Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Written evidence submitted by the Parliamentary Office of Science and Technology

SUMMARY

In May 2010 the government announced that it would allow the construction of new nuclear generators but stated that they would receive no public subsidy. The definition used for "public subsidy" excludes any support that is general for low carbon generators rather than specific to the new nuclear industry. The government has also stated that it does not rule out taking on financial risks or liabilities related to new nuclear power.

In this context, there has been debate over what can be defined as a subsidy. This document describes broad and narrow definitions of the term "energy subsidy" and considers existing and proposed support mechanisms for electricity generation technologies including new nuclear power stations in the UK.

DEFINITIONS OF ENERGY SUBSIDIES

State financial interventions in the energy sector have been common for many years. Governments have used subsidies to enhance security of supply, reduce air pollution and emissions of greenhouse gases, strengthen competitiveness, provide social benefits and protect employment.[109] This sometimes involves supporting novel technologies until they become competitive with established ones.

BROAD DEFINITION

The International Energy Agency (IEA) define "energy subsidy" broadly, as "any government action that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by consumers".[110] A similar approach has been used by the OECD to define subsidies in general.110 Both approaches capture direct subsidies, such as grants from governments to consumers or producers, but also a variety of other interventions that directly or indirectly affect prices or costs. Table 1 summarises government interventions that fall within the IEA definition.

Table 1

TYPES OF ENERGY SUBSIDY AS DEFINED BY THE IEA110 AND EEA[111]


An example of a simple and direct subsidy scheme in the UK was the Low Carbon Buildings Programme, which provided grants to consumers installing small scale generators such as solar panels. Another example of a direct subsidy is the Deep Geothermal Challenge Fund, which subsidises producers (rather than consumers) by providing grants to support the development of geothermal projects. There are a number of other government interventions that fall within the IEA's broader definition of an energy subsidy. These include the government's plans to provide up to £60 million for the development of infrastructure at UK ports for offshore wind turbine manufacturing, and funding for the Nuclear Skills Academy and the Nuclear Advanced Manufacturing Research Centre led by the University of Sheffield. Funding for research and development across of wide range of energy technologies is also provided through the Research Councils.

NARROWER DEFINITION: SUBSIDIES IN NATIONAL ACCOUNTS

A narrower definition for subsidies is used when countries report their economic activity in the form of National Accounts. The UK and other European Union (EU) countries follow European guidelines, in which subsidies are described as "current unrequited payments made by general government or the European Union to enterprises".[112]

The Office for National Statistics (ONS) is responsible for producing the UK's National Accounts. Like similar statistical offices throughout the EU, it interprets the European guidelines in order to do this, sometimes in consultation with the relevant government department or Eurostat. Whenever the classification is not straightforward it is referred to the National Accounts Classification Committee (NACC) within the ONS.[113]

The Renewables Obligation (RO) is an example of an unclear, energy-related classification that was referred to the NACC and deemed to provide subsidies. The RO is not a straightforward subsidy to renewable generators because it does not involve a flow of money from the government to the producers (generators) themselves. Instead, it places an obligation on electricity suppliers to buy a growing percentage of the electricity they sell from eligible renewable generators. Eligible generators receive Renewable Obligation Certificates (ROCs) for each unit of electricity that they generate, which they sell in a marketplace to be bought by suppliers who thus demonstrate their compliance with their obligation. If suppliers do not meet their obligation in full they can pay into a "buyout" fund, which is later redistributed to suppliers in proportion to the number of ROCs they presented.

The National Accounts Classification Committee ("the Committee") concluded that the Renewables Obligation is an imputed tax and subsidy.[114] The renewable generators are effectively being subsidised by the ROCs, which are funded by a "tax" on electricity suppliers (and their customers, to whom the costs are likely to be passed). As an imputed tax and subsidy, ROCs appear in the National Accounts as money flowing to and from the government as taxes and subsides, although these transactions do not in fact take place.

The Committee also concluded that the trading of allowances within the European Union's Emissions Trading Scheme (EU ETS) should be treated as an imputed tax and subsidy. In this case, however, there has been disagreement at an international level and Eurostat are yet to issue formal guidance to national statistical offices on how they should be treated.[115] The EU ETS is not, therefore, treated as a tax or subsidy in the UK accounts as yet. The Committee are currently considering classifications for a range of other energy-related interventions. These include the Carbon Emissions Reduction Target, the Renewable Transport Fuels Obligation, and Feed In Tariffs for small electricity generators (of less than 5 MW in rated output).

CONTINGENT LIABILITIES

In addition to the costs of current subsidies, the UK government has commitments to cover certain future costs related to energy supply. These do not necessarily appear in the National Accounts which, just like many balance sheets, include only those liabilities that fall within a relatively narrow definition. To support effective fiscal policy, and in the interests of transparency, the ONS has published an assessment of "wider measures of public sector debt",[116] which includes liabilities that are contingent on future events.

A significant example of contingent liabilities relates to nuclear decommissioning. The Nuclear Decommissioning Authority estimated that in 2004-05, gross decommissioning commitments for its estate were £24.1 billion, and that these increased each year to reach £44.5 billion in 2008-09. Of this latter figure, only £5 billion will be recoverable under commercial arrangements,116 presumably with funds generated by the NDA's remaining magnox nuclear generators. As contingent liabilities, these figures do not appear in the UK's National Accounts, but are nevertheless costs that the public sector will ultimately cover.

NEW NUCLEAR IN THE UK

In May 2010 the Coalition government said that it would allow the construction of new nuclear generators "provided that they are subject to the normal planning process for major projects (under a new National Planning Statement), and also provided that they receive no public subsidy".[117]

On 18 October 2010 the Secretary of State for Energy and Climate Change, Chris Huhne, confirmed this policy and clarified what is meant by "no public subsidy", saying:

(a)  there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation. New nuclear power will, for example, benefit from any general measures that are in place or may be introduced as part of wider reform of the electricity market to encourage investment in low-carbon generation.

(b)  I would also like to make it clear that we are not ruling out action by the Government to take on financial risks or liabilities for which they are appropriately compensated or for which there are corresponding benefits.[118]

In contrast, there are at least three ways in which commentators have argued that new nuclear power will or may effectively be subsidised:

(c)  Through the carbon floor price and proposed feed in tariffs that form part of the government's programme of electricity market reform;

(d)  By agreeing fixed costs for decommissioning and waste management costs, and;

(e)  By limiting the liability of nuclear operators in the case of an accident.

Each of these areas is explored below in the context of both the government's stated position on new nuclear power and the previous IEA and NAO definitions of subsidies.

ELECTRICITY MARKET REFORM

The government recently proposed various reforms of the electricity market to encourage a significant expansion of low carbon generation. A white paper is due in late spring 2011 that will outline the associated legislative proposals. Two elements of the proposals that some have argued would be subsidies for nuclear power are the introduction of both a carbon price floor (confirmed by the Treasury in the 2011 Budget) and a full system of feed in tariffs for new electricity generators.

The carbon price floor will be imposed through amendments to the climate change levy and fuel duty and will be introduced in April 2013. It involves a tax imposed on top of the market price for tradable carbon credits under the EU ETS, and is set at a level that increases the price of carbon to a guaranteed £16 per tonne of emitted carbon dioxide in 2013-14. The tax will be adjusted such that the floor price increases linearly to £30 per tonne by 2020. The aim is to provide an increased and certain price for carbon and thus encourage investment in low carbon rather than high carbon generation.

Producers of low carbon electricity such as existing and new nuclear generators will benefit from the increased price of electricity that the tax will presumably cause. According to the IEA definition of energy subsidies, the intervention could therefore be considered a subsidy. In the government's terms, however, the intervention is not specific to the nuclear industry and hence does not contravene its stated definition of "no public subsidy for nuclear".

In addition to the carbon price floor the government aims to introduce a system of feed in tariffs (FITs). These are long term contracts that guarantee an increase in the price of electricity for low-carbon generators above the wholesale market price. Again, the aim is to encourage investment by providing attractive and more certain rates of return to generators. The specific design of the FITs is yet to be determined but in any of the proposed forms it would, under the IEA definition, be considered an energy subsidy since it increases the price of electricity for low-carbon generators. Once again, though, if the intervention is non-specific regarding technology it would not contravene the government's stated definition of "no public subsidy for nuclear".

Some have argued that the FIT system will need to be designed differently for different technologies. EDF Energy, for example, gave evidence to the Commons Energy and Climate Change Committee saying that "a single flat payment is unlikely to provide sufficient returns to deliver all ... technologies and ... some renewable technologies in particular will require higher payments until they become mature."[119] Indeed, it is for this reason that differentiation between technologies was introduced into the existing Renewables Obligation in April 2009, providing greater payments to (more expensive) technologies that are further from market and thus encouraging a wider portfolio of technologies. If such differentiation is introduced into the proposed FITs, it is possible that there would then be a specific "subsidy" for the nuclear industry.

COSTS OF DECOMMISSIONING

The Energy Act 2008 requires nuclear operators to arrange financing to cover the full costs of decommissioning and their share of waste management costs. Prior to construction, operators must submit a Funded Decommissioning Programme (FDP) for scrutiny by the Nuclear Liabilities Financing Assurance Board and approval of the Secretary of State.

Currently, Section 48 of the Energy Act 2008 allows the Secretary of State to propose a modification to the FDP after it has been approved, and this may include adding additional obligations on the operator. Additional obligations might be required, for example, if there were issues with stored waste or if a new safety feature were developed that ought to be installed.[120]

Clause 102 in the Energy Bill 2010-11 would alter this situation. It would allow the Secretary of State "to agree to exercise, or not to exercise, the Section 48 power" in a particular manner and over a particular period. This has raised concern that the Secretary of State could guarantee, at the outset, not to amend an agreed Funded Decommissioning Programme. This would reduce risk for investors but potentially expose the public to unforeseen decommissioning or waste-related costs. The Shadow Secretary of State for Energy and Climate Change has said that it "could leave taxpayers facing liabilities in the future", and Friends of the Earth said that by shifting financial risks to the public sector, it would represent a hidden subsidy. In response, DECC said that it would not pave the way for taxpayer funding, however, since the Secretary of State must aim to ensure prudent provision for all the costs at the outset.120

LIMITED LIABILITY FOR NUCLEAR OPERATORS

The UK is a signatory to the Paris Convention on nuclear third party liability and Brussels Supplementary Convention, and has been since their inception in the 1960s. The Conventions establish an international (largely western European) framework for compensating victims of a nuclear accident and are implemented in the UK by the Nuclear Installations Act 1965. The Conventions have been revised periodically and most recently in 2004, and the government recently published its proposals for implementing these most recent amendments.[121]

Significant among the proposals is a sevenfold increase in the liability of nuclear operators from the existing level of £140 million to €1200 million, which is €500 million more than required by the amended Conventions. Operators will also become liable for a wider range of potential claims and geographical scope. The increased limit will be phased in over five years starting at €700 million and increasing annually by €100 million. Although the government is proposing a greater limit than the minimum required, the Conventions do in fact allow countries to set an unlimited liability for private nuclear operators. If an accident were to involve costs that exceed the defined limit, the government and hence the taxpayer would presumably cover the excess.

Furthermore, the government has indicated a willingness to step in as an insurer of last resort if the operators cannot find private insurance or other financial security to cover all of their new and increased liabilities. It would do so for a charge based on its assessment of the risks it would be taking on. This would again involve the transfer of risk from the private to public sector.

FURTHER ISSUES

As indicated in paragraph 5, there are a range of other support mechanisms that some consider as subsidies. For the nuclear industry these include funding for the Nuclear Skills Academy and the Nuclear Advanced Manufacturing Research Centre led by the University of Sheffield. The Secretary of State has indicated[122] that these forms of support fall outside of the scope of what the government means by "public subsidy" for new nuclear power.

APPENDIX A

The following contains more of the written ministerial statement by the Secretary of State for Energy and Climate Change on 18 October 2010 that relates to public subsidies for nuclear power. Hansard reference: HC Deb, 18 October 2010, col 42-46WS, also available at http://www.decc.gov.uk/en/content/cms/news/en_statement/en_statement.aspx.

FINANCING OF NUCLEAR WASTE AND DECOMMISSIONING

The Energy Act 2008 puts in place the framework to ensure that operators of new nuclear power stations meet in full their waste management, waste disposal and decommissioning costs.

Today I am laying in the House the Nuclear Decommissioning and Waste Handling (Designated Technical Matters) Order 2010. This order will give operators greater clarity over which liabilities require monies to be set aside in segregated funds.

The Order will proceed under the affirmative procedure and, if passed, will be followed by the Decommissioning and Waste Handling (Finance and Fees) Regulations 2010.

The Order and the Regulations together complete the statutory framework for the financing of nuclear waste and decommissioning.

NO SUBSIDY FOR NEW NUCLEAR POWER

Alongside the other announcements being made today on steps the Government are taking to enable new nuclear power, I should like to take the opportunity to reconfirm the Government's policy that there will be no public subsidy for new nuclear power.

To be clear, this means that there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation.

New nuclear power will, for example, benefit from any general measures that are in place or may be introduced as part of wider reform of the electricity market to encourage investment in low-carbon generation.

I would also like to make it clear that we are not ruling out action by the Government to take on financial risks or liabilities for which they are appropriately compensated or for which there are corresponding benefits.

Specifically, within the framework of the Government's policy under the Energy Act 2008, that new nuclear operators must have arrangements in place to meet the full costs of decommissioning and their full share of waste management costs, we will not rule out taking title to radioactive waste, including spent fuel, at a fixed price provided that price properly reflects any financial risks or liabilities assumed by the state.

In addition, the Government are committed to the Paris convention on nuclear third-party liability and the Brussels supplementary convention. These conventions establish an internationally agreed framework for compensating victims in the unlikely event of a nuclear accident. The UK is already a party to them-and currently caps operators' liability at £140 million. The UK is also bound, with other Brussels signatory states, to contribute to a fund that will compensate victims both in the UK and other convention countries should a serious nuclear incident happen.

The Government will consult later this year on our proposals to implement amendments to the conventions. These amendments impose a more stringent regime for operators than the current one, and alongside these improvements, the Government will be consulting on whether to continue to include an upper limit on operator liability, as permitted by the conventions. Accordingly, in line with the policy I am outlining, and without prejudice to the outcome of that consultation, the Government have not ruled out the maintenance of a limit on operator liability set at an appropriate level provided that it is justifiable in the public interest, is the right way of ensuring that risk is appropriately managed, and that, overall, any potential cost or risk to the Government can be justified by the corresponding benefits of the Paris/Brussels regime.

Arguably, few economic activities can be absolutely free of subsidy in some respect, given the wide-ranging scope of state activity and the need to abide by international treaty obligations. Our "no subsidy" policy will therefore need to be applied having regard to proportionality and materiality.

We will not rule out the Government providing support to industry in the normal course of the business of government, for example through the activities of the Office for Nuclear Development in taking forward the actions to facilitate the deployment of new nuclear power in a similar manner to the facilitation of other energy types. The Government will continue to meet their international obligations and support wider activity in the nuclear sector, including support for research and development, supply chain and skills activity.

The Government will also continue to provide funding to the Nuclear Decommissioning Authority to ensure the efficient and effective clean-up of the UK's civil, public sector legacy nuclear facilities.

21 April 2011




109   European Environment Agency, 2004, Energy Subsidies and Renewables Back

110   UNEP and IEA, 2002, Reforming Energy Subsidies Back

111   European Environment Agency, 2004, Energy Subsidies in the European Union: A Brief Overview Back

112   Eurostat, 1995, European System of Accounts 1995. These guidelines are themselves based on the international System of Accounts 1993, which the ONS indicates are being adopted throughout the world. The full definitions relating to subsidies may be found at
http://circa.europa.eu/irc/dsis/nfaccount/info/data/esa95/en/een00162.htm 
Back

113   http://www.statistics.gov.uk/about/national_statistics/cop/downloads/NAclassification.pdf Back

114   Gazely I,2006, UK Environmental Taxes: Classification and Recent Trends Back

115   Stokoe P, National Accounts Classification, Office for National Statistics, 2011, Personal Communication Back

116   Hobbs D, 2010, Wider Measures of Public Sector Debt: A Broader Approach to the Public Sector Balance Sheet Back

117   The Coalition, May 2010, Our Programme for Government Back

118   HC Deb, 18 October 2010, col 42-46WS. Also reproduced in Appendix A. Back

119   Energy and Climate Change Committee, EMR Written Evidence No.25 (EDF) Back

120   Harvey F, 4 April 2011, Loophole in energy bill could see UK taxpayers funding nuclear bailouts. Available online at:
http://www.guardian.co.uk/environment/2011/apr/04/loophole-energy-bill-nuclear 
Back

121   DECC. Jan 2010, Implementation of changes to the Paris and Brussels Conventions on nuclear third party liability: A Public Consultation Back

122   HC Deb, 18 October 2010, col 42-46WS. Also reproduced in Appendix A. Back


 
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Prepared 7 July 2011