HC 61

Written evidence submitted by the Department of Energy and Climate Change and
HM Treasury.

        Introduction  

 

1. This is the Government’s evidence to the Environmental Audit Committee inquiry into energy subsidies, covering UK government support for energy , following a call for evidence on 24 April 2013 . This evidence is a joint response from the Department of Energy and Climate Change (DECC) and HM Treasury (HMT) .

Background  

 

2. Currently there is no universally accepted definition of a subsidy. The Organisation for Economic Co-operation and Development (OECD) describes it as an "elusive concept" [1] . The spectrum of what could be included in a definition is extremely broad. The narrowest possible definition of subsidy refers to direct budgetary payments by a g overnmental body to producers or consumers. [2] T he widest definitions extend to most or all areas of g overnment activity, encompassing the time g overnment officials act for or on behalf of a particular group or industry.

3. N either extreme would provide the basis for sensible engagement on how, and to what extent the Government incentivises a particular sector to deliver Government objectives.

4. The International Energy Agency ( IEA ) , OECD , the World Trade Organisation ( WTO ) and others have all undertaken work to look at subsidies, and have endeavoured to provide definitions. However, these definitions have been proposed for specific purposes and studies .

5. The Government has worked with international organisations on a number of these studies into subsidies. Agreeing working definitions of subsidies has been important to progress these areas of inquiry which seek to provide recommendations and advice for government s to reduce the incentives for fossil fuels and encourage low-carbon alternatives.

6. The Government looks at th e support it provides more generally, allowing it to consider development, deployment and management of a clear and coherent package of support to enable the Government to deliver its energy objectives.

7. The UK faces a huge investment challenge to ensure security of supply, and keep energy bills affordable while meeting targets for economy-wide decarbonisation. To meet our energy objectives, the Government needs to diversify the mix of energy, increasing and accelerating the use of low-carbon energy in the U K.

8. The Government’s policy therefore is to incentivise the energy industry to bring forward investment where there is a market failure that would act as a barrier to do so in the absence of those incentives. For example, while new mechanisms were introduced to enable renewable generation to compete in the market this left exposure to power price risk . For investors in technologies such as offshore wind, which face substantial initial investments but very low running costs, this can be problematic . Additionally, support available for low-carbon generation was not considered within a long-term funding envelope, meaning that investors have not had certainty and consumers have not been protected.

9. The Government has taken decisive action to address these issues and provide a sustainable, long-term basis for investment in electricity. It is determined to ensure that electricity supplies are secure, produce fewer emissions, and above all are affordable for consumers. It has :

· i ntroduced legislation to provide new support for low-carbon electricity generation through C ontracts for Difference ( CfDs ) which will provide investors in technologies such as wind for the first time with stable, predictable revenues and protect them from the risks associated with wholesale volatility ;

· i mplemented the levy control framework and set a long-term funding envelope for support available for investment in low-carbon generation, to up to £7.6 billion (in 2012 prices) in 2020-21 ; t his provides unprecedented certainty, stretching well beyond existing spending plans;

· created incentives for low-carbon investment further by impl emen ting the Carbon Price Floor;

· i nvested in low-carbon infrastructure projects through t he Green Investment Bank (GIB) which seeks to leverage additional private finance th r ough its lending and aims to multiply the £3 b illio n lent through its original capitalisation ; and

· recognised the need to accelerate delivery of schemes in the shorter term. Therefore the Government is using the strength of its balance sheet to provide the £40 billion UK Guarantees facility for infrastructure projects [3] .

10. Energy taxes on businesses are designed to support wider energy policy in addition to raising revenue and cover both upstream and downstream activities. The main taxes are the oil and gas tax regime, the Carbon Price Floor (CPF) , the Climate Change Levy (CCL) and the Carbon Reduction Commitment (CRC) , all of which have different objectives. In the case of oil and gas the Government has introduced field allowances for more challenging categories of field that are economic, but commercially marginal at the high rate of tax. Such fields are relieved of tax of 32% for a certain portion of their income – but they still pay ring fence corporation tax at 30% for this portion, higher than the mainstream corporation tax rate. Field allowances do not reduce the cost of oil to consumers; rather increase what is extracted from the UK continental   shelf.

11. In the case of the CPF , EU emissions trading scheme , CCL and CRC , the Government does provide support for certain industries or sectors which would be disproportionately impacted or as a transition measure to prevent carbon leakage. It is important the Government provides this kind of support to ensure our tax system remains competitive whilst managing the transition to a low-carbon economy.

12. The Government is open and transparent about where, how, and to what extent it provides support to incentivise the energy sector to help deliver the Government’s objectives, regardless of what that support is called.

13. The Government does not consider that any of its energy policies are ‘harmful’. Furthermore, e nergy policy (as with other Government policy) is subject to an initial impact assessment and subsequent monitoring, evaluation and review. This ensures that the Government can p rovide confidence and certainty while ensuring that the policy advances the Government’s objectives in a coherent way that provides best value for money. It also ensures that detrimental consequences can be qu ickly and effectively addressed.

Extent and measurement of support for energy in the UK  

 

Overall b udget c ontrol  

14. As confirmed in the UK Renewable Energy Roadmap Update 2012 [1] and in Electricity Market Reform : Delivering UK Investment published on 27 June 2013 [2] , the amount of market support to be available for low-carbon electricity investment (under the LCF) up to 2020/21 has now been agreed. This will be set at up to £7.6 billion (real 2011/12 prices) in 2020, and will help diversify the UK’s energy mix by increasing the amount of electricity coming from renewables from 11% today to around 30% by 2020, as well as supporting new nuclear power and carbon capture and storage. [3]

Departmental s pending l imits

15. Non-levy funded support must be provided from within agreed departmental spending limits as set by HM Treasury. Government Departments providing support to the energy sector follow government-wide guidelines on project and financial management, with projects subject to monitoring to ensure spending delivers value for money for taxpayer s, and to prevent overspending.

The Levy Control Framework

16. The LCF places limits on the aggregate amount levied from consumers by energy suppliers to implement Government policy. In effect, it specifies the budget available to levy-funded policies and helps protect energy consumers from excessive levies on their energy bills.

17. Table 1 shows the annual caps to levies raised for electricity policy agreed under the LCF as announced on 2 7 Ju ne 2013 . These caps are upper limits on the levies raised to fund electricity policies such as the Renewables Obligation (RO) , Feed-in Tariffs ( FITs ) and CfDs , but would apply equally to any future levy-funded electricity policy.

18. These caps do not apply to non-electricity policies that are levy-funded, such as the Warm Home   Discount.

Table 1   - Upper Limits to Electricity Policy Levies under the Levy Control Framework  

	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21
£ billion (2011/12 prices)	4.30	4.90	5.60	6.45	7.00	7.60

Impact on energy Bills

19. The Government is committed to being open and transparent about the impacts of energy and climate change policies on households and businesses. In March 2013, the Government published the E stimated I mpacts of E nergy and Cl imate C hange P olicies on E nergy P rices and B ills 2012 [1] . Th is document assesses the impact of energy and climate change policies on gas and electricity prices and bills and updates analysis published in November 2011 [2] . It shows that the cost of energy and climate change policies account for around nine per cent of household energy bills in 2013 .

Support for low-carbon energy  

Renewables Obligation

20. The RO is currently the main financial mechanism by which the Government incentivises the deployment of large-scale renewable el ectricity generation in the UK .

21. The RO places an obligation on UK electricity suppliers to source a specified proportion of electricity they supply to customers from renewable sources, or pay a penalty [1] . This proportion is set each year and has increased annually since the RO was introduced in 2002. The size of the Obligation in 2013-14 is 61.5 million Renewables Obligation Certificates ( ROCs ) with the suppliers Obligation for England and Wales set at 0.206 ROCs per megawatt hour ( MWh ) of electricity supplied .

22. Ofgem issue ROCs to renewable electricity generators for every MWh of eligible renewable electricity they generate. Generators sell their ROCs to suppliers or traders which allows them to receive a premium in addition to the price of their electricity. Suppliers present ROCs to Ofgem to demonstrate their compliance with the Obligation. Suppliers failing to present enough ROCs to meet their obligation in full have to pay a penalty known as the buy-out price. This is set at £42.02 per ROC for 2013-14 (linked to RPI) and p rovides a floor price for a ROC.

23. I n April 2009 the RO was moved from a mechanism which offered a single level of support for all renewable technologies to one where support levels vary by technology according to a number of factors, including their costs and level of deployment.

24. The Government has stated that the RO will close in 2037. DECC intend to close the scheme to new generation in March 2017 and this will be put in secondary legislation. A generating station accredited under the RO will continue to receive its full lifetime of support (20 years) until the scheme closes in 2037. Introduction of Electricity Market Reform and CfDs will provide support for large-scale renewable electricity generation beyond 2017 [2] .

25. While it is for suppliers to decide whether to pass the cost of ROCs to consumers through their electricity bills, the Government assumes that they do for cost control purposes. The total cost that can be levied on consumers is controlled within agreed limits by the LCF .

Table 2 - The budget for the RO under the Levy Control Framework within the Spending Review period

Year	11/12	12/13	13/14	14/15
Levy Budget (£ m illion ) *	1,750	2,156	2,556	3,114
*2011/12 prices, discounted

26. The total RO annual support costs are expected to rise from around £1.4 billion in 2011/12 to up to £3.5 billion at the peak in 2016/17 (undiscounted , 2011/12 prices) [3] .

Contracts for Difference

27. CfD s support low-carbon generation by ensuring that generators will receive a fixed price level for the el ectricity they produce known as the ‘strike price’ [1] . Generators will receive revenue from selling their electricity into the market as usual. However, when the market reference price is below the strike price they will also receive a top-up payment from suppliers for the additional amount. Importantly , if the reference price is above the strike price, the generator must pay back the difference.

28. The CfD was identified as the support mechanism for low-carbon generation as it offered the best balance of results across the four key criteria chosen : cost-effectiveness, coherence with the rest of the E lectricity M arket R eform package, durability and practicality [2] .

29. CfDs for renewables will initially be awarded on a first come first served basis before moving to allocation rounds. This will support a move to a more competitive allocation and price-setting system later in the decade. The allocation and price - setting processes for carbon capture and storage ( CCS ) and nuclear projects that will apply after the final investment decision (FID) enabling window and outside the CCS Commercialisation co mpetitions is being developed. The Government expect s to publish further information in the s ummer. The level of support for different renewables technologies will be set administratively in the first instance.

30. The Government’s ultimate aim is to move to a technology- neutral competitive process as soon as reasonably practicable. Realistically as technologies are at different stages of development this ultimate technology neutral process is likely to be preceded by a technology differentiated competitive process. This technology differentiated process may be introduced as early as 2017. The Government’s ambition is to move to the next phase, in which there will be technology-neutral auctions, in the 2020s before ultimately reaching a phase where there is no longer a need to issue CfDs due to the existence of a competitive market which delivers low-carbon electricity without the need for Government support .

Value of CfDs

31. While it is for suppliers to decide how to pass the cost of the CfD on to consumers through their electricity bills, the Government assumes that they will do so for budgetary and cost control purposes. The total cost that can be levied on consumers through the CfD is therefore controlled within agreed limits by the LCF .

32. The budget for the CfD under the LCF within the Spending Review period is still to be determined, and as a cap has been set for total spend, will depend on spending on the RO and small scale FITs.

Feed-in Tariffs scheme

33. The FITs scheme was introduced on 1 April 2010, under powers in the Energy Act 2008 to encourage deployment of small-scale, low-carbon electricity generation. The technologies supported under FITs are: solar photo voltaic (PV), wind, hydro, anaerobic digestion and micro (less than 2kW) combined heat and power. FIT s provide a fixed payment to these small scale generators (per MWh produced ) .

34. DECC has just completed the first Comprehensive Review of the scheme . T his sought to improve value for money and reduce tariffs in light of falling costs. The reforms introduced a syste m called degression which reduces tariffs over time to ensure the scheme delivers increased value for money.

35. Funding for FITs is delivered throu gh a levy on electricity bills and controlled within agreed limits by the LCF. S uppliers are a t liberty to determine how to pass through the cost of the scheme to their consumers.

Value of FIT s

Table 3 – Feed-In Tariffs s pend, £ million, 2011/12 prices, undiscounted [1]

Financial Year	2011/12	2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21
Total	155	477	596	729	849	955	1051	1,126	1,179	1,224

Heat

Renewable Heat Incentive

36. The purpose of the Renewable Heat Incentive (RHI) scheme is to encourage and support heat users to move away from using fossil fuels for heating and to contribute to the UK’s renewable energy and emissions reduction target s by making it more financially appealing to install renewable heating systems.

37. Renewable heat technologies are currently more expensive than traditional, fossil-fuelled technologies. T he RHI provides financial support in the form of a payment per unit (kilowatt hour) of heat produced .

38. The Government launched the non-domestic RHI in November 2011. The scheme provides tariff-based financial support to commercial, industrial, public, not-for-profit and community generators of renewable heat for a 20-year period. The Government consulted on its proposals for the domestic RHI last autumn, and is intending to introduce the scheme in spring 2014.

39. The RHI Scheme is subject to a degression -based mechanism which is designed to respond quickly to emerging budget risks (for example, from unexpectedly high levels of deployment) by decreasing tariffs gradually over time; whilst also enabling continued growth towards the heat portion of the 2020 renewables targets [1] .

Costs

40. The RHI is funded directly from Government spending and has been assigned annual budgets for the four years of this Spending Review period.

Table 4 - RHI annual budgets for the 2011/12 to 14/15 Spending Review period [2]

Financial year	2011/12	2012/13	2013/14	2014/15	Total
Budget (£m)	56	133	251	424	864

41. This includes budget for the Renewable Heat Premium Payment (RHPP) in 2011/12 and a spend of up to £25 million for the second phase of the RHPP (expected to be spent primarily in 2012/13 but with flexibility for some spend in 2013/14).

42. The recently agreed Spending Review settlement for 2015/16 is £430 m illion , which allows the RHI spend to significantly increase from levels currently being observed. [3]

Renewable Heat Premium Payment

43. The RHPP scheme was introduced to provide a one-off payment for householders to install renewable heating systems as a short term measure before the introduction of the domestic   RHI.

44. The scheme provides vouchers which can be redeemed against the cost of installing renewable heating technologies, and is mainly targeted at those living off the gas grid, where most money on bills and carbon can be saved.

Fuel poverty and energy efficiency  

Addressing f uel p overty

45. Government is committed to doing all that is reasonably practicable to end fuel poverty in England by 2016, and to helping low i ncome and vulnerable households heat their homes more affordably. The support provided comprises:

· The Warm Front s cheme provided help to low income vulnerable households to improve the thermal efficiency of their homes. It is expected that around 35,000 households will be assisted from applications received in 2012/13 [1] .

· The Warm Home Discount scheme provides rebates on electricity bills to a range of low income and vulnerable customers. Around £283m is expected to have been spent by suppliers providing rebates and other support in 2012/13 [2] .

· The Energy Company Obligation runs alongside the Green Deal (see paragraph 47 below) providing support to low income and vulnerable households to improve the thermal efficiency of their homes. The Affordable Warmth and Carbon Saving Communities Obligations together should generate expenditure in home thermal efficiency improvements worth around £540 million and supporting around 230,000 households per year.

· The Department for Work and Pensions (DWP) automatic Cold Weather Payments are targeted at the elderly, disabled and those with young children. During the 2012-13 Cold Weather Payment season [3] , 5.8 million payments (worth £25 a week) were made to 3,290,800 recipients at a cost of over £146.1 million. DWP also offer automatic annual Winter Fuel Payments of £200 for households with someone who has reached women’s state pension age and is under 80 and £300 for households with someone aged 80 or over. In winter 2011/12 [4] it helped over 12.6 million older people in over 9 million households with their fuel bills at an estimated cost of £2.1 billion.

Energy efficiency and energy demand reduction

46. The Government has also introduced measures designed to improve energy efficiency and reduce energy demand :

· The Green Deal lets consumers pay for some of the cost of energy-saving property improvements, like insulation, over time through savings on their energy bills. Repayments will be no more than what a typical household should save in energy costs [1] .

· Smart Meters: The roll-out of smart gas and electricity meters is expected to deliver significant economic benefits, placing consumers in control of their energy use, and more widely to improve the consumer experience and engagement with the energy market [2] .

· Businesses can benefit from 100% first-year capital allowances for energy saving-technologies [3] , commonly called enhanced capital allowances or ECAs, which were introduced in 2001 to help the UK meet its target for reducing greenhouse gases [4] . These allowances reduce the effective cost of the machinery for the investor. They do not, however, significantly affect the unit price paid for energy consumed.

Low-carbon capital investment and research & development  

Carbon capture and storage

47. The Government is also supporting CCS, which will allow the use of existing fossil fuel supplies more cleanly by capturing carbon dioxide from fossil fuel power stations (or large industrial sources), transporting it via pipelines and then storing it safely offshore in deep underground structures.

48. Through its CCS Commercialisation Programme, the Government hopes to support up to two CCS projects with the funding available. These projects have potential to support large supply chains with significant UK content, through the capital support the Government is providing, as well as the further approximately £1.9 billion being invested by the winning projects themselves.

49. The Government has allocated £1billion of capital support through its CCS Commercialisation Programme , although the final level of support for each project will be confirmed depending on the outcome of the on-going competition.

50. This support is provided in the form of capital funding by the Government.

Research and Development Funding for CCS

51. The UK has a four -year (2011-2015) £125 million cross- G overnment CCS research, development and innovation programme. Funding comes from the DE CC , the Technology Strategy Board, the Energy Technologies Institute and the Research Councils.

52. CCS research, development and innovation will play an important role in reducing the costs of CCS. This is necessary to help bridge the gap to commercial scale demonstration, enable wider scale deployment, as well as developing the supply chain to maintain the industry.

Funding for research and development

53. The Government provides support for research and development, covering early stage research to pre-commercial deployment with over £1 billion committed over the current S pending R eview period.

54. The funding is distributed through a number of organisations. The key sources of funding are detailed in Annex D .

55. In addition, businesses in low-carbon sectors are encouraged to apply for grants and/or loans from the £2.4 billion Regional Growth Fund (RGF) and the   £125 million Advanced Manufacturing Supply Chain Initiative (AMSCI)   .

Carbon p ricing  

Energy intensive industry compensation

56. HM Treasury’s 2011 A utumn S tatement announced a £250 million package of measures to help electricity intensive industries adjust to the low-carbon transformation while remaining competitive [1] . It included:

· £40 million to increase the rate of CCA relief for electricity to 90%;

· £110 million to provide compensation for the indirect costs of EU ETS; and

· £100 million to provide compensation for the indirect costs of the CPF .

57. The 2013 Budget announced that the Government will continue to provide support to energy-intensive industries to compensate for the indirect cost of the CPF in 2015-16. Further details will be announced at the next spending round. However, support is intended to be transitional while other countries catch up in pricing the costs of carbon emissions.

Climate Change Agreements

58. CCAs allow eligible energy-intensive businesses to receive up to a 65% discount from the CCL [2] in return for meeting energy efficiency or carbon-saving targets. The discount for electricity will increase to 90% from April 2013.

59. Currently, 51 industrial sectors participate in CCAs which cover some 9,900 facilities or sites [3] , and in 2011/12, CCL discount awarded by the scheme was £165m [4] . Budget 2011 announced that the scheme would be extended for all currently eligible sectors until 2023 [5] .

European Union Emissions Trading System (EU ETS) Free Allowances and Commercial Support

60. Although auctioning is the default method for allocating emission allowances to companies participating in the EU ETS in Phase III (2013-2020), industry will continue to receive a share of allowances for free until 2027 under the revised EU ETS Directive. This is a transitional measure for industrial installations to lessen the risk of a ‘shock’ introduction to the carbon price signal. In 2013 those sectors not deemed to be at significant risk of carbon leakage will receive free allowances to cover emissions from 80% of their benchmarked baseline output, decreasing linearly each year to 30% in 2020 and 0% in 2027.

61. In addition, Directive 2003/87/EC sets out two mechanisms to address the risk of carbon leakage [6] :

· sectors deemed at significant risk of carbon leakage will receive 100% of their EU allowances need for free (based on their average production (e.g. in tonnes of product) over a baseline period), up to a product benchmark based on the average of the 10% most efficient installations in the EU (termed free allocation); and

· from January 2013, Member States may choose to compensate sectors at risk of carbon leakage as a result of indirect costs (i.e. through EU ETS related increases in electricity prices), based on revisions to the State Aid guidelines.

Table 5 - Levels of support under the EU ETS for UK industry

Measure	Value of mechanism	Number of installations
Free allocation on a declining trajectory for sectors not deemed to be at significant risk of carbon leakage .	Around £210 million*	Around 430 installations**
Free allocation on a non-declining trajectory for sectors deemed to be at significant risk of carbon leakage .	Around £4 billion*	Around 400 installations**
Compensation for those sectors at significant risk of indirect carbon leakage due to the EU ETS .	£110 million †	15 sectors ‡
*Based on the UK’s draft National Implementation Measures (NIMs), DECC’s short-term traded carbon values published in October 2012 and expressed in real 2012 prices. ** Based on current draft of the UK’s National Implementation Measures (NIMs). † Over January 2013 - March 2015 ‡ No. of companies will be known in July 2013, once the scheme is operational

Carbon Price F loor and Climate Change Levy

62. Putting a price on carbon emissions is at the heart of the Government’s strategy for enabling the UK to reduce emissions over the long term. The CPF firmly establishes the ‘polluter pays principle’. Liability will be directly linked to the environmental damage caused by different types of fossil fuel-based electricity generation.

63. The C arbon P rice S upport (CPS) rates announced in Budget 2013 , of £18.08, are in-line with the previously announced price CPF . It is important to maintain the commitment to this floor to provide the certainty that investors need to invest now in our ageing electricity infrastructure.

64. Similarly, the CCL encourages businesses to reduce their energy consumption. The CCL is a tax on energy supplies (electricity, natural gas, liquid petroleum gas and coal) to UK business and the public sector.

65. Supplies of electricity from renewable sources (e.g. wind, hydro, wave , waste) are exempt from the CCL . Renewable electricity is exempt from the CCL via a system of levy exemption certificates. These ensure that the amount of renewable electricity supplied to businesses matches up with the amount of renewable electricity generated.

66. Electricity produced from renewable sources is exempt in support of the CCL’s objective, which is to encourage energy efficiency and reduce emissions of carbon dioxide from the energy used by business and the public sector.

Combined H eat and P ower

67. Combined H eat and P ower (CHP) captures and utilises the heat that is a by-product of the electricity generation process and can be more efficient and reduce carbon emissions by up to 30% compared to separate generation of heat and power, via a boiler and power station, using the same fuel.

68. Input fuels used to generate ‘good quality’ heat in fossil fuel CHP plants are exempt under the CPF . This reflects the fact that heat generation will not ordinarily be subject to the CPF. Small scale generators, of 2 MW capacity and less, will also be excluded from the CPF. Taken together, this puts CHP electricity generation on a level playing field with alternatives. Fossil fuel CHP remains incentivised through the tax system, as fuel used in ‘good quality’ CHP is exempt from CCL , unlike separate boilers producing heat which will still be liable to the CCL [1] .

Capacity M arket  

69. The Government is legislating through the Energy Bill to introduce a Capacity Market to ensure that we can maintain reliable electricity supplies. The first capacity auction will be run in 2014, for delivery in 2018-19, subject to state aid approval. [1]

70. A Capacity Market works by providing upfront payments to all providers of capacity (including generation and demand side, and with some exceptions, for example plant receiving the a CfD ), in return for which they must commit to be delivering energy when needed or face financial penalties. Capacity agreements will be allocated through a competitive auction, four years ahead of delivery. The costs of the upfront capacity payments will fall to energy suppliers (and therefore consumers), but the Capacity Market will have a dampening effect on wholesale electricity prices that will largely offset the upfront costs.

71. Consumers already pay the costs of capacity through the wholesale electricity price; the Capacity Market simply means that the costs of capacity are instead made through a separate revenue stream. The cost s of the Capacity Market are not included in the agreed £7.6 b illio n LCF. However, the costs of the Capacity Market will be included within updated LCF totals for purposes of reporting to Parliament. The level of support provided will depend on the clearing price of the auction and the amount of capacity contracted, but as noted above, the net cost to consumers is expected to be lower than the gross cost of the auction as the Capacity Market will result in lower wholesale prices than would have otherwise been the case.

Other s upport  

Support for energy used in t ransport

  Renewable Transport Fuel Obligation

72. The Renewable Transport Fuel Obligation ( RTFO ) requires transport fuel suppliers to supply biofuel in proportion to fossil fuel. Typically more expensive than the displaced fossil fuel the obligation represents a cash transfer from fuel suppliers to biofuel producers and their supply chains (e.g. farmers, waste cooking oil collectors) rather than direct government support. RTFO costs are assumed to be passed through to end fuel consumers.

73. Some NGOs (and others) consider biofuel support harmful on grounds of environmental sustainability, social sustainability and food price impacts.

74. The total cost to suppliers subject to the obligation is estimated to be £387 million in 2013/14. However, the RTFO value is determined by the market reflecting biofuel and fossil fuel prices at any given point in time.

Low Emission Vehicles

75. The Office for Low Emission Vehicles is a cross Government, industry endorsed, team combining policy and funding streams to support the early market for electric and other ultra-low emission vehicles (ULEVs).

76. Buyers of ULEVs are able to benefit from a consumer incentive grant if purchasing an eligible new vehicle. This is worth 25% up to £5 , 000 towards the value of a car and 20% up to £8 , 000 towards the value of a van. Grants are also available for the installation of recharging points in homes, stations and the public sector estate.

77. Whilst these measures are G overnment funded they are not classified as support for energy, rather they support the cost of the vehicles powered by the energy , not the electricity on which they run.

Nat ional Concessionary Fuel Scheme

78. Under the 1994 Coal Industry Act HMG inherited responsibility for certain employee related benefits stemming from the nationalised coal period (1947- 1994). Amongst these is the National Concessionary Fuel Scheme whereby certain former employees of British Coal are entitled to either the supply of solid fuel (coal) or cash in lieu.

79. The entitlement to receive concessionary coal is linked to the beneficiaries original contract of employment and DECC is not able to vary that arrangement on a unilateral basis. Any change has to be with the consent of the individual concerned. Any wholesale change to the coal services would require legislation and would give rise to human rights implications. Currently DECC has no plans to seek such a legislative change.

80. The majority of the beneficiaries are now in receipt of cash in lieu ( around 57,000 currently) but DECC still supplies coal to around 11,000 f ormer employees or their widows . The fuel element of the service is estimated to cost DECC around £16.5 m illion in 2013/14 and the cash in lieu arrangements around £35m. The amounts of coal supplied are all set out within agreements negotiated between the former British Coal and the mining trade unions.

81. This scheme directly reduces the price paid by a specific group of consumers for energy they receive under specified circumstances .

International c omparisons  

 

82. The energy challenge in each country is different. Governments must choose the appropriate support mechanisms, and support them to the appropriate levels depending on their respective energy needs. The UK has an ambitious target to halve emissions from 1990 levels by 2027. [1] By comparison, Japan has a 30% target between 2003 and 2030 and Sweden a 20% target between 2008 and 2020.

83. In addition, the UK has a legally binding target to produce 15% of its energy needs from renewables by 2020. Whilst this target is lower than those for other European countries it is nonetheless very ambitious. The UK must secure a factor of ten increase in renewable energy over the period, compared with an average factor of two increase across Europe – all while increasing demand means additional deployment is needed just to ‘stand still ’ .

84. State Aid guidelines on compensation for those sectors at significant risk of indirect carbon leakage due to the EU ETS were adopted by the European Commission in late 2012. Compensation is voluntary. Only one Member State other than the UK has announced a compensation scheme so far – Germany has €500 million per year. The approach for free allocation is harmonised across all EU member States.

85. It is extremely difficult to directly compare the support for renewable energy between different European countries as regulatory issues, taxation, base load cost of energy and many others factors can all play a role. According to the Status Review of Renewable and Energy Efficiency Support Schemes in Europe conducted by the Council of European Energy regulators, in 2011, the UK had a low level of subsidy per MWh when compared to other member states. [2]

86. Most European and OECD countries have some form of Feed-in Tariff . Spend varies widely, Germany and other well established schemes have spent many billions on support over the past decade. Other countries are only now starting to offer this type of support (notably China).

87. The Global Carbon Capture and Storage Institute ( GCCSi ) estimate that worldwide up to $40 billion has been committed by Governments to support CCS projects. Governments around the world have provided different levels of financial incentives to support the deployment of CCS. It is difficult to directly compare support levels, as projects in different countries face different market conditions and regulatory and policy frameworks. In addition to direct financial support in the forms of grants, subsidies can be in other forms. For example, in the US , federal and state support for CCS have included investment tax credits and loan guarantees to help offset the higher capital and operating costs of CCS projects.

88. Estimates of levels of funding specifically for carbon capture and storage R&D in other countries are not easily available. However, there is information on publication rankings (a good measure of research activity) and specific initiatives in other countries.

89. A Capacity Market is a type of ‘capacity mechanism’. Capacity mechanisms are a common feature of liberalised energy markets, and indeed when the England and Wales electricity market was first liberalised there was a capacity mechanism in place. France is developing a Capacity Market similar to the one we are legislating for, and there are similar mechanisms already operating in a number of worldwide markets, including in the US and Europe.

Annexes  

 

Annex A - Reduced (5%) VAT rate on domestic heating and power  

90. A reduced rate of VAT applies to domestic and small business heating fuel and electricity. This is a tax, not a subsidy, and increases the price above the world-market prices. Non-fossil fuel heating would also be covered under the 5% VAT rate.

Annex B - Nuclear p ower  

91. The UK Government believes that nuclear energy has a vital role to play in the energy mix and is committed to removing unnecessary obstacles to investment in new nuclear power.

92. The Office for Nuclear Development (OND) is part of the Energy Markets and Infrastructure (EMI) group within DECC, and has a key role in helping to ensure that the UK has access to clean, safe, and secure supplies of competitively priced energy.

New nuclear power

93. It is the Government’s policy that there will be no public subsidy for new nuclear power, as defined in a written statement made to Parliament in October 2010 [1] , and in a debate in Parliament in February 2013 [2] . This means that new nuclear will receive no levy, direct payment or market support for electricity supplied or capacity provided, unless similar support is also made available more widely to other types of generation.

94. New nuclear power will 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. This is about creating a level playing field for all forms of generation, not subsidising nuclear.

95. It will be for private sector energy companies to construct, operate and decommission nuclear power stations. It will be for the Government and the independent regulators to ensure appropriate levels of safety, security and environmental regulation.

Nuclear waste and decommissioning

Legacy waste and decommissioning

96. In terms of financing the legacy waste and decommissioning of old and existing nuclear power stations and facilities, the UK policy operates under cover of and in accordance with European Commission decisions on the restructuring of British Energy (BE) and Nuclear Decommissioning Authority (NDA) / British Nuclear Fuel Limited (BNFL).

97. Responsibility for decommissioning, cleaning up and dealing with the waste from the public sector, civil nuclear legacy sites has been given to the NDA, created in 2005. The NDA’s mission is fully funded by the public sector, through a mixture of direct grant and commercial income from the few facilities in the estate that are still operational. This will decline over time as the remaining operational nuclear plants close and enter decommissioning. Closure of the operational commercial plants was one of the conditions attached to state aid approval, with which we remain in compliance.

98. The European Commission approved the grant of state aid to the restructuring of British Energy plc (BE) in October 2004 (decision 2005/407/EC) on the basis that it was satisfied that the new structure of British Energy would ensure that aid was exclusively used for the decommissioning of BE's nuclear power plants and the discharge of its nuclear liabilities, for example for radioactive waste and spent fuel. Under restructuring agreements scrutinised by the Commission at the time of its original decision, the Nuclear Liabilities Fund (NLF) - a company limited by shares and owned by an independent trust - was made responsible for meeting those decommissioning costs.

99. In January 2009, BE was purchased by EDF. At the time of sale, the UK Government committed to ensuring through the sale process that the conditions for State Aid imposed by the Commission on BE at the time of restructuring would continue to be met. Accordingly, EDF are subject to the BE restructuring agreements. As a consequence EDF must submit their decommissioning plans and any applications for NLF payments to the UK's NDA for prior approval. In providing their approval, the NDA are charged with ensuring that EDF's plans and applications meet the terms of the restructuring agreements including that such funding is directed only to that work deemed qualifying under those agreements.

100. The NLF’s liabilities as stated in the 2011-12 DECC accounts are £5.1 billion whilst its assets are £8.7 billion. The liabilities are extremely long-dated, stretching more than 100 years into the future on current plans. And there are a number of uncertainties regarding decommissioning costs, including the applied discount rate, station lifetimes, regulatory changes, inflation and the rate of investment return. Given these uncertainties it is very difficult to predict whether the fund will be sufficient to cover the liabilities. If they do not, the Government has undertaken to meet any shortfall.

101. Any money paid out by the NLF to EDS conform to the conditions imposed by the Commission at the time of British Energy’s restructuring in October 2004, and does not constitute a subsidy or state aid. Neither is the Government’s undertaking to meet any NLF shortfall, should that be necessary. As is the case with NLF payments to EDF, the Government would only meet costs that fall within the conditions imposed by the Commission at the time of British Energy’s restructuring in October 2004.

Decommissioning and waste from new nuclear power stations

102. Geological disposal is the way in which higher activity radioactive waste will be managed in the long term. The Government expects to dispose of spent fuel and intermediate level waste (ILW) from new nuclear power stations in the same geological disposal facility that will be constructed for the disposal of legacy waste.

103. Before construction of a new nuclear power station begins the Government expects to enter into a contract with the operator regarding the terms on which the Government will take title to and liability for the operator’s waste. This "Waste Transfer Contract" will in particular set out how the price that will be charged for this waste transfer will be determined (the "Waste Transfer Price").

104. In December 2011 the Government published details of how the Waste Transfer Price is to be determined. This stated that the Government’s objective is to ensure the safe disposal of ILW and spent fuel from new nuclear power stations without cost to the taxpayer and to facilitate investment through providing cost certainty.

105. This arrangement involves the transfer of liabilities and risks from the operator to Government, but the waste transfer pricing methodology sets out how this will be done in a way that does not involve any subsidy to new nuclear power. As set out in the written Ministerial Statement of October 2010, the Government does not consider that taking title to radioactive waste, including spent fuel, for a fixed price is a subsidy to new nuclear power, provided that the price properly reflects any financial risks or liabilities assumed by the state.

Limitation of liabilities

106. The UK is a Contracting Party to the Paris Convention on nuclear third party liability and the Brussels Supplementary Convention. The Conventions establish an internationally agreed framework for compensating victims in the event of a nuclear accident and are implemented in the UK by the Nuclear Installations Act 1965. This regime seeks to ensure access to adequate and fair compensation for victims by requiring operators to take on more onerous obligations than they would under the ordinary law, so that they are bound to pay compensation irrespective of whether they are at fault and are required to put in place insurance or other financial security to cover their liabilities. This is consistent with the no public subsidy policy.

107. As part of the regime, a limit is set on operator third party nuclear liability. Government believes this is justifiable in the public interest and 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. The UK currently limits operators’ liability at £140 million per incident but this will rise to €1 . 2 b illion once we have implemented the revisions that were made to the Conventions. 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.

108. Government is working with other parties to the Paris/Brussels regime to amend and update the existing scheme and published a consultation on the changes in 2011. These amendments impose a more stringent regime for operators than the current one. As mentioned in the summary of responses to the consultation [1] , Government has always acknowledged that a catastrophic accident at a nuclear plant could far exceed the ability of the operator to pay and that Government, as with other natural or man-made disasters, may have to step in. The most effective way of guarding against large accidents is to have a robust regulatory regime to ensure the risk of a significant incident is kept extremely small. In so doing, the nuclear industry is already paying to protect society for a very low probability but high consequence accident through meeting the exacting regulatory requirements .

Annex C - Oil and g as fiscal regime  

109. The tax regime which applies to exploration for, and production of, oil and gas in the UK and on the UK Continental Shelf (UKCS) currently comprises three elements:

· Ring fence corporation tax – this is calculated in the same way as standard corporation tax, but the ring fence prevents taxable profits from oil and gas extraction being reduced by losses from other activities or by excessive interest payments. The current rate of tax on ring fence profits, which is set separately from the rate of mainstream corporation tax, is 30%.

· Supplementary charge – this is an additional charge, currently at a rate of 32% on a company’s ring fence profits (increased from 20% from March 2011).

· Petroleum revenue tax (PRT) – this is a field based tax charged on profits arising from oil and gas production from individual oil and gas fields which were given development consent before March 1993. The current rate of PRT is 50%. PRT is deductible as an expense in computing profits chargeable to ring fence corporation tax and supplementary charge.

110. Oil and gas produced in the UK is therefore subject to a tax on profits of 62% for new fields and 81% for older fields. This ensures the taxpayer benefits from highly profitable fields. The Government has introduced field allowances for more challenging categories of field that are economic, but commercially marginal at the high rate of tax. Such fields are relieved of tax at 32% for a certain portion of their income – but they still pay ring fence corporation tax at 30% for this portion, higher than the mainstream corporation tax rate. Field allowances do not reduce the cost of oil to consumers.

111. International organisations such as the I nternational Energy Agency ( IEA ) , Organisation for Economic Co-operation and Development (OECD) and International Monetary Fund ( IMF ) use a variety of different methodologies to assess support to fossil fuels. The IMF and IEA use versions of a methodology known as the price gap approach, which, similar to the EU definition, compares prices to world market prices. The OECD uses broad measures of Producer and Consumer Support Estimates (PSE & CSE), based on metrics used by the OECD in other sectors, such as agriculture. These measures take account of where lower rates of tax are applied than elsewhere in the economy and so give different results to assessing purely whether fossil fuels are subsidised.

112. For the purposes of G20 work on inefficient fossil fuel subsidies, the UK, along with other EU G20 members, defines a fossil fuel subsidy as any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies.

113. This oil and gas fiscal regime policy ensures the Government maximises the economic production of oil and gas in the UK, without giving undue support to otherwise uneconomic production. For that reason, field allowances cannot be seen as a subsidy.

114. Any profits from shale gas production would be subject to the same ring fence regime, and would have a marginal 62% tax rate. Given that the industry is at an early stage of development, the Government has announced that it will introduce a shale gas allowance to help unlock investment. This allowance will operate in a similar way to existing field allowances – relieving a portion of a company’s income from the supplementary charge. Companies will continue to pay ring fence corporation tax on this portion. The use of allowances to encourage investment in the North Sea has demonstrated the effectiveness of a targeted allowance in stimulating investment and production that would not otherwise have gone ahead. [1]

115. The Government will publish a consultation document on proposals for the shale gas allowance to ensure that the final structure is appropriately targeted while maintaining a fair return for the Exchequer.

Annex D - Research and d evelopment f unding  

Research councils

116. The Engineering and Physical Sciences Research Council (EPSRC) is the main UK G overnment agency for funding research and training in engineering and the physical sciences and leads the Research Councils UK Energy programme, worth over £500 million over the period 2011-15, bringing strategy to UK energy research in support of G overnment targets.

Technology Strategy Board

117. The Technology Strategy Board (TSB) tackles barriers to early stage technology development, and supports business-led innovation. It works across business, academia and government - supporting innovative projects, reducing risk, creating partnerships, and promoting collaboration, knowledge exchange and open innovation. [1] It has a budget of around £1 billion over four years, which includes over £200 million of Government funding over the current spending review period for low-carbon innovation.

118. In addition to sponsoring the Energy Technology Institute, some examples of TSB investments between 2007 and 2012:

• £25.5 million in offshore renewables , including co-funding of £5.5 million from Scottish Enterprise, Natural Environment Research Council and Regional Development Agencies (R DAs ) with a commitment to invest a further £10 million core funding per annum to the Offshore Renewables Catapult centre;

• £29.5 million in fuel cells and hydrogen, including £7 million co-funding from DECC;

• £19.5 million in carbon abatement technologies, including £9 million from DECC and RDAs;

• £17 million in civil nuclear, including £8m illion from the Nuclear Decommissioning Authority, DECC and EPSRC; and

• £11.9 million in grid balancing, management and infrastructure and £6 million in oil and gas. [2]

DECC innovation funding

119. DECC has made up to £150 million of funding available to cover the 2010 Spending Review period. The spending focus has been on those technologies and programmes where there are clear market failures and where intervention will have greatest impact on meeting our climate change and energy objectives.

120. Funding decisions are subject to the Technology Innovation Needs Assessments (TINAs). TINAs aim to identify and value the main innovation needs of specific low-carbon technology families to inform the prioritisation of public sector investment in low-carbon innovation [1] .

121. The TINAs apply a consistent methodology across a diverse range of technologies, and a comparison of relative values across the different TINAs is as important as the examination of absolute values within each TINA. Once priority areas for funding have been decided, suitable projects are selected . T hey include projects to reduce the cost of offshore wind, marine innovation, work to reduce the costs of next generation of CCS, work on energy storage, energy efficiency and work on future nuclear R&D. Each project that is funded has an evaluation plan in order to see how much it did achieve against its original aims and to learn lessons that can be used or shared.

Energy Technologies Institute

122. The Energy Technologies Institute (ETI) will receive up to £120 million of public funding and up to £120 million of private funding over the 2011-15 S pending R eview period.

123. The ETI’s goals are to accelerate the development, demonstration and eventual commercial deployment of a focused portfolio of energy technologies, which will increase energy efficiency, reduce greenhouse gas emissions and help achieve energy and climate change goals. [1]

Waste & Resources Action Programme (WRAP)

124. WRAP’s Business Plan 2011-15 promotes "working in partnership towards a world without waste". WRAP’s focus is now on preventing waste being created in the first place. However, where waste is unavoidable, WRAPs expertise can help make sure the material is recycled to maximum value, or used to create energy.

Ofgem – Low-carbon Networks Fund

125. As part of the electricity distribution price control arrangements that run from 1 April 2010 to 31 March 2015, Ofgem established the Low-carbon Networks (LCN) Fund. The LCN Fund allows up to £500 million support to projects sponsored by the distribution network operators (DNOs) to try out new technology, operating and commercial arrangements. The objective of the projects is to help all DNOs understand what they need to do to provide security of supply at value for money as Great Britain (GB) moves to a low-carbon economy.

126. Projects awarded funding involve the DNOs partnering with suppliers, generators, technology providers and other parties to explore how networks can facilitate the take up of low-carbon and energy saving initiatives such as electric vehicles, heat pumps, micro and local generation and demand side management, as well as investigating the opportunities that smart meter roll out provide to network companies. As such the Fund should also provide valuable learning for the wider energy industry and other parties.

OLEV (DfT)

127. Ultra-low emission vehicle technology is developing fast. The G overnment is committed to accelerating the pace of change in this area and contributes to the funding of a range of innovative research and development activities. The Office for Low Emission Vehicles (OLEV) is focused on identifying and supporting emerging technologies in the field of ultra-low emission vehicles. [1]

128. The G overnment’s programme of research and development for low-carbon vehicle technologies is delivered through the Technology Strategy Board’s Low-C arbon V ehicles I nnovation P latform (LCVIP). This platform was launched in 2007 and is funded by the Department for Transport , Department for Business, Innovation and Skills, the TSB and the EPSRC .

Reviewing funding of Research and Development

129. The Low-carbon Innovation Co-ordination Group (LCICG) was re-invigorated following DECC’s leadership of a pan G overnment review of the innovation landscape and improving its delivery. It brings together the UK’s major public-sector funding and delivery bodies that are supporting low-carbon innovation in the UK . The G roup aims to maximise the impact of UK public sector funding for low-carbon technology, in order to:

· deliver affordable, secure, sustainable energy for the UK;

· deliver UK economic growth; and

· develop the UK’s capabilities, knowledge and skills.

130. It is developing a common evidence base, using the TINA work done for DECC and is developing a joint strategy to ensure focus on those areas where of most impact, and to ensure strong coordination of members work.

Annex E – URLs for documents referenced in this evidence  

To note – URLs were correct on 27 June 2013

Document Title/Reference	URL
Overview of key methods used to identify and quantify environmentally harmful Subsidies with a focus on the energy sector	http://www.oecd.org/env/outreach/EAP(2012)2_NP_Subsidies%20report_ENG.pdf
UK Renewable Energy Roadmap Update 2012	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80246/11-02-13_UK_Renewable_Energy_Roadmap_Update_FINAL_DRAFT.pdf
Investing in Britain’s Future	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209279/PU1524_IUK_new_template.pdf
Electricity Market Reform: Delivering UK Investment	https://www.gov.uk/government/publications/electricity-market-reform-delivering-uk-investment
Estimated impacts of energy and climate change policies on energy prices and bills 2012.	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_Report_Final.pdf
Estimated impacts of energy and climate change policies on energy prices and bills	https://www.gov.uk/government/publications/assessment-of-the-impact-of-energy-and-climate-change-policies-on-prices-and-bills
Final Impact Assessment on proposals for the levels of banded support under the renewables Obligation for the period 2013-17 and the Renewables Obligation Order 2012	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/66181/Renewables_Obligation_consultation_-_impact_assessment.pdf
EMR Impact Assessment	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/42637/1042-ia-electricity-market-reform.pdf
UK Renewable Energy Roadmap Update 2012	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80246/11-02-13_UK_Renewable_Energy_Roadmap_Update_FINAL_DRAFT.pdf
The Renewable Heat Incentive: consultation on interim cost control	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/42906/4729-rhi-consultation-interim-cost-control.pdf
2011 Autumn Statement	http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/as2011_documents.htm
Climate Change Levy - introduction	http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_InfoGuides&propertyType=document&id=HMCE_CL_001174
Climate Change Agreements Scheme (Environment Agency Website)	http://www.environment-agency.gov.uk/business/topics/pollution/136236.aspx
Budget 2011	http://webarchive.nationalarchives.gov.uk/20130129110402/http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf
Electricity Market Reform: Capacity Market proposals	https://www.gov.uk/government/publications/electricity-market-reform-capacity-market-proposals
Status Review of Renewable and Energy Efficiency Support Schemes in Europe	http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Electricity/Tab2/C12-SDE-33-03_RES%20SR_3-Dec-2012_Rev19-Feb-2013.pdf
Green Deal Impact Assessment	https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43000/3603-green-deal-eco-ia.pdf
Green Deal Consultation	https://www.gov.uk/government/consultations/the-green-deal-and-energy-company-obligation
Budget 2013	https://www.gov.uk/government/publications/budget-2013-documents

4 July 2013