Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Peter Jones OBE, Ecolateral Ltd
(I) Credentials
Thank you for the opportunity to contribute to the Committee’s deliberations. For the last 45 years I have operated in large private sector companies facing substantial challenges from change in terms of market demand, technology shift, legislative frameworks and economic structures. These comprise industrial gases, welding, materials handling, parcels and, latterly, waste and resources. In the case of the latter I have been instrumental in creating a locational strategy tool for waste to energy facilities, broadening a general understanding of the relevance of material flow mapping in the UK and (currently) facilitating strategic partnering between waste logistics companies, energy consumers, property companies and conversion technology providers in the “resource conversion” space. This work post-dates my membership of the Sustainable Consumption and Production Taskforce Steering Group examination of Waste to Decentralised Energy which Reported in February 2008 under the Chairmanship of Neil Carson, CEO Johnson Matthey Plc. With sponsorship of DEFRA and BERR.
(II) Executive Summary
We are at a crossroads where we need to confront the inadequacies of the past false dawn of energy market reform which has created a potentially socially divisive transfer payment subsidy driven policy framework. Worse the complexity of instruments has erected barriers to investment with dubious credibility in terms of scientific rigour. We must seize the opportunity to re-establish peer reviewed scientific assessment to enable market based instruments which drive engineering innovation in a high conversion efficiency, low carbon footprint energy infrastructure utilising common denominators of technical and economic measurement.
(III) The Broader Picture
(a) I suggest that there is a need to return to the basics in terms of quantifying the “energy” market around standardised denominators and measurement systems. Lack of transparency in achieving this has created fertile ground for multiplying numbers of ill thought through, inconsistent and incoherent policy and economic instruments often with no foundation in sound science. There is a chronic requirement to measure and quantify energy flows in common unit measurement systems (as Gigajoules, BTUs or similar) instead of the current confusing framework of kilowatts (hours), gallons, therms, megawatts or tonnes. We are where we are because energy supply chains have remained in their respective “chimneys” of thought heavily influenced by historical, engineering influenced criteria.
In reality the UK currently consumes each year c 60 million tonnes of coal, (40 mToe) 70 million tonnes of LNG (93 m Toe) and has at its disposal around 60 million tonnes of carbon based waste (c24 mTOE) and estimated tonnages of farm and forestry residues exceeding 150 m tonnes of material. As a starting point we should have a critical review of whether those balances are both correct and effectively sourced.
(b) These future mix strategies need to be predicated on a common cost measurement basis (as Gj/BTUs etc) in terms of operating and capital costs per common unit across the different types of fossil and non fossil feedstock sourced technologies identified in the current DUKES reporting framework (coal, oil, dual-fire, CCGT, nuclear, GT, hydro, wind, waste—as landfill, anaerobic digestion etc) Against these accumulated cost “inflows” (some reflecting mature, written down capital and others reflecting market entry levels) can be juxtaposed current revenue flows per standard unit for electricity, gas, petrol, diesel, biomass exclusive of tax as duty or VAT. Finally the construct should identify Government “transfer costs” as taxes and duty per standard unit of measurement. Failure to model this overall framework has led to a rash of financial instruments which have been applied on a technology specific basis to skew supply and demand in ways that have little to do with the original intentions of the Climate Change Act and without foundation in sound science with regard to CO2 emissions reduction potential. I summarise this approach as akin to “Old McDonald’s Farm” (Here a ROC, there a ROC, everywhere a ROC, ROC) The Contract for Difference regime simply risks taking us back to the NFFO auction process of the 1990’s.
(c) On the assumption of 20% renewables being met by 30% share of electricity supply from renewables the evaluation of recent DUKES data on supply and ROC prices suggests a potential green levy of the order of £8 to £11 billion by 2020. Of course the OPEX and CAPEX cost per Mw of capacity remains shrouded in mystery when seeking to compare nominal as opposed to on line capacity. This figure pushes into insignificance the debate on pasty taxes or charity clawbacks.
(d) Worse still the investment needed to achieve the shift to “renewables” is assumed to be best supported by a subsidy based system of inducements via ROCs and FITs which is funded by transfer payments from the financially poorer sections of society consuming energy (especially as electricity) and transferred to largely middle class price support for energy saving infrastructure. I posit that this is a wholly questionable social as well as economic strategy which carries substantial political risk once the electorate realise how contradictory and perverse the pricing and taxation framework has become. In large part I believe this to be attributable to the lack of a common denominator or an across the board measurement system. Subsidy based systems achieve the exact opposite—they offer investors no long term security of return, especially when Government arbitrarily withdraws the subsidy as a consequence of getting the sums wrong (as with solar).
(e) In the waste sector we are exporting energy (in the form of RDF to the Low Countries and Denmark) because their waste to energy plants have been denuded of feedstock by Germany suffering a supply shortfall due to their nuclear switch-off post Fukushima. International valuations of feedstocks which can be exported as recyclate or energy fuels cannot be embraced in a nationally based subsidy driven mentality.
(f) Consumer education and action (with regard to the installation of new renewables generating equipment, tariffs, energy using equipment) and understanding would come from greater transparency were such common unit pricing systems to be adopted. A start has been made in the electricity and gas billing arrangements but this needs to be top down in the entire statistical reporting framework. In the absence of such initiatives consumers have become at best confused and at worst cynical. Lacking a common comparator they are confronted with tariff frameworks more akin to a medieval Kasbah than a modern low carbon economy.
(iv) Solutions
(a) Instead of the current (aka Osborne) spaghetti of subsidy based instruments the entire structure of renewable energy instruments needs to be replaced by two simple instruments which will provide clarity to financiers, operators, domestic users, half hourly interruptible businesses, NGOs, the public and the international community. Namely….
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(b) Establish a single Ministry of Carbon and cut through the conflicting priorities of DECC, DEFRA, DCLG, BIS in the energy portfolio.
(c) Review innovative priorities for energy storage alongside distributed energy connectivity issues in relation to grid balancing—in particular in relation to pumped storage on existing water company assets (regulated by OFWAT), the siting of anaerobic digestion plants alongside lock systems to provide waste based renewable pumping capacity when managing water movement via the canal network and a re-evaluation of hydrogen as a fuel store of electricity, gas and transport fuel.
(d) Recognise that by transferring all sewerage undertakings from the water to the waste Regulatory regime via an Auction of the assets some £2 billion windfall taxes could be produced and sites for Resource recovery Parks be available via streamlined Planning processes.
(e) In operating a Nationally based subsidy driven strategy the UK sits outside the UN FCC framework underpinned by the concept of tradeable permits of Assigned Amount Units (AAUs). We need to dump subsidies and rejoin the Clean Development Mechanism to permit the UK Government and Internationally scaled Global Brand private sector companies to trade their UK emissions reductions within the Audit framework of the CDM. Taxation (or its doppelganger as subsidies)—will never work as efficiently as a cap and trade system operated via certified, scientifically evaluated Trading platforms. Whilst not absolutely proven it is highly likely that instead of operating a hidden tax based system the UK might derive income and balance of trade benefits by entering the CDM as originally envisaged.
(v) Conclusion
We are at a crossroads. Past economic approaches to energy market reform based around a subsidy mentality have proved confusing, socially regressive, a deterrent to investment and lacking any scientific rationality. Whilst there are clearly political issues and risks they are manageable compared to the opportunities for investment, jobs, innovation and social equity offered by a shift to market determined renewable energy technologies based on sound scientific assessment of their fuel conversion efficiency backed by the prospect of access to traded carbon credits within a Clean Development Mechanism accreditation framework. The proposals set out in the Bill with regard to Emissions Performance Standards and CFDs are a fudge at a time when far more intellectual rigour is called for to safeguard the interests of future generations.
June 2012