to Great Britain's
environment and fuel poverty strategies. Energy suppliers met
the targets set in the first stage of the EEC (2002-05), with
86.8 TWh of potential energy savings generated.
9. The Government set a target for the current
phase of EEC (2005-08) that roughly doubled the first stage target.
The current programme has a heavy reliance on the insulation industry.
In 2007, the Government has announced its intention to consult
on the third phase to run from 2008 to 2011.
10. There is currently an inherent conflict
within the existing EEC programme between carbon and social objectives.
EEC is primarily aimed at reducing carbon emissions with a proportion
of the activity going to support the priority group. Fuel poverty
and carbon emission targets may be better served by separating
the fuel poverty/priority element of EEC into a separate component.
This way, resources can be focused and measured on providing real
help to removing household fuel poverty which would require a
different emphasis from reducing their carbon emissions.
11. Suppliers have made a solid start in
delivering against their EEC2 obligation. The transition between
EEC1 and EEC2 was helped enormously by the early decision from
Government on carry over rules. In order to maintain the momentum
built up by industry and deliver a potential step change required
for EEC3, carry over rules need to be in place at least 12 months
prior to the start of EEC3. Consultation therefore on this element
of the EEC3 programme needs to begin this year.
12. Customer apathy to energy efficiency
in general remains a barrier to take up and ultimately to a reduction
in carbon emissions. Currently vulnerable customers such as the
elderly and disabled can qualify for free insulation under the
fuel poverty programmes run by energy suppliers and the Government.
Despite this, take-up is not as strong as would have been expected.
Furthermore, despite significant product subsidies in the able
to pay section of the market, consumer demand could be stronger.
13. There is scope to develop marketing
approaches that capture the consumers' interest and offer another
benefit. Linking energy efficiency to fiscal measures is one way
to do this. A trial launched by British Gas appears to confirm
that linking energy efficiency to local council tax bills is appealing
and potentially cuts through customer apathy.
14. As a market leader in delivering energy
efficiency products and programmes, British Gas has taken an important
step to help tackle this problem through an innovative scheme
which aims to motivate this group to see the benefits of improved
energy efficiency. Working with a number of local authorities,
British Gas has developed an initiative that encourages the take-up
of energy efficiency measures by offering customers a discount
of up to £100 on their council tax bills after having subsidised
cavity wall insulation installed in their home.
15. Although the householder has to invest
on average £175 to install the cavity wall insulation, a
significant discount on the normal retail price, the average annual
savings on energy bills as a result are around £110. Householders
are also given the opportunity to spread the payments for the
cavity wall insulation over two years. The scheme is promoted
through enclosures in council tax bill mailings and the local
press.
16. In addition, under the scheme, householders
are entitled to a "Home Energy Audit" that highlights
other areas where they may be able to save energy in the home,
and potentially reduce their bills. Coupled with the council tax
rebate of up to £100, householders could see their investment
paid back within two years.
17. Not all participating councils have
taken the decision to match British Gas' funding. Customers participating
under the Braintree Council scheme receive a payment of £100
whilst customers in South Hams and South Cambridgeshire receive
a payment of £50. The customer has the option of receiving
the payment as a single payment to use as a rebate against their
annual council tax bill or to spread the payment across 12 direct
debit instalments.
18. The scheme was initially trialled at
Braintree Council, Essex in 2004 and the programme was extended
to South Cambridgeshire council in March and South Hams Council
in April 2005. Taunton Deane Borough Council and Conwy are the
latest Councils to come on board British Gas is currently in discussion
with around many other local authorities with a view to extending
the programme and are confident of extending the scheme further
in 2006.
19. We believe that this scheme offers real
benefits to householders by offering both lower energy and council
tax bills and more energy efficient homes. So far the response
to the scheme has been encouraging, demonstrating that there is
an appetite for energy efficiency improvements that are linked
to fiscal incentives.
20. Linking the energy rating of a property
to fiscal incentives could also be achieved by reducing stamp
duty at the sale of a property that is compliant with energy efficiency
recommendations. This should recognise past work and not only
encourage the current owner to make home improvements. Thus the
energy rating of a property would become an important asset in
a property. This could mirror the minimum energy efficiency rating
requirement for new buildings.
21. Micro CHP is an important carbon reducing
technology which is reaching a stage where it can now be manufactured
to a high reliable standard at an acceptable size and at reasonable
cost. However, pump priming of this market is important if consumers
are to be persuaded to buy them and help the technology achieve
critical mass.
22. We support the decision by the government
to reduce VAT on grant funded micro CHP as a move which could
offer reduction in household energy bills. However for these savings
to be significant it is vital that this reduction should be available
for one-off domestic customers and on the total installation of
the micro CHP boiler and not just the product. In addition, micro
CHP should be given the equivalent grant funding on start up as
other energy efficiency products via the innovation uplift in
EEC.
RENEWABLES OBLIGATION
23. Centrica believes that the Renewables
Obligation has provided a strong stimulus to the development of
renewable generation in the UK and that the period to 2015 will
result in substantial investment in new developments. We welcome
the Government's commitment to maintain investor confidence which
has ensured the success of the Renewables Obligation to date.
24. During the 2005-06 review of the Renewables
Obligation, Centrica has expressed the view that early clarification
on targets beyond 2015-16 is critically important in providing
greater investor certainty for longer-term renewable technologies.
25. Financing horizons are important for
the development of all renewables projects. Projects that are
financed solely by equity investors are normally evaluated over
approximately a 20 year life, and need to have visibility of future
income streams (such as ROC price curves) over this period for
meaningful investment decisions to be made. Meanwhile, debt finance
projects require a 10 to 12 year period over which to finance
their investment.
26. Both of these investment timelines extend
beyond the current extent of the Renewable Obligation (2015-16).
Clearly, it is essential for the Obligation levels beyond this
date to be clarified at the earliest opportunity to provide visibility
of targets going forward, and thus greater investment certainty.
27. Overall, the RO seeks to generate 15.4%
of the UK's electricity requirement from renewable sources by
2015-16. This objective is a key element of the government's climate
change strategy but it cannot be achieved without the widespread
development of higher cost renewable technologies, in particular,
offshore wind.
28. Round 2 offshore wind projects are currently
faced with a substantial funding shortfall. Investors will only
commit to projects if the financial returns are attractive and
therefore if government is to ensure the development of these
key projects and the delivery of the RO objective, all practical
options must be considered for bridging the funding gap for offshore
wind technology.
29. We believe that additional support for
high cost technologies should come from outside the RO and the
industry has put forward several suggestions for fiscal support
(including tax allowances and capital grants) and other initiatives
to improve the financial case. Experience and learning gained
from early projects will help deliver the cost synergies and contracting
strategies that will make offshore wind technology competitive.
February 2006
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