Memorandum submitted by EDF Energy
SUMMARY
EDF Energy is one of the UK's largest energy
companies with activities throughout the energy chain. Our interests
include coal and gas-fired electricity generation, combined heat
and power plants, electricity networks and energy supply to end
users. We have over five million electricity and gas customer
accounts in the UK, including both residential and business users.
Climate change is the biggest challenge facing
the world today. EDF Energy is fully committed to tackling climate
change. We support the UK Government's ambition to move progressively
to a low carbon economy and to play a leading role in the global
effort to address climate change. In our view, the scientific
evidence presented to date justifies action to mitigate climate
change by reducing greenhouse gas emissions.
The Climate Change Levy (CCL) and Climate Change
Agreements (CCA) were the first major climate change policies
to address carbon emissions from energy-intensive industries within
the UK. They have played an important role in focusing the attention
of energy-intensive businesses on energy efficiency. Climate change
policy has evolved since their introduction, in particular, with
the introduction of the EU Emissions Trading Scheme (EU ETS) and
with the draft Climate Change Bill being progressed in Parliament.
The underlying principles supporting a future regulatory framework
should be that policies covering industrial sectors are consistent,
cap emissions from these sectors and provide business with flexibility
to meet the emissions cap in a cost-effective manner.
This is an opportune time to review these policy
measures. We believe that CCAs should not be renegotiated after
2010 and that CCL should be significantly reformed and focused
on energy supplies where there is an absence of robust carbon
pricing. This will ensure that climate change policy measures
are better aligned with the approach being undertaken in the draft
Climate Change Bill and are streamlined to avoid overlap. Below
is EDF Energy's reform proposal.
EDF ENERGY PROPOSAL
Climate Change Agreements should, in our view,
be concluded at the end of 2010 (milestone 5). The cessation of
CCAs will result in both direct and indirect CO2 emissions from
these sectors being captured under existing and proposed cap and
trade schemes. Large scale direct emissions are already covered
by the EU ETS and indirect emissions and small-scale direct emissions
will be captured under Carbon Reduction Commitment (CRC). The
provision of absolute caps for a much higher proportion of industrial
emissions than are capped at present will provide greater environmental
integrity.
The Climate Change Levy should also be reformed
to focus on CO2 emissions to ensure that there is a single robust
price of carbon integrated into energy costs, with:
— CCL on electricity being set to zero,
as the cost of carbon is already incorporated into wholesale electricity
prices via EU ETS. While the CO2 price signal in electricity prices
for tariff customers is currently somewhat weakened by a combination
of retail market competition and a significant proportion of free
allocation of carbon allowances to the electricity power sector,
it will become much sharper once the electricity sector moves
to full auctioning of allowances after 2012; and
— CCL on gas remaining based on its
associated CO2 emissions until an alternative robust price signal
exists. The removal of revenue recycling from CRC or the inclusion
of a carbon price in wholesale gas prices, for example via EU
ETS, would provide a sufficient carbon price signal to allow CCL
to be set to zero for gas.
Setting CCL to zero on electricity will have
little impact on investment in low carbon generation. Investment
decisions for new renewable electricity or CHP assets already
factor in the risk that the CCL exemption mechanism may not exist
in the future. The key support mechanism for renewable generation
developments should continue to be the Renewables Obligation.
If necessary, Government can review the need for a new more effective
support mechanism to promote the uptake of large, carbon efficient,
good quality CHP.
ANSWERS TO
INQUIRY QUESTIONS
1. Is it right for the Levy and Agreements
to target energy use, or should they be reformed to target carbon
emissions directly? If so, how should they be changed?
Climate Change Levy
1.1 CCL is effectively a tax on the use
of energy, based on the energy content of fuels consumed. We believe
it should be significantly reformed to focus on CO2 emissions
and be focused on energy supplies where there is an absence of
robust carbon pricing. This supports Government's primary environmental
objective of CO2 emission reduction and the mitigation of climate
change.
1.2 Currently business electricity users
pay twice for the cost of carbon, via CCL and via the EU ETS price
of carbon that is integrated into the wholesale electricity market
price. Refocusing CCL to become a tax on CO2 emissions would create
an opportunity to remove this duplication of the cost of carbon
in electricity prices by setting the CCL rate to zero for electricity.
1.3 CCL on gas should remain based on CO2
emissions until a robust price signal is provided through either
EU ETS or CRC. Large users currently pay CCL and have to surrender
allowances against their direct emissions. However, energy-intensive
users are provided with "business-as-usual" free allocations
and are therefore not directly exposed to EU ETS carbon prices
associated with their gas consumption. Direct emissions associated
with smaller gas users will be captured under CRC but they will
not be exposed to the price of carbon as a result of the proposed
revenue recycling mechanisms. CCL on gas therefore remains a means
of providing a carbon price signal to gas consumers.
1.4 The removal of revenue recycling from
CRC, or the removal of free EU ETS allocations to the energy intensive
sector, or the inclusion of a carbon price in wholesale gas prices
could provide sufficient price signal to allow CCL for gas to
be set to zero in the future.
Climate Change Agreements
1.5 We believe that CCAs should be concluded
at the end of 2010 (milestone 5). This would result in both direct
and indirect CO2 emissions from these sectors being captured under
existing and proposed cap and trade schemes. Large scale direct
emissions are already covered by the EU ETS and indirect emissions
and small-scale direct emissions would be captured under Carbon
Reduction Commitment (CRC) into which emissions will fall by default
under the current proposal for eligibility criteria in CRC.
1.6 EU ETS is a more appropriate mechanism
for managing emissions from large-scale direct emitters than any
future UK-only cap-and-trade scheme, as large emission swings
are better managed within a large, liquid emissions market and
could be potentially damaging to other participants in a smaller
UK-only market.
1.7 The introduction of the EU ETS for energy-intensive
industries has created an overlap with CCAs, adding complexities
for both operators and the administrators of the scheme and duplication
of policies on emissions. Removing CCAs would remove this overlap
and reduce the administrative burden.
1.8 EDF Energy's proposal outlined above
is consistent with Government's desire to cap UK direct and indirect
emissions and the need for all sectors of the economy to contribute
to the overall UK CO2 emissions reductions. Importantly, it will
also create equality with non energy-intensive organisations whose
emissions will be capped by the Carbon Reduction Commitment (CRC).
2. With the advent of UK-wide carbon budgets
from 2008 (proposed under the draft Climate Change Bill), how
valuable is the focus of the CCL and CCA on the efficiency with
which business consumes energy? Would it be better to have an
instrument which enforced absolute caps in energy use (or CO2
emissions)?
2.1 EDF Energy believes that all sectors
of the economy should contribute to achieving the overall targeted
reductions in CO2 emissions. These policies should focus on CO2
emissions, with the aim of capping absolute direct and indirect
CO2 emissions from the sectors covered by the policy measure.
These policies should be aligned with the carbon budget approach
proposed in the draft Climate Change Bill and Government's current
approach to implementing both upstream and downstream measures.
2.2 The Climate Change Levy does not sufficiently
incentivise non-energy intensive large energy consumers to invest
in energy efficiency (for example retail chains). Sectors without
CCAs have no leverage over the CCL charge and the additional £4.30
per MWh is not considered sufficiently "material" (ie
costly enough) to stimulate additional effort towards improving
energy efficiency. It is worth noting that the higher energy prices
seen in the last couple of years are beginning to stimulate this
effort, but the growth in energy services is not as large as might
have been expected from such a substantial increase in energy
costs. Government has recognised and addressed this through the
proposed introduction of the Carbon Reduction Commitment.
2.3 Please also refer to our answer to question
1.
3. How well do the Levy and Agreements fit
together with other existing and proposed climate change policies,
and what can be done to ensure maximum impact from complementary
policies with minimum administrative burden and overlap?
3.1 Please refer to the answers to questions
1 and 2.
3.2 The current CCL structure places considerable
administrative expense and burden on energy suppliers. Suppliers
are responsible for the integration of CCL into customer bills,
and for charging customers, collecting the moneys and making payments
to Government. This process places compliance responsibility and
the financial risk on the supplier rather than Government.
3.3 Setting CCL to zero on electricity and
in the future potentially on gas, as proposed in answer to question
1, would reduce the administrative burden on both energy suppliers
and Government, without compromising UK's desire to reduce CO2
emissions.
4. Businesses are able to use carbon trading
to meet their targets under the Climate Change Agreements. What
have been the impacts of trading so far? Should trading be allowed
in this way, or how should it be controlled?
4.1 Trading allows greater flexibility for
industry to meet environmental objectives in the lowest cost manner.
In principle, we support the use of trading to meet environmental
objectives.
5. What have been the economic impacts of
the CCL and CCA on the organisations subject to them, and the
wider UK economy?
5.1 No comment.
6. Should the Climate Change Agreements be
reformed in any way? For instance, should the Agreements be simplified,
or the sectoral targets made more stringent?
6.1 As outlined in Question 1, we believe
that CCAs should be concluded at the end of 2010 (milestone 5).
This would result in both direct and indirect CO2 emissions from
these sectors being captured under existing and proposed cap and
trade schemes by which these emissions would be capped. Large
scale direct emissions are already covered by the EU ETS and indirect
emissions and small-scale direct emissions would be captured under
Carbon Reduction Commitment (CRC).
6.2 If Government decided to continue with
CCAs, alongside an absolute carbon emissions reduction target,
there would be an opportunity to use CCAs to promote energy and
production efficiency. This enables the use of carbon intensity
based targets which encourage production efficiency, do not restrict
production and manage fluctuations in emissions profiles related
to production variations.
6.3 The Netherlands Covenant benchmarking
of industrial sectors energy could assist in the development of
any energy efficiency targets and simplify the process. Work has
been undertaken to create world wide benchmark studies for a range
of industrial sectors.
7. What are the main barriers to accelerating
energy efficiency in the business sector? How can these be overcome?
7.1 We believe the key barriers to accelerating
energy efficiency in the business sectors is the lack of long
term visibility and stability of Government policy that provide
strong pricing signals for both energy efficiency and CO2 emissions
reductions. The current policy timeframes do not match investment
cycles and do not provide investors with sufficient certainty.
7.2 To assist in overcoming these barriers,
a long term stable framework that drives investment in low carbon
technologies needs to be created. A predictable and stable carbon
market is required that provides certainty around the level of
abatement required from the sectors to allow scarcity within the
market to be forecasted, and hence a price of carbon to be determined
based on fundamentals.
8.Products which can increase energy efficiency
(such as insulating glass for windows) can be energy-intensive
to manufacture. Policies such as the CCL and CCA can penalise
manufacturers for making such products. How big an issue is this,
and what, if anything, should be done about it?
8.1 We do not believe that CCL and CCA penalise
manufacturers of products that increase energy efficiency. Energy
efficiency and carbon abatement benefits should be valued in the
sale price of the products. With the increase in focus and requirements
to reduce carbon emissions and increase energy efficiency, the
demand for these products will increase. If there is a barrier
to incorporating the value of the carbon saving in the product
price, for example if the sector in which it is deployed is not
subject to a transparent carbon price, then action should be taken
in that sector to correct defective carbon pricing rather than
distorting the CCL / CCA mechanism.
9. Alongside the CCL, the Government introduced
the Enhanced Capital Allowances, to further encourage firms to
make energy saving investments. How well is this scheme working?
How well does it fit with other existing or proposed climate change
instruments?
9.1 No comment.
10. The Levy exempts electricity from renewables,
though so far this appears to have had little impact. Should it
play a greater role in incentivising the growth of renewable electricity,
and, if so, how?
10.1 The levy exemption for renewable and
CHP electricity has had little impact on incentivising the development
of new projects because:
— the CCL exemption for renewables
does not provide a significant financial incentive to develop
new projects, and the key mechanism for this is the Renewables
Obligation (RO), which provides about ten times the level of support;
and
— uncertainty around the longevity
of the CCL and exemptions has resulted in its financial benefits
not being fully integrated into investment decisions.
10.2 However, the Levy exemption mechanism
has influenced the behaviour of final consumers. There is a strong
and growing demand for levy exempted certificates (LEC) due to
the financial benefits of the exemption and the corporate driver
to be a responsible organisation. It has provided an incentive
for business customers to contract for renewable and good quality
fossil CHP electricity. However new certification mechanisms,
for example Renewable Energy Guarantee of Origin certificates
and CHP Guarantee of Origin certificates, mean that demand for
energy with particular environmental characteristics could be
met in future without the need for continuation of the LEC mechanism.
10.3 The RO should remain as the key driver
and mechanism for investment in renewables, along with a carbon
price signal from the EU ETS via wholesale electricity prices.
Government should provide greater certainty around these policies
and ensure that long term stable frameworks are implemented to
allow financial incentives and benefits of policies to be factored
fully into investment decisions. Where possible Government should
encourage market mechanisms that incentivise the use of low carbon
and or renewable energy, rather than potentially duplicative policies
favouring specific technologies.
September 2007
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