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 2006. 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. Centrica is strongly supportive of the
EUETS. We believe it remains the major mechanism to reduce emissions
across the EU, and are in favour of cap and trade schemes as a
preferred market mechanism.
4. Centrica welcomes the UK Phase II cut
in emissions at the top end of the previously published range—8mt
of carbon (29mt CO2) against a Business As Usual (BAU) projection.
The Commission did not ask for reductions in the UK NAP and we
believe this reflects the strong leadership the UK government
has taken on the climate change agenda to date. We are supportive
of this approach.
5. If left unchecked, the combined original
EU NAP submissions would not have brought about the necessary
shortfall in allowances to create a credible carbon market. Centrica
is therefore strongly supportive of the European Commission taking
a strong line on other country NAPs thus far.
6. However, we are concerned that some Member
States are challenging the Commission's decisions and that there
remains a lack of clarity on some NAPs. For this reason we believe
it is important to maintain pressure on the Commission to ensure
Phase II sees a significant shortfall, and that substantial and
enduring emission reductions result. The significant cuts in submitted
NAPs requested by the Commission reflects in part the over-allocation
in Phase I, and, if over-allocation can be eradicated this time,
far more moderate phase-on-phase cuts will be required in future
phases.
7. The free allocation of allowances to
sectors which recover the cost of allowances via their received
price (primarily the power generation sector) remains the Scheme's
fundamental flaw. Centrica welcomes the introduction of auctioning
in the UK under Phase II, but would have preferred to see the
maximum 10% auctioning allowed under the scheme, compared to 7%
announced. Similarly it is disappointing that there hasn't been
greater use of the auctioning provision by other member states.
8. We are concerned with the proposed restrictions
on the use of project credits. The UK is becoming a world leader
in the financing of climate change services to the developing
world. Project credits kick-start CO2 reductions in developing
world countries, support innovation in UK business and allow reductions
to be made at lowest cost. We understand, however, that a balance
needs to be struck between effort at home and abroad. We believe
that the ability to use project credits for compliance should
be restricted to sectors being asked to make cuts, rather than
spread across all participants in the scheme equally.
9. Looking forward, the most fundamental
issue to be addressed is clarifying the future of the scheme beyond
2012. We believe that it is sufficient to clarify two key points.
Firstly, that the scheme is here to stay, until at least 2040,
and secondly, that each phase of the scheme will tighten the cap
on the level of total emissions.
10. The UK government should therefore continue
to strive for early EU agreement on the continuation of the scheme
post 2012. Should it prove impossible to reach the necessary international
agreement at an early stage, however, we favour unilateral action
to replicate on an interim basis the expected effect of Phase
III. We are not in favour of interventionist tools including carbon
contracts, and believe these will be far less efficient in providing
long-term carbon support without distortive effects.
11. In future phases, Centrica would like
to see maximum use of auctioning to mitigate the adverse impacts
of free allocation and believes that full permissible auctioning
should be focused on the power sector at least. Ideally we would
like to see the elimination of any free allocation, although we
recognise that some non-ESI sectors may need protection where
they are facing international competitors not similarly carbon-constrained.
12. Where practical and material, we are
supportive of broadening the scheme to include other sectors and
gases. It is vital that the increased level of allowances as a
result of broadening the scheme is robustly determined to ensure
that the over-allocation seen in the first year of Phase 1 is
not repeated. Consideration could be given to running "parallel"
schemes for new sectors for an initial period.
13. Significant harmonisation across the
EU would help to remove the potential for any sector within an
individual country to become uncompetitive with respect to its
EU counterparts. Potential areas include accurate allocation,
use of project credits, sector coverage and key definitions including
that of installations covered by the scheme.
14. In order to preserve and extend the
emissions reduction investment streams seen under the Kyoto flexible
mechanisms, it is vital that both the UK and Commission continue
to recognise the need for the EU ETS to link to other carbon markets.
The current restrictions on the use of project credits should
be removed for post 2012 periods.
RENEWABLES OBLIGATION
15. Centrica has recently submitted a response
to the Government's preliminary consultation on reform of the
Renewables Obligation.
16. Overall, the RO seeks to generate 15.4%
of the UK's electricity requirement from renewable sources by
2015-16, with an aspirational target of 20% by 2020. 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.
17. 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.
18. Our preference is to fund higher cost
technologies, including Offshore Wind, outside an unchanged RO,
but if the additional funding that this would require cannot be
provided, the government proposals to introduce banding represent
the next best solution.
19. Centrica therefore broadly welcomes
the proposals that Government has brought forward to band the
RO as they have the potential to result in the deployment of a
range of renewable technologies, including offshore wind. We believe
that in general the proposals are workable and that with some
modification can realise a significant upturn in the generation
of renewable electricity.
20. Having reviewed all the proposals to
improve support for emerging renewable technologies, Centrica
believes that banding is the only option that has the potential
to deliver significant volumes of renewable generation with minimum
disruption to the RO. However, we believe that if the proposals
are to be successful government must also:
— reverse its intent to remove
the RPI escalator on the ROC buyout price,
— set targets based on expected
ROCs rather than expected generation; and
— overturn the commitment to net
neutrality.
21. If banding is introduced, we remain
convinced that emerging technologies (such as wave and tidal)
should be funded outside the RO until the costs and risks are
fully understood. Funding for this could be delivered from the
NFFO surplus. This is money that is taken from consumers to fund
the RO, but is returned to Treasury via the NFPA auctions. Centrica
does not believe that this provides value for money for consumers
and believes there is a compelling case for the surplus to be
recycled back into the renewables industry.
22. Centrica also believes that a unified
approach for England and Wales, Scotland, and Northern Ireland
is essential to reduce complexity across the RO and to prevent
cross border gaming and arbitrage. The distortions that can occur
when this unified approach is abandoned were demonstrated over
several years in the RO before the England and Wales and Scottish
buyout funds were amalgamated.
23. Finally, an effective RO can only be
achieved if the planning consent and grid connection issues are
addressed in tandem with the funding mechanism. Without efficient
approval procedures any proposed funding arrangement is likely
to struggle. In relation to offshore wind, grid socialisation
is a key issue that must be resolved if the technology is to reach
maturity.
CLEAN COAL
TECHNOLOGY
24. Centrica has recently acquired an option
to participate in what would be the UK's first complete clean
coal power generation project. We are now at the start of a two
year development phase to take this project through the development
and consenting phase through to a firm investment decision in
2008.
25. If progressed the project will combine
the construction of a new 800MW Integrated Gasification Combined
Cycle (IGCC) clean coal power station in Teesside which will supply
electricity to British Gas customers, and Carbon Capture and Storage
(CCS) capabilities to enable CO2 emissions to be captured and
stored in the North Sea in saline aquifers or depleting oil fields
for the purpose of Enhanced Oil Recovery. If we go ahead, the
plant could be operating in 2012-13 (CCGT operation) followed
by CCS operation in 2013-14.
26. In order to be financially viable, all
clean coal projects are likely to need the combination of a visible
forward carbon price as well as additional government support.
27. Government has already indicated that
it is likely to give initial support for one or more CCS demonstration
projects. The Chancellor's pre-budget report delayed a decision
on how much support to provide, and in what manner, for another
year in order to continue discussions with industry. We believe
that, when the government is developing criteria for which project(s)
to support, priority should be given to projects that provide
full CCS rather than just "capture ready" and should
be targeted on technologies that are most likely to be suitable
for wider deployment at least cost.
28. Whilst we are expecting to continue
discussions with government over the coming months around the
nature and level of support we believe is necessary for our project
to become viable, support could include enhanced capital allowances,
capital support, and changes to the fiscal treatment of incremental
oil produced under enhanced oil recovery.
29. We welcome the commitment to date shown
by the government for this technology, and in particular the Treasury
consultation on barriers to deployment of CCS and the commitment
to further consultation and cost assessment in the Chancellor's
pre-budget report.
30. We also welcome the amendment in November
2006 to the London Convention allowing the use of offshore geological
CO2 storage from CO2 capture processes, and look forward to a
similar amendment of the OSPAR Treaty later this year.
31. At a national level, the UK will need
to develop a regulatory regime for developing storage sites on
the UKCS. In addition, CCS will need to be brought into the Kyoto
Process and EUETS.
MICROGENERATION
32. The microgeneration industry is in the
relatively early stages of market development, with a range of
technologies at different stages. Some are poised for mass market
deployment, some are still in development stage. Some of these
technologies will reach mass market production which will help
reduce the costs of the technologies but fiscal incentives such
as capital grants or VAT reductions/exemptions on technologies
will also help stimulate demand.
33. Centrica is actively exploring a range
of microgeneration technologies including domestic combined heat
and power, wind turbines and solar thermal panels. We are working
with Microgen to develop a domestic combined heat and power boiler
for UK homes. These developments have the potential to significantly
change the type of boilers we use for our heating and hot water
in the UK.
34. We also have a relationship with Ceres
Power to develop the world's first mass-market, household boiler
powered by fuel cells. Unlike many fuel cells, the Ceres fuel
cell can work on natural gas as well as hydrogen, making the technology
immediately accessible by UK households with a gas central heating
system.
35. Micro CHP is an important carbon reducing
technology which is advancing towards 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.
36. Centrica does not believe, however,
that a Renewable Heat Obligation is the most appropriate mechanism
to support renewable heat. Measures which should be considered
include:
VAT reductions
37. We support the decision by the Government
to reduce VAT on grant funded microCHP 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 microCHP boiler and not just the product. In addition, microCHP
should be given the equivalent grant funding on start up as other
energy efficiency products such as photovoltaics.
Grant funding
38. Interaction with the Low Carbon Building
Programme (LCBP) is currently a barrier for inclusion in EEC.
Current rules restrict EEC funding potential for renewable technologies,
and, in the future, microgeneration. Under the current rules the
energy saving attributable to EEC is in direct relation to the
contribution made versus the LCBP grant contribution. Removing
this restriction so that the entire savings are attributed to
EEC would increase EEC funding in this sector and further support
the growth of renewables/microgeneration technologies. The funds
available from the three year EEC3 programme could therefore,
if used in this way, make these products more attractive and attainable
through maintaining consumer interest.
EEC uplift
39. We would urge that that all categories
of micro renewable and other microgeneration technologies qualify
for an innovation uplift under EEC, something currently only afforded
to MicroCHP. The development and growth of these products over
the course of the EEC3 programme is essential to the success of
this and future programmes. An uplift in the order of 50%, would
encourage suppliers to invest in bringing forward these technologies
earlier. To further complement this uplift, we would suggest,
as stated earlier, that the current practice of restricting energy
savings when interacting with the Low Carbon Building programme
is removed. The framework of EEC should be flexible enough to
allow other product categories to be added if necessary.
40. Microgeneration technologies are going
to be essential during EEC3 but also particularly post EEC3 if
they are to develop and fulfil mass market potential in the longer
term. These products will therefore need additional support, and
we see EEC3 as being one of the key ways of achieving this. The
inclusion of microgeneration technologies, including renewable
heat technologies, will incentivise investment, help suppliers
to reduce their reliance on the insulation sector, and also deliver
carbon savings in an area where early indications appear to suggest
some consumers are becoming increasingly aware/engaged.
41. In addition, we believe that the structure
of EEC3 should be such that merging microgeneration technologies
can be easily introduced into the programme.
HOUSEHOLD ENERGY
EFFICIENCY
42. 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.
43. Government is currently consulting on
changes to the next phase of EEC, and Centrica has responded to
the preliminary consultation. We believe that EEC3 must provide
an environment where new approaches and technologies that contribute
to demand reduction are nurtured and embedded. To this end, we
welcome the proposed inclusion of microgeneration, feedback devices,
and behavioural changes within the product/measure mix.
44. It is critical that there is a realistic
balance between supporting the Government's carbon targets and
delivering carbon reductions in the most cost efficient way. Implicit
within the decision making about an increase in the size of the
EEC3 target is the consequential impact on consumer bills, and
Government must take full account of this in their final decision.
45. It is equally important that the size
and scale of the next phase of EEC is achievable, and that this
is agreed with both energy suppliers and the energy efficiency
industry. This should take full account of factors such as product
range, industry capacity, market potential, changes in market
dynamics and Building Regulations. Additionally, the target must
be achievable within the three years of the obligation, and should
not exert undue pressure on cost efficiencies. It is important
that suppliers continue to be incentivised to invest in delivering
carbon savings as cost effectively as possible.
46. As in previous programmes the government
is proposing that the entire risk, and cost, associated with the
delivery of EEC lies with the energy suppliers and their customers.
The Government's proposal to increase the target by between 50%
and 100% will take the programme to the absolute extremes of,
and possibly beyond, what is physically achievable, thereby increasing
stakeholder risk. We strongly believe therefore that supplier
(and customer) risk and liability from the EEC programme should
be capped, and that this will provide greater certainty.
47. In the current environment there is
undoubtedly greater awareness and, to a lesser degree, increased
participation of consumers in energy efficiency. Over the last
eight months, 1.5 million households have completed the British
Gas Energy Savers Report, which enables households to undertake
an energy efficiency survey of their own property. Whilst this
is a phenomenal response, and one which suggests consumers are
interested in, and ready, to change behaviour, the underlying
growth in our energy efficiency product sales has been modest.
This may well be a consequence of consumers understanding through
participation in the survey the straightforward, simple, measures
they can undertake to reduce their consumption (ie turning appliances
off standby etc). It is therefore important, and appropriate,
that the recognition of behavioural change programmes and initiatives
are fully incorporated within the EEC mechanism.
48. A key aspect of the transition to EEC3
is to ensure that, as a minimum, the EEC2 momentum is maintained.
Innovative and imaginative solutions will be needed, supported
by government, suppliers, and other stakeholders, alike.
49. There are ways of further increasing
customer interest in this area. The success of the British Gas
Council Tax Rebate scheme has clearly demonstrated the value of
fiscal incentives in driving consumer engagement in energy efficiency.
We strongly support the view that the Government should build
upon the success of our Council Tax Rebate Scheme by introducing
a range of fiscal incentives, for example, Council Tax, Stamp
Duty, Personal tax Allowances, and VAT equalisation, to stimulate
increased consumer pull for energy efficiency solutions.
50. EEC should, first and foremost, focus
on delivering improved energy efficiency. The root causes of fuel
poverty are complex, and holistic solutions, broader than energy
efficiency, are needed. We believe that the co-existence of both
carbon and social targets within the same mechanism restricts
suppliers' ability to properly address fuel poverty, which requires
more innovative and complete solutions. We therefore believe that
EEC has to be restructured to facilitate the delivery of both
energy efficiency and "social" measures to those homes
that suffer the consequences of fuel poverty, whilst not increasing
the overall cost of the total programme.
51. The proposed heavy reliance on insulation
brings with it an increased high risk for the programme. Whilst
this sector has managed to deliver moderate increases in capacity
over the EEC2 period, the incremental growth needed for EEC3 is,
we believe, significantly beyond the existing capacity, and the
growth capability of the sector.
52. We must develop a broad and diverse
product portfolio if we are to achieve the EEC3 goals. Centrica
therefore very much welcome the inclusion of microgeneration,
feedback devices, and the inclusion of services which influence
behavioural change, within the product mix. However we need to
find simple and easy ways to administer the processes for accrediting
these new services technologies, and incentivising their growth,
by uplifting the associated energy savings.
53. The current rules of the EEC programme
can, in some instances, act as a barrier to entry for innovation.
A more streamlined process, with fewer restrictions, is needed.
Whilst we recognise that this may introduce greater uncertainty,
we also believe that it is possible to manage the impact. Essentially,
the EEC mechanism should embrace new ideas, not create barriers.
ENVIRONMENTAL REPORTING
REQUIREMENTS
54. The abolition of the proposed Operating
and Financial Review has not significantly altered companies'
environmental reporting requirements. Centrica's public reporting
on environmental matters encompasses both mandatory and voluntary
aspects.
55. The Companies' Bill requires publicly-listed
companies to publish an annual business review setting out their
approach to managing significant non-financial matters including
the environment, their employees and the community. We are establishing
non-financial key performance indicators to enable year-on-year
comparison. Centrica will therefore continue to take account of
relevant non-financial matters in both our Annual Report and Accounts
and our Annual Corporate Responsibility Report.
56. Centrica's gas production and power
generation assets must comply with the Integrated Pollution and
Prevent Control Directive and, as such, we report publicly on
our performance in relation to the Directive. The Group is also
required to disclose the environmental (carbon emissions) performance
of our gas production and power generation plants under the requirements
of the EU Emissions Trading Scheme. The Environmental Management
Systems of all Centrica's upstream assets are accredited to the
ISO 14001 standard, which is subject to annual audit.
57. Stakeholder expectations of companies'
environmental performance meanwhile has intensified significantly
over the past year, largely due to increased public awareness
of climate change. At the same time, the appetite for public reporting
in this area has increased, with companies being closely scrutinised
for underperformance and/or lack of action. Given this trend,
enlightened companies recognise the commercial value in going
beyond compliance where appropriate.
58. Centrica has published a standalone
corporate responsibility (CR) report for the past four years.
We report our performance across a number of key impact areas
including "environment".
59. We report our CR performance in line
with the Global Reporting Initiative—the international standard
for sustainability reporting. In addition, we make public disclosures
to research organisations working on behalf of Socially Responsible
Investment (SRI) Funds. Centrica is a constituent of the Dow Jones
Sustainability Index and FTSE4Good Indices. Whilst these are the
most recognised indices Centrica also provides sustainability
performance information to a number of other SRI Funds and to
international research projects such as the Carbon Disclosure
Project.
January 2007
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