Environmental Audit CommitteeWritten evidence submitted by Energy UK

1. Energy UK is the trade association for the energy industry. Energy UK has over 80 companies as members that together cover the broad range of energy providers and suppliers and include companies of all sizes working in all forms of gas and electricity supply and energy networks. Energy UK members generate more than 90% of UK electricity, provide light and heat to some 26 million homes and invested £10 billion in the British economy in 2011.

Summary

2. We welcome the work of the Environmental Audit Committee (EAC) to provide an overview of energy subsidies in the UK. We believe it is important to increase transparency on energy subsidies.

3. Both the benefits and the costs of subsidies should be considered. In the current UK context, it is important to remember that subsidies are designed to help achieve the transition to a low-carbon, secure and affordable energy mix. Subsidies are needed when the market alone cannot deliver the outcomes government is aiming for.

4. Subsidies can be paid for through general taxation or through levies on energy suppliers. In the latter case, an obligation is often placed on energy companies, who bear the costs and are responsible for delivering the objectives.

5. We believe subsidies should be addressed transparently, objectively—by comparing cost and benefits, consistently—by looking at tax in parallel to looking at subsidies—and should be designed as cost-effectively as possible.

6. We are engaging with the Government in order to achieve this objective.

7. Oxford Energy Associates report provides a useful contribution to the debate, but does not provide a full picture of the subsidies in the energy market (eg Energy Companies Obligation, Renewable Heat Incentive).

Comments on the Written Evidence Submitted by Oxford Energy Associates

8. We welcome the report by Oxford Energy Associates. It helps clarify certain issues in the debate about energy subsidies.

8.1Only under perfect market assumptions are subsidies always a source of economic inefficiency. When perfect market assumptions do not hold, subsidies can be justified or even necessary to contribute to economic efficiency. This is particularly true in the case of asymmetric information or externalities—which, arguably, are both present in the energy sector.

8.2There is no clear definition of what a subsidy exactly is and how to measure subsidies. The report identifies at least five definitions of what subsidies are and as many methodologies to identify them.

8.3The effort to identify the extent of energy subsidies in the UK is helpful. As an industry that often has to support the cost of subsidies, we would welcome more transparency on the costs and benefits of subsidies.

9. However, there are limitations to the report that we would like to highlight:

9.1We feel some elements should not be counted as subsidies. This is the case for the budget of the Nuclear Decommissioning Authority (NDA) which is in charge of the decommissioning and cleaning up of the civil nuclear facilities previously under the control of British Nuclear Fuels Limited (BNFL) and the United Kingdom Atomic Energy Authority (UKAEA). Liabilities remaining from the early research and nuclear power development programmes are, and always have been, public liabilities. The costs of dealing with them are therefore the Government’s responsibility and not a subsidy.

9.2The statement regarding the financial intervention by the Government in British Energy and the resulting waste liabilities is inaccurate. The Government provided a credit facility of up to £650 million but not all of this was used, and was paid back with interest by British Energy during its restructuring.

9.3Some policies which meet the criteria used by the report to assess subsidies have been left out of the report summary table. These include the Winter Fuel Payment and the Cold Weather Payment and the Energy Companies Obligation (ECO), smart-meter roll-out and Renewable Heat Incentive. These should be taken into account in order to get a full picture of subsidies on the energy market from the beginning to the end of the value chain.

Our View on Energy Subsidies

Developing a more balanced view on subsidies

10. Subsidies can provide benefits. Energy subsidies in the UK support government’s social, low carbon and security of supply objectives.

11. Under the current policy framework, about half of the total direct subsidies are targeted to support low-carbon generation. About a third of direct subsidies are designed to deliver energy efficiency improvements, the rest going to innovation and affordability.

12. The majority of direct subsidies are funded by levies on the industry—which means that they add on to the costs and eventually get passed through the bill. We feel this is an important point as it makes clear that in many cases, the industry has become the delivery body of subsidies.

Principles for designing subsidies that work

13. Subsidies should be designed to meet objectives in the most cost-effective way.

14. We believe there should be a transparent approach to subsidies. There should be a clear assessment of their costs as well as their benefits. It should be clear who benefits from subsidies and who pays for it.

15. We endorse the phasing out of subsidies for commercialised/mature technologies in the longer term. However, support mechanisms continue to have an important role as we transition to mature low-carbon technologies being fully competitive in the electricity market. It is also important that the principle of grandfathering for existing support mechanisms is maintained.

16. We are engaging with policy makers in order to support a more rigorous approach to subsidies.

16.1We have regularly taken positions aiming at improving the cost-effectiveness of subsidies. For example, we have said that the design of consumer support subsidies including the 5% VAT rate and other cash transfers such as Winter Fuel Payment and Cold Weather Payment could be improved.

16.2We have published reports analysing the cost of subsidies, such as ECO, where our estimates diverged from the Government’s and which we believe warrant further consideration. As the Green Deal and ECO delivery goes along and actual data becomes available, we would welcome a review of the actual costs compared to the estimates by an independent body.

16.3We are constantly engaging with the Government on the detailed design of its policy mechanisms, and will continue to do so in order to achieve a clear consensus on the estimated cost of its policies.

17 July 2013