Memorandum submitted by the Department
of Energy and Climate Change (DECC)
This Memorandum responds to the Committee's
call for evidence, announced on 2 April 2009.
EXECUTIVE SUMMARY
The transition to a low carbon world will transform
every aspect of our society, and alter the way we all live and
work. This new, global, green industrial revolution will create
a huge demand for goods and services to help us meet our climate
change goals. As well as being an environmental imperative, the
shift to a low carbon economy is also an economic opportunity.
Low carbon technologies will be at the heart
of the transition to the low carbon economy. This memorandum summarises
DECC's views on the questions raised by the Energy and Climate
Change Committee regarding the role of low carbon technologies
in a green economy, the role they can play in supporting growth
and enabling delivery of our climate change targets.
Q1. What opportunities exist for the creation
of a green new deal whilst pursuing a low carbon economy? Which
technologies have the biggest potential? Has the Government done
enough in its stimulus package?
1. The move to a low carbon economy can
make a significant contribution to economic growth and job creation
in Britain, not only as part of the short term economic recovery,
but also through sustainable growth over the decades to come.
2. The size of opportunity is large and
increasing: already the global market for low carbon and environmental
goods and services is worth £3 trillion, and this is
projected to grow to over £4.3 trillion by 2015.[17]
In the UK, the low carbon and environmental sector is already
worth £107 billion per year, employs over 880,000 people,
and represents 7.4% of GDP[18]
3. Looking ahead, the UK low carbon and
environmental sector is growing fast and is expected to be worth
as much as £150 billion and employ over one million
people by the middle of the next decade.[19]
Technologies with the biggest potential
4. It is clear that in order to meet our
longer term climate change goals, deliver our carbon budgets,
and create a low carbon resource efficient economy, we need to
create the right conditions for effective low carbon economic
development and technological innovation. To do this we propose
to focus our approach on key sectors and technologies where the
UK has the potential to take a global lead because of our natural
resources, skills base and other advantages. These include:
1. Carbon capture and storage (CCS).
2. Offshore wind generation.
5. We are taking steps to ensure effective
development in each of these areas:
6. On CCS, Government remains committed
to the commercial scale demonstration of carbon capture and storage
technologies (CCS) and their development as soon as possible as
key technologies to address climate change. In Budget 2009 the
Chancellor announced the Government's intention to put in place
a levy mechanism to provide funding for up to four UK CCS demonstrations,
including the current demonstration project. Government has also
allocated some £90 million to fund companies in the current
CCS competition to undertake detailed preparatory studies for
CCS.
7. Offshore wind is one of the key technologies
which should form the basis of the UK transition to a low carbon
economy and has the potential to create 70,000 new green
jobs and bring economic benefits and investment to the UK of up
to £8 billion in annual revenues by 2020.[20]
In Budget 2009 the Government announced a review of support
for offshore wind under the Renewables Obligation, based on evidence
that the costs of projects nearing financial close has risen markedly
in the past few months. The additional support being proposed
is expected to protect up to 3GW of planned investment over the
next two years—enough to power an estimated 2.8 million
homes. This support has already been successful in securing investment
in the Walney offshore wind farm, and most notably in the London
Array, which once completed will be the world's largest offshore
wind farm.
8. The UK possesses a unique level of marine
energy resources. The UK has an estimated practical wave resource
of around 50TWh/y of electricity a year and a practical tidal
stream resource is around 18TWh/y. This represents around 50%
of Europe's tidal energy resource (10-15% of the global resource)
and 35% of Europe's wave energy resource. The sector is still
at a very early stage of development but the Carbon Trust has
estimated that marine energy has the potential supply up to 20%
of the current UK electricity demand. We anticipate that around
1-2 GW could be deployed by 2020 and 30-50GW deployed
by 2050. The UK is also seen as a focus for wave and tidal technologies,
and the world's first commercial scale tidal turbine (SeaGen)
and the world's first commercial-scale wave energy array (Pelamis),
both British technologies, were deployed in 2008.
9. The Nuclear White Paper, published in
January 2008, set out the Government's view that new nuclear power
stations should have a role to play in this country's future energy
mix alongside other low-carbon sources. The White Paper set out
the facilitative actions Government would take to allow energy
companies to invest in new nuclear power stations, including Generic
Design Assessment of reactor designs and streamlining the planning
process. We are actively pursuing these actions and have made
good progress. In September 2008 the Office for Nuclear Development
(OND) was established, with the mission to:
— enable operators to build and operate
new nuclear power stations in the UK from the earliest possible
date and to enable new nuclear to make the fullest contribution
it is capable of, with no public subsidy, and with unnecessary
obstacles removed; and
— build and maintain the UK as the best
market in the world for companies to do business in nuclear power
With the creation of the OND, the Government
took on a broader role, to look at issues beyond the facilitative
actions which need to be resolved to allow new nuclear power stations
to be built in the UK. In particular, the OND has a role to create
and support a globally competitive UK supply chain, focusing on
high value added activities to take advantage of the UK and worldwide
nuclear programme. The OND is also working to ensure that the
skills base is sufficiently developed to support a new generation
of nuclear power stations.
10. Low carbon vehicles: In April 2009,
Government announced our strategy "Ultra Low Carbon Vehicles
in the UK". This provides a clear road map for making the
UK the first choice to research, design build and sell low carbon
vehicles. The Government is providing £100 million to
support research and demonstration, £250 million for
consumer incentives to buy lower carbon vehicles, £20 million
procurement of Low Carbon Vehicles for government, while the £2.3
billion package of support for the automotive sector in the downturn
has been tailored to support development of low carbon products.
Green stimulus
11. The UK has already made considerable
progress in comparison to the rest of the world by setting out
an ambitious programme enabling over £50 billion of
investment in cleaner transport and energy over the three years
to 2011. The recent Budget set out the Government's commitment
to support development of the low carbon sector, including in
the areas above, by supporting and deploying new low carbon technologies
with over £1.4 billion of extra targeted support for
the low carbon sector, including an additional £405 million
for the development and deployment of low carbon technologies.
This additional funding will include support for close-to-market
innovation, for example through the Environmental Transformation
Fund (ETF), as well as support for mature industry through Grants
for Business Investment (GBI) and other appropriate business support
mechanisms. The Budget also included £45 million for
small scale renewable electricity and heat, primarily through
the Low Carbon Buildings Programme. Funding announced through
the Budget, and previously through the 2008 Pre-Budget Report,
will help to maximise the role the low carbon sector can play
in economic recovery, while also positioning us to meet our climate
change goals.
12. This summer Government will bring forward
further proposals on the opportunities for business and communities
from the transition to a low carbon economy, and how Government
and business can help realise them. This will build on the vision
for a low carbon economy we set out in Low Carbon Industrial
Strategy: A Vision in March this year, and in Investing
in a Low Carbon Britain (April 2009), which makes the case
for applying the Government's new activism to low carbon growth,
focusing on key sectors where the UK may have an advantage to
help us secure a significant share of the £3 trillion
global market for low carbon and environmental goods and services.
Q2. How realistic are the Committee on Climate
Change's projections for the use of different types of new technologies?
What is needed to achieve the development and deployment of them?
13. In its December 2008 report, the
Committee on Climate Change makes clear that its role is not to
predict the precise technological path to a low-carbon economy.
The Government shares the Committee's view that there are a number
of alternative scenarios by which different combinations of new
technologies can deliver low-carbon energy, greater energy efficiency
and compliance with the emissions reduction targets and carbon
budgets established by the Climate Change Act 2008. Furthermore,
the Government considers these technologies to have considerable
potential outside the scenarios considered in the Committee's
report and that additional technologies, such as the direct delivery
of low-carbon heat at district level, also have the potential
to make significant contributions to decarbonising the UK economy.
14. The Government supports the development
and deployment of technologies to reduce greenhouse gas emissions
through targeted funding and policies at a European, National
and Regional/Devolved level to overcome market failures in innovation.
This includes tailored funding mechanisms designed to support
technologies at each stage of their development, offered by the
Research Councils, the Technology Strategy Board, the Carbon Trust
and Energy Technologies Institute. The Government will also provide
funding to support the development and demonstration of technologies
using the £405 million for low carbon investment announced
in Budget 2009, and through the Environmental Transformation Fund.
We are also developing a supportive market structure for the deployment
of innovative technologies including the use of tax credits, Renewable
Obligation (RO) Certificates and plan a renewable heat incentive
and feed-in-tariff for small scale electricity.
15. From 1 April this year, RO banding
was introduced, increasing the support for offshore wind from
1 Renewables Obligation Certificate (ROC) per MWh to 1.5 ROCs
per MWh. We announced in the Budget that we will be reviewing
the level of support for offshore wind further.
16. A number of forthcoming publications
will set out Government policy for the promotion of low-carbon
and energy efficient technologies in different sectors. These
will include the UK Renewable Energy Strategy, for meeting our
EU target to supply 15% of UK energy from renewable sources by
2020, a consultation on a new framework for coal power stations
and carbon capture and storage, a Heat and Energy Saving Strategy
for saving energy and decarbonising heating, and a strategy for
reducing greenhouse gas emissions from transport. Together, these
will inform an energy and climate change strategy, to be published
in Summer 2009, which will put emissions reduction in the context
of the overall programme for delivering secure and low-carbon
energy, transport and housing in a way that benefits the UK economy
into the future.
Q3. What are the most important drivers,
nationally and internationally, for a low carbon economy in the
UK? To what extent do the outcomes of the international negotiations
at Copenhagen matter?
17. A number of drivers are central to the
delivery of a low carbon economy in the UK. We already have in
place the key targets and regulatory drivers for carbon reductions
in the areas of households, transport and power generation. These
aim to give business the confidence and certainty to invest in
making strategic decisions and investments to reduce carbon emissions,
and to bring low carbon products and services to the market.
18. This framework includes the Climate
Change Act 2008, which sets a legally binding target for the UK
to reduce greenhouse gas emissions by 80% by 2050, and establishes
a system of carbon budgets to set the trajectory towards this;
the EU Emissions Trading Scheme, which covers almost half of all
emissions; the forthcoming Carbon Reduction Commitment, a new
mandatory emissions trading scheme for the UK covering large business
and public sector organisations, which represent around 10% of
UK emissions; funding for low carbon innovation; market pull interventions
which drive deployment, such as the Renewables Obligation and
Climate Change Levy; and a range of other policies, such as dynamic
product standards for consumer goods the Landfill Tax, and the
Waste Strategy for England. Along with these mitigation activities,
there is a need to adapt to the unavoidable consequences of climate
change. The Climate Change Act requires to the UK to develop a
national risk assessment by 2011. This will help the UK better
understand the level of risk it faces, regionally and sectorally,
which will drive innovation and the need to develop the right
infrastructure for a climate resilient economy.
19. A clear framework in the UK is essential,
but on its own it is not enough. The challenge of developing a
portfolio of low-carbon technologies to deliver sufficient emission
reductions is a global one. There needs to be a significant increase
in global investment to develop and deploy low-carbon technologies
as the costs and scale of production must be shared. Much of this
increase will be in countries' own interest as they strive to
meet mitigation goals and future-proof their industrial development.
By setting an ambitious set of national mitigation actions, the
Copenhagen negotiations can build the incentive for national low
carbon investments. The Copenhagen negotiations can also ensure
greater collaboration between countries and help deliver key technologies
that are not being taken forward through action at national level.
20. There is also a need to build innovative
capacity and support technology deployment in developing countries
to enable them to adopt the technologies in the future and avoid
lock-in to high-carbon technologies. International discussions
such as the G8, Major Emitters Forum and bilaterals offer the
chance to build partnerships as part of an international response
to the technology challenge. It is possible to take forward many
of these proposals outside of the negotiations but a successful
package on technology will be important to delivering the requisite
overall level of ambition. For example in 2008 the G8 agreed
to launch 20 large CCS demonstration projects by 2010. In
addition we are pursuing progress on key technologies including
Carbon Capture and Storage, Energy Efficiency in Buildings, Low
Carbon Vehicles, Solar and Smart Grid.
21. Other key drivers for the move to the
low carbon economy include:
— Consumer demand, in particular as a result
of consumers making purchasing decisions on the basis of their
environmental impact. Studies indicate that over 50% of consumers
value environmental and social performance highly enough to let
it influence their choice of brand.[21]
— Technological innovation—both improvement
of existing technologies, and development of new technologies—has
a crucial role to play in delivery of our climate change targets,
as well as providing economic opportunities.
— Investment in energy efficiency and wider
resource efficiency: Enabling and incentivising businesses and
households to make energy efficient investments is a key driver
to the development of the low carbon economy. Research indicates
that UK businesses could save £6.4 billion per year
through low and no cost resource and energy efficiency improvements.[22]
There is a range of support in place to incentivise energy efficient
investment—for example interest free loans to help small
and medium enterprises make energy efficient investments. An additional
£100m of funding for this scheme was announced in Budget
2009.
— Financial incentives: It is essential
that the best low carbon projects have access to capital to enable
delivery, and that businesses can make low carbon investments.
A range of measures specifically to support low carbon access
to finance are in place, and the economy wide-measures Government
is taking to help companies struggling to access finance, such
as the Enterprise Finance Guarantee Scheme and Working Capital
Scheme, will also help low carbon businesses. (See also question
5). Tax incentives to encourage the adoption of new energy technologies—for
example the reduced rate of VAT (5%) for the professional installation
of micro-generation equipment, exemption from the Climate Change
Levy for supplies of electricity generated from renewable sources—also
have a vital role to play.
— Skills: In reforming the skills system
we need to ensure that the needs of a low carbon economy are met.
This includes the need to develop the practical and analytical
capability to assess quickly and effectively the skills needed
in key sectors and where there are market failures and barriers
that need to be overcome to develop those skills. A cross-government
High Level Forum involving DIUS, Defra, BERR and DECC in conjunction
with UK Commission for Employment and Skills, Alliance of Sector
Skills Councils (SSA) and the Sustainable Development Commission
(SDC) are working with leading cutting edge employers, to discuss
how to better align the skills system to emerging and latent employer
needs.
— Infrastructure: having the right infrastructure
for a climate resilient economy, particularly for energy, is central
to our requirement to deliver power more efficiently and to adapt
to new forms of power generation.
Q4. How important is it to the UK economy
that it becomes a leading developer and exporter of low carbon
technologies? What Government policy needs to be in place to do
this?
22. The global market for low carbon goods
and services is already worth over £3 trillion and is
growing rapidly. This is a huge potential opportunity for the
UK. The UK accounted for over 3.5% the global market amounting
to about £107 billion making it the world's sixth largest
low carbon economy. The expansion of the global low carbon market
offers huge opportunities for UK businesses.
23. In key technology areas, such as those
referred to in question 1, the UK has the potential to take a
global lead. For example we have some of the best wind and marine
resources in the world; offshore wind could make a major contribution
towards meeting the UK's share of the EU 2020 target for
20% renewable energy, and some of the world's best marine energy
resource is also situated in UK waters.
24. To capitalise on the growth opportunities
created by the move to a low carbon economy across every sector,
we must create the conditions for the UK to be the leading place
in the world in which to locate an innovative business and to
develop new products and services. Government alone cannot achieve
our climate change goals, and we need to harness the ideas and
capabilities of business to create a prosperous low carbon society.
In partnership with business, we are promoting the UK's low carbon
offer internationally through the UK Low Carbon International
Marketing Strategy. This has the dual aim of promoting the UK's
low carbon goods and services to drive exports, and enhancing
the UK's low carbon reputation to attract inward investment. This
is particularly important where the UK is already considered a
leader and where, with the correct framework of support in place,
we can capitalise on the environmental and economic benefits of
that position.
25. As set out in the Innovation Nation
White Paper (2008), catalysing business innovation where there
are UK strengths and global market opportunities will require
strategic action to align demand side measures such as the power
of public procurement, public policy, and the regulatory environment
with support for supply side measures such as research and development
and access to finance.
26. Over the last decade sustained investment
has given Britain one of the strongest science and research bases
in the world. Britain is now acknowledged as world class in science,
research and development, including in areas crucial to the development
of low carbon technologies.
27. We have also established the business-led
Technology Strategy Board to drive business innovation in areas
where the there are opportunities for future growth; established
the Energy Technologies Institute (ETI) as a unique private/public
partnership to invest in the development of low carbon energy
technologies and solutions; operated a successful R&D tax
credit scheme; funded the Carbon Trust to support the development
and deployment of new and emerging low carbon technologies; invested
in the UK's innovation infrastructure, notably intellectual property
systems and procedures, standards and the National Measurement
System and its facilities to facilitate greater business innovation;
and created the Environmental Transformation Fund to support the
pre-commercial deployment of low carbon energy technologies.
28. We are keen to ensure the benefits of
our investment throughout the innovation pipeline will be reaped
fully by UK businesses. Government recognises the importance of
supporting pre-commercial/near-commercial development that helps
the technologies to reach the commercialisation stage. The "Ultra-Low
Carbon Vehicles in the UK" initiative, which involves working
across and beyond Whitehall with the aim of making the UK a world-leader
in ultra-low carbon vehicles, is an exemplar of how the Government
is using its policy levers to secure best opportunities for the
UK. The Ultra Low Carbon Vehicle strategy (April 2009) has committed
almost £400m to R&D, demonstration, infrastructure and
consumer incentives for ultra low carbon vehicles.
Q5. Are we seeing impacts of a downturn on
demand and investment in low carbon technologies? If so, how can
this be addressed given the need to meet long term targets? What
obstacles to investment are there?
29. Indications are that the economic downturn
is having an impact on investment in low carbon technologies.
For example, following significant growth in the low carbon venture
capital market until 2008, investment in this area has fallen
in Europe since then.
30. There are a range of reasons for the
contraction of funding, including that fewer funders are operating
in the project finance markets as they retreat to their domestic
markets; funders tend to focus on their perceived long term core
customer relationships; and a significant number of the funders
are no longer providing long term project finance deals, typically
15-20 years.
31. Additionally, there are systemic issues—such
as that average venture capital seed funding in the UK tends to
be lower than in the Europe and North America, impacting on companies'
ability to achieve commercial success, and that companies in the
UK and Europe tend to receive early stage funding rather than
support for mid-late stage development which generally requires
higher levels of funding. This funding is required to scale up
manufacturing prior sales. In the current economic climate it
is these businesses that are particularly suffering as a result
of investors moving toward post revenue and profitable companies.
32. The government is taking steps to address
this shortage of capital, for example through the Carbon Trust
which finances emerging clean energy technology businesses that
demonstrate commercial potential. DECC is also considering options
for increasing its capacity to tackle obstacles to investment,
and work with the investor community and enhance low carbon investment
decisions.
Renewables
33. While the economic downturn will affect
availability and cost of capital to all firms, we recognise that
investment in energy infrastructure and renewables requires particularly
large scale capital investment in the long term. We are working
to create the right conditions to ensure continued investment
in renewables through the downturn. The credibility and certainty
provided by Government policy on renewables will provide a stable
long term climate for investment in renewables. One example of
this is the commitment in the November 2008 Pre-Budget Report
to maintaining the Renewables Obligation as the main means of
support for large-scale renewable generation and to extending
it from its current end-date of 2027 to at least 2037.
34. Smaller companies may find it harder
to raise capital, and we are providing a range of financial help
in addition to the main financial support provided through the
Renewables Obligation. For example, capital grants are available
through the Environmental Transformation Fund which should ease
the impact on firms investing in emerging renewables technologies.
35. Budget 2009 also announced that
UK renewable and energy projects stand to benefit from up to £4 billion
of new capital from the European Investment Bank (EIB) through
direct lending to energy projects and intermediated lending to
banks, to finance UK projects. We aim to bring together the EIB,
banks and developers to ensure this new framework lending and
other products deliver rapid and sustained investment for UK renewable
energy. DECC also works with the investor community to support
low carbon investment decisions, by supporting the provision of
timely and accurate information about Government policy.
Q6. What is the potential role for public
procurement and policies such as the 2016 zero carbon homes
target in driving investment, development and job creation?
36. As noted above, there is major scope
for policy and regulation to drive investment, development and
job creation.
37. Adopting more sustainable procurement
procedures is one of the key ways in which public bodies can reduce
the environmental impact of their activities and contribute towards
wider Government targets on carbon reduction and resource efficiency,
while also helping to accelerate the transition to a low carbon
economy. It also offers the Government the opportunity to lead
by example by using its substantial purchasing power to influence
suppliers and the products they develop and design, for the wider
benefit of the UK environment and others in the economy. The UK
public sector as a whole purchases around £175 billion
worth of goods and services each year. Budget 2009 also announced
an additional £65 million for public sector loans, with £54.5
million available in England. This money complements that already
available for loans to pay for the installation of a wide range
of energy efficiency measures in public buildings—supporting
the public sector in making further progress towards reducing
their energy bills and carbon emissions, freeing up resources
for investment in front-line services, and supporting the development
of the low carbon sector.
38. A number of initiatives have been introduced
in recent years to aid the delivery of more sustainable procurement
activities across the public sector, including the development
of detailed environmental specifications, for public procurers
to apply in their purchasing activities. The government also established
in 2008 a Centre of Expertise in Sustainable Procurement
within the Office of Government Commerce to support central government
in making more sustainable investment decisions.
39. The government is driving forward a
number of related initiatives in order to make use of public procurement
as a tool to encourage industry to bring forward innovative solutions
to environmental issues. These include the Small Business Research
Initiative, promotion of outcome based specifications and forward
commitment procurement, and the Innovation platforms operated
by the Technology Strategy Board.
40. The zero carbon homes policy announced
in July 2007 (and indeed our ambition for zero carbon non-domestic
buildings announced in Budget 2008) sets the way for a transformation
in the way that new homes and other buildings are constructed
over the next decade. This creates a number of economic opportunities:
— Investment in the supply chain supporting
the industry, so as to produce the energy efficient building materials
and low and zero carbon energy supply technologies that zero carbon
homes will require;
— Expertise in the construction industry
which can result in export opportunities as other countries follow
the UK's lead on low and zero carbon buildings.
41. If we are to make the most of these
economic opportunities, then it is vital that industry gears up
in preparation for the zero carbon policies. That is why we announced
the policies a long time in advance of their introduction and
is why we are setting a trajectory towards zero carbon homes between
now and 2016. Government is in the process of providing a detailed
definition of zero carbon homes and is working with industry via
the 2016 Task Force and Zero Carbon Hub to create the certainty
that industry needs and to overcome the practical barriers to
implementation of the policy. A range of support is also available
to drive business innovation to deliver low carbon buildings through
initiatives such as the Technology Strategy Board's recent £10 million
competition to develop and demonstrate innovative solutions in
the social housing sector. This competition will enable successful
companies to be well placed to bid for future refurbishment contracts
and help the UK meet future targets in reduction of CO2 emissions
and energy use.
June 2009
17 Innovas (2009), Low carbon and environmental
goods and services: an industry analysis Back
18
Innovas (2009), Low carbon and environmental goods and services:
an industry analysis Back
19
Innovas (2009), Low carbon and environmental goods and services:
an industry analysis Back
20
Carbon Trust, 2008, Offshore Wind Power: Big Challenge,
Big Opportunity Back
21
http://www.wwf.org.uk/filelibrary/pdf/let_them_eat_cake_abridged.pdf Back
22
IOakdene Hollins (2007 Quantification of the business
benefits of resource efficiency Back
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